As filed with the Securities and Exchange Commission on 23 June 2003
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 31 December 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-15246
LLOYDS TSB GROUP plc
(Exact name of Registrant as Specified in Its Charter)
Scotland
(Jurisdiction of Incorporation or Organization)
25 Gresham Street
London EC2V 7HN
United Kingdom
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
registered
Ordinary shares of nominal value 25 The New York Stock Exchange.
pence each, represented
by American Depositary Shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
The number of outstanding shares of each of Lloyds TSB Group plc's classes of
capital or common stock as of 31 December 2002 was:
Ordinary shares, nominal value 25 pence each, as of 31 December 2002
....5,583,099,804
Limited voting shares, nominal value 25 pence each, as of 31 December 2002...
78,947,368
Preference shares, nominal value 25 pence each, as of 31 December 2002... 0
Preference shares, nominal value 25 cents each, as of 31 December 2002..... 0
Preference shares, nominal value 25 euro cents each, as of 31 December 2002... 0
Preference shares, nominal value Japanese Y25 each, as of 31 December 2002... 0
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 Item 18 X
TABLE OF CONTENTS
Page
Presentation of information 2
Business overview 3
Selected consolidated financial data 4
Exchange rates 6
Business 7
Operating and financial review and prospects 17
Management and employees 76
Major shareholders and related party
transactions 89
Regulation 90
Listing information 94
Dividends 96
Memorandum and articles of association 96
Exchange controls 96
Taxation 97
Where you can find more information 101
Enforceability of civil liabilities 101
Risk factors 102
Forward-looking statements 104
Lloyds TSB Group structure 105
Index to Consolidated Financial Statements F-1
Glossary 107
Form 20-F cross-reference sheet 110
List of exhibits 112
Signatures 113
Certifications required under Section 302
of the Sarbanes-Oxley Act 114
_____________________
PRESENTATION OF INFORMATION
In this annual report, references to "Lloyds TSB Group" are to Lloyds TSB
Group plc and its subsidiary and associated undertakings; references to "Lloyds
TSB Bank" are to Lloyds TSB Bank plc; and references to the "Consolidated
Financial Statements" are to Lloyds TSB Group's Consolidated Financial
Statements included in this annual report. References to the "Financial Services
Authority" are to the United Kingdom (the "UK") Financial Services Authority.
Lloyds TSB Group publishes its Consolidated Financial Statements expressed
in British pounds ("pounds sterling", "sterling" or "GBP"), the lawful currency
of the UK. In this annual report, references to "pence" and "p" are to
one-hundredth of one pound sterling; references to "US dollars", "US$" or "$"
are to the lawful currency of the United States (the "US"); references to "cent"
are to one-hundredth of one US dollar; and references to "euro" or "Euro" are to
the lawful currency of the member states of the European Union that have adopted
a single currency in accordance with the Treaty establishing the European
Communities, as amended by the Treaty of European Union. Solely for the
convenience of the reader, this annual report contains translations of certain
pounds sterling amounts into US dollars at specified rates. These translations
should not be construed as representations by Lloyds TSB Group that the
pounds sterling amounts actually represent such US dollar amounts or could be
converted into US dollars at the rate indicated or any other rate. Unless
otherwise stated, the translations of pounds sterling into US dollars have been
made at the noon buying rate in New York City for cable transfers in pounds
sterling as certified for customs purposes by the Federal Reserve Bank of New
York (the "Noon Buying Rate") in effect on 31 December 2002, which was $1.6095 =
GBP1.00. The Noon Buying Rate on 31 December 2002 differs from certain of the
actual rates used in the preparation of the Consolidated Financial Statements,
which are expressed in pounds sterling, and therefore US dollar amounts
appearing in this annual report may differ significantly from actual US dollar
amounts which were translated into pounds sterling in the preparation of the
Consolidated Financial Statements in accordance with accounting principles
generally accepted in the UK.
2
BUSINESS OVERVIEW
Lloyds TSB Group is a leading UK-based financial services group, whose
businesses provide a comprehensive range of banking and financial services in
the UK and overseas. At 31 December 2002 total Lloyds TSB Group assets were
GBP252,758 million and Lloyds TSB Group had over 79,000 employees. Lloyds TSB
Group plc's market capitalisation at that date was some GBP24,800 million. The
profit on ordinary activities before tax for the 12 months to 31 December 2002
was GBP2,607 million and the risk asset ratios as at that date were 9.6 per cent
for total capital and 7.8 per cent for tier 1 capital.
The operations of Lloyds TSB Group in the UK were conducted through
approximately 2,200 branches of Lloyds TSB Bank, Lloyds TSB Scotland plc and
Cheltenham & Gloucester plc at the end of December 2002. International business
is conducted mainly in the Americas, New Zealand and continental Europe. Lloyds
TSB Group's services in these countries are offered through a combination of
branches of Lloyds TSB Bank and subsidiary companies, principally The National
Bank of New Zealand Limited, New Zealand's second largest bank measured by
assets during 2002, and Losango, the Lloyds TSB Group's consumer finance
business in Brazil. Lloyds TSB Group also offers offshore banking facilities in
a number of countries. For additional information see "Regulation".
The following table shows the profit before tax of Lloyds TSB Group's UK
Operations and its International Operations in each of the last three years.
2002 2001 2000
GBPm GBPm GBPm
UK Operations 2,111 2,595 3,352
International Operations 496 566 433
Profit before tax 2,607 3,161 3,785
Lloyds TSB Group's activities are organised into three segments: UK Retail
Banking and Mortgages, Insurance and Investments and Wholesale Markets and
International Banking. Services provided by UK Retail Banking and Mortgages
encompass the provision of banking and other financial services to personal and
small business customers, private banking, stockbroking and mortgages. Insurance
and Investments offers life assurance, pensions and investment products, general
insurance and fund management services. Wholesale Markets and International
Banking provides banking and related services for major UK and multinational
companies, banks and financial institutions, and medium-sized UK businesses,
including venture capital finance. It also provides asset finance and share
registration services to personal and corporate customers, manages Lloyds TSB
Group's activities in financial markets through its Treasury function and
provides banking and financial services overseas.
The following table shows the results of Lloyds TSB Group's UK Retail
Banking and Mortgages, Insurance and Investments and Wholesale Markets and
International Banking segments and Central group items in each of the last three
fiscal years. In order to provide a clearer representation of the underlying
performance, the results of the Insurance and Investments segment include
investment earnings calculated using longer-term rates of return and annual
management charges based on unsmoothed fund values. Management separately
analyse the difference between these normalised earnings and the actual return
('the investment variance') together with the impact of changes in the economic
assumptions used in the embedded value calculation.
2002 2001 2000
GBPm GBPm GBPm
UK Retail Banking and Mortgages 1,172 1,205 1,363
Insurance and Investments 1,231 1,421 1,158
Wholesale Markets and International Banking 1,005 1,209 1,035
Central group items 96 185 378
3,504 4,020 3,934
Changes in economic assumptions 55 - 127
Investment variance (952) (859) (276)
Profit before tax 2,607 3,161 3,785
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,
United Kingdom, telephone number + 44 (0) 20 7626 1500.
3
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial information set out in the table below
has been derived from the annual reports and accounts of Lloyds TSB Group plc
for each of the past five years adjusted for subsequent changes in accounting
policy and presentation. The Consolidated Financial Statements for each of the
years 1998 to 2001 have been audited by PricewaterhouseCoopers, independent
accountants; the Consolidated Financial Statements for 2002 were audited by
their successor firm PricewaterhouseCoopers LLP, independent accountants.
The Consolidated Financial Statements have been prepared in accordance with
UK GAAP, which differs in certain significant respects from US GAAP. A
discussion of such differences and a reconciliation of certain UK GAAP amounts
to US GAAP is included in Note 48 to the Consolidated Financial Statements.
2002 2001 2000 1999 1998
Profit and loss
account data for
the year ended
31 December (GBPm)
(1)
Net interest 5,171 4,922 4,587 4,783 4,398
income
Other finance 165 307 424 268 252
income
Other income 3,542 3,660 3,765 3,267 2,792
Trading 3,963 4,113 4,497 4,434 3,566
surplus
Provisions for (1,029) (747) (541) (615) (555)
bad and doubtful
debts
Profit on 2,607 3,161 3,785 3,529 2,948
ordinary
activities
before tax
Profit on 1,843 2,286 2,703 2,445 2,086
ordinary
activities after
tax
Profit for the 1,781 2,229 2,654 2,439 2,073
year
attributable to
shareholders
Dividends 1,908 1,872 1,683 1,451 1,204
Balance sheet
data at 31
December (GBPm) (1)
Called-up share 1,416 1,411 1,396 1,389 1,379
capital
Shareholders' 7,972 10,356 11,901 11,760 9,333
funds
(equity)
Customer 116,334 109,116 101,989 93,714 90,445
accounts
Undated 5,496 4,102 3,391 3,294 1,518
subordinated
loan capital
Dated 4,672 4,006 4,119 3,199 2,503
subordinated
loan capital
Loans and 134,474 122,935 114,432 102,233 95,243
advances to
customers
Assets(2) 207,418 189,404 169,587 153,172 146,475
Total assets 252,758 235,793 220,672 179,714 170,167
Share
information (1)
Basic earnings 32.0p 40.3p 48.4p 44.8p 38.4p
per ordinary
share
Diluted earnings 31.8p 39.9p 47.9p 44.0p 37.6p
per ordinary
share
Net asset value 141p 184p 213p 212p 170p
per ordinary
share
Dividends per 34.2p 33.7p 30.6p 26.6p 22.2p
ordinary
share(3)
Equivalent cents 54.1c 49.3c 44.2c 42.3c 36.7c
per share(3)
(4)
Market price 446p 746p 708p 774p 855p
(year-end)
Number of 973 981 1,026 1,024 1,028
shareholders
(thousands)
Number of 5,583 5,564 5,507 5,475 5,435
ordinary shares
in issue
(millions)
Financial ratios % % % % %
(1) , (5)
Dividend payout 107.1 84.0 63.4 59.5 58.1
ratio
Post-tax return 16.7 18.1 21.1 23.9 23.5
on average
shareholders'
equity
Post-tax return 0.93 1.28 1.68 1.63 1.48
on average
assets
Post-tax return 1.61 2.26 3.07 2.94 2.62
on average
risk-weighted
assets
Average 5.4 6.9 7.8 6.8 6.3
shareholders'
equity to
average
assets
Efficiency 55.4 53.7 48.8 46.7 52.1
ratio(6)
Capital ratios
(1)
Total 9.6 8.8 8.7 14.9 11.2
capital
Tier 1 7.8 7.8 8.0 9.9 8.6
capital
(1) Figures for 2001 and earlier years have been restated to reflect the
implementation of FRS 12, "Provisions, Contingent Liabilities and
Contingent Assets", FRS 15, "Tangible Fixed Assets", FRS 18, "Accounting
Policies", FRS 17, "Retirement Benefits", FRS 19 "Deferred Tax", UITF 33
"Obligations in Capital Instruments", detailed guidance from the
Association of British Insurers for best practice in the preparation of
results using the achieved profits method of accounting and other minor
adjustments.
(2) Assets exclude long-term assurance assets attributable to policyholders.
(3) Annual dividends are comprised of both interim and final dividend payments.
Final dividends (which are always paid in the following year) are included
in the year to which they relate rather than in the year in which they are
paid.
(4) Translated into US dollars at the Noon Buying Rate on the date each payment
is made.
(5) Averages are calculated on a monthly basis from the consolidated financial
data of Lloyds TSB Group.
(6) The efficiency ratio is calculated as total operating expenses as a
percentage of total income.
4
SELECTED US GAAP FINANCIAL 2002 2001* 2000* 1999*
DATA
Income statement data for
the year ended 31 December
(GBPm)
Total revenues, net of 10,498 9,335 10,380 9,493
interest expense
Policyholder benefits and (1,565) (2,228) (1,735) (936)
claims expense
Provision for bad and (1,029) (747) (541) (615)
doubtful debts
Income before tax 2,376 2,215 2,755 3,352
Net income 1,751 1,632 1,986 1,993
Dividends 1,903 1,738 1,522 1,285
Balance sheet data at 31
December (GBPm)
Shareholders' equity 10,190 13,533 13,712 13,109
Deposits 141,777 133,419 117,473 110,545
Loans, net of 134,202 122,485 110,788 99,120
provisions
Total assets 254,389 243,226 225,776 180,825
Share information (pence
per ordinary share)
Basic earnings 31.4 29.5 36.2 36.6
Diluted earnings 31.3 29.2 35.8 35.9
Net asset value 180 240 246 236
Dividends 34.2 31.5 27.8 23.6
Financial ratios(1) % % % %
Dividend payout ratio 108.7 106.5 76.6 64.5
Post-tax return on average 14.8 12.0 14.8 15.6
shareholders' equity
Post-tax return on average 0.73 0.72 1.00 1.13
assets
Average shareholders' 4.8 5.8 6.6 7.2
equity to average
assets
* restated (see page F-67)
(1) Lloyds TSB Group does not have sufficient information to calculate US GAAP
average balances on a monthly basis. Where applicable, these financial
ratios have been based upon simple averages of the opening and closing
balances.
5
EXCHANGE RATES
In this annual report, unless otherwise indicated, all amounts are
expressed in pounds sterling. For the months shown the US dollar high and low
Noon Buying Rates per pound sterling were:
2003 2002
May April March February January December
(US dollars per pound sterling)
High 1.65 1.60 1.61 1.65 1.65 1.61
Low 1.59 1.55 1.56 1.57 1.60 1.56
For the years shown the averages of the US dollar Noon Buying Rates per
pound sterling on the last day of each month were:
2002 2001 2000 1999 1998
(US dollars per pound sterling)
Average 1.51 1.44 1.52 1.61 1.66
On 18 June 2003, the latest practicable date, the US dollar Noon Buying
Rate was $1.6798 = GBP1.00. Lloyds TSB Group makes no representation that
amounts in pounds sterling have been, could have been or could be converted into
US dollars at that rate or at any of the above rates.
6
BUSINESS
History and development of Lloyds TSB Group
The history of Lloyds TSB Bank can be traced back to the 18th century when
the banking partnership of Taylor and Lloyds was established in the UK. The
early years of the 20th century were marked by many acquisitions and mergers,
significantly expanding the number of banking offices in the UK. For much of the
last 30 years Lloyds TSB Bank has also had an international exposure principally
in New Zealand and Latin America. Lloyds TSB Bank expanded further in the late
1980's by the creation of the insurance-led group of Lloyds Abbey Life following
the merger of five Lloyds TSB Bank businesses and Abbey Life Group plc, and in
1995 the business of Cheltenham and Gloucester Building Society was acquired.
TSB Group plc became operational in 1986 when, following UK government
legislation, the operations of four Trustee Savings Banks and other related
companies were transferred to TSB Group plc and its new banking subsidiaries. By
1995, the TSB Group had, either through organic growth or acquisition, developed
life and general insurance operations, investment management activities, a motor
vehicle hire purchase and leasing operation, and an estate agency business to
supplement its retail banking activities.
In 1995, TSB Group plc merged with Lloyds TSB Bank. Under the terms of the
merger, the TSB and Lloyds TSB Bank groups were combined under TSB Group plc,
which was re-named Lloyds TSB Group plc. In 1999, the businesses, assets and
liabilities of TSB Bank, the principal banking subsidiary of the TSB Group prior
to the merger, and its subsidiary Hill Samuel Bank were vested in Lloyds TSB
Bank. In 2000, Lloyds TSB Group acquired Scottish Widows, for a total
consideration of GBP5,947 million. This transaction positioned Lloyds TSB Group
as one of the leading suppliers of long-term savings and protection products in
the UK. The Lloyds TSB Group has remained in substantially this form since that
time. For additional information on the Lloyds TSB Group see "Business
Overview".
Management and resources
Lloyds TSB Group recognises that it will create value for its shareholders
if it creates value for its customers. Its constant aim is to meet the rapidly
changing needs and expectations of its customers. Lloyds TSB Group believes that
success depends upon service, consistency and commitment. Nothing is more
important to Lloyds TSB Group's business than maintaining the trust and
confidence of its customers and Lloyds TSB Group aims, wherever possible, to
maintain long-term relationships with its customers. Lloyds TSB Group has an
established code of business conduct which is published and available, on
request, to the public. The policy defines the standards and values which are
used to operate the business and covers Lloyds TSB Group's relationship with
customers, suppliers, employees, the community, shareholders and competitors.
The code is incorporated within procedures for each area of the business and has
been communicated to all employees.
Lloyds TSB Group operates in a marketplace which is continually changing.
No organisation can successfully manage change without the support and
commitment of its staff. The pace and scope of change will not diminish as
competition in the financial services market continues to increase. Lloyds TSB
Group recognises that it is the staff of the organisation who have delivered,
and will continue to deliver, its success and considers that one of its greatest
competitive advantages is the ability of its people to adapt to rapid and far
reaching change. The knowledge and skills of Lloyds TSB Group's employees are a
key element in its success and therefore it invests significantly in training,
ensuring that it is accessible by everyone in the organisation.
Lloyds TSB Group recognises that long-term success depends on the quality
of its management. It is therefore committed to developing the potential of all
managers; in particular ensuring that it has the succession management
capability to meet future needs for top management. On 20 December 2002 Lloyds
TSB Group announced that Eric Daniels, group executive director, UK Retail
Banking, would succeed Peter Ellwood who retired as group chief executive on 31
May 2003, and that Peter Ayliffe, managing director, Personal Banking, would
succeed Eric Daniels as group executive director, UK Retail Banking and join the
Board. On 6 February 2003 it was announced that Steve Targett, formerly chief
executive officer, Europe, for National Australia Group would succeed David
Pritchard as group executive director, Wholesale and International Banking upon
Mr Pritchard's retirement as an executive director on 16 April 2003. David
Pritchard became deputy chairman replacing Alan Moore who retired from the
Lloyds TSB Group on the same day. Also on 16 April 2003, the following
non-executive directors left the Board: Kent Atkinson, Clive Butler and Sheila
Forbes; and on 1 May 2003, Wolfgang Berndt and Angela Knight joined the Board as
non-executive directors.
Strategy of Lloyds TSB Group
The governing objective of Lloyds TSB Group is to maximise shareholder
value over time. Lloyds TSB Group believes that this objective can only be
achieved by having clear strategic aims, plans capable of translating strategy
into shareholder value, and the determination and ability to implement and
deliver those plans. Lloyds TSB Group plans to maximise shareholder value over
time by a combination of organic growth and acquisitions, balancing short-term
profit growth and investment in the future of the business to create sustainable
long-term value for all its stakeholders.
7
Lloyds TSB Group's three strategic aims are to be a leader in its chosen
markets, to be the first choice for its customers and to reduce day-to-day
operating costs to allow greater scope for investment in better products,
enhanced service and multi-channel distribution.
* To be a leader in its chosen market Lloyds TSB Group aims to be a leader in
its chosen markets as market leaders earn higher returns and create greater
value. Lloyds TSB Group has pursued this aim by seeking opportunities to
consolidate its position in businesses where it is already strong by a
combination of organic growth and acquisitions and by divesting businesses
in markets where it is not a leader and cannot aspire reasonably to
leadership. The acquisition of Scottish Widows in March 2000 has greatly
enhanced Lloyds TSB Group's market position in the life assurance market.
Based on figures provided by the Association of British Insurers, Lloyds
TSB Group's share of the UK life and pensions market in 1999 was 1.5 per
cent, excluding Abbey Life. By September 2002, following the acquisition of
Scottish Widows, this rose to 5.3 per cent. Within Asset Finance, Lloyds
TSB Group has acquired Chartered Trust, First National Vehicle Holdings,
Abbey National Vehicle Finance and the Dutton-Forshaw Group to enhance the
Group's leading position in UK motor finance. In 1998, the acquisition of
Countrywide Banking Corporation further strengthened Lloyds TSB Group's
position in New Zealand; although, following approaches in 2003, Lloyds TSB
Group is undertaking a strategic review so that potential offers for The
National Bank of New Zealand, as well as retention of the business, can be
considered. Lloyds TSB Group has also divested businesses such as Mortgage
Express, International Factors, Black Horse Agencies, Schroder Munchmeyer
Hengst & Co and Lloyds TSB Asset Management S.A. which were either
duplicated or were in markets in which Lloyds TSB Group did not wish to
become a leader.
* To be first choice for its customer Lloyds TSB Group aims to be first
choice for its customers by understanding and meeting their needs more
effectively than any of its competitors. Central to this objective is
Lloyds TSB Group's Customer Relationship Management programme, which brings
together all the customer information that Lloyds TSB Group holds so that
it can build on its relationship with individual customers by providing
them with products, services and access suited to their individual
requirements. Lloyds TSB Group has continued to broaden its product range
which, supported by the knowledge and expertise of its staff, ensures that
the Lloyds TSB Group provides comprehensive financial solutions to meet the
needs of all its customers. Lloyds TSB Group's multi-channel banking
infrastructure, including internet and telephony services, means that it
can provide its customers with significant options in terms of convenience
and choice.
* To reduce day-to-day operating costs Reducing day-to-day operating costs
allows Lloyds TSB Group greater scope for investment in products, enhanced
service and multi-channel distribution. In February 2000 Lloyds TSB Group
announced the commencement of a substantial medium-term efficiency
programme to improve the Lloyds TSB Group's overall efficiency to support
increasing levels of investment in the Lloyds TSB Group's businesses. The
efficiency programme has been a major contributing factor to the net
reduction in staff numbers during 2002 of 4,191, after adjusting for an
additional 2,328 staff following a number of acquisitions, against a
targeted reduction of 3,000. The major projects comprising the efficiency
programme are now coming to an end, although the Lloyds TSB Group remains
committed to strict cost control and, largely as a result of continuing
efficiency initiatives, operating expenses in 2003, excluding the impact of
acquisitions and operating lease depreciation, are expected to grow by no
more than the rate of inflation.
Lloyds TSB Group continues to develop new strategies which will leverage
the strength of its brands and its multi-channel distribution capability, its
enhanced understanding of what its customers want and its cost advantage to
deliver greater value to customers.
Lloyds TSB Group remains alert for opportunities to grow through
acquisitions that complement its good organic strategies and help provide new
opportunities for profitable growth, both in the UK and overseas. Whilst Lloyds
TSB Group remains well placed to participate in cross-border consolidation with
potential to create value by exploiting its retailing and cost management skills
and its ability to manage change effectively, the prevailing stock market
conditions appear to have slowed down the consolidation process, both in the UK
and Europe. Lloyds TSB Group's proposed acquisition of Abbey National in 2001,
which was blocked by the UK Competition Commission, signalled an end to
large-scale consolidation within the UK by domestic participants.
Businesses and activities of Lloyds TSB Group
The main businesses and activities of Lloyds TSB Group's three segments are
described below.
UK Retail Banking and Mortgages
UK Retail Banking and Mortgages provided banking and financial services to
some 15 million customers during 2002. With approximately 2,200 branches of
Lloyds TSB Bank, Lloyds TSB Scotland and Cheltenham & Gloucester at the end of
2002, Lloyds TSB Group provides comprehensive geographic branch coverage in
England, Scotland and Wales. The profit before tax of UK Retail Banking and
Mortgages in 2002 was GBP1,172 million.
8
UK Retail Banking
Current accounts, savings and investment accounts, and consumer lending.
The retail branches of Lloyds TSB Bank offer a broad range of branded products
and Cheltenham & Gloucester provides retail investments through its branch
network and a postal investment centre.
Business banking. Small businesses were served by over 1,750 dedicated
business managers based in some 450 locations throughout the UK at the end of
2002. Customers have access to a wide range of tailored business services
ranging from traditional banking products through factoring, insurance and
investments to non-financial solutions to their business problems such as Debtor
Management service, providing legal support to help customers recover debts, and
Prospect Finder, providing customers with a tailored list of potential customers
for their business. Lloyds TSB Group is one of the leading banks for new
business start-ups with around one in five opening accounts with Lloyds TSB
Group.
Card services. Lloyds TSB Group provides a range of card-based products and
services, including credit and debit cards and card transaction processing
services for retailers. Lloyds TSB Group is a member of both the VISA and
MasterCard payment systems and is the third largest credit card issuer in the UK
with a 10 per cent share of outstanding card balances at 31 December 2002.
Cash machines. Lloyds TSB Group has one of the largest cash machine
networks of any leading banking group in the UK and, at 31 December 2002,
personal customers of Lloyds TSB Bank were able to withdraw cash, check balances
and obtain mini statements through some 4,200 cashpoint machines at branches and
external locations around the country. In addition, they had access to a further
some 37,000 cash machines via LINK in the UK and to cash machines worldwide
through the VISA and MasterCard networks.
Telephone banking. Telephone Banking continues to grow and Lloyds TSB Group
provides one of the largest telephony services in Europe, in terms of customer
numbers. At the end of 2002, some 3.2 million customers had registered to use
the services of PhoneBank and the automated voice response service PhoneBank
Express. Lloyds TSB Group's telephone banking contact centres handled some 46
million calls during 2002.
Internet banking. Internet Banking provides online banking facilities for
personal and business customers and enables them to conduct their financial
affairs without the need to use the branch network. Some 2 million customers
have registered to use Lloyds TSB Group's internet banking services.
UK Wealth Management. Private Banking provides a range of tailor-made
wealth management services and products to individuals from 40 offices
throughout the UK. In addition to asset management, these include tax and estate
planning, executor and trustee services, deposit taking and lending, insurance
and personal equity plan and individual savings account (ISA) products. At 31
December 2002, client funds under management totalled some GBP10,000 million.
Lloyds TSB Stockbrokers undertakes retail stockbroking through its Sharedeal
Direct telephone service.
Mortgages
Cheltenham & Gloucester is Lloyds TSB Group's specialist residential
mortgage provider, providing a range of mortgage products to personal customers
through its own branches and those of Lloyds TSB Bank in England and Wales, as
well as through the telephone, internet and postal service, C&G TeleDirect.
Lloyds TSB Group also provides mortgages through Lloyds TSB Scotland and
Scottish Widows Bank. Lloyds TSB Group is the third largest residential mortgage
lender in the UK on the basis of outstanding balances, with mortgages
outstanding at 31 December 2002 of GBP62,467 million, representing an estimated
market share of 9.3 per cent.
Insurance and Investments
The operating profit, calculated as explained under "Operating and
Financial Review and Prospects - Line of business information - Summary", of
Insurance and Investments in 2002 was GBP1,231 million.
Life assurance, pensions and investments. Scottish Widows is Lloyds TSB
Group's specialist provider of life assurance, pensions and investment products,
which are distributed through Lloyds TSB Bank's branch network, through
independent financial advisors and directly via the telephone and the internet.
Before its acquisition in 2000, Scottish Widows distributed life assurance,
pensions and long-term savings products mainly through independent financial
advisors. Following the acquisition, the Scottish Widows brand became the sole
brand for Lloyds TSB Group's life, pensions, unit trust and other long-term
savings products, and Lloyds TSB Group extended the brand's product range to
Lloyds TSB Group's retail banking branch network.
In common with other life assurance companies in the UK, the life and
pensions business of each of the life assurance companies in the Lloyds TSB
Group is written in a long-term business fund. The long-term business fund is
divided into a With-Profits and a Non-Participating sub-fund.
9
With-profits life and pensions products are written from the With-Profits
Fund. The benefits accruing from these policies are designed to provide a
smoothed return to policyholders who hold their policies to maturity through a
mix of annual and final (or terminal) bonuses added to guaranteed basic
benefits. The guarantees generally only apply on death or maturity. The actual
bonuses declared will reflect the experience of the With-Profits Fund.
Other life and pensions products are generally written from the
Non-Participating sub-fund. Examples include unit-linked policies, annuities,
term assurances and health insurance (under which a pre-determined amount of
benefit is payable in the event of an insured event such as death). The benefits
provided by such linked policies are wholly or partly determined by reference to
a specific portfolio of assets known as unit-linked funds.
General Insurance. Lloyds TSB General Insurance provides general insurance
through the retail branches of Lloyds TSB Bank and Cheltenham & Gloucester, and
through a direct telephone operation and the internet. Based on a survey
conducted for Lloyds TSB Group, Lloyds TSB General Insurance had a new business
market share of 12 per cent of the new household insurance market in 2002
(compared to 14 per cent in 2001). The new household insurance market is defined
as those customers switching suppliers, taking out first ever policies and
customers re-entering the household insurance market.
Scottish Widows Investment Partnership. Scottish Widows Investment
Partnership manages funds for Lloyds TSB Group's retail life, pensions and
investment products. Clients also include corporate pension schemes, local
authorities and other institutions in the UK and overseas. At 31 December 2002
funds under management amounted to some GBP70,000 million, compared to some
GBP78,000 million a year earlier. The decline mainly reflects the lower stock
market levels experienced in 2002.
Wholesale Markets and International Banking
Wholesale Markets
The profit before tax of Wholesale Markets in 2002 was GBP626 million.
Lloyds TSB Group's relationships with major UK and multinational companies,
banks and institutions, and medium-sized UK businesses, together with its
activities in financial markets, are managed through dedicated offices in the UK
and a number of locations overseas, including New York.
Treasury. Lloyds TSB Group is a leading participant in the Sterling money
market. It is also active in currency money markets, foreign exchange markets
and also in certain derivatives markets, primarily to meet the needs of
customers. It also plays a central role in the funding, cash and liquidity
management of Lloyds TSB Group.
Corporate. Lloyds TSB Group provides a relationship banking, financial and
advisory service to the corporate market place for customers with turnovers in
excess of GBP2 million, along with access to specialists in a number of banking
support areas, including financial institutions and trade finance, strategic
asset finance including large value lease finance, structured finance, share
registration, acquisition finance and capital markets. The Agricultural Mortgage
Corporation provides long-term finance for the agricultural sector, and through
Lloyds TSB Development Capital, venture capital finance is provided to
developing companies.
Asset Finance. Lloyds TSB Group's asset finance businesses provide
individuals and companies with finance through leasing, hire purchase and
contract hire packages. Hire purchase, or instalment credit, is a form of
consumer financing where a customer takes possession of goods on payment of an
initial deposit but the legal title to the goods does not pass to them until the
agreed number of instalments have been paid and the option to purchase has been
exercised. Through its invoice discounting and factoring subsidiary Lloyds TSB
Commercial Finance, Lloyds TSB Group provides working capital finance for
customers by releasing to the customer up to 90 per cent of the value of their
unpaid invoices, with the balance payable, after deduction of a service fee,
once the invoices have been settled. Invoice discounting differs to factoring in
that the customer retains control of the debt collection and the credit risk.
Specialist personal lending, store credit, small/medium ticket leasing and the
recently acquired Dutton-Forshaw motor dealership complete this group of
businesses.
International Banking
The profit before tax of International Banking in 2002 was GBP379 million.
New Zealand. The National Bank of New Zealand Limited ("NBNZ") was New
Zealand's second largest bank measured by assets during 2002 and provides a wide
range of banking services through some 160 retail branch outlets. NBNZ serves
retail customers' needs for current and savings accounts, credit cards, consumer
lending and home loans. NBNZ also has a substantial non-personal business
providing working capital, term lending, trade finance and treasury services to
the business and agricultural sector.
Europe. Lloyds TSB Group has private banking operations for wealthy
individuals outside their country of residence. The business is conducted
through branches of Lloyds TSB Bank located in Switzerland, Luxembourg, Monaco
and Gibraltar. There are also private and corporate banking operations in
Belgium, Netherlands, Spain and France.
Offshore banking. The Lloyds TSB Group's offshore banking operations
comprise offices in the Channel Islands and Isle of Man, providing a full range
of retail banking, private banking and financial services to overseas residents
and islanders, together with deposit services offshore for UK residents.
10
The Americas. Lloyds TSB Group has operated in the Americas for over 130
years and has offices in Brazil, Argentina, Colombia, Ecuador, Guatemala,
Honduras, Panama, Paraguay and Uruguay. In addition Lloyds TSB Group has private
banking and investment operations in the US. In Brazil, where Lloyds TSB Bank
has a corporate banking operation, Lloyds TSB Group also owns Losango, a
consumer lending operation providing three retail products: borrowing at the
point of sale in stores, unsecured personal lending and borrowing to fund new
and second-hand car purchases. The Losango lending business is mainly conducted
through Banco Lloyds TSB S.A., a locally incorporated subsidiary of Lloyds TSB
Bank. Lloyds TSB Bank also provides specialist banking and treasury products to
corporate clients in Brazil. In Argentina where Lloyds TSB Bank has 36 branches
and Colombia, where Lloyds TSB Bank's subsidiary Lloyds TSB Bank S.A. has 17
branches, Lloyds TSB Group provides corporate banking services, including trade
finance, working capital loans, import finance, term deposits and money
transmission. It also provides retail banking services through a network of
branches, including current and savings accounts, credit cards, personal loans
and mortgages.
Middle East and Asia. There are banking operations in Hong Kong, Singapore,
Tokyo, Malaysia and Dubai.
Recent developments
Lloyds TSB Group issued a trading update on 23 June 2003, which made
the following comments:
Lloyds TSB Group expects to deliver a satisfactory trading performance for
the half-year to 30 June 2003.
At 31 March 2003 total Lloyds TSB Group loans and advances to customers
were GBP138,640 million, an increase of 3 per cent in the first quarter of 2003.
This increase largely reflected good quality growth in the Lloyds TSB Group's UK
mortgage and credit card portfolios. Total Lloyds TSB Group risk weighted assets
at 31 March 2003 were GBP125,659 million. Customer deposits totalled GBP120,535
million, an increase of 3.6 per cent in the first quarter of 2003, as a result
of strong growth in current account balances and international deposits. The
Lloyds TSB Group net interest margin for the first three months of 2003 was 3.05
per cent compared with a Lloyds TSB Group net interest margin of 3.16 per cent
in the fourth quarter of 2002. The implementation of the remedies proposed in
March 2002 by the Competition Commission's report, following its investigation
into the supply of banking services to small and medium sized enterprises
(SMEs), reduced the Lloyds TSB Group net interest margin in the first quarter of
2003 by some 10 basis points.
Despite a general slowdown in the growth of consumer credit in the UK, the
Lloyds TSB Group continues to deliver good growth in mortgage and credit card
lending and is growing market share in many of its key product areas, supported
by the recent launch of a number of highly segmented, competitive and innovative
product offers. Net new mortgage lending in the first quarter of 2003 was some
GBP2,200 million, an estimated market share of 10.9 per cent, compared with some
GBP700 million in the first quarter of 2002.
Overall, weighted sales of life, pensions and unit trust products in the
first five months of 2003 were at a similar level to the comparative period in
2002. By distribution channel, in the first five months of 2003, weighted sales
of life, pensions and unit trusts via Independent Financial Advisors increased
strongly by 37 per cent, against the same period in 2002, building on the
strength of the Scottish Widows brand and its resources. By contrast, sales via
the branch network remained subdued and fell by 26 per cent against the
comparative period last year.
Overall sales of general insurance products continue to perform well
despite creditor insurance sales, in the first five months of 2003, being lower
than the comparative period in 2002, as a result of the general slowdown in
growth in personal loan lending.
Strict control of the Lloyds TSB Group's costs has been maintained and the
Lloyds TSB Group expects that its cost growth for 2003, excluding the impact of
acquisitions and operating lease depreciation, will be less than the rate of
inflation. In the first quarter of 2003 the impact of acquisitions added GBP51
million to the Lloyds TSB Group's cost base and operating lease depreciation was
GBP52 million (first quarter 2002: GBP56 million).
Overall asset quality remains satisfactory, with no material increase in
the level of arrears or non-performing lending. As a result, the annualised
charge for bad and doubtful debts in the first quarter of 2003, as a percentage
of average lending, was lower than the 0.77 per cent charge as a percentage of
average lending for the full year 2002.
In May 2003 the Lloyds TSB Group agreed the sale of its French fund
management and private banking businesses. A net loss of approximately GBP15
million will be included in the profit and loss account of Lloyds TSB Group for
the half-year ending 30 June 2003. Following approaches, Lloyds TSB Group is
considering its options relating to its subsidiary, The National Bank of New
Zealand. The Lloyds TSB Group is undertaking a strategic review so that
potential offers for The National Bank of New Zealand, as well as retention of
the business, can be considered.
During the first quarter of 2003 improved secondary bond market conditions
have allowed the Lloyds TSB Group to reduce its Emerging Markets Debt portfolio.
As a result, profits on bond sales, and mark-to-market gains in the first
quarter of the year totalled some GBP90 million. This income was however partly
offset by lower than expected 'other finance income' as the Lloyds TSB Group
pension schemes' returns have been reduced by the effect of lower asset values.
In the first quarter of 2003, other finance income totalled GBP8 million (first
quarter 2002: GBP42 million). The increase in the FTSE All Share Index in the
first five months of 2003 led to a positive investment variance of GBP58 million
during that period.
The Lloyds TSB Group continues to carry out, in conjunction with the
regulator, its investigation into the appropriateness of certain sales of the
Extra Income & Growth Plan, a stock market related investment product sold in
2000 and 2001. This investigation is expected to be completed within the next
few months when the Lloyds TSB Group will be in a better position to quantify
the financial effect. During the first quarter of 2003 there has also been an
increase in the level of complaints relating to Lloyds TSB Group sales and
performance of certain endowment based and long-term savings products. Whilst
the Lloyds TSB Group maintains provisions for redress to policyholders in
respect of past sales, further provisions and charges will arise in 2003 to
cover these issues.
11
Properties
As at 31 December 2002, Lloyds TSB Group occupied 3,617 properties in the
UK. Of these, 849 were held as freeholds, 92 as long-term leaseholds and 2,676
as short-term leaseholds. The majority of these properties are retail branches
and are widely distributed throughout England, Scotland and Wales. The most
significant of these properties are Lloyds TSB Group's new head office in
London, together with administrative buildings in Bristol, Gloucester and
Edinburgh.
In addition, Lloyds TSB Group owns, leases or uses under licence properties
for business operations elsewhere in the world, principally in Argentina,
Brazil, New Zealand, Spain and Switzerland.
On 13 March 2002, Lloyds TSB Group disposed of its freehold head office,
although it continued to occupy these premises until May 2003 when the move to
its new head office building was completed. The new head office, which is held
on a long leasehold, is also located within the City of London.
Legal actions
Lloyds TSB Group is periodically subject to threatened or filed legal
actions in the ordinary course of business. Lloyds TSB Group does not expect the
final outcome of any legal proceedings currently known to it to have a material
adverse effect on its consolidated results of operations or financial condition.
Guaranteed annuity options
A guaranteed annuity option policy is a pension policy that provides a cash
benefit at retirement age, which can be converted into an annuity at a specified
minimum rate. When market rates fall below the specified minimum and
policyholder funds are not expected to be sufficient to meet the excess cost of
the annuity at retirement a provision is established. In 1998, a provision was
made within Abbey Life for liabilities under certain unit-linked products with
guaranteed annuity options written between the mid 1960s to the mid 1980s.
Unit-linked insurance policies are insurance policies where the policyholder's
premiums are used to buy units in a fund run by the insurer. At 31 December 2002
this provision was GBP111 million; Lloyds TSB Group is satisfied that this
remains adequate.
The implications of guaranteed annuity option contracts for the
distribution of profits in the form of bonuses to with-profits policyholders
were clarified by the House of Lords in its judgement in the guaranteed
annuities case, Equitable Life vs. Hyman. The House of Lords ruled that a life
company could not use its discretion to undermine or negate a contractual
guaranteed annuity rate, and that the cost of funding such rates could not be
met by guaranteed annuity option policyholders alone. After an extensive review
of its existing practices carried out in the light of this judgement, Scottish
Widows revised the way it calculates benefits for guaranteed annuity policies
with effect from 1 February 2002. As a result of this change, the terminal
bonuses for guaranteed annuity option policies were increased.
Under the terms of the transfer of Scottish Widows' business, a separate
memorandum account was created within the With Profits Fund called the
Additional Account. This Account had a value at 31 December 2002 of
approximately GBP1,500 million (2001: GBP1,700 million) and is available to meet
any additional costs of providing guaranteed benefits on transferred policies,
including guaranteed annuity option policies. The assets allocated to the
Additional Account include certain hedge assets, which are intended to protect
the With-Profits Fund against the consequences of a future fall in interest
rates.
The eventual cost of providing the enhanced benefits is dependent upon a
number of factors, including in particular:
* The proportion of policyholders with a guaranteed annuity option policy
who choose to exercise their options;
* The effect of future interest rate and mortality trends on the cost of
annuities; and
* The future investment performance of the With-Profits Fund.
Having considered a range of possible outcomes, Lloyds TSB Group currently
expects that the most likely outcome is that the balance in the Additional
Account available for this purpose will be sufficient to meet the cost of the
enhanced benefits payable to the guaranteed annuity option policyholders, as
well as other contingencies. The cost of enhanced benefits, currently estimated
to be approximately GBP1,100 million (2001: GBP1,400 million) on a net present
value basis, will be paid out over many years as policies mature. In the event
that the amount in the Additional Account proves, over time, to be insufficient,
the shortfall will be met by Lloyds TSB Group. At this time, no provision is
considered necessary for such risk.
Customer remediation payments
Redress to past purchasers of pension policies
As a measure to reduce the burden on the state benefit system resulting
from the increasing size of the retired population the government introduced, as
part of the UK Income and Corporation Taxes Act 1988, legislation aimed at
encouraging the working population to make their own private pension
arrangements. For several years following the introduction of this legislation,
insurance companies and intermediaries advised a large number of customers to
set up private pension plans, often by transferring out of, or choosing not to
join, occupational pension schemes offered by their employers. As a further way
of relieving the possible pensions burden on the state, individuals had been
given the option, by the government, to forego their entitlement to the earnings
related element of state pension benefits - the State Earnings Related Pension
Scheme ("SERPS") - in return for having part of their National Insurance
contributions diverted into personal pension plans.
12
During the early 1990s, the UK government and regulatory authorities became
increasingly concerned that many of these customers had been given poor advice
and that they would, in fact, have been in a better position if they had
remained in, or joined, employer sponsored pension schemes. The regulator of the
UK pension industry (then the Securities and Investments Board now the Financial
Services Authority) carried out an industry-wide investigation into the conduct
of business involving the transfer of pensions. The conclusion of this
investigation was that a large number of customers had been poorly advised by
insurance companies and intermediaries across the industry.
As a result of its investigation, the regulator established an action plan for
the UK pensions industry to follow in reviewing all cases of possible
misselling as described in the preceding paragraph and determining necessary
compensation. For the purposes of this review, all relevant cases were
segregated into two classes:
* Phase 1 cases ("priority cases") - these were mainly cases where the
customer had retired since taking out the private pension plan, was
approaching retirement or had since died.
* Phase 2 cases ("non-priority cases") - these cases primarily relate to
younger customers who were not yet approaching their expected
retirement dates.
In February 2000, the regulator widened the scope of the review to
encompass Free Standing Additional Voluntary Contributions ('FSAVC') business,
which constitutes sales of personal pensions to members of company pension
schemes. Individuals who purchased these pensions instead of investing their
money and any matching contributions from their employer in the Additional
Voluntary Contributions ('AVC') scheme connected to their company's pension
scheme may have been financially disadvantaged, due to not being properly
informed of the benefits foregone from not investing in their AVC scheme.
In common with a number of other banks and insurance companies, in January
1997 Lloyds TSB Bank was fined GBP325,000 by the Investment Management
Regulatory Organisation Limited for regulatory breaches and failings in
connection with the sale of personal pensions between April 1988 and July 1993.
Lloyds TSB Group does not expect any further fines or regulatory investigations
in connection with the regulator's action plan for reviewing cases of possible
misselling.
The most significant costs are the compensation of past purchasers of
pensions. As the review of pension cases in Lloyds TSB Group has progressed,
provisions have been established for the cost of compensation to past purchasers
of pensions.
Movements in the provisions established by the Lloyds TSB bancassurance
business and Abbey Life over the last three years have been as follows:
2002 2001 2000
GBPm GBPm GBPm
Provision at 1 January 203 352 397
Accrual of interest on the provision 17 20 26
Additional amounts provided 40 70 100
Compensation paid (223) (238) (173)
Phase 1 guarantees(1) - (1) 3
Phase 2 guarantees(1) - - (1)
Provision at 31 December (2) 37 203 352
(1) In some cases, rather than pay cash compensation directly into the
customer's private pension plan, Lloyds TSB Group has guaranteed to
'top-up' the customer's pension income, on retirement, to the level that
they would have received under the relevant occupational scheme. A separate
provision for these amounts is carried in Lloyds TSB Group's balance sheet.
(2) This provision is included within the figure for the long-term assurance
business attributable to the shareholder ("embedded value") in Lloyds TSB
Group's balance sheet.
At the beginning of 2000 a provision totalling GBP397 million was held in
respect of Phase 1 and Phase 2 cases. This provision was calculated by making
assumptions about the number of cases that would be identified during the review
as requiring compensation and the estimated cost of the resulting payment. As
the review has progressed greater experience has enabled management to refine
these assumptions. The size of the provision has also been affected by the
widening in the scope of the review to encompass certain parts of the FSAVC
business and periodic revisions to the actuarial guidelines issued by the
Financial Services Authority for the calculation of redress payments. Lower
stock market levels have also had a significant impact on total redress costs as
the cost of restitution into company pension schemes increases as personal
pension fund values reduce. These factors have resulted in additional charges
being made to the Lloyds TSB Group's profit and loss account of GBP100 million
in 2000, GBP70 million in 2001 and GBP40 million in 2002.
13
Following normal actuarial practice, each year the provision has also been
increased to recognise the interest accruing upon the assets held to match the
liability. This increase in the provision amounted to GBP17 million in 2002,
GBP20 million in 2001 and GBP26 million in 2000, although there was no net
effect on Lloyds TSB Group's profit and loss account.
By 31 December 2002, Lloyds TSB Group had met the requirement of the
Financial Services Authority to have completed the review and where appropriate
issued offers of compensation to customers, except for those cases with
mitigating circumstances. Lloyds TSB Group was satisfied as to the adequacy of
the provision as at 31 December 2002.
Before its acquisition in 2000, Scottish Widows mainly distributed its
products through independent financial advisors and for this reason the
liability of the business to pay redress to past purchasers of pension policies
is less significant. At 31 December 2002 a provision of GBP5 million (2001:
GBP11 million) was held within the With-Profits Fund. The review has been
completed and no further costs are anticipated. However in the event that this
is not the case the cost will be met from assets held in the With-Profits Fund
and will therefore have no financial impact upon Lloyds TSB Group.
Mortgage endowment and other savings products
A current industry issue concerns the sale of life assurance products
related to the repayment of residential mortgages ('mortgage endowments'). At
sale, the premium is set at a level such that the projected benefits assured,
including an estimate of growth over the life of the policy and allowing for an
estimate of the expenses to be charged, will equal or exceed the mortgage debt.
Falling investment returns have led to increased concern that the value of some
of these policies will be less than the amount required to repay the mortgage.
Certain customers have complained that this risk was not properly explained to
them at the time of the sale.
During 2002, a review was carried out in conjunction with the Financial
Services Authority into past sales of mortgage endowment and other long-term
savings products made by the Abbey Life sales force prior to its disposal by the
Lloyds TSB Group in February 2000. As a result of this review, in December 2002
the Financial Services Authority fined Abbey Life GBP1 million for mortgage
endowment misselling and other deficiencies in its compliance procedures and
controls. A provision of GBP165 million has been established for the cost of
compensation due to customers based upon assumptions as to the number of cases
requiring redress and the estimated average cost. Lloyds TSB Group was satisfied
with the adequacy of the provision at 31 December 2002.
Other complaints, including those related to the sale of mortgage
endowments by other parts of the Lloyds TSB Group, are dealt with on a case by
case basis and where appropriate compensation is paid. Provision has been made,
based upon the level of complaints, for the estimated cost of redress which at
31 December 2002 was not significant.
Concerns have also been expressed over the appropriateness of sales of
certain stock market related savings products. In this regard, Lloyds TSB Group
is carrying out, in conjunction with the Financial Services Authority, an
investigation into sales made in 2000 and 2001 of the Extra Income & Growth
Plan. The Extra Income & Growth Plan is a term investment providing a fixed
return either by way of quarterly income, annual income or a single payment at
maturity. The capital repayment at maturity is linked to the performance of a
basket of shares, selected from the FTSE 100. This investigation is expected to
be completed during 2003.
Recent Developments
Since the end of 2002, the Lloyds TSB Group has continued to carry out, in
conjunction with the regulator, its investigation into the appropriateness of
certain sales of the Extra Income & Growth Plan. This investigation is expected
to be completed within the next few months when the Lloyds TSB Group will be in
a better position to quantify the financial effect. During the first quarter of
2003 there has also been an increase in the level of complaints relating to
sales and performance of mortgage endowments made by Lloyds TSB Group and other
long-term savings products. In addition, in the light of further experience the
Lloyds TSB Group has revised some of the assumptions used in the calculation of
the cost of redress in the areas described above. As a result of these
developments, and volatility in global stock markets, further provisions and
charges will arise in 2003 to cover these issues.
Competitive environment
General
Lloyds TSB Group operates in a financial services world that is
experiencing consolidation at both national and international levels. The last
few years have seen the establishment of global players in the industry together
with the beginnings of pan-European consolidation and considerable consolidation
within the US. Product manufacture and support in markets such as credit cards,
mortgages, savings and funds management will increasingly be driven on a global
scale.
Globalisation and developments in technology are significantly expanding
Lloyds TSB Group's range of competitors, by removing many barriers to entry.
These new entrants are expected to put Lloyds TSB Group's margins under
increasing pressure with products becoming increasingly simplified and
standardised. Nonetheless, Lloyds TSB Group expects competition within the
industry to continue to be partially based on service and relationships as well
as price, particularly for core banking services. Furthermore, complex products
such as pensions are expected to be more resistant to standardisation and
selling across the internet. In addition, Lloyds TSB Group has significant
strengths with which to counter the pressure on margins in its portfolio of
powerful brands, its existing customer base, its distribution capability and its
purchasing power.
14
The UK
Lloyds TSB Group's key markets are in the UK, predominantly in the retail
sector, where the market for basic financial and banking services is relatively
mature. The market for life and pensions and general insurance products has
exhibited growth in a number of key sectors.
The removal of regulatory and financial barriers in recent years has
blurred the traditional financial services industry lines and allowed new
competitors into the market. Lloyds TSB Group's competitors include all the
major retail financial services and fund management companies operating in the
UK. De-mutualised building societies which have become banks and life assurers
which have entered the banking market have become direct competitors in the
provision of banking products, whilst several UK banks have announced the launch
of stand-alone internet banks to complement their existing services. In the
mortgage market competitors include the traditional banks and building societies
and new entrants to the market, with the market becoming increasingly
competitive as both new entrants and incumbents endeavour to gain market share.
Lloyds TSB Group's competitors in the credit card market again include both the
traditional banks and new entrants, including overseas companies. In the last
few years a large share of new business has been acquired by US and new UK
competitors. In the provision of life, pensions and investments products Lloyds
TSB Group has seen increased competition from new market entrants, such as
traditional retailers, primarily in specialist areas. The fragmented nature of
the life, pensions and investments market in the UK has resulted in some
consolidation within the sector; government regulations on product charges and
competitive pressures are likely to drive further consolidation as providers
seek to achieve the benefits of economies of scale. In the general insurance
sector, the market has seen significant consolidation amongst underwriters but
continued fragmentation in distribution and an increasing number of new market
entrants including both overseas insurers and direct operators.
In addition to the challenging competitive environment, the UK financial
services industry is characterised by recent government intervention and
regulation. Lloyds TSB Group is currently facing over 120 potential legislative
issues which may have an impact on its business, over half of which emanate from
Europe as part of the Financial Services Action Plan or in the shape of EU
social legislation. Many of the reviews instigated by the UK government into the
financial services sector have been against a backdrop of increased consumerism,
driven by support for open competition and a fair deal for the consumer.
In 1998, the UK government commissioned an investigation into competition
in the banking industry whose findings were published in March 2000. The
investigation specifically examined the levels of innovation, competition and
efficiency in various sub-markets within the industry. The investigation found
that the small and medium-sized business market was not sufficiently
competitive, with barriers to entry existing for new players. The provision of
banking services to this sector was referred to the UK Competition Commission
under the Fair Trading Act 1973 for a full competition inquiry.
In pursuing its investigation, the UK Competition Commission provisionally
decided to regard the small and medium-sized business market to be comprised of
sole traders, firms and companies generating an annual turnover of up to GBP25
million. There are a number of operating units within Lloyds TSB Group engaged
in the small and medium-sized business market, the largest of which is Business
Banking. Business Banking provides services to those businesses with an annual
turnover of less than GBP2 million and has a 19 per cent share of this market,
based on research by NFO WorldGroup.
On 14 March 2002, the Competition Commission's report into the
competitiveness of banking for small and medium-sized enterprises (SME's) was
published by the government. The Competition Commission concluded that a number
of specific practices had the effect of restricting or distorting price
competition between the main banks. Particular examples that were identified
included the similarity of pricing structures and the fact that in general no
interest is paid on current account balances; a pattern of differentiation in
the charges made by the main banks, with free banking generally confined to
certain categories of SME such as new start-ups or customers switching banks;
and the use of negotiation for those considering switching. The Competition
Commission also concluded that there were significant barriers to entry, in part
caused by the lack of price competition, but also because of the unwillingness
of SME's to change banks because of the perceived complexity. In the view of the
Competition Commission the restriction and distortion of price competition has
led to excessive prices and profits. The government has accepted in full the
recommendations made by the Competition Commission. To remedy this situation one
of the most significant proposals is that banks should offer any SME customer
operating a current account in England and Wales, either:
* a current account that pays interest of at least the Bank of England Base
Rate, minus 2.5 per cent; or
* a current account free of money transmission charges; or
* a choice between the two.
The principal behavioural remedies intended to reduce barriers to entry and
expansion are measures to ensure fast error-free switching of accounts between
banks. In addition, measures have been proposed limiting the bundling of
services and improving market information and transparency.
15
Lloyds TSB Group has introduced initiatives to address a number of these
remedies, such as ease of switching and transparency of charging, either on its
own initiative or via the Business Banking Code. The estimated annual cost to
Lloyds TSB Group of implementing the Competition Commission's findings is likely
to be in the region of GBP150 million.
Other recent reviews into the Financial Services sector include:
* The DeAnne Julius Banking Code Review aimed at improving services to bank
customers, including the regulation of mortgage advice and the
introduction of an independent reviewer to develop the Banking Code.
* The Sandler Review into the UK's long-term retail savings industry which
was commissioned to identify structural flaws in the financial services
industry which might prevent customers from saving. The report's core
recommendation is the introduction of simple regulated products with
capped charges, restrictions on investment profile and the ability to
exit on reasonable terms.
* The Pickering Review of Pensions, published in July 2002, which focused
on the simplification of the pensions framework. Core recommendations
included a new Pensions Act to consolidate all existing pensions
legislation; a new, more pro-active regulator; a more targeted
approach to communicating with pension scheme members; and allowing
employers to make membership of their occupational pension schemes a
condition of employment.
Lloyds TSB Group has always supported the principle of competition and
agrees with the importance of building consumer confidence in financial
services. Lloyds TSB Group has concerns about the introduction of price
controls, which would be a barrier to entry and believes that voluntary codes,
rather than statutory regulation, are in the best interests of consumers and
competition.
Other markets
Lloyds TSB Group also operates in other countries, principally in New
Zealand and Latin America, where it is exposed to different competitive
pressures.
Lloyds TSB Group operates in New Zealand through its wholly-owned
subsidiary NBNZ. NBNZ's competitors principally comprise the major Australian
banks each of which offers retail and wholesale products through branch networks
and, more recently, over the telephone and internet. Consolidation in the
Australian banking industry would, therefore, have a direct effect upon the
competitive environment in New Zealand.
Lloyds TSB Group has operated in the Americas for over 130 years and has
offices in Brazil, Argentina, Colombia and seven other countries. The
competitive environment in each country varies significantly where the number of
players, both local and international, is substantially different. In Brazil
there are over 200 banks, a third of which are either partially or wholly owned
by foreign interests; in addition, there are a number of specialist consumer
finance businesses. In Argentina and Colombia the competition is limited to a
small number of domestic and foreign banks.
16
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The results discussed below are not necessarily indicative of Lloyds TSB
Group's results in future periods. The following information contains certain
forward-looking statements. For a discussion of certain cautionary statements
relating to forward-looking statements, see "Forward-Looking Statements".
The following discussion is based on and should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto included
elsewhere in this annual report. For a discussion of the accounting policies
used in the preparation of the Consolidated Financial Statements, see
"Accounting policies" in Note 1 to the Consolidated Financial Statements. The
Consolidated Financial Statements are prepared in accordance with UK GAAP, which
varies in certain significant respects from US GAAP. A discussion of such
differences and a reconciliation of certain UK GAAP amounts to US GAAP is
included in Note 48 to the Consolidated Financial Statements.
TABLE OF CONTENTS
Page Page
Overview and trend information 18 Changes in net interest income - volume and
Critical accounting policies 18 rate analysis 47
Results of operations for 2002, 2001 and 2000 20 Enterprise-wide risk management 48
Economic profit 30 Loan portfolio 53
Line of business information 31 Risk elements in the loan portfolio 57
Future accounting developments 43 Market risk 60
UK GAAP compared with US GAAP 44 Insurance risk 63
Average balance sheet and net interest income 45 Liquidity and capital resources 67
17
Overview and trend information
Lloyds TSB Group has operations in both the UK and overseas, however, its
earnings are heavily dependent upon its domestic activities. In 2002, 81 per
cent of Lloyds TSB Group's profit before tax was derived from its UK operations.
The state of the UK economy, therefore, has significant implications for the way
in which the Lloyds TSB Group runs its business and its performance.
Although the UK economy has avoided recession, performance across different
sectors has been varied with growth in the services sector reflecting strong
domestic demand tempered by recession in the manufacturing sector, largely
caused by the strength of sterling and weak overseas demand. The level of
indebtedness of the UK corporate sector has started to reduce. However, profit
growth is expected to remain sluggish and if interest rates start to increase
there may be an effect upon the level of corporate failures. Low interest rates,
low unemployment and low inflation have helped drive strong growth in the UK
residential housing market and an increase in consumer borrowing, which has
allowed a rise in savings flows without having a significant effect upon
spending patterns. However, there are now indications that the growth in the
housing market is starting to slow which would have an effect upon future levels
of growth in customer lending and deposits.
Within the UK banking businesses of the Lloyds TSB Group there has been
continued growth in personal, mortgage and corporate lending and a steady
increase in savings balances. The arrears position in the personal lending and
mortgage portfolios has remained stable, although there has been an increased
bad debt charge against corporate exposures to certain sectors of the UK economy
which are experiencing a slowdown in economic growth. However, the low interest
rate environment has also resulted in a lower net interest margin as the full
effect of base rate reductions has not been reflected in the rates of interest
paid on deposit accounts and the benefit of low and interest free current
accounts has been reduced.
The continued fall in the level of the stock market in the UK has had a
significant effect upon the Lloyds TSB Group's insurance and investment
businesses. There has been a marked reduction in customer demand for equity
based savings products and significant losses have been incurred following a
fall in the value of the investments held to support the long-term assurance
business. Although steps have been taken to reduce Lloyds TSB Group's exposure
to further reductions in equity market levels, the future performance of this
business is, to a certain extent, dependent upon a recovery in these markets.
Overseas, the benign economic conditions in New Zealand contributed to a 16
per cent increase in local currency profits as a result of strong lending
growth; in sterling terms the increase in profit was 32 per cent. However, the
economic situation in Latin America remains uncertain. Since the October
presidential election in Brazil the economic situation has somewhat stabilised.
The Lloyds TSB Group reduced its total exposure to Brazil, net of provisions, to
some GBP1,900 million during 2002 from some GBP3,300 million at the end of 2001,
largely from not replacing maturing government bonds. Economic activity in
Brazil has remained reasonably robust, and this relative strength in the local
economy, in conjunction with the significant International Monetary Fund support
package which the newly elected president and incoming government have indicated
they will support, should alleviate current concerns about the Brazilian
economy. The economic situation in Argentina continues to be difficult and the
outlook is likely to remain uncertain during 2003. Lloyds TSB Group's total
exposure to Argentina at the end of 2002 had reduced to some GBP190 million net
of provisions and charges, compared to GBP610 million at the end of 2001.
See also "Business - Competitive environment"
Critical accounting policies
Introduction
The results of Lloyds TSB Group are sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its Consolidated
Financial Statements. The accounting policies used in the preparation of the
Consolidated Financial Statements are set out in Note 1 to the Consolidated
Financial Statements. In preparing the accounts, the directors are required to
select suitable accounting policies, apply them consistently and make judgements
and estimates that are reasonable and prudent. Where UK GAAP allows a choice of
policy, Financial Reporting Standard 18 'Accounting Policies' requires Lloyds
TSB Group to adopt those policies judged to be most appropriate to its
particular circumstances for the purpose of giving a true and fair view.
In its 2002 Consolidated Financial Statements Lloyds TSB Group adopted
fully the accounting requirements of Financial Reporting Standard 17 "Retirement
Benefits" although the UK Accounting Standards Board has deferred mandatory
adoption until 2005. Implementation of this accounting standard has had a
significant effect on the results of the Lloyds TSB Group, which is explained
further in Notes 1 and 43 of the Consolidated Financial Statements.
The accounting policies that are deemed critical to the Lloyds TSB Group's
results and financial position, based upon materiality and significant judgement
and estimates, are discussed below.
18
Provisions for bad and doubtful debts
In circumstances where there is significant doubt over the recoverability
of specific loans and advances, provisions are made to reduce the carrying value
of those advances to their expected ultimate net realisable value. The
methodology used to calculate the required provision varies according to the
type of lending portfolio. For portfolios of smaller balance homogenous loans,
such as residential mortgages, personal loans and credit card balances, specific
provisions are calculated using formulae which take into account factors such as
the length of time that the customer's account has been delinquent, historic
loss rates and the value of any collateral held. The variables used in the
formulae are kept under regular review to ensure that as far as possible they
reflect the current economic circumstances, although actual experience may
differ from that assumed.
For the Lloyds TSB Group's other lending portfolios, provisions are
calculated on a case-by-case basis having regard to expected future cash flows
including those arising from the realisation of collateral. The determination of
these provisions often requires the exercise of considerable judgment by
management involving matters such as future economic conditions and the
resulting trading performance of the customer and the value of collateral, for
which there may not be a readily accessible market. As a result these provisions
can be subject to significant variation as time progresses and the circumstances
of the customer become clearer.
The Lloyds TSB Group also maintains a general provision to cover latent bad
and doubtful debts which are present in any portfolio of advances but which have
not been specifically identified. The calculation of the general provision
requires a significant amount of judgement to assess the level of losses
inherent in the portfolio and is based upon factors such as the level of
watchlist or potential problem debt, the propensity for such debt to become
impaired and historical loss rates. The general provision is reviewed on a
regular basis to ensure that it remains appropriate in prevailing economic
conditions and in the light of the perceived level of credit risk within the
lending portfolios.
Goodwill impairment
Lloyds TSB Group reviews the goodwill arising on the acquisition of
subsidiary undertakings when events or changes in economic circumstances
indicate that impairment may have taken place and at the end of the first full
year after an acquisition. In addition, since the goodwill arising on the
acquisition of Scottish Widows is considered to have an indefinite useful life,
because of the strength of the brand and the position of the business as one of
the leading providers of life, pensions, unit trust and fund management
products, and is therefore not amortised, the Lloyds TSB Group is required under
UK GAAP to perform an annual review to determine whether an impairment has
occurred.
The impairment review is performed by projecting future cash flows,
excluding finance and tax, based upon budgets and plans and making prudent
assumptions about longer term rates of growth and discounting these using a rate
approximating to the Group's weighted average cost of capital. 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 has occurred and a
charge would be made to the profit and loss account. This calculation requires
the exercise of significant judgment by management; if the estimates made prove
to be incorrect or changes in Scottish Widows' performance affect the amount and
timing of future cash flows, the goodwill may become impaired in future periods.
Embedded value
Lloyds TSB Group accounts for the value of the shareholder's interest in
the long-term assurance business using the embedded value basis of accounting,
which is UK GAAP for banking groups owning life assurance operations. The
embedded value is comprised of the net tangible assets of the life assurance
subsidiaries and the present value of the in-force business, which is calculated
by projecting future surpluses and other net cash flows attributable to the
shareholder arising from business written by the balance sheet date and
discounting the result at a rate which reflects the shareholder's overall risk
premium.
Future surpluses will depend on experience in a number of areas such as
investment returns, lapse rates, mortality and investment expenses. Surpluses
are projected by making assumptions about future experience, having regard to
both actual experience and forecast long-term economic trends. Changes to these
assumptions may cause the present value of future surpluses to differ from those
assumed at the balance sheet date and could significantly affect the value
attributed to the in-force business. In Note 29 of the Consolidated Financial
Statements the effect of theoretical changes in the principal economic
assumptions upon the embedded value included in the balance sheet and new
business income is set out.
The value of the in-force business could also be affected by changes in the
amounts and timing of other net cash flows, principally annual management
charges and other fees levied upon the policyholders, which are reflected in the
profit and loss account using unsmoothed fund values. In addition, to the extent
that actual experience is different from that assumed, the effect will be
recognised in the profit and loss account for the period. The effect of changes
in the underlying assumptions and variations between actual and assumed
experience on the results of the current and prior periods are disclosed in Note
29 in the Consolidated Financial Statements.
19
Results of operations - 2002 compared with 2001 and 2001 compared with 2000
Summary
2002 2001* 2000*
GBPm GBPm GBPm
Net interest income 5,171 4,922 4,587
Other finance income 165 307 424
Other income 3,542 3,660 3,765
Total income 8,878 8,889 8,776
Operating expenses (4,915) (4,776) (4,279)
Trading surplus 3,963 4,113 4,497
General insurance claims (229) (174) (142)
Provisions for bad and doubtful debts (1,029) (747) (541)
Amounts written off fixed asset investments (87) (60) (32)
Operating profit 2,618 3,132 3,782
Income from joint ventures (11) (10) 3
Profit on sale of businesses - 39 -
Profit on ordinary activities before tax 2,607 3,161 3,785
Tax on profit on ordinary activities (764) (875) (1,082)
Profit on ordinary activities after tax 1,843 2,286 2,703
Minority interests - equity (19) (17) (13)
- non-equity (43) (40) (36)
Profit attributable to shareholders 1,781 2,229 2,654
Economic profit(1) 821 1,119 1,524
* Figures for 2001 and 2000 have been restated to reflect changes in accounting
policy and presentation adopted in 2002; for further details see Note 1 to the
Consolidated Financial Statements.
(1) Lloyds TSB Group defines economic profit as the earnings on the equity
invested in the business less a notional charge for the cost of the equity
invested in that business. See "- Economic Profit".
2002 compared with 2001
In 2002, Lloyds TSB Group's profit before tax decreased by GBP554 million,
or 18 per cent, to GBP2,607 million from GBP3,161 million in 2001. Profit
attributable to shareholders was 20 per cent lower at GBP1,781 million and
earnings per share decreased by 21 per cent to 32.0p. Shareholders' equity
decreased by GBP2,384 million to GBP7,972 million following a reduction of
GBP2,331 million in the value of the Group's pension schemes, largely caused by
the significant fall in equity market values. The post-tax return on average
shareholders' equity was 16.7 per cent, compared to 18.1 per cent in 2001.
Economic profit decreased by 27 per cent to GBP821 million. The post-tax return
on average assets was 0.93 per cent, and the post-tax return on average
risk-weighted assets was 1.61 per cent.
Total income was GBP11 million lower at GBP8,878 million, compared to
GBP8,889 million in 2001. Lloyds TSB Group's net interest income increased by
GBP249 million, or 5 per cent, to GBP5,171 million. Average interest-earning
assets increased by GBP16,873 million, or 12 per cent, to GBP161,818 million,
adding GBP655 million to net interest income. In the UK, average personal
lending and mortgage balances increased by GBP6,732 million driven by the strong
residential housing market and the low interest rate environment; wholesale
balances were GBP7,195 million higher with increased corporate term and money
market lending and a number of new structured finance transactions. Average
balances overseas increased by GBP3,215 million, with the majority of the growth
being in New Zealand reflecting a strengthening exchange rate and increased
mortgage and agricultural lending. The effect of this volume growth was partly
offset by a 20 basis point fall in the net interest margin, reducing net
interest income by GBP290 million, reflecting the reduced benefits accruing from
the Lloyds TSB Group's low interest and interest-free liabilities and a change
in mix toward finer margin products. Adverse exchange movements reduced net
interest income by GBP116 million.
Other finance income, at GBP165 million, was down GBP142 million, or 46 per
cent, from GBP307 million in 2001. The expected return on pension scheme assets
was GBP27 million lower, reflecting the lower market value of scheme assets at
the start of 2002, as a result of stock market conditions. The interest charge
in respect of the unwinding of the discount on scheme liabilities was GBP115
million higher, due to the increased level of scheme liabilities at the start of
2002 mainly reflecting the greater longevity of the members of the schemes.
20
Other income was GBP118 million, or 3 per cent, lower at GBP3,542 million
compared to GBP3,660 million in 2001. Income from long-term assurance business
was GBP274 million lower, mainly as a result of the depressed stock market
conditions reducing the returns from the investments supporting the life funds
and the capitalised value of annual management charges, together with a GBP135
million increase in provisions for redress to past purchasers of endowment and
pension products. There was also a charge of GBP57 million to reflect the
implementation of revised mortality assumptions. Dealing profits were GBP45
million lower, largely as a result of less favourable market conditions. These
factors more than offset an increase in net fees and commissions receivable
which were GBP88 million higher. Growth in general insurance broking income and
income from credit and debit cards was only partly offset by reduced levels of
stock market related fees. General insurance premium income was GBP58 million
higher and other operating income increased by GBP55 million as reductions in
venture capital gains and profits from sale and leasebacks of premises were more
that offset by increased operating lease rental income, mainly reflecting the
impact of acquisitions during the year.
Operating expenses were GBP139 million, or 3 per cent, higher at GBP4,915
million compared to GBP4,776 million in 2001. Administrative expenses were GBP12
million lower than in 2001. Staff costs reduced by GBP36 million as the benefits
of reductions in staff numbers and lower levels of pension scheme augmentation
costs more than offset the impact of acquisitions, the annual pay review and
increased severance costs. Premises and equipment costs were GBP26 million
higher as a result of increased rental costs and repairs and maintenance
expenditure. Depreciation was GBP131 million higher, largely reflecting a GBP95
million increase in respect of operating lease assets as a result of
acquisitions and organic growth in the Lloyds TSB Group's existing businesses.
Goodwill amortisation was GBP20 million higher. The efficiency ratio increased
to 55.4 per cent from 53.7 per cent.
General insurance claims increased by GBP55 million, or 32 per cent, to
GBP229 million, reflecting volume related increases in property claims and a
higher level of weather and flood related insurance claims.
The charge for bad and doubtful debts was 38 per cent higher at GBP1,029
million compared with GBP747 million in 2001. In UK Retail Banking and Mortgages
the provisions charge increased by GBP148 million, or 36 per cent, to GBP563
million, largely as a result of volume related asset growth in the personal loan
and credit card portfolios, which grew by 15 per cent and 27 per cent
respectively and the non-recurrence of one-off releases recognised in 2001. In
Wholesale Markets and International Banking the provisions charge increased by
GBP135 million to GBP473 million. Provisions against the corporate lending
portfolio increased by GBP145 million as a result of a small number of large
provisions against certain US customers following the discovery of accounting or
other operational irregularities and higher provisions against exposures in
specific sectors of the UK economy which are now starting to experience a
slowdown in activity. Within International Banking provisions fell mainly as a
result of lower specific provisions in Losango, Lloyds TSB Group's consumer
finance business in Brazil, largely reflecting exchange rate movements. The
general provision held against the Lloyds TSB Group's exposure to Argentina was
increased by GBP50 million, compared to a charge of GBP55 million in 2001.
Amounts written off fixed asset investments increased by GBP27 million, or
45 per cent, to GBP87 million in 2002, compared to GBP60 million in 2001. There
was a GBP21 million write down following operating irregularities on one
specific securitisation issue and a GBP21 million increase in the charge in
respect of the venture capital business in the UK, reflecting portfolio growth.
These increases were partly offset by a GBP15 million reduction in the charge in
respect of Argentine government debt.
In 2001, a profit of GBP39 million arose on the sale of the Lloyds TSB
Group's Brazilian fund management and private banking businesses.
At the end of 2002, the total capital ratio increased to 9.6 per cent as
new issues of tier 1 and tier 2 capital instruments during the year more than
offset the effect of a GBP14,550 million, or 13 per cent, increase in risk
weighted assets to GBP122,411 million, from GBP107,861 million at the end of
2001. Balance sheet assets increased by GBP16,965 million, or 7 per cent, to
GBP252,758 million. Loans and advances to customers increased by GBP11,539
million, mainly reflecting growth in UK mortgage and personal period end lending
balances, which increased by GBP8,036 million, and growth of GBP2,012 million in
New Zealand. Debt securities were GBP5,089 million higher due to further growth
in the Lloyds TSB Group's asset-backed portfolio.
2001 compared with 2000
Profit on ordinary activities before tax fell by GBP624 million or 16 per
cent to GBP3,161 million from GBP3,785 million, driven by a reduction in income
from Lloyds TSB Group's insurance businesses caused by the overall fall in stock
market values. Shareholders' equity fell by 13 per cent and earnings per share
fell by 17 per cent to 40.3p. The post-tax return on average shareholders'
equity was 18.1 per cent.
Total income grew by GBP113 million, or 1 per cent, from GBP8,776 million
in 2000 to GBP8,889 million in 2001. Net interest income increased by GBP335
million, or 7 per cent, from GBP4,587 million to GBP4,922 million, although
after adjusting for the effect of the inclusion of a full year's funding cost
relating to the acquisition of Scottish Widows in March 2000, there was an
underlying growth of GBP437 million or 9 per cent. Average interest earning
assets increased by GBP13,923 million or 11 per cent to GBP144,945 million. Most
of this growth was in the UK where average interest earning assets grew by
GBP10,670 million; personal lending and mortgage balances grew by GBP6,139
million and corporate balances increased by GBP4,628 million. Overseas average
interest earning assets increased by GBP3,253 million with growth in New Zealand
and Brazil. The effect of this growth was partly offset by a 6 basis point fall
in the underlying net interest margin reflecting the increasingly competitive
operating conditions and a lower contribution from interest-free liabilities,
caused by the lower interest rate environment.
21
Other finance income decreased by GBP117 million or 28 per cent from GBP424
million in 2000 to GBP307 million in 2001. The decrease reflects a lower level
of assets held in Lloyds TSB Group's defined benefit pension schemes at the
start of 2001, coupled with lower expectations for market returns during the
year.
Other income in 2001 fell by GBP105 million, or 3 per cent, from GBP3,765
million to GBP3,660 million. Income from long-term assurance business fell by
GBP472 million as a 15 per cent fall in the FTSE All-Share index during the year
caused a sharp reduction in the earnings from the investments held to support
Lloyds TSB Group's life and general insurance activities. This was partly offset
by a GBP272 million improvement in other operating income caused mainly by an
increase of GBP178 million in operating lease rental income, reflecting both the
inclusion of Chartered Trust for the full year and underlying volume growth, and
profits of GBP57 million from the sale and leaseback of branch and head office
premises. There was an increase in net fees and commissions receivable, after
deducting fees and commissions payable, of GBP31 million, dealing profits
increased by GBP35 million and premium income from the general insurance
underwriting business grew by GBP29 million.
Operating expenses in 2001 increased by GBP497 million, or 12 per cent to
GBP4,776 million from GBP4,279 million. The efficiency ratio increased from 48.8
per cent to 53.7 per cent. Of this increase, GBP145 million was due to the
inclusion of Scottish Widows and Chartered Trust for a full year, the remainder
of the growth was due to increased business development expenditure including
increased staff and other costs supporting the improvement in retail banking
sales volumes achieved during the year, together with costs of GBP82 million
relating to benefit improvements in Lloyds TSB Group's pension schemes.
The total charge in respect of bad and doubtful debt provisions increased
by GBP206 million or 38 per cent to GBP747 million from GBP541 million, although
this was adversely affected by an increase in the general provision of GBP55
million in respect of Lloyds TSB Group's exposures in Argentina. The charge for
bad and doubtful debts attributable to UK operations grew by GBP144 million to
GBP570 million partly reflecting the inclusion of Chartered Trust for a full
year, but also as a result of an GBP83 million increase in the charge against
the retail banking and mortgages portfolio due to the growth in the level of
outstanding balances and partly as a result of a one-off benefit of GBP42
million in 2000. Provisions against the corporate and commercial lending
portfolios also increased as provisions were required against a small number of
large exposures. Overseas provisions, excluding the general provision in respect
of Argentina, increased by GBP7 million as higher charges in Uruguay, Dubai and
the Netherlands more than offset improvements in Colombia and New Zealand.
Amounts written off fixed asset investments increased by GBP28 million, or
88 per cent, from GBP32 million to GBP60 million. In 2001 Lloyds TSB Group
provided GBP45 million against the carrying value of its holding of Argentine
government bonds as a result of the deterioration in the economic environment in
that country. The 2000 results included a provision of GBP18 million against
Lloyds TSB Group's holding of Ecuadorian bonds.
The profit on sale of business of GBP39 million arose as a result of the
sale of Lloyds TSB Group's Brazilian fund management and private banking
business including its subsidiary, Lloyds TSB Asset Management S.A., to Banco
Itau S.A. The sale of this business did not affect Lloyds TSB Group's other
Brazilian businesses.
At 31 December 2001, the total capital ratio was 8.8 per cent and the tier
1 capital ratio was reduced to 7.8 per cent, reflecting a 16 per cent growth in
risk-weighted assets from GBP93,211 million to GBP107,861 million. Balance sheet
assets grew by GBP15,121 million, or 7 per cent, from GBP220,672 million to
GBP235,793 million. Loans and advances to customers increased by GBP8,503
million, or 7 per cent mainly as a result of growth in UK mortgage and personal
lending, which increased by GBP5,565 million, and higher levels of corporate and
commercial lending. Debt securities increased by GBP9,620 million due to higher
year-end liquidity requirements and a number of new structured finance
transactions which result in lower cost funding for the Group.
22
Net interest income
The yields, spreads and margins in the table below are those relating to the
banking business only.
2002 2001 2000
Lloyds TSB Group:
Net interest income GBPm 5,171 4,922 4,587
Average interest-earning assets GBPm 161,818 144,945 131,022
Average rates
Gross yield on interest-earning assets%(1) 6.52 7.84 8.44
Interest spread %(2) 2.94 3.00 2.98
Net interest margin %(3) 3.20 3.40 3.50
Domestic:(4)
Net interest income GBPm 4,425 4,202 3,956
Average interest-earning assets GBPm 134,902 121,244 110,574
Average rates
Gross yield on interest-earning assets %(1) 6.10 7.38 8.07
Interest spread %(2) 3.08 3.11 3.06
Net interest margin %(3) 3.28 3.47 3.58
International:(4)
Net interest income GBPm 746 720 631
Average interest-earning assets GBPm 26,916 23,701 20,448
Average rates
Gross yield on interest-earning assets %(1) 8.63 10.19 10.40
Interest spread %(2) 2.12 2.43 2.58
Net interest margin %(3) 2.77 3.04 3.09
(1) Gross yield is the rate of interest earned on average interest-earning
assets.
(2) Lloyds TSB Group interest spread is the difference between the rate of
interest earned on total average interest-earning assets and the rate of
interest paid on total average interest-bearing liabilities. The domestic
interest spread is the difference between the rate of interest earned on
domestic average interest-earning assets and the rate of interest paid on
domestic average interest-bearing liabilities. The international interest
spread is the difference between the rate of interest earned on
international average interest-earning assets and the rate of interest paid
on international average interest-bearing liabilities.
(3) The net interest margin represents the interest spread together with the
contribution of interest-free liabilities. It is calculated by expressing
net interest income as a percentage of average interest-earning assets.
(4) The analysis of net interest income by domestic and international
operations shown above is based on the location of the office recording the
transaction, except for lending by the international business booked in
London.
2002 compared with 2001
Lloyds TSB Group net interest income increased by GBP249 million, or 5 per
cent, to GBP5,171 million, representing 58 per cent of total income compared to
55 per cent in 2001. Average interest-earning assets increased by GBP16,873
million, or 12 per cent, to GBP161,818 million, adding GBP655 million to net
interest income. Within UK Retail Banking and Mortgages, continued strong growth
lead to increases of GBP2,251 million in average personal lending and credit
card balances and GBP4,481 million in average mortgage balances. Within
Wholesale Markets and International Banking, average interest-earning assets
increased by GBP10,352 million, reflecting growth in corporate and money market
lending and increased volumes of structured finance products. Overseas, growth
in balances in New Zealand was partly offset by reductions in Latin America as
exchange rates have weakened and the Lloyds TSB Group's exposures to Brazil and
Argentina have been reduced.
The net interest margin fell by 20 basis points to 3.20 per cent from 3.40
per cent in 2001, reducing net interest income by GBP290 million. Reductions in
interest rates in the UK in the second half of 2001 have resulted in a reduced
benefit from Lloyds TSB Group's low interest rate deposits and interest-free
liabilities. There has also been a continuing shift in the mix of average
interest-earning assets towards high quality, but finer margin, corporate and
wholesale lending. Adverse exchange rate movements, principally in Latin
America, reduced net interest income by GBP116 million.
Domestic net interest income increased by GBP223 million, or 5 per cent, to
GBP4,425 million. This represents 86 per cent of consolidated net interest
income. Average interest-earning assets increased by GBP13,658 million, or 11
per cent, to GBP134,902 million, adding GBP449 million to net interest income.
Average personal lending and mortgage balances grew by GBP6,732 million and
wholesale balances increased by GBP7,195 million.
23
The domestic net interest margin decreased by 19 basis points, reducing net
interest income by GBP226 million, as a result of a reduction in the
contribution of interest-free liabilities and the continuing shift in the mix of
average interest-earning assets towards finer margin, corporate and wholesale
lending. In UK Retail Banking and Mortgages there was a 4 basis point decrease
in the net interest margin as an erosion in the mortgage margin was partly
offset by a shift in the mix of retail business towards personal lending and
credit cards. In Wholesale Markets there was an 18 basis point reduction caused
by further growth in finer margin corporate lending.
Net interest income from international operations increased by GBP26
million, or 4 per cent, to GBP746 million, representing 14 per cent of
consolidated net interest income. In sterling terms, average interest-earning
assets increased by GBP3,215 million, or 14 per cent, to GBP26,916 million,
adding GBP206 million to net interest income. Average balances in New Zealand
increased by GBP2,420 million reflecting both organic growth and positive
exchange rate movements; growth in US structured finance and government
guaranteed export credit transactions increased average interest-earning assets
by a further GBP1,277 million. Balances in Latin America fell by GBP841 million
as modest growth in local currency terms, principally in the Brazilian consumer
finance business, was more than offset by the effect of exchange rate movements.
The net interest margin from international operations reduced by 27 basis
points, leading to a fall of GBP64 million in net interest income, as a result
of lower margins in our Latin American and US structured finance businesses
which more than offset an improved margin in New Zealand.
2001 compared with 2000
Lloyds TSB Group net interest income increased by GBP335 million, or 7 per
cent, to GBP4,922 million, representing 55 per cent of total income compared to
52 per cent in 2000. After adjusting for the effect of funding the Scottish
Widows purchase consideration for a full year in 2001 compared to only ten
months in 2000, the underlying growth was GBP437 million, or 9 per cent. Average
interest-earning assets increased by GBP13,923 million or 11 per cent to
GBP144,945 million, adding GBP566 million to net interest income. Personal
lending and mortgage balances in the UK grew by GBP6,139 million as Lloyds TSB
Group sought to develop these portfolios prudently, but profitably. Within
Wholesale Markets and International Banking, average interest earning assets
increased by GBP7,902 million. The asset finance portfolio grew by GBP1,074
million, partly reflecting the inclusion of Chartered Trust for a full year and
there was an increase of GBP4,628 million in corporate and commercial lending
balances in the UK. There was also growth in structured finance balances in the
UK and overseas.
The net interest margin fell by 10 basis points, although after adjusting
for the funding cost of Scottish Widows, there was an underlying reduction of 6
basis points reducing net interest income by GBP70 million. A lower interest
rate environment in the UK resulted in a reduced contribution from Lloyds TSB
Group's low interest rate and interest-free liabilities and this was coupled
with lower margins earned on corporate and commercial and some personal lending
balances, due to competitive pressures. These factors more than offset the
benefits obtained from positive interest rate management within Lloyds TSB
Group's treasury and central functions. Adverse exchange rate movements, mainly
in Brazil, reduced net interest income by GBP59 million.
Domestic net interest income in 2001 increased by GBP246 million, or 6 per
cent, to GBP4,202 million, representing 85 per cent of consolidated net interest
income. After adjusting for the effect of the inclusion of a full year's funding
cost in respect of the Scottish Widows acquisition in March 2000, there was an
underlying increase of GBP348 million. Average interest-earning assets increased
by GBP10,670 million, or 10 per cent, to GBP121,244 million adding GBP401
million to net interest income. Personal lending and mortgage balances increased
by GBP6,139 million and corporate and commercial balances increased by GBP4,628
million.
The domestic net interest margin fell by 11 basis points reflecting the
higher funding cost of Scottish Widows, which caused a reduction of 6 basis
points. There was an underlying reduction of 5 basis points costing GBP53
million mainly as a result of a reduced contribution from low interest and
interest-free liabilities due to the lower interest rate environment. The net
interest margin on retail lending products fell 5 basis points and margins on
corporate and commercial lending also reduced, although the margin earned on
mortgage products was little changed.
Net interest income from international operations increased by GBP89
million, or 14 per cent, to GBP720 million, representing 15 per cent of
consolidated net interest income. Average interest-earning assets increased by
20 per cent on a local currency basis, but this was partly offset by the effect
of exchange rate movements. In sterling terms, average interest-earning assets
increased by GBP3,253 million, or 16 per cent, to GBP23,701 million adding
GBP155 million to net interest income. Average interest-earning assets in Latin
America increased by GBP592 million with growth in corporate and consumer
lending in Brazil, and in New Zealand there was an increase of GBP574 million
due to higher volumes of corporate and commercial lending. Overseas structured
finance and government guaranteed export credit transactions resulted in a
GBP1,932 million increase in average interest-earning assets. Adverse exchange
rate movements, mainly in Brazil, reduced net interest income by GBP59 million.
The net interest margin from international operations decreased by 5 basis
points lowering net interest income by GBP7 million. Lower margins in Lloyds TSB
Group's Latin American businesses more than offset small improvements in New
Zealand and the benefits of lower funding costs for the overseas wholesale
businesses.
24
Other income
2002 2001 2000
GBPm GBPm GBPm
Fees and commissions receivable:
UK current account fees 579 573 629
Other UK fees and commissions 1,163 1,220 1,171
Insurance broking 647 528 398
Card services 414 332 304
International fees and commissions 250 269 266
3,053 2,922 2,768
Fees and commissions payable (645) (602) (479)
Dealing profits (before expenses):
Foreign exchange trading income 173 158 141
Securities and other gains 15 75 57
188 233 198
Income from long-term assurance business (303) (29) 443
General insurance premium income 486 428 399
Other operating income 763 708 436
Total other income 3,542 3,660 3,765
2002 compared with 2001
Other income decreased by GBP118 million, or 3 per cent, to GBP3,542
million although after adjusting for the effect of acquisitions made during 2002
there was a reduction of GBP231 million or 6 per cent.
Fees and commissions receivable increased by GBP131 million, or 4 per cent,
to GBP3,053 million, mainly due to increases in income from insurance broking
and card services. Insurance broking commission income increased by GBP119
million, with continued strong growth in creditor insurance products, reflecting
the increased lending volumes in the branch network, and higher levels of
retrospective commission income. Income from credit and debit card services
increased by GBP82 million, mainly as a result of higher merchant service
charges and fees. UK current account fee income rose by GBP6 million, reversing
the downward trend experienced in recent years; a GBP37 million increase in fee
income from added value current accounts more than offset a reduction in service
charges following their partial withdrawal during 2001. This more than offset a
reduction in other UK fees and commissions of GBP57 million, or 5 per cent, from
GBP1,220 million to GBP1,163 million following a GBP59 million reduction in unit
trust and asset management fees, as the continued fall in the level of stock
markets during 2002 have reduced the level of funds under management and
significantly reduced customer demand for equity based products. There was also
a fall in the level of recharges to Goldfish Bank, Lloyds TSB Group's joint
venture with Centrica plc, which were down GBP10 million, and a reduction of
GBP6 million in income from the company registration business, as the
exceptionally high levels of corporate transactions in 2001 were not repeated.
Fees and commissions payable increased by GBP43 million, or 7 per cent,
compared to 2001 as a result of higher reciprocity fees and an increase in
package costs relating to a number of products. Commissions paid to motor
dealers by the asset finance business also increased, in line with business
volumes.
Dealing profits decreased by GBP45 million, or 19 per cent, compared with
2001 as a result of a reduction of GBP60 million in gains from securities
trading; there were reduced opportunities for the Lloyds TSB Group's London
Treasury department, due to less favourable market conditions, and losses
resulting from the economic turmoil in Brazil. Foreign exchange trading income
improved by GBP15 million as a result of an improved performance from Lloyds TSB
Group's UK operations.
Income from long-term assurance business decreased by GBP274 million
however, excluding the effect of changes in the economic assumptions used in the
embedded value calculation which in 2002 resulted in profits of GBP55 million
and the impact of a GBP135 million increase in provisions for redress to past
purchasers of endowment and pension products, income was GBP194 million lower.
Falling stock markets have increased the losses from the investment portfolio
supporting the long-term assurance funds by GBP46 million and reduced the
capitalised value of annual management charges by a further GBP66 million. The
expected return from existing business was GBP36 million lower, reflecting the
lower value of in-force business at the start of the year as a result of the
reduction in stock market levels during 2001. There was also a reduction of
GBP55 million in benefits from experience variances and actuarial assumption
changes, largely reflecting the implementation of revised actuarial mortality
assumptions which resulted in a one-off cost of GBP57 million. Despite the
difficult market conditions sales of life and pensions products grew, with an
improved performance in the more profitable products. This resulted in a GBP9
million or 7 per cent increase in new business profitability, after taking
distribution costs into account.
25
Premium income from general insurance underwriting increased by GBP58
million, or 14 per cent, to GBP486 million compared to GBP428 million in 2001.
There was growth of GBP69 million in premiums from home insurance products,
reflecting successful cross-selling to Lloyds TSB Group's mortgage customers and
the strength of the UK housing market. This has been partly offset by a further
small decline in creditor insurance as this portfolio is now in run-off,
following the outsourcing of the card protection book in 2000. Re-insurance
premiums payable increased by GBP7 million following the decision to mitigate
risks on policies with large sums assured.
Other operating income increased by GBP55 million, or 8 per cent, to GBP763
million. Increases of GBP25 million in earnings on the sale and restructuring of
emerging markets debt investments and GBP111 million in operating lease rentals,
largely as a result of the acquisition of First National Vehicle Holdings and
Abbey National Vehicle Finance, were offset by a GBP35 million reduction in the
realisation of venture capital gains by Lloyds TSB Development Capital and a
reduction of GBP25 million in profits on the sale and leaseback of premises.
2001 compared with 2000
Other income reduced by GBP105 million, or 3 per cent, to GBP3,660 million
representing 41 per cent of total income. Excluding the impact of the Chartered
Trust acquisition made in September 2000, other income fell by GBP231 million or
6 per cent.
Fees and commissions receivable increased by GBP154 million, or 6 per cent,
largely reflecting strong growth in income from insurance broking. Other UK fees
and commissions increased by GBP49 million, or 4 per cent, from GBP1,171 million
to GBP1,220 million mainly due to the inclusion in 2001 of fees earned by
Chartered Trust which resulted in fee income from the Asset Finance business
increasing by GBP45 million. There was a GBP26 million increase in fees from
large corporate and factoring activity; and fee income from Lloyds TSB Group's
share registration operation increased by GBP12 million. However, unit trust and
asset management fees fell by GBP20 million and stockbroking income fell by
GBP10 million, as a result of the substantial reduction in stock market activity
in the second half of the year. Fees from the retail banking operations also
fell following the withdrawal of ATM fees, which reduced income by GBP29
million, although this was partly offset by the inclusion of GBP22 million of
recharges to Goldfish Bank, Lloyds TSB Group's joint venture with Centrica plc.
Insurance broking commission income increased by GBP130 million, or 33 per
cent, as a result of higher levels of creditor insurance sales which increased
income by GBP98 million and growth in other major product lines. There was also
a benefit of GBP30 million from a one-off change in broking commission
arrangements. Income from credit and debit cards increased by GBP28 million,
mainly as a result of higher merchant service charges and fees. However, UK
current account fee income fell by GBP56 million; a GBP28 million increase in
fee income from Added Value accounts was more than offset by a GBP51 million
fall in unauthorised borrowing fees and a GBP40 million reduction in service
charges, as part of the Group's programme to make its customer proposition more
competitive.
Fees and commissions payable increased by GBP123 million, or 26 per cent,
compared to 2000 as a result of the impact of the Chartered Trust acquisition,
higher reciprocity fees and an increase in package costs relating to a number of
products.
Dealing profits increased by GBP35 million, or 18 per cent, to GBP233
million, reflecting benefits from opportunities created from managing certain
exposures arising within the Group's insurance businesses, an improved
performance from the treasury operations in London and higher foreign exchange
trading income from The National Bank of New Zealand.
Income from long-term assurance business fell by GBP472 million from GBP443
million in 2000 to a loss of GBP29 million in 2001. Income from long-term
assurance business in 2000 benefited from a change in the economic assumptions
used to calculate the embedded value, which increased income by GBP127 million,
although this was partly offset by a one-off charge of GBP80 million in respect
of stakeholder pensions. Excluding these items there was an underlying decrease
of GBP425 million.
There was growth in new business, in part reflecting successful sales of
Lloyds TSB Group's stakeholder pension product and a change in the mix of new
business to more profitable regular premium business, which after distribution
costs increased income by GBP47 million. There was a GBP27 million increase in
the expected return from existing business reflecting the growth in the size of
the in-force book and a GBP30 million reduction in provisions for redress to
past purchasers of pension policies as the review nears its completion. However
these factors were more than offset by a GBP529 million reduction in the
earnings from the investments held to support the life assurance operations,
which were GBP259 million lower, and the capitalised value of annual management
charges, which was GBP270 million lower, both largely reflecting the decline in
stock market values during the year.
Premium income from insurance underwriting increased by GBP29 million, or 7
per cent, from GBP399 million to GBP428 million. This was due to higher home
insurance sales during 2001, which increased by GBP53 million to GBP281 million
reflecting the success of the home insurance product and improved cross-selling
to Lloyds TSB Group's mortgage customers. This has more than offset a GBP16
million fall in income from creditor insurance, following the outsourcing of the
card protection book to Norwich Union in 2000, and small reductions in income
from other products.
Other operating income increased to GBP708 million from GBP436 million in
2000 reflecting an increase in income from operating lease rentals, partly as a
result of the acquisition of Chartered Trust, from GBP151 million in 2000 to
GBP329 million in 2001. Other significant contributions to other operating
income were the realisation of venture capital gains within Lloyds TSB
Development Capital of GBP57 million, earnings on the sale and restructuring of
emerging market investments of GBP109 million and GBP57 million profit on the
sale and leaseback of premises.
26
Operating expenses
2002 2001 2000
GBPm GBPm GBPm
Administrative expenses
Staff:
Salaries and profit sharing 1,758 1,776 1,644
National insurance 134 140 131
Pensions 318 347 225
Restructuring 105 69 85
Other staff costs 202 221 212
2,517 2,553 2,297
Premises and equipment:
Rent and rates 280 261 247
Hire of equipment 18 18 26
Repairs and maintenance 131 115 115
Other 114 123 112
543 517 500
Other expenses:
Communications and external data processing 446 483 438
Advertising and promotion 147 154 180
Professional fees 113 110 159
Other 448 409 319
1,154 1,156 1,096
Administrative expenses 4,214 4,226 3,893
Depreciation 642 511 364
Amortisation of goodwill 59 39 22
Total operating expenses 4,915 4,776 4,279
Efficiency ratio (in %) 55.4 53.7 48.8
Efficiency ratio (adjusted) (in %)(1) 50.3 49.0 47.9
(1) Excluding changes in economic assumptions and investment variance. (See
"- Line of business information - Insurance and Investments")
2002 compared with 2001
Total operating expenses increased by GBP139 million, or 3 per cent, to
GBP4,915 million compared to GBP4,776 million in 2001; acquisitions added GBP105
million to costs in 2002.
Administrative expenses of GBP4,214 million in 2002 were GBP12 million
lower than in 2001. Staff costs reduced by GBP36 million or 1 per cent. Salaries
and profit sharing were GBP18 million lower as the impact of the annual pay
review and the effect of acquisitions during the year were more than offset by
the effect of an underlying reduction of 4,191 staff (full time equivalent) and
lower levels of accruals for bonuses and profit related payments. Pension costs
were GBP29 million lower as an increased current service cost, reflecting the
impact of changes in the mortality assumptions made at the end of 2001, and
higher costs relating to staff taking early retirement, were more than offset by
the non-repetition of costs of GBP82 million incurred in 2001 in relation to
benefit improvements. Severance costs were GBP36 million higher at GBP105
million, but other staff costs were GBP19 million lower, reflecting a GBP22
million reduction in agency staff costs.
Premises and equipment costs were GBP26 million, or 5 per cent, higher as a
result of higher rental costs on branch and head office premises, in part
reflecting the sale and leaseback of a number of properties in 2001, and
increased repairs and maintenance expenditure reflecting costs incurred in
advance of vacating a number of central properties. This was partly offset by a
reduction in other premises and equipment costs.
Other expenses reduced by GBP2 million. Communications and external data
processing costs were GBP37 million lower as a result of reduced levels of
expenditure on the development of the Lloyds TSB Group's e-commerce and
real-time banking systems. Other costs were GBP39 million higher, reflecting the
impact of acquisitions and increased charges from iPSL, Lloyds TSB Group's
clearings joint venture.
27
Depreciation was GBP131 million, or 26 per cent, higher reflecting a GBP95
million increase in operating lease depreciation. Of this amount GBP33 million
relates to the Lloyds TSB Group's existing operations, reflecting both organic
growth and the non-repetition of a one-off benefit of GBP23 million recognised
in 2001 in respect of certain ship leases, and GBP62 million relates to the
businesses acquired during 2002. The remaining increase in the charge reflects
the ongoing impact of the significant investment in computers, software and
other equipment made by the Lloyds TSB Group in recent years. Goodwill
amortisation increased by GBP20 million, reflecting the acquisitions made in the
year.
The efficiency ratio in 2002 was 55.4 per cent compared to 53.7 per cent in
2001.
2001 compared with 2000
Total operating expenses in 2001 increased by GBP497 million, or 12 per
cent, to GBP4,776 million from GBP4,279 million in 2000. Of this growth in
costs, GBP145 million was due to the acquisitions of Scottish Widows and
Chartered Trust and GBP16 million to costs incurred in connection with the
unsuccessful offer for Abbey National.
Administrative expenses in 2001 increased by GBP333 million, or 9 per cent,
from GBP3,893 million to GBP4,226 million. Staff costs grew by GBP256 million,
or 11 per cent. There was a GBP132 million growth in salaries and profit sharing
reflecting both the growth in staff numbers, the effect of the annual pay
review, and the increased cost of incentive payments to customer facing staff.
There was also a GBP122 million increase in pension costs, reflecting additional
costs of GBP82 million as a result of benefit improvements in the Lloyds TSB
Group's pension schemes, together with costs of GBP35 million in connection with
staff taking early retirement.
Premises and equipment costs increased by GBP17 million, or 3 per cent,
principally due to higher rental costs on branch and head office properties and
losses on the disposal of equipment which more than offset lower IT equipment
hire costs. Other costs increased by GBP60 million. There was a GBP45 million
growth in communications and external data processing costs to support the
development of Lloyds TSB Group's e-commerce activities and real-time banking
systems. Advertising and promotion expenses were GBP26 million lower, largely
due to the non-repetition of the costs incurred in 2000 in relation to the
merging of the Scottish Widows and Lloyds TSB brands. Professional fees were
GBP49 million lower due to lower levels of consultancy and advisory fees related
to efficiency programme projects, internet banking and the assimilation of
Scottish Widows into the Lloyds TSB Group. There was a GBP23 million increase in
charges made by iPSL, Lloyds TSB Group's new clearings joint venture, and a
GBP19 million increase in operational losses, partly caused by a higher
incidence of credit card fraud.
Depreciation increased by GBP147 million, or 40 per cent. There was an
increase of GBP95 million in the charge in respect of operating lease assets,
following a reduction of GBP23 million in the depreciation charge on certain
ship leases, of which GBP82 million was due to the acquisition of Chartered
Trust. In addition, there was a GBP49 million increase in the depreciation
charge in respect of equipment reflecting the impact of capital expenditure, in
particular on IT equipment, during 2000. Goodwill amortisation increased by
GBP17 million due to the amortisation of the goodwill arising on the acquisition
of Chartered Trust.
The efficiency ratio in 2001 was 53.7 per cent compared to 48.8 per cent in
2000.
Charge for bad and doubtful debts
2002 2001 2000
GBPm GBPm GBPm
UK Retail Banking and Mortgages 563 415 332
Wholesale Markets and International Banking 473 338 228
Central group items (7) (6) (19)
Total charge 1,029 747 541
Specific provisions 965 736 547
General provisions 64 11 (6)
Total charge 1,029 747 541
Charge as % of average lending: % % %
Domestic 0.70 0.54 0.45
International 1.28 1.10 0.80
Total charge 0.77 0.62 0.50
2002 compared with 2001
The total charge for bad and doubtful debts increased by GBP282 million, or
38 per cent, to GBP1,029 million from GBP747 million in 2001. In UK Retail
Banking and Mortgages the provisions charge increased by GBP148 million, from
GBP415 million in 2001, to GBP563 million, as a result of asset growth in the
personal loan and credit card portfolios and a lower level of recoveries and
releases, following the non-recurrence of the release of surplus provisions in
2001.
28
In Wholesale Markets and International Banking the provisions charge
increased by GBP135 million, or 40 per cent, to GBP473 million from GBP338
million in 2001. The charge in respect of corporate banking operations was
GBP145 million higher partly as a result of provisions against the Group's
exposure to certain large US corporate customers which totalled some GBP100
million compared to GBP30 million in 2001. There was also an increase in the
provisions charge against the UK corporate lending portfolio, reflecting the
slowdown in activity in certain sectors of the UK economy. The charge in respect
of the Lloyds TSB Group's asset finance businesses increased by GBP11 million,
reflecting volume growth. There was a GBP27 million reduction in the specific
provisions charge in Losango, the Lloyds TSB Group's consumer finance business
in Brazil, largely reflecting exchange rate movements. The general provision
against the Lloyds TSB Group's exposure to Argentina was increased by GBP50
million, compared to a charge of GBP55 million in 2001.
In Central group items there was a credit of GBP7 million, little changed
from a credit of GBP6 million in 2001; these credits represent the release of
provisions following the repayment of medium-term debt in the emerging markets
portfolio.
2001 compared with 2000
The total charge for bad and doubtful debts increased by GBP206 million, or
38 per cent, to GBP747 million from GBP541 million. In UK Retail Banking and
Mortgages, the charge increased by GBP83 million. During 2000, UK Retail Banking
had a one-off benefit of GBP42 million following the full centralisation of its
arrears processing, which was not repeated in 2001. Adjusting for this,
provisions in UK Retail Banking increased by GBP52 million reflecting the growth
in the size of the personal loan and credit card portfolios. This was partly
offset by a GBP32 million release of the general provision relating to the
Lloyds TSB Group's mortgage portfolio following a change in provisioning
methodology.
The provisions charge in Wholesale Markets and International Banking
increased by GBP110 million, or 48 per cent, although excluding the impact of
the acquisition of Chartered Trust, which increased the charge by GBP27 million,
provisions were GBP83 million higher. The charge against the corporate and
commercial lending portfolios increased by GBP53 million largely as a result of
provisions being required against a small number of corporate exposures,
reflecting the slowdown in economic growth, but also as a result of a GBP30
million provision made against the Group's loans and advances to one specific
corporate customer. There was an GBP18 million reduction in the provisions made
against the consumer finance portfolio of Lloyds UDT reflecting improved credit
procedures. Provisions overseas increased by GBP49 million, largely as a result
of a GBP55 million increase in the general provision, taken as a measure of
prudence, to cover ongoing credit difficulties in Argentina. Increased
provisions against specific corporate exposures in Uruguay, Dubai and the
Netherlands were, however, offset by improvements in Colombia and New Zealand.
In Central group items these was a credit of GBP6 million in 2001, compared
to a credit of GBP19 million in 2000. The higher credit in 2000 arose following
repayments of GBP15 million of Moroccan debt that had previously been provided
for.
Taxation
The rate of tax is influenced by the geographic and business mix of
profits. In the absence of special factors, Lloyds TSB Group does not expect the
tax rate to vary significantly from the average UK corporation tax rate.
2002 2001 2000
GBPm GBPm GBPm
UK corporation tax
Current tax on profits for the year 784 769 889
Adjustments in respect of prior years 12 (14) 3
796 755 892
Double taxation relief (129) (87) (72)
667 668 820
Foreign tax
Current tax on profits for the year 216 179 137
Adjustments in respect of prior years (15) (17) (5)
201 162 132
Current tax charge 868 830 952
Deferred tax (106) 44 129
Associated undertakings and joint ventures 2 1 1
Total charge 764 875 1,082
29
2002 compared with 2001
The effective rate of tax in 2002 was 29.3 per cent, slightly lower than
the corporate tax rate of 30 per cent, compared to an effective rate of tax of
27.7 per cent in 2001. The higher effective rate of tax in 2002 is largely due
to a lower level of tax relief on payments to the Lloyds TSB qualifying share
ownership trust ('QUEST') to satisfy Save As You Earn options and a lower level
of gains on the disposal of properties which are sheltered by capital losses.
There was also a higher effective rate of tax in the Lloyds TSB Group's life and
pensions businesses because of increased losses on the investment portfolio. See
Note 8 to the Consolidated Financial Statements.
2001 compared with 2000
The effective rate of tax in 2001 was 27.7 per cent compared with 28.6 per
cent in 2000; the corporation tax rate for both years was 30 per cent. The lower
effective tax rate in 2001 is largely due to tax relief on payments to the QUEST
which reduced the effective rate by 1.9 per cent and gains on the disposal of
investments and properties sheltered by capital losses which reduced the
effective rate by 1.2 per cent; offset by the impact of different overseas tax
rates which increased the effective rate by 0.4 per cent.
Economic profit
In pursuit of our aim to maximise shareholder value over time, management
has for the last eleven years used a system of value based management as a
framework to identify and measure value creation. Management uses economic
profit as a measure of performance because it captures both growth in investment
and return. Lloyds TSB Group defines economic profit as the earnings on the
equity invested in the business less a notional charge for the cost of the
equity invested in that business.
Lloyds TSB Group believes that economic profit instils financial discipline
in determining investment decisions throughout Lloyds TSB Group and that it
enables Lloyds TSB Group to evaluate alternative strategies objectively, with a
clear understanding of the value created by each strategy, and then to select
the strategy which creates the greatest value. Awards to senior executives under
Lloyds TSB Group's annual bonus arrangements are partly determined by the
achievement of economic profit targets.
Management only changes its estimates of the cost of equity to reflect
significant changes in long-term interest rates and other external market
factors which are considered sustainable. The principal factor in estimating the
cost of equity is sustainable long-term interest rates. If long-term interest
rates increase, management will consider raising its estimate of the cost of
equity; if long-term interest rates fall, management will consider reducing its
estimate of the cost of equity. The principal other external market factors
considered are equity risk premium and Lloyds TSB Group's share price volatility
relative to the UK stock market as a whole. Any change to the estimated cost of
equity will be disclosed. For the last three years, management has used a cost
of equity of 9 per cent to reflect the shareholders' minimum required rate of
return on equity invested.
The table below summarises Lloyds TSB Group's calculation of economic
profit for the periods indicated.
2002 2001 2000
GBPm GBPm GBPm
Average shareholders' equity 10,672 12,338 12,551
Profit attributable to shareholders 1,781 2,229 2,654
Less: notional charge (960) (1,110) (1,130)
Economic profit 821 1,119 1,524
The notional charge has been calculated by multiplying average
shareholders' equity by the cost of equity.
2002 compared with 2001
Economic profit fell by GBP298 million or 27 per cent from GBP1,119 million
in 2001 to GBP821 million in 2002. Profit attributable to shareholders fell by
GBP448 million (20 per cent) to GBP1,781 million, however the notional charge on
average equity was GBP150 million lower, as a result of a 14 per cent fall in
average equity to GBP10,672 million from GBP12,338 million in 2001.
2001 compared with 2000
Economic profit fell by GBP405 million, or 27 per cent, from
GBP1,524 million in 2000 to GBP1,119 million in 2001. Profit attributable to
shareholders fell by GBP425 million (16 per cent) to GBP2,229 million
but there was a slightly lower notional charge on equity resulting from a 2
per cent fall in average equity from GBP12,551 million to GBP12,338 million.
30
Line of business information
Summary
In order to provide a clearer representation of the underlying performance,
the results of the Insurance and Investments segment include investment earnings
calculated using longer-term rates of return and annual management charges based
on unsmoothed fund values. Management separately analyse the difference between
these normalised earnings and the actual return ("the investment variance")
together with the impact of changes in the economic assumptions used in the
embedded value calculation. The results of the business units are set out below:
2002 2001 2000
GBPm GBPm GBPm
UK Retail Banking and Mortgages 1,172 1,205 1,363
Insurance and Investments 1,231 1,421 1,158
Wholesale Markets and International Banking 1,005 1,209 1,035
Central group items 96 185 378
3,504 4,020 3,934
Changes in economic assumptions 55 - 127
Investment variance (952) (859) (276)
Profit before tax 2,607 3,161 3,785
UK Retail Banking and Mortgages
The UK retail businesses of Lloyds TSB Group provide banking and financial
services to personal and small business customers, private banking and
stockbroking. Lloyds TSB Group's UK mortgage business is conducted through
Cheltenham & Gloucester, Lloyds TSB Bank, Lloyds TSB Scotland, Scottish Widows
Bank and C&G TeleDirect.
2002 2001 2000
GBPm GBPm GBPm
Net interest income 3,340 3,102 2,951
Other income 1,076 1,135 1,143
Total income 4,416 4,237 4,094
Operating expenses (2,670) (2,607) (2,401)
Trading surplus 1,746 1,630 1,693
Provisions for bad and (563) (415) (332)
doubtful debts
Income from joint (11) (10) 2
ventures
Profit before tax 1,172 1,205 1,363
Efficiency ratio 60.5% 61.5% 58.6%
Total assets (year-end) GBP85,868m GBP77,982m GBP71,292m
Total risk-weighted assets GBP54,157m GBP48,220m GBP44,009m
(year-end)
2002 compared with 2001
Profit before tax from UK Retail Banking and Mortgages decreased by GBP33
million, or 3 per cent, to GBP1,172 million, compared with GBP1,205 million in
2001.
Total income increased by GBP179 million, or 4 per cent, to GBP4,416
million. Net interest income increased by GBP238 million, or 8 per cent, to
GBP3,340 million. Growth in lending and deposit balances added GBP266 million to
net interest income, which was only partly offset by a reduction of GBP28
million caused by a reduction of 4 basis points in the overall margin. Since 31
December 2001, personal loans and credit card lending increased by 15 per cent
and 27 per cent respectively and, within Retail Banking, balances on current
accounts and savings and investment accounts grew by 10 per cent. Mortgage
balances outstanding increased by 10 per cent to GBP62,467 million representing
a market share of 9.3 per cent. Gross new mortgage lending increased by 36 per
cent to GBP19,039 million, compared with GBP13,986 million a year ago. Net new
lending increased to GBP5,889 million resulting in a market share of net new
lending of 7.5 per cent; the Lloyds TSB Group's market share of net new lending
in the second half of 2002, at 8.8 per cent, was considerably better than in the
first half of the year. Mortgages offer the Lloyds TSB Group the opportunity to
sell a range of additional products and, during 2002, the Lloyds TSB Group's key
objective in the mortgage business has been to achieve an appropriate balance
between market share and profitability.
The net interest margin fell by 4 basis points, reducing net interest
income by GBP28 million. The margin on retail lending products was 17 basis
points higher than in 2001, with improved business banking overdraft and
personal loan margins. Margins on personal overdrafts and credit card lending
fell, but volume growth in these products resulted in a positive impact on the
overall lending margin, since these relatively high margin portfolios now
represent a higher proportion of the retail lending portfolio. The retail
deposit margin was 16 basis points lower as the full impact of interest rate
reductions in the second half of 2001 has not been reflected in the rate of
interest paid on some savings products and the benefit of interest-free and low
interest current accounts has been reduced. The margin on mortgage lending fell
by 20 basis points.
31
Other income decreased by GBP59 million, or 5 per cent, to GBP1,076
million. There was an improvement in income earned from credit and debit cards,
and increased income from added value current accounts, but this was offset by a
higher level of fees and commissions payable and a reduction of GBP57 million in
profits from the sale and leaseback of premises, as the Group's strategy of
converting much of its branch portfolio from freehold tenure to leasehold is
almost complete.
Operating expenses were GBP63 million, or 2 per cent, higher at GBP2,670
million compared to GBP2,607 million in 2001. Costs associated with the Lloyds
TSB Group's efficiency programme totalled GBP197 million compared to GBP151
million in 2001, an increase of GBP46 million, as the Lloyds TSB Group continues
to invest in initiatives to enhance Retail Banking performance and rationalise
software and systems. There were also increased costs relating to the
implementation of the Lloyds TSB Group's business banking strategy and staff
costs within the Mortgages business increased as additional staff were taken on
in order to maintain customer service levels in the expanding portfolio. These
increases and the effect of annual pay awards were partly offset by reduced
headcount in the branch network and lower development costs in respect of
internet banking and other initiatives. The efficiency ratio, however, improved
to 60.5 per cent from 61.5 per cent in 2001.
Provisions for bad and doubtful debts were GBP148 million, or 36 per cent,
higher at GBP563 million, compared to GBP415 million in 2001, as a result of
volume related asset growth in the personal loan and credit card portfolios and
a lower level of recoveries and releases following the non-recurrence of the
release of surplus provisions of GBP72 million in 2001. Excluding these
provision releases, the charge as a percentage of average lending for personal
loans and overdrafts decreased to 3.73 per cent from 3.88 per cent in 2001, and
the charge in the credit card portfolio decreased to 3.52 per cent from 3.60 per
cent in 2001. Overall the arrears position remained stable.
Lloyds TSB Group's share of the results of its joint venture operations was
a loss of GBP11 million, little changed from 2001.
2001 compared with 2000
The profit before tax from UK Retail Banking and Mortgages in 2001 fell by
GBP158 million, or 12 per cent, to GBP1,205 million.
Total income increased by GBP143 million, or 3 per cent to GBP4,237
million. Net interest income increased by GBP151 million to GBP3,102 million as
growth in lending and savings balances, adding GBP241 million to income, more
than offset a 14 basis point fall in the margin, reducing net interest income by
GBP90 million. Compared to 2000, period end personal loan and credit card
balances increased by 18 per cent and balances on current accounts and savings
and investment accounts grew by 9 per cent. Mortgage balances also increased;
gross new mortgage lending increased by 21 per cent to GBP13,986 million
compared with GBP11,518 million in 2000, however net new lending was GBP3,919
million compared to GBP4,627 million in 2000. This resulted in a fall in Lloyds
TSB Group's estimated market share of net new lending from 11.3 per cent to 7.2
per cent. Mortgage balances outstanding at the end of 2001 amounted to GBP56,578
million compared to GBP52,659 million at the end of 2000, an estimated market
share of 9.5 per cent. The net interest margin was little changed.
The net interest margin on retail lending products was 6 basis points
lower, with improved margins on credit cards and overdrafts following base rate
cuts, offset by lower margins on personal loans due to a combination of a higher
proportion of lending being at concessionary rates offered to attract new
business and higher average loan values which are provided at lower interest
rates. The retail deposit margin fell by 25 basis points as the lower interest
rate environment reduced the benefit from low interest rate and interest-free
current accounts. The margin on mortgage lending reduced by 1 basis point.
Other income decreased by GBP8 million, or 1 per cent, to GBP1,135 million.
There was a GBP21 million improvement in income earned from credit and debit
cards and income from added value current accounts increased by GBP19 million
due to increased volumes. In 2001, profits on the sale and leaseback of premises
totalled GBP57 million reflecting Lloyds TSB Group's ongoing strategy, started
some years ago, to sell and lease back a number of branches to create greater
flexibility in the changing environment for retail sales. This was largely
offset by a GBP76 million decrease in income following the withdrawal of ATM
fees and planned reductions in unauthorised borrowing fees; stockbroking income
fell by GBP10 million due to lower transaction volumes.
Operating expenses increased by GBP206 million, or 9 per cent, to GBP2,607
million compared to GBP2,401 million in 2000. Costs associated with the Group's
efficiency programme totalled GBP151 million, compared to GBP78 million in 2000.
The increase of GBP73 million reflects investment in customer management and
handling systems and costs related to the reassessment of software used in the
internet banking and wealth management businesses. There was an increase in
staff costs reflecting the growth in staff numbers during the year as a result
of the recruitment of additional service and sales staff into the branch network
and the effect of the annual pay review. Communications costs were higher
following revisions to network rental charges and the depreciation charge
increased reflecting the high levels of capital expenditure, particularly in
respect of IT equipment, in 2000. The efficiency ratio increased from 58.6 per
cent in 2000 to 61.5 per cent in 2001.
Provisions for bad and doubtful debts increased by GBP83 million, or 25 per
cent, to GBP415 million. During 2000 there was a benefit of GBP42 million as a
result of a change in provisioning methodology following the centralisation of
arrears processing. If this is adjusted for there was an underlying increase of
GBP52 million in the provisions charge against personal and credit card lending,
reflecting the growth in the size of the portfolios. There was a net release
from the provisions held against the mortgage portfolio of GBP24 million as a
result of a GBP32 million reduction in the general provision following a change
in provisioning methodology; in 2000 there was a net release of provisions of
GBP13 million.
32
Lloyds TSB Group's share of the results of its joint venture operations was
a loss of GBP10 million, due to start-up costs incurred by Goldfish Bank.
Insurance and Investments
Lloyds TSB Group's insurance and investments activities comprise the life,
pensions and unit trust businesses of Scottish Widows and Abbey Life, general
insurance underwriting and broking, and Scottish Widows Investment Partnership.
2002 2001 2000
GBPm GBPm GBPm
Net interest income 74 80 88
Other income 1,876 2,006 1,673
Total income 1,950 2,086 1,761
Operating expenses (490) (491) (462)
Trading surplus 1,460 1,595 1,299
General insurance claims (229) (174) (142)
Income from joint ventures - - 1
Operating profit 1,231 1,421 1,158
Changes in economic assumptions 55 - 127
Investment variance (952) (859) (276)
Profit before tax 334 562 1,009
2002 compared to 2001
The operating profit from Insurance and Investments, calculated as
explained under "- Line of business information - Summary", at GBP1,231 million,
was GBP190 million, or 13 per cent, lower than 2001.
Net interest income was GBP6 million, or 8 per cent, lower at GBP74
million, compared to GBP80 million in 2001, largely reflecting the impact of
lower interest rates on the cash balances held in the general insurance
business.
Other income was GBP130 million, or 6 per cent, lower at GBP1,876 million,
compared to GBP2,006 million in 2001. Income from the long-term assurance
businesses, excluding changes in economic assumptions and investment variance,
was GBP245 million lower. New business income was GBP40 million higher, as a
result of sales growth, but this was partly offset by a GBP28 million increase
in distribution costs. The expected return on existing business reduced by GBP34
million, partly reflecting the lower average volume of in-force business caused
by the fall in the stock market in 2001, and investment earnings were GBP33
million lower, as a result of the reduction in the value of the investments
supporting the long-term assurance funds. Following a review carried out in
conjunction with the Financial Services Authority into past sales made by the
Abbey Life sales force, a provision of GBP165 million was established in 2002
for the estimated cost of redress due to customers. See "- Business - Customer
remediation payments - Mortgage endowment and other savings products". In
addition a further provision of GBP40 million was made in respect of
compensation payable to past purchasers of pension policies, compared to GBP70
million in 2001; this review is now substantially complete. See "- Business -
Customer remediation payments - Redress to past purchasers of pension policies".
There was a reduction of GBP55 million in benefits from experience variances and
actuarial assumption changes, largely reflecting the implementation of revised
mortality assumptions which resulted in a one-off charge of GBP57 million. Fee
income from the unit trust and asset management businesses fell by GBP59
million, reflecting the continued fall in the level of stock markets during
2002. This more than offset an increase in premium income from general insurance
underwriting which was GBP58 million higher, as a result of strong growth in
home products; commissions from insurance broking were GBP119 million higher,
with continued growth in creditor insurance products.
Operating expenses, at GBP490 million, were down slightly from GBP491
million in 2001. Cost reductions resulting from lower levels of sales and
marketing activities in the unit trust and asset management operations have been
largely offset by higher client service costs and increased costs in the general
insurance business, to manage the significant increase in volumes.
General insurance claims were GBP55 million, or 32 per cent, higher at
GBP229 million compared to GBP174 million in 2001. The increase in claims
reflects the significant growth in the size of the underwritten portfolio
together with higher claims due to flood and storm damage during the early part
of 2002.
2001 compared to 2000
The operating profit from Insurance and Investments in 2001, calculated as
explained under "- Line of business information - Summary" increased by GBP263
million, or 23 per cent, to GBP1,421 million from GBP1,158 million.
33
Net interest income, at GBP80 million, was GBP8 million, or 9 per cent,
lower than in 2000. The reduction in income is primarily a reflection of lower
market interest rates reducing the earnings on the cash deposits held by the
general insurance business.
Other income was GBP333 million, or 20 per cent, higher at GBP2,006
million, compared to GBP1,673 million in 2000. Income from the long-term
assurance businesses, excluding changes in economic assumptions and investment
variance, was GBP204 million higher. New business income was GBP64 million, or
22 per cent, higher at GBP358 million following a 41 per cent increase in
weighted sales, primarily as a result of the inclusion of Scottish Widows for a
full year, compared to only ten months in 2000; however this was partly offset
by a GBP25 million increase in distribution costs reflecting the growth in
sales. The expected return from existing business was GBP20 million higher, as a
result of portfolio growth during 2001. There was a GBP30 million reduction in
provisions for redress to past purchasers of pension policies (see "- Business -
Customer remediation payments - Redress to past purchasers of pension policies")
and a further GBP80 million benefit from the non-repetition of a one-off charge
in 2000 related to stakeholder pensions. Investment earnings were GBP35 million
higher reflecting the inclusion of Scottish Widows for a full year.
General insurance underwriting premiums were GBP29 million, or 7 per cent,
higher, as strong growth in home protection products more than offset reduced
creditor insurance income and general insurance broking commissions were GBP130
million higher with particular growth in creditor insurance products, following
the decision to outsource the underwriting of this portfolio in 2000. This was
partly offset by a decrease in unit trust and asset management fees which fell
by GBP20 million, as a result of the substantial fall in the level of stock
market activity in the second half of 2001.
Operating expenses were GBP29 million, or 6 per cent, higher at GBP491
million compared to GBP462 million in 2000, reflecting the inclusion of costs in
respect of Scottish Widows' non-life businesses for a full year compared to ten
months in 2000 and higher costs in the general insurance business to support
portfolio growth.
General insurance claims, at GBP174 million, were GBP32 million, or 23 per
cent, higher than in 2000. The increase reflected higher property claims in line
with rising volumes of new business, only partly offset by lower creditor
insurance claims.
Area of business
2002 2001 2000
GBPm GBPm GBPm
Life, pensions and unit trusts:
Scottish Widows 573 585 433
Abbey Life (98) 175 127
475 760 560
General Insurance 754 651 574
Scottish Widows Investment Partnership 2 10 24
Operating profit 1,231 1,421 1,158
Changes in economic assumptions 55 - 127
Investment variance (952) (859) (276)
Profit before tax 334 562 1,009
2002 compared with 2001
The operating profit from life, pensions and unit trusts decreased by
GBP285 million, or 38 per cent, from GBP760 million in 2001 to GBP475 million in
2002. Operating profit at Scottish Widows was GBP12 million lower at GBP573
million, compared to GBP585 million in 2001. Life and pensions new business
income increased by GBP40 million, or 11 per cent, to GBP398 million, following
a 7 per cent increase in weighted sales and a change in mix towards more
profitable products. See "- Line of business information - Life, pensions and
unit trusts operating profit". Income from life and pensions existing business
was GBP38 million higher, principally reflecting a GBP40 million reduction in
provisions for redress to past purchasers of pension policies. See "- Business -
Customer remediation payments - Redress to past purchasers of pension policies".
Investment earnings were GBP27 million lower, reflecting reduced asset values at
the start of 2002, and life and pensions distribution costs rose GBP28 million,
in line with sales. Unit trust profits were GBP35 million lower reflecting lower
sales and reduced management income, both as a result of adverse stock market
conditions.
Abbey Life's operating profit reduced by GBP273 million to a loss of GBP98
million in 2002. This reduction in profitability principally reflected a GBP165
million provision for redress to past purchasers of endowment policies (see "-
Business - Customer remediation payments - Mortgage endowment and other savings
products"), together with reduced expected return from existing business and
investment earnings as a result of lower asset levels at the start of 2002 and a
reduction in benefits from experience variances and actuarial assumption
changes, which were GBP73 million lower, as a number of one-off benefits in 2001
were not repeated.
The operating profit from the general insurance businesses increased by
GBP103 million or 16 per cent, to GBP754 million from GBP651 million in 2001.
Profit from the broking business was GBP126 million higher as a result of
increases in commission income, particularly in respect of creditor products,
and higher levels of retrospective commissions. However, there was a GBP23
million reduction in operating profits from the underwriting business as a
result of an increase in weather related claims following floods and storms
early in 2002 and increased distribution and administration expenses, as a
result of higher transaction volumes. See "- Line of business information -
General Insurance".
34
Operating profit from Scottish Widows Investment Partnership ("SWIP") was
GBP2 million, compared to GBP10 million in 2001, the reduction in profitability
being driven primarily by lower stock market levels and significant investment
in new infrastructure to support future business growth. At the end of the year
SWIP had some GBP70,000 million of funds under management compared to GBP78,000
million at the end of 2001; the decline reflects the continued fall in stock
market levels.
2001 compared with 2000
The operating profit from Lloyds TSB Group's life, pensions and unit trusts
businesses increased by GBP200 million, or 36 per cent, to GBP760 million.
Operating profit from Scottish Widows was GBP152 million higher at GBP585
million, principally reflecting the inclusion of the acquired Scottish Widows
business for a full year, compared with only ten months in 2000, together with
the non-repetition of a one-off charge of GBP80 million made in 2000 in respect
of stakeholder pensions. The market for medium and long-term investments was
adversely affected in the second half of 2001, as a consequence of the events of
September 11 and the general decline in global stock markets. However, weighted
sales (regular premiums plus one-tenth single premiums) increased by 12 per cent
helped by the inclusion of Scottish Widows for the full twelve months. See "-
Line of business information - Life, pensions and unit trusts operating profit".
Operating profit from Abbey Life, at GBP175 million, was GBP48 million higher
than in 2000. This increase in profits reflects a GBP28 million lower charge for
provisions for redress to past purchasers of pension policies and increased
benefits from experience variances and actuarial assumption changes, only partly
offset by a reduction in the expected return from existing business and
investment earnings as the closed business begins to run down.
The operating profit from general insurance operations increased by GBP77
million, or 13 per cent, to GBP651 million. There was continued growth in sales
of card and loan protection products which resulted in an GBP86 million
improvement in profits from broking activities, although there was a GBP9
million reduction in profits from the underwriting business following a 23 per
cent increase in claims expense due to higher property claims. See "- Line of
business information - General Insurance".
During 2001 Scottish Widows Investment Management and Hill Samuel Asset
Management were fully integrated into Scottish Widows Investment Partnership
('SWIP'). A complete overhaul of the management structure has also been
undertaken, together with a fundamental review of investment philosophy,
processes and systems. The operating profit from SWIP in 2001 was GBP10 million
compared to GBP24 million in 2000, the reduction in profitability being partly
driven by lower stock market levels. At the end of 2001 SWIP had some GBP78,000
million of funds under management compared to some GBP87,000 million at 31
December 2000. The decline has been primarily caused by the lower stock market
levels experienced in 2001.
Changes in economic assumptions
Lloyds TSB Group accounts for the value of the shareholder's interest in
the long-term assurance business using the embedded value basis of accounting.
The embedded value comprises the net tangible assets of the life assurance
subsidiaries and the present value of the in-force business. The present value
of the in-force business is calculated by projecting future surpluses and other
net cash flows attributable to the shareholder and discounting the result at a
rate which reflects the shareholder's overall risk premium.
When projecting future surpluses and other net cash flows Lloyds TSB Group
makes a series of assumptions about long-term economic conditions. In the past
these assumptions were only updated infrequently for changes that were
considered sustainable. In order to achieve greater comparability with other
listed insurers in the UK, in 2002 the Lloyds TSB Group changed its practice and
in future will revise these assumptions at each reporting date.
The economic assumptions have been revised at 31 December 2002 as follows:
2002 2001
% %
Risk-adjusted discount rate (net of tax) 7.35 8.50
Return on equities (gross of tax) 7.10 8.00
Return on fixed interest securities (gross of tax) 4.50 5.25
Expenses inflation 3.30 3.00
The revised assumptions have resulted in a net credit to the profit and
loss account in 2002 of GBP55 million.
The economic assumptions were last reviewed following the acquisition of
Scottish Widows in March 2000 to ensure that they remained appropriate for the
enlarged life and pensions business. As a result of this review changes were
made to the assumptions used by Abbey Life and the bancassurance business of
Lloyds TSB in order to make the assumptions used by these businesses consistent
with those used by Scottish Widows. The risk adjusted discount rate was reduced
from 10.00 per cent to 8.50 per cent and the assumed gross return on equities
was reduced from 8.50 per cent to 8.00 per cent leading to a credit of GBP127
million being recognised in the profit and loss account in 2000.
35
Investment variance
In accordance with generally accepted accounting practice in the UK, it is
Lloyds TSB Group's accounting policy to carry the investments comprising the
reserves held by its life companies at market value. The reserves held to
support the with-profits business of Scottish Widows are substantial and changes
in market values will result in significant volatility in the Group's embedded
value earnings, which are beyond the control of management. Consequently, in
order to provide a clearer representation of the underlying performance, the
results of the life and pensions business are separately analysed to show an
operating profit including investment earnings calculated using longer-term
investment rates of return, and annual management charges based on unsmoothed
fund values. The investment variance represents the difference between the
actual investment return in the year on investments backing shareholder funds
and the expected return based upon the economic assumptions made at the
beginning of the year, and the effect of these fluctuations on the value of
in-force business. The effects of other changes in economic circumstances beyond
the control of management are also reflected in the investment variance. A
similar approach has been adopted for Lloyds TSB Group's general insurance
business.
In 2002, there was a negative investment variance of GBP952 million (2001:
GBP859 million; 2000: GBP276 million) reflecting in particular the poor
performance of the UK stock market, where the FTSE All-Share index fell by 24
per cent.
Life, pensions and unit trusts operating profit
The operating profit of the life, pensions and unit trust businesses is
analysed in the following table. The basis of this analysis is as follows: The
life and pensions results are split into four elements:
* New business: this represents the value recognised at the end of each
financial year from the new business written during that year after taking
into account the cost of establishing technical provisions and reserves.
This is shown before the significant costs of acquiring that new business,
which are shown separately as "Distribution costs".
* Existing business: this comprises the following elements:
- the expected return arising from the unwinding of the discount applied to
the expected cash flows at the beginning of a year;
- experience variances caused by differences between the actual experience
during the year and the expected experience;
- the effects of changes in assumptions, other than economic assumptions,
and other items; and
- provisions for redress to past purchasers of pension and endowment
policies and, in 2000, a stakeholder pension related charge.
* Investment earnings: this represents the expected investment return on both
the net tangible assets and the value of the shareholder's interest in the
long-term business account, based upon the economic assumptions made at the
beginning of the year.
* Distribution costs: the costs of acquiring the new business generated in the
year. These comprise the cost of selling products through Lloyds TSB Bank's
branch network, the commissions paid to independent financial advisors and
the costs of other direct sales channels.
Unit trust income is shown before the acquisition costs of new business which
are separately disclosed.
36
2002 2001 2000
GBPm GBPm GBPm
New business 398 358 294
Existing business:
- expected return 273 307 287
- experience variances (1) 37 36
- assumption changes and other items 78 95 96
- provisions for redress to past purchasers of (40) (70) (100)
pension policies
- provision for redress to past purchasers of (165) - -
endowment policies
- stakeholder pension related charge - - (80)
145 369 239
Investment earnings 214 247 212
Life and pensions distribution costs (283) (255) (230)
474 719 515
Unit trusts 90 141 156
Unit trust distribution costs (89) (100) (111)
1 41 45
Operating profit of life, pensions and unit 475 760 560
trusts
Changes in economic assumptions 55 - 127
Investment variance (892) (813) (249)
(Loss) profit before tax (362) (53) 438
The table below shows the level of new business premium income and unit
trust sales. Management monitor these figures because they provide an indication
of both the rate of growth and the profitability of the business.
2002 2001 2000
GBPm GBPm GBPm
New business premium income and unit trust
sales:
Regular premiums 286.3 282.0 156.9
Single premiums 3,089.0 2,741.0 2,376.1
Unit trusts - regular premiums 71.5 65.0 91.0
- single premiums 1,009.5 1,335.5 1,902.3
Total unit trusts 1,081.0 1,400.5 1,993.3
Weighted sales is a UK insurance industry standard which measures the new
business volumes; the weighting is made towards regular premium policies to
reflect the long-term nature of these contracts. There are three main
distribution channels for the sale of Lloyds TSB Group's life, pension and unit
trust products and the table below shows the relative importance of each.
2002 2001 2000
GBPm GBPm GBPm
Weighted sales (regular + 1/10 single) by
distribution channel:
Branch network 350.6 376.2 353.3
Independent financial advisors 348.5 279.8 254.9
Direct 68.5 98.7 67.6
767.6 754.7 675.8
2002 compared with 2001
The operating profit, calculated as explained under "- Line of business
information - Summary" of the life, pensions and unit trust businesses in 2002
was GBP475 million, compared to GBP760 million in 2001, a decrease of GBP285
million, or 38 per cent.
New business income from the life and pensions businesses was GBP40
million, or 11 per cent, higher at GBP398 million. This 11 per cent increase in
profits reflects a 7 per cent increase in weighted sales from life and pensions
products, and an improved performance in the more profitable life products. The
life and pensions new business margin, defined as new business income less
distribution costs divided by weighted sales, improved to 19.3 per cent from
18.5 per cent in 2001. The improvement largely arose from an improved product
mix, as a result of the growth in sales of higher margin term assurance and
regular premium life products. Distribution costs increased by GBP28 million, or
11 per cent, to GBP283 million from GBP255 million partly due to the growth in
weighted sales but also because of the increasing proportion of sales made
through independent financial advisors.
Regular premium sales, at GBP286.3 million, were GBP4.3 million, or 2 per
cent, higher than 2001. Regular premium mortgage-related product sales,
providing life cover on repayment mortgages, were GBP10.3 million higher as a
result of the buoyant housing market in the UK and successful cross-selling to
mortgage customers in the branch network. Sales of non-mortgage related life
products were also higher reflecting strong sales of term assurance products
following a number of sales initiatives in the branch network. These increases,
however, were partly offset by a GBP20.1 million reduction in sales of regular
premium pension products. Sales of the stakeholder pension product have been
strong since the launch in April 2001, as the lower charges on this product
continue to make it attractive; however this growth has been more than offset by
reduced sales of the older pension products, reflecting the less attractive
charging structures and adverse stock market conditions.
37
Single premium sales were GBP348.0 million, or 13 per cent, higher at
GBP3,089.0 million, compared to GBP2,741.0 million in 2001. Sales of single
premium life products were GBP152.4 million lower, reflecting reduced sales of
investment bond products which have been affected by low stock market levels and
adverse press comment. Annuity sales, however, were GBP158.4 million higher;
Scottish Widows have improved their position in the annuity market by
maintaining rates, in the face of competitor reductions, and through the launch
of a number of new products. Single premium pension sales increased by GBP342.0
million, benefiting from an increase in Department of Social Security rebates.
Overall sales of unit trust products were GBP319.5 million lower. There was
a large fall in sales of equity-based Individual Savings Accounts, as a result
of the continuing volatility in global stock markets throughout 2002.
Weighted sales of life and pensions and unit trust products were GBP767.6
million compared to GBP754.7 million in 2001. By distribution channel, weighted
sales through the branch network have fallen by 7 per cent, with decreases in
sales of life and pension products, particularly investment bond products which
have been affected by low stock market levels and adverse press comment, and
lower unit trust sales as a result of the depressed market conditions. Weighted
sales by independent financial advisors increased by 25 per cent as a result of
the strong sales of single premium stakeholder pensions and annuities products.
Direct sales are down 31 per cent, partly a result of market conditions; in
particular volumes of pension and annuity product sales have fallen with
customers preferring to purchase these products from independent financial
advisors.
Existing business earnings fell by 61 per cent to GBP145 million, from
GBP369 million in 2001. The expected return from existing business was GBP34
million lower at GBP273 million. This item reflects the unwinding of the
long-term discount rate applied to the expected cash flows from in-force
business and the reduction reflects the lower value of in-force business at the
beginning of 2002, caused by the effect of lower stock markets on annual
management charges.
It is standard practice for life companies to regularly review the
underlying assumptions that support the embedded value calculations, taking into
account latest experience in respect of lapse rates, expense inflation,
investment mix, mortality rates and other items. In 2002, there was a reduction
of GBP55 million in benefits from experience variances and actuarial assumption
changes, largely reflecting the implementation of revised actuarial mortality
assumptions. There was a GBP30 million reduction in provisions for redress to
past purchasers of pension policies, although this was more than offset by a
GBP165 million provision for possible redress to past purchasers of endowment
policies. These items are discussed further under "Business - Customer
remediation payments - Redress to past purchasers of pension policies" and
"Business - Customer remediation payments - Mortgage endowment and other savings
products".
Life and pensions investment earnings, at GBP214 million, were GBP33
million, or 13 per cent, lower than in 2001. This fall reflected the lower asset
level at the start of 2002, following poor stock market performance in the
latter part of 2001.
Unit trust profits in 2002, at GBP1 million, were down significantly from
GBP41 million in 2001. Income in the unit trusts business is derived from both
initial charges at the point of sale and annual management fees, the latter
being calculated as a percentage of funds managed. During 2002, unit trust
income, before distribution costs, reduced by 36 per cent compared to 2001. This
reduction reflects a fall in income from initial charges, following a 13 per
cent fall in weighted sales, and a GBP32 million decrease in annual management
fee income, as global stock market conditions have reduced the value of the
funds managed. Unit trust distribution costs have fallen in line with the
reduced sales.
2001 compared with 2000
The operating profit in 2001 calculated as explained under "- Line of
business information - Summary", of the life, pensions and unit trust businesses
increased by GBP200 million, or 36 per cent, to GBP760 million from GBP560
million.
New business income from the life and pensions businesses increased in 2001
by GBP64 million or 22 per cent, from GBP294 million to GBP358 million following
a 41 per cent increase in weighted sales, primarily as a result of the inclusion
of Scottish Widows for a full year, compared with only ten months in 2000.
During the year, the life and pensions new business margin, defined as new
business income less distribution costs divided by weighted sales, increased to
18.5 per cent from 16.2 per cent in 2000. This improvement was largely a result
of cost efficiencies driven by process enhancements, which limited the increase
in distribution costs to 11 per cent, together with an improved product mix.
The growth in the weighted sales of life and pensions products was mainly
due to an 80 per cent increase in the sales of regular premium products from
GBP156.9 million to GBP282.0 million. The inclusion of Scottish Widows for the
full year compared to only ten months in 2000 added GBP17.1 million with the
remainder of the growth largely due to the launch of stakeholder pension
products in April 2001. During 2001, Scottish Widows became the nominated
stakeholder pensions provider for a number of associations and employers which
gave access to more than 46,000 employers at 31 December 2001. By the end of
2001, over 20,000 employers had already nominated Scottish Widows as their
stakeholder pensions provider resulting in 837,000 employees being offered
stakeholder pensions. In 2001, weighted sales of stakeholder pension products
totalled GBP76 million, a market share of 15 per cent based upon management
estimates.
38
Sales of single premium life and pensions products increased by GBP364.9
million, or 15 per cent, to GBP2,741.0 million. The inclusion of Scottish Widows
for a full year accounted for GBP174.3 million of this increase, the remainder
of the growth being due to higher sales of the Scottish Widows with-profits bond
through the branch network distribution channel. With-profits bonds comprise a
lump-sum investment into a with-profits fund of a life insurance company.
With-profit bonds are designed to be low risk investments which produce growth
and allow the investor to take out money when needed. The overall return on the
investment varies based on the annual bonuses declared by the life insurance
company each year, which in turn will depend upon the performance of its
investments. During a period of considerable volatility on the world's stock
markets, customers regarded this as a safer investment than unit trusts and
Individual Savings Accounts (ISAs).
Existing business earnings increased by 54 per cent from GBP239 million to
GBP369 million. The expected return from existing business increased by GBP20
million, or 7 per cent, to GBP307 million. This reflects the unwinding of the
long-term discount rate applied to the expected cash flows from the portfolio of
in-force business; the increase reflects the growth in the size of the
portfolio. In 2001, changes in actuarial assumptions, together with the planned
harmonisation of actuarial models between Scottish Widows and other Lloyds TSB
Group companies, resulted in a benefit of GBP95 million, compared to a benefit
of GBP96 million in 2000.
As explained under "Business - Customer remediation payments - Redress to
past purchasers of pension policies" there was a pension provision of GBP70
million in 2001, compared to GBP100 million in 2000.
There was also a stakeholder pension related charge of GBP80 million in
2000. During 1999, the UK government had announced changes intended to encourage
more of the population to provide retirement income for themselves through
increased rates of private savings. One of these initiatives was the
introduction of stakeholder pensions with effect from April 2001. Stakeholder
pensions are intended to provide a source of low cost retirement savings for
individuals earning enough to be able to afford to make contributions towards a
pension but not currently doing so. A key feature of these products is that
charges are transparent and limited to 1 per cent per annum, which was
significantly lower than historic charging rates on other personal pension
products. In common with other pension providers in the UK, Scottish Widows
introduced a stakeholder pension product in April 2001. In anticipation of this,
in order not to disadvantage existing pensions customers, Lloyds TSB Group
decided during 2000 to reduce charges made on certain existing policies. This
had the effect of reducing the projected cash flows in Lloyds TSB Group's
embedded value calculation, resulting in the charge to the profit and loss
account.
Investment earnings in 2001, before taking into account investment
variance, increased by GBP35 million, or 17 per cent, due to the inclusion of
Scottish Widows for the full year and the growth in the size of the investment
portfolio supporting the business.
Profits from the unit trust business fell by GBP4 million, to GBP41
million. Continued customer focus upon the Scottish Widows with-profits bond and
uncertainty created by global stock market volatility resulted in a 29 per cent
fall in weighted sales. However, this was only partly reflected in the decline
in profitability of the business because of the income earned from fees charged
for managing customers' funds invested in earlier years.
General Insurance
The following table shows premium income from underwriting and commission
income from insurance broking.
2002 2001 2000
GBPm GBPm GBPm
Premium income from underwriting
Creditor 107 110 126
Home 350 281 228
Health 44 45 50
Reinsurance premiums (15) (8) (5)
486 428 399
Commissions from insurance broking
Creditor 426 323 225
Home 44 41 34
Health 17 22 19
Other 160 142 120
647 528 398
Operating profit 754 651 574
Investment variance (60) (46) (27)
Profit before tax 694 605 547
39
2002 compared with 2001
The operating profit, calculated as explained under "- Line of business
information - Summary", from general insurance was GBP754 million in 2002, up
GBP103 million or 16 per cent from GBP651 million in 2001. This comprised a
profit of GBP185 million from general insurance underwriting and GBP569 million
from broking activities.
The operating profit of the underwriting business, at GBP185 million, was
down GBP23 million, or 11 per cent, from GBP208 million in 2001. Premium income
increased by GBP58 million, or 14 per cent, to GBP486 million, principally
driven by a GBP69 million increase in income from home protection products
reflecting the strength of the housing market in the UK and success in
cross-selling home insurance products to mortgage customers. Creditor insurance
premiums were GBP3 million lower, due to the continuing impact of the
outsourcing of the card protection book in 2000. Reinsurance premiums payable
have increased by GBP7 million to GBP15 million, following a decision to
mitigate the risks on policies with large sums assured.
Operating expenses increased in line with sales, as more staff were taken
on to deal with the increased business volumes, and commissions expense
increased by GBP19 million as a result of increased sales volumes and, in
particular, higher levels of affinity sales.
Claims were GBP55 million, or 32 per cent, higher at GBP229 million
compared to GBP174 million in 2001. The overall claims ratio at 45.7 per cent
was higher than in 2001 (39.9 per cent) largely as a result of increased
property claims, due to a 26 per cent growth in the home underwritten portfolio,
and higher weather and flood related insurance claims.
The operating profit of the general insurance broking business, at GBP569
million, was GBP126 million, or 28 per cent, higher than GBP443 million in 2001,
principally reflecting a GBP119 million increase in broking commission income to
GBP647 million in 2002. Creditor insurance commissions were GBP103 million
higher at GBP426 million reflecting improved penetration into the Lloyds TSB
Group's personal credit portfolios, coupled with the benefit of higher volumes
of personal loans and credit card outstandings. There has also been a benefit
from the Lloyds TSB Group's continuing shift towards broking more general
insurance business. Other commission income was GBP18 million higher as
increased commissions on motor and other smaller products, together with
increased levels of retrospective commissions on a number of products, more than
offset the impact of the non-repetition of a one-off benefit of GBP30 million in
2001 which resulted from a change in broking arrangements.
2001 compared with 2000
The operating profit, calculated as explained under "- Line of business
information - Summary", from general insurance operations, comprising both
underwriting and broking activities, rose by GBP77 million, or 13 per cent, to
GBP651 million in 2001.
The operating profit of the underwriting business fell in 2001 by GBP9
million, or 4 per cent, to GBP208 million. Premium income increased by GBP29
million, or 7 per cent, due to a GBP53 million increase in premium income from
home insurance partly due to the successful cross-selling of this product by
Cheltenham & Gloucester to its mortgage customers. This more than offset a
decline of GBP16 million in income from creditor insurance caused by the
transfer of the card protection book to Norwich Union in the second half of
2000. Premiums from health insurance fell by GBP5 million and reinsurance
premiums increased by GBP3 million.
General insurance claims increased by GBP32 million or 23 per cent to
GBP174 million. The claims ratio was 39.9 per cent compared to 35.1 per cent in
2000, reflecting higher property claims.
The operating profit of the broking business increased by GBP86 million or
24 per cent to GBP443 million due to an increase in commission income of GBP130
million. Creditor insurance sales increased by GBP98 million as a result of the
growth in Lloyds TSB Group's personal lending and credit card portfolios and the
success of the branch network in selling related income protection products. In
addition, there was a GBP22 million increase in other commissions as a benefit
of GBP30 million resulting from a one-off change in broking arrangements more
than offset a fall in the level of retrospective commissions. There was a fall
in investment earnings reflecting the lower interest rate environment and costs
increased by GBP30 million to support the higher business volumes.
40
Wholesale Markets and International Banking
Lloyds TSB Group's Wholesale Markets and International Banking business
comprises banking, treasury, large value lease finance, long-term agricultural
finance, share registration, venture capital, factoring and invoice discounting,
and other related services for major UK and multinational companies, banks and
financial institutions, and medium-sized UK businesses, and other forms of asset
finance. It also includes banking and financial services overseas in four main
areas (the Americas, New Zealand, Europe, and Offshore Banking).
2002 2001 2000
GBPm GBPm GBPm
Net interest income 1,903 1,845 1,642
Other income 1,349 1,208 998
Total income 3,252 3,053 2,640
Operating expenses (1,717) (1,523) (1,363)
Trading surplus 1,535 1,530 1,277
Provisions for bad and (473) (338) (228)
doubtful debts
Amounts written off fixed (57) (22) (14)
asset investments
1,005 1,170 1,035
Profit on sale of Lloyds - 39 -
TSB Asset Management
S.A.
Profit before tax 1,005 1,209 1,035
Efficiency ratio 52.8% 49.9% 51.6%
Total assets (period-end) GBP110,845m GBP100,777m GBP85,243m
Total risk-weighted assets GBP67,156m GBP58,634m GBP48,161m
(period-end)
2002 compared with 2001
The profit before tax of Wholesale Markets and International Banking
decreased by GBP204 million, or 17 per cent, to GBP1,005 million in 2002 from
GBP1,209 million in 2001. The acquisition during the year of First National
Vehicle Holdings, Abbey National Vehicle Finance and the Dutton-Forshaw Group
had a significant impact on the trends in income and expenses within Wholesale
Markets and International Banking. In 2002 these acquisitions contributed GBP101
million of income, and GBP102 million of operating expenses, including goodwill
amortisation of GBP3 million, resulting in a loss before tax of GBP1 million.
Total income increased by GBP199 million, or 7 per cent, to GBP3,252
million. Excluding the impact of acquisitions, total income was GBP98 million,
or 3 per cent, higher. Net interest income was GBP58 million higher at GBP1,903
million. Growth in interest-earning assets more than offset a 25 basis point
reduction in the net interest margin and the effect of adverse exchange rate
movements, which reduced net interest income by GBP116 million.
Total assets were GBP10,068 million, or 10 per cent, higher at GBP110,845
million. Of this increase, some GBP4,700 million resulted from a growth in debt
securities within Wholesale Markets, reflecting an increase in the Lloyds TSB
Group's portfolio of asset backed securities, most of which are triple A rated.
The portfolio allows the Lloyds TSB Group to provide a securitised asset funding
service for its corporate clients (see "- Operating and Financial Review and
Prospects - Liquidity and Capital Resources"), and to participate in structured
deals with a limited number of global financial institutions. The high level of
growth in the portfolio largely reflects the development of the Lloyds TSB
Group's capability in this market and, having now achieved a meaningful
presence, it is not intended that recent rates of portfolio growth will continue
into 2003 and beyond. Customer lending balances increased by some GBP2,600
million with growth in lending to large corporates and asset finance balances as
these businesses have sought to grow their balance sheets. There was an increase
in interbank lending of some GBP2,400 million mainly as a result of deposits
made by the Lloyds TSB Group's Treasury department in London as part of its
liquidity management activities. Within International Banking, total assets
increased by GBP372 million as strong growth in New Zealand, where total assets
increased by GBP2,370 million in sterling terms, was largely offset by
reductions in the Lloyds TSB Group's exposure to Brazil and Argentina.
Other income increased by GBP141 million, or 12 per cent, to GBP1,349
million. Operating lease rentals were GBP111 million higher; of this growth
GBP83 million was due to the acquisitions made during the year, with the balance
due to organic growth in the Lloyds UDT and Lloyds TSB Leasing portfolios. A
higher level of insurance commission income within the asset finance business
and a GBP20 million increase in corporate banking and factoring fees were offset
by a GBP35 million reduction in the realisations of venture capital gains. Fee
income in the company registration business was GBP6 million lower, as the
exceptionally high levels of company transactions in 2001 were not repeated.
Overseas, other income increased by GBP29 million mainly as a result of profits
on the sale and leaseback of premises totalling GBP32 million.
Operating expenses increased by GBP194 million, or 13 per cent, to GBP1,717
million. Excluding the effect of acquisitions made during the year, the
underlying increase was GBP92 million. Of this increase GBP33 million was due to
increased operating lease depreciation as a result of organic growth in the
Lloyds UDT and Lloyds TSB Leasing portfolios and the non-repetition of a one-off
benefit of GBP23 million recognised in 2001 in respect of certain ship leases.
There was increased investment spend in corporate and commercial banking
activities to support business growth and increased staff and other costs in the
UK asset finance businesses. Overseas, costs were little changed as increases in
New Zealand, to support recent business growth, and the effect of annual pay
awards and increased pension costs, were offset by favourable exchange
movements.
41
Provisions for bad and doubtful debts were GBP135 million, or 40 per cent,
higher at GBP473 million compared to GBP338 million in 2001. The charge in
respect of corporate banking operations was GBP145 million higher following a
charge of some GBP100 million in respect of certain large US corporates, caused
by accounting and operational irregularities, and an increased charge from the
UK corporate lending portfolio reflecting the slowdown in activity in certain
sectors of the UK economy. The charge in respect of the asset finance businesses
increased by GBP11 million as a result of volume growth. Within International
Banking, the charge was GBP21 million lower as a result of lower specific
provisions in Losango, the Lloyds TSB Group's consumer finance business in
Brazil, largely reflecting exchange rate movements. There was a general
provision charge of GBP50 million in relation to the Lloyds TSB Group's exposure
to Argentina, compared to GBP55 million in 2001.
Amounts written off fixed asset investments were GBP35 million higher at
GBP57 million. There was a GBP21 million charge following operating
irregularities on one securitisation issue and a GBP21 million increase in the
charge in respect of the Lloyds TSB Group's development capital business,
following the significant growth in the portfolio over recent years. These
increases were partly offset by the non-repetition of a charge of GBP7 million
incurred in 2001, in respect of Argentine government debt instruments held
within International Banking.
2001 compared with 2000
The profit before tax from Wholesale Markets and International Banking in
2001 increased by GBP174 million, or 17 per cent, to GBP1,209 million from
GBP1,035 million in 2000. In 2001, the impact of Chartered Trust was a profit of
GBP19 million compared to a loss of GBP20 million, after restructuring costs,
during the four months of ownership in 2000.
Total income increased by GBP413 million, or 16 per cent, from GBP2,640
million to GBP3,053 million. Net interest income increased by GBP203 million to
GBP1,845 million; the inclusion of Chartered Trust for a full year accounted for
GBP85 million of this increase, after funding costs, giving an underlying growth
of GBP118 million, or 7 per cent. This increase resulted primarily from positive
interest rate management and asset growth.
Period end assets increased by GBP15,534 million, or 18 per cent, to
GBP100,777 million. Of this increase, over GBP9,000 million resulted from a
growth in debt securities reflecting an increase in Lloyds TSB Group's asset
backed and other investment grade securities, many of which were triple A rated.
A high percentage of these assets, which are very liquid and marketable, have
low capital weightings and represented a profitable deployment of Lloyds TSB
Group's capital at a time when margins in this area were improving. Period end
lending to corporate and commercial customers increased by some GBP3,900 million
as a result of a significant growth in term and money market lending and
short-term lending to specialist investment funds and UK and US insurance
companies. Within International Banking, period end assets grew by GBP2,559
million primarily as a result of corporate and consumer lending growth in New
Zealand and Brazil.
The net interest margin was little changed. The benefits of positive
interest rate management in the treasury operations in the UK and improved
margins in New Zealand more than offset lower margins earned on corporate and
commercial lending balances due to competitive pressures and reductions in the
margin in Brazil. Adverse exchange rate movements, mainly in Brazil, reduced net
interest income by GBP59 million.
Other income increased by GBP210 million, or 21 per cent; the inclusion of
Chartered Trust for a full year accounted for GBP126 million of this increase
giving an underlying growth of GBP84 million, or 9 per cent. There was a GBP54
million increase in operating lease rentals from Lloyds UDT and Lloyds TSB
Leasing as a result of growth in the portfolio and a GBP26 million increase in
fees from large corporate activity, factoring and following the completion of a
number of high quality structured finance transactions. Income from share
registration activities increased by GBP12 million and dealing profits from the
treasury operations improved, benefiting from opportunities created from certain
exposures arising within Lloyds TSB Group's insurance businesses.
Overseas, other income decreased by GBP32 million as an increase in fee
income in New Zealand of GBP10 million was more than offset by adverse exchange
rate movements of GBP24 million and a reduction of GBP19 million in fee income
from Lloyds TSB Group's overseas wealth management businesses, reflecting lower
stock market values.
Operating expenses increased by GBP160 million, or 12 per cent; the
inclusion of Chartered Trust for a full year added GBP145 million of costs
giving an underlying increase of GBP15 million. Operating lease depreciation
within Lloyds UDT and Lloyds TSB Leasing increased by GBP13 million, despite a
GBP23 million reduction in the depreciation charge on certain ship leases.
Overseas, increased operating costs in New Zealand of GBP13 million and Brazil
of GBP12 million, to support higher business volumes, were more than offset by a
GBP46 million benefit from exchange rate movements.
Provisions for bad and doubtful debts increased by GBP110 million, or 48
per cent; the inclusion of Chartered Trust for a full year resulted in an
increase of GBP27 million giving an underlying growth of GBP83 million. The
growth in the charge was mainly attributable to a GBP55 million increase in the
general provision following economic difficulties in Argentina.
42
The charge for provisions for bad and doubtful debts relating to the
corporate and commercial lending portfolios increased by GBP53 million largely
as a result of new provisions required against a small number of corporate
exposures. There was an GBP18 million reduction in the charge against the
consumer finance portfolio of Lloyds UDT due to improved credit control
procedures.
Amounts written off fixed asset investments increased by GBP8 million, or
57 per cent, following a provision of GBP7 million against the carrying value of
certain Argentine government debt.
In October 2001, Lloyds TSB Group sold its Brazilian fund management and
private banking business, including its subsidiary, Lloyds TSB Asset Management
S.A. to Banco Itau S.A. The net asset value of the business sold was less than
GBP2 million and assets under management were approximately US$2,000 million.
The sale of this business did not affect Lloyds TSB Group's other Brazilian
businesses.
Central group items
Included within Central group items are the costs of Lloyds TSB Group
support functions, the accrual for the annual payment to the Lloyds TSB
Foundations, other finance income arising on the Lloyds TSB Group's
post-retirement defined benefit schemes together with the cost of any benefit
augmentations in those schemes, the net earnings on that part of Lloyds TSB
Group's capital base which is not required to support the operations of the
business units together with earnings on the emerging markets debt investment
portfolio, and other items of income and expenditure managed centrally.
2002 2001 2000
GBPm GBPm GBPm
Accrual for payment to Lloyds TSB Foundations (33) (36) (34)
Other finance income 165 307 424
Pension scheme benefit augmentations - (82) -
Earnings on surplus capital and the emerging markets 2 63 22
debt investment portfolio
Abbey National offer costs - (16) -
Central costs and other unallocated items (38) (51) (34)
Profit before tax 96 185 378
2002 compared with 2001
The four independent Lloyds TSB Foundations support registered charities
throughout the UK that enable people, particularly disabled and disadvantaged
people, to play a fuller role in society. The Foundations receive one per cent
of Lloyds TSB Group's pre-tax profit averaged over three years instead of the
dividend on their shareholdings. See Note 40 to the Consolidated Financial
Statements. The reduction in the charge in 2002 reflected the fall in Lloyds TSB
Group profits.
Other finance income at GBP165 million was GBP142 million, or 46 per cent,
lower than in 2001, as a result of a reduced expected return on the pension
scheme assets following the fall in their value during 2001, together with an
increased charge in respect of the unwinding of the discount on the scheme
liabilities. Costs of GBP82 million in 2001 in respect of benefit augmentations
in the Lloyds TSB Group's main pension schemes were not repeated in 2002.
Earnings on surplus capital and the emerging markets debt investment
portfolio were GBP61 million lower due to increased interest expense following
issues of subordinated debt during 2002 and a reduction in the level of surplus
capital because of dividend payments and increased investment in the business
units. Benefits realised in 2001 of GBP30 million from changes in interest rate
hedging arrangements were not repeated.
2001 compared with 2000
The increased accrual for the payment to the Lloyds TSB Foundations in 2001
reflected continued growth in the average profitability of the Lloyds TSB Group.
The reduction in other finance income reflected a lower level of assets held in
the Group's defined benefit pension schemes at the start of 2001, coupled with
lower expectations for market returns during that year. In 2001, costs of GBP82
million were incurred in augmenting certain benefits available from the Group's
defined benefit pension schemes. Earnings on surplus capital and the emerging
markets debt investment portfolio were GBP41 million better than in 2000. A full
year's funding cost of the consideration for the acquisition of Scottish Widows,
compared to ten months in 2000, was more than offset by the gradual build-up of
surplus capital and some GBP30 million of benefits to Lloyds TSB Group capital
from changes in interest rate hedging arrangements.
During 2001, Lloyds TSB Group incurred costs of GBP16 million in connection
with the proposed acquisition of Abbey National prior to the announcement by the
Secretary of State for Trade and Industry that Lloyds TSB Group would not be
permitted to proceed with an offer.
Future accounting developments
Information concerning future accounting developments is provided in Note 48 to
the Consolidated Financial Statements.
43
UK GAAP compared with US GAAP
Under US GAAP, Lloyds TSB Group's net income for the year ended 31 December
2002 was GBP1,751 million (2001: GBP1,632 million) compared to GBP1,781 million
(2001: GBP2,229 million) under UK GAAP. Reconciliations between the UK GAAP and
US GAAP figures, together with detailed explanations of the accounting
differences, are included in Note 48 to the Consolidated Financial Statements.
Following a review of the Lloyds TSB Group's accounting treatment for
derivatives held for risk management purposes, the US GAAP figures for 2001 and
2000 have been restated to reflect a revised interpretation of the accounting
requirements. The effects of the restatement are set out on page F-67.
The most significant areas of difference between UK GAAP and US GAAP which
affect net income are as follows:
Insurance accounting. Under UK GAAP applicable to banking groups, life
assurance activities are accounted for using the embedded value basis of
accounting which requires the recognition of the discounted value of the
projected future net cash flows attributable to the shareholder at the point of
sale. UK GAAP therefore results in a substantial proportion of the net profit
accruing on a portfolio of life assurance polices being recognised at their
inception. Under US GAAP income is recognised in the profit and loss account in
the period in which it is earned and expenses in the period in which they are
incurred. This results in a more even recognition of profit over the life of the
related policies.
Goodwill and intangible assets. Under US GAAP, following the full
implementation of SFAS No. 142 in 2002, goodwill is no longer amortised through
the profit and loss account. Goodwill continues to be amortised under UK GAAP,
however the charge in the Lloyds TSB Group's profit and loss account is
relatively small since the directors have decided that it is not appropriate to
amortise the goodwill that arose on the acquisition of Scottish Widows in 2000.
In 2001 and earlier years, prior to the full implementation of SFAS No. 142, the
US GAAP amortisation charge was significantly higher than under UK GAAP, since
US GAAP then required the amortisation of the Scottish Widows goodwill balance
and of the goodwill arising, under US GAAP, from the business combination of
Lloyds Bank Plc and TSB Group plc in 1995. Under UK GAAP the combination of
Lloyds Bank Plc and TSB Group plc was accounted for as a merger.
However, US GAAP net income is lower due to an amortisation charge in
respect of customer related intangibles, the intangible assets representing the
value of customer relationships associated with acquisitions, which are
separately established under US GAAP.
Derivative instruments held for risk management purposes. Under UK GAAP,
derivatives held for risk management purposes are accounted for on an accruals
basis, in line with the underlying instruments being hedged. Under US GAAP,
because Lloyds TSB Group has elected not to satisfy the more onerous hedging
criteria of SFAS No. 133 'Accounting for Derivative Instruments and for Hedging
Activities' in respect of derivative contracts, these instruments are treated as
trading, with the unrealised mark-to-market gains and losses taken to income as
they arise and the resulting assets or liabilities recorded on the balance
sheet. As Lloyds TSB Group will continue to hold a significant number of
derivatives which are hedge accounted under UK GAAP this means that net income
and shareholders' equity under US GAAP will be subject to increased volatility.
44
Average balance sheet and net interest income
The following average balance sheet excludes the long-term assurance
business assets and liabilities attributable to policyholders. The interest
yields and costs for foreign office assets and liabilities are affected by
Lloyds TSB Group's operations in Latin America. The countries in which Lloyds
TSB Group operates are periodically subject to comparatively high rates of
interest, which in certain instances in the tables below has had the effect of
producing unusually high yields and costs.
2002 2001 2000
Average Interest Average Interest Average Interest
balance income Yield balance income Yield balance income Yield
GBPm GBPm % GBPm GBPm % GBPm GBPm %
Assets
Treasury
bills and
other
eligible
bills
Domestic
offices 2,608 85 3.26 1,858 91 4.90 836 48 5.74
Foreign
offices 906 211 23.29 1,641 423 25.78 1,224 265 21.65
Loans and
advances to
banks
Domestic
offices 11,839 470 3.97 12,086 692 5.73 13,384 828 6.19
Foreign
offices 2,275 129 5.67 2,308 153 6.63 2,332 180 7.72
Loans and
advances to
customers
Domestic
offices 98,725 6,246 6.33 89,802 6,876 7.66 80,231 6,815 8.49
Foreign
offices 17,695 1,761 9.95 15,316 1,532 10.00 14,009 1,393 9.94
Debt
securities
Domestic
offices 8,661 347 4.01 4,394 230 5.23 3,882 252 6.49
Foreign
offices 6,022 220 3.65 4,397 300 6.82 2,827 271 9.59
Lease and
hire
purchase
receivables
Domestic
offices 13,069 1,078 8.25 13,104 1,061 8.10 12,241 984 8.04
Foreign
offices 18 2 11.11 39 6 15.38 56 18 32.1
Total
interest-
earning assets
of banking
book 161,818 10,549 6.52 144,945 11,364 7.84 131,022 11,054 8.44
Total
interest-
earning assets
of
trading
book 15,518 602 3.88 12,252 544 4.44 10,189 511 5.02
Total
interest-
earning
assets 177,336 11,151 6.29 157,197 11,908 7.58 141,211 11,565 8.19
Provisions
for bad and
doubtful
debts (1,623) (1,489) (1,531)
Non-interest
earning
assets
Domestic
offices 19,941 20,653 19,389
Foreign
offices 2,822 2,255 2,121
Total
average
assets and
interest
income 198,476 11,151 5.62 178,616 11,908 6.67 161,190 11,565 7.17
Percentage
of assets
applicable
to foreign
activities
(in %) 14.8 14.3 13.8
2002 2001 2000
Average Average Average
interest Net Net interest Net Net interest Net Net
earning interest interest earning interest interest earning interest interest
assets income margin assets income margin assets income margin
GBPm GBPm % GBPm GBPm % GBPm GBPm %
Average
interest-
earning assets
and net
interest
income:
Banking
business 161,818 5,171 3.20 144,945 4,922 3.40 131,022 4,587 3.50
Trading
business 15,518 - - 12,252 - - 10,189 - -
Net yield
on
interest-
earning
assets 177,336 5,171 2.92 157,197 4,922 3.13 141,211 4,587 3.25
45
2002 2001 2000
Average Interest Average Interest Average Interest
balance expense Cost balance expense Cost balance expense Cost
GBPm GBPm % GBPm GBPm % GBPm GBPm %
Liabilities
and
shareholders'
equity
Deposits by
banks
Domestic
offices 12,587 322 2.56 13,452 658 4.89 9,057 490 5.41
Foreign
offices 4,234 137 3.24 3,949 288 7.29 3,506 247 7.05
Liabilities
to banks
under sale
and
repurchase
agreements
Domestic
offices 2,799 80 2.86 1,547 74 4.78 2,022 113 5.59
Foreign
offices 457 77 16.85 671 110 16.39 300 68 22.67
Customer
accounts
Domestic
offices 82,009 2,240 2.73 72,633 2,724 3.75 72,071 3,232 4.48
Foreign
offices 11,265 993 8.81 10,877 924 8.49 10,326 801 7.76
Liabilities
to customers
under sale
and
repurchase
agreements
Domestic
offices 2,898 135 4.66 1,552 73 4.70 551 35 6.35
Foreign
offices 140 4 2.86 128 4 3.13 127 4 3.15
Debt
securities in
issue
Domestic
offices 14,750 498 3.38 12,716 713 5.61 8,136 620 7.62
Foreign
offices 7,953 355 4.46 6,052 359 5.93 4,707 366 7.78
Subordinated
liabilities
Domestic
offices 10,921 526 4.82 9,333 506 5.42 7,383 481 6.51
Foreign
offices 190 11 5.79 158 9 5.70 162 10 6.17
Total
interest-
bearing
liabilities
of
banking
book 150,203 5,378 3.58 133,068 6,442 4.84 118,348 6,467 5.46
Total
interest-
bearing
liabilities
of
trading
book 15,518 602 3.88 12,252 544 4.44 10,189 511 5.02
Total
interest-
bearing
liabilities 165,721 5,980 3.61 145,320 6,986 4.81 128,537 6,978 5.43
Interest-free
liabilities
Minority
interests and
shareholders'
funds
Domestic
offices 8,522 10,609 11,115
Foreign
offices 2,801 2,225 1,930
Non-interest
bearing
customer
accounts
Domestic
offices 5,985 6,182 6,058
Foreign
offices 789 595 635
Other
interest-free
liabilities
Domestic
offices 13,118 12,721 12,430
Foreign
offices 1,540 964 485
Total
liabilities 198,476 5,980 3.01 178,616 6,986 3.91 161,190 6,978 4.33
Percentage of
liabilities
applicable to
foreign
activities
(in %) 14.2 14.1 13.7
Net interest margin for the banking book
2002 2001 2000
% % %
Domestic offices 3.28 3.47 3.58
Foreign offices 2.77 3.04 3.09
Group margin 3.20 3.40 3.50
Loans and advances to banks and customers include non-performing loans.
Interest receivable on such loans has been included to the extent to which
either cash payments have been received, in accordance with Lloyds TSB Group's
policy on income recognition.
Approximately 85 per cent of the value of the balances are calculated on a
daily basis with balances held by Lloyds TSB Group's leasing and asset finance
businesses averaged on a monthly basis. Management believes that the interest
rate trends are substantially the same as they would be if all balances were
averaged on the same basis.
46
Changes in net interest income - volume and rate analysis
The following table allocates changes in net interest income between volume
and rate for 2002 compared with 2001 and for 2001 compared with 2000. Where
variances have arisen from both changes in volume and rate these are allocated
to volume.
2002 compared with 2001 2001 compared with 2000
Increase/(decrease) Increase/(decrease)
Total Total
change Volume Rate change Volume Rate
GBPm GBPm GBPm GBPm GBPm GBPm
Interest
receivable
and
similar
income
Treasury
bills and
other
eligible
bills
Domestic
offices (6) 24 (30) 43 50 (7)
Foreign
offices (212) (171) (41) 158 107 51
Loans and
advances
to banks
Domestic
offices (222) (10) (212) (136) (74) (62)
Foreign
offices (24) (2) (22) (27) (2) (25)
Loans and
advances
to
customers
Domestic
offices (630) 565 (1,195) 61 733 (672)
Foreign
offices 229 237 (8) 139 131 8
Debt
securities
Domestic
offices 117 171 (54) (22) 27 (49)
Foreign
offices (80) 59 (139) 29 107 (78)
Lease and
hire
purchase
receivables
Domestic
offices 17 (3) 20 77 70 7
Foreign
offices (4) (2) (2) (12) (3) (9)
Total
banking
book
interest
receivable
and
similar
income (815) 868 (1,683) 310 1,146 (836)
Total
trading
book
interest
receivable
and
similar
income 58 127 (69) 33 92 (59)
Total
interest
receivable
and
similar
income (757) 995 (1,752) 343 1,238 (895)
Interest
payable
Deposits
by banks
Domestic
offices (336) (22) (314) 168 215 (47)
Foreign
offices (151) 9 (160) 41 32 9
Liabilities
to
banks
under
sale and
repurchase
agreements
Domestic
offices 6 36 (30) (39) (23) (16)
Foreign
offices (33) (36) 3 42 61 (19)
Customer
accounts
Domestic
offices (484) 256 (740) (508) 21 (529)
Foreign
offices 69 34 35 123 47 76
Liabilities
to
customers
under
sale and
repurchase
agreements
Domestic
offices 62 63 (1) 38 47 (9)
Foreign
offices - - - - - -
Debt
securities
in issue
Domestic
offices (215) 69 (284) 93 257 (164)
Foreign
offices (4) 85 (89) (7) 80 (87)
Subordinated
liabilities
Domestic
offices 20 76 (56) 25 106 (81)
Foreign
offices 2 2 - (1) - (1)
Total
banking
book
interest
payable (1,064) 572 (1,636) (25) 843 (868)
Total
trading
book
interest
payable 58 127 (69) 33 92 (59)
Total
interest
payable (1,006) 699 (1,705) 8 935 (927)
47
Enterprise-wide risk management
Lloyds TSB Group has adopted an enterprise-wide framework for the
identification, assessment and management of risk, designed to meet its
customers' needs and maximise shareholder value by aligning risk management with
the corporate strategy; assessing the impact of emerging risks from new
technologies or markets; and developing risk tolerances and mitigating
strategies.
Enterprise-wide risk management ("EWRM") is founded on four principal
concepts: strong risk governance; empowerment; competitive advantage; and common
risk language.
Strong Risk Common
Governance Risk Language
Current and
Emerging Risks
Competitive
Empowerment Advantage
Strong risk governance
The risk governance structure is designed to create a risk-aware culture in
which the nature and size of risks are well understood, and business decisions
strike a balance between risk and reward which is consistent with the Lloyds TSB
Group's risk appetite, whilst maximising shareholder value. The governance
structure is based on the following elements:
The Board is responsible for determining the long-term strategy of the
business, the markets in which the Lloyds TSB Group will operate and the level
of risk acceptable to the Lloyds TSB Group in each area of its business.
The Group Executive Committee is responsible to the Group Chief Executive
for the development and implementation of strategy, operational plans, policies
and budgets. It monitors operating and financial performance, assesses and
controls risk, and prioritises and allocates resources.
The Group Risk Committee is responsible to the Group Executive Committee
for protecting shareholder value through assessment and control of the high
level risks assumed by the Lloyds TSB Group; approving the Lloyds TSB Group's
high level policies; ensuring that the necessary culture, practices and systems
are in place to enable the Lloyds TSB Group to meet its internal and external
obligations; and reviewing the allocation and deployment of capital at risk,
taking into account the Lloyds TSB Group's risk appetite.
The Director of Group Risk Management is responsible for the implementation
of risk policy and the provision of independent assurance to the Audit Committee
and Board, who receive regular reports on risk issues prepared by Group Risk
Management. The Director of Group Risk Management reports to the Group Chief
Executive and has access to the Chairman and members of senior management; he is
also a member of the Group Risk Committee.
The diagram below sets out the existing risk governance structure, but
during 2003 the Lloyds TSB Group is carrying out a wide-ranging review aimed at
further improving the risk governance framework which is likely to lead to
changes before the end of the year.
Board
Audit Group Chief Chairman's
Committee Executive Committee
External
Auditors
Group Risk Group Risk Group Executive ALCO
Management Committee Committee
Regulators
Business
Units
48
Empowerment
The directors of the Lloyds TSB Group's business units have primary
responsibility for measuring, monitoring and controlling risks within their
areas of accountability. They are empowered to establish control frameworks for
their businesses that are consistent with the Lloyds TSB Group's high level
policies and within parameters set by Group Risk Management.
Competitive Advantage
The EWRM model strengthens the Lloyds TSB Group's ability to identify and
assess risks; aggregate risks and define the corporate risk appetite; develop
solutions for reducing or transferring risk, where appropriate; and exploit
risks to gain competitive advantage, thereby increasing shareholder value.
Common Risk Language
The Lloyds TSB Group has adopted a risk language in which all risks are
classified by one or more of the following 11 Risk Drivers:
Governance, People and Organisation
Strategy Product and Service
Credit Financial
Market Customer Treatment
Insurance Legal and Regulatory
Operational Change Management
The Lloyds TSB Group's high level policy and reporting to the Group Risk
Committee, Audit Committee and Board have been aligned to the Risk Drivers.
Roll-out of the risk language to the business has commenced and will be
completed during 2003, ensuring a consistent approach to classifying and
describing risks.
Governance, People and Organisation
Definition
The risk of loss from poor corporate governance at Group and business unit
level, sub-optimal organisational structuring, or failure to recruit, manage and
retain appropriate skilled staff to achieve business objectives.
Lloyds TSB Group Policy Manual
The Lloyds TSB Group's policy for managing Governance, People and
Organisation risk is set out in the Lloyds TSB Group Policy Manual, which is
approved by the Group Risk Committee. The salient elements of the policy are
summarised below.
Governance and Organisation
The Lloyds TSB Group's governance and organisation policy is to:
- Organise itself into three principal business units (UK Retail Banking and
Mortgages, Wholesale and International Banking, and Insurance and
Investments) with centralised IT and operational support. These units are
run in a manner consistent with strategic direction from the Board, tight
financial and operating controls and the prudent management of risk.
- Develop and maintain a strong risk management and control culture across
all businesses.
- Follow industry best practice on corporate governance, and conduct
business with integrity, due skill, care and diligence.
Management of Risks
The Lloyds TSB Group sets high standards for the conduct of its business
and values its reputation. Responsibility for establishing an effective
organisational structure is vested in Group and business unit management. Sound
internal risk management practices are promoted through business unit directors
who are responsible for identifying, measuring, monitoring and controlling the
risks within their specific areas of accountability.
49
The Lloyds TSB Group seeks to identify and classify risks in a timely
manner. The likelihood of risks crystallising and the significance of the
consequent impact on the business, the Lloyds TSB Group and its customers are
evaluated. The Lloyds TSB Group's business control environment ensures effective
and efficient operational management; reliability, integrity and consistency of
financial and other reporting; and compliance with governing laws and
regulations. Business unit directors ensure that material risks are reported to
the relevant Group Executive Director and to Group Risk Management.
Information and Communication
It is the Lloyds TSB Group's policy for the Board and senior management at
both Group and business unit level to receive relevant, reliable and timely
management information in line with business objectives to ensure that
activities are appropriately controlled, key risks are identified and monitored,
decisions are implemented and regulatory obligations are met.
Audit Responsibilities and Rights
Group Audit independently reviews adherence to the policies and processes
that make up the control environment, disseminating best practices throughout
the Lloyds TSB Group in the course of its monitoring and corrective action
activities. The Group Audit Director meets regularly with the Group Chief
Executive and periodically with the Audit Committee.
People
The Lloyds TSB Group's approach to people management is to employ skilled,
committed staff, working as a team for the benefit of customers and
shareholders, who are given the opportunity to fulfil their potential; employ
the highest ethical standards of behaviour and best practice management
principles; and recruit on the basis of ability and competence.
Standards of Behaviour
The Lloyds TSB Group seeks to ensure that its employees act with integrity
and seek to deliver high levels of customer service. It promotes a working
environment free from discrimination, harassment, bullying or victimisation of
any kind. Employees are encouraged and expected to alert management to suspected
misconduct, fraud or other serious malpractice.
Performance and Reward Management
The Lloyds TSB Group seeks to:
- Ensure that all employees understand their role, the purpose of the role
and where it fits into the wider team and organisational context.
- Manage and measure employees' performance and contribution to collective
goals.
- Recognise the contribution of individuals in the context of the pay market
and the performance of the business in which they work, and reward
appropriately.
Training and Development
The Lloyds TSB Group believes that:
- Long term success depends on the quality and skills of its staff.
- It has a joint responsibility with employees for their personal and career
development to improve current performance and to enhance future
prospects.
Strategy Risk
Definition
The risk arising from the adoption of the Lloyds TSB Group's agreed
strategy and its implementation at corporate or business unit level.
Processes
The Lloyds TSB Group's governing objective is to maximise value for its
shareholders by:
- Being first choice for its customers.
- Being a leader in its chosen markets.
- Driving down day-to-day costs to facilitate investment.
The risks arising from the adoption of the Lloyds TSB Group's strategy at
corporate and business unit level are managed by a number of processes.
A common approach is applied across the Lloyds TSB Group to assess the
creation of shareholder value. This is measured by economic profit (the profit
attributable to shareholders, less a notional charge for the equity invested in
the business). The focus on economic profit allows the Lloyds TSB Group to
compare the returns being made on capital employed in each business. The use of
risk-based economic capital and regulatory capital is closely monitored at
business unit and Group level. The Lloyds TSB Group's economic capital model
covers credit, market, insurance, business and operational risks.
50
A rigorous annual strategic planning process is conducted at Group and
business unit level and includes a quantitative and qualitative assessment of
the risks in the Lloyds TSB Group plan.
The Lloyds TSB Group's strategy and those of its constituent business units
are reviewed and approved by the Board. Regular reports are provided to the
Group Executive Committee and the Board on the progress of the Group's key
strategies and plans.
Revenue and capital investment decisions require additional formal
assessment and approval. Formal risk assessment is conducted as part of the
financial approval process.
Company mergers and acquisitions require specific approval by the Board. In
addition to the standard due diligence conducted during a merger or acquisition,
Group Risk Management conducts an independent risk assessment of the target
company and its proposed integration into the Lloyds TSB Group.
Credit Risk
Definition
The risk of loss arising from counterparty default subsequent to the
provision of credit facilities (both on and off-balance sheet).
Measurement
The Lloyds TSB Group has dedicated standards, policies and procedures to
control and monitor credit and related risks. Examples of the way in which such
risks are measured include:
Group Rating System - all business units are required to operate an
authorised rating system that complies with the Lloyds TSB Group's standard
methodology. The Lloyds TSB Group uses a 'Master Scale' rating structure with
ratings corresponding to a range of probability of future default.
Portfolio Analysis - in conjunction with Group Risk Management, business
units identify and define portfolios of credit and related risk exposures and
the key benchmarks, behaviours and characteristics by which those portfolios are
managed in terms of credit risk exposure. This entails the production and
analysis of regular portfolio monitoring reports for review by Group Risk
Management.
To further enhance the ability to measure and predict future risk, the
Lloyds TSB Group continues to develop new policies and risk management systems.
Limits
A number of tools, including Group-level credit policy where appropriate,
are used to control the Lloyds TSB Group's exposure to undue levels of credit
risk:
Counterparty Limits - exposure to individual counterparties, groups of
counterparties or customer risk segments is controlled through a tiered
hierarchy of delegated sanctioning authorities. Approval requirements for each
decision are based on the transaction amount, the customer's aggregate
facilities, credit risk ratings and the nature and term of the risk. Regular
reports on significant credit exposures are provided to the Group Executive
Committee and Board.
Bank Exposures - an in-house proprietary rating system is used to approve
bank facilities, which are sanctioned on a Group-wide basis.
Cross-border Exposures - Country limits are authorised and managed by a
dedicated unit, using an in-house rating system, which takes into account
economic and political factors.
Concentration Risk - formulation of concentration limits on certain
industries and sectors. Group Risk Management sets Sector Caps that reflect risk
appetite, and monitors exposures to prevent excessive concentration of risk.
Credit Risk Arising from the Use of Derivatives - Note 45a on page F-53
shows the total notional principal amount of interest rate, exchange rate and
equity contracts outstanding at 31 December 2002. The notional principal amount
does not, however, represent the Lloyds TSB Group's real exposure to credit
risk, which is limited to the current cost of replacing contracts with a
positive value to the Lloyds TSB Group, should the counterparty default. This
replacement cost is also shown in Note 45a. To reduce credit risk the Lloyds TSB
Group uses a variety of credit enhancement techniques such as netting and
collateralisation, where security is provided against the exposure.
51
Credit Derivatives - these are a method of transferring credit risk from
one counterparty to another and of managing exposure to selected
counterparties. Credit derivatives include credit swaps, credit spread options
and credit linked notes. Lloyds TSB Group has limited exposure to such
instruments.
Processes
The processes by which Group Risk Management discharges its
responsibilities in respect of credit risk include the following:
- Formulation of high-level credit policies designed to ensure a balanced
and managed approach to the identification and mitigation of credit risk.
- Provision of lending guidelines. These define the responsibilities for
lending officers and provide a disciplined and focused benchmark for
credit decisions.
- Group Risk Management has direct involvement in the sanctioning of
counterparty limits over defined thresholds and also notes decisions made
within business unit and divisional credit functions to ensure
appropriate oversight. Such activities assist not only in the management
of the overall portfolio but also provide essential input to the
development and maintenance of robust credit policies.
- Sector Caps, encompassing both industry sectors and specific product
types are established by Group Risk Management to communicate Lloyds TSB
Group's risk appetite for specific types of business, primarily in the
non-retail markets.
- Establishment and maintenance of the Lloyds TSB Group's large exposure
and provisioning policies, in accordance with regulatory reporting
requirements.
- Monitoring of scorecards. The Lloyds TSB Group utilises
statistically-based decisioning techniques (primarily credit scoring and
performance scoring) for its principal consumer lending portfolios. Group
Risk Management reviews and monitors new and material changes to
scorecards.
- Maintenance of a facilities database. Group Risk Management operates a
centralised database of large corporate, sovereign and bank facilities
designed to ensure a consistent aggregation policy is maintained
throughout the Lloyds TSB Group.
- Monitoring and controlling residual value risk exposure. The Lloyds TSB
Group's appetite for such exposure is communicated to the business by a
series of time referenced Sector Caps, ensuring an acceptable
distribution of future risk.
- Communication and provision of general guidance on all credit-related
risk issues, including regulatory changes and environmental risk policy,
to promote consistent and best practice throughout the Lloyds TSB Group.
Day-to-day credit management and asset quality within each business unit is
primarily the responsibility of the relevant business unit director. Such
responsibility is fulfilled by:
- Each business unit having in place established credit processes which are
consistent with the corresponding Lloyds TSB Group policies.
- Authority to delegate lending authorities within business units resting
with officers holding divisional delegated lending authority. All
material authorities are advised to Group Risk Management.
- Specialist units established within Lloyds TSB Group businesses to
provide, for example: intensive management and control; security
perfection, maintenance and retention; expertise in documentation for
lending and associated products; sector-specific expertise; and legal
services applicable to the particular market place and product range
offered by the business unit.
52
Loan portfolio
Analysis of loans and advances to customers and banks
The following table analyses loans to banks and customers by geographical area
and type of loan at 31 December for each of the five years listed.
2002 2001 2000 1999 1998
GBPm GBPm GBPm GBPm GBPm
Domestic:
Loans and advances to
banks 15,291 12,737 13,165 14,341 15,905
Loans and advances to
customers:
Mortgages 62,467 56,578 52,659 47,451 44,660
Other personal lending 14,931 12,784 11,138 10,092 9,570
Agriculture, forestry and
fishing 2,076 2,074 2,026 2,183 2,052
Manufacturing 3,373 3,321 3,357 3,262 2,987
Construction 1,482 1,309 1,016 754 671
Transport, distribution
and hotels 4,696 4,440 3,836 3,540 3,308
Financial, business and
other services 8,352 8,736 9,295 6,614 5,029
Property companies 4,008 2,907 2,470 2,303 2,304
Lease financing 7,285 7,552 8,070 8,369 8,165
Hire purchase 5,990 5,345 5,172 3,674 3,701
Other 3,397 2,992 2,526 2,127 1,921
Total domestic loans 133,348 120,775 114,730 104,710 100,273
Foreign:
Loans and advances to
banks 2,239 2,489 2,131 2,628 2,606
Loans and advances to
customers:
Mortgages 4,763 3,467 3,490 3,558 3,187
Other personal lending 1,098 1,672 1,602 1,784 1,832
Agriculture, forestry and
fishing 2,220 1,708 1,528 1,606 1,703
Manufacturing 1,608 2,004 1,730 945 976
Construction 328 304 190 158 155
Transport, distribution
and hotels 2,459 2,570 2,166 1,638 1,082
Financial, business and
other services 3,196 2,631 2,174 2,553 2,542
Property companies 1,117 896 637 470 428
Lease financing 15 33 53 79 136
Hire purchase - - - - 19
Other 1,436 1,148 807 581 374
Total foreign loans 20,479 18,922 16,508 16,000 15,040
Total loans 153,827 139,697 131,238 120,710 115,313
Less provision for loan
losses (1,767) (1,468) (1,426) (1,414) (1,462)
Less interest held in
suspense (57) (70) (90) (100) (145)
Total loans and advances
net of provisions and
interest held in
suspense 152,003 138,159 129,722 119,196 113,706
2002 2001 2000 1999 1998
GBPm GBPm GBPm GBPm GBPm
Analysis of foreign loans by
region:
Loans and advances to customers:
New Zealand 10,447 8,435 7,368 7,659 7,310
Latin America 1,591 2,347 2,222 1,761 2,120
Rest of the world 6,202 5,651 4,787 3,952 3,004
18,240 16,433 14,377 13,372 12,434
Loans and advances to banks:
New Zealand 622 534 357 467 375
Latin America 52 209 105 190 148
Rest of the world 1,565 1,746 1,669 1,971 2,083
2,239 2,489 2,131 2,628 2,606
Total foreign loans 20,479 18,922 16,508 16,000 15,040
The classification of lending as domestic or foreign is based on the location
of the office recording the transaction, except for certain lending of the
international business booked in London.
53
Summary of loan loss experience
The following table analyses the movements in the allowance for loan losses
for each of the five years listed.
2002 2001 2000 1999 1998
GBPm GBPm GBPm GBPm GBPm
Balance at beginning of period
Domestic 1,162 1,129 1,134 1,126 1,252
Foreign 306 297 280 336 519
Total balance at beginning of
period 1,468 1,426 1,414 1,462 1,771
Exchange and other adjustments (55) (14) 51 (49) (30)
Advances written off:
Domestic:
Loans and advances to customers:
Mortgages (21) (23) (35) (30) (38)
Other personal lending (530) (438) (399) (364) (279)
Agriculture, forestry and
fishing (2) (9) (12) (14) (9)
Manufacturing (25) (18) (13) (33) (33)
Construction (17) (8) (9) (10) (6)
Transport, distribution and
hotels (27) (34) (27) (46) (108)
Financial, business and other
services (53) (44) (28) (40) (34)
Property companies (19) (21) (17) (24) (45)
Lease financing (17) (11) (12) (14) (30)
Hire purchase (74) (86) (69) (29) (5)
Other (2) (9) - (6) -
Total domestic (787) (701) (621) (610) (587)
Foreign (91) (184) (124) (134) (372)
Total advances written off (878) (885) (745) (744) (959)
Recoveries of advances written off:
Domestic:
Loans and advances to customers:
Mortgages 5 17 12 11 9
Other personal lending 81 80 63 60 27
Agriculture, forestry and
fishing 3 4 2 2 4
Manufacturing 17 5 6 11 14
Construction 3 2 2 1 2
Transport, distribution and
hotels 12 10 11 7 15
Financial, business and other
services 13 11 10 6 10
Property companies 10 6 5 7 20
Lease financing 3 4 5 5 3
Hire purchase 17 23 24 10 7
Other 1 3 - 1 -
Total domestic 165 165 140 121 111
Foreign 38 29 25 9 14
Total recoveries of advances written
off 203 194 165 130 125
54
2002 2001 2000 1999 1998
GBPm GBPm GBPm GBPm GBPm
Net advances written
off:
Domestic (622) (536) (481) (489) (476)
Foreign (53) (155) (99) (125) (358)
Total net advances
written off (675) (691) (580) (614) (834)
Provision for loan
losses charged
against income
for the year
Domestic:
Loans and advances
to customers:
Mortgages (5) 2 (4) 9 34
Other personal
lending 489 403 323 379 201
Agriculture,
forestry and
fishing - 3 (6) (4) 31
Manufacturing 31 40 21 28 20
Construction 14 (2) 1 5 8
Transport,
distribution and
hotels 28 28 3 23 7
Financial, business
and other
services 107 39 12 16 40
Property
companies (1) 4 8 4 (19)
Lease financing 3 5 8 14 8
Hire purchase 82 67 52 31 26
Other specific
provisions 38 23 15 (5) 14
General
provisions 14 (42) (7) - (7)
Total domestic 800 570 426 500 363
Foreign 229 177 115 115 192
Total provision for
loan losses charged
against income for
the year 1,029 747 541 615 555
Balance at end of
period
Domestic 1,344 1,162 1,129 1,134 1,126
Foreign 423 306 297 280 336
Total balance at end
of period 1,767 1,468 1,426 1,414 1,462
Ratio of net
write-offs during
the period to
average loans
outstanding during
the period 0.5% 0.6% 0.5% 0.6% 0.9%
55
The following table analyses the coverage of the allowance for loan losses by
category of loans.
2002 2001 2000 1999 1998
Percentage Percentage Percentage Percentage Percentage
of of of of of
loans in loans in loans in loans in loans in
each each each each each
category category category category category
to to to to to
total total total total total
Allowance loans Allowance loans Allowance loans Allowane loans Allowance loans
GBPm % GBPm % GBPm % GBPm % GBPm %
Balance at
period end
applicable
to:
Domestic:
Loans and
advances to
banks - 9.9 - 9.1 - 10.0 - 11.9 - 13.8
Loans and
advances to
customers:
Mortgages 25 40.7 44 40.5 48 40.1 75 39.3 85 38.7
Other
personal
lending 447 9.7 407 9.2 362 8.5 358 8.4 283 8.3
Agriculture,
forestry
and
fishing 10 1.3 9 1.5 11 1.5 27 1.8 43 1.8
Manufacturing 121 2.2 98 2.4 71 2.6 57 2.7 51 2.6
Construction 7 1.0 7 0.9 15 0.8 21 0.6 25 0.6
Transport,
distribution
and
hotels 67 3.1 54 3.2 50 2.9 63 2.9 79 2.9
Financial,
business
and other
services 136 5.4 65 6.3 59 7.1 65 5.5 83 4.3
Property
companies 8 2.6 18 2.1 29 1.9 33 1.9 46 2.0
Lease
financing 7 4.7 18 5.4 20 6.2 16 6.9 11 7.1
Hire
purchase 123 3.9 98 3.8 94 3.9 49 3.0 37 3.2
Other 65 2.2 30 2.1 15 1.9 9 1.8 18 1.7
Total
domestic 1,016 86.7 848 86.5 774 87.4 773 86.7 761 87.0
Foreign 318 13.3 251 13.5 295 12.6 280 13.3 336 13.0
General
provision 433 - 369 - 357 - 361 - 365 -
Total
balance at
period end 1,767 100.0 1,468 100.0 1,426 100.0 1,414 100.0 1,462 100.0
56
Risk elements in the loan portfolio
Non-accrual, past due and restructured loans
The following discussion consists of an analysis of credit risk elements by
categories which reflect US lending and accounting practices. These differ from
those employed in the UK. In particular:
Suspended interest and non-performing lending
In accordance with the UK British Bankers' Association Statement of
Recommended Practice on Advances, Lloyds TSB Group continues to accrue interest,
where appropriate, on doubtful debts when there is a realistic prospect of
recovery. This accrued interest is charged to the customer's account but it is
not applied to income; it is placed on a suspense account and only taken to
income if there ceases to be significant doubt about its being paid. Loans are
transferred to non-accrual status where the operation of the customer's account
has ceased. The lending is managed by specialist recovery departments and is
written down to its estimated realisable value. Interest is not added to the
lending or placed on a suspense account as its recovery is considered unlikely;
it is only taken to income if it is received.
In the US, it is the normal practice to stop accruing interest when
payments are 90 days or more past due or when recovery of both principal and
interest is doubtful. When the loans are transferred to non-accrual status,
accrued interest is reversed from income and no further interest is recognised
until it becomes probable that the principal and interest will be repaid in
full. Loans on which interest has been accrued but suspended would be included
in risk elements as loans accounted for on a non-accrual basis.
In addition, in the US non-performing loans and advances are typically
written off more quickly than in the UK. Consequently a UK bank may appear to
have a higher level of non-performing loans and advances than a comparable US
bank although the reported income is likely to be similar in both the US and the
UK.
Troubled debt restructurings
In the US, loans whose terms have been modified due to problems with the
borrower are required to be separately disclosed. If the new terms were in line
with market conditions at the time of the restructuring and the restructured
loan remains current as to repayment of principal and interest then the
disclosure can be discontinued at the end of the first year.
There are no similar disclosure requirements in the UK.
Potential problem loans
Potential problem loans are loans where known information about possible
credit problems causes management to have concern as to the borrowers' ability
to comply with the present loan repayment terms. Interest continues to be
accrued to the profit and loss account until, in the opinion of management, its
ultimate recoverability becomes doubtful.
Assets acquired in exchange for advances
In most circumstances in the US, title to property securing residential
real estate transfers to the lender upon foreclosure. The loan is written off
and the property acquired in this way is reported in a separate balance sheet
category with any recoveries recorded as an offset to the provision for loan
losses recorded in the period. Upon sale of the acquired property, gains or
losses are recorded in the income statement as a gain or loss on acquired
property.
In the UK, although a bank is entitled to enforce a first charge on a
property held as security, it typically does so only to the extent of enforcing
its power of sale. In accordance with UK GAAP and industry practice, Lloyds TSB
Group takes control of a property held as collateral on a loan at repossession
but title does not transfer to it. Loans subject to repossession continue to be
reported as loans in the balance sheet although the accrual of interest is
suspended. Any gains or losses on sale of the acquired property are recorded
within the provision for loan losses during the reporting period.
The difference in practices has no effect on net income reported in the UK
compared to that reported in the US but it does result in a difference in
classification of losses and recoveries in the income statement. It also has the
effect of causing UK banks to report an increased level of non-performing loans
compared with US banks.
57
The following table analyses risk elements in the loan portfolio as at 31
December for the last five years:
2002 2001 2000 1999 1998
GBPm GBPm GBPm GBPm GBPm
Loans accounted for on a non-accrual
basis:
Domestic offices 421 278 223 209 287
Foreign offices 241 101 181 139 130
Total non-accrual loans 662 379 404 348 417
Accruing loans on which:
- interest is being placed in
suspense:
Domestic offices 553 637 617 502 479
Foreign offices 199 206 238 217 292
Total suspended interest loans 752 843 855 719 771
- interest is still being accrued
and taken to profit,
and against which specific
provisions have been made:
Domestic offices 1,217 1,265 1,713 1,924 2,056
Foreign offices 66 75 101 74 75
Total accruing loans against which
specific provisions
have been made 1,283 1,340 1,814 1,998 2,131
- interest is still being accrued
and taken to profit,
the lending is contractually past
due 90 days or
more as to principal or interest,
but against which
no provisions have been made:
Domestic offices 776 693 520 506 313
Foreign offices 34 37 33 15 -
Total accruing loans against which
no provisions
have been made 810 730 553 521 313
Troubled debt restructurings:
Domestic offices 1 1 2 10 1
Foreign offices 2 9 12 10 1
Total troubled debt
restructurings 3 10 14 20 2
Total non-performing lending:
Domestic offices 2,968 2,874 3,075 3,151 3,136
Foreign offices 542 428 565 455 498
Total non-performing lending 3,510 3,302 3,640 3,606 3,634
58
Interest forgone on non-performing lending
The table below summarises the interest forgone on loans accounted for on a
non-accrual basis and troubled debt restructurings:
2002
GBPm
Domestic lending:
Interest income that would have been recognised under original
contract terms 30
Interest income included in profit 25
Interest forgone 5
Foreign lending:
Interest income that would have been recognised under original
contract terms 17
Interest income included in profit 6
Interest forgone 11
Potential problem loans
In addition to the non-performing lending disclosed above, lendings which
were current as to payment of interest and principal but where concerns existed
about the ability of the borrowers to comply with loan repayment terms in the
near future were as follows:
2002 2001 2000 1999 1998
GBPm GBPm GBPm GBPm GBPm
Potential problem lending 1,734 1,423 1,142 936 958
The figures shown for potential problem lending are not indicative of the
losses that might arise should the credit quality of this lending deteriorate
since they do not take into account security held.
Cross border outstandings
The business of Lloyds TSB Group involves significant exposures in
non-local currencies. These cross border outstandings comprise loans (including
accrued interest), acceptances, interest-bearing deposits with other banks,
other interest-bearing investments and any other monetary assets which are
denominated in non-local currency. The following tables analyse, by type of
borrower, foreign outstandings which individually represent in excess of 1 per
cent of Lloyds TSB Group's total assets.
Banks and
Governments other Commercial,
and official financial industrial
% of Total institutions institutions and other
assets GBPm GBPm GBPm GBPm
As at 31
December 2002
Germany 3.1 6,511 57 5,624 830
United
States of
America 1.8 3,655 207 1,274 2,174
Italy 1.5 3,013 1,912 909 192
France 1.0 2,075 99 1,187 789
As at 31
December 2001
Germany 2.0 3,756 59 2,920 777
United
States of
America 1.8 3,403 151 1,290 1,962
Italy 1.7 3,170 1,834 1,052 284
As at 31
December 2000
Germany 1.6 2,659 171 2,222 266
United
States of
America 1.4 2,290 90 907 1,293
As at 31 December 2002, Germany had commitments of GBP1,511 million, United
States of America had commitments of GBP1,783 million, Italy had commitments of
GBP129 million and France had commitments of GBP424 million.
As at 31 December 2002, the countries with cross border outstandings of
between 0.75 per cent and 1 per cent of assets, amounting to GBP5,080 million in
total were Japan, the Netherlands and Belgium.
59
As at 31 December 2001, the countries with cross border outstandings of
between 0.75 per cent and 1 per cent of assets, amounting to GBP3,504 million in
total were Japan and the Netherlands. As at 31 December 2000 the countries with
cross border outstandings of between 0.75 per cent and 1 per cent of assets,
amounting to GBP4,529 million in total were France, Italy and Japan.
Market Risk
Definition
Market risk is the risk of loss arising from unexpected changes in
financial prices, including interest rates, exchange rates, bond and equity
prices.
Market risk arises in all areas of Lloyds TSB Group's activities and is
managed by a variety of different techniques. The Lloyds TSB Group's banking
activities expose it to the risk of adverse movements in interest rates or
exchange rates, with little or no exposure to equity or commodity risk; this is
covered in detail in this section. The Lloyds TSB Group's insurance activities
also expose it to market risk (see "Insurance Risk" below).
Measurement
Measurement techniques - a variety of techniques are used to quantify the
market risk arising from the Group's banking and trading activities. These
reflect the nature of the business activity, and include simple interest rate
gapping, open exchange positions, sensitivity analysis and Value at Risk. Stress
testing and scenario analysis are also used in certain portfolios, and at Group
level, to simulate extreme conditions to supplement these core measures.
Trading Value at Risk ("VaR") - VaR can be calculated using a number of
different methodologies and at different confidence intervals. Lloyds TSB Group
utilises more than one methodology for comparative purposes, thus avoiding undue
reliance on a single measure.
The predominant measure within Lloyds TSB Group is the variance/covariance
("VcV") methodology. Based on the commonly used 95 per cent confidence level,
assuming positions are held overnight and using observation periods of the
preceding three years, the value at risk based on Lloyds TSB Group's global
trading was as detailed in the table below.
The following table shows closing, average, maximum and minimum VaR for the
years ended 31 December 2002 and 2001.
31 December 2002 31 December 2001
Closing Average Maximum Minimum Closing Average Maximum Minimum
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest
Rate
Risk 0.5 0.7 1.5 0.4 0.6 0.6 0.9 0.4
Foreign
Exchange
Risk 0.5 0.5 0.9 0.3 1.0 0.6 1.0 0.3
Equity
Risk 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0
Total
VaR 1.0 1.2 2.1 0.9 1.6 1.2 1.6 0.8
The risk of loss measured by the VaR model is the potential loss in
earnings. The total and average trading VaR does not assume any diversification
benefit across the three risk types. The maximum and minimum VaR reported for
each risk category did not necessarily occur on the same day as the maximum and
minimum VaR reported as a whole.
There are some limitations to the VcV methodology which are covered below:
- The model assumes that changes in the underlying asset returns can be
modelled by a normal distribution. This assumption is an approximation
of reality that may not reflect all circumstances.
- The use of a confidence limit does not convey any information about
potential losses on occasions when the confidence limit is exceeded. In
times of extreme market movements actual losses may be several times
greater than the VaR number. Stress testing is used to supplement VaR to
estimate the impact of extreme events.
- Any model that forecasts the future based on historic data is implicitly
assuming that the conditions that generated the data will remain true in
the future. Stress testing and using more than one VaR methodology for
some local markets form part of the wider market risk framework.
- Periods of severe market illiquidity, both in terms of the extent of the
illiquidity and the time that it lasts, would mean that it may not be
possible to hedge, or close, all positions in the timescales assumed in
the VaR model.
- VaR is calculated at the close of business each day, which excludes the
profit and loss impact of intra-day trading.
- The variance/covariance approach to VaR is not well suited to options
positions. As a result these positions are controlled by additional
sensitivity limits.
60
In summary, although VaR is an important component of Lloyds TSB Group's
approach to managing trading market risk, it is supplemented by position and
sensitivity limits and stress testing.
Interest rate exposures - comprise those originating in treasury trading
activities and structural interest rate exposures, which arise from the
commercial and retail banking activities of Lloyds TSB Group.
Trading interest rate risk - the VaR relating to interest rate trading
positions is set out in "- Market Risk - Measurement - Trading Value at Risk
("VaR")".
Structural interest rate risk - in Lloyds TSB Group's retail portfolios,
including mortgages, and in Lloyds TSB Group's capital funds, arises from the
different repricing characteristics of Lloyds TSB Group's banking assets and
liabilities and is managed by the Group Balance Sheet Management department
under the direction of the Asset and Liability Committee ("ALCO").
Liabilities arising in the course of business from Lloyds TSB Group's
retail banking business fall into two broad categories:
- those which are insensitive to interest rate movements, non-interest
bearing liabilities such as shareholders' funds and interest-free or very
low interest current account deposits; and
- those which are sensitive to interest rate movements, primarily savings
deposits bearing interest rates which are varied at Lloyds TSB Group's
discretion ("managed rate liabilities") but which for competitive reasons
generally reflect changes in the Bank of England's base rate.
There is a relatively small volume of naturally arising banking liabilities
whose interest rate is contractually fixed typically for periods of up to two
years.
Most banking assets, with the exception of such non-interest earning items
as premises, are sensitive to interest rate movements. There is a large volume
of managed rate assets such as variable rate mortgage loans, and these may be
considered as a natural offset to managed rate liabilities. However many assets,
such as personal loans and fixed rate mortgages, bear interest which is
contractually fixed for periods of up to five years or longer.
Interest rate risk arises from the mismatch between interest rate
insensitive liabilities and interest rate sensitive assets, and between the
differing contractual periods for which interest rates are fixed on interest
rate sensitive assets and liabilities. Group Balance Sheet Management department
manages this risk centrally by:
- offsetting against each other any matching interest rate sensitive assets
and liabilities;
- acquiring new financial assets and liabilities as matching hedges against
net balances of mismatched interest rate sensitive banking liabilities
and assets, respectively; and
- acquiring new financial assets with interest rates contractually fixed
for a range of periods up to five years as hedges for net balances of
interest rate insensitive liabilities.
The financial assets and liabilities referred to above are acquired by way
of internal transactions between Group Balance Sheet Management and the Lloyds
TSB Group's Treasury department in London, typically in the form of interest
rate swaps and loans or deposits.
Structural interest rate risk can also arise from the wholesale banking
books in the UK, where it is managed by the Lloyds TSB Group's Treasury
department in London, and internationally, where it is managed by an authorised
local treasury operation in each overseas centre. The levels of exposure within
these books are controlled and monitored within approved limits locally and
centrally by Group Risk Management. Group Risk Management issues the limits to
the international business units on interest rate gaps or, where more
appropriate, VaR.
Lloyds TSB Group's non-trading exposure is summarised in the form of an
interest rate repricing table, as set out in Note 45b to the Consolidated
Financial Statements. Items are allocated to time bands by reference to the
earlier of the next contractual interest rate repricing date and the maturity
date. However, the table does not take into account the effect of interest rate
options used by Lloyds TSB Group to hedge its exposure.
The simulation models used by Lloyds TSB Group include assumptions about
the relationships between customer behaviour and the level of interest rates;
the anticipated level of future business is also taken into account. The
accuracy of these assumptions will impact the efficiency of hedging
transactions. The assumptions are regularly updated and the projected exposure
is actively managed in accordance with Lloyds TSB Group's Asset and Liability
Committee policy.
It is estimated that a hypothetical immediate and sustained 100 basis point
increase in interest rates on 1 January 2003 would decrease net interest income
by GBP37.9 million for the 12 months to 31 December 2003, while a hypothetical
immediate and sustained 100 basis point decrease in interest rates would
increase net interest income by GBP30.3 million.
61
Europe &
North Asia & Latin Middle Total Total
UK America Australasia America East 2003 2002
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Change in
net interest
income from a
+100 basis
point shift in
yield curves 1.2 (20.8) (0.9) (1.1) (16.3) (37.9) (102.9)
Change in
net interest
income from a
-100 basis
point shift in
yield curves (8.8) 20.8 0.9 1.1 16.3 30.3 85.7
The analysis above is subject to certain simplifying assumptions including,
but not limited to, the following:
- all rates of all maturities worldwide move simultaneously by the same
amount;
- all positions in the wholesale books run to maturity; and
- there is no management action in response to movements in interest rates.
In practice, positions in both the retail and wholesale books are actively
managed and actual impact on net interest income may be different than the
model.
Foreign exchange risk - exposures comprise those originating in treasury
trading activities and structural foreign exchange exposures, which arise from
investment in Lloyds TSB Group's overseas operations.
Trading foreign exchange - the corporate and retail businesses incur
foreign exchange risk in the course of providing services to their customers.
These risks reside in the authorised trading centres who are allocated exposure
limits by Group Risk Management. The limits are monitored daily by the local
centres and reported to Group Risk Management. Group Risk Management calculates
the associated VaR as shown in the table in "- Market Risk - Measurement -
Trading Value at Risk ("VaR")".
Structural foreign exchange - risk arises from Lloyds TSB Group's
investments in its overseas operations. Lloyds TSB Group's structural foreign
currency exposure is represented by the net asset value of the holding company's
foreign currency exchange equity and subordinated debt investments in its
subsidiaries and branches. Gains or losses on structural foreign currency
exposures are taken to retained earnings.
The structural position is managed by Lloyds TSB Group Capital Funds having
regard to the currency composition of Lloyds TSB Group's risk-weighted assets
and reported to the Asset and Liability Committee on a monthly basis. The
objective is to limit the effect of the exchange rate movements on the published
risk asset ratio.
Lloyds TSB Group's structural position at 31 December 2002 is set out in
Note 45d to the Consolidated Financial Statements. The position implies that at
31 December 2002 a hypothetical increase of 10 per cent in the value of sterling
against all other currencies would have led to a GBP201 million reduction in
reserves, and vice versa. On this basis, there would have been no material
impact on Lloyds TSB Group's risk asset ratios.
Equity exposure - a small number of Lloyds TSB Group's authorised centres
can incur equity risk in dealings with their retail and commercial customers.
Limits on these equity exposures are controlled and monitored by Group Risk
Management. Group Risk Management calculates VaR on these equities positions as
set out in the trading VaR table in "- Market Risk - Measurement - Trading Value
at Risk ("VaR")".
Limits
Market Risk Limits - limits to control market risk in respect of trading
positions, UK wholesale banking and overseas centres are set by Group Risk
Management up to a total authorised by the Lloyds TSB Group Board. A combination
of position and sensitivity limits is used, depending on the nature of the
business activity.
Retail Portfolios - limits to control interest rate risk within the Lloyds
TSB Group's UK retail portfolios are set out in the policy for Group Balance
Sheet Management ("GBSM"), which is established by the ALCO and ratified by the
Lloyds TSB Group Board. The policy is to optimise the stability of future net
interest income, and this is achieved by entering into hedging transactions
using interest rate swaps and other financial instruments. Both short and
long-term interest rate parameters are applied to management of the balance
sheet. Overseas operations are managed within limits authorised by Group Risk
Management, in addition to which some centres have adopted benchmark profiles
for investment of interest rate insensitive liabilities as approved by Group
Risk Management.
Processes
Trading Activities - trading is restricted to a number of specialist
centres, authorised by Group Risk Management, the most important centre being
the Lloyds TSB Group's principal Treasury department in London. The level of
exposure is strictly controlled and monitored within approved limits locally and
centrally by Group Risk Management. Most of the Lloyds TSB Group's trading
activity is undertaken to meet the requirements of customers for foreign
exchange and interest rate products. However, some interest rate and exchange
rate positions are taken out using derivatives (forward foreign exchange
contracts, interest rate swaps and forward rate agreements) and on-balance sheet
instruments (mainly debt securities), with the objective of earning a profit
from favourable movements in market rates. Accordingly, these transactions are
reflected in the accounts at their fair value and gains and losses shown in the
profit and loss account as dealing profits.
62
Wholesale Banking - market risk in the wholesale banking books is managed
in the UK by the Lloyds TSB Group's Treasury unit in London, and internationally
by an authorised local treasury operation in each overseas centre. The levels of
exposure within these books are controlled and monitored within approved limits,
both locally and also centrally by Group Risk Management. Active management of
the book is necessary to meet customer requirements and changing market
circumstances.
Retail Portfolios and Capital Funds - market risk in the Lloyds TSB Group's
retail portfolios and in the Lloyds TSB Group's capital funds arises from the
different repricing characteristics of the Group's banking assets and
liabilities and is managed by Group Balance Sheet Management. The simulation
models used by Group Balance Sheet Management include assumptions about the
relationships between customer behaviour and the level of interest rates; the
anticipated level of future business is also taken into account. The accuracy of
these assumptions will impact the efficiency of hedging transactions. The
assumptions are regularly updated and the projected exposure is actively managed
in accordance with the policy.
Derivatives - these are used to meet customers' financial needs; as part of
the Lloyds TSB Group's trading activities; and to reduce the Lloyds TSB Group's
own exposure to fluctuations in interest and exchange rates. The principal
derivatives used by the Lloyds TSB Group are interest rate contracts (including
interest rate swaps, forward rate agreements and options) and exchange rate
contracts (including forward foreign exchange contracts, currency swaps and
options). Particular attention is paid to the liquidity of the markets and
products in which the Lloyds TSB Group trades to ensure that there are no undue
concentrations of activity and risk.
Insurance Risk
Definition
The risk of loss arising from the sensitivity of profits to movements in
claims experience and expectation; movements in the market value of invested
assets which are not matched by similar movements in the value of insurance
liabilities; the presence of options and guarantees in insurance products; and
changes in the legal, regulatory and fiscal environment as applicable to the
insurance businesses.
Measurement
Financial risks are measured through deterministic studies of the impact
of different insurance and investment market scenarios on the future free
assets of the business as well as some stochastic modelling.
The composition, and value, of both the non-participating fund and the
General Insurance portfolio are reported to Group Risk Management on a monthly
basis and a VaR is calculated. Stress testing is also used to supplement the VaR
models.
The risk of loss measured by the VaR model is the potential loss in
earnings over a given time horizon. The VaR methodology used is a
variance/covariance ("VcV") approach which is the same in all respects to that
used for the traded risk in the banking book, except that in the case of equity
risk, the model maps the portfolio composition onto a series of appropriate
indices by region and sector. The figures quoted below are the sum of the two
portfolios with no allowance for diversification between portfolios or asset
classes and represents the potential loss in earnings.
The following table shows closing, average, maximum and minimum VaR for the
years ended 31 December 2002 and 2001.
31 December 2002 31 December 2001
Closing Average Maximum Minimum Closing Average Maximum Minimum
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest 3.1 3.2 3.7 2.8 3.3 3.7 4.1 3.3
Rate Risk
Foreign 1.0 1.4 1.8 1.0 2.1 2.2 2.4 2.0
Exchange
Risk
Equity 17.4 19.9 22.6 17.4 22.2 24.2 28.4 21.3
Risk
Total 21.5 24.5 28.1 21.5 27.6 30.1 34.1 27.5
VaR
Processes
Insurance risks are both retained and reinsured with external underwriters.
The retained risk level is carefully controlled and monitored, with close
attention being paid to the analysis of underwriting experience, product design,
policy wordings, adequacy of reserves, solvency management and regulatory
requirements.
General insurance exposure to accumulations of risk and possible
catastrophes is mitigated by reinsurance arrangements which are broadly spread
over different reinsurers. Detailed modeling, 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. 63
Investment strategy is determined by the term and nature of the
underwriting liabilities, and asset/liability matching positions are actively
monitored. The aim is to invest in assets such that the cash flows on the
investments will match those on the projected future liabilities. Actuarial
tools are used to project and match the cash flows. It is not possible to
eliminate risk completely as the timing of mortality is uncertain, and bonds are
not available at all of the required maturities. As a result the cash flows
cannot be precisely matched and so sensitivity tests are used to test the extent
of the mismatch.
Investment strategy for surplus assets held in excess of liabilities takes
account of the regulatory and internal business requirements for capital to be
held to support the business now and in the future. Surplus assets are held
primarily in two portfolios: the surplus in the Scottish Widows
non-participating fund and an investment portfolio within the General Insurance
business.
The surplus in the long-term non-participating fund of Scottish Widows plc
exists to provide the long-term funds with liquidity and working capital. The
surplus also forms a capital reserve to support the investments managed on
behalf of the with-profits policies which were transferred from Scottish Widows
Fund and Life Assurance Society. With-profits business involves guaranteed
benefits; in extreme market conditions the surplus could be called upon to
support with-profits benefits. As a consequence it is appropriate to invest this
fund in a mixture of equities, investment properties, and fixed interest
investments that is related to the With-Profits Fund. This investment policy
maintains the value of the reserve as a proportion of the underlying
With-Profits Fund. The existence and investment mix of the surplus in the
non-participating fund can therefore be considered as structural rather than as
a traded portfolio. Under UK GAAP the portfolio is shown at market value and
gains and losses are recognised in the profit and loss account.
The General Insurance portfolio is invested in a mixture of assets: cash,
bonds and equities. The size of the equity component allowed and the investment
policy are approved by Group Risk Management.
Equity derivatives are used by the Lloyds TSB Group to match equivalent
liabilities arising from some of its retail products. Derivatives may also be
used for efficient portfolio management purposes in client funds where such
activity is in accordance with approved policy and the customer mandate.
With-profits life and pensions business involves guaranteed benefits that
create a contingent market risk to the Lloyds TSB Group. Accordingly, in
extreme investment market conditions the surplus assets in the life and
pensions business could be called upon to support with-profits benefits.
Options and guarantees are only incorporated in new insurance products after
careful consideration of the risk management issues that they present. This
occurs as part of the new product approval process (see "Product and Service
Risk" below).
Operational Risk
Definition
The risk of loss resulting from inadequate or failed internal processes,
people and systems, or from external events. For internal purposes, reputational
impact is also included.
Processes
Business units have primary responsibility for identifying and managing
their operational risks. They employ internal control techniques to reduce their
likelihood or impact to tolerable levels within the Lloyds TSB Group's risk
appetite. Where appropriate, risk is mitigated by way of insurance.
Group Risk Management's responsibilities in relation to operational risk
include:
- Defining high-level operational risk policies to ensure a
comprehensive and consistent approach to the identification and
management of operational risk.
- Implementation of a standard methodology to ensure consistency in
the identification, assessment and management of operational risk.
- Communication and provision of general guidance on operational risk
related issues, including regulatory changes and developments in the
measurement and management of operational risk, to promote best
practice throughout the Lloyds TSB Group.
- Continuous review and improvement of all aspects of operational risk
management to reflect developments in industry best practice and
regulatory requirements.
- Approval from a risk perspective of all new products launched
throughout the Lloyds TSB Group, to ensure their risks are understood
by the business and managed appropriately (see "Product and Service
Risk" below).
- Identification of risk through formal risk reviews, covering specific
risks, activities, business sectors or products, and ensuring that
prompt and pre-emptive action is taken to address any actual or
perceived risks that may emerge, whether specific to the Lloyds TSB
Group or to the industry generally.
64
Product and Service Risk
Definition
The risk of loss arising from the inherent characteristics, management or
distribution of products or services, or from failure to meet or exceed customer
expectations and competitor offerings.
Processes
For the Lloyds TSB Group to achieve its strategic aims of leadership in
chosen markets and being first choice for customers, product life cycles must be
effectively managed and new products developed to meet customer needs.
Business units are responsible for maintaining a range of products which
meets the needs of customers and the business strategy; managing and controlling
product risks; and compliance with applicable regulations.
Product Planning and Development - business units have formal processes for
reviewing the range of their product portfolios and subjecting all product
development to rigorous assessment. They are also responsible for ensuring
compliance with all relevant regulatory and legislative requirements.
Product Pricing - business units have pricing objectives consistent with
Lloyds TSB Group strategy.
Product Promotion, Distribution and Sales - business units have a defined
channel distribution strategy for products, consistent with the Lloyds TSB
Group's distribution strategy. Business units launching new products are
responsible for ensuring that proposed sales activity within delivery channels
is compliant with regulatory requirements.
All advertising and marketing material is required to comply with the
Lloyds TSB Group's governing policy on Business Conduct. Any statement of fact
should be substantiated through documentary evidence; any comparison should be
presented in a fair and balanced way; and any reference to past performance
should clearly state the basis of measurement.
Business units are required, prior to publication of any sales material, to
seek confirmation that it complies with the regulatory and legal requirements of
the jurisdiction in which the product is offered and marketed. Terms and
conditions (to include mandates, agreements and other documentation) are
approved by legal advisors and reviewed periodically.
New Product Approval - the Lloyds TSB Group defines a New Product as a new
or amended product that introduces a significantly different risk profile at
Group or business unit level. In line with defined policy, business units
provide Group Risk Management with details of New Products at an early stage of
product or service development to ensure compliance with the Lloyds TSB Group's
risk appetite and strategy.
Where appropriate, technical advice/approval is sought from specialist
functions. Only products carrying the approval of Group Risk Management and the
business units involved in their manufacture/delivery are offered to customers.
Product Performance - business units establish and monitor performance
standards for all marketed products across a range of indicators, e.g. sales
volumes, customer service, risk profile. Significant deviations from these
standards are investigated and appropriate action taken.
Financial Risk
Definition
The risk of financial failure arising from lack of capital or liquidity,
poor management or poor quality/volatile earnings.
Measurement
The international standard for measuring capital adequacy is the risk asset
ratio, which relates to on- and off-balance sheet exposures weighted according
to broad categories of risk. The Group's capital ratios, calculated in line with
the requirements of the Financial Services Authority ("FSA"), are set out in
detail on page 70.
Liquidity Policy - a policy is in place which requires a common methodology
to measuring liquidity across the Lloyds TSB Group. The methodology derives a
liquidity ratio calculated by taking the sum of liquid assets, five-day
wholesale inflows and back-up lines, and then dividing this by the sum of
five-day wholesale outflows and a percentage of retail maturities and contingent
claims drawable over the next five days.
Accounting Policies - the Lloyds TSB Group seeks to use appropriate
accounting policies, consistently applied and supported by reasonable and
prudent judgements and estimates.
65
Limits
The Lloyds TSB Group and its regulated subsidiary banks have been allocated
an Individual Capital Ratio by the Financial Services Authority, and the Board
has agreed a formal buffer to be maintained in addition to the Individual
Capital Ratio. Actual or prospective breaches of the formal buffer must be
notified to the Financial Services Authority, together with proposed remedial
action; no such notifications have been made during 2002. Informally, a further
buffer is maintained. In addition, the Board has agreed a maximum limit of the
proportion of debt instruments in the capital base. Risk-weighted assets are
monitored by business unit, while capital is controlled centrally.
The liquidity policy requires all authorised local treasury operations to
maintain a liquidity ratio of over 100 per cent, in addition to ensuring
compliance with local regulatory requirements.
Processes
Capital ratios are a key factor in the Lloyds TSB Group's budgeting and
planning processes, and updates of expected ratios are prepared regularly during
the year. Capital raised takes account of expected growth and currency of risk
assets, and also allows for the sensitivity of the Lloyds TSB Group's capital to
movements in equity markets.
Each reporting entity within the Lloyds TSB Group has a finance function
which is responsible for the production of financial, management and regulatory
information. It is the responsibility of Group Finance to produce consolidated
information for use internally and to meet external regulatory and statutory
reporting requirements.
In conjunction with directives laid down by Group Finance, business units
or reporting entities:
- Have formal month-end and quarter-end procedures in place for
preparation of management and financial accounts respectively.
- Review and formally approve management accounts at a determined level
of detail, ensuring consistency with financial accounts.
- Prepare forecasts and detailed annual budgets that are subject to
formal review and approval.
- Implement measures to monitor performance at local level to identify
significant fluctuations or unusual activity.
It is the responsibility of local line management to ensure that the
liquidity policy is met, and the sources and maturities of assets and
liabilities are continually managed and appropriately diversified to avoid any
undue concentration as market conditions evolve. Compliance is monitored by
regular liquidity returns to Group Risk Management.
Customer Treatment Risk
Definition
The risk of financial loss or reputational damage arising from
inappropriate or poor customer treatment.
Measurement
Service improvements are monitored by customer satisfaction surveys. The
results of the research are fed into the Lloyds TSB Group's CARE Index, which
measures ongoing performance against five principal objectives: customer
understanding; accessibility; responsibility; expertise; and overall service
quality improvement.
Processes
Trends across all the CARE Index categories are monitored and fed into a
programme of continuous customer service improvement. Lloyds TSB Group also
provides its staff with clear Financial Services Authority compliant guidelines
and processes for dealing with customer complaints.
Legal and Regulatory Risk
Definition
The risk of financial loss or reputational damage arising from failing to
comply with the laws, regulations or codes applicable to the financial services
industry.
Processes
The Lloyds TSB Group's business is regulated overall by the Financial
Services Authority, and additionally by local regulators in offshore and
overseas jurisdictions.
66
Each business has a nominated individual with 'Compliance Oversight'
responsibility under Financial Services Authority rules. The role of such
individuals is to ensure that management have in place within the business a
control structure which creates awareness of the rules and regulations to which
the Lloyds TSB Group is subject, and to monitor and report on adherence to these
rules and regulations.
Group Compliance - all compliance personnel also have a reporting line to
Group Compliance, which sets compliance standards across the Lloyds TSB Group
and provides independent reporting and assessment to the Board and business unit
directors.
Financial Crime - Group Compliance includes a dedicated unit, led by the
Group Financial Crime Director, which is responsible for ensuring that the
Lloyds TSB Group has effective processes in place to identify and report on
suspicious transactions and customers in support of the world-wide fight against
financial crime.
The Group Compliance Director has access to the Chairman, Group Chief
Executive and members of senior management.
Change Management Risk
Definition
The risk of financial loss or reputational damage arising from programmes
or projects failing to deliver to requirements, budget or timescale; or failing
to implement change effectively.
Processes
To deliver the Lloyds TSB Group's strategic aims, change must be managed in
an effective, risk-aware and appropriately controlled manner throughout the
organisation. The Lloyds TSB Group's Change Management Standards provide
consistency of approach across the Lloyds TSB Group's project portfolio. In
particular, the following control processes are in place:
- The Lloyds TSB Group's approach to change management is regularly
benchmarked against other organisations around the world.
- A specialist Group Project Services function provides a pool of
experienced, professional project managers to be deployed on major
projects across the Lloyds TSB Group.
- An Investment Committee oversees the Lloyds TSB Group's investment in
projects, and is constituted as a sub-committee of the Group Executive
Committee.
- Changes that significantly impact customers or staff are managed as
part of an overall change plan managed by the Change Implementation
Review Committee ("CIRC"). The CIRC ensures that the aggregate impact
of the implementation of change on customers, staff and systems is
understood, managed and controlled.
- A six-monthly update on the Lloyds TSB Group's aggregate change plan
is provided to the Board.
Liquidity and Capital Resources
Liquidity risk is defined as the risk of a loss arising from Lloyds TSB
Group's inability to meet its financial obligations as they fall due. These
obligations include the repayment of deposits on demand or at their contractual
maturity; the repayment of loan capital and other borrowings as they mature; the
payment of insurance policy benefits, claims and surrenders; the payment of
lease obligations as they become due; the payment of operating expenses and
taxation; the payment of dividends to shareholders; the ability to fund new and
existing loan commitments; and the ability to take advantage of new business
opportunities, Lloyds TSB Group complies with the Financial Services Authority's
liquidity requirements, with similar liquidity policies in place across all
trading centres worldwide. Compliance is monitored by regular liquidity returns
to Group Risk Management.
The principal sources of liquidity for Lloyds TSB Group plc are dividends
received from its only directly owned subsidiary company, Lloyds TSB Bank and
loans from this and other Lloyds TSB Group companies. The ability of Lloyds TSB
Bank to pay dividends, or for Lloyds TSB Bank or other Lloyds TSB Group
companies to make loans to Lloyds TSB Group plc, depends on a number of factors,
including their own regulatory capital requirements, distributable reserves and
financial performance. For additional information see "Dividends".
Lloyds TSB Group plc is also able to raise funds by issuing loan capital or
equity, although in practice Lloyds TSB Group plc has never issued equity for
this purpose and the majority of Lloyds TSB Group's loan capital has been issued
by Lloyds TSB Bank. As at 31 December 2002, Lloyds TSB Group plc had GBP1,370
million of subordinated debt in issuance following the issue of GBP958 million
of loan capital during the year, compared with GBP10,168 million for the
consolidated Lloyds TSB Group. The cost and availability of subordinated debt
finance are influenced by credit ratings. A reduction in these ratings could
increase the cost and could reduce market access. At 31 December 2002, the
credit ratings of Lloyds TSB Bank were as follows:
67
Senior debt
Moody's Aaa
Standard & Poor's AA
Fitch AA+
The credit ratings of Lloyds TSB Group plc were one notch lower. The
ratings outlook from Moody's and Fitch for Lloyds TSB Bank is stable. The
Standard & Poor's rating outlook is negative. These credit ratings are not a
recommendation to buy, hold or sell any security; and each rating should be
evaluated independently of every other rating.
A significant part of the liquidity of Lloyds TSB Group's banking
businesses arises from their ability to generate customer deposits. A
substantial proportion of the customer deposit base is made up of current and
savings accounts which, although repayable on demand, have traditionally
provided a stable source of funding. During 2002, amounts deposited by customers
increased by GBP7,218 million from GBP109,116 million at 31 December 2001 to
GBP116,334 million at 31 December 2002. These customer deposits are supplemented
by the issue of subordinated loan capital and wholesale funding sources in the
capital markets, as well as from direct customer contracts. Wholesale funding
sources include deposits taken on the inter-bank market, certificates of
deposit, sale and repurchase agreements, a Euro Medium Term Note programme, of
which GBP2,364 million had been utilised for senior funding at 31 December 2002,
and a US$5,000 million commercial paper programme, of which US$2,846 million had
been utilised at 31 December 2002.
The ability to sell assets quickly is also an important source of liquidity
for Lloyds TSB Group's banking businesses. Lloyds TSB Group holds sizeable
balances of marketable Treasury and other eligible bills and debt securities
which could be disposed of to provide additional funding should the need arise.
Lloyds TSB Group makes limited use of asset securitisation arrangements to
provide alternative funding sources. Prior to its acquisition by Lloyds TSB
Group, Black Horse Limited (formerly Chartered Trust plc) disposed of its
interest in a portfolio of motor vehicles and caravan instalment credit
agreements to a special purpose vehicle ("SPV"). Black Horse Limited has no
interest in the share capital of this SPV, although it acts as credit manager
for the administration of the portfolio and receives a fee for this service.
Black Horse Limited has no obligation to the holders of the floating rate notes
issued by this SPV to fund the original purchase of the portfolio, or to any
other creditors of this SPV. At 31 December 2002, this SPV held GBP24 million of
receivables which are included in Lloyds TSB Group's consolidated balance sheet
using a linked presentation; further information is given in Note 13 to the
Consolidated Financial Statements.
The following table sets out the amounts and maturities of Lloyds TSB
Group's contractual cash obligations at 31 December 2002:
Within one One to Three to Over five
year three five years years Total
GBPm years GBPm GBPm GBPm
GBPm
Long-term debt - dated 67 505 548 3,552 4,672
Finance leases 1 - - - 1
Operating leases 230 388 362 290 1,270
Total 298 893 910 3,842 5,943
At 31 December 2002, Lloyds TSB Group also had GBP5,496 million of undated
long-term debt outstanding.
The following table sets out the amounts and maturities of Lloyds TSB
Group's other commercial commitments at 31 December 2002. These commitments are
not included in Lloyds TSB Group's consolidated balance sheet.
Within one One to Three to Over
year three five five Total
GBPm years years years GBPm
GBPm GBPm GBPm
Acceptances 1,879 - - - 1,879
Guarantees 5,240 178 45 464 5,927
Other contingent 2,277 149 9 105 2,540
liabilities
Total contingent 9,396 327 54 569 10,346
liabilities
Lending 48,106 8,847 4,983 1,853 63,789
commitments
Other 548 32 5 130 715
commitments
Total 48,654 8,879 4,988 1,983 64,504
commitments
Total contingents 58,050 9,206 5,042 2,552 74,850
and commitments
Loan commitments are agreements to lend to customers in accordance with
contractual provisions; these are either for a specified period or, as in the
case of credit cards, represent a revolving credit facility which can be drawn
down at any time, provided that the agreement has not been terminated. The total
amounts of unused commitments do not necessarily represent future cash
requirements, in that commitments often expire without being drawn upon.
68
Lloyds TSB Group's banking businesses are also exposed to liquidity risk
through the provision of securitisation facilities to certain corporate
customers. At 31 December 2002 Lloyds TSB Group acted as sponsor to two
off-balance sheet entities, Monument and Obelisk, which are wholly owned by
independent trusts and administered by third parties. These off-balance sheet
entities purchase receivables from customers funded by secured lending from
third parties, which in turn issue asset-backed commercial paper to investors.
Lloyds TSB Group does not sell its own receivables to these entities, and the
assets and obligations of Monument and Obelisk are not included in Lloyds TSB
Group's consolidated balance sheet. However, Lloyds TSB Group provides
short-term asset-backed commercial paper liquidity support facilities on
commercial terms to the issuers of the commercial paper, for use in the event of
a market disturbance should they be unable to roll-over maturing commercial
paper or obtain alternative sources of funding.
During 2002, fee income earned by Lloyds TSB Group in relation to the
Monument and Obelisk transactions totalled approximately GBP3 million. At 31
December 2002, Monument and Obelisk held assets of approximately GBP840 million,
primarily loans and investments. The assets are generally of investment grade
quality and are typically secured. Based upon the commitments of Monument and
Obelisk to their customers as at 31 December 2002, Lloyds TSB Group provided
asset-backed commercial paper liquidity support facilities of GBP910 million.
On 15 January 2003, Lloyds TSB Group entered into a new asset-backed
commercial paper conduit structure. The conduit structure is divided into three
subgroups of companies:
(a) the issuer companies, Cancara Asset Securitisation Limited and Cancara
Asset Securitisation LLC, which issue the commercial paper and are
bankruptcy remote special purpose limited liability companies, each
wholly owned by an independent charitable trust;
(b) the purchasing companies, Dragon Securities Nos. 1, 2 and 3 Limited,
which purchase the customers' receivables and are bankruptcy remote
special purpose vehicles, each wholly owned by one or more independent
charitable trusts; and
(c) an investment purchasing company, Dragon Securities No. 4 Limited,
which purchases asset-backed securities from Lloyds TSB Group. As
Lloyds TSB Group acts as investment advisor to the investment
purchasing company and receives a performance related fee, the company
will be consolidated by Lloyds TSB Group under the provisions of
Financial Reporting Standard 5.
Lloyds TSB Group does not sell its own assets to the other purchasing
companies or issuer companies nor does it, or any of its subsidiaries or
affiliates, have an affiliation through ownership control or otherwise to these
companies. However, Lloyds TSB Group does provide liquidity facilities to the
issuer, purchasing and investment purchasing companies to fund short-term cash
deficits that may arise through timing differences between cash receipts from
the receivables and cash payments to the holders of the commercial paper. In the
future it is intended that all of the business currently recorded in Monument
and much of the business recorded in Obelisk will be transferred to the conduit
structure. The Monument facility will then close.
Within Lloyds TSB Group's insurance and investments businesses, the
principal sources of liquidity are premiums received from policyholders, charges
levied upon policyholders, investment income and the proceeds from the sale and
maturity of investments. The investment policies followed by Lloyds TSB Group's
life assurance companies take account of anticipated cash flow requirements by
matching the cash inflows with projected liabilities. Any liquidity requirements
in excess of those anticipated are met from additional funds held to provide
solvency margin cover; these include significant short-term cash deposits. As at
31 December 2002, these funds amounted to GBP2,211 million, representing an
excess of GBP1,228 million over the required minimum solvency margin.
Based upon the levels of resources within the banking and insurance and
investments businesses and the ability of Lloyds TSB Group to access the
wholesale money markets or issue debt securities should the need arise, Lloyds
TSB Group believes that its overall liquidity is sufficient to meet current
obligations to customers, policyholders and debt holders, support expectations
for future changes in asset and liability levels and carry on normal operations.
Because the principal business of Lloyds TSB Group is banking, it is able
to raise substantial amounts of cash in the wholesale money markets to provide
funds for acquisitions, should the need arise. In deciding whether Lloyds TSB
Group has sufficient resources to be able to make an acquisition the key factor
is not the availability of cash, but the ability of Lloyds TSB Group, and the
authorised institutions within Lloyds TSB Group, to continue to meet the capital
adequacy requirements of the regulatory authorities, see "Capital ratios" below.
69
Capital resources
The total capital resources of Lloyds TSB Group are set out below:
31 December 31 December 31 December
2002 2001 2000
GBPm GBPm GBPm
Minority interests (equity and 731 546 552
non-equity)
Called-up share capital 1,416 1,411 1,396
Share premium account 1,093 959 595
Merger reserve 343 343 343
Profit and loss account 5,120 7,643 9,567
Shareholders' funds 7,972 10,356 11,901
(equity)
8,703 10,902 12,453
Undated loan capital 5,496 4,102 3,391
Dated loan capital 4,672 4,006 4,119
Total capital resources 18,871 19,010 19,963
Lloyds TSB Group's total capital resources decreased by GBP139 million
during 2002.
Shareholders' funds decreased by GBP2,384 million, due to the actuarial
losses of GBP2,331 million relating to the Group's post-retirement benefit
schemes, largely caused by the significant reduction in equity market values,
which have been recognised in the Lloyds TSB Group's reserves. Loan capital
increased by GBP2,060 million, due to the issue of additional subordinated loan
capital to support the expansion of Lloyds TSB Group's balance sheet.
Capital ratios
The international standard for measuring capital adequacy is the risk asset
ratio, which relates regulatory capital to balance sheet assets and off-balance
sheet exposures weighted according to broad categories of risk.
Lloyds TSB Group's regulatory capital is divided into tiers defined by the
European Community Own Funds Directive as implemented in the UK by the FSA's
Interim Prudential Sourcebook for Banks. Tier 1 comprises mainly shareholders'
funds, tier 1 capital instruments and minority interests, after deducting
goodwill and intangible assets. Tier 2 comprises general loan loss provisions,
and qualifying subordinated loan capital, with restrictions on the amount of
general provisions and loan capital which may be included. The amount of
qualifying tier 2 capital cannot exceed that of tier 1 capital. Total capital is
reduced by deducting investments in subsidiaries and associates which are not
consolidated for regulatory purposes and investments in the capital of other
credit/financial institutions. In the case of Lloyds TSB Group, this means that
the net assets of its life assurance and general insurance businesses are
deducted from Lloyds TSB Group's regulatory capital.
Banking operations are categorised as either banking book or trading book
(broadly, activities which are accounted for on a mark-to-market basis).
Risk-weighted assets are determined according to a broad categorisation of the
nature of each asset or exposure and counterparty and, for the trading book, by
taking into account market-related risks.
31 December 31 December 31 December
2002 2001 2000
GBPm GBPm GBPm
Capital: tier 1 9,490 8,408 7,446
tier 2 8,846 7,831 7,446
18,336 16,239 14,892
Supervisory deductions (6,588) (6,752) (6,809)
Total regulatory capital 11,748 9,487 8,083
Total risk-weighted assets 122,411 107,861 93,211
Post-tax return on average 1.61% 2.26% 3.07%
risk-weighted assets
Risk asset ratios: total capital 9.6% 8.8% 8.7%
tier 1 7.8% 7.8% 8.0%
At 31 December 2002, the risk asset ratios were 9.6 per cent for total
capital and 7.8 per cent for tier 1 capital. The 7.8 per cent tier 1 capital
ratio appears higher than would perhaps be expected for Lloyds TSB Group. This
reflects the higher level of supervisory deductions resulting from Lloyds TSB
Group's significantly increased investment in its life assurance operations as a
result of the acquisition of Scottish Widows.
70
There are strict limits imposed by the regulatory authorities as to the
proportion of Lloyds TSB Group's regulatory capital base that can be made up of
subordinated debt and preferred securities. Lloyds TSB Group's capacity to raise
new debt capital for regulatory purposes increases as profits are retained; at
31 December 2002, Lloyds TSB Group had capacity to raise approximately GBP650
million of tier 2 debt capital, compared to approximately GBP600 million at 31
December 2001. This small increase reflects the combined effects of retained
profits, which were adversely affected by losses on the investments supporting
the long-term assurance business, the issuance of tier 1 and tier 2 securities,
and exchange rate movements. The unpredictable nature of movements in the value
of the investments supporting the long-term assurance funds could cause the
amount of qualifying tier 2 capital to be restricted because of falling tier 1
resources. The Lloyds TSB Group seeks to ensure that even in the event of such
restrictions, that total capital ratio will remain adequate.
During 2002, total capital for regulatory purposes increased by GBP2,261
million to GBP11,748 million. Tier 1 capital increased by GBP1,082 million,
mainly from the issue of new tier 1 capital instruments. Tier 2 capital
increased by GBP1,015 million and supervisory deductions decreased by GBP164
million, as a result of a decrease in the Lloyds TSB Group's embedded value to
GBP6,228 million, from GBP6,366 million in December 2001.
Risk-weighted assets increased to GBP122,411 million at 31 December 2002
and the post-tax return on average risk-weighted assets was 1.61 per cent.
The free asset ratio is a common measure of financial strength in the UK
for long-term businesses. It is the ratio of assets less liabilities (including
actuarial reserves but before the required regulatory minimum solvency margin)
expressed as a percentage of the liabilities. It is derived from annual
insurance returns which were completed in March 2003. At 31 December 2002 the
free asset ratio for Scottish Widows plc was 12.2 per cent, compared with 11.5
per cent at 31 December 2001. This free asset ratio included some GBP400 million
allowance for future profits (December 2001: nil). After adjusting for the
inclusion of the required regulatory minimum solvency margin within liabilities,
the Scottish Widows plc ratio was 8.0 per cent at 31 December 2002. In common
with its peers, Scottish Widows plc is required to maintain adequate solvency,
as determined by the FSA's Interim Prudential Sourcebook for Insurers. One of
the factors influencing solvency is the level of equity markets: the FTSE 100
index could fall below 3,000 (compared with 4,048 at 31 May 2003) before the
Lloyds TSB Group would need to inject capital into its life operations. At this
level the Lloyds TSB Group may need to inject up to GBP300 million to support
business growth.
Corporate Social Responsibility
Lloyds TSB Group adopts a responsible attitude to Social, Environmental and
Ethical ("SEE") issues, and publishes a separate document on its role in the
community, its code of business conduct and its environmental performance.
The Group has a dedicated Environmental Risk unit which is responsible for
the development of environmental policies and procedures, and provides practical
advice and guidance on environmental issues to business units. During the year,
the Lloyds TSB Group has reviewed its SEE performance and is of the opinion that
it already complies with the majority of the guidelines published by the
Association of British Insurers in 2001. The Lloyds TSB Group continues to
develop its policies and procedures and will monitor its performance more
rigorously in 2003.
71
Investment portfolio
Investment securities and other securities
The following table sets out the book value and valuation of Lloyds TSB
Group's investment securities and other securities at 31 December for each of
the three years indicated.
2002 2001 2000
Book Valuation Book Book
value value Valuation value Valuation
GBPm GBPm GBPm GBPm GBPm GBPm
Investment
securities(1)
Bank and building 3,147 3,148 4,670 4,677 3,034 3,034
society certificates
of deposit
Corporate debt 1,495 1,496 613 616 465 466
securities
Mortgage backed 893 892 521 527 18 18
securities
Other asset backed 2,817 2,820 1,193 1,198 162 163
securities
Other debt 1,369 1,367 1,211 1,209 619 618
securities
Securities of the US 1,740 1,736 1,148 1,147 379 378
Treasury and
US government
agencies
Other government 400 405 1,633 1,829 1,717 2,136
securities
Other public sector 1 1 - - 1 1
securities
Equity shares 38 67 38 66 41 102
11,900 11,932 11,027 11,269 6,436 6,916
Other securities
UK government - - 31 31 893 893
securities
Securities of the US 40 40 - - 16 16
Treasury and US
government
agencies
Other government 5,995 5,995 4,072 4,072 2,151 2,151
securities
Other public sector 112 112 151 151 131 131
securities
Bank and building 340 340 234 234 105 105
society certificates of
deposit
Corporate debt 7,842 7,842 7,102 7,102 4,671 4,671
securities
Mortgage backed 1,838 1,838 1,054 1,054 242 242
securities
Other asset backed 1,191 1,191 592 592 - -
securities
Other debt 94 94 - - 1 1
securities
Equity shares 168 168 187 187 206 206
17,620 17,620 13,423 13,423 8,416 8,416
________________
(1) Investment securities are those intended for use on a continuing basis
in the activities of Lloyds TSB Group and not for dealing purposes.
Investment securities held by Lloyds TSB Group's insurance businesses
are not included.
72
Maturities and weighted average yields of debt securities
The weighted average yield for each range of maturities is calculated by
dividing the annualised interest income prevailing at 31 December 2002 by the
book value of securities held at that date.
Maturing Maturing Maturing Maturing
within after after after ten
one year one but five but years
within five within ten
years years
Amount Yield Amount Yield Amount Yield Amount Yield
GBPm % GBPm % GBPm % GBPm %
Investment
securities
Bank and 3,112 3.7 35 3.8 - - - -
building
society
certificates
of deposit
Corporate 59 4.2 973 5.2 409 2.1 54 3.3
debt
securities
Mortgage - - 588 4.4 305 4.9 - -
backed
securities
Other asset 48 2.4 1,974 3.6 767 3.6 28 2.2
backed
securities
Other debt 215 1.8 696 3.1 458 4.2 - -
securities
Securities of 6 3.9 370 2.1 1,313 2.2 51 2.2
the US
Treasury and
US government
agencies
Other 349 4.1 20 2.4 31 3.2 - -
government
securities
Other public - - 1 11.4 - - - -
sector
securities
Total book 3,789 3.6 4,657 3.9 3,283 3.1 133 2.7
value
Maturing Maturing Maturing Maturing
within after after after ten
one year one but five but years
within five within ten
years years
Amount Yield Amount Yield Amount Yield Amount Yield
GBPm % GBPm % GBPm % GBPm %
Other
securities
Securities of - - - - 40 3.9 - -
the US
Treasury and
US government
agencies
Other 715 4.0 2,376 3.6 2,238 4.2 666 7.9
government
securities
Other public - - 77 3.1 35 4.1 - -
sector
securities
Bank and 326 6.6 14 22.5 - - - -
building
society
certificates
of deposit
Corporate 1,513 2.6 5,501 3.1 828 3.9 - -
debt
securities
Mortgage 50 3.9 568 3.3 1,177 3.7 43 4.7
backed
securities
Other asset - - 684 3.4 428 3.8 79 4.5
backed
securities
Other debt 18 15.8 76 17.6 - - - -
securities
Total book 2,622 3.6 9,296 3.4 4,746 4.0 788 7.5
value
Maturity analysis and interest rate sensitivity of loans and advances to
customers and banks as at 31 December 2002
The following table analyses the maturity profile and interest rate
sensitivity of loans by type on a contractual repayment basis as at 31 December
2002. All amounts are before deduction of provisions and interest in suspense.
Demand loans are included in the "maturing in one year or less" category.
Maturing
after one
Maturing in year but not Maturing
one year or more than after five
less five years years Total
GBPm GBPm GBPm GBPm
Domestic:
Loans and advances 13,715 1,245 331 15,291
to banks
Loans and advances
to customers:
Mortgages 1,620 8,150 52,697 62,467
Other personal 9,151 5,660 120 14,931
lending
Financial, business 4,070 2,242 2,040 8,352
and other
services
Lease financing 521 1,667 5,097 7,285
Hire purchase 2,804 3,105 81 5,990
Others 9,314 4,811 4,907 19,032
Total domestic 41,195 26,880 65,273 133,348
loans
Total foreign 8,600 5,457 6,422 20,479
loans
Total loans 49,795 32,337 71,695 153,827
Of which:
Fixed interest 31,821 15,385 26,592 73,798
rate
Variable interest 17,974 16,952 45,103 80,029
rate
73
Deposits
The following table shows the details of Lloyds TSB Group's average customer
deposits in each of the past three years.
2002 2001 2000
Average Average Average Average Average Average
balance rate balance rate balance rate
GBPm % GBPm % GBPm %
Deposits in
domestic
offices
Non interest 5,985 - 6,182 - 6,058 -
bearing demand
deposits
Interest 19,150 0.49 18,034 0.73 17,836 1.36
bearing demand
deposits
Savings 43,585 3.14 38,743 4.49 34,468 5.26
deposits
Time 19,274 4.04 15,856 5.39 19,767 5.95
deposits
Total domestic 87,994 2.55 78,815 3.46 78,129 4.14
office
deposits
Deposits in
foreign offices
Non interest 789 - 595 - 635 -
bearing demand
deposits
Interest 1,410 1.56 991 2.93 793 4.04
bearing demand
deposits
Savings 2,049 5.08 1,842 5.16 1,901 4.58
deposits
Time 7,806 11.11 8,044 9.95 7,632 8.94
deposits
Total foreign 12,054 8.24 11,472 8.05 10,961 7.31
office
deposits
Total average 100,048 3.23 90,287 4.04 89,090 4.53
deposits
Certificates of deposit and other time deposits
The following table gives details of Lloyds TSB Group's certificates of deposit
issued and other time deposits as at 31 December 2002 individually in excess of
US $100,000 (or equivalent in another currency) by time remaining to maturity.
Over 3 Over 6
months but months but
3 months within 6 within 12 Over 12
or less months months months Total
GBPm GBPm GBPm GBPm GBPm
Domestic
Certificates of 10,749 3,090 1,555 15 15,409
deposit
Time 24,898 1,404 593 2,373 29,268
deposits
35,647 4,494 2,148 2,388 44,677
Foreign
Certificates of 10,672 1,574 429 778 13,453
deposit and
other time
deposits
Total 46,319 6,068 2,577 3,166 58,130
Short-term borrowings
Short-term borrowings are included within the balance sheet captions "Deposits
by banks", "Customer accounts" and "Debt securities in issue" and are not
identified separately on the balance sheet. The short-term borrowings of Lloyds
TSB Group consist of overdrafts from banks, securities sold under agreements to
repurchase, certificates of deposit issued, commercial paper and promissory
notes issued and other marketable paper. Securities sold under agreements to
repurchase and certificates of deposit issued are the only significant
short-term borrowings of Lloyds TSB Group.
74
The following table gives details of the significant short-term borrowings of
Lloyds TSB Group for each of the past three years.
2002 2001 2000
GBPm GBPm GBPm
Liabilities in respect of securities sold under
repurchase agreements
Balance at the period end 6,157 5,516 4,030
Average balance for the period 6,294 3,898 3,000
Maximum balance during the period 9,697 5,516 6,158
Average interest rate during the period 4.7% 6.7% 7.3%
Interest rate at the period end 4.6% 6.1% 6.4%
Certificates of deposit issued
Balance at the period end 21,246 17,060 12,052
Average balance for the period 22,040 14,643 11,910
Maximum balance during the period 26,199 18,160 13,645
Average interest rate during the period 3.2% 5.0% 6.3%
Interest rate at the period end 3.2% 3.7% 6.3%
75
MANAGEMENT AND EMPLOYEES
Directors and senior management
Lloyds TSB Group plc is led and controlled by a board comprising executive and
non-executive directors with wide experience. The appointment of directors is
considered by the board and, following the provisions in the articles of
association, they must retire by rotation, and may stand for re-election by the
shareholders, at least every three years. Executive directors normally retire at
age 60 as required by their service agreements. Independent non-executive
directors are appointed for a specified term, not exceeding five years, which
may be renewed.
The board meets nine times a year and a programme is prepared and agreed each
year, which ensures that the directors are able regularly to review corporate
strategy and the operations and results of the business units in the Lloyds TSB
Group and to discharge their other duties. The roles of the chairmen, the group
chief executive and the board and its governance arrangements are reviewed
annually.
The board has a chairman's committee, comprising the chairman, the deputy
chairman, the group chief executive and his deputy. The chairman's committee
meets to discuss current issues and strategy, examine and test proposals and
prepare for board meetings. It also has specific powers delegated to it by the
board. The board also has audit, nomination and remuneration committees which
comply with the code annexed to the UK Listing Authority's listing rules.
The chairman, the group chief executive and the group finance director have
meetings with representatives of institutional shareholders and all
shareholders are encouraged to participate in Lloyds TSB Group's annual general
meeting.
Board of directors
Biographical details of the board of directors are given below.
Maarten A van den Bergh <
Chairman
Joined Lloyds TSB Group in 2000 as deputy chairman and was appointed chairman
in 2001. Joined the Royal Dutch/Shell Group of companies in 1968 and after a
number of senior and general management appointments in that group, became
group managing director in 1992. Appointed president of Royal Dutch Petroleum
Company and vice chairman of the committee of managing directors of the Royal
Dutch/Shell Group in 1998 and continued in these roles until 2000. A
non-executive director of Royal Dutch Petroleum Company, BT Group and British
Airways. Elected by the shareholders to the board in April 2001. Aged 61.
David P Pritchard
Deputy Chairman
Joined TSB Group in 1995 as group treasurer. Seconded to the Securities and
Investments Board as head of supervision & standards, markets & exchanges, from
1996 to 1998. Appointed to the board in 1998, as group executive director,
Wholesale and International Banking. Retired from executive duties in 2003,
when he was appointed deputy chairman. Held senior and general management
appointments with Citicorp from 1978 to 1986 and Royal Bank of Canada from 1986
to 1995. A non-executive director of the London Clearing House. Most recently
re-elected by the shareholders to the board in April 2001. Aged 58.
Executive directors
J Eric Daniels
Group Chief Executive
Joined the board in 2001 as group executive director, UK Retail Banking before
his appointment as group chief executive in 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. Elected by the shareholders to the board in April 2002. Aged 51.
Michael E Fairey
Deputy Group Chief Executive
Joined TSB Group in 1991 and held a number of senior and general management
appointments before being appointed to the board in 1997 and deputy group chief
executive in 1998. 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. Most recently re-elected by the
shareholders to the board in April 2002. Aged 55.
76
Michael D Ross CBE
Deputy Group Chief Executive
Joined the board in 2000. Joined Scottish Widows in 1964 and following a number
of senior and general management appointments became group chief executive of
that company in 1991. Chairman of the Association of British Insurers. Most
recently re-elected by the shareholders to the board in April 2003. Aged 56.
Peter G E Ayliffe
Group Executive Director, UK Retail Banking
Joined the board in 2003, having held a number of senior and general management
appointments in the Lloyds TSB Group since 1985. Appointed Managing Director,
Personal Banking in 2000. Served with National Westminster Bank from 1974 to
1985. Aged 50.
Philip R Hampton
Group Finance Director
Joined the board in 2002. Previously, finance director of BT Group from 2000 to
2002, BG Group from 1996 to 2000 and British Steel from 1990 to 1996. Before
that, he worked for Coopers & Lybrand from 1975 to 1980 and Lazard Brothers
from 1981 to 1990. A non-executive director of RMC Group. Elected by the
shareholders to the board in April 2003. Aged 49.
Archie G Kane
Group Executive Director, IT and Operations
Joined TSB Commercial Holdings in 1986 and held a number of senior and general
management appointments in Lloyds TSB Group before being appointed to the board
in 2000. After some 10 years in the accountancy profession, joined General
Telephone & Electronics Corporation in 1980, serving as finance director in the
UK from 1983 to 1985. Chairman of the council of the Association for Payment
Clearing Services. Most recently re-elected by the shareholders to the board in
April 2003. Aged 51.
Steve C Targett
Group Executive Director, Wholesale and International Banking
Joined the board in 2003. Served with National Australia Bank from 1997, where
he held a number of senior and general management appointments in Australia and
the UK before becoming chief executive officer, Europe, in 2002. Previously
held a number of senior and general management appointments in Cargill, a
commodity trading group, from 1980 to 1988, State Bank of South Australia from
1988 to 1991 and ANZ Bank from 1991 to 1997. His early career, between 1972 and
1980, was spent with National Australia Bank. Elected by the shareholders to
the board in April 2003. Aged 48.
Non-executive directors
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 and North America,
before retiring in 2001. A non-executive director of Cadbury Schweppes and GfK
AG. Chairman of the Institute for the Future. Aged 60.
Ewan Brown CBE FRSE >**
Chairman of Lloyds TSB Scotland
A director since 1999. A non-executive director of Lloyds TSB Scotland since
1997. Executive director of Noble Grossart since 1971. Chairman of Transport
Initiatives Edinburgh. A non-executive director of John Wood Group and
Stagecoach Holdings. Most recently re-elected by the shareholders to the board
in April 2001. Aged 61.
Gavin J N Gemmell CBE >*
Chairman of Scottish Widows
Joined the board in 2002. A non-executive director of Scottish Widows, having
been appointed to the board of that company before it became a member of the
Lloyds TSB Group. Retired as senior partner of Baillie Gifford in 2001, after
37 years with that firm. A non-executive director of Archangel Informal
Investment. Chairman of the court of Heriot-Watt University. Elected by the
shareholders to the board in April 2002. Aged 61.
Christopher S Gibson-Smith >+
A director since 1999. Chairman of National Air Traffic Services and to be
Chairman of the London Stock Exchange from July 2003. Joined BP in 1970,
serving as managing director from 1997 to 2001, having held senior and general
management appointments in the UK, USA, Canada and Europe. A non-executive
director of The British Land Company. Most recently re-elected by the
shareholders to the board in April 2002. Aged 57.
77
DeAnne S Julius CBE >+ss
Joined the board in 2001. Held a number of senior appointments in the UK and
USA with the World Bank, Royal Dutch/Shell Group and British Airways, before
membership of the Bank of England Monetary Policy Committee from 1997 to 2001.
Chaired HM Treasury's banking services consumer codes review group in 2000/1.
To be chairman of the Royal Institute of International Affairs from July 2003.
A non-executive director of the Bank of England, BP, Serco Group and Roche
Holdings SA. Elected by the shareholders to the board in April 2002. Aged 54.
Angela A Knight >*
Joined the board in 2003. Deputy chairman of Scottish Widows, having been
appointed to the board of that company before it became a member of the Lloyds
TSB Group. A member of parliament from 1992 to 1997 and Economic Secretary to
the Treasury from 1995 to 1997. Chief Executive of the Association of Private
Client Investment Managers and Stockbrokers. A non-executive director of
LogicaCMG, South East Water and the Port of London Authority. Aged 52.
Sir Tom McKillop ^#
A director since 1999. Joined ICI in 1969 and held a number of senior and
general management appointments before the demerger in 1993, when Zeneca was
created. Chief executive of Zeneca Pharmaceuticals from 1994 to 1999 and chief
executive of AstraZeneca from 1999. Pro-chancellor of Leicester University.
Most recently re-elected by the shareholders to the board in April 2002. Aged
60.
The Earl of Selborne KBE FRS >*ss
A director since 1995, having been a director of Lloyds Bank since 1994.
Managing director of The Blackmoor Estate, his family business. Chancellor of
Southampton University since 1996. President of the Royal Geographical Society
from 1997 to 2000. Most recently re-elected by the shareholders to the board in
April 2002. Aged 63.
* Member of the audit committee
** Chairman of the audit committee
+ Member of the remuneration committee
# Chairman of the remuneration committee
ss Member of the nomination committee
< Chairman of the nomination committee
> Independent director
^ Senior independent director
Compensation
Directors' remuneration
The remuneration committee makes recommendations to the board on the framework
of executive directors' remuneration and its cost, and determines, on the
board's behalf, specific remuneration packages for each of the chairman, the
deputy chairman and the executive directors. Additionally, all the
non-executive directors receive the minutes of remuneration committee meetings
and have the opportunity to comment and have their views taken into account
before the committee's decisions are implemented. See also "- Board practices -
Remuneration committee".
Executive directors' remuneration policy
Lloyds TSB Group aims to ensure that the executive directors' remuneration
arrangements, in line with the Lloyds TSB Group's overall practice on pay and
benefits, are competitive and designed to attract, retain and motivate
executive directors of the highest calibre, who are expected to perform to the
highest standards. Account is taken of information, from internal and
independent sources, on the remuneration for comparable positions in a wide
range of FTSE 100 companies. The strategy for executive directors' pay is for
basic salaries to reflect the relevant market median; for benefits such as a
company car, medical insurance and pension to reflect market practice; and for
total direct compensation (basic salary, annual incentives and the value of
long-term incentives) to be at the upper quartile of the market place, provided
that performance justifies the amount. This strategy is consistent with the
Lloyds TSB Group's belief that performance should determine a significant
proportion of the total remuneration package for executive directors. There are
no plans to change the strategy.
The fees of the non-executive directors are agreed by the board within a total
amount determined by the shareholders. They are designed to recognise the
significant responsibilities of directors and to attract individuals with the
necessary experience and ability to make an important contribution to the
Lloyds TSB Group's affairs. The fees, which are neither performance related nor
pensionable, are comparable with those paid by other companies.
78
Reward package. Each year, with the help of external management consultants,
the total remuneration package of the directors is reviewed, and in 2002 The
Hay Group Management Limited were commissioned by the remuneration committee to
conduct the review. The current package for executive directors comprises the
following elements:
Basic salary. The aim is to ensure that salaries are competitively set in
relation to similar jobs in a wide range of FTSE 100 companies.
Current salaries for the chairman, deputy chairman and executive directors,
following the most recent salary review are:
Mr Ayliffe GBP375,000
Mr Daniels GBP700,000
Mr Fairey GBP498,000
Mr Hampton GBP483,000
Mr Kane GBP397,500
Mr Pritchard GBP233,520
Mr Ross GBP443,000
Mr Targett GBP450,000
Mr van den Bergh GBP422,500
Annual incentive. The annual incentive scheme is designed to reflect specific
goals linked to the performance of the business. In 2002, the group chief
executive had a maximum incentive opportunity equal to 100 per cent of his
salary as did Mr Daniels, whose bonus opportunity and payment for 2002 were
agreed as part of his recruitment package. Each of the other executive
directors could earn an incentive equal to 75 per cent of their salary. The
awards were based on Lloyds TSB Group performance and the attainment of
predetermined targets relating to total income, profit before tax and economic
profit. Each received an award equal to 4.7 per cent of salary based on
achievement against the income target, which was met in part. No bonus has been
earned for the other targets.
In 2003, all the executive directors will have a maximum incentive opportunity
equal to 100 per cent of their salaries. Awards will be based on Lloyds TSB
Group performance, with predetermined targets relating to profit before tax and
economic profit. 75 per cent of the award will be payable on achievement of
profit before tax and economic profit relating to the Lloyds TSB Group's
stretching budget for 2003 and the remuneration committee has set a higher
target for the maximum award. The threshold performance levels, below which no
bonus will be payable, have also been set by the remuneration committee at
higher figures than those achieved in 2002.
The remuneration committee reviewed the attainment of targets in 2002 and
agreed the incentive payments, and the auditors confirmed the calculations.
These payments are not pensionable.
Medium-term incentive plan. In April 2000, shareholders approved the
introduction of a medium-term incentive plan which gave the executive directors
serving at that time the opportunity of an award, deferred until after the end
of 2002, which was the subject of two performance targets, based on the
efficiency ratio and return on equity. For the group chief executive, the
maximum potential award was equal to 50 per cent of aggregate basic salary for
the years 2000 to 2002 and for other executive directors, the maximum potential
award was equal to 25 per cent of aggregate basic salary for those three years.
The two minimum performance targets were a reduction in Lloyds TSB Group's
efficiency ratio to 37 per cent by the end of 2002 and a return on equity of 28
per cent by the end of 2002. No payment was to be made under the plan unless
both these minimum targets were met. The performance targets were not met by
the end of 2002 and, accordingly, the plan ended without any payments being
made.
Executive share option schemes. All executive share options granted since March
1996 have been subject to performance conditions. Performance conditions are
set when the grant of options is made and the options cannot normally be
exercised unless the conditions have been met. To meet the performance
conditions applied to options granted since August 2001, Lloyds TSB Group plc's
ranking, based on total shareholder return (calculated by reference to both
dividends and growth in share price) over the relevant (three year) period,
within the comparator group, must be at least ninth. Hoare Govett independently
provides the information on total shareholder return and Lloyds TSB Group plc's
ranking and the auditors are also involved before the remuneration committee
confirms whether the conditions have been met.
In 2002, options were granted to executive directors and senior executives
within the scheme limits. These limits relate to the number of shares under
option and the price payable on exercise. The maximum limit for the grant of
options to an executive director in any one year is equal to one and a half
times annual basic salary multiplied by a performance multiplier of 3.5
(although in exceptional circumstances, for example on the recruitment of a new
executive, that could be increased to four times annual basic salary multiplied
by 3.5).
79
The full grant of options for executive directors will only become exercisable
if Lloyds TSB Group plc is ranked first within the comparator group.
The following table illustrates the percentage of the grant which would be
exercisable depending on the ranking within the comparator group.
At the end of 2002 Lloyds TSB Group plc was ranked:
6th after two years of the performance period for options granted in 2001; and
11th after one year of the performance period for options granted in 2002.
Option awards have been made to the executive directors in February 2003 and
were subject to the same scheme limits and performance conditions as outlined
above.
Ranking position within comparator group % of option which may be exercised
1 100
2 86
3 71
4 57
5 43
6 29
7 23
8 17
9 14
10 or below Nil - options not exercisable
The current constituents of the comparator group are:
Abbey National ABN Amro Alliance and Leicester
Aviva Barclays Citigroup
Fortis HBOS HSBC Holdings
ING Legal and General National Australia Bank
Prudential Royal Bank of Scotland Royal & Sun Alliance
Standard Chartered
In addition, share options have been granted in previous years in accordance
with the relevant scheme rules and market practice at that time. The table on
page 86 includes options granted under these previous schemes.
Options granted Performance conditions
Prior to March 1996 None
March 1996 - August 1999 That Lloyds TSB Group plc's ranking based on
shareholder return (calculated by reference to
both dividends and growth in share price) over the
relevant period should be in the top fifty
companies of the FTSE 100 and that there must have
been growth in earnings per share which is equal
to the aggregate percentage change in the Retail
Price Index plus two percentage points for each
complete year of the relevant period.
March 2000 - March 2001 As for March 1996 - August 1999 except that there
must have been growth in the earnings per share
equal to the change in the Retail Price Index plus
three percentage points for each complete year of
the relevant period.
The remuneration committee chose the relevant performance condition, where
applicable, because it was felt to be challenging, aligned to shareholder
interests and appropriate at the time.
80
At the annual general meeting in April 2003, the shareholders approved an
amendment to the rules of the executive share option schemes. Under the
previous rules, a share option could not be granted to any person who, at the
date of grant, was within 2 years of retirement. The rules of the schemes were
amended to allow share options to be granted to executives up to six months
before retirement.
Since the introduction of the new performance condition in 2001, the exercise
of options after retirement would still require the condition to be satisfied
over the original performance period. Also, if the optionholder retired within
3 years of the date of the grant, the number of shares which could be acquired
on exercise would be reduced according to the length of time the optionholder
was employed between the date of grant and the date of retirement.
Share retention plan and Lloyds TSB Group plc Share Plan 2003. Two further
share plans have been established as part of the recent recruitment of
executive directors to the Lloyds TSB Group. During 2001, the share retention
plan was adopted, specifically to facilitate the recruitment of Mr Daniels, who
was based in the USA, as part of the remuneration package considered necessary
to attract him to the UK. Mr Daniels is the only participant in the plan and he
became eligible to participate in it when he joined Lloyds TSB Group plc on 1
November 2001. On 2 November 2001, an option was granted to Mr Daniels under
the plan to acquire 216,763 ordinary shares in Lloyds TSB Group plc (with a
value of GBP1.5 million at the date of grant) for a total price of GBP1. No
further options may be granted to him under the plan.
The Lloyds TSB Group plc Share Plan 2003 was adopted in March 2003,
specifically to facilitate the recruitment of Mr Targett, to compensate him for
the value of the options he had with his previous employer, which lapsed when
he left them to join the Lloyds TSB Group. Mr Targett is the only participant
in the plan and he became eligible to participate in it when he joined Lloyds
TSB Group plc on 10 March 2003. On 11 March 2003, an option was granted to him
under the plan to acquire 331,125 ordinary shares in Lloyds TSB Group plc (with
a value of GBP1 million at the date of grant) for a total price of GBP1. No
further options may be granted to him under the plan.
No new shares will be issued to satisfy the options under either of these plans.
The options are designed to encourage the participants to remain with Lloyds
TSB Group plc. Accordingly, the options, which are not subject to any
performance conditions, will normally become exercisable only if the
participants remain as employees, and have not given notice of resignation, on
31 December 2004, in the case of Mr Daniels, and 31 December 2005, in the case
of Mr Targett. The options will also be exercisable if the participants cease
to be employees before those dates in certain circumstances described in their
service agreements, in which case the options will be exercisable for six
months and then lapse. For both plans, these circumstances include the
participant being entitled to terminate his service agreement without notice by
reason of his employer's conduct or the participant being removed as a director
or employee otherwise than in accordance with that agreement. The options may
also become exercisable early on a takeover or reconstruction of Lloyds TSB
Group plc.
In the case of Mr Daniels' option, such circumstances also include there being
any material diminution of his duties or, within 18 months of his employment,
there being a change of circumstances of Lloyds TSB Group plc such that there
was, in his reasonable judgement, a material and adverse effect on his
prospects or a material diminution of his status.
In the case of Mr Targett's option, the circumstances also include his service
agreement being terminated by Lloyds TSB Group plc due to sickness or injury,
or if he dies (in which case his personal representatives would generally have
twelve months from the date of death to exercise the option).
Both of these options will lapse if the participant ceases to be an employee,
or gives notice of resignation, before the normal exercise dates, except in the
circumstances described above. Mr Daniels' option will lapse if he dies before
the normal exercise date.
The number and/or nominal amount of shares may be adjusted by the board on
certain variations in the share capital of Lloyds TSB Group plc.
The benefits conferred by these options are not pensionable and the options are
not transferable.
Other share plans. The executive directors, the chairman and the deputy
chairman may participate in the Group's 'Sharesave' scheme and 'Shareplan' on
the same basis as other employees.
Pensions. Executive directors are entitled to pensions based on salary and
length of service with Lloyds TSB Group, with a maximum pension of two-thirds
of final salary.
81
Directors' emoluments for 2002
Performance
Other -related Shareplan 2002
Salaries/fees benefits payments Total 2001
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
Current
directors who
served during 2002:
Ewan Brown 60 60 59
J E Daniels 450 349 450 14 1,263 192
M E Fairey 470 137 22 14 643 791
G J N Gemmell 68 68 -
C S Gibson-Smith 38 38 38
P R Hampton 268 9 13 8 298 -
D S Julius 38 38 9
A G Kane 375 14 18 11 418 548
Sir Tom McKillop 45 45 45
D P Pritchard 390 17 18 12 437 588
M D Ross 430 15 20 13 478 650
Lord Selborne 33 33 43
M A van den Bergh 400 15 415 406
Former
directors who
served during 2002:
M K Atkinson 174 370 18 5 567 588
A C Butler 40 40 40
P B Ellwood 660 22 31 20 733 1,001
S M Forbes 38 38 38
A E Moore 210 11 6 227 229
L M Urquhart 25 25 93
Former 391
directors who
served during 2001
4,212 959 590 103 5,864 5,749
"Other benefits" include the use of a car, private medical insurance, life
insurance cover and payments to a former executive director on termination of
his service contract (see below). Allowances for relocation, housing and legal
advice arising from Mr Daniels' service agreement and an additional payment in
respect of the contribution to the separate fund relating to Mr Fairey's
pension, are also included. The separate fund was established to cover pension
obligations of those who joined Lloyds TSB Group after 1 June 1989 and who are
subject to the Inland Revenue earnings cap relating to pensions, introduced by
the Finance Act 1989.
GBP348,637 included in "other benefits"' for Mr Atkinson represents the amount
to which he was contractually entitled when his employment was terminated on 31
May 2002. This included 12 months' salary from which he elected to pay
GBP318,637 to purchase additional pension from Lloyds TSB Group Pension Scheme
No. 1. As part of his termination package, he is also entitled to a bonus
reflecting what he would have received during his notice period. He became
entitled to a pension of GBP273,514 immediately when his employment terminated,
which took into account the additional 12 months' service for the notice period.
He also continues to receive beneficial rights to medical insurance and use of
a car for 12 months after departure. His outstanding share options are
exercisable either up to 12 months after departure or, for those options
granted after August 2001, at the later appropriate time providing the
performance condition has been met.
Performance-related payments
These payments relate solely to cash bonuses earned in 2002 under the annual
incentive scheme. They do not include any amounts relating to the former
medium-term incentive plan, approved by shareholders in 2000, which ended in
2002 without any payments being made, as the relevant performance targets were
not met.
Shareplan
Amounts shown are those received by directors in respect of the Group's
Shareplan. Under the scheme, employees received, in April 2003, an award equal
to 3 per cent of salary received in 2002. A maximum of GBP3,000 was received in
shares for those eligible, with any balance paid in cash.
82
Directors' pensions in 2002
The executive directors are all members of one of the defined benefit schemes
provided by the Lloyds TSB Group. Those directors who joined the Group after 1
June 1989 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.
With the exception of Mr Pritchard, directors have a normal retirement age of
60. Mr Pritchard retired on 16 April 2003. For executive directors, in the
event of death in service, a lump sum of 4 times salary is payable plus a
spouse's pension of 2/3 of the member's prospective pension. On death in
retirement, a spouse's pension of 2/3 of the member's pension is payable. The
schemes are non-contributory.
Mr Pritchard has a deferred cash entitlement of GBP71,310 from his membership of
the defined contribution section of the Group's FURBS.
Additional
Accrued Accrued pension
pension at pension at Transfer Transfer earned to 31
31 31 value at 31 value at 31 Change in December Transfer
December December December December transfer 2002 value of
2002 2001 2002 2001 value the
increase
(a) (b) (c) (d) (c) - (d) (e) (f)
Current directors who served during 2002:
J E Daniels 31,250 23,750 346,555 312,504 34,051 7,096 78,693
M E Fairey 155,805 127,183 2,075,301 1,862,642 212,659 26,460 352,443
P R Hampton 5,963 - 58,631 - 58,631 5,963 58,631
A G Kane 144,353 118,599 1,514,190 1,503,489 10,701 23,737 248,989
D P 38,974 30,582 656,073 518,412 137,661 7,872 132,514
Pritchard
M D Ross 274,125 245,229 4,395,896 3,564,387 831,509 24,727 392,853
In addition, the following unfunded benefits have accrued for Mr van den Bergh instead of a salary increase in 2002:
M A van den 3,378 - 36,160 - 36,160 3,378 36,160
Bergh
Former directors who served during 2002:
M K Atkinson 273,514 227,274 4,632,189 3,455,667 1,176,522 42,376 717,673
P B Ellwood 393,875 336,441 7,093,775 5,943,051 1,150,724 51,715 931,398
Columns (a) and (b) represent the deferred pension to which the directors would
have been entitled had they left the Group on 31 December 2002 and 2001,
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 2002 based on factors supplied by the actuary of
the relevant Lloyds TSB Group pension scheme in accordance with actuarial
guidance note GN11.
Column (d) is the equivalent transfer value, but calculated as at 31 December
2001 on the assumption that the director left service at that date. Mr Hampton
joined the Lloyds TSB Group on 1 June 2002 and previous years' figures are not
shown.
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).
Members of the Group's pension schemes have the option to pay additional
voluntary contributions: neither the contributions nor the resulting benefits
are included in the above table.
Board practices
Audit committee
The audit committee comprises Mr Brown (chairman), Mr Gemmell, Mrs Knight and
Lord Selborne. The deputy chairman is invited to attend all meetings of the
committee. The audit committee's duties include considering the appointment,
resignation or dismissal of the external auditors and their independence and
objectivity. The audit committee also reviews all 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 work of the group risk management division, where duties include
internal audit and advising on and monitoring compliance with financial
services legislation and regulations, and the adequacy of its resources; the
results of the external audit and its cost effectiveness; communications from
the external auditors on audit planning and findings on material weaknesses in
accounting and internal control systems; the major findings of any relevant
internal investigations; and its own efficiency and effectiveness. All audit
and non-audit services provided by the auditors are approved by the audit
committee.
83
Nomination committee
The nomination committee, comprising Mr van den Bergh (chairman), Dr Julius and
The Earl of Selborne, considers potential candidates for appointment as
directors and makes recommendations to the board. The deputy chairman and group
chief executive are invited to attend all meetings of the committee. The
committee also makes recommendations to the board concerning the following:
* the re-appointment of any 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 by
rotation provisions of the articles of association;
* any matters relating to the continuation in office as a director of any
director at any time; and
* the appointment of any director to executive or other office, other than to
the positions of chairman and group chief executive where special arrangements
apply.
Remuneration committee
The remuneration committee, comprising Sir Tom McKillop (chairman), Dr Berndt,
Dr Gibson-Smith and Dr Julius, reviews and makes recommendations to the board
on the framework of executive directors' remuneration and its cost. It also
determines, on the board's behalf, specific remuneration packages for each of
the chairman, the deputy chairman, the executive directors, and any employee of
Lloyds TSB Group plc or any subsidiary whose salary exceeds GBP300,000 per
annum. In addition, it determines proposals for the granting of executive share
options.
All the non-executive directors receive the minutes of remuneration committee
meetings and have the opportunity to comment and have their views taken into
account before the committee's decisions are implemented.
Directors' service agreements
The general Lloyds TSB Group policy is for executive directors to have service
agreements with notice periods of no greater than one year, to reflect current
corporate governance best practice. Executive directors are required to give
the Lloyds TSB Group six months' notice if they wish to leave. The Association
of British Insurers and the National Association of Pension Funds published a
joint statement of best practice on executive contracts and severance in
December 2002 and, during 2003, the remuneration committee will consider what
changes would be desirable in respect of service agreements.
Mr Ayliffe, Mr Fairey, Mr Hampton, Mr Kane and Mr Targett each has a service
agreement which the company may terminate by giving one year's notice. Mr Ross's
service agreement, entered into in connection with the arrangements for the
transfer of the business of Scottish Widows to the Lloyds TSB Group in March
2000, provided for two years' notice for the first two years, but since March
2002 the notice period has decreased by one month for each month of service, to
one year's notice. Since March 2003, therefore, Mr Ross's agreement may be
terminated on one year's notice.
Mr Daniels' service agreement provided for two years' notice for the first
eighteen months (from November 2001): after that, the notice period reduced to
one year. Since May 2003, therefore, Mr Daniels' agreement may be terminated on
one year's notice. His contract also provided that if, within eighteen months of
the commencement of his employment, there were to be a change of circumstances
of the company (as defined in the agreement) so that there was, in his
reasonable judgement, a materially adverse effect on his prospects or a material
diminution in his status, he would be entitled to serve notice terminating his
employment and appropriate compensation would be payable to him.
None of the other directors has a service agreement with a notice period of
more than one year.
The remuneration committee has considered the provisions of the UK Listing
Authority's corporate governance code and the recent ABI/NAPF joint statement
mentioned above, relating to compensation in the event of early termination of
directors' service agreements and a departing director's duty to mitigate his
or her loss. The Lloyds TSB Group will have regard to that duty on a case by
case basis when assessing the appropriate level of compensation which may be
payable. It is the Lloyds TSB Group's policy that where compensation on early
termination is due, in appropriate circumstances it should be paid on a phased
basis.
Non-executive directors do not have service agreements and, in accordance with
the articles of association, their appointment may be terminated at any time
without compensation.
84
Employees
As at 31 December 2002, Lloyds TSB Group employed 79,537 people (full-time
equivalent), compared with 81,400 at 31 December 2001. At 31 December 2002
68,697 employees were located in the UK, 4,859 in the Americas, 4,532 in New
Zealand, and 1,449 in the rest of the world. At the same date, 47,895 people
were employed in UK Retail Banking and Mortgages, 6,170 in Insurance and
Investments, 23,173 in Wholesale Markets and International Banking, and 2,299
in other functions.
Lloyds TSB Group is committed to employment policies which follow best
practice, based on equal opportunities for all employees irrespective of sex,
race, national origin, religion, colour, disability, sexual orientation, age or
marital status.
In the UK, Lloyds TSB Group supports Opportunity Now and Race for Opportunity;
campaigns to improve opportunities for women and ethnic minorities in the work
place. Lloyds TSB Group is a member of the Employers' Forum on Disability in
support of employment of people with disabilities. This recognises the need for
ensuring fair employment practices in recruitment and selection, and the
retention, training and career development of disabled staff.
Employees are kept closely involved in major changes affecting them through a
variety of means. In the UK, Lloyds TSB Group has long standing arrangements
with finance sector unions covering both collective and individual
representation of staff. Lloyds TSB Group has gone through substantial changes
in recent years; adjusting for the effect of acquisitions and disposals
underlying staff numbers have reduced by 15,000 since 1995. However, during
this time no material strikes or work stoppages have occurred. Additionally
staff are kept closely involved in major changes affecting them through such
measures as regular briefings, internal communications and opinion surveys as a
way of ensuring 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 Lloyds TSB Group.
Further details are given in "- Compensation".
Share ownership
Directors' interests
The interests of those who were directors at 31 December 2002, all beneficial,
in shares in Lloyds TSB Group plc were:
At At
At 1 January 2002 1 January 2002
31 December (or date of At (or date of
2002 appointment if 31 December 2002 appointment if
Shares: later) later)
M K Atkinson 93,394 124,815 P R Hampton 6,021 -
Ewan Brown 3,548 3,402 D S Julius 2,000 2,000
A C Butler 2,000 2,000 A G Kane 81,248 80,120
J E Daniels 1,029 1,000 Sir Tom McKillop 1,000 1,000
P B Ellwood 183,999 178,751 A E Moore 1,108,475 1,107,396
M E Fairey 75,425 74,158 D P Pritchard 4,446 3,367
S M Forbes 2,000 2,000 M D Ross 2,500 2,500
G J N Gemmell 50,000 30,000 Lord Selborne 3,372 3,372
C S Gibson-Smith 3,151 3,151 M A van den Bergh 5,079 4,000
85
Options to acquire shares of Lloyds TSB Group plc:
At Weighted Exercise Amount of gain
1 January average price of on exercise***
2002 exercise share
Exercised/ options Market
(or date of Granted lapsed At price at granted, price at 2002 2001
appointment during during the 31 31 exercised date of GBP000 GBP000
(if later) year year December December or lapsed exercise
2002 2002
M K Atkinson Exercisable 147,600 97,600 259p
Not exercisable 253,155 - -
Exercisable* - 92,000 670p
Not exercisable* 92,000 232,122 676p
275,349 715p - 577
916+ 442p
1,245+ 591p
91,817+ 733p
252,404+ 715p
J E Daniels Exercisable - - -
Not exercisable 907,780 - -
Exercisable* - - -
Not exercisable* - 1,238,597 700p
330,419 715p
398 474p
P B Ellwood** Exercisable 321,340 211,340 280p
Not exercisable 276,725 - -
Exercisable* - 190,000 657p
Not exercisable* 165,000 357,579 663p
4,146 416p 632.5p 9 -
M E Fairey Exercisable 54,000 - -
Not exercisable 288,329 - -
Exercisable* - 102,809 675p
Not exercisable* 105,809 691,230 701p
345,104 715p
797 474p - 882
P R Hampton Exercisable - - -
Not exercisable - - -
Exercisable* - - -
Not exercisable* - 326,351 740p
326,351 740p
A G Kane** Exercisable 171,547 131,547 252p
Not exercisable 233,721 4,157 442p
Exercisable* - 90,000 716p
Not exercisable* 77,000 531,913 701p
275,349 715p
D P Pritchard Exercisable - - -
Not exercisable 250,096 4,687 416p
Exercisable* - 50,000 860p
Not exercisable* 90,000 571,772 700p
286,363 715p
M D Ross Exercisable - - -
Not exercisable 440,549 - -
Exercisable* - - -
Not exercisable* - 756,283 657p
315,734 715p
Gain made by Dennis Holt, who left the board on 31 August 2001 - 53
Gain made by A E Moore, who no longer holds share options - 281
9 1,793
Share retention plan
J E Daniels Not exercisable 216,763 - - 216,763 (see page 81)
86
Options may be exercised between 2003 and 2012.
Options were not exercisable because they had not been held for the
period required by the relevant scheme or the performance conditions
had not been met.
* Market price of shares is below the share option exercise price.
** These directors will receive additional Lloyds TSB Group shares on
exercising share options held on 28 December 1995. These shares will
compensate them for the special dividend of 68.3p per share which was
paid to former TSB Group shareholders in 1996 following the merger with
Lloyds Bank, but which was not paid to optionholders.
*** This is the difference between the market price of the shares on the
day on which the share option was exercised and the price paid for the
shares, and includes the value of shares issued to compensate directors
for the special dividend mentioned above.
+ These share options lapsed following termination of Mr Atkinson's
service contract.
The market price for a share in the Company at 1 January 2002 and 31
December 2002 was 746p and 446p respectively. The range of prices
between 1 January 2002 and 31 December 2002 was 427.5p to 817p.
None of the other directors at 31 December 2002 had options to acquire
shares in Lloyds TSB Group or its subsidiaries.
Scottish Widows loan capital
At the end of the year, Mr Ross had an interest in GBP28,394 of Scottish Widows
Group Limited floating rate unsecured loan notes 2008 (2001: GBP43,194).
Directors' non-beneficial interests
Directors had non-beneficial interests as follows:
1. Mr Daniels, Mr Ellwood, Mr Fairey, Mr Hampton, Mr Kane, Mr Moore, Mr
Pritchard, Mr Ross and Mr van den Bergh, together with some 80,000 other
employees, were potential beneficiaries in the 1,721,503 and 1,684,041 shares
held at the end of the year by the Lloyds TSB qualifying employee share
ownership trust and the Lloyds TSB Group employee share ownership trust,
respectively. 2,417,245 and 1,952,179 shares, respectively, were held by these
trusts at the beginning of the year.
2. At the beginning and end of the year, Mr Ellwood also had a
non-beneficial interest in 7,000 shares held in another trust.
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.
Corporate governance
The Board considers that good governance is central to achieving the Lloyds TSB
Group's governing objective of maximising shareholder value. Lloyds TSB Group
has complied throughout the year with the provisions of the UK Listing
Authority's corporate governance code where the requirements are of a
continuing nature.
Internal control
The board of directors is responsible for the Lloyds TSB Group's system of
internal control, which is designed to ensure effective and efficient
operations, internal control, including financial reporting, and compliance
with laws and regulations. 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 materiality of relevant risks, the
likelihood of a loss being incurred and the costs of control. It follows,
therefore, that the system of internal control can only provide reasonable but
not absolute assurance against the risk of material loss.
The directors and senior management are committed to maintaining a
control-conscious culture across all areas of operation. This is communicated
to all employees by way of procedures manuals and regular management briefings.
Key business risks are identified, and these are controlled by means of
procedures such as physical controls, credit, trading and other authorisation
limits and segregation of duties. There are well established budgeting and
forecasting procedures in place and reports are presented regularly to the
Board detailing the results of each principal business unit, variances against
budget and prior year, and other performance data. Internal controls contain
procedures which assist the Board in identifying new and emerging risks.
The effectiveness of the internal control system is reviewed regularly by the
Board and the Audit Committee, which also receives reports of reviews
undertaken around the Lloyds TSB Group by Group Risk Management. The Audit
Committee receives reports from the external 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.
The US Sarbanes-Oxley Act of 2002
The US Sarbanes-Oxley Act came into force at the end of July 2002. Many of the
rules implementing the Act are currently being written and proposed by the
Securities and Exchange Commission. As a result, the detailed provisions of the
Act are likely to become effective during 2003. Lloyds TSB Group will comply
with those provisions of the Act applicable to foreign issuers as and when they
become effective. The Board takes the view that Lloyds TSB Group already has a
sound corporate governance framework, good processes for the accurate and
timely reporting of its financial position and results of operations and an
effective and robust system of internal controls. Consequently, Lloyds TSB
Group's approach to compliance with the Act principally involves the
development and adjustment of the existing corporate governance framework and
associated processes concerning reporting, internal controls and other relevant
matters. In particular, some additional work has been undertaken to ensure that
the Group Chief Executive and the Group Finance Director are in a position to
provide the certifications required by the Act in respect of this report for
the year ended 31 December 2002.
Disclosure controls and procedures
Within 90 days prior to the date of this report, the Lloyds TSB Group, under
the supervision and with the participation of the Lloyds TSB Group's
management, including the Group Chief Executive and Group Finance Director,
performed an evaluation of the effectiveness of the Lloyds TSB Group's
disclosure controls and procedures. Based on this evaluation, the Group Chief
Executive and Group Finance Director concluded that the Lloyds TSB Group's
disclosure controls and procedures are effective for gathering, analysing and
disclosing the information that the Lloyds TSB Group is required to disclose in
the reports that it files under the Securities Exchange Act of 1934, within the
time periods specified in the SEC's rules and forms. The Lloyds TSB Group's
management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures, which by their nature can provide only
reasonable assurance regarding management's control objectives.
There have been no significant changes in the Lloyds TSB Group's internal
controls or other factors that could significantly affect internal controls
subsequent to the date of their evaluation.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Major shareholders
Lloyds TSB Group plc does not know of any shareholder owning beneficially,
directly or indirectly, five per cent or more of the shares of Lloyds TSB Group
plc, or of any shareholder having more than five per cent of the voting rights.
At 31 December 2002, those who were directors of Lloyds TSB Group plc on that
day beneficially owned the following ordinary shares, not including options:
Title of Class Identity of Person Amount Owned Per cent of
or Group Class
Ordinary shares, Directors (18 1,628,687 0.03
nominal value 25 persons)
pence each
In addition, those directors held, as at 31 December 2002, options to acquire
5,896,750 shares, all of which were granted pursuant to the executive share
option schemes, sharesave share option schemes and share retention plan.
Lloyds TSB Group plc is not owned or controlled directly or indirectly by
another corporation or by any government and Lloyds TSB Group plc is unaware of
any arrangements which might result in a change in control.
Related party transactions
Lloyds TSB Group, as at 31 December 2002, had related party transactions with 4
directors and 31 officers. See Note 42 to the Consolidated Financial
Statements. The transactions in question were made in the ordinary course of
business, were made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions
with other persons, and did not involve more than the normal risk of
collectibility or present other unfavourable features.
89
REGULATION
European Union Directives
European Union ("EU") Directives, which are required to be implemented in
member states through national legislation, have a strong influence over the
framework for supervision and regulation of banking and financial services in
the UK. The banking Directives aim to harmonise banking regulation and
supervision throughout member states by setting out minimum standards in key
areas such as capital adequacy and deposit and investor compensation schemes.
The UK has now largely implemented these minimum requirements. The Directives
also require member states to give "mutual recognition" to each other's
standards of regulation. Under the Second Banking Co-ordination Directive the
concept of mutual recognition has also been extended to create the "passport"
concept: this gives a bank which has been authorised in its "home" state the
freedom to establish branches in, and to provide cross-border services into,
other member states without the need for additional local authorisation.
Whilst credit institutions such as those in Lloyds TSB Group are primarily
regulated in their home state by a local regulator, the EU Directives prescribe
minimum criteria for the authorisation of credit institutions and the
prudential supervision applicable to them. Investment firms are subject to a
similar regulatory environment and can obtain a "passport" under the Investment
Services Directive. Despite the application of the "passports" a member state
can impose certain requirements on the conduct of banking and investment
activities in its boundaries (including conduct of business rules).
Credit institutions and investment firms are required to make adequate capital
provisions for risks entered into: the Directives set out the deemed quality
and acceptable relative proportions of various types of capital. The Directives
also regulate permissible counterparty exposures, provide for the supervision
of consolidated financial groups' capital adequacy requirements and define
permissible exposures to individual or linked counterparties.
During 2001 the Basel Committee on Banking Supervision has issued further
consultation documents with the purpose of replacing the Capital Accord of 1988
with a new capital adequacy framework. The outcome of these consultations is
likely to result in comprehensive changes to the capital adequacy regulations
applicable to Lloyds TSB Group. The proposals for the new framework cover three
main areas:
* Minimum capital requirements and methodologies for allocation of regulatory
capital for credit and other risks.
* A supervisory review process, including the setting of capital ratios by bank
supervisors.
* Improvement in the stability of the financial system by reliable and timely
disclosure of risk information.
It is not expected that the eventual framework will be implemented before
31 December 2006.
The UK financial services industry will be affected by a number initiatives
currently being developed by the EU; work continues on the Financial Services
Action Plan, which is intended to create a single market for financial services
by 2005, and there are proposals for a new Consumer Credit Directive. The
Lloyds TSB Group will continue to monitor the progress of these initiatives and
assess the likely impact on its business.
UK regulations
In the UK, the fundamental concepts of constitutional issues, company
registration and the format and production of company annual reports and
accounts are controlled by the UK Companies Act 1985. In addition, as a company
listed on the London Stock Exchange Limited, Lloyds TSB Group plc is obliged to
comply with a code of practice known as the Combined Code regarding corporate
governance. As part of the continuing obligations of Lloyds TSB Group under the
rules of that Exchange it must disclose, through the Exchange, major
developments in its sphere of activity which may lead to substantial movement
in the price of its securities listed on that Exchange.
The undertaking of certain financial activities in the UK subjects the relevant
entity to further regulatory regimes. The UK government has implemented major
changes to the supervisory regimes affecting financial services businesses. In
accordance with the provisions of the Financial Services and Markets Act 2000
("FSMA") on 1 June 2002, the Financial Services Authority ("FSA") completed the
process of assuming responsibility for the regulation and oversight of all
financial services activity in the UK, including investment in securities and
long-term insurance contracts.
Any individual who carries out what is known as a 'controlled function' in a
financial services firm needs to be approved by the FSA. Controlled functions
include those of directors, the finance officer, risk management, compliance,
anti-money laundering and internal audit. The FSA have established a Code of
Practice for Approved Persons; shortfalls in their conduct can lead to
sanctions against the individual by the FSA.
90
The most significant regulatory regimes relevant to Lloyds TSB Group are
discussed below.
Banking
Primary responsibility for the prudential supervision of UK banks was
transferred from the Bank of England to the FSA under the Bank of England Act
1998. The Bank of England retained its monetary policy role and responsibility
for the overall stability of the financial system. The FSA carries out its
supervision of the UK banking sector through the collection of information from
a series of periodic statistical and prudential returns covering both sterling
and non-sterling operations, meetings with the senior management of the banks
and reports obtained from skilled persons. The regular reports include
operating statements and returns covering (amongst other things) capital
adequacy, liquidity, large single exposures and large exposures to related
borrowers, lendings by industry sector and geographical area, maturity analyses
and foreign exchange activities. A risk-based approach for the supervision of
all banks was introduced in 1998; under this approach, the starting point for
the FSA's supervision of a bank is based on a systematic analysis of that
bank's risk profile. Having determined the level of inherent risk in the bank a
minimum capital adequacy requirement is established, which the bank is required
to meet at all times.
UK banks are required to maintain, in interest-free accounts at the Bank of
England, a non-operational cash balance calculated as a percentage of eligible
liabilities, which are, broadly, a measure of the sterling resources available
to the banks for lending purposes.
Depositors in the UK are provided with protection for their deposits with
authorised institutions. Depositors with a failed institution are entitled to
receive 100 per cent of the first GBP2,000 and 90 per cent of the next GBP33,000
of their protected deposits from the UK deposit protection fund, subject to a
maximum amount of GBP31,700, including both principal and accrued interest. All
authorised institutions are required to be members of the deposit protection
scheme and are subject to a levy in proportion to their deposit base, which
includes deposits in sterling, other European Economic Area currencies and Euro,
to finance the deposit protection fund.
The Banking Code (the "Code") is a voluntary code agreed by UK banks and
building societies which became effective in 1992, with subsequent revisions in
1994, 1998, 2001 and 2003, and which has been adopted by Lloyds TSB Group. The
Code defines the responsibilities of the banks and building societies to their
personal customers in connection with the operation of their accounts and sets
out minimum standards of service that these customers can expect from
institutions which subscribe to the Code. Compliance with the Code is monitored
by the Banking Code Standards Board.
The Business Banking Code is a voluntary code agreed by UK banks which became
effective at the end of March 2002, with a subsequent revision in 2003 and
which has been adopted by Lloyds TSB Group. The Business Banking Code defines
the responsibilities of the banks to their smaller business customers in
connection with UK operation of their accounts and sets out minimum standards
of service that such customers can expect from institutions which subscribe to
the Business Banking Code. Compliance with the Business Banking Code is
monitored by the Banking Code Standards Board.
Investment business
The FSA is responsible for the authorisation and supervision of those firms
which are engaged in investment business as defined in the FSMA. As part of the
authorisation process, the FSA reviews applicants to ensure that they satisfy
the necessary criteria including honesty, competence and financial soundness,
to engage in regulated activity. Lloyds TSB Group's investment businesses
became authorised by the FSA through being "grandfathered" as having been
authorised under previous legislation to carry on investment business.
The FSA's regulatory approach aims to focus and reinforce the responsibility of
the management of each authorised person to ensure that it takes reasonable
care to organise and control its affairs responsibly and effectively and that
it develops and maintains adequate risk management systems. The FSA Handbook of
Rules and Guidance ('the Handbook') sets out the principles of market conduct
and the rules to which investment businesses are required to adhere.
Under the FSMA a compulsory single, industry wide, investor's compensation
scheme, the Financial Services Compensation Scheme has been set up. The Scheme
is financed by a levy system and the FSMA allows for the establishment of
different funds for different kinds of business and for different maximum
amounts of claim. The limit for investment business compensation is GBP48,000.
"Listed money market institutions" are regulated by the FSA which expects such
entities to observe the "London Code of Conduct" and other regulations
contained in the paper entitled "The Regulation of the Wholesale Cash and OTC
Derivatives Markets" which was originally issued by the Bank of England to
regulate the operation of the wholesale money markets. Lloyds TSB Bank has been
granted listed money market institution status.
91
Insurance
The insurance companies within the Lloyds TSB Group became authorised by the
FSA through being "grandfathered" as having been authorised under previous
legislation. While the authorisation and supervision of insurance companies is
subject to the same FSA regulatory approach as other investment companies,
rules exist to:
* Restrict the carrying out of insurance business in the UK to persons
authorised by the FSA.
* Require the separation of the long-term business assets of an insurance
company from the assets attributable to shareholders.
* Require, and define the role of, an appointed actuary for each insurance
company carrying out long-term business in the UK. The appointed actuary is
responsible for monitoring the financial health of the company.
* Require the directors to prepare an annual report on the solvency position of
the insurer. The valuation basis for assets is defined and there are limits on
the extent to which certain categories of assets are allowable in determining
the solvency position. The appointed actuary must calculate the value of
long-term liabilities and details of his investigations are contained in the
directors' solvency report. In determining the value of long-term liabilities
the appointed actuary must use a method and valuation basis permitted by the
Handbook.
* Require the maintenance of a prescribed solvency margin at all times. The
amount of the solvency margin depends upon the amount and type of business an
insurance company writes. Failure to maintain the required solvency margin
gives the regulator grounds for intervention.
* Prevent an insurer, and its parent, from declaring a dividend when long-term
business assets do not exceed long-term liabilities. Furthermore, surplus
assets in the long-term fund can only be transferred out once the appointed
actuary has completed an investigation.
* Prevent the use of the long-term business assets for purposes other than
supporting long-term business.
The Financial Services Compensation Scheme also applies to insurance business
written by an insurer authorised by the FSA or by the UK branch of an EEA firm
carrying on "home state regulated activity". The limit of compensation in
respect of long-term insurance contracts is 90 per cent of the value of the
contract with no maximum.
Other relevant legislation and regulation
The Consumer Credit Act 1974 regulates both brokerage and lending activities in
the provision of personal secured and unsecured lending. The Data Protection
Acts 1984 and 1998 regulate, among other things, the retention and use of data
relating to individual customers. The Unfair Terms in Consumer Contracts
Regulations 1994 came into force in July 1995. These Regulations together with
the Unfair Contract Terms Act 1977 apply to certain contracts for goods and
services entered into with customers. The main effect of the Regulations is
that a contractual term covered by the Regulations which is "unfair" will not
be enforceable against a consumer. These Regulations apply, among other things,
to mortgages and related products and services.
The Mortgage Code is a voluntary code followed by lenders and mortgage
intermediaries dealing with customers in the UK who want a loan secured on
their home. It sets standards of good mortgage practice, which are followed as
a minimum standard by those subscribing to it. Compliance with the Mortgage
Code is monitored by the Mortgage Code Compliance Board. A new mortgage
regulation regime is currently being developed by the FSA and is expected to
take effect from 31 October 2004.
The General Insurance Standards Council ("GISC") is an independent,
non-statutory organisation that was officially launched on 3 July 2000 to
regulate the sales, advice and service standards of its members. GISC members
may be insurers, intermediaries or others involved in general insurance such as
claims handlers. Members' obligations to individuals buying insurance for
themselves and their families are explained fully in the GISC Private Customer
Code, while the GISC Commercial Code explains members' obligations in relation
to businesses buying insurance. Members are monitored to make sure they follow
the standards in the Code.
In December 2001 the UK government announced that the FSA would become
responsible for regulating the sale and administration of general insurance
(e.g. motor, property and liability insurance) and pure protection contracts
(i.e. critical illness, income protection, term assurance and long-term care
assurance). The government's legislation, and the FSA's rules subsequently made
under it, will, when finalised, implement the Insurance Mediation Directive
("IMD") in the UK. The regulation of insurance intermediation will commence
from 14 January 2005.
The Financial Ombudsman was established pursuant to the Financial Services and
Markets Act 2000 to provide customers with a free, independent service designed
to resolve disputes where the customer is not satisfied with the response
received from the regulated firm. The Financial Ombudsman Scheme ("FOS") was
established at "N2" (30 November 2001) when the Financial Services Authority
became regulator for the financial services industry. The FOS resolve disputes
that cover most financial products and services provided in (or from) the
United Kingdom - from insurance and pension plans to bank accounts and
92
investments. The decisions made by the FOS are binding on firms. Under section
229 of the Financial Services and Markets Act 2000, if a complaint is
determined in favour of the complainant, the determination may include a money
award against the firm of such amount as the Ombudsman considers fair
compensation for financial loss and subject to the maximum limit of GBP100,000,
or a direction that the firm take such steps in relation to the complainant as
the Ombudsman considers just and appropriate or, both of these.
Rest of the world
Lloyds TSB Group operates in many countries around the world and its overseas
branches, subsidiaries and associated companies are subject to reporting and
reserve requirements and controls imposed by the relevant central banks and
regulatory authorities.
93
LISTING INFORMATION
The information in this section has been extracted from publicly available
documents from various sources, including officially prepared materials from
the London Stock Exchange, and has not been prepared or independently verified
by us.
The ordinary shares of Lloyds TSB Group plc are listed and traded on the London
Stock Exchange under the symbol "LLOY.L". The prices for shares as quoted in
the official list of the London Stock Exchange are in pounds sterling. The
following table shows the reported high and low closing prices for the ordinary
shares on the London Stock Exchange.
Price per share
(in pence)
High Low
Annual prices:
2002 817.0 427.5
2001 772.0 590.0
2000 774.5 517.0
1999 1,060.0 725.0
1998 1,070.5 575.5
Quarterly prices:
2003:
First quarter 459.0 295.75
2002:
Fourth quarter 591.0 427.5
Third quarter 665.0 456.5
Second quarter 817.0 624.0
First quarter 775.0 680.0
2001:
Fourth quarter 757.0 644.0
Third quarter 742.0 590.0
Second quarter 772.0 684.5
First quarter 751.0 610.0
Monthly prices:
May 2003 454.5 405.25
April 2003 423.0 326.0
March 2003 369.75 295.75
February 2003 431.25 341.0
January 2003 459.0 370.5
December 2002 545.0 427.5
On 18 June 2003, the closing price of shares on the London Stock Exchange was
474.5 pence, equivalent to $797.07 per share translated at the Noon Buying Rate
of $1.6798 per GBP1.00 on 18 June 2003.
94
Lloyds TSB Group plc's ADRs have been traded on the over-the-counter market in
the US under the symbol "LLDTY" since March 2000. Since 27 November 2001 Lloyds
TSB Group plc ADSs have been listed on The New York Stock Exchange under the
symbol "LYG". The prices for Lloyds TSB Group plc's ADRs, as quoted below, are
in US dollars. Each ADS represents four ordinary shares. The following table
shows the reported high and low closing prices for the ADRs in the
over-the-counter market in the US.
Price per ADR
(in US dollars)
High Low
Annual prices:
2001 (to 26 November 2001) 46.00 34.75
2000 45.27 33.50
Quarterly prices:
2001:
Fourth quarter (to 26 November 2001) 43.88 38.25
Third quarter 44.00 35.50
Second quarter 43.94 38.94
First quarter 46.00 34.75
The following table shows the reported high and low closing prices for ADSs on
the New York Stock Exchange:
Price per ADS
(in US dollars)
High Low
Annual prices:
2002 48.55 27.85
2001 (from 27 November 2001) 44.99 41.30
Quarterly prices:
2003:
First quarter 29.79 19.65
2002:
Fourth quarter 37.75 27.85
Third quarter 41.84 28.97
Second quarter 48.55 38.30
First quarter 45.30 39.16
2001:
Fourth quarter (from 27 November 2001) 44.99 41.30
Monthly prices:
May 2003 30.02 26.21
April 2003 27.28 20.98
March 2003 23.61 19.65
February 2003 27.91 22.00
January 2003 29.79 24.99
December 2002 34.27 27.85
On 18 June 2003, the closing price of ADSs on the New York Stock Exchange was
$32.13
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DIVIDENDS
Lloyds TSB Group plc has paid an interim and final dividend each year since the
merger of TSB Group plc and Lloyds Bank Plc in 1995. Dividends are paid in May
and October and the record date for the purpose of determining the shareholders
who will be entitled to a dividend is approximately 10 weeks before the
dividend payment date. TSB Group plc, which was re-named Lloyds TSB Group plc
after the merger, has paid an interim and final dividend every year after its
flotation on the London Stock Exchange in September 1986, with the exception of
1986 when no final dividend was paid. Lloyds TSB Bank has paid a dividend every
year since its incorporation as Lloyds Banking Company Limited in 1865.
Lloyds TSB Group plc's ability to pay dividends is restricted under UK company
law. Dividends may only be paid if distributable profits are available for that
purpose. In the case of a public limited company, a dividend may only be paid
if the amount of net assets is not less than the aggregate of the called-up
share capital and undistributable reserves and if the payment of the dividend
will not reduce the amount of the net assets to less than that aggregate. In
addition, a company cannot pay a dividend if any of its UK insurance
subsidiaries is insolvent on a regulatory valuation basis or in the case of
regulated entities, if the payment of a dividend results in regulatory capital
requirements not being met. Similar restrictions exist over the ability of
Lloyds TSB Group plc's subsidiary companies to pay dividends to their immediate
parent companies. Furthermore, in the case of Lloyds TSB Group plc, dividends
may only be paid if sufficient distributable profits are available for
distributions due in the financial year on certain preferred securities. The
Board has the discretion to decide whether to pay a dividend and the amount of
any dividend. In making this decision, the Board is mindful of the level of
dividend cover and, consequently, profit growth may not necessarily result in
increases in the dividend. The Board recognises the importance attached by
shareholders to the Lloyds TSB Group's dividend. Dividends are paid through The
Bank of New York which acts as paying and transfer agent for the American
Depositary Shares.
The table below sets out the interim and final dividends which were
declared in respect of the ordinary shares for fiscal years 1998 through 2002.
The sterling amounts have been converted into US dollars at the Noon Buying
Rate in effect on each payment date.
Interim Interim Final dividend Final dividend
dividend per dividend per per share per share
share share
GBP $ GBP $
1998 0.067 0.114 0.155 0.253
1999 0.081 0.134 0.185 0.289
2000 0.093 0.136 0.213 0.306
2001 0.102 0.149 0.235 0.344
2002 0.107 0.167 0.235 0.374
There are no UK governmental laws, decrees or regulations that affect the
remittance of dividends or other shareholder payments to non-residents of the
UK who hold shares of Lloyds TSB Group plc.
MEMORANDUM AND ARTICLES OF ASSOCIATION OF LLOYDS TSB GROUP PLC
A summary of the material provisions of Lloyds TSB Group plc's memorandum and
articles of association was incorporated into Lloyds TSB Group plc's
registration statement filed with the SEC on 25 September 2001 and is therefore
incorporated into this annual report by reference to that statement.
EXCHANGE CONTROLS
There are no UK laws, decrees or regulations that restrict Lloyds TSB Group
plc's export or import of capital, including the availability of cash and cash
equivalents for use by Lloyds TSB Group, or that affect the remittance of
dividends or other shareholder payments to non-UK holders of Lloyds TSB Group
plc shares, except as otherwise set out in "Taxation".
96
TAXATION
UK Taxation
The following discussion is intended only as a general guide to current UK tax
legislation, what is understood to be current UK Inland Revenue practice and
the terms of the current UK/US income tax treaty (the "Treaty") and the New
Treaty (as defined below), all of which are subject to change at any time,
possibly with retroactive effect. On 24 July, 2001, the UK and the US entered
into a new income tax treaty (the "New Treaty"), which has been ratified by
both the UK Parliament and the US Senate and will enter into force when
instruments of ratification are exchanged. The UK Inland Revenue is the UK
government department responsible for assessing and collecting UK tax revenues.
The discussion is intended as a general guide and only applies to persons who
are the beneficial owners of their ordinary shares or ADSs. References below to
a US Holder are to that term as defined, and subject to the exclusions
described in the introduction, below under "- US federal income tax
considerations". It may not apply to certain shareholders or ADS holders, such
as dealers in securities. Any person who is in any doubt as to his tax position
should consult his own professional adviser.
Taxation of chargeable gains
UK residents
A disposal (or deemed disposal) of ordinary shares or ADSs by a shareholder or
holder of ADSs resident or (in the case of an individual) ordinarily resident
for tax purposes in the UK may, depending on the shareholder's or ADS holder's
particular circumstances, and subject to any available exemption or relief,
give rise to a chargeable gain or an allowable loss for the purposes of UK
taxation on chargeable gains.
Persons, other than US Holders, temporarily non-resident in the UK
A shareholder or ADS holder who is an individual and who has, on or after 17
March 1998, ceased to be resident and ordinarily resident for tax purposes in
the UK for a period of less than five years of assessment and who disposes of
ordinary shares or ADSs during that period may be liable, on return to the UK,
to UK taxation on chargeable gains arising during the period of absence,
subject to any available exemption or relief.
US Holders
Subject to the provisions set out in the next paragraph in relation to
temporary non-residents, US Holders will not normally be liable for UK tax on
chargeable gains unless they carry on a trade, profession or vocation in the UK
through a branch or agency and the ordinary shares or ADSs are or have been
used or held by or for the purposes of the branch or agency, in which case such
US Holder might, depending on individual circumstances, be liable to UK tax on
chargeable gains on any disposition of ordinary shares or ADSs. A US Holder who
is only temporarily not resident in the UK may, under anti-avoidance
legislation, still be liable for UK tax on chargeable gains realised, subject
to any available exemption or relief.
A US Holder who is an individual and who has, on or after 17 March 1998, ceased
to be resident or ordinarily resident for tax purposes in the UK for a period
of less than five years of assessment and who disposes of ordinary shares or
ADSs during that period may be liable, on return to the UK, to UK taxation on
chargeable gains arising during the period of absence, subject to any available
exemption or relief.
Other non-UK resident persons
Subject to the provisions set out above under "- Persons, other than US
Holders, temporarily non-resident in the UK", shareholders or ADS holders who
are neither resident nor ordinarily resident in the UK will not normally be
liable for UK tax on chargeable gains unless they carry on a trade, profession
or vocation in the UK through a branch or agency and the ordinary shares or
ADSs are or have been used or held by or for the purposes of the branch or
agency, in which case such shareholder or ADS holder might, depending on
individual circumstances, be liable to UK tax on chargeable gains on any
disposition of ordinary shares or ADSs. An individual holder of ordinary shares
or ADSs who is only temporarily not resident in the UK may, under
anti-avoidance legislation, still be liable for UK tax on chargeable gains
realised, subject to any available exemption or relief.
Taxation of dividends
UK residents
Lloyds TSB Group will not be required to withhold tax at source when paying a
dividend on the ordinary shares or ADSs.
An individual shareholder or ADS holder who is resident in the UK for tax
purposes will be entitled to a tax credit in respect of any dividend received
from us and will be taxable on the gross dividend, which is the aggregate of
the dividend received and related tax credit. The value of the tax credit will
be equal to one-ninth of the dividend received (and, therefore, 10 per cent of
the gross dividend). The gross dividend will be treated as an individual's
marginal income. The tax credit will, however, be treated as discharging the
individual's liability to income tax in respect of the gross dividend, unless
and except to the extent that the gross dividend falls above the threshold for
the higher rate of income tax. A UK resident individual shareholder or ADS
97
holder who is liable to income tax at the higher rate will be subject to tax at
the rate applicable to dividends for such shareholders or ADS holders
(currently 32.5 per cent) on the gross dividend. The tax credit will be set
against but will not fully discharge such shareholder's or ADS holder's tax
liability on the gross dividend and he will have to pay additional tax equal to
22.5 per cent of the gross dividend, being 25 per cent of the dividend
received, to the extent that such sum, when treated as marginal income, falls
above the threshold for the higher rate of income tax.
There will be no payment of the tax credit or any part of it to an individual
whose liability to income tax on the dividend and the related tax credit is
less than the tax credit, except where the individual holds the relevant shares
through a personal equity plan or individual savings account and the dividend
is received into such plan or account on or before 5 April 2004.
UK resident shareholders or ADS holders which are not liable to UK tax on
dividends, including pension funds and charities, will not be entitled to
reclaim the tax credits in respect of dividends although charities will be
entitled to a payment by the UK Inland Revenue of a specified proportion of any
dividend paid by us to the charities on or before 5 April 2004, that proportion
declining on a year by year basis.
Subject to an exception for some insurance companies with overseas business, UK
resident corporate shareholders or ADS holders will generally not be subject to
corporation tax in respect of dividends received from Lloyds TSB Group, but
will not be entitled to the payment of any tax credit with respect to the
dividends.
US Holders
Lloyds TSB Group will not be required to withhold tax at source when paying a
dividend on the ordinary shares or ADSs to a US Holder.
A US Holder is entitled under the terms of the Treaty, in principle, to receive
a payment from the UK Inland Revenue in respect of a dividend from us in an
amount equal to the tax credit (the "Tax Credit Amount") to which a UK resident
individual is generally entitled in respect of the dividend. This is an amount
equal to one-ninth of the dividend received. However, that entitlement is
subject to a deduction withheld under the Treaty. The amount of such deduction
will equal the Tax Credit Amount, i.e. one-ninth of the dividend. Therefore, a
US Holder will not be able to claim any payment from the UK Inland Revenue in
respect of a dividend from Lloyd TSB Group.
When the New Treaty comes into effect (and the Treaty ceases to apply), a US
Holder will not be entitled to claim a payment from the UK Inland Revenue in
respect of a dividend from Lloyds TSB Group because the New Treaty does not
provide for that entitlement.
Other non-UK resident persons
Lloyds TSB Group will not be required to withhold tax at source when paying a
dividend on the ordinary shares or ADSs to a holder, other than a US Holder, who
is not resident for tax purposes in the UK. Holders of ordinary shares or ADSs,
other than US Holders, who are not resident for tax purposes in the UK and who
receive a dividend from us will not have any further UK tax to pay in respect of
the dividend, but will not normally be able to claim any additional payment in
respect of the dividend from the UK Inland Revenue under any applicable double
tax treaty.
Stamp duty and stamp duty reserve tax
UK residents, US Holders and other non-UK resident persons
Any conveyance or transfer on sale of ordinary shares (whether effected using
the CREST settlement system or not) will be subject to UK stamp duty or stamp
duty reserve tax ("SDRT"). The transfer on sale of ordinary shares will be
liable to ad valorem UK stamp duty or SDRT, generally at the rate of 0.5 per
cent of the consideration paid (rounded up to the next multiple of GBP5 in the
case of stamp duty). Stamp duty is usually the liability of the purchaser or
transferee of the ordinary shares. An unconditional agreement to transfer such
ordinary shares will be liable to SDRT, generally at the rate of 0.5 per cent
of the consideration paid, but such liability will be cancelled, or, if already
paid, refunded, if the agreement is completed by a duly stamped transfer within
six years of the agreement having become unconditional. SDRT is normally the
liability of the purchaser or transferee of the ordinary shares.
Where Lloyds TSB Group issue ordinary shares or a holder of ordinary shares
transfers such shares to the custodian or nominee for the depositary to
facilitate the issue of ADSs to him representing the ordinary shares or to a
person providing clearance services (or their nominee or agent), a liability to
UK stamp duty or SDRT at the rate of 1.5 per cent (rounded up to the next
multiple of GBP5 in the case of the stamp duty) of either the issue price or, in
the case of transfer, the listed price of the ordinary shares, calculated in
sterling, will arise. Where a holder of ordinary shares transfers such shares
to the custodian or nominee for the depositary or clearance service this charge
will generally be payable by the person receiving the ADSs or transferring the
ordinary shares into the clearance service.
A liability to stamp duty at the fixed rate of GBP5 will arise as a result of
the cancellation of any ADSs with the ordinary shares that they represent being
transferred to the ADS holder.
98
No liability to UK stamp duty or SDRT will arise on a transfer of ADSs provided
that any document that effects such transfer is not executed in the UK and that
it remains at all subsequent times outside the UK. An agreement to transfer
ADSs will not give rise to a liability to SDRT.
US federal income tax considerations
The following summary describes certain US federal income tax consequences of
the acquisition, ownership and disposition of ADSs or ordinary shares, but it
does not purport to be a comprehensive description of all of the tax
considerations that may be relevant to a decision to acquire such securities.
The summary applies only to holders that hold ADSs or ordinary shares as
capital assets and does not address special classes of holders, such as:
* certain financial institutions;
* insurance companies;
* dealers in securities or foreign currencies;
* holders holding ADSs or ordinary shares as part of a hedge, straddle or other
conversion transaction;
* holders whose "functional currency" is not the US dollar;
* holders liable for alternative minimum tax;
* partnerships or other entities classified as partnerships for US federal
income tax purposes; or
* a holder that owns 10 per cent or more of the voting shares of Lloyds TSB
Group plc.
In addition, the summary is based in part on representations of the
Depositary and assumes that each obligation provided for in or otherwise
contemplated by the Deposit Agreement or any other related document will be
performed in accordance with its terms. The US Treasury has expressed concerns
that parties to whom ADSs are pre-released may be taking actions that are
inconsistent with the claiming of foreign tax credits for US Holders of ADSs.
Accordingly, the analysis of the creditability of UK taxes described below
could be affected by future actions that may be taken by the US Treasury.
The summary is based upon tax laws of the US including the Internal Revenue
Code of 1986, as amended to the date hereof (the "Code"), administrative
pronouncements, judicial decisions and final, temporary and proposed Treasury
Regulations, as well as upon the Treaty and the New Treaty, as appropriate,
changes to any of which may affect the tax consequences described herein
possibly with retroactive effect. Except as discussed under "-Taxation of
distributions", application of the New Treaty will not affect this summary.
Prospective purchasers of the ADSs or ordinary shares should consult their own
tax advisors as to the US, UK or other tax consequences of the purchase,
ownership and disposition of such securities in their particular circumstances,
including the effect of any state or local tax laws.
As used herein, a "US Holder" is a beneficial owner of ADSs or shares that is,
for US federal income tax purposes:
* a citizen or resident of the US;
* a corporation or a partnership created or organized in or under the laws of
the US or of any political subdivision thereof;
* an estate the income of which is subject to US federal income taxation
regardless of its source; or
* a trust subject to the control of one or more US persons and the primary
supervision of a US court.
For US federal income tax purposes, US Holders of ADSs will be treated as the
owners of the underlying ordinary shares.
Taxation of distributions
To the extent paid out of current or accumulated earnings and profits of Lloyds
TSB Group plc (as determined in accordance with US federal income tax
principles), distributions made with respect to ADSs or ordinary shares (other
than certain distributions of capital stock of Lloyds TSB Group plc or rights
to subscribe for shares of capital stock of Lloyds TSB Group plc) will be
includible in the income of a US Holder as ordinary dividend income. Such
dividends will not be eligible for the "dividends received deduction" generally
allowed to corporations under the Code. The amount of the distribution will
equal the US dollar value of the pounds sterling received, calculated by
reference to the exchange rate in effect on the date such distribution is
received (which, for holders of ADSs, will be the date such distribution is
received by the Depositary), whether or not the Depositary or US Holder in fact
converts any pounds sterling received into US dollars at that time. Any gains
or losses resulting from the conversion of pounds sterling into US dollars will
be treated as ordinary income or loss, as the case may be, of the US Holder and
will be US source.
99
A US Holder may, under the Treaty, elect to claim a foreign tax credit in
respect of the Tax Credit Amount. A US Holder who so elects must include the
Tax Credit Amount in income. Under the New Treaty no such election would be
available.
The limitation of foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. For this purpose, any dividends
paid by Lloyds TSB Group plc on ADSs or ordinary shares will generally
constitute "passive income" or, in the case of US financial service providers,
may be "financial services income".
Taxation of capital gains
Gain or loss realised by a US Holder on (i) the sale or exchange of ADSs or
ordinary shares or (ii) the Depositary's sale or exchange of ordinary shares
received as distributions on the ADSs will be subject to US federal income tax
as capital gain or loss in an amount equal to the difference between the US
Holder's tax basis in the ADSs or ordinary shares and the amount realised on
the disposition. Gain or loss, if any, will be US source. US Holders should
consult their tax advisors regarding the US federal tax treatment of capital
gains, which may be taxed at lower rates than ordinary income for individuals,
and losses, the deductibility of which is subject to limitations.
Deposits and withdrawals of ordinary shares in exchange for ADSs will not
result in taxable gain or loss for US federal income tax purposes.
Information reporting and backup withholding
Dividends paid on ADSs or ordinary shares to a US Holder may be subject to
information reporting requirements of the Code. Such dividends may also be
subject to backup withholding unless the US Holder:
* is a corporation or comes within certain other exempt categories and, when
required, demonstrates this fact, or
* provides a taxpayer identification number on a properly completed Form W-9 or
a substitute form and certifies that no loss of exemption from backup
withholding has occurred and that such holder is a US person.
Any amount withheld under these rules will be creditable against the US
Holder's federal income tax liability. A US Holder who does not provide a
correct taxpayer identification number may be subject to certain penalties.
100
WHERE YOU CAN FIND MORE INFORMATION
The documents concerning us which are referred to herein may be inspected at
the Securities and Exchange Commission ("SEC"). You may read and copy any
document filed or furnished by us at the SEC's public reference rooms in
Washington D.C., New York and Chicago, Illinois. Please call the SEC at
1-800-SEC-0330 for further information on the reference rooms. The SEC also
maintains a website at www.sec.gov which contains, in electronic form, each of
the reports and other information that we have filed electronically with the
SEC.
ENFORCEABILITY OF CIVIL LIABILITIES
Lloyds TSB Group plc is a public limited company incorporated under the laws of
Scotland. Most of Lloyds TSB Group plc's directors and executive officers and
certain of the experts named herein are residents of the United Kingdom. A
substantial portion of the assets of Lloyds TSB Group plc, and a substantial
portion of the assets of such persons, are located outside the United States.
As a result, it may not be possible for investors to effect service of process
within the United States upon such persons or to enforce against them
judgements of US courts, including judgements predicated upon the civil
liability provisions of the federal securities laws of the United States.
Furthermore, Lloyds TSB Group plc has been advised by its English solicitors
that there is doubt as to the enforceability in the United Kingdom, in original
actions or in actions for enforcement of judgements of US courts, of civil
liabilities, including those predicated solely upon the federal securities laws
of the United States.
101
RISK FACTORS
An investment in Lloyds TSB Group plc's ordinary shares involves a number of
risks, including credit, market, operational, regulatory, competitive and
acquisition risks, some of which could be substantial and are inherent in
Lloyds TSB Group's business.
Lloyds TSB Group's businesses are subject to inherent risks concerning borrower
credit quality as well as general UK and international economic conditions.
Development of adverse conditions in the UK or in other major economies could
cause profitability to decline.
Lloyds TSB Group's businesses are subject to inherent risks regarding borrower
credit quality as well as general UK economic conditions, each of which can
change the level of demand for Lloyds TSB Group's products and services.
Changes in the credit quality of Lloyds TSB Group's UK or international
borrowers and counterparties could reduce the value of Lloyds TSB Group's
assets, and increase provisions for bad and doubtful debts. Any significant
increase in the UK unemployment rate would reduce profits from the insurance
business. Furthermore, a general deterioration in the UK economy would also
reduce Lloyds TSB Group's profit margins for both its UK banking and financial
services businesses. A general deterioration in any other major world economy
could also adversely impact Lloyds TSB Group's profitability.
Lloyds TSB Group's businesses are inherently subject to the risk of market
fluctuations, which could reduce profitability.
Lloyds TSB Group's businesses are inherently subject to the risk of market
fluctuations. The most significant market risks Lloyds TSB Group faces are
interest rate risk and foreign exchange risk in its banking businesses and
equity risk in its insurance businesses. See "Operating and Financial Review
and Prospects - Enterprise-wide risk management" for a discussion of these
risks. The Lloyds TSB Group's pension schemes are also subject to market risks,
principally equity risk and interest rate risk; adverse market movements would
have an effect upon the financial condition of the pension schemes which would
be reflected in the Lloyds TSB Group's Consolidated Financial Statements.
Lloyds TSB Group's insurance business is subject to inherent risks concerning
changing demographic developments, catastrophic weather and similar
contingencies outside its control. Development of adverse conditions could
reduce profitability margins.
Lloyds TSB Group's insurance business is subject to inherent risk regarding
changing demographic developments, catastrophic weather and similar
contingencies outside its control, both in the UK and overseas. Such
contingencies can change the risk profile and profitability of such products
and services.
Adverse experience in the operational risks inherent in Lloyds TSB Group's
businesses could have a negative impact on its results of operations.
Operational risks are present in Lloyds TSB Group's businesses, including the
risk of direct or indirect loss resulting from inadequate or failed internal
and external processes, people and systems or from external events. Lloyds TSB
Group's businesses are dependent on their ability to process very efficiently a
very large number of complex transactions across numerous and diverse products
and services, in different currencies and subject to a number of different
legal and regulatory regimes. Lloyds TSB Group's systems and processes are
designed to ensure that the operational risks associated with its activities
are appropriately controlled, but Lloyds TSB Group realises that any weakness
in these systems could have a negative impact on its results of operations
during the affected period. See "Operating and Financial Review and Prospects -
Enterprise-wide risk management - Operational risk" and "Operating and
Financial Review and Prospects - Enterprise-wide risk management - Legal and
regulatory risk ".
Terrorist acts and other acts of war could have a negative impact on the
business and results of operations of Lloyds TSB Group.
Terrorist acts and other acts of war or hostility and responses to those acts,
have created many economic and political uncertainties, which could have a
negative impact on UK and international economic conditions generally, and more
specifically on the business and results of operations of Lloyds TSB Group in
ways that cannot currently be predicted.
Lloyds TSB Group operates its businesses subject to substantial regulation,
regulatory and governmental oversight. Any significant adverse regulatory
developments or changes in government policies or economic controls could have
a negative impact on Lloyds TSB Group's results of operations.
Lloyds TSB Group conducts its businesses subject to ongoing regulation and
associated regulatory risks, including the effects of changes in the laws,
regulations, policies, voluntary codes of practice and interpretations in the
UK and the other markets where it operates. Future changes in regulation,
fiscal or other policies are unpredictable and beyond the control of Lloyds TSB
Group. For additional information, see "Regulation".
102
The resolution of a number of issues affecting the UK financial services
industry, including Lloyds TSB Group, could have a negative impact on Lloyds
TSB Group's results of operations or on its relations with some of its
customers and potential customers.
These issues involve the possible misselling of pension and other life
assurance policies and matters arising from the treatment of guaranteed annuity
options. There is a risk that further provisions may be required as a result of
these issues. See "Business - Guaranteed annuity options" and "Business -
Customer remediation payments".
Lloyds TSB Group's businesses are conducted in highly competitive environments
and management's ability to create an appropriate return for shareholders
depends upon management's ability to respond effectively to competitive
pressures.
The market for UK financial services and the other markets within which Lloyds
TSB Group operates are highly competitive and management expects such
competition to intensify in response to consumer demand, technological changes,
the impact of consolidation, regulatory actions and other factors, which could
result in a reduction in profit margins. Lloyds TSB Group's ability to generate
an appropriate return for its shareholders depends significantly upon the
competitive environment and management's response to it. See "Business -
Competitive environment".
Lloyds TSB Group is devoting considerable time and resources to securing new
customers and developing more business from existing customers. If Lloyds TSB
Group is unsuccessful, its organic growth prospects and results of operations
may decline.
Lloyds TSB Group seeks to achieve further organic growth by securing new
customers and developing more business from existing customers. Lloyds TSB
Group is currently expending significant resources and effort to bring about
this growth, particularly with respect to its UK retail financial services
business. If these expenditures and efforts do not meet with success, its
operating results could grow more slowly or decline.
Lloyds TSB Group's businesses are conducted in a market place that is rapidly
consolidating, significant cross-border mergers and acquisitions may happen in
the coming years and Lloyds TSB Group's ability to generate an appropriate
return for its shareholders over the long term will depend upon whether
management is able or permitted by either regulatory bodies or its shareholders
to achieve value-creating mergers and/or acquisitions at the appropriate times
and prices.
In addition to its important strategy of organic growth, one of Lloyds TSB
Group's aims is to remain alert for opportunities to participate in the further
consolidation of the financial services industry, both in the UK and overseas.
In light of the Secretary of State's decision to prohibit the attempted
acquisition of Abbey National, management believes that under current
conditions Lloyds TSB Group may find it difficult to be able to make a
significant acquisition in the UK in any business line where it already has a
significant market share. Management also believes that domestic consolidation
in many overseas markets, particularly in Europe, is entering its final phase
and that, therefore, significant cross border mergers and acquisitions may
happen in the coming years. Lloyds TSB Group's ability to generate an
appropriate return for its shareholders over the long term may depend upon
whether management is able to achieve value-creating mergers and/or
acquisitions at the appropriate times and prices. Lloyds TSB Group cannot be
sure that it will ultimately be able to make any such mergers or acquisitions.
103
FORWARD LOOKING STATEMENTS
This annual report includes certain forward-looking statements with respect to
the business, strategy and plans of Lloyds TSB Group and its current goals and
expectations relating to its future financial condition and performance.
Statements that are not historical facts, including statements about Lloyds TSB
Group's or management's beliefs and expectations, are forward-looking
statements. Words such as "believes", "anticipates", "estimates", "expects",
"intends", "aims", "potential", "will", "could", "considered", "likely",
"estimate" and variations of these words and similar expressions are intended
to identify forward-looking statements but are not the exclusive means of
identifying such statements. By their nature, forward-looking statements
involve risk and uncertainty because they relate to events and depend upon
circumstances that will occur in the future.
Examples of such forward-looking statements include, but are not limited to:
* projections or expectations of profit attributable to shareholders,
provisions, economic profit, dividends, capital structure or any other
financial items or ratios;
* statements of plans, objectives or goals of Lloyds TSB Group or its
management;
* statements about the future trends in interest rates, stock market levels and
demographic trends and any impact on Lloyds TSB Group;
* statements concerning any future UK or other economic environment or
performance, including in particular any such statements included in this
registration statement in "Operating and Financial Review and Prospects";
* 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 in other countries in which the
Lloyds TSB Group has significant business activities or investments;
* inflation, interest rate, exchange rate, market and monetary fluctuations;
* changing demographic developments, catastrophic weather and similar
contingencies outside the Lloyds TSB Group's control;
* inadequate or failed internal or external processes, people and systems;
* terrorist acts and other acts of war or hostility and responses to those
acts;
* changes in laws, regulations or taxation;
* changes in competition and pricing environments;
* the ability to secure new customers and develop more business from existing
customers;
* the ability to achieve value-creating mergers and/or acquisitions at the
appropriate time and prices; and
* the success of the Lloyds TSB Group in managing the risks of the
foregoing.
Lloyds TSB Group plc may also make or disclose written and/or oral
forward-looking statements in reports filed with or furnished to the US
Securities and Exchange Commission, Lloyds TSB Group plc's annual report and
accounts to shareholders, proxy statements, offering circulars, registration
statements and 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.
104
LLOYDS TSB GROUP STRUCTURE
The following is a list of the principal subsidiaries of Lloyds TSB Group plc
at 31 December 2002. The audited consolidated accounts of Lloyds TSB Group plc
for the year ended 31 December 2002 include the audited accounts of each of
these companies.
Name of Country of Percentage Nature of Registered
subsidiary registration/ of equity business office
undertaking incorporation share
capital and
voting
rights held
Lloyds TSB England 100% Banking and 25 Gresham
Bank plc financial Street,
services London EC2V
7HN
England
Cheltenham & England *100% Mortgage Barnett Way,
Gloucester plc lending and Gloucester
retail GL4 3RL
investments England
Lloyds TSB England *100% Credit Beaumont
Commercial factoring House,
Finance Beaumont Road,
Limited Banbury,
Oxfordshire
OX16 7RN
England
Lloyds TSB England *100% Financial 25 Gresham
Leasing leasing Street,
Limited London EC2V
7HN
England
Lloyds TSB England *100% Private 25 Gresham
Private banking Street,
Banking London EC2V
Limited 7HN
England
The England *100% Long-term AMC House,
Agricultural agricultural Chantry
Mortgage finance Street,
Corporation Andover,
PLC Hampshire
SP10 1DD
England
The National New Zealand *100% Banking and National Bank
Bank of New financial House,
Zealand services 170-186
Limited Featherston
Street,
Wellington,
New Zealand
Lloyds TSB Jersey *100% Banking and 25 New Street,
Bank (Jersey) financial St. Helier
Limited services JE4 8RG
Jersey
Lloyds TSB Scotland *100% Banking and Henry Duncan
Scotland plc financial House,
services 120 George
Street,
Edinburgh EH2
4LH
Scotland
Lloyds TSB England *100% General 25 Gresham
General insurance Street,
Insurance London EC2V
Limited 7HN
England
Scottish England *100% Investment 10 Fleet
Widows management Place,
Investment London EC4M
Partnership 7RH
Group Limited England
Abbey Life England *100% Life assurance 80
Assurance Holdenhurst
Company Road,
Limited Bournemouth
BH8 8ZQ
England
105
Lloyds TSB England *100% Insurance 25 Gresham
Insurance broking Street,
Services London EC2V
Limited 7HN
England
Lloyds TSB England *100% Life 25 Gresham
Life assurance and Street,
Assurance other London EC2V
Company financial 7HN
Limited services England
Lloyds TSB England *100% Consumer 25 Gresham
Asset Finance credit, Street,
Division leasing and London EC2V
Limited related 7HN
services England
Black Horse England *100% Consumer 25 Gresham
Limited credit, Street,
leasing and London EC2V
related 7HN
services England
Scottish Scotland *100% Life assurance 69 Morrison
Widows plc Street,
Edinburgh,
EH3 8YF
Scotland
Scottish Scotland *100% Life assurance 69 Morrison
Widows Street,
Annuities Edinburgh,
Limited EH3 8YF
Scotland
* Indirect interest
106
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Accountants F-2
Consolidated profit and loss account for the year ended 31 December F-3
2002
Consolidated balance sheet at 31 December 2002 F-4
Other statements
Statement of total recognised gains and losses for the year F-6
ended 31 December 2002
Reconciliation of movements in shareholders' funds for the year F-6
ended 31 December 2002
Consolidated cash flow statement for the year ended 31 December 2002 F-7
Notes to the accounts F-8
F-1
Report of Independent Accountants
To the Shareholders of Lloyds TSB Group plc:
We have audited the accompanying consolidated balance sheets of Lloyds TSB
Group plc and its subsidiaries as of 31 December 2002 and 31 December 2001, and
the related consolidated profit and loss account, consolidated statement of
total recognised gains and losses, reconciliation of movement in shareholders'
funds and consolidated cash flow statement for each of the three years in the
period ended 31 December 2002 which, as described in Note 1, have been prepared
on the basis of accounting principles generally accepted in United Kingdom.
These financial statements are the responsibility of the directors of Lloyds
TSB Group plc. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lloyds TSB
Group plc and its subsidiary undertakings at 31 December 2002 and 31 December
2001, and the results of their operations and their cash flows, for each of the
three years in the period ended 31 December 2002 in conformity with accounting
principles generally accepted in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain material respects from accounting principles in the United States. The
application of the latter, after the restatement referred to on page F-67,
would have affected the determination of consolidated net income expressed in
pounds sterling for each of the three years in the period ended 31 December
2002 and the determination of consolidated shareholders' equity also expressed
in pounds sterling at 31 December 2002 and 2001 to the extent summarised in
Note 48 to the consolidated financial statements.
PricewaterhouseCoopers LLP
Southampton, England
13 February 2003, except for the restatement referred to on page F-67 as to
which the date is 23 June 2003.
F-2
Consolidated profit and loss account
for the year ended 31 December 2002
2002 2001* 2000*
Note GBP million GBP million GBP million
Interest receivable:
Interest receivable and similar 567 530 443
income arising from debt securities
Other interest receivable and 9,982 10,834 10,611
similar income
Interest payable 5,378 6,442 6,467
Net interest income 5,171 4,922 4,587
Other finance income 43 165 307 424
Other income
Fees and commissions receivable 3,053 2,922 2,768
Fees and commissions payable (645) (602) (479)
Dealing profits (before expenses) 3 188 233 198
Income from long-term assurance 29 (303) (29) 443
business
General insurance premium income 486 428 399
Other operating income 763 708 436
3,542 3,660 3,765
Total income 8,878 8,889 8,776
Operating expenses
Administrative expenses 4 4,214 4,226 3,893
Depreciation 23 642 511 364
Amortisation of goodwill 22 59 39 22
Depreciation and amortisation 701 550 386
Total operating expenses 4,915 4,776 4,279
Trading surplus 3,963 4,113 4,497
General insurance claims 229 174 142
Provisions for bad and doubtful 14
debts
Specific 965 736 547
General 64 11 (6)
1,029 747 541
Amounts written off fixed asset 5 87 60 32
investments
Operating profit 2,618 3,132 3,782
Income from joint ventures 19 (11) (10) 3
Profit on sale of businesses 6 - 39 -
Profit on ordinary activities 7 2,607 3,161 3,785
before tax
Tax on profit on ordinary 8 764 875 1,082
activities
Profit on ordinary activities 1,843 2,286 2,703
after tax
Minority interests : equity 19 17 13
: non-equity 39 43 40 36
Profit for the year attributable 1,781 2,229 2,654
to shareholders
Dividends 9 1,908 1,872 1,683
(Loss) profit for the year 41 (127) 357 971
Earnings per share 10 32.0p 40.3p 48.4p
Diluted earnings per share 10 31.8p 39.9p 47.9p
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* restated (see note 1)
F-3
Consolidated balance sheet
at 31 December 2002
2002 2001*
Note GBP million GBP million
Assets
Cash and balances at central banks 1,140 1,240
Items in course of collection from banks 1,757 1,664
Treasury bills and other eligible bills 11 2,409 4,412
Loans and advances to banks 12 17,529 15,224
Loans and advances to customers 134,498 123,059
Non-returnable finance (24) (124)
13 134,474 122,935
Debt securities 16 29,314 24,225
Equity shares 17 206 225
Interests in joint ventures: 19
- Share of gross assets 336 281
- Share of gross liabilities (291) (242)
45 39
Intangible fixed assets 22 2,634 2,566
Tangible fixed assets 23 4,096 3,365
Own shares 26 18 23
Other assets 27 5,263 4,468
Prepayments and accrued income 28 2,305 2,296
Post-retirement benefit asset 43 - 356
Long-term assurance business attributable to 29 6,228 6,366
the shareholder
207,418 189,404
Long-term assurance assets attributable to 29 45,340 46,389
policyholders
Total assets 252,758 235,793
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* restated (see note 1)
F-4
2002 2001*
Note GBP million GBP million
Liabilities
Deposits by banks 31 25,443 24,310
Customer accounts 32 116,334 109,116
Items in course of transmission to banks 775 534
Debt securities in issue 33 30,255 24,420
Other liabilities 34 8,289 6,673
Accruals and deferred income 35 3,696 3,563
Post-retirement benefit liability 43 2,077 75
Provisions for liabilities and charges:
Deferred tax 36 1,317 1,411
Other provisions for liabilities and charges 37 361 292
Subordinated liabilities:
Undated loan capital 38 5,496 4,102
Dated loan capital 38 4,672 4,006
Minority interests:
Equity 37 37
Non-equity 39 694 509
731 546
Called-up share capital 40 1,416 1,411
Share premium account 41 1,093 959
Merger reserve 41 343 343
Profit and loss account 41 5,120 7,643
Shareholders' funds (equity) 7,972 10,356
207,418 189,404
Long-term assurance liabilities to 29 45,340 46,389
policyholders
Total liabilities 252,758 235,793
Memorandum items 44
Contingent liabilities:
Acceptances and endorsements 1,879 2,243
Guarantees and assets pledged as collateral 5,927 3,789
security
Other contingent liabilities 2,540 1,931
10,346 7,963
Commitments 64,504 53,342
The accompanying notes are an integral part of the Consolidated Financial
Statements.
* restated (see note 1)
F-5
Other statements
Statement of total recognised gains and losses
for the year ended 31 December 2002
2002 2001* 2000*
GBP million GBP million GBP million
Profit attributable to shareholders 1,781 2,229 2,654
Currency translation differences on (3) (86) (11)
foreign currency net investments
Actuarial losses recognised in (3,299) (2,873) (1,452)
post-retirement benefit schemes (note 43)
Deferred tax thereon (note 43) 968 863 450
(2,331) (2,010) (1,002)
Total recognised gains and losses (553) 133 1,641
relating to the year
Prior year adjustment at 1 January 2002
in respect of current year changes
in accounting policy (note 1) (404) - -
Prior year adjustment in respect of the - 248 -
adoption of FRS 18
Prior year adjustment in respect of the - - (112)
adoption of FRS 15
Total gains and losses recognised during (957) 381 1,529
the year
* restated (see note 1)
Historical cost profits and losses
for the year ended 31 December 2002
There was no material difference between the results as reported and the
results that would have been reported on an unmodified historical cost basis.
Accordingly, no note of historical cost profits and losses has been included.
Reconciliation of movements in shareholders' funds
for the year ended 31 December 2002
2002 2001* 2000*
GBP million GBP million GBP million
Profit attributable to shareholders 1,781 2,229 2,654
Dividends (1,908) (1,872) (1,683)
(Loss) profit for the year (127) 357 971
Currency translation differences on (3) (86) (11)
foreign currency net investments
Actuarial losses recognised in (2,331) (2,010) (1,002)
post-retirement benefit schemes
Issue of shares 77 194 74
Goodwill written back on sale and - - 109
closure of businesses
Net (decrease) increase in shareholders' (2,384) (1,545) 141
funds
Shareholders' funds at beginning of year 10,356 11,901 8,829
Prior year adjustment at 1 January 2000 - - 2,931
(note 1)
Shareholders' funds at end of year 7,972 10,356 11,901
* restated (see note 1)
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-6
Consolidated cash flow statement
for the year ended 31 December 2002
2002 2001* 2000
GBP million GBP million GBP million
Net cash inflow from operating 5,394 9,927 7,474
activities (note 47a)
Dividends received from associated 2 2 2
undertakings
Returns on investments and servicing of
finance:
Dividends paid to equity minority
interests (18) (17) (12)
Payments made to non-equity minority
interests (43) (40) (36)
Interest paid on subordinated
liabilities (loan capital) (463) (514) (442)
Interest element of finance lease rental
payments - (1) (1)
Net cash outflow from returns on (524) (572) (491)
investments and servicing of finance
Taxation:
UK corporation tax (758) (682) (723)
Overseas tax (193) (147) (141)
Total taxation (951) (829) (864)
Capital expenditure and financial
investment:
Additions to fixed asset investments (46,830) (47,049) (23,564)
Disposals of fixed asset investments 45,507 40,530 24,850
Additions to tangible fixed assets (1,315) (1,157) (1,006)
Disposals of tangible fixed assets 359 285 78
Capital injections to long-term (140) (100) -
assurance business
Net cash (outflow) inflow from capital (2,419) (7,491) 358
expenditure and financial investment
Acquisitions and disposals:
Additions to interests in joint ventures (21) (44) -
Acquisition of group undertakings (note
47e) (117) (180) (5,110)
Disposal of group undertakings and
businesses (note 47g) - 40 83
Net cash outflow from acquisitions and (138) (184) (5,027)
disposals
Equity dividends paid (1,903) (1,738) (1,522)
Net cash outflow before financing (539) (885) (70)
Financing:
Issue of subordinated liabilities (loan
capital) 2,120 742 952
Issue of capital securities by
subsidiary undertakings - - 509
Issue of ordinary share capital net of
GBP62 million (2001: GBP185 million;
2000: GBP124 million) charge in respect of
the QUEST (note 26) 77 194 74
Repayments of subordinated liabilities
(loan capital) (55) (131) (55)
Minority investment in subsidiaries 167 - -
Capital element of finance lease rental
payments (4) (20) (4)
Net cash inflow from financing 2,305 785 1,476
Increase (decrease) in cash (note 47c) 1,766 (100) 1,406
*restated (see note 1)
The accompanying notes are an integral part of the Consolidated Financial
Statements.
F-7
1 Accounting policies
Accounting policies are unchanged from 2001, except that:
(i) The Group has implemented the requirements of the Urgent Issues Task
Force's Abstract 33 'Obligations in capital instruments'. Following its
implementation the Group has reclassified Euro750 million of Perpetual
Capital Securities as undated loan capital and the related cost is included
within interest expense. Previously these securities were included within
minority interests in the balance sheet and the cost was treated as a
minority interest deduction. The effect of this change on the profit and
loss account for the year ended 31 December 2002 has been to increase
interest payable and reduce non-equity minority interests by GBP31 million
(2001: GBP22 million; 2000: nil); there has been no effect on attributable
profit. The effect on the Group's balance sheet at 31 December 2002 has
been to increase undated loan capital and reduce non-equity minority
interests by GBP482 million (2001: GBP451 million).
(ii) The Group has implemented the requirements of Financial Reporting
Standard 19 ("FRS 19") 'Deferred Tax'. Following its implementation, the
Group makes full provision for deferred tax assets and liabilities arising
from timing differences between the recognition of gains and losses in the
financial statements and their recognition in a tax computation. Previously
provision was only made where it was considered that there was a reasonable
probability that a liability or asset would crystallise in the foreseeable
future. A prior year adjustment has been made increasing shareholders'
funds by GBP54 million to reflect the revised policy. The effect of this
change on the profit and loss account for the year ended 31 December 2002
has been to reduce the tax charge by GBP29 million (2001: increase the tax
charge by GBP14 million; 2000: nil). The effect on the Group's balance
sheet at 31 December 2002 has been to reduce the deferred tax liability and
increase shareholders' funds by GBP69 million (2001: GBP40 million).
(iii)The Group has adopted fully the accounting requirements of Financial
Reporting Standard 17 ("FRS 17") 'Retirement Benefits'. FRS 17 replaces
Statement of Standard Accounting Practice 24 and the Urgent Issues Task
Force's Abstract 6 as the accounting standard dealing with post-retirement
benefits. The Group has decided to implement the requirements of FRS 17 in
2002 to coincide with the triennial full actuarial valuations of the
Group's pension schemes and because of the significant impact that
implementation has on the Group's reported results.
FRS 17 requires the assets of post-retirement defined benefit schemes to be
included on the balance sheet together with the related liability to make
benefit payments. The profit and loss account includes a charge in respect
of the cost of accruing benefits for active employees, benefit improvements
and the cost of severances borne by the schemes; the expected return on the
schemes' assets is included within other finance income net of a charge in
respect of the unwinding of the discount applied to the schemes'
liabilities. It also includes a charge in respect of post-retirement
healthcare obligations. Under Statement of Standard Accounting Practice 24
the profit and loss account included a charge in respect of the cost of
accruing benefits for active employees offset by a credit representing the
amortisation of the surplus in the Group's defined benefit pension schemes;
a pension prepayment was included in the Group's balance sheet, together
with a provision in respect of post-retirement healthcare obligations. A
prior year adjustment has been made increasing shareholders' funds by
GBP2,810 million to reflect the revised policy.
The effect of this change on the profit and loss account for the year ended
31 December 2002 has been to introduce other finance income of GBP165
million (2001: GBP307 million; 2000: GBP424 million), and to increase
administrative expenses by GBP323 million (2001: GBP452 million; 2000:
GBP327 million). Profit before tax has been reduced by GBP158 million
(2001: reduced by GBP145 million; 2000: increased by GBP97 million). The
effect on the Group's balance sheet at 31 December 2002 has been to reflect
a net post-retirement benefit liability of GBP2,077 million (2001: a net
post-retirement benefit asset of GBP356 million and a post-retirement
benefit liability of GBP75 million), to reduce prepayments and accrued
income by GBP928 million (2001: GBP894 million), to reduce the deferred tax
liability by GBP251 million (2001: GBP268 million), to reduce other
provisions for liabilities and charges by GBP76 million (2001: GBP109
million) and to reduce shareholders' funds by GBP2,678 million (2001:
GBP236 million).
(iv) In December 2001, the Association of British Insurers (ABI) published
detailed guidance for the preparation of figures using the achieved profits
method of accounting which are published as supplementary financial
information accompanying the accounts of most listed insurance companies.
The ABI guidance recommends the use of unsmoothed fund values to calculate
the value of in-force business. To improve the comparability of the results
of the Group's insurance operations with the supplementary financial
information published by listed insurers the Group has changed the basis of
its embedded value calculations to use unsmoothed fund values; previously
the effect of investment fluctuations had been amortised to the profit and
loss account over a two year period. A prior year adjustment has been made
reducing shareholders' funds by GBP67 million, to reflect the revised
policy.
The effect of this change on the profit and loss account for the year ended 31
December 2002 has been to reduce income from long-term assurance business before
tax by GBP104 million (2001: GBP222 million; 2000: GBP172 million). The effect
on the Group's balance sheet at 31 December 2002 has been to reduce the value of
the long-term assurance business attributable to the shareholder by GBP281
million (2001: GBP208 million) and to reduce shareholders' funds by the same
amount.
F8
1 Accounting policies (continued)
Comparative figures for 2001 and 2000 have been restated in respect of all of
the above changes.
The prior year adjustments in respect of these changes can be summarised as
follows:
Actuarial
Impact on losses Adjustment to
Adjustment to attributable recognised in shareholders'
shareholders' profit for post-retirement funds at 31
funds at 1 year ended benefit schemes December 2000
January 2000 31 December for year ended
2000 31 December 2000
GBPm GBPm GBPm GBPm
FRS 19 Deferred tax (ii) 54 - - 54
FRS 17 Retirement 2,810 68 (1,002) 1,876
benefits (iii)
ABI guidance (iv) 67 (120) - (53)
Total 2,931 (52) (1,002) 1,877
Actuarial
Impact on losses Adjustment to
Adjustment to attributable recognised in shareholders'
shareholders' profit for post-retirement funds at 31
funds at 1 year ended benefit schemes December 2001
January 2001 31 December for year ended
2001 31 December 2001
GBPm GBPm GBPm GBPm
FRS 19 Deferred tax (ii) 54 (14) - 40
FRS 17 Retirement 1,876 (102) (2,010) (236)
benefits (iii)
ABI guidance (iv) (53) (155) - (208)
Total 1,877 (271) (2,010) (404)
a Accounting convention
The consolidated accounts are prepared under the historical cost convention as
modified by the revaluation of debt securities and equity shares held for
dealing purposes (see g) and assets held in the long-term assurance business
(see n), in compliance with Section 255A, Schedule 9 and other requirements of
the Companies Act 1985 except as described below (see c), in accordance with
applicable accounting standards, pronouncements of the Urgent Issues Task Force
and with the Statements of Recommended Practice issued by the British Bankers'
Association and the Finance & Leasing Association. The Group's methodology for
calculating embedded value follows the guidance published by the Association of
British Insurers for the preparation of figures using the achieved profits
method of accounting except that tangible assets attributable to the
shareholder are valued at market value. The guidance would require those assets
backing capital requirements to be discounted to reflect the cost of encumbered
capital, but such a treatment would be inconsistent with the treatment of
capital supporting the Group's banking operations. If this treatment had been
followed income from long-term assurance business before tax in 2002 would have
been slightly improved. Conversely, embedded value would have been some 8 per
cent lower given the size of the shareholder capital required to be retained
within Scottish Widows under the terms of the demutualisation.
The Group continues to take advantage of the dispensation in the Urgent Issues
Task Force's Abstract 17 'Employee Share Schemes' not to apply that Abstract to
the Group's Inland Revenue approved SAYE schemes.
b Basis of consolidation
Assets, liabilities and results of group undertakings and joint ventures are
included in the consolidated accounts on the basis of accounts made up to 31
December. Entities that do not meet the legal definition of a subsidiary but
which give rise to benefits that are in substance no different to those that
would arise from subsidiaries are also included in the consolidated accounts.
In order to reflect the different nature of the shareholder's and
policyholders' interests in the long-term assurance business, the value of
long-term assurance business attributable to the shareholder and the assets and
liabilities attributable to policyholders are classified under separate
headings in the consolidated balance sheet. Details of transactions entered
into by the Group which are not eliminated on consolidation are given in note
42.
F-9
1 Accounting policies (continued)
c Goodwill
Goodwill arising on acquisitions of or by group undertakings is capitalised.
For acquisitions prior to 1 January 1998, goodwill was taken direct to reserves
in the year of acquisition. As permitted by the transitional arrangements of
Financial Reporting Standard 10, this goodwill was not reinstated when the
Group adopted the standard in 1998.
The useful economic life of the goodwill arising on each acquisition is
determined at the time of the acquisition. The directors consider that it is
appropriate to assign an indefinite life to the goodwill which arose on the
acquisition of Scottish Widows during 2000 in view of the strength of the
Scottish Widows brand, developed through over 185 years of trading, and the
position of the business as one of the leading providers of life, pensions,
unit trust and fund management products. Both of these attributes are deemed to
have indefinite durability, which has been determined based on the following
factors: the nature of the business; the typical lifespans of the products; the
extent to which the acquisition overcomes market entry barriers; and the
expected future impact of competition on the business.
The Scottish Widows goodwill is not being amortised through the profit and loss
account; however, it is subjected to annual impairment reviews in accordance
with Financial Reporting Standard 11. Impairment of the goodwill is evaluated
by comparing the present value of the expected future cash flows, excluding
financing and tax, (the 'value-in-use') to the carrying value of the underlying
net assets and goodwill. If the net assets and goodwill were to exceed the
value-in-use, an impairment would be deemed to have occurred and the resulting
write-down in the goodwill would be charged to the profit and loss account
immediately.
Paragraph 28 of Schedule 9 to the Companies Act 1985 requires that all goodwill
carried on the balance sheet should be amortised. In the case of the goodwill
arising on the acquisition of Scottish Widows, the directors consider that it is
appropriate to depart from this requirement in order to comply with the
over-riding requirement for the accounts to show a true and fair view. If this
goodwill was amortised over a period of 20 years, profit before tax for the year
ended 31 December 2002 would be GBP93 million lower (2001: GBP94 million lower;
2000: GBP78 million lower), with a corresponding reduction in reserves of GBP265
million (2001: GBP172 million); intangible assets on the balance sheet would
also be GBP265 million lower (2001: GBP172 million lower).
Goodwill arising on all other acquisitions after 1 January 1998 is amortised on
a straight line basis over its estimated useful economic life, which does not
exceed 20 years.
At the date of the disposal of group or associated undertakings, any
unamortised goodwill, or goodwill taken directly to reserves prior to 1 January
1998, is included in the Group's share of the net assets of the undertaking in
the calculation of the profit or loss on disposal.
d Income recognition
Interest income is recognised in the profit and loss account as it accrues,
with the exception of interest on non-performing lending which is taken to
income either when it is received or when there ceases to be any significant
doubt about its ultimate receipt (see e).
Fees and commissions receivable from customers to reimburse the Group for costs
incurred are taken to income when due. Fees and commissions relating to the
ongoing provision of a service or risk borne for a customer are taken to income
in proportion to the service provided or risk borne in each accounting period.
Fees and commissions charged in lieu of interest are taken to income on a level
yield basis over the period of the loan. Other fees and commissions receivable
are accounted for as they fall due.
e Provisions for bad and doubtful debts and non-performing lending
Provisions for bad and doubtful debts
It is the Group's policy to make provisions for bad and doubtful debts, by way
of a charge to the profit and loss account, to reflect the losses inherent in
the loan portfolio at the balance sheet date. There are two types of provision,
specific and general, and these are discussed further below.
Specific provisions
Specific provisions relate to identified risk advances and are raised when the
Group considers that recovery of the whole of the outstanding balance is in
serious doubt. The amount of the provision is equivalent to the amount
necessary to reduce the carrying value of the advance to its expected ultimate
net realisable value.
F-10
1 Accounting policies (continued)
e Provisions for bad and doubtful debts and non-performing lending (continued)
Provisions for bad and doubtful debts (continued)
For the Group's portfolios of smaller balance homogeneous loans, such as the
residential mortgage, personal lending and credit card portfolios, specific
provisions are calculated using a formulae driven approach. These formulae take
into account factors such as the length of time that payments from the customer
are overdue, the value of any collateral held and the level of past and
expected losses, in order to derive an appropriate provision.
For the Group's other lending portfolios, specific provisions are calculated on
a case-by-case basis. In establishing an appropriate provision, factors such as
the financial condition of the customer, the nature and value of any collateral
held and the costs associated with obtaining repayment and realisation of the
collateral are taken into consideration.
General provisions
General provisions are raised to cover latent bad and doubtful debts which are
present in any portfolio of advances but have not been specifically identified.
The Group holds general provisions against each of its principal lending
portfolios, which are calculated after having regard to a number of factors; in
particular, the level of watchlist or potential problem debt, the observed
propensity for such debt to deteriorate and become impaired and prior period
loss rates. The level of general provision held is reviewed on a regular basis
to ensure that it remains appropriate in the context of the perceived risk
inherent in the related portfolio and the prevailing economic climate.
Non-performing lending
An advance becomes non-performing when interest ceases to be credited to the
profit and loss account. There are two types of non-performing lending which
are discussed further below.
Accruing loans on which interest is being placed in suspense
Where the customer continues to operate the account, but where there is doubt
about the payment of interest, interest continues to be charged to the
customer's account, but it is not applied to income. Interest is placed on a
suspense account and only taken to income if there ceases to be significant
doubt about its being paid.
Loans accounted for on a non-accrual basis
In those cases where the operation of the customer's account has ceased and it
has been transferred to a specialist recovery department, the advance is
written down to its estimated realisable value and interest is no longer
charged to the customer's account as its recovery is considered unlikely.
Interest is only taken to income if it is received.
f Mortgage incentives
Payments made under cash gift and discount mortgage schemes, which are
recoverable from the customer in the event of early redemption, are amortised
as an adjustment to net interest income over the early redemption charge
period. Payments cease to be deferred and are charged to the profit and loss
account in the event that the related loan is redeemed or becomes impaired.
g Debt securities and equity shares
Debt securities, apart from those held for dealing purposes, are stated at cost
as adjusted for the amortisation of any premiums and discounts arising on
acquisition, which are amortised from purchase to maturity in equal annual
instalments, less amounts written off for any permanent diminution in their
value. Equity shares, apart from those held for dealing purposes, are stated at
cost less amounts written off for any permanent diminution in their value.
Debt securities and equity shares held for dealing purposes are included at
market value. In rare circumstances where securities are transferred from
dealing portfolios to investment portfolios or vice versa, the transfer is
effected at an amount based on the market value at the date of transfer. Any
resulting profit or loss is reflected in the profit and loss account.
h Tangible fixed assets
Tangible fixed assets are included at cost less depreciation.
Land is not depreciated. Leasehold premises with unexpired lease terms of 50
years or less are depreciated by equal annual instalments over the remaining
period of the lease. Freehold and long leasehold buildings are depreciated over
50 years. The costs of adapting premises for the use of the Group are
separately identified and depreciated over 10 years, or over the term of the
lease if less; such costs are included within premises in the balance sheet
total of tangible fixed assets.
F-11
1 Accounting policies (continued)
h Tangible fixed assets (continued)
Equipment is depreciated by equal annual instalments over the estimated useful
lives of the assets, which for fixtures and furnishings are 10-20 years and for
computer hardware, operating software and application software and the related
development costs relating to separable new systems, motor vehicles and other
equipment are 3-8 years.
Premises and equipment held for letting to customers under operating leases are
depreciated over the life of the lease to give a constant rate of return on the
net investment, taking into account anticipated residual values. Anticipated
residual values are reviewed regularly and any impairments identified are
charged to the profit and loss account.
i Vacant leasehold property
When a leasehold property ceases to be used in the business or a commitment is
entered into which would cause this to occur, provision is made to the extent
that the recoverable amount of the interest in the property is expected to be
insufficient to cover future obligations relating to the lease.
j Leasing and instalment credit transactions
Assets leased to customers are classified as finance leases if the lease
agreements transfer substantially all of the risks and rewards of ownership to
the lessee; all other leases are classified as operating leases.
Income from both finance and operating leases is credited to the profit and
loss account in proportion to the net cash invested so as to give a constant
rate of return over each period after taking account of tax. Income from
instalment credit transactions is credited to the profit and loss account using
the sum of the digits method.
In those cases where the Group is the lessee, operating lease costs are charged
to the profit and loss account in equal annual instalments over the life of the
lease.
k Deferred tax
Full provision is made for deferred tax liabilities arising from timing
differences between the recognition of gains and losses in the financial
statements and their recognition in a tax computation. Deferred tax assets are
recognised to the extent that it is regarded as more likely than not that there
will be suitable taxable profits from which the future reversal of the
underlying timing differences can be deducted, or where they can be offset
against deferred tax liabilities. Deferred tax is measured at the average tax
rates that are expected to apply in the periods in which the timing differences
are expected to reverse, based on tax rates and laws that have been enacted or
substantively enacted by the balance sheet date.
l Pensions and other post-retirement benefits
The Group operates a number of defined benefit pension and post-retirement
healthcare schemes, and a number of employees are members of defined
contribution pension schemes.
Full actuarial valuations of the Group's main defined benefit schemes are
carried out every three years with interim reviews in the intervening years;
these valuations are updated to 31 December each year by qualified independent
actuaries. For the purposes of these annual updates, scheme assets are included
at market value and scheme liabilities are measured on an actuarial basis using
the projected unit method; these liabilities are discounted at the current rate
of return on a high quality corporate bond of equivalent currency and term. The
post-retirement benefit surplus or deficit is included on the Group's balance
sheet, net of the related amount of deferred tax. Surpluses are only included
to the extent that they are recoverable through reduced contributions in the
future or through refunds from the schemes. The current service cost and any
past service costs are included in the profit and loss account within operating
expenses and the expected return on the schemes' assets, net of the impact of
the unwinding of the discount on scheme liabilities, is included within other
finance income. Actuarial gains and losses, including differences between the
expected and actual return on scheme assets, are recognised, net of the related
deferred tax, in the statement of total recognised gains and losses.
The costs of the Group's defined contribution pension schemes are charged to
the profit and loss account in the period in which they fall due.
F-12
1 Accounting policies (continued)
m Foreign currency translation
Assets, liabilities and results in foreign currencies are expressed in sterling
at the rates of exchange ruling on the dates of the respective balance sheets.
Exchange adjustments on the translation of opening net assets held overseas are
taken direct to reserves. All other exchange profits or losses, which arise
from normal trading activities, are included in the profit and loss account.
n Long-term assurance business
A number of the Group's subsidiary undertakings are engaged in writing
long-term assurance business, including the provision of life assurance,
pensions, annuities and permanent health insurance contracts. In common with
other life assurance companies in the UK, these companies are structured into
one or more long-term business funds, depending upon the nature of the products
being written, and a shareholder's fund. All premiums received, investment
returns, claims and expenses, and changes in liabilities to policyholders are
accounted for within the related long-term business fund. Any surplus, which is
determined annually by the Appointed Actuary after taking account of these
items, may either be distributed between the shareholder and the policyholders
according to a predetermined formula or retained within the long-term business
fund. The shareholder will also levy investment management and administration
charges upon the long-term business fund.
The Group accounts for its interest in long-term assurance business using the
embedded value basis of accounting, in common with other UK banks with
insurance subsidiaries. The value of the shareholder's interest in the
long-term assurance business ('the embedded value') included in the Group's
balance sheet is an actuarially determined estimate of the economic value of
the Group's life assurance subsidiaries, excluding any value which may be
attributed to future new business. The embedded value is comprised of the net
tangible assets of the life assurance subsidiaries, including any surplus
retained within the long-term business funds, which could be transferred to the
shareholder, and the present value of the in-force business. The value of the
in-force business is calculated by projecting the future surpluses and other
net cash flows attributable to the shareholder arising from business written by
the balance sheet date, using appropriate economic and actuarial assumptions,
and discounting the result at a rate which reflects the shareholder's overall
risk premium attributable to this business.
Changes in the embedded value, which are determined on a post-tax basis, are
included in the profit and loss account. For the purpose of presentation, the
change in this value is grossed up at the underlying rate of corporation tax.
The assets held within the long-term business funds are legally owned by the
life assurance companies, however the shareholder will only benefit from
ownership of these assets to the extent that surpluses are declared or from
other cash flows attributable to the shareholder. Reflecting the different
nature of these assets, they are classified separately on the Group's balance
sheet as 'Long-term assurance assets attributable to policyholders', with a
corresponding liability to the policyholders also shown. Investments held
within the long-term business funds are included on the following basis: equity
shares, debt securities and unit trusts held for unit linked funds are valued
in accordance with policy conditions at market prices; other equity shares and
debt securities are valued at middle market price and other unit trusts at bid
price; investment properties are included at valuation by independent valuers
at existing use value at the balance sheet date, and mortgages and loans are at
cost less amounts written off.
o General insurance business
The Group both underwrites and acts as intermediary in the sale of general
insurance products. Underwriting premiums are included, net of refunds, in the
period in which insurance cover is provided to the customer; premiums received
relating to future periods are deferred and only credited to the profit and
loss account when earned. Where the Group acts as intermediary, commission
income is included in the profit and loss account at the time that the
underwriter accepts the risk of providing insurance cover to the customer.
Where appropriate, provision is made for the effect of future policy
terminations based upon past experience.
The underwriting business makes provision for the estimated cost of claims
notified but not settled and claims incurred but not reported at the balance
sheet date. The provision for the cost of claims notified but not settled is
based upon a best estimate of the cost of settling the outstanding claims after
taking into account all known facts. In those cases where there is insufficient
information to determine the required provision, statistical techniques are
used which take into account the cost of claims that have recently been settled
and make assumptions about the future development of the outstanding cases.
Similar statistical techniques are used to determine the provision for claims
incurred but not reported at the balance sheet date. Claims equalisation
provisions are calculated in accordance with the relevant legislative
requirements.
F-13
1 Accounting policies (continued)
p Derivatives
Derivatives are used in the Group's trading activities to meet the financial
needs of customers, for proprietary purposes and to manage risk in the Group's
trading portfolios. Such instruments include exchange rate forwards and
futures, currency swaps and options together with interest rate swaps, forward
rate agreements, interest rate options and futures. These derivatives are
carried at fair value and all changes in fair value are reported within dealing
profits in the profit and loss account. Fair values are normally determined by
reference to quoted market prices; internal models are used to determine fair
value in instances where no market price is available. The unrealised gains and
losses on trading derivatives are included within other assets and other
liabilities respectively. These items are reported gross except in instances
where the Group has entered into legally binding netting agreements, where the
Group has a right to insist on net settlement that would survive the insolvency
of the counterparty; in these cases the positive and negative fair values of
trading derivatives with the relevant counterparties are offset within the
balance sheet totals.
Derivatives used in the Group's non-trading activities are taken out to reduce
exposures to fluctuations in interest and exchange rates and include exchange
rate forwards and futures, currency swaps together with interest rate swaps,
forward rate agreements and options. These derivatives are accounted for in the
same way as the underlying items which they are hedging. Interest receipts and
payments on hedging interest derivatives are included in the profit and loss
account so as to match the interest payable or receivable on the hedged item.
A derivative will only be classified as a hedge in circumstances where there
was evidence of the intention to hedge at the outset of the transaction and the
derivative substantially matches or eliminates the risk associated with the
exposure being hedged.
Where a hedge transaction is superseded, ceases to be effective or is
terminated early the derivative is measured at fair value. Any profit or loss
arising is then amortised to the profit and loss account over the remaining
life of the item which it was originally hedging. When the underlying asset,
liability or position that was being hedged is terminated, the hedging
derivative is measured at fair value and any profit or loss arising is
recognised immediately.
F-14
2 Segmental analysis
The Group's activities are organised into three segments: UK Retail Banking and
Mortgages, Insurance and Investments and Wholesale Markets and International
Banking. Services provided by UK Retail Banking and Mortgages encompass the
provision of banking and other financial services to personal and small
business customers, private banking, stockbroking and mortgages. Insurance and
Investments offers life assurance, pensions and savings products, general
insurance and fund management services. Wholesale Markets and International
Banking provides banking and related services for major UK and multinational
companies, banks and financial institutions, and medium-sized UK businesses. It
also provides asset finance to personal and corporate customers, manages the
Group's activities in financial markets through its Treasury function and
provides banking and financial services overseas.
Life,
UK Retail pensions Wholesale
Banking unit trusts Insurance Markets and
and General and asset and International Central
Mortgages insurance management Investments Banking group items Total
Year ended 31 GBP million GBP million GBP million GBP million GBP million GBP million GBP million
December 2002
Net interest income 3,340 38 36 74 1,903 (146) 5,171
Other finance income - - - - - 165 165
Income from long-term - - (314) (314) 11 - (303)
assurance business
Other operating income 1,076 1,065 228 1,293 1,338 138 3,845
Total income 4,416 1,103 (50) 1,053 3,252 157 8,878
Operating expenses (2,670) (180) (310) (490) (1,717) (38) (4,915)
Trading surplus 1,746 923 (360) 563 1,535 119 3,963
General insurance claims - (229) - (229) - - (229)
Provisions for bad and (563) - - - (473) 7 (1,029)
doubtful debts
Amounts written off fixed - - - - (57) (30) (87)
asset investments
Income from joint ventures (11) - - - - - (11)
Profit (loss) before tax 1,172 694 (360) 334 1,005 96 2,607
Life,
UK Retail pensions Wholesale
Banking unit trusts Insurance Markets and
and General and asset and International Central
Mortgages insurance management Investments Banking group items Total
Year ended 31 GBP million GBP million GBP million GBP million GBP million GBP million GBP million
December 2001*
Net interest income 3,102 48 32 80 1,845 (105) 4,922
Other finance income - - - - - 307 307
Income from long-term - - (41) (41) 12 - (29)
assurance business
Other operating income 1,135 900 288 1,188 1,196 170 3,689
Total income 4,237 948 279 1,227 3,053 372 8,889
Operating expenses (2,607) (169) (322) (491) (1,523) (155) (4,776)
Trading surplus 1,630 779 (43) 736 1,530 217 4,113
General insurance claims - (174) - (174) - - (174)
Provisions for bad and (415) - - - (338) 6 (747)
doubtful debts
Amounts written off fixed - - - - (22) (38) (60)
asset investments
Income from joint ventures (10) - - - - - (10)
Profit on sale of businesses - - - - 39 - 39
Profit (loss) before tax 1,205 605 (43) 562 1,209 185 3,161
F-15
2 Segmental analysis (continued)
Life,
UK Retail pensions Wholesale
Banking unit trusts Insurance Markets and
and General and asset and International Central
Mortgages insurance management Investments Banking group items Total
Year ended 31 GBP million GBP million GBP million GBP million GBP million GBP million GBP million
December 2000*
Net interest income 2,951 57 31 88 1,642 (94) 4,587
Other finance income - - - - - 424 424
Income from long-term - - 435 435 8 - 443
assurance business
Other operating income 1,143 774 315 1,089 990 100 3,322
Total income 4,094 831 781 1,612 2,640 430 8,776
Operating expenses (2,401) (142) (320) (462) (1,363) (53) (4,279)
Trading surplus 1,693 689 461 1,150 1,277 377 4,497
General insurance claims - (142) - (142) - - (142)
Provisions for bad and (332) - - - (228) 19 (541)
doubtful debts
Amounts written off fixed - - - - (14) (18) (32)
asset investments
Income from joint ventures 2 - 1 1 - - 3
Profit before tax 1,363 547 462 1,009 1,035 378 3,785
Geographical area: ** Inter- Inter- Inter-
Domestic national Total Domestic* national Total* Domestic* national Total*
2002 2002 2002 2001 2001 2001 2000 2000 2000
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Interest receivable 8,226 2,323 10,549 8,950 2,414 11,364 8,927 2,127 11,054
Other finance income 165 - 165 307 - 307 424 - 424
Fees and commissions 2,773 280 3,053 2,636 286 2,922 2,480 288 2,768
receivable
Dealing profits (before 125 63 188 138 95 233 149 49 198
expenses)
Income from long-term (314) 11 (303) (41) 12 (29) 435 8 443
assurance business
General insurance premium 486 - 486 428 - 428 399 - 399
income
Other operating income 552 211 763 538 170 708 269 167 436
Total gross income 12,013 2,888 14,901 12,956 2,977 15,933 13,083 2,639 15,722
Profit on ordinary 2,111 496 2,607 2,595 566 3,161 3,352 433 3,785
activities before tax
F-16
2 Segmental analysis (continued)
Net assets + Assets ++
2002 2001* 2002 2001*
GBPm GBPm GBPm GBPm
Class of business:
UK Retail Banking and Mortgages 2,541 2,437 85,868 77,982
Insurance and Investments
- General insurance 447 339 794 825
- Life, pensions, unit trusts 6,489 6,472 8,367 8,445
and asset management
6,936 6,811 9,161 9,270
Wholesale Markets and 4,925 4,405 110,845 100,777
International Banking
Central group items (6,393) (3,260) 1,544 1,375
8,009 10,393 207,418 189,404
Geographical area: **
Domestic 6,634 9,319 177,702 160,796
International 1,375 1,074 29,716 28,608
8,009 10,393 207,418 189,404
* Figures for 2001 and 2000 have been restated to take account of the
changes in accounting policy explained in note 1 and the reclassification of
emerging markets debt earnings from Wholesale Markets and International
Banking to Central group items.
** The geographical distribution of gross income sources, profit on
ordinary activities before tax and assets by domestic and international
operations is based on the location of the office recording the transaction,
except for lending by the international business booked in London.
+ Net assets represent shareholders' funds plus equity minority interests.
Disclosure of information on net assets is an accounting standard requirement
(SSAP 25); it is not appropriate to relate it directly to the segmental
profits above because the business is not managed by the allocation of net
assets to business units.
++ Assets exclude long-term assurance assets attributable to policyholders.
As the business of the Group is mainly that of banking and insurance, no
segmental analysis of turnover is given.
3 Dealing profits (before expenses) 2002 2001 2000
GBPm GBPm GBPm
Foreign exchange trading income 173 158 141
Securities and other gains 15 75 57
188 233 198
Dealing profits include the profits and losses arising both on the purchase and
sale of trading instruments and from the year-end revaluation to market value,
together with the interest income earned from these instruments and the related
funding cost.
F-17
4 Administrative expenses 2002 2001* 2000*
GBPm GBPm GBPm
Salaries and profit sharing 2,065 2,066 1,941
Social security costs 134 140 131
Other pension costs (note 43) 318 347 225
Staff costs 2,517 2,553 2,297
Other administrative expenses 1,697 1,673 1,596
4,214 4,226 3,893
*restated (see note 1)
2002 2001 2000
The average number of persons on a headcount
basis employed by the Group during
the year was as follows:
UK 71,134 71,184 67,848
Overseas 11,491 11,768 11,847
82,625 82,952 79,695
The above staff numbers exclude 5,870 (2001: 5,450; 2000: 6,152) staff employed
in the long-term assurance business. Costs of GBP209 million (2001: GBP168
million; 2000: GBP199 million) in relation to those staff are reflected in the
valuation of the long-term assurance business.
Details of directors' emoluments, pensions and interests are given on pages 81,
82 and 84 to 86.
During the year the auditors earned the following fees:
2002 2001 2000
GBPm GBPm GBPm
Statutory audit 4.8 4.0 4.1
Other audit fees including regulatory reporting 2.6 5.5 4.5
Due diligence 0.8 5.7 1.0
Internal control reviews 0.3 0.2 -
Other 0.2 0.5 0.3
Audit related fees 1.3 6.4 1.3
Audit and audit related fees 8.7 15.9 9.9
Tax fees 0.7 0.4 0.4
Management consultancy fees 0.1 3.5 24.5
Other fees 1.0 1.3 1.3
Total fees 10.5 21.1 36.1
The auditors' remuneration for the holding company was GBP50,000 (2001:
GBP50,000; 2000: GBP50,000).
It is the Group's policy to employ the auditors on assignments additional to
their statutory audit duties, where their expertise and experience with the
Group are important, principally relating to tax advice and due diligence
reporting on acquisitions and disposals. Following a change in policy earlier
this year, the auditors are no longer permitted to perform management
consultancy work on behalf of the Group.
5 Amounts written off fixed asset investments
2002 2001 2000
GBPm GBPm GBPm
Debt securities 84 58 27
Equity shares 3 2 5
87 60 32
F-18
6 Profit before tax on sale of businesses
On 3 October 2001 the Group announced the sale of its Brazilian fund management
and private banking business, including its subsidiary, Lloyds TSB Asset
Management S.A. This resulted in a profit on sale of GBP39 million (tax: GBP11
million).
7 Profit on ordinary activities before tax 2002 2001* 2000
GBPm GBPm GBPm
Profit on ordinary activities before tax is stated
after taking account of:
Income from:
Aggregate amounts receivable, including capital
repayments, in respect of assets leased to customers
and banks under:
Finance leases and hire purchase contracts 3,290 3,250 3,295
Operating leases 440 329 151
Profit less losses on disposal of investment 160 160 127
securities
Charges:
Rental of premises 220 203 193
Hire of equipment 18 18 26
Interest on subordinated liabilities (loan capital) 537 515 490
*restated (see note 1)
8 Tax on profit on ordinary activities
a) Analysis of charge for the year 2002 2001* 2000*
GBPm GBPm GBPm
UK corporation tax
Current tax on profits for the year 784 769 889
Adjustments in respect of prior years 12 (14) 3
796 755 892
Double taxation relief (129) (87) (72)
667 668 820
Foreign tax
Current tax on profits for the year 216 179 137
Adjustments in respect of prior years (15) (17) (5)
201 162 132
Current tax charge 868 830 952
Deferred tax (106) 44 129
Associated undertakings and joint ventures 2 1 1
764 875 1,082
* restated (see note 1)
The charge for tax on the profit for the year is based on a UK corporation tax
rate of 30 per cent (2001: 30 per cent; 2000: 30 per cent).
In addition to the tax charge in the profit and loss account detailed above,
GBP968 million (2001: GBP863 million; 2000: GBP450 million) of deferred tax has
been credited to the statement of total recognised gains and losses in respect
of actuarial losses recognised in post-retirement benefit schemes (note 43).
F-19
8 Tax on profit on ordinary activities (continued)
b) Factors affecting the tax charge for the year
A reconciliation of the charge that would result from applying the standard UK
corporation tax rate to profit before tax to the current tax charge and total
tax charge for the year is given below:
2002 2001 2000
GBPm GBPm GBPm
Profit on ordinary activities before tax 2,607 3,161 3,785
Tax charge thereon at UK corporation tax 782 948 1,135
rate of 30%
Factors affecting charge:
Change in non-allowable provisions - - 3
Goodwill amortisation 9 8 10
Overseas tax rate differences 24 12 14
Non-allowable and non-taxable items (28) 8 13
Gains exempted or covered by capital losses (23) (39) (14)
Tax deductible coupons on non-equity (12) (12) (12)
minority interests
Payments to employee trust (20) (60) (37)
Capital allowances in excess of 7 (48) (17)
depreciation
Other timing differences 99 4 (112)
Life companies rate differences 44 21 (11)
Other items (14) (12) (20)
Current tax charge 868 830 952
Deferred tax - capital allowances in (7) 48 17
excess of depreciation
- other timing differences (99) (4) 112
Associated undertakings and joint ventures 2 1 1
Tax on profit on ordinary activities 764 875 1,082
Effective rate 29.3% 27.7% 28.6%
c) Factors that may affect the future tax charge
The current tax charge includes a credit of GBP46 million (2001: charge of GBP11
million; 2000: charge of GBP122 million) in respect of notional tax on the
shareholder's interest in the movement in value of the long-term assurance
business. Since this derives from the use of a combination of tax rates it can
give rise to a higher or lower charge compared to an expected 30 per cent rate,
depending upon the reported investment returns.
Following Government changes recently announced in respect of employee benefit
trusts the future benefit to the tax charge from this source will be less.
In December 2002 the Inland Revenue announced its intention to introduce
legislation which may affect the tax treatment of certain transfers from
Scottish Widows plc's long-term business fund to its shareholder's fund. The
precise impact of these proposals is yet to be determined, however it is
possible that these transfers will be subject to a higher tax charge than was
previously anticipated.
Factors that may affect the future deferred tax charge are dealt with in Note
36.
9 Ordinary 2002 2001 2000 2002 2001 2000
dividends pence pence pence
per share per share per share GBPm GBPm GBPm
Interim: paid 10.7 10.2 9.3 597 566 511
Final: proposed 23.5 23.5 21.3 1,311 1,306 1,172
34.2 33.7 30.6 1,908 1,872 1,683
F-20
10 Earnings per share 2002 2001* 2000*
Profit attributable to shareholders+ GBP1,781m GBP2,229m GBP2,654m
Weighted average number of ordinary shares in 5,570m 5,533m 5,487m
issue during the year++
Dilutive effect of options outstanding 27m 50m 58m
Diluted weighted average number of ordinary 5,597m 5,583m 5,545m
shares in issue during the year
Earnings per share 32.0p 40.3p 48.4p
Diluted earnings per share 31.8p 39.9p 47.9p
* restated (see note 1)
+ No adjustment was made to profit attributable to shareholders in
calculating diluted earnings per share.
++ The weighted average number of shares for the year has been calculated
after deducting 5 million (2001: 15 million; 2000: 9 million) ordinary
shares held by Lloyds TSB Group Holdings (Jersey) Limited and the trustees
of the TSB Group Employee Trust, the Lloyds TSB Group Employee Share
Ownership Trust and the Lloyds TSB Qualifying Employee Share Ownership
Trust, on which dividends have been waived (note 26).
11 Treasury bills and 2002 2002 2001 2001
other eligible bills Balance Balance
sheet Valuation sheet Valuation
GBPm GBPm GBPm GBPm
Investment securities:
Treasury bills and 257 258 748 748
similar securities
Other eligible bills 1,622 1,620 2,034 2,032
1,879 1,878 2,782 2,780
Other securities:
Treasury bills and 530 1,630
similar securities
2,409 4,412
Geographical analysis by
issuer:
United Kingdom 1,726 2,620
Latin America 567 1,412
Other 116 380
2,409 4,412
Included above:
Unamortised discounts net 5 6
of premiums on investment
securities
Premiums
Cost and discounts Total
Movements in investment GBPm GBPm GBPm
securities comprise:
At 1 January 2002 2,777 5 2,782
Exchange and other (3) - (3)
adjustments
Additions 30,402 - 30,402
Bills sold or matured (31,301) (76) (31,377)
Amortisation of premiums - 75 75
and discounts
At 31 December 2002 1,875 4 1,879
Investment securities are those intended for use on a continuing basis in the
activities of the Group and not for dealing purposes.
The difference between the cost of other securities and market value, where the
market value is higher than the cost, is not disclosed as its determination is
not practicable.
It is expected that tax of GBP1 million (2001: GBP1 million) would be
recoverable if the investment securities were sold at their year end valuation.
F-21
12 Loans and advances to banks 2002 2001
GBPm GBPm
Lending to banks 2,212 1,616
Deposits placed with banks 15,318 13,610
Total loans and advances to banks 17,530 15,226
Provisions for bad and doubtful debts (1) (2)
17,529 15,224
Repayable on demand 4,313 2,443
Other loans and advances by residual maturity repayable:
3 months or less 8,512 8,995
1 year or less but over 3 months 2,624 2,698
5 years or less but over 1 year 1,700 708
Over 5 years 381 382
Provisions for bad and doubtful debts (1) (2)
17,529 15,224
13 Loans and advances to customers 2002 2001
GBPm GBPm
Lending to customers 123,007 111,541
Hire purchase debtors 5,990 5,345
Equipment leased to customers 7,300 7,585
Total loans and advances to customers 136,297 124,471
Provisions for bad and doubtful debts (1,766) (1,466)
Interest held in suspense (57) (70)
134,474 122,935
Loans and advances by residual maturity repayable:
3 months or less 23,989 21,393
1 year or less but over 3 months 10,357 8,867
5 years or less but over 1 year 30,637 27,910
Over 5 years 71,314 66,301
Provisions for bad and doubtful debts (1,766) (1,466)
Interest held in suspense (57) (70)
134,474 122,935
Of which repayable on demand or at short notice 11,852 10,116
The cost of assets acquired during the year for letting to customers under
finance leases and hire purchase contracts amounted to GBP3,752 million (2001:
GBP3,166 million).
Equipment leased to customers, which is stated after deducting GBP5,603 million
(2001: GBP5,905 million) of unearned charges, is repayable as follows:
2002 2001
GBPm GBPm
3 months or less 127 157
1 year or less but over 3 months 407 511
5 years or less but over 1 year 1,669 1,653
Over 5 years 5,097 5,264
7,300 7,585
F-22
13 Loans and advances to customers (continued)
Securitisations
Certain instalment credit receivables have been securitised and are subject to
non-returnable financing arrangements. In accordance with Financial Reporting
Standard 5, these items have been shown under the linked presentation method.
The Group's subsidiary, Black Horse Limited (formerly Chartered Trust plc),
entered into transactions whereby it disposed of its interest in portfolios of
motor vehicle and caravan instalment credit agreements for a total of GBP980
million to Cardiff Automobile Receivables Securitisation (UK) No 4 plc (CARS 4).
CARS Trustee (UK) No 4 Limited is responsible for the collection and onward
payment of all amounts falling due under the terms of the receivables sold to
CARS 4. Principal receipts up to 10 December 2000 were used to purchase further
receivables; subsequent to this date they are being used to redeem floating rate
notes. Income receipts are applied in the following order of priority: interest
due on the floating rate notes; credit manager fees; payments under swaps;
amounts due to third parties; dividends; and residual income to Black Horse
Limited. Black Horse Limited has been appointed by CARS Trustee (UK) No 4
Limited as credit manager and receives a fee for fulfilling this function. It
has no liability to the noteholders or any creditor of CARS 4 or CARS Trustee
(UK) No 4 Limited other than through failure to meet its obligations as credit
manager or for breach of warranties given. Black Horse Limited has no interest
in the share capital of CARS 4 or CARS Trustee (UK) No 4 Limited.
Black Horse Limited and CARS 4 have also entered into interest rate swaps in
respect of this transaction, the interest rates payable and receivable under
these swaps are set by reference to market rates of interest on an arm's length
basis.
At 31 December 2002 CARS 4 held GBP24 million (2001: GBP124 million) of
receivables, matched by non-returnable finance of the same amount.
14 Provisions 2002 2002 2001 2001 2000 2000
for bad and doubtful Specific General Specific General Specific General
debts and GBPm GBPm GBPm GBPm GBPm GBPm
non-performing
lending
At 1 January 1,099 369 1,069 357 1,053 361
Exchange and other (55) (3) (15) 1 4 (2)
adjustments
Adjustments on - 3 - - 45 4
acquisition
Advances written off (878) - (885) - (745) -
Recoveries of 203 - 194 - 165 -
advances written off
in previous years
Charge (release) to
profit and loss
account:
New and additional 1,544 64 1,310 64 1,093 7
provisions
Releases and (579) - (574) (53) (546) (13)
recoveries
965 64 736 11 547 (6)
At 31 December 1,334 433 1,099 369 1,069 357
1,767 1,468 1,426
In respect of:
Loans and advances 1 2 6
to banks
Loans and advances 1,766 1,466 1,420
to customers
1,767 1,468 1,426
2002 2001
GBPm GBPm
Non-performing lending comprises:
Accruing loans on which interest is being placed in suspense 752 843
Loans accounted for on a non-accrual basis 662 379
1,414 1,222
Provisions (992) (829)
Interest held in suspense (57) (70)
365 323
F-23
15 Concentrations of exposure 2002 2001
GBPm GBPm
Loans and advances to customers:
Domestic:
Agriculture, forestry and fishing 2,076 2,074
Manufacturing 3,373 3,321
Construction 1,482 1,309
Transport, distribution and hotels 4,696 4,440
Property companies 4,008 2,907
Financial, business and other services 8,352 8,736
Personal : mortgages 62,467 56,578
: other 14,931 12,784
Lease financing 7,285 7,552
Hire purchase 5,990 5,345
Other 3,397 2,992
Total domestic 118,057 108,038
International:
Latin America 1,591 2,347
New Zealand 10,447 8,435
Rest of the world 6,202 5,651
Total international 18,240 16,433
136,297 124,471
Provisions for bad and doubtful debts* (1,766) (1,466)
Interest held in suspense * (57) (70)
134,474 122,935
* Figures exclude provisions and interest held in suspense relating to loans and
advances to banks.
The classification of lending as domestic or international is based on the
location of the office recording the transaction, except for certain lending of
the international business booked in London.
F-24
16 Debt securities 2002 2002 2001 2001
Balance sheet Valuation Balance sheet Valuation
GBPm GBPm GBPm GBPm
Investment securities:
Government securities 2,140 2,141 2,781 2,976
Other public sector securities 1 1 - -
Bank and building society certificates of deposit 3,147 3,148 4,670 4,677
Corporate debt securities 1,495 1,496 613 616
Mortgage backed securities 893 892 521 527
Other asset backed securities 2,817 2,820 1,193 1,198
Other debt securities 1,369 1,367 1,211 1,209
11,862 11,865 10,989 11,203
Other securities:
Government securities 6,035 6,035 4,103 4,103
Other public sector securities 112 112 151 151
Bank and building society certificates of deposit 340 340 234 234
Corporate debt securities 7,842 7,842 7,102 7,102
Mortgage backed securities 1,838 1,838 1,054 1,054
Other asset backed securities 1,191 1,191 592 592
Other debt securities 94 94 - -
29,314 29,317 24,225 24,439
Due within 1 year 6,412 6,745
Due 1 year and over 22,902 17,480
29,314 24,225
Geographical analysis by issuer:
United Kingdom 5,569 5,947
Other European 13,254 9,920
North America and Caribbean 6,077 4,708
Latin America 1,231 1,290
Asia Pacific 2,763 1,921
Other 420 439
29,314 24,225
Unamortised discounts net of premiums on investment 337 622
securities
Investment securities:
Listed 6,102 6,101 5,544 5,751
Unlisted 5,760 5,764 5,445 5,452
11,862 11,865 10,989 11,203
Other securities:
Listed 16,034 16,034 12,139 12,139
Unlisted 1,418 1,418 1,097 1,097
17,452 17,452 13,236 13,236
Premiums
Cost & discounts Provisions Total
GBPm GBPm GBPm GBPm
Movements in investment securities comprise:
At 1 January 2002 10,553 519 83 10,989
Exchange and other adjustments (479) (28) (4) (503)
Additions 16,418 - - 16,418
Transfers to other securities (694) (451) (63) (1,082)
Securities sold or matured (13,913) (61) (11) (13,963)
Charge for the year - - 84 (84)
Amortisation of premiums and discounts - 87 - 87
At 31 December 2002 11,885 66 89 11,862
Investment securities are those intended for use on a continuing basis in the
activities of the Group and not for dealing purposes. Transfers to other
securities mainly relates to the reclassification of the Group's portfolio of
emerging market securities, following the decision to accelerate the disposal
programme for these investments.
The difference between the cost of other securities and market value, where the
market value is higher than the cost, is not disclosed as its determination is
not practicable. It is expected that tax of GBP4 million (2001: GBP60 million)
would be payable if the investment securities were sold at their year end
valuation.
F-25
17 Equity shares 2002 2002 2001 2001
Balance sheet Valuation Balance sheet Valuation
GBPm GBPm GBPm GBPm
Investment securities:
Listed 5 5 4 14
Unlisted 33 62 34 52
38 67 38 66
Other securities:
Listed 168 187
206 225
Cost Provisions Total
GBPm GBPm GBPm
Movements in investment securities comprise:
At 1 January 2002 50 12 38
Additions 10 - 10
Disposals (9) (2) (7)
Charge for the year - 3 (3)
At 31 December 2002 51 13 38
Investment securities are those intended for use on a continuing basis in the
activities of the Group and not for dealing purposes.
The difference between the cost of other securities and market value, where the
market value is higher than the cost, is not disclosed as its determination is
not practicable.
If investment securities were sold at their year end valuation no tax is
expected to be payable as any such gains would be covered by available capital
losses.
18 Assets transferred under sale and repurchase transactions
Included in the Group's balance sheet are assets subject to sale and repurchase
agreements as follows:
2002 2001
GBPm GBPm
Treasury bills and other eligible bills 588 1,036
Debt securities 5,651 4,498
6,239 5,534
These investments have been sold to third parties but, since the Group is
committed to reacquire them at a future date and at a predetermined price, they
are shown in the balance sheet.
19 Interests in joint ventures
GBPm
At 1 January 2002 39
Additions 21
Share of losses (15)
At 31 December 2002 45
The Group's principal investments are in two joint ventures:
Group interest Nature of business
iPSL 19.5% of issued ordinary share capital Cheque processing
Goldfish Holdings Limited 25.0% of issued ordinary share capital Financial services
During 2002 the Group contributed a further GBP21 million of capital to Goldfish
Holdings Limited.
F-26
19 Interests in joint ventures (continued)
In the year ended 31 December 2002 GBP31 million (2001: GBP27 million; 2000:
GBP4 million) of fees payable to iPSL have been included in the Group's
administrative expenses and GBP6 million (2001: GBP6 million; 2000: GBP1
million) of charges to iPSL have been included in the Group's income. The Group
has also prepaid GBP6 million (2001: GBP8 million) of fees in respect of 2003
and this amount is included in prepayments and accrued income.
In the year ended 31 December 2002 GBP25 million (2001: GBP1 million; 2000: nil)
of interest receivable from Goldfish Bank Limited and GBP12 million (2001: GBP22
million; 2000: nil) of charges to Goldfish Bank Limited in respect of
administrative costs have been included in the Group's income. At 31 December
2002 Goldfish Bank Limited owed GBP430 million (2001: GBP611 million) to the
Group, which is included in loans and advances to banks. In addition, at 31
December 2002, the Group had made facilities available for Goldfish Bank Limited
to borrow a further GBP420 million (2001: GBP239 million); these facilities are
included in undrawn commitments (note 44).
Included in the gross assets disclosed on the balance sheet is an investment of
GBP8 million (2001: GBP5 million) in associated undertakings.
20 Interests in group undertakings
The principal group undertakings, all of which have prepared accounts to 31
December and whose results are included in the consolidated accounts of Lloyds
TSB Group plc, are:
Country of
registration/ Percentage of equity share
incorporation capital and voting rights held Nature of business
Lloyds TSB Bank plc England 100% Banking and financial services
Cheltenham & Gloucester plc England +100% Mortgage lending and retail
investments
Lloyds TSB Commercial Finance England +100% Credit factoring
Limited
Lloyds TSB Leasing Limited England +100% Financial leasing
Lloyds TSB Private Banking England +100% Private banking
Limited
The Agricultural Mortgage England +100% Long-term agricultural finance
Corporation PLC
The National Bank of New Zealand New Zealand +100% Banking and financial services
Limited
Lloyds TSB Bank (Jersey) Limited Jersey +100% Banking and financial services
Lloyds TSB Scotland plc Scotland +100% Banking and financial services
Lloyds TSB General Insurance England +100% General insurance
Limited
Scottish Widows Investment England +100% Investment management
Partnership Group Limited
Abbey Life Assurance Company England +100% Life assurance
Limited
Lloyds TSB Insurance Services England +100% Insurance broking
Limited
Lloyds TSB Life Assurance England +100% Life assurance and other
Company Limited financial services
Lloyds TSB Asset Finance England +100% Consumer credit, leasing and
Division Limited related services
Black Horse Limited England +100% Consumer credit, leasing and
related services
Scottish Widows plc Scotland +100% Life assurance
Scottish Widows Annuities Limited Scotland +100% Life assurance
+ Indirect interest
The country of registration/incorporation is also the principal area of
operation for each of the above group undertakings except as follows:
Lloyds TSB Bank plc operates principally in the UK but also through branches in
Argentina, Belgium, Brazil, Dubai, Ecuador, Gibraltar, Guatemala, Hong Kong,
Honduras, Japan, Luxembourg, Malaysia, Monaco, Netherlands, Panama, Paraguay,
Singapore, Spain, Switzerland, Uruguay, the USA and a representative office in
Iran. The National Bank of New Zealand Limited also operates through
representative offices in the UK and Hong Kong.
F-27
21 Quasi-subsidiaries
The Group has interests in a number of entities which, although they do not meet
the legal definition of a subsidiary, give rise to benefits that are in
substance no different from those that would arise if those entities were
subsidiaries. As a consequence, these entities are consolidated in the same way
as if they were subsidiaries.
The primary financial statements of these entities can be summarised as follows:
Equipment leasing Structured finance
vehicles vehicles
2002 2001 2000 2002 2001 2000
GBPm GBPm GBPm GBPm GBPm GBPm
Profit and loss account
Interest receivable - - - 12 - -
Interest payable (55) (41) (21) (4) - -
Other operating income 80 58 29 - - -
Total income 25 17 8 8 - -
Operating expenses (24) (8) (18) - - -
Profit on ordinary activities before taxation 1 9 (10) 8 - -
Tax on profit on ordinary activities 5 (6) 10 - - -
Retained profit 6 3 - 8 - -
Balance sheet
Assets
Loans and advances to customers - - 329 -
Tangible fixed assets 1,307 911 - -
Other assets and prepayments 25 45 4 -
Total assets 1,332 956 333 -
Liabilities
Deposits by banks 1,245 923 - -
Debt securities in issue - - 73 -
Other liabilities and accruals 77 29 2 -
Shareholders' funds 10 4 258 -
Total liabilities 1,332 956 333 -
Cashflow statement
Net cash inflow (outflow) from operating 422 391 (250) -
activities
22 Intangible fixed assets Net book
Cost Amortisation value
GBPm GBPm GBPm
Goodwill
At 1 January 2002 2,640 74 2,566
Exchange and other adjustments 28 4 24
Acquisitions (note 46) 103 - 103
Charge for the year - 59 (59)
At 31 December 2002 2,771 137 2,634
F-28
23 Tangible fixed assets Operating lease
Premises Equipment assets
GBPm GBPm GBPm
Cost:
At 1 January 2002 1,074 2,270 1,771
Exchange and other adjustments (1) (7) (3)
Adjustments on acquisition 31 2 351
Additions 174 260 881
Disposals (82) (210) (428)
At 31 December 2002 1,196 2,315 2,572
Depreciation:
At 1 January 2002 334 1,278 138
Exchange and other adjustments (2) 1 -
Charge for the year 64 286 292
Disposals (19) (170) (215)
At 31 December 2002 377 1,395 215
Balance sheet amount at 31 December 2002 819 920 2,357
4,096
Balance sheet amount at 31 December 2001 740 992 1,633
3,365
2002 2001
GBPm GBPm
Balance sheet amount of premises comprises:
Freeholds 414 436
Leaseholds 50 years and over unexpired 132 36
Leaseholds less than 50 years unexpired 273 268
819 740
Land and buildings occupied for own activities 749 664
The Group's residual value exposure in respect of operating lease assets, all of
which are expected to be disposed of at the end of the lease terms, was as
follows:
2002 2001
GBPm GBPm
Residual value expected to be recovered in:
1 year or less 272 156
2 years or less but over 1 year 173 119
5 years or less but over 2 years 542 388
Over 5 years 617 482
Total exposure 1,604 1,145
F-29
24 Lease commitments
At 31 December 2002, the Group was committed to various non-cancellable
operating leases, which require aggregate future rental payments as follows:
Premises Equipment
GBPm GBPm
Payable within one year 227 3
1 to 2 years 196 1
2 to 3 years 190 1
3 to 4 years 185 -
4 to 5 years 177 -
Over 5 years 290 -
1,265 5
Annual commitments under non-cancellable operating leases were:
2002 2002 2001 2001
Premises Equipment Premises Equipment
GBPm GBPm GBPm GBPm
Leases on which the commitment is due
to expire in:
1 year or less 10 2 7 5
5 years or less but over 1 year 29 1 33 3
Over 5 years 188 - 181 -
227 3 221 8
2002 2001
Equipment Equipment
Obligations under finance leases were: GBPm GBPm
Amounts payable in 1 year or less 1 3
25 Capital commitments
Capital expenditure contracted but not provided for at 31 December 2002 amounted
to GBP117 million (2001: GBP137 million) of which GBP107 million (2001: GBP125
million) relates to assets to be leased to customers under operating leases.
26 Own shares
Lloyds TSB Group plc sponsors the Lloyds TSB Group Employee Share Ownership
Trust, a discretionary trust for the benefit of employees and former employees
of the Lloyds TSB Group. The Company has lent GBP21 million to the trustees,
interest free, to enable them to purchase Lloyds TSB Group plc ordinary shares,
which are used to satisfy options granted by the Company or to meet commitments
arising under other employee share schemes. Under the terms of the trust, the
trustees have waived all but a nominal dividend on the shares they hold. The
cost of providing these shares is charged to the profit and loss account on a
systematic basis over the period that the employees are expected to benefit. At
31 December 2002, 2 million shares were held by the trustees with a book value
of GBP13 million and a market value of GBP7 million. (2001: 2 million shares
with a book value of GBP15 million and a market value of GBP15 million).
The Group has also established the Lloyds TSB Qualifying Employee Share
Ownership Trust ('the QUEST') for the purpose of providing shares on the
exercise of options under certain of the Group's Save As You Earn (SAYE) share
option schemes. During 2002, Lloyds TSB Group plc contributed GBP66 million to
the QUEST, and the trustees subscribed for 18 million shares in the Company for
a consideration of GBP136 million. During 2001, Lloyds TSB Group plc contributed
GBP200 million and the trustees subscribed for 47 million shares for a
consideration of GBP316 million. At 31 December 2002, 2 million shares were held
by the QUEST with a book value of GBP5 million (2001: 2 million shares with a
book value of GBP8 million) reflecting the exercise price of the options the
shares are expected to be used to satisfy. Under the terms of the QUEST's trust
deed, the trustees have waived all
F-30
26 Own shares (continued)
but a nominal dividend on the shares they hold. The difference between the
amount contributed by the Company and the movement in the book value of the
shares and cash held by the QUEST has been charged to profit and loss account
reserves.
In addition, a further 0.4 million ordinary shares were held by Lloyds TSB Group
Holdings (Jersey) Limited at 31 December 2002 (2001: 0.5 million shares). These
shares, on which the dividend entitlement has been waived, were gifted to the
Group some years ago at nil cost and are used to satisfy outstanding options or
to meet commitments arising under other employee share schemes.
27 Other assets
2002 2001
GBPm GBPm
Balances arising from derivatives used for trading purposes (note 45a) 3,428 2,090
Balances arising from derivatives used for hedging purposes 778 931
Settlement balances 76 570
Other assets 981 877
5,263 4,468
28 Prepayments and accrued income
2002 2001*
GBPm GBPm
Interest receivable 931 843
Deferred expenditure incurred under cash gift and discount mortgage schemes 201 256
Other debtors and prepayments 1,173 1,197
2,305 2,296
*restated (see note 1)
29 Long-term assurance business
a Methodology
For the purposes of the Group's consolidated accounts, the value of the
shareholder's interest in the long-term assurance business is calculated on an
embedded value basis. The embedded value is comprised of the net tangible assets
of the life assurance subsidiaries, including any surplus retained in the
long-term business funds, which could be transferred to shareholders, and the
present value of the in-force business. The value of the in-force business is
calculated by projecting future surpluses and other net cash flows attributable
to the shareholder arising from business written by the balance sheet date and
discounting the result at a rate which reflects the shareholder's overall risk
premium attributable to this business.
Surpluses arise following annual actuarial valuations of the long-term business
funds, which are carried out in accordance with the statutory requirements
designed to ensure and demonstrate the solvency of the funds. Future surpluses
will depend upon experience in a number of areas such as investment returns,
lapse rates, mortality and administrative expenses. Surpluses can be projected
by making realistic assumptions about future experience, having regard to both
actual experience and forecast long-term economic trends. Other net cash flows
principally comprise annual management charges and other fees levied upon the
policyholders by the life assurance subsidiaries.
Changes in the embedded value, which are determined on a post-tax basis, are
included in the profit and loss account and described as income from long-term
assurance business. For the purpose of presentation the change in this value is
grossed up at the underlying rate of corporation tax.
F-31
29 Long-term assurance business (continued)
b Analysis of embedded value
The embedded value included in the consolidated balance sheet comprises:
2002 2001*
GBPm GBPm
Net tangible assets of life companies including surplus 3,324 3,628
Value of other shareholder's interests in the long-term assurance business 2,904 2,738
6,228 6,366
Movements in the embedded value balance have been as follows:
2002 2001*
GBPm GBPm
At 1 January - as previously reported 6,366 6,549
Prior year adjustment (note 1) - (53)
At 1 January - restated 6,366 6,496
Exchange and other adjustments (14) (35)
Loss after tax (257) (40)
Capital injections 140 100
Dividends (7) (155)
At 31 December 6,228 6,366
*restated (see note 1)
c Analysis of income from long-term assurance business
Income from long-term assurance business included in the profit and loss account
can be divided into those items comprising the operating profit of the business
and other items. Included within operating profit are the following items:
New business contribution: this represents the value recognised at the end of
the year from new business written during the year after taking into account the
cost of establishing technical provisions and reserves.
Contribution from existing business: this comprises the following elements:
* The expected return arising from the unwinding of the discount applied to the
expected cash flows at the beginning of the year;
* Experience variances caused by the differences between the actual experience
during the year and the expected experience;
* The effects of changes in assumptions, other than economic assumptions, and
other items;
* Pension provisions (see d);
* Endowment provision (see e); and
* Stakeholder pension related charge (see f).
Investment earnings: this represents the expected investment return on both the
net tangible assets and the value of the shareholder's interest in the long-term
business account, based upon the economic assumptions made at the beginning of
the year.
Distribution costs: this represents the actual costs of acquiring new business
during the year and includes commissions paid to independent financial advisors
and other direct sales costs.
Operating profit is adjusted by the following items to arrive at income from
long-term assurance business:
Investment variance: this represents (a) the difference between the actual
investment return in the year on investments backing shareholder funds and the
expected return based upon the economic assumptions made at the beginning of the
year; (b) the effect of these fluctuations on the value of in-force business;
and (c) other effects of changes in extraneous economic circumstances beyond the
control of management.
Changes in economic assumptions: this represents the effect of changes in the
economic assumptions referred to in h).
F-32
29 Long-term assurance business (continued)
c Analysis of income from long-term assurance business (continued)
Income from long-term assurance business is set out below:
2002 2001* 2000*
GBPm GBPm GBPm
New business contribution 413 374 305
Contribution from existing business
- expected return 312 348 321
- experience variances (1) 37 36
- changes in assumptions and other items 78 95 96
- pension provisions (see d) (40) (70) (100)
- endowment provision (see e) (165) - -
- stakeholder pension related charge (see f) - - (80)
Investment earnings 214 247 212
Distribution costs (277) (247) (225)
Operating profit 534 784 565
Investment variance (892) (813) (249)
Changes in economic assumptions (see h) 55 - 127
Income from long-term assurance business before tax (303) (29) 443
Attributed tax 46 (11) (122)
Income from long-term assurance business after tax (257) (40) 321
*restated (seen note 1)
d Pension provisions
During the early 1990s, there was increasing concern that many customers had
been given poor advice when they were advised to set up their own personal
pension plan and that they would, in fact, have been in a better position if
they had remained in, or joined, employer sponsored pension schemes. The
regulator of the pension industry (now the responsibility of the Financial
Services Authority) carried out an industry wide investigation into the conduct
of business involving the transfer of pensions. The conclusion of this
investigation was that a large number of customers had been poorly advised, by
insurance companies and intermediaries across the industry. As a result of this
investigation the regulator established an action plan for the pensions industry
to follow in reviewing all cases of possible misselling and determining the
necessary compensation. As the review of pension cases in the Group has
progressed, provisions have been established for the estimated cost of
compensation.
Movements in the provision over the last three years have been as follows:
2002 2001 2000
GBPm GBPm GBPm
At 1 January 203 352 397
Accrual of interest on the provision 17 20 26
Charge for the year 40 70 100
Compensation paid (223) (238) (173)
Guarantees* - (1) 2
At 31 December 37 203 352
* In some cases, rather than pay cash compensation directly into the customer's
personal pension plan, the Group has guaranteed to 'top-up' the customer's
pension income, on retirement, to the level that they would have received under
the relevant occupational scheme.
F-33
29 Long-term assurance business (continued)
d Pension provisions (continued)
By the end of 2000, the Group had gained significant experience as to the number
and size of claims likely to require compensation, in particular those affected
by the revised guidelines issued towards the end of 1999 dealing with the way in
which compensation should be calculated for those customers who had opted out of
the State Earnings Related Pension Scheme. After taking this into account, the
cost of redress was forecast to increase by GBP100 million and a provision of
this amount was made.
A review of the adequacy of the provision was carried out as at 31 December
2001. Lower stock market levels had had a significant impact on total redress
costs as the cost of restitution into company pension schemes rose as personal
pension fund values reduced. As a result of this and the fact that there was
greater certainty as to the number and size of compensation claims to be paid,
an additional provision of GBP70 million was made in the Group's results for
year ended 31 December 2001.
The adequacy of the provision has again been reviewed at 31 December 2002, in
the light of final experience as to the amount of compensation to be paid. Lower
stockmarket levels have increased the final cost of redress and a further
provision of GBP40 million has been made in the year ended 31 December 2002.
e Endowment provision
In common with a number of companies in the life assurance industry, Abbey Life
Assurance Company Limited ('Abbey Life'), one of the Group's life assurance
subsidiaries, has been carrying out a review of the past sales of certain
endowment based and long-term savings products made, primarily in the late 1980s
and early 1990s, by the Abbey Life sales force prior to its disposal by the
Group in February 2000. The Group has assessed the likely implications for
redress to policyholders and as a result a provision of GBP165 million had been
raised.
f Stakeholder pension related charge
During 1999, the government announced changes intended to encourage more of the
population to provide retirement income for themselves through increased rates
of savings. One of these initiatives was the introduction of stakeholder
pensions with effect from April 2001; a key feature of these products is that
charges are limited to 1 per cent per annum, which is significantly lower than
historic charging rates on other personal pension products. In anticipation of
the introduction of stakeholder pension products in 2001, during 2000 the Group
decided to reduce the charges made on certain existing policies, resulting in a
cost of GBP80 million.
g Guaranteed annuity options
After an extensive review of its existing practices, carried out in the light of
the judgement of the House of Lords in the guaranteed annuities case Equitable
Life vs. Hyman, it was announced that Scottish Widows was revising the way it
calculates benefits for guaranteed annuity policies with effect from 1 February
2002. As a result of this change, the terminal bonuses for guaranteed annuity
option policies were increased.
Under the terms of the transfer of the Scottish Widows business, a separate
memorandum account was created within the With Profits Fund called the
Additional Account. This Account had a value at 31 December 2002 of
approximately GBP1,500 million (2001: GBP1,700 million) and is available to meet
any additional costs of providing guaranteed benefits on transferred policies,
including guaranteed annuity option policies. The assets allocated to the
Additional Account include certain hedge assets, to provide protection to the
With Profits Fund against the consequences of a future fall in interest rates.
The eventual cost of providing the enhanced benefits is dependent upon a number
of factors, including in particular:
* The proportion of policyholders with a guaranteed annuity option policy who
choose to exercise their options;
* The effect of future interest rate and mortality trends on the costs of
annuities; and
* The future investment performance of the With Profits Funds.
Having considered a range of possible outcomes, the Group currently expects that
the most likely outcome is that the balance in the Additional Account available
for this purpose will be sufficient to meet the cost of the enhanced benefits
payable to the guaranteed annuity option policyholders, as well as other
contingencies. The cost of the enhanced benefits, currently estimated to be
approximately GBP1,100 million (2001: GBP1,400 million) on a net present value
basis, will be paid out over many years as policies mature. In the event that
the amount in the Additional Account proves, over time, to be insufficient, the
shortfall will be met by the Group. At this time, no provision is considered
necessary for such risk.
F-34
29 Long-term assurance business (continued)
h Assumptions
Following the publication, in December 2001, of the Association of British
Insurers' detailed guidance for the preparation of figures using the achieved
profits method of accounting the Group has reviewed the way in which economic
assumptions are set for the purposes of the embedded value calculations. The
guidance requires that the assumptions should be reviewed at each reporting
date. In order to comply with this guidance, and achieve greater comparability
with other major insurers, the Group has adopted this approach.
The principal economic assumptions have been revised at 31 December 2002 as
follows:
2002 2001
% %
Risk-adjusted discount rate (net of tax) 7.35 8.50
Return on equities (gross of tax) 7.10 8.00
Return on fixed interest securities (gross of tax) 4.50 5.25
Expenses inflation 3.30 3.00
The revised assumptions have resulted in a net credit to the profit and loss
account of GBP55 million.
Other assumptions used to derive the embedded value are as follows:
* Assumed rates of mortality and morbidity are taken from published tables
adjusted for demographic differences. Assumptions in respect of lapse rates
reflect the recent actual experience of the companies concerned.
* Current tax legislation and rates have been assumed to continue unaltered,
except where future changes have been announced. The UK corporation tax rate
used for grossing up was 30 per cent (2001: 30 per cent; 2000: 30 per cent).
The normalised investment earnings have been grossed up at a composite
longer term tax rate of 17 per cent (2001: 17 per cent; 2000: 17 per cent).
* The value of the in-force business does not allow for future premiums under
recurring single premium business or non-contractual increments, which
are included in new business when the premium is received. Department of
Social Security rebates have been treated as recurring single premiums.
* Future bonus rates on with-profits business are set at levels which would
fully utilise the assets supporting the with-profits business. The proportion
of profits derived from with-profits business allocated to the shareholder
has been assumed to continue at the current rate of one-ninth of the cost of
the bonus.
i Sensitivities
The table below shows the effect on both the embedded value at 31 December 2002
and the new business contribution for the year then ended of theoretical changes
in the main economic assumptions.
New
Embedded business
value contribution
GBPm GBPm
As published 6,228 413
Effect of a 1% increase in the discount rate (152) (27)
Effect of a 1% reduction in the discount rate 166 32
Effect of a 1% reduction in the return on equities (70) (12)
F-35
29 Long-term assurance business (continued)
j Balance sheet
The long-term assurance assets attributable to policyholders comprise:
2002 2001*
GBPm GBPm
Investments 47,151 47,910
Premises and equipment 45 16
Other assets 1,468 2,091
48,664 50,017
Net tangible assets of life companies including surplus (3,324) (3,628)
45,340 46,389
Investments shown above comprise:
Fixed interest securities 14,779 12,642
Stocks, shares and unit trusts 24,143 27,018
Investment properties 3,623 3,722
Other properties 121 121
Mortgages and loans 53 102
Deposits 4,432 4,305
47,151 47,910
The liabilities to policyholders comprise:
Technical provisions:
Long-term business provision (net of reinsurance) 23,217 24,129
Claims outstanding (net of reinsurance) 225 211
Technical provisions for linked liabilities 20,996 21,098
Fund for future appropriations 12 75
Other liabilities 890 876
45,340 46,389
*restated (see note 1)
F-36
29 Long-term assurance business (continued)
k Disclosures on a modified statutory solvency basis
The individual statutory accounts of the Group's life assurance subsidiaries are
prepared under the modified statutory solvency basis, in the same way as the
statutory accounts of listed insurance groups in the UK. The principle
difference between the modified statutory solvency basis and the embedded value
basis used for the preparation of the Group's accounts is that accounts prepared
under the modified statutory solvency basis do not reflect the value of in-force
business.
Under the modified statutory solvency basis, the results of the Group's
long-term life and pensions businesses were as follows:
2002 2001 2000
GBPm GBPm GBPm
Premiums 5,524 4,854 5,540
Investment income 1,942 1,832 1,677
Other income 33 93 23
7,499 6,779 7,240
Claims (5,031) (4,957) (4,617)
Change in technical provisions 3,877 2,759 (1,129)
Expenses (720) (625) (744)
Realised (losses) gains on investments (1,790) (1,031) 810
Unrealised losses on investments (4,445) (4,423) (2,499)
Other charges (3) (8) (2)
Tax attributable to long-term business 200 280 (67)
Transfer from the fund for future appropriations 63 1,365 1,014
Balance on the technical account - long-term business (350) 139 6
Tax credit attributable to balance on the technical account - long-term business (190) (103) 83
Income in shareholder fund 35 38 119
Expenses in shareholder fund (1) - (1)
(Loss) profit on ordinary activities before tax (506) 74 207
Tax on (loss) profit on ordinary activities 179 94 (92)
(Loss) profit for the financial year (327) 168 115
Income from long-term assurance business after tax reconciles to the loss
calculated on a modified statutory solvency basis as follows:
2002 2001 2000
GBPm GBPm GBPm
Income from long-term assurance business attributable to the shareholder after tax (257) (40) 321
(Increase) decrease in value-in-force (166) 111 (49)
(423) 71 272
Other differences:
- movement in deferred acquisition costs 45 (79) (52)
- tax adjustment 55 150 (33)
- other (4) 26 (72)
(Loss) profit for the financial year
- modified statutory solvency basis (327) 168 115
F-37
29 Long-term assurance business (continued)
k Disclosures on a modified statutory solvency basis (continued)
A summarised balance sheet on a modified statutory solvency basis was as
follows:
2002 2001
GBPm GBPm
Assets
Investments 26,555 27,204
Assets held to cover linked liabilities 20,996 21,098
Other assets 1,718 2,210
Total assets 49,269 50,512
Liabilities
Shareholder's funds 3,929 4,123
Fund for future appropriations 12 75
Long-term business provision + 23,217 24,129
Technical provision for linked liabilities + 20,996 21,098
Other creditors 1,115 1,087
Total liabilities 49,269 50,512
+ Net of reinsurers' share of technical provisions
The value of long-term business attributable to the shareholder on an embedded
value basis reconciles to the net assets of the Group's life and pensions
subsidiaries calculated on a modified statutory solvency basis as follows:
2002 2001
GBPm GBPm
Long-term assurance business attributable
to the shareholder - embedded value basis 6,228 6,366
Value of in-force business (2,904) (2,738)
3,324 3,628
Other differences:
- deferred acquisition costs 430 385
- tax adjustment 205 150
- other adjustments (30) (40)
Net tangible assets of life operations
- modified statutory solvency basis 3,929 4,123
30 Assets and liabilities denominated in
foreign currencies 2002 2001*
GBPm GBPm
Assets : denominated in sterling 142,661 132,812
: denominated in other currencies 64,757 56,592
207,418 189,404
Liabilities: denominated in sterling 142,641 132,915
: denominated in other currencies 64,777 56,489
207,418 189,404
* restated (see note 1)
Assets and liabilities exclude long-term assurance assets attributable to
policyholders and liabilities to policyholders.
F-38
31 Deposits by banks 2002 2001
GBPm GBPm
Repayable on demand 8,500 6,634
Other deposits by banks with agreed maturity
dates or periods of notice by residual
maturity repayable:
3 months or less 14,692 14,227
1 year or less but over 3 months 1,634 2,529
5 years or less but over 1 year 487 751
Over 5 years 130 169
25,443 24,310
The breakdown of deposits by banks between the
domestic and international offices of the Group
is set out below:
2002 2001
GBPm GBPm
Domestic
Non-interest bearing 166 601
Interest bearing 19,411 18,535
19,577 19,136
International
Non-interest bearing 82 80
Interest bearing 5,784 5,094
5,866 5,174
Total 25,443 24,310
32 Customer accounts 2002 2001
GBPm GBPm
Repayable on demand 87,918 80,635
Other customer accounts with agreed maturity
dates or periods of notice by residual maturity
repayable:
3 months or less 19,047 19,902
1 year or less but over 3 months 3,099 2,889
5 years or less but over 1 year 4,140 3,369
Over 5 years 2,130 2,321
116,334 109,116
The breakdown of customer accounts between the
domestic and international offices of the Group
is set out below:
2002 2001
GBPm GBPm
Domestic
Non-interest bearing 2,381 6,875
Interest bearing 103,870 92,919
106,251 99,794
International
Non-interest bearing 759 758
Interest bearing 9,324 8,564
10,083 9,322
Total 116,334 109,116
F-39
33 Debt securities in issue 2002 2001
GBPm GBPm
Bonds and medium-term notes by residual maturity repayable:
1 year or less 437 589
2 years or less but over 1 year 443 178
5 years or less but over 2 years 746 405
Over 5 years 1,659 928
3,285 2,100
Other debt securities by residual maturity repayable:
3 months or less 19,525 17,070
1 year or less but over 3 months 7,174 4,931
5 years or less but over 1 year 30 104
Over 5 years 241 215
26,970 22,320
30,255 24,420
Debt securities in issue include certificates of deposit of GBP21,246 million
(2001: GBP17,060 million) and commercial paper of GBP3,109 million (2001:
GBP1,966 million). An amount of GBP2,364 million (2001: GBP996 million) relating
to debt securities issued under the Group's Euro Medium Term Note programme is
included in these figures.
34 Other liabilities 2002 2001
GBPm GBPm
Balances arising from derivatives used for trading purposes (note 45a) 4,462 2,288
Balances arising from derivatives used for hedging purposes 611 475
Current tax 528 598
Dividends 1,311 1,306
Settlement balances 49 542
Other liabilities 1,328 1,464
8,289 6,673
35 Accruals and deferred income 2002 2001
GBPm GBPm
Interest payable 1,385 1,310
Other creditors and accruals 2,311 2,253
3,696 3,563
36 Deferred tax 2002 2001*
GBPm GBPm
Short-term timing differences (353) (271)
Accelerated depreciation allowances 1,670 1,682
1,317 1,411
GBPm
At 1 January 2002 - as previously reported 1,719
Prior year adjustment (note 1) (308)
At 1 January 2002 -restated 1,411
Exchange and other adjustments 25
Adjustments on acquisition (13)
Tax provided (106)
At 31 December 2002 1,317
*restated (note 1)
F-40
36 Deferred tax (continued)
Deferred tax is recognised in respect of the retained earnings of overseas
subsidiaries and associates only to the extent that, at the balance sheet date,
dividends have been accrued as receivable or a binding agreement to distribute
past earnings in future has been entered into. Deferred tax balances have not
been discounted.
The deferred tax balance at 31 December 2002 does not include any amounts in
respect of the Group's post-retirement benefit liability which is shown on the
balance sheet after deduction of a deferred tax asset of GBP854 million (2001: a
net post-retirement benefit asset of GBP281 million after deduction of a
deferred tax liability of GBP152 million) (note 43).
37 Other provisions for liabilities and charges
Post- Vacant
Pension Insurance retirement leasehold
obligations provisions healthcare property and other Total
GBPm GBPm GBPm GBPm GBPm
At 1 January 2002 - as previously reported 34 204 75 88 401
Prior year adjustment (note 1) (34) - (75) - (109)
At 1 January 2002 - restated - 204 - 88 292
Exchange and other adjustments - (2) - - (2)
Provisions applied - (210) - (40) (250)
Charge for the year - 233 - 88 321
At 31 December 2002 - 225 - 136 361
Insurance provisions
The Group's general insurance subsidiary maintains provisions for outstanding
claims which represent the ultimate cost of settling all claims arising from
events which have occurred up to the balance sheet date and these include
provisions for the cost of claims notified but not settled and for claims
incurred but not yet reported. In addition, in line with the requirements of the
Insurance Companies (Reserves) Act 1995, claims equalisation provisions are
maintained in relation to property, credit and suretyship business. The majority
of provisions in respect of claims will be settled in the following year,
although new provisions will then be required in respect of claims arising from
that year. The level of the claims equalisation provision will be adjusted
annually, taking into account the guidelines contained in the legislation, and
such provisions will be held for as long as the Group continues to write the
relevant types of general insurance business.
The Group also carries provisions in respect of its obligations relating to UIC
Insurance Company Limited ("UIC"), which is partly owned by the Group. The Group
has indemnified a third party against losses in the event that UIC does not
honour its obligations under a re-insurance contract, which is subject to
asbestosis and pollution claims in the US. The ultimate exposure to claims in
respect of the insurance business of UIC is uncertain. Accordingly, the
provision has been based upon an actuarial estimate of prospective claims,
taking account of re-insurance arrangements protecting UIC and UIC's available
assets. Given the long-term nature of many of the claims to which UIC is
exposed, it is expected to be many years before the Group's ultimate liability
can be assessed with certainty.
Vacant leasehold property and other
Vacant leasehold property provisions are made by reference to a prudent estimate
of expected sub-let income and the possibility of disposing of the Group's
interest in the lease, taking into account conditions in the property market.
These provisions are reassessed on an annual basis and will normally run off
over the remaining life of the leases concerned, currently averaging five years;
where a property is disposed of earlier than anticipated, any remaining balance
in the provision relating to that property is released.
F-41
38 Subordinated liabilities
2002 2001*
Notes GBPm GBPm
Undated loan capital (see below) 5,496 4,102
Dated loan capital (see below) 4,672 4,006
Total subordinated liabilities 10,168 8,108
** Undated loan capital:
Primary Capital Undated Floating Rate Notes: a
Series 1 (US$750 million) 466 516
Series 2 (US$500 million) 311 344
Series 3 (US$600 million) 373 412
11 3/4% Perpetual Subordinated Bonds 100 100
6.625% Perpetual Capital Securities (Euro750 million) b 482 451
6.90% Perpetual Capital Securities callable 2007 (US$1,000 million) c, j 610 -
5 5/8% Undated Subordinated Step-up Notes callable 2009 (Euro1,250 million) g 807 757
Undated Step-up Floating Rate Notes callable 2009 (Euro150 million) a 97 91
6 5/8% Undated Subordinated Step-up Notes callable 2010 e 406 406
6.35% Step-up Perpetual Capital Securities callable 2013 (Euro500million) d, g, j 322 -
5.57% Undated Subordinated Step-up Coupon Notes callable 2015 (Y20,000 million) h 104 105
6 1/2% Undated Subordinated Step-up Notes callable 2019 e 267 266
8% Undated Subordinated Step-up Notes callable 2023 e 199 199
6 1/2% Undated Subordinated Step-up Notes callable 2029 e 455 455
6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 e, j 497 -
5,496 4,102
Dated loan capital:
Eurocurrency Zero Coupon Bonds 2003 (Y3,045 million) 14 15
Subordinated Fixed Rate Bonds 2003 (NZ$151 million) f 48 43
Subordinated Floating Rate Notes 2004 a 10 15
7 3/8% Subordinated Bonds 2004 400 399
Subordinated Floating Rate Notes 2004 a, i 100 100
8 1/2% Subordinated Bonds 2006 249 249
7 3/4% Subordinated Bonds 2007 299 299
Subordinated Fixed Rate Bonds 2007 (NZ$150 million) f - 43
5 1/4% Subordinated Notes 2008 (DM 750 million) 249 234
10 5/8% Guaranteed Subordinated Loan Stock 2008 100 100
9 1/2% Subordinated Bonds 2009 99 99
Subordinated Step-up Floating Rate Notes 2009 callable 2004 (US$500 million) a 310 343
Subordinated Fixed Rate Bonds 2010 (NZ$100 million) f 33 29
6 1/4% Subordinated Notes 2010 (Euro400 million) 259 244
Subordinated Floating Rate Notes 2010 (US$400 million) a 248 274
12% Guaranteed Subordinated Bonds 2011 100 100
9 1/8% Subordinated Bonds 2011 149 149
4 3/4% Subordinated Notes 2011 (Euro850 million) 532 498
Subordinated Fixed Rate Bonds 2011 (NZ $100 million) f 33 28
Subordinated Fixed Rate Bonds 2012 (NZ $125 million) f, j 41 -
Subordinated Fixed Rate Bonds 2012 (NZ $125 million) f, j 41 -
5 7/8% Subordinated Guaranteed Bonds 2014 (Euro750 million) j 461 -
5 7/8% Subordinated Notes 2014 j 148 -
6 5/8% Subordinated Notes 2015 344 343
Subordinated Floating Rate Notes 2020 (Euro100 million) a 65 61
9 5/8% Subordinated Bonds 2023 340 341
4,672 4,006
* restated (see note 1)
These liabilities will, in the event of the winding-up of the issuer, be
subordinated to the claims of depositors and all other creditors of the issuer.
** In certain circumstances, these notes and bonds would acquire the
characteristics of preference share capital.
a These notes bear interest at rates fixed periodically in advance based on
London Interbank rates.
b In certain circumstances the interest payments on these securities can be
deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB
Group plc can declare or pay a dividend until any deferred payments have
been made. In the event of a winding up of Lloyds TSB Bank plc, these
securities will acquire the characteristics of preference shares. The
securities can be redeemed at par at the option of Lloyds TSB Bank plc on
or after 25 October 2006.
F-42
38 Subordinated liabilities (continued)
c In certain circumstances the interest payments on these securities can be
deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB
Group plc can declare or pay a dividend until payments are resumed. Any
deferred payments will be made good on redemption of the securities. In the
event of a winding up of Lloyds TSB Bank plc, these securities will acquire
the characteristics of preference shares. The securities can be redeemed at
par at the option of Lloyds TSB Bank plc on or after 22 November 2007.
d In certain circumstances the interest payments on these securities can be
deferred although in this case neither Lloyds TSB Bank plc nor Lloyds TSB
Group plc can declare or pay a dividend until any deferred payments have
been made. In the event of a winding up of Lloyds TSB Bank plc, these
securities will acquire the characteristics of preference shares. The
securities can be redeemed at par at the option of Lloyds TSB Bank plc on or
after 25 February 2013.
e At the callable date the coupon on these Notes will be reset by reference to
the applicable five year benchmark gilt rate.
f These bonds bear interest, to be reset 5 years before redemption date, at a
fixed margin over New Zealand Government stocks.
g In the event that these Notes are not redeemed at the callable date, the
coupon will be reset to a floating rate.
h In the event that these Notes are not redeemed at the callable date, the
coupon will be reset to a fixed margin over the then 5 year Yen swap rate.
i Exchangeable at the election of the Group for further subordinated floating
rate notes.
j Issued during 2002 primarily to finance the general business of the Group.
Dated subordinated liabilities are repayable as follows:
Group
2002 2001
GBPm GBPm
1 year or less 67 5
2 years or less but over 1 year 505 63
5 years or less but over 2 years 548 753
Over 5 years 3,552 3,185
4,672 4,006
39 Non-equity minority interests
Non-equity minority interests comprise: 2002 2001*
GBPm GBPm
Euro Step-up Non-Voting Non-Cumulative Preferred Securities callable 2012 (Euro430 million) ** 278 261
Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015 + 248 248
Capital instruments 526 509
European Financial Institution Investments Partnership ^ 123 -
LM ABS Investment Partnership # 45 -
694 509
* restated (see note 1)
** These securities constitute limited partnership interests in Lloyds TSB
Capital 1 L.P., a Jersey limited partnership in which Lloyds TSB (General
Partner) Limited, a wholly owned subsidiary, is the general partner.
Non-cumulative income distributions accrue at a fixed rate of 7.375 per cent per
annum up to 7 February 2012; thereafter they will accrue at a rate of 2.33 per
cent above EURIBOR, to be set annually.
+ These securities constitute limited partnership interests in Lloyds TSB
Capital 2 L.P., a Jersey limited partnership in which Lloyds TSB (General
Partner) Limited, a wholly owned subsidiary, is the general partner.
Non-cumulative income distributions accrue at a fixed rate of 7.834 per cent per
annum up to 7 February 2015; thereafter they will accrue at a rate of 3.50 per
cent above a rate based on the yield of specified UK government stock.
Both of the above issues were made under the limited subordinated guarantee of
Lloyds TSB Bank plc. In certain circumstances these preferred securities will be
mandatorily exchanged for preference shares in Lloyds TSB Group plc. Lloyds TSB
Group plc has entered into an agreement whereby dividends may only be paid on
its ordinary shares if sufficient distributable profits are available for
distributions due in the financial year on these preferred securities.
F-43
39 Non-equity minority interests (continued)
^ These securities constitute interests in European Financial Institution
Investments Partnership, an English law general partnership in which the
principal partner is Langbourn Holdings Limited, a wholly owned subsidiary of
the Group. The minority interests are entitled to 90 per cent of the
partnership's profits. In the event of a winding-up, at least 90 per cent of the
capital of the partnership would be returned to Langbourn Holdings Limited.
# These securities constitute interests in LM ABS Investment Partnership, an
English law general partnership in which the principal partner is Lime Street
Holdings Limited, a wholly owned subsidiary of the Group. The minority interests
are entitled to 95 per cent of the partnership's profits. In the event of a
winding-up, at least 85 per cent of the capital of the partnership would be
returned to Lime Street Holdings Limited.
40 Called-up share capital 2002 2001 2000
GBPm GBPm GBPm
Authorised:
Sterling
6,911 million Ordinary shares of 25p each 1,728 1,728 1,728
79 million Limited voting ordinary shares of 25p each 20 20 20
175 million Preference shares of 25p each 44 44 44
1,792 1,792 1,792
US dollars US$m US$m US$m
160 million Preference shares of US25 cents each 40 40 40
Euro Eurom Eurom Eurom
160 million Preference shares of Euro25 cents each 40 40 40
Japanese yen Ym Ym Ym
50 million Preference shares of Y25 each 1,250 1,250 1,250
Issued and fully paid: 2002 2001 2000
GBPm GBPm GBPm
Ordinary shares of 25p each
At 1 January 1,391 1,376 1,369
Issued to the QUEST (note 27) 5 12 7
Issued under employee share schemes - 3 -
At 31 December 1,396 1,391 1,376
Limited voting ordinary shares of 25p each
At 1 January and 31 December 20 20 20
Total 1,416 1,411 1,396
Number of shares in issue (millions):
Ordinary shares at 25p each 5,583 5,564 5,507
Limited voting ordinary shares at 25p each 79 79 79
The limited voting ordinary shares are held by the Lloyds TSB Foundations. These
shares carry no rights to dividends but rank pari passu with the ordinary shares
in respect of other distributions and in the event of winding up. These shares
do not have any right to vote at general meetings other than on resolutions
concerning acquisitions or disposals of such importance that they require
shareholder consent, or for the winding up of the Company, or for a variation in
the class rights of the limited voting ordinary shares.
Lloyds TSB Group plc has entered into deeds of covenant with the Lloyds TSB
Foundations, under the terms of which the Company makes annual donations to the
foundations equal, in total, to 1 per cent of the Group's pre-tax profits (after
certain adjustments) averaged over three years. The deeds of covenant can be
cancelled by the Company at nine years' notice.
At 31 December 2002, options to acquire 126 million Lloyds TSB Group ordinary
shares of 25p each were outstanding under the executive share option schemes,
the share retention plan, and the staff sharesave share option schemes
exercisable up to 2012. These include the option, described on page 81, to
acquire 216,763 shares under the share retention plan: otherwise the options are
exercisable at prices ranging from 160p to 888p per share.
F-44
41 Reserves 2002 2001 2000
GBPm GBPm GBPm
Share premium account:
At 1 January 959 595 404
Premium arising on issue of shares 134 364 191
At 31 December 1,093 959 595
Merger reserve:
At 1 January and 31 December 343 343 343
Profit and loss account:
At 1 January - as previously reported 7,643 9,567 6,693
Prior year adjustment (note 1) - - 2,931
At 1 January - restated 7,643 9,567 9,624
Exchange and other adjustments (3) (86) (11)
Actuarial losses recognised in post-retirement benefit schemes (note 43) (2,331) (2,010) (1,002)
Charge in respect of the QUEST (note 26) (62) (185) (124)
Goodwill written back on sale and closure of businesses - - 109
(Loss) profit for the year (127) 357 971
At 31 December 5,120 7,643 9,567
The profit and loss account reserves at 31 December 2002 include GBP1,310
million (2001: GBP1,222 million; 2000: GBP1,238 million) not presently available
for distribution representing the Group's share of the value of long-term
assurance business in force and the surplus retained within the long-term
assurance funds. The profit and loss account reserves at 31 December 2002 are
stated after including a deficit of GBP2,077 million relating to the Group's
post-retirement defined benefit schemes (2001: surplus of GBP281 million; 2000:
surplus of GBP2,305 million).
The cumulative amount of premiums on acquisitions written off against reserves
during previous years amounts to GBP2,271 million of which GBP1,823 million was
within the last 10 years.
The accumulated foreign exchange translation adjustment as at 31 December 2002
reduced reserves by GBP262 million (2001: GBP259 million; 2000: GBP173 million).
42 Related party transactions
a Transactions, arrangements and agreements involving directors and others
At 31 December 2002, transactions, arrangements and agreements entered into by
the Group's banking subsidiaries with directors and connected persons and with
officers included:
2002 2002 2001 2001
Number of Total Number of Total
persons GBP000 persons GBP000
Loans and credit card transactions:
Directors and connected persons 4 3,334 7 1,343
Officers 31 3,930 28 4,113
During the year three officers purchased cars from the Group for a total
consideration of GBP37,000.
b Group undertakings
Details of the principal group undertakings are given in note 20. In accordance
with FRS 8, transactions or balances with group entities that have been
eliminated on consolidation are not reported.
c Joint ventures
Details of the Group's joint ventures are provided in note 19. Information
relating to transactions entered into between Group undertakings and the joint
ventures and details of outstanding balances at 31 December 2002 are also shown
in note 19.
F-45
42 Related party transactions (continued)
d Long-term assurance business
The Group enters into certain transactions with its long-term assurance
businesses, which cannot be eliminated in the consolidated accounts because of
the basis of accounting used for the Group's long-term assurance businesses.
After taking into account legally enforceable netting agreements, at 31 December
2002 Group entities owed GBP1,372 million (2001: GBP1,186 million) and were owed
GBP145 million (2001: GBP299 million); these amounts are included in customer
accounts and loans and advances to customers respectively. In addition, fees of
GBP76 million (2001: GBP62 million; 2000: GBP68 million) were received, and fees
of GBP35 million (2001: GBP28 million; 2000: GBP29 million) were paid, in
respect of asset management services.
Certain administrative properties used by Scottish Widows are owned by the
long-term assurance funds. During 2002 Scottish Widows paid rent to the
long-term assurance funds amounting to GBP5 million (2001: GBP4 million; 2000:
GBP3 million). In addition, at 31 December 2002, the long-term assurance funds
owned 31 million ordinary shares in the Company (2001: 31 million shares).
e Pension funds
Group entities provide a number of banking and other services to the Group's
pension funds, which are conducted on similar terms to third party transactions.
At 31 December 2002, the Group's pension funds had call deposits with Lloyds TSB
Bank plc amounting to GBP89 million (2001: GBP572 million).
43 Pensions and other post-retirement benefits
The pension costs included in administrative expenses are comprised as follows:
2002 2001 2000
GBPm GBPm GBPm
Defined contribution schemes 25 18 16
Defined benefit schemes 293 329 209
318 347 225
The majority of the Group's employees are members of the defined benefit
sections of Lloyds TSB Group Pension Schemes No's 1 and 2. During the years
ended 31 December 2000, 2001 and 2002, the Group made no contributions to these
schemes. Since the defined benefit sections of these schemes are now closed to
new members and the age profile of the active members is increasing, under the
projected unit method, the current service cost will increase as the members of
the schemes approach retirement.
The latest full valuations of the schemes were carried out as at 30 June 2002;
these have been updated to 31 December 2002 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 2002 by qualified
independent actuaries or, in the case of the Scottish Widows Retirement Benefits
Scheme, by a qualified actuary employed by Scottish Widows.
The principal assumptions used in the scheme valuations were as follows:
31 31
December December
2002 2001
% %
Rate of inflation 2.30 2.50
Rate of salary increases 3.83 4.04
Rate of increase for pensions in payment and deferred pensions 2.30 2.50
Discount rate 5.60 6.00
In addition, the Group operates a number of schemes which provide
post-retirement healthcare benefits to certain employees, retired employees and
their dependent relatives. The principal scheme relates to former Lloyds Bank
staff and under this scheme the Group has undertaken to meet the cost of
post-retirement healthcare for all eligible former employees (and their
dependents) who retired prior to 1 January 1996. For retirements subsequent to
this date, the Group will meet a reducing proportion of the cost until 31
December 2004, after which date the only obligation will be in respect of the
pre 1 January 1996 retirements.
Included within other finance income is an interest cost of GBP4 million (2001:
GBP3 million; 2000: GBP3 million) in respect of these defined benefit
post-retirement healthcare schemes.
F-46
43 Pensions and other post-retirement benefits (continued)
For the principal post-retirement healthcare scheme, the latest actuarial
valuation of the liability was carried out at 31 December 2000; this valuation
has been updated to 31 December 2002 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 4.86 per cent.
The assets of the Group's defined benefit schemes and the expected rates of
return are summarised as follows:
Expected Expected long-
long-term rate term rate of
Fair value at of return at 31 Fair value at return at 31
31 December December 31 December December
2002 2002 2001 2001
GBPm % GBPm %
Market values of scheme assets:
Equities 7,175 8.4 7,779 8.0
Fixed interest securities 557 4.5 1,835 5.1
Property 791 6.9 798 7.1
Other 560 5.4 714 4.1
Total fair value of scheme assets 9,083 11,126
Other finance income is comprised of:
2002 2001 2000
GBPm GBPm GBPm
Expected return on scheme assets 817 844 931
Interest cost of scheme liabilities (652) (537) (507)
165 307 424
The pension and other post-retirement benefit cost in respect of defined benefit
schemes is comprised of:
2002 2001 2000
GBPm GBPm GBPm
Current service cost 244 212 209
Past service costs 49 117 -
Defined benefit costs 293 329 209
F-47
43 Pensions and other post-retirement benefits (continued)
The amounts recognised in the statement of total recognised gains and losses are
comprised of:
2002 2001 2000
GBPm GBPm GBPm
Actual return less expected return on scheme assets (2,582) (2,015) (1,138)
Experience gains and losses arising on scheme liabilities (240) (71) (314)
Effect of changes in demographic and financial assumptions (477) (787) -
Actuarial losses recognised (3,299) (2,873) (1,452)
Deferred tax thereon 968 863 450
Amount recognised in the statement of total recognised gains and losses (2,331) (2,010) 1,002
The experience gains and losses recognised can also be interpreted as follows:
2002 2001 2000
GBPm GBPm GBPm
Actual return less expected return on scheme assets
Amount (2,582) (2,015) (1,138)
Percentage of scheme assets at balance sheet date 28.4% 18.1% 9.1%
Experience gains and losses arising on scheme liabilities
Amount (240) (71) (314)
Percentage of scheme liabilities at balance sheet date 2.0% 0.7% 3.4%
Total amount recognised in the statement of total recognised gains and losses
Amount (3,299) (2,873) (1,452)
Percentage of scheme liabilities at balance sheet date 27.5% 26.9% 15.9%
The amounts reported on the Group's balance sheet are comprised as follows:
2002 2001
GBPm GBPm
Market value of assets 9,083 11,126
Present value of scheme liabilities (12,014) (10,693)
(Deficit) surplus in the schemes (2,931) 433
Related deferred tax asset (liability) 854 (152)
Net post-retirement benefit (liability) asset (2,077) 281
Disclosed in the accounts as follows:
Post-retirement benefit asset - 356
Post-retirement liability (2,077) (75)
(2,077) 281
The movements in the (deficit) surplus in the schemes over the year have been as
follows:
2002 2001
GBPm GBPm
Surplus at beginning of year 433 3,325
Exchange and other adjustments 26 -
Other finance income 165 307
Current service costs (244) (212)
Contributions 37 3
Past service costs (49) (117)
Actuarial loss (3,299) (2,873)
(Deficit) surplus at end of year (2,931) 433
F-48
44 Contingent liabilities and commitments
a Contingent liabilities and commitments arising out of banking transactions
Acceptances and endorsements arise where the Lloyds TSB Group agrees to
guarantee payment on a negotiable instrument drawn up by a customer.
Guarantees include those given on behalf of a customer to stand behind the
current obligations of the customer and to carry out those obligations should
the customer fail to do so.
Other items serving as direct credit substitutes include standby letters of
credit, or other irrevocable obligations, serving as financial guarantees where
the Lloyds TSB Group has an irrevocable obligation to pay a third party
beneficiary if the customer fails to repay an outstanding commitment; they also
include acceptances drawn under letters of credit or similar facilities where
the acceptor does not have specific title to an identifiable underlying shipment
of goods.
Performance bonds and other transaction related contingencies (which include bid
or tender bonds, advance payment guarantees, VAT Customs & Excise bonds and
standby letters of credit relating to a particular contract or non-financial
transaction) are undertakings where the requirement to make payment under the
guarantee depends on the outcome of a future event.
Where guarantees are issued on behalf of customers, Lloyds TSB Group usually
holds collateral against the exposure or has a right of recourse to the
customer.
Lloyds TSB Group's maximum exposure to loss is represented by the contractual
nominal amount detailed in the table below. Consideration has not been taken of
any possible recoveries from customers for payments made in respect of such
guarantees under recourse provisions or from collateral held or pledged.
A maturity analysis of all commitments and contingencies is give on page 68 of
the 'Operating and Financial Review and Prospects'.
2002 2001
GBPm GBPm
Contingent liabilities:
Acceptances and endorsements 1,879 2,243
Guarantees 5,927 3,789
Other:
Other items serving as direct credit substitutes 1,103 460
Performance bonds and other transaction-related contingencies 1,436 1,469
Other contingent liabilities 1 2
2,540 1,931
10,346 7,963
Commitments:
Documentary credits and other short-term trade-related transactions 289 354
Forward asset purchases and forward deposits placed 394 783
Undrawn note issuing and revolving underwriting facilities 32 35
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year maturity 49,417 42,594
1 year or over maturity 14,372 9,576
64,504 53,342
b Contingent liabilities arising out of past sales of savings and investment
products
In common with other companies providing savings and investment products to
retail consumers, matters arise from time to time as a result of customer
complaints or investigations by the regulator requiring remedial action to be
taken, which may include the payment of compensation.
One such matter relates to the sale of life assurance products related to the
repayment of residential mortgages. Falling investment returns have led to
increased concern that the value of some of these policies will be less than the
amount required to repay the mortgage. Certain customers have complained that
this risk was not properly explained to them at the time of sale. Following a
review of past sales made by Abbey Life a provision of GBP165 million has been
made for the estimated cost of redress (note 29e).
Other complaints, including those related to the sale of life assurance
products, are dealt with on a case by case basis and where appropriate
compensation is paid. Provision has been made, based upon the level of
complaints for the estimated cost of redress which is not significant. If the
position changes, further provisions may be required.
F-49
44 Contingent liabilities and commitments (continued)
b Contingent liabilities arising out of past sales of savings and investment
products (continued)
Concerns have also been expressed over the appropriateness of certain sales of
stockmarket related savings products. In this regard the Group is carrying out,
in conjunction with the regulator, an investigation into the sales of the Extra
Income & Growth Plan. This investigation is expected to be completed during 2003
when the Group will be in a position to estimate the financial effect.
45 Derivatives and other financial instruments
Information about the Group's use of financial instruments and management of the
associated risks is given on pages 60 to 63.
a Derivatives
Derivatives are used to meet the financial needs of customers, as part of the
Group's trading activities and to reduce its own exposure to fluctuations in
interest and exchange rates. The principal derivatives used by the Group are
interest rate and exchange rate contracts; particular attention is paid to the
liquidity of the markets and products in which the Group trades to ensure that
there are no undue concentrations of activity and risk.
Interest rate related contracts include interest rate swaps, forward rate
agreements and options. An interest rate swap is an agreement between two
parties to exchange fixed and floating interest payments, based upon interest
rates defined in the contract, without the exchange of the underlying principal
amounts. Forward rate agreements are contracts for the payment of the difference
between a specified rate of interest and a reference rate, applied to a notional
principal amount at a specific date in the future. An interest rate option gives
the buyer, on payment of a premium, the right, but not the obligation, to fix
the rate of interest on a future loan or deposit, for a specified period and
commencing on a specified future date.
Exchange rate related contracts include forward foreign exchange contracts,
currency swaps and options. A forward foreign exchange contract is an agreement
to buy or sell a specified amount of foreign currency on a specified future date
at an agreed rate. Currency swaps generally involve the exchange of interest
payment obligations denominated in different currencies; the exchange of
principal can be notional or actual. A currency option gives the buyer, on
payment of a premium, the right, but not the obligation, to sell specified
amounts of currency at agreed rates of exchange on or before a specified future
date.
Equity derivatives are also used by the Group as part of its equity based retail
product activity to eliminate the Group's exposure to fluctuations in various
international stock exchange indices. Index-linked equity options are purchased
which give the Group the right, but not the obligation, to buy or sell a
specified amount of equities, or basket of equities in the form of published
indices on or before a specified future date.
Derivatives contracts expose the Group to both market risk and credit risk. Only
a few highly specialist trading centres within the Group are permitted to enter
into derivative contracts and the level of exposure to interest rate and
exchange rate movements and other market variables is strictly controlled and
monitored within approved limits.
Unlike on-balance sheet instruments the principal amount of the contract does
not represent the Group's real exposure to credit risk which is limited to the
current cost of replacing contracts with a positive value to the Group, should
the counterparty default. To reduce credit risk the Group uses a variety of
credit enhancement techniques such as netting and collateralisation, where
security is provided against the exposure.
F-50
45 Derivatives and other financial instruments (continued)
a Derivatives (continued)
Trading
The notional principal amounts and fair values (which, after netting,
are the carrying values) of trading instruments entered into with third parties
were as follows:
31 December 2002 Notional Fair values
principal
amount Assets Liabilities
GBPm GBPm GBPm
Exchange rate contracts:
Spot, forwards and futures 94,250 2,064 2,735
Currency swaps 8,556 232 304
Options purchased 4,468 87 8
Options written 4,303 - 103
111,577 2,383 3,150
Interest rate contracts:
Interest rate swaps 258,523 5,473 5,808
Forward rate agreements 41,768 35 37
Options purchased 8,248 105 -
Options written 4,899 - 152
Futures 18,963 - -
332,401 5,613 5,997
Equity contracts 5,662 608 491
Effect of netting (5,176) (5,176)
Balances arising from off-balance sheet financial instruments 3,428 4,462
31 December 2001 Notional Fair values
principal
amount Assets Liabilities
GBPm GBPm GBPm
Exchange rate contracts:
Spot, forwards and futures 95,895 1,035 1,038
Currency swaps 6,737 223 152
Options purchased 3,825 11 -
Options written 3,492 - 9
109,949 1,269 1,199
Interest rate contracts:
Interest rate swaps 286,617 4,085 4,535
Forward rate agreements 54,171 78 84
Options purchased 8,887 73 -
Options written 3,993 - 58
Futures 35,112 - -
388,780 4,236 4,677
Equity contracts 4,580 428 255
Effect of netting (3,843) (3,843)
Balances arising from off-balance sheet financial instruments 2,090 2,288
F-51
45 Derivatives and other financial instruments (continued)
a Derivatives (continued)
Non-trading
Through intra company and intra group transactions, Group companies
establish non-trading derivatives positions with the Group's independent trading
operations, which then enter into similar positions with third parties. The
notional principal amounts and fair values of non-trading instruments entered
into with third parties were as follows:
Notional Fair values
principal
amount Positive Negative
31 December 2002 GBPm GBPm GBPm
Exchange rate contracts:
Spot, forwards and futures 146 16 4
Currency swaps 59 4 1
205 20 5
Interest rate contracts:
Interest rate swaps 17,261 129 223
Forward rate agreements 1,279 2 2
Options written 41 - 1
18,581 131 226
Effect of netting (36) (36)
115 195
Notional Fair values
principal
amount Positive Negative
31 December 2001 GBPm GBPm GBPm
Exchange rate contracts:
Spot, forwards and futures 146 3 1
Currency swaps 70 9 1
216 12 2
Interest rate contracts:
Interest rate swaps 2,919 164 68
Forward rate agreements 62 - -
2,981 164 68
Effect of netting (39) (39)
137 31
The aggregate carrying value of non-trading derivatives with a positive fair
value was an asset of GBP54 million (2001: an asset of GBP18 million) and with a
negative fair value was an asset of GBP9 million (2001: an asset of GBP1
million).
F-52
45 Derivatives and other financial instruments (continued)
a Derivatives (continued)
The maturity of the notional principal amounts and replacement cost of both
trading and non-trading instruments entered into with third parties was:
Under 1 to 5 Over 5
1 year years years Total
GBPm GBPm GBPm GBPm
31 December 2002
Exchange rate contracts:
Notional principal amount 102,559 6,888 2,335 111,782
Replacement cost 2,209 108 86 2,403
Interest rate contracts:
Notional principal amount 150,883 149,381 50,718 350,982
Replacement cost 850 2,682 2,212 5,744
Equity contracts:
Notional principal amount 1,130 3,714 818 5,662
Replacement cost 3 531 74 608
Total:
Notional principal amount 254,572 159,983 53,871 468,426
Replacement cost 3,062 3,321 2,372 8,755
31 December 2001
Exchange rate contracts:
Notional principal amount 102,130 6,260 1,775 110,165
Replacement cost 1,087 152 42 1,281
Interest rate contracts:
Notional principal amount 187,570 155,079 49,112 391,761
Replacement cost 1,300 1,796 1,304 4,400
Equity contracts:
Notional principal amount 738 3,394 448 4,580
Replacement cost 75 330 23 428
Total:
Notional principal amount 290,438 164,733 51,335 506,506
Replacement cost 2,462 2,278 1,369 6,109
The notional principal amount does not represent the Group's real exposure to
credit risk, which is limited to the current cost of replacing contracts at
current market rates should the counterparties default.
Net replacement cost represents the total positive fair value of all derivative
contracts at the balance sheet date, after allowing for the offset of all
negative fair values where the Group has a legal right of set-off with the
counterparty concerned.
An analysis of the net replacement cost of both trading and non-trading
instruments entered into with third parties by counterparty type is set out
below; the Group's exposure is further reduced by qualifying collateral held.
2002 2001
GBPm GBPm
OECD banks 1,939 1,425
Other 1,604 802
Net replacement cost 3,543 2,227
Qualifying collateral held (521) (339)
Potential credit risk exposure 3,022 1,888
F-53
45 Derivatives and other financial instruments (continued)
b Interest rate sensitivity gap analysis for the non-trading book
The table below summarises the repricing mismatches of the Group's non-trading
assets and liabilities. Items are allocated to time bands by reference to the
earlier of the next contractual interest rate repricing date and the maturity
date. The table does not take into account the effect of interest rate options
used by the Group to hedge its exposure; details of options are given in note
45a.
6 months 1 year 5 years
or less or less or less Non-
3 months but over but over but over Over interest Trading
or less 3 months 6 months 1 year 5 years bearing book Total
As at 31 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
December 2002
Assets:
Treasury bills 1,759 23 94 1 2 - 530 2,409
and other
eligible bills
Loans and 12,363 1,362 761 775 200 666 1,402 17,529
advances to
banks
Loans and 88,349 4,997 8,233 26,787 7,210 (1,732) 630 134,474
advances to
customers
Debt securities 6,093 1,049 312 1,972 2,516 (42) 17,620 29,520
and equity
shares
Other assets 130 25 25 243 48 16,536 6,479 23,486
Total assets 108,694 7,456 9,425 29,778 9,976 15,428 26,661 207,418
Liabilities:
Deposits by 21,572 817 240 377 112 248 2,077 25,443
banks
Customer 103,996 1,318 1,193 3,829 2,008 3,140 850 116,334
accounts
Debt securities 19,169 5,526 2,002 1,212 1,224 - 1,122 30,255
in issue
Other 353 - 6 - - 9,136 7,020 16,515
liabilities
Subordinated 2,692 1,140 12 1,183 5,141 - - 10,168
liabilities -
loan capital
Minority - - - - - 8,855 (152) 8,703
interests and
shareholders'
funds
Internal (7,973) (198) (1,545) (5,148) (880) - 15,744 -
funding of
trading
business
Total 139,809 8,603 1,908 1,453 7,605 21,379 26,661 207,418
liabilities
Off-balance 10,942 5,939 (10,082) (8,830) 2,031 - - -
sheet items
Interest rate (20,173) 4,792 (2,565) 19,495 4,402 (5,951) - -
repricing gap
Cumulative (20,173) (15,381) (17,946) 1,549 5,951 - - -
interest rate
repricing gap
6 months 1 year 5 years
or less or less or less Non-
3 months but over but over but over Over interest Trading
or less 3 months 6 months 1 year 5 years bearing book Total
As at 31 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
December 2001*
Assets:
Treasury bills 2,709 37 26 4 6 - 1,630 4,412
and other
eligible bills
Loans and 11,311 1,621 1,076 142 289 452 333 15,224
advances to
banks
Loans and 74,361 5,252 8,798 28,497 7,108 (1,353) 272 122,935
advances to
customers
Debt securities 2,545 1,662 718 1,940 4,168 (6) 13,423 24,450
and equity
shares
Other assets 154 9 8 4 15 16,545 5,648 22,383
Total assets 91,080 8,581 10,626 30,587 11,586 15,638 21,306 189,404
Liabilities:
Deposits by 19,226 1,859 666 512 90 681 1,276 24,310
banks
Customer 92,834 1,644 1,172 3,228 2,299 7,633 306 109,116
accounts
Debt securities 16,453 3,957 1,333 600 890 - 1,187 24,420
in issue
Other 350 - 3 - 5 6,838 5,352 12,548
liabilities
Subordinated 1,069 714 - 641 5,684 - - 8,108
liabilities -
loan capital
Minority - - - - - 10,800 102 10,902
interests and
shareholders'
funds
Internal (3,736) (741) (1,171) (6,051) (1,384) - 13,083 -
funding of
trading
business
Total 126,196 7,433 2,003 (1,070) 7,584 25,952 21,306 189,404
liabilities
Off-balance 21,937 (10,861) (7,509) (2,896) (671) - - -
sheet items
Interest rate (13,179) (9,713) 1,114 28,761 3,331 (10,314) - -
repricing gap
Cumulative (13,179) (22,892) (21,778) 6,983 10,314 - - -
interest rate
repricing gap
* restated (see note 1)
F-54
45 Derivatives and other financial instruments (continued)
c Fair value analysis
Financial instruments include both financial assets and financial liabilities
and also derivatives. The fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
Wherever possible, fair values have been estimated using market prices for
instruments held by the Group. Where market prices are not available, fair
values have been estimated using quoted values for instruments with
characteristics either identical or similar to those of the instruments held by
the Group. In certain cases, where no ready markets currently exist, various
techniques have been developed to estimate what the approximate fair value of
such instruments might be. These estimation techniques are necessarily
subjective in nature and involve several assumptions.
The fair values presented in the following table are at a specific date and may
be significantly different from the amounts which will be actually be paid or
received on the maturity or settlement date. In many cases, the estimated fair
values could not be realised immediately and accordingly do not represent the
value of these financial instruments to the Group as a going concern.
Because a variety of estimation techniques are employed and significant
estimates made, comparisons of fair values between financial institutions may
not be meaningful. Readers of these accounts are thus advised to use caution
when using this data to evaluate the Group's financial position.
Fair value information is not provided for items that do not meet the
definitions of a financial instrument. These items include intangible assets,
such as the value of the Group's branch network, the long-term relationships
with depositors and credit card relationships, premises and equipment and
shareholders' equity. These items are material and accordingly the Group
believes that the fair value information presented does not represent the
underlying value of the Group.
The valuation technique for each major category of financial instrument is
discussed below:
Treasury bills and other eligible bills
Fair value is estimated using market prices, where available.
Loans and advances to banks and customers
The Group provides loans and advances to commercial, corporate and personal
customers at both fixed and variable rates. The carrying value of the variable
rate loans and those relating to lease financing is assumed to be their fair
value. For fixed rate lending, several different techniques are used to estimate
fair value, as considered appropriate. For commercial and personal customers,
fair value is principally estimated by discounting anticipated cash flows
(including interest at contractual rates) at market rates for similar loans
offered by the Group and other financial institutions. The fair value for
corporate loans was estimated by discounting anticipated cash flows at a rate
which reflects the effects of interest rate changes, adjusted for changes in
credit risk. Certain loans secured on residential properties are made at a fixed
rate for a limited period, typically two to five years, after which the loans
revert to the relevant variable rate. The fair value of such loans has been
estimated by reference to the market rates for similar loans of maturity equal
to the remaining fixed interest rate period.
Debt securities and equity shares held for investment purposes
Listed investment securities are valued at quoted mid-market prices. Unlisted
securities and equity shares are valued based on discounted cash flows, market
prices of similar securities and other appropriate valuation techniques.
Deposits by banks and customer accounts
The fair value of deposits repayable on demand is considered to be equal to
their carrying value. The fair value for all other deposits and customer
accounts was estimated using discounted cash flows applying either market rates,
where applicable, or current rates for deposits of similar remaining maturities.
Debt securities in issue and subordinated liabilities
The fair value of short-term debt securities in issue is approximately equal to
their carrying value. Fair value for other debt securities and for subordinated
liabilities is estimated using quoted market prices.
Financial commitments and contingent liabilities
The Group considers that, given the lack of an established market, the diversity
of fee structures and the difficulty of separating the value of the instruments
from the value of the overall transaction, it is not meaningful to provide an
estimate of the fair value of financial commitments and contingent liabilities.
These are therefore excluded from the following table.
The carrying and fair values of non-trading derivative financial instruments are
disclosed in note 45a.
F-55
45 Derivatives and other financial instruments (continued)
c Fair value analysis (continued)
The table below shows a comparison by category of book values and fair values of
the Group's on-balance sheet financial assets and liabilities.
As at 31 December 2002 Trading book Non-trading book
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Assets:
Treasury bills and other eligible bills 530 530 1,879 1,878
Loans and advances to banks and customers 2,032 2,032 149,971 151,526
Debt securities and equity shares 17,620 17,620 11,900 11,932
Liabilities:
Deposits by banks and customers 2,927 2,927 138,850 138,428
Debt securities in issue 1,122 1,122 29,133 29,005
Subordinated liabilities - - 10,168 11,156
As at 31 December 2001* Trading book Non-trading book
Book Fair Book Fair
value value value value
GBPm GBPm GBPm GBPm
Assets:
Treasury bills and other eligible bills 1,630 1,630 2,782 2,780
Loans and advances to banks and customers 605 605 137,554 138,287
Debt securities and equity shares 13,423 13,423 11,027 11,269
Liabilities:
Deposits by banks and customers 1,582 1,582 131,844 131,813
Debt securities in issue 1,187 1,187 23,233 23,266
Subordinated liabilities - - 8,108 8,544
*restated (see note 1)
The disclosures in this note cover all on-balance sheet financial instruments;
fair values of all derivative instruments are disclosed in note 45a.
Fair values are determined by reference to quoted market prices or, where no
market price is available, using internal models which discount expected future
cashflows at prevailing interest rates.
Fair values have not been calculated for sundry debtors and creditors in the
trading book.
d Currency exposures
Structural currency exposures
The Group's main overseas operations are in New Zealand, the Americas and
Europe. Details of the Group's structural foreign currency exposures are as
follows:
2002 2001
Functional currency of Group operation GBPm GBPm
New Zealand dollar 921 748
Euro 304 286
US dollar 363 541
Swiss franc 100 104
Other non-sterling 323 438
2,011 2,117
F-56
45 Derivatives and other financial instruments (continued)
d Currency exposures (continued)
Non-structural currency exposures
All foreign exchange exposures in the non-trading book are transferred to the
trading area where they are monitored and controlled.
Information about the management of market risk in the Group's trading
activities is given on pages 60 to 63 .
e Unrecognised gains and losses on hedging instruments
The Group uses a variety of financial instruments to hedge exposures in its
banking book; these hedges are accounted for on an accruals basis, in line with
the underlying instruments being hedged. Any gains or losses that would occur if
these instruments were carried at market value are therefore not recognised.
At 31 December 2002, the unrecognised gains on financial instruments used for
hedging were GBP418 million (2001: GBP122 million) and unrecognised losses were
GBP516 million (2001: GBP539 million).
The net losses arising in 2001 and earlier years and recognised in 2002 amounted
to GBP396 million. Net losses of GBP91 million arose in 2002 but were not
recognised in the year.
Of the net losses of GBP98 million at 31 December 2002, GBP109 million of net
gains are expected to be recognised in the year ending 31 December 2003 and
GBP207 million of net losses in later years.
f Value at risk in trading activities
Details of value at risk in the Group's global trading activities are given on
page 60.
46 Acquisitions
a) On 18 April 2002 the Group's subsidiary, Lloyds TSB Asset Finance Division
Limited, completed the acquisition of First National Vehicle Holdings and Abbey
National Vehicle Finance, both previously wholly owned subsidiaries of Abbey
National plc operating in the UK contract hire and fleet management market; the
results of these businesses have been consolidated in full from that date, the
effect on the results of the Group is not material. The premium on acquisition
of GBP86 million has been capitalised and will be written off to the profit and
loss account over its estimated useful life of 20 years.
A summarised profit and loss account for First National Vehicle Holdings and
Abbey National Vehicle Finance for the period from 1 January 2002 to 17 April
2002 is set out below:
GBPm
Net interest income 6
Other income 25
Total income 31
Operating expenses 38
Provisions for bad and doubtful debts 1
Loss on ordinary activities before tax (8)
Tax 2
Loss after tax for the period to 17 April 2002 (6)
Profit after tax for the year ended 31 December 2001 -
All recognised gains and losses are included in the profit and loss account.
F-57
46 Acquisitions (continued)
The combined balance sheet of First National Vehicle Holdings and Abbey National
Vehicle Finance at 18 April 2002 was as follows:
Book value at Fair value Fair value at
18 April adjustments acquisition
2002 GBPm GBPm
GBPm
Loans and advances to customers 64 - 64
Tangible fixed assets 355 (8) 347
Other assets and prepayments 63 - 63
Deposits by banks (405) - (405)
Other liabilities and accruals (107) (6) (113)
Net liabilities acquired (30) (14) (44)
Goodwill 86
Consideration 42
An initial cash payment of GBP47 million has been made, however following the
preparation of the completion accounts it is believed that this should be
subject to a downward adjustment of GBP5 million. Accordingly a receivable of
this amount has been recognised in the Group's balance sheet. The fair value
adjustments principally reflect adjustments to the carrying value of operating
lease assets and related taxation. Negotiations regarding the completion of this
acquisition are still ongoing and, whilst no further significant adjustments to
consideration or fair value adjustments are expected, in accordance with the
requirements of paragraph 27 of Financial Reporting Standard 6, it is noted that
the fair value of the net assets of the acquired businesses and the goodwill
arising shown above are provisional.
b) On 17 October 2002 the Group's subsidiary, Lloyds TSB Bank (No. 5) Limited,
completed the purchase of the business of Accucard, a credit card technology
development and marketing company. The consideration for the purchase was GBP9
million, of which GBP7 million was settled in cash and with a further GBP1
million payable in 2003 and GBP1 million payable in 2004. The premium on
acquisition of GBP7 million has been capitalised and will be written off to the
profit and loss account over its estimated useful life of 5 years. There were no
fair value adjustments made to the assets acquired. The results of this business
have been consolidated in full from the date of acquisition, the effect on the
results of the Group is not material.
c) On 16 December 2002 the Group's subsidiary, Lloyds TSB Asset Finance Division
Limited, completed the purchase of the business of the Dutton-Forshaw Group, a
motor dealer which has a network of 38 franchised dealerships representing 14
motor vehicle manufacturers. The consideration for the purchase was GBP49
million which was settled in cash. The premium on acquisition of GBP10 million
has been capitalised and will be written off to the profit and loss account over
its estimated useful life of 20 years. Fair value adjustments were made to the
carrying value of tangible fixed assets and in respect of certain liabilities.
Negotiations regarding the completion of this acquisition are still ongoing, and
whilst no further significant adjustments to consideration or fair value
adjustments are expected, in accordance with the requirements of paragraph 27 of
Financial Reporting Standard 6, it is noted that the goodwill arising stated
above is provisional. The results of this business have been consolidated in
full from the date of acquisition, the effect on the results of the Group is not
material.
F-58
47 Consolidated cash flow statement
The cash flow statement reflects cash flows attributable to the banking, life
and general insurance businesses. Cash flows from long-term assurance business
attributable to shareholders include the surplus emerging from the life and
pension businesses; 'Income from long-term assurance business' reflects the
movement in the value of long-term assurance business attributable to
shareholders (see note 29) as adjusted for capital injections and acquisitions,
which are reflected within the 'Capital expenditure and financial investment'
and 'Acquisitions and disposals' sections of the cash flow statement. Cash flows
relating to the long-term assurance business attributable to policyholders are
not reflected within this statement.
a Reconciliation of operating profit to net cash inflow from operating activities 2002 2001* 2000*
GBPm GBPm GBPm
Operating profit 2,618 3,132 3,782
Increase in prepayments and accrued income (21) (285) -
Increase (decrease) in accruals and deferred income 113 (439) 830
Provisions for bad and doubtful debts 1,029 747 541
Net advances written off (675) (691) (580)
Insurance claims 233 174 142
Insurance claims paid (210) (178) (146)
Amounts written off fixed asset investments 87 60 32
Income from long-term assurance business 303 29 (443)
Transfer from long-term assurance business - 155 104
Interest on subordinated liabilities (loan capital) 537 515 490
Interest element of finance lease rental payments - 1 1
Depreciation and amortisation 701 550 386
Other non-cash movements (189) (376) (484)
Net cash inflow from trading activities 4,526 3,394 4,655
Net increase in loans and advances (11,970) (9,340) (6,350)
Net increase in investments other than investment securities (2,494) (5,664) (355)
Net increase in other assets (683) (327) (124)
Net increase (decrease) in deposits by banks 1,018 7,689 (2,794)
Net increase in customer accounts 6,900 7,525 7,469
Net increase in debt securities in issue 5,904 6,557 4,738
Net increase in other liabilities 1,511 109 185
Net decrease (increase) in items in course of collection/transmission 147 (17) (126)
Other non-cash movements 535 1 176
Net cash inflow from operating activities 5,394 9,927 7,474
b Analysis of cash as shown in the balance sheet 2002 2001 2000
GBPm GBPm GBPm
Cash and balances with central banks 1,140 1,240 1,027
Loans and advances to banks repayable on demand 4,313 2,443 2,794
5,453 3,683 3,821
The Group is required to maintain balances with the Bank of England which, at 31
December 2002, amounted to GBP165 million (2001: GBP156 million; 2000: GBP142
million).
c Analysis of changes in cash during the year 2002 2001 2000
GBPm GBPm GBPm
At 1 January 3,683 3,821 2,408
Net cash inflow (outflow) before adjustments for the effect of foreign exchange
movements 1,766 (100) 1,406
Effect of foreign exchange movements 4 (38) 7
At 31 December 5,453 3,683 3,821
F-59
47 Consolidated cash flow statement (continued)
d Analysis of changes in financing during the year Share capital (including
premium and merger reserve)
2002 2001 2000
GBPm GBPm GBPm
At 1 January 2,713 2,334 2,136
Cash inflow from financing 139 379 198
At 31 December 2,852 2,713 2,334
Capital securities issued by
subsidiary undertakings
2002 2001* 2000
GBPm GBPm GBPm
At 1 January 509 515 -
Effect of foreign exchange movements 17 (6) 6
Cash inflow from financing - - 509
At 31 December 526 509 515
Minority investment in
subsidiaries
2002 2001 2000
GBPm GBPm GBPm
At 1 January - - -
Cash inflow from financing 167 - -
Retained profit 1 - -
At 31 December 168 - -
Subordinated liabilities and
finance leases
2002 2001* 2000
GBPm GBPm GBPm
At 1 January 8,111 7,533 6,497
Effect of foreign exchange movements (5) (13) 120
Cash inflow from financing 2,065 611 897
Capital repayments (4) (20) (4)
Adjustments on acquisition 2 - 23
At 31 December 10,169 8,111 7,533
e Analysis of the net cash outflow in respect of the acquisition of group 2002 2001 2000
undertakings GBPm GBPm GBPm
Cash consideration paid (see f) 103 1 5,110
Payments to former members of Scottish Widows Fund and Life Assurance Society
acquired during 2000 14 179 -
Net cash outflow 117 180 5,110
F-60
47 Consolidated cash flow statement (continued)
f Acquisition of group undertakings 2002 2001 2000
GBPm GBPm GBPm
Net assets acquired:
Loans and advances 66 - 2,827
Long-term assurance business - - 4,052
Other assets 137 15 168
Tangible fixed assets 384 - 375
Deposits by banks, customer accounts and other liabilities (590) (13) (3,239)
(3) 2 4,183
Goodwill arising on consolidation 103 8 2,405
100 10 6,588
Satisfied by:
Amounts receivable (5) - -
Issue of loan notes - 9 1,077
Deferred consideration 2 - -
Cash 103 1 5,110
Payments pending settlement - - 401
100 10 6,588
g Disposal of group undertakings and businesses 2002 2001 2000
GBPm GBPm GBPm
Sundry net assets disposed of - 1 2
Goodwill written back on disposal - - 93
- 1 95
Profit (loss) on sale - 39 (12)
Cash consideration received - 40 83
*restated (see note 1)
F-61
48 Differences between UK GAAP and US GAAP
The accounts presented in this report have been prepared in accordance with
accounting principles generally accepted in the United Kingdom (UK GAAP). These
differ in significant respects to the accounting principles generally accepted
in the United States (US GAAP). The following is a summary of significant
differences applicable to the Group.
UK GAAP US GAAP
Business combinations
UK GAAP permits merger accounting for business Following the implementation of Statement of Financial
combinations where all of the following criteria are Accounting Standards (SFAS) No. 141 'Business
met: (1) no party is either portrayed as acquirer or Combinations', which supersedes Accounting Principles
acquired; (2) all parties participate in establishing Board (APB) Opinion No. 16 'Business Combinations', the
the management structure; (3) one party does not purchase method must be used for all business
dominate by virtue of its relative size; (4) combinations initiated after 30 June 2001. For business
consideration received by the equity shareholders of combinations initiated before 1 July 2001, APB Opinion
each party, in relation to their equity shareholding, No. 16 required that a business combination be accounted
comprises primarily equity shares in the combined for as a pooling-of-interests if two previously
entity; and (5) no equity shareholder retains any independent entities combined as a result of one entity
material interest in only part of the combined entity. issuing common stock in exchange for substantially all
Business combinations that do not satisfy all these the common stock of the second entity. However, whilst
criteria must be accounted for using acquisition the offer may include provisions to distribute cash for
accounting. fractional shares or shares held by dissenting
shareholders, it may not include a pro-rata distribution
of cash or other consideration. In addition, no changes
in the equity interests of the common stock may be made
prior to the pooling in contemplation of the transaction
and neither may the ratio of the interest of the
individual common stockholder to those of other common
stockholders in a combining company change as a result of
the exchange of stock.
Goodwill/customer related intangibles
Following the implementation of Financial Reporting Following the implementation in full of SFAS No. 142
Standard (FRS) 10 'Goodwill and intangible assets' in 'Goodwill and Other Intangible Assets' on 1 January 2002,
1998 goodwill arising on acquisitions of or by group goodwill arising on all acquisitions by group and
and associated undertakings is capitalised and associated undertakings is capitalised but no longer
amortised over its estimated life. There is a amortised and is subject to regular review for
presumption that the estimated life is limited to 20 impairment. Prior to the adoption of SFAS No. 142, the
years or less, although this may be rebutted and a Group accounted for goodwill under the provisions of APB
longer or indefinite useful life considered. Goodwill No. 17 'Intangible Assets' which required that all
is written off when judged to be irrecoverable. For goodwill be capitalised and amortised over its estimated
acquisitions prior to 1 January 1998 goodwill was useful life, which should not exceed 40 years; the Group
charged directly against reserves as permitted by amortised goodwill over periods of up to 20 years.
Statement of Standard Accounting Practice 22. This Goodwill amortised prior to the adoption of SFAS No. 142
goodwill was not reinstated following the is not permitted to be reinstated.
implementation of FRS 10, but in the event of a
subsequent disposal it will be written back and
included in the calculation of the profit or loss on
disposal.
UK GAAP does not require a value to be placed upon the For acquisitions occurring on or after 1 July 2001, SFAS
customer relationships in acquisitions. No. 141 requires that, when assessing the value of the
assets of an acquired entity, certain identifiable
intangible assets must be recognised. Such identifiable
intangible assets include the asset representing the
value of customer relationships, which is capitalised
separately and amortised through the income statement
over the estimated average life of the customer
relationships. Prior to 1 July 2001, the Group applied
similar provisions contained within SFAS No. 72
'Accounting for Certain Transactions of Bank and Thrift
Institutions' in assessing the value of assets of an
acquired financial institution.
F-62
48 Differences between UK GAAP and US GAAP (continued)
UK GAAP US GAAP
Pension costs
For defined benefit schemes, pension costs in the profit SFAS No. 87 'Employers' Accounting for Pensions'
and loss account reflect the cost of accruing benefits prescribes a similar method but allows that a certain
for active employees, benefit improvements and the cost portion of actuarial gains and losses be deferred and
of severances borne by the schemes; the expected return allocated in equal amounts over the average remaining
on scheme assets, net of a charge in respect of the service lives of the current employees. In addition, if
unwinding of the discount applied to scheme liabilities, the fair value of plan assets falls below the
is included in the profit and loss account as other accumulated benefit obligation (which is the current
finance income. Actuarial gains and losses, including value of accrued benefits without allowance for future
differences between the expected and actual return on salary increases) an additional minimum liability must
scheme assets, are recognised as they arise, net of be recognised. An equal amount should be recognised as
deferred tax, in the statement of total recognised gains an intangible asset up to the amount of any
and losses. Scheme assets are assessed at fair value and unrecognised prior service cost. Any amount not
scheme liabilities are measured on an actuarial basis recognised as an intangible asset is reported in other
using the projected unit method and are discounted at the comprehensive income, net of deferred tax.
current rate of return on a high quality corporate bond
of equivalent currency and term. The overall surplus or US GAAP also requires a transition adjustment for
deficit is included on the balance sheet, net of the pension schemes in place before the introduction of
related deferred tax. SFAS No. 87. The difference between the funded status
of the schemes and the total amount of accrued or
Costs in relation to defined contribution schemes are prepaid pension cost, at the date of transition, is
charged to the profit and loss account in the period in amortised over the average remaining service lives of
which they fall due. employees at that date.
Leasing
Finance lease income is recognised in proportion to the The application of SFAS No. 13 'Accounting for Leases'
funds invested in the lease using a method that results gives rise to a level rate of return on the investment
in a constant rate of return on the net cash investment, in the lease, but without taking into account tax
which takes into account tax payments and receipts. payments and receipts. This results in income being
recognised in different periods than under UK GAAP.
Operating lease assets are depreciated such that rentals Operating lease assets are depreciated such that the
less depreciation are recognised at a constant periodic depreciation charge is at least equal to that which
rate of return on the net cash invested in that asset. would arise on a straight line basis.
Profits or losses arising on sale and leasebacks are Under SFAS No. 28 'Accounting for Sales with
taken to profit as they arise. Leasebacks' profits or losses arising on a sale and
leaseback are deferred and amortised. For leasebacks
resulting in a finance lease, the amounts are amortised
in proportion to the amortisation of the leased asset;
for leasebacks resulting in an operating lease, the
amounts are amortised in proportion to the gross rental
charged to expense over the lease term.
Property
Depreciation is charged on the cost of freehold and long Freehold and long leasehold properties are included in
leasehold properties over their estimated useful economic the balance sheet at historical cost and depreciated
lives. Following the adoption of FRS 15, the Group over their estimated useful economic lives.
reassessed the useful economic lives and residual values
of its freehold and long-leasehold premises and, with
effect from 1 January 2000, the cost of these properties,
after deducting the value of the land, is being
depreciated over 50 years. Previously it was considered
that the residual values were such that depreciation was
not significant.
F-63
48 Differences between UK GAAP and US GAAP (continued)
UK GAAP US GAAP
Share compensation schemes
Where shares are purchased to satisfy an actual, or The Group accounts for share compensation schemes based on
anticipated, requirement created by the exercise of their estimated fair values at the date of the grant in
options under either the Group's Executive or accordance with SFAS No. 123 'Accounting for Stock Based
Save-As-You-Earn option schemes, the difference Compensation'.
between the purchase price and exercise price is
charged to the profit and loss account on a systematic
basis over the period that the employees are expected
to benefit. Where shares are issued, no charge is made
to the profit and loss account.
Computer software developed or obtained for internal
use
All computer software costs are expensed as incurred The American Institute of Certified Public Accountants
except for operating software and application software (AICPA) Statement of Position 98-1 'Accounting for the
relating to separable new systems, which are costs of computer software developed or obtained for
capitalised and depreciated over their estimated internal use' requires certain costs incurred from 1
useful lives. January 1999 in respect of software developed for internal
use to be capitalised and subsequently amortised.
Derivative instruments held for risk management
purposes
Derivatives used in the Group's trading activities are SFAS No. 133 'Accounting for Derivative Instruments and
carried at fair value and all changes in fair value for Hedging Activities' requires that all derivatives be
are reported within dealing profits in the profit and recognised on-balance sheet at fair value. Changes in the
loss account. Derivatives used in the Group's fair value of derivatives that are not hedges are reported
non-trading activities are accounted for on an in the income statement. For derivatives which are hedges,
accruals basis, in line with the treatment of the depending on the nature of the hedge, changes in the fair
underlying items which they are hedging. A derivative value of derivatives will either be offset against the
will only be classified as a hedge in circumstances change in fair value of the hedged assets, liabilities, or
where there was adequate evidence of the intention to firm commitments through earnings or recognised in other
hedge at the outset of the transaction and the comprehensive income until the hedged item is recognised
derivative substantially matches or eliminates the in earnings. The ineffective portion of a hedge's change
exposure being hedged. in fair value is immediately recognised in earnings.
Foreign currency translation
The assets, liabilities and results of the Group's Under SFAS No. 52 'Foreign Currency Translation', foreign
overseas operations are translated into sterling at currency assets and liabilities are translated at the
the rate of exchange prevailing at the balance sheet year-end rate; however, results are translated at the
date, as permitted under UK GAAP. average rate for the year.
Investment securities
Debt securities and equity shares intended for use on SFAS No. 115 'Accounting for Certain Investments in Debt
a continuing basis by the Group are treated as and Equity Securities' requires that debt securities which
investment securities and included in the balance are "available-for-sale" (where there is the absence of
sheet at cost as adjusted for the amortisation of any either the intent or the ability to hold them to maturity)
premiums and discounts arising upon acquisition, less and equity shares with a readily determinable market value
provision for any permanent diminution in value. should be recorded at fair value with unrealised gains and
losses reflected in shareholders' equity. All debt
securities held as available-for-sale are subject to
assessment for other than temporary impairment in
accordance with SFAS No. 115 and, for asset backed
securities, in accordance with the Emerging Issues Task
Force (EITF) Abstract No. 99-20 'Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial
Interests in Securitized Financial Assets'.
F-64
48 Differences between UK GAAP and US GAAP (continued)
UK GAAP US GAAP
Dividend payable
Dividends declared after the period end are recorded in Dividends are recorded in the period in which they are
the period to which they relate. declared.
Own shares
Own shares held are included within equity and are Own shares held are reclassified as Treasury stock and
reported as an asset on the balance sheet. deducted from shareholders' equity in accordance with
the AICPA Accounting Research Bulletin (ARB) No. 51
'Consolidated Financial Statements'.
Deferred tax
Deferred tax is provided for all timing differences Under SFAS No. 109 'Accounting for Income Taxes',
between the recognition of gains and losses in the deferred tax assets and liabilities are recorded for all
financial statements and their recognition in a tax temporary differences. A valuation allowance is recorded
computation. Deferred tax assets are recognised to the against a deferred tax asset where it is more likely
extent that it is regarded as more likely than not that than not that some portion of the deferred tax asset
there will be suitable taxable profits from which the will not be realised.
future reversal of the underlying timing differences can
be deducted.
Provision for credit losses
A specific provision is made to cover the estimated loss SFAS No. 114 'Accounting by Creditors for Impairment of
as soon as the recovery of an outstanding loan is a Loan' requires the overall credit risk provision to be
considered doubtful. General provisions are raised to determined based upon the present value of expected
cover losses incurred but not yet identified as of the future cash flows, discounted at the loan's effective
balance sheet date. interest rate or, as a practical expedient, on the
loan's observable market value, or the fair value of the
collateral if the loan is collateral dependent. Smaller
balance homogeneous consumer loans that are collectively
valued for impairment are outside the scope of SFAS No.
114, as are debt securities and leases. General
provisions are made against such loans when losses have
been incurred but not yet identified as of the balance
sheet date.
Acceptances
Acceptances are not recorded on the balance sheet. Acceptances and the related customer liabilities are
recorded on the balance sheet.
Insurance activities
The shareholder's interest in the long-term assurance The net present value of the profits inherent in the
fund is valued at the net present value of the profits policies of the long-term assurance fund is not
inherent in such policies. recognised. An adjustment is made for the amortisation
of acquisition costs and fees.
Additional information on the differences between the UK
and US accounting for insurance activities is provided
within the Insurance section of this note on pages F-89
to F-92.
F-65
48 Differences between UK GAAP and US GAAP (continued)
Future accounting developments
United States
SFAS 146 - Accounting for Costs Associated with Exit or Disposal Activities
SFAS No. 146 was issued in June 2002 and became effective for the Lloyds TSB
Group for exit or disposal activities initiated after 31 December 2002. Costs
associated with a disposal activity (other than employee termination benefits)
should be recorded at fair value in the period in which they are incurred, and
in subsequent periods, unless a reasonable estimate of fair value cannot be
determined. Costs relating to employee termination benefits should be recognised
at the communication date when employees are not required to provide future
services beyond the contractual notification period. Adoption is not expected to
have a material impact on Lloyds TSB Group's US GAAP financial statements.
SFAS 147 - Acquisitions of Certain Financial Institutions
SFAS No. 147 was issued on 1 October 2002 and became effective for the Lloyds
TSB Group on that date, with earlier application permitted for the transition
provisions related to previously recognised unidentifiable intangible assets.
Financial institutions meeting certain conditions outlined in SFAS No. 147 will
be required to restate previously issued financial statements. Adoption of this
Statement has not had an impact on Lloyds TSB Group's US GAAP financial
statements.
FASB Interpretation Number (FIN) 45 - Guarantor's Accounting and Disclosure
requirements for Guarantees Including Indirect Guarantees of Indebtedness of
Others
FIN 45 was issued in November 2002 and the disclosure requirements contained
therein are detailed within this annual report. The remainder of the provisions
of FIN 45, which require that a liability be recognised for the fair value of
the obligations assured under the guarantees, are effective in respect of
guarantees issued or modified after 31 December 2002. The effect on Lloyds TSB
Group's US GAAP financial statements has not yet been determined.
SFAS 148 - Accounting for Stock-based Compensation - Transition and Disclosure
SFAS No. 148 was issued in December 2002 and is effective for fiscal years
ending on or after 15 December 2002. The Statement provides alternative methods
of transition for a voluntary change to the fair value based method for
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
frequent disclosures about the effects of stock-based compensation. Adoption of
this statement has not had a significant impact on the disclosures made in
Lloyds TSB Group's US GAAP financial statements.
FASB Interpretation Number (FIN) 46 - Consolidation of Variable Interest
Entities
FIN 46 was issued in January 2003 and is effective for all variable interests in
variable interest entities (VIE) created after 31 January 2003. For VIEs created
before that date, the requirements are effective from 1 July 2003. FIN 46
requires certain transitional disclosures to be made immediately if it is
reasonably possible that an entity will consolidate or disclose information
about VIEs when FIN 46 becomes effective. FIN 46 defines a VIE as an entity
where either the total equity investment at risk is not sufficient to permit the
entity to finance its activities, without additional subordinated financial
support; or the equity investors lack any one of the following: (1) the ability
to make decisions about an entity's activities; (2) the obligation to absorb
losses of the entity; or (3) the right to receive residual returns of the
entity. VIEs are required to be consolidated by the primary beneficiary, which
is the party that absorbs the majority of the entity's expected losses, expected
gains, or both. The required transitional disclosures have been made within this
annual report; the impact on Lloyds TSB Group's US GAAP financial statements has
not yet been determined.
SFAS 149 - Amendment of Statement 133 on Derivative Instruments and Hedging
Activities
SFAS No. 149 was issued in April 2003. This Statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. This Statement is effective
prospectively for contracts entered into or modified after 30 June 2003 and
prospectively for hedging relationships designated after 30 June 2003. Lloyds
TSB Group is currently analysing the impact of this Statement.
SFAS 150 - Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity
SFAS No. 150 was issued in May 2003. The Statement improves the accounting for
certain financial instruments that, under previous guidance, issuers could
account for as equity and requires that these instruments be classified as
liabilities in statements of financial position. This Statement is effective
prospectively for financial instruments entered into or modified after 31 May
2003 and otherwise is effective at the beginning of the first interim period
beginning after 15 June 2003. This statement shall be implemented by reporting
the cumulative effect of a change in an accounting principle for financial
instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Lloyds TSB Group is
currently analysing the impact of this Statement.
F-66
48 Differences between UK GAAP and US GAAP (continued)
Restatement
The Group's US GAAP net income and shareholders' equity for the years ended 31
December 2001 and 2000 have been restated to reflect the effects of
reconsideration of the accounting for certain hedging transactions. This has
resulted in a revised calculation of the US GAAP adjustment in respect of
"Derivative instruments held for risk management purposes". There have been no
changes to the Lloyds TSB Group's UK GAAP results. The effects are as follows;
2001 2000
GBPm GBPm
Net income:
Net income under US GAAP, as previously reported 1,524 1,929
Adjustment to "Derivative instruments held for risk management purposes" 155 82
Deferred tax effect of adjustment (47) (25)
Net income under US GAAP as adjusted 1,632 1,986
Earnings per share:
Basic earnings per share, as previously reported 27.5p 35.2p
Effect of adjustment 2.0p 1.0p
Basic earnings per share, as adjusted 29.5p 36.2p
Diluted earnings per share, as previously reported 27.2p 34.8p
Effect of adjustment 2.0p 1.0p
Diluted earning per share as adjusted 29.2p 35.8p
Shareholders' equity under US GAAP, as previously reported 13,421 13,708
Adjustment to "Derivative instruments held for risk management purposes" 161 6
Deferred tax effect of adjustment (49) (2)
Shareholders' equity under US GAAP as adjusted 13,533 13,712
F-67
48 Differences between UK GAAP and US GAAP (continued)
The following tables summarise the adjustments to net income and shareholders'
equity which would arise from the application of US GAAP:
Reconciliation of net income 2002 2001* 2000*
Note GBPm GBPm GBPm
Profit for the year attributable to shareholders under UK GAAP 1,781 2,229 2,654
Insurance activities, before tax (n) (384) (328) (356)
Banking and Group activities:
Goodwill amortisation (a) 72 (209) (188)
Profit/loss on sale and closure of businesses - - 12
Amortisation of customer related intangibles (a) (193) (219) (219)
Pension costs (b) 113 132 (130)
Leasing (109) (131) (47)
Property depreciation 4 3 3
Share compensation schemes (c) (44) (46) (31)
Internal software costs 6 16 10
Derivative instruments held for risk management purposes (e) 305 (160) (86)
Foreign currency translation differences 12 (4) 2
Total Banking and Group activities, before tax 166 (618) (674)
Taxation
- deferred taxation (h) 25 52 (75)
- deferred taxation on GAAP differences (h) 163 297 437
Total Taxation 188 349 362
Total adjustments, after tax (30) (597) (668)
Net income under US GAAP 1,751 1,632 1,986
Reconciliation of shareholders' equity 2002 2001*
Note GBPm GBPm
Shareholders' funds under UK GAAP 7,972 10,356
Insurance activities, before tax (n) (74) 13
Banking and Group activities:
Goodwill (a) 1,347 1,312
Customer related intangibles (a) 589 772
Pension costs (b) 840 2,099
Leasing (383) (274)
Property depreciation (50) (53)
Internal software 69 63
Derivative instruments held for risk management purposes (e) (98) (417)
Net unrealised gain on available-for-sale investment securities (f) 32 242
Dividend payable 1,311 1,306
Own shares (g) (154) (251)
Total Banking and Group activities, before tax 3,503 4,799
Taxation
- deferred taxation (h) (60) (85)
- deferred taxation on GAAP differences (h) (1,151) (1,550)
Total Taxation (1,211) (1,635)
Total adjustments, after tax 2,218 3,177
Shareholders' equity under US GAAP 10,190 13,533
* restated (see note 1 and page F-67)
F-68
48 Differences between UK GAAP and US GAAP (continued)
Reconciliation of movements in shareholders' equity under US GAAP 2002 2001* 2000*
GBPm GBPm GBPm
Net income in period 1,751 1,632 1,986
Dividends (1,903) (1,738) (1,522)
(152) (106) 464
New share capital subscribed 77 194 74
Movement in own shares 97 (4) (41)
Share compensation schemes 44 46 31
Minimum pension liability (3,277) - -
Change in the fair value of available-for-sale securities - Insurance activities 15 (46) 21
Change in the fair value of available-for-sale securities - Banking activities (147) (165) 67
Exchange and other differences - (98) (13)
(3,343) (179) 603
Shareholders' equity at beginning of period 13,533 13,712 13,109
Shareholders' equity at end of period 10,190 13,533 13,712
* restated (see page F-67)
Accumulated other comprehensive income 2002 2001 2000
GBPm GBPm GBPm
Exchange translation differences (321) (321) (223)
Minimum pension liability (3,277) - -
Available-for-sale securities:
Net unrealised gains - Insurance activities 245 49 98
Related amortisation of deferred acquisition costs (197) (23) (7)
Net unrealised gains - Banking activities 32 242 480
Taxation (25) (81) (173)
55 187 398
Accumulated other comprehensive income under US GAAP (3,543) (134) 175
F-69
48 Differences between UK GAAP and US GAAP (continued)
Condensed US GAAP Profit and loss account
The following table provides a condensed profit and loss account for the Group,
incorporating the US GAAP adjustments arising.
2002 2001* 2000*
GBPm GBPm GBPm
Loan interest, including fees 9,678 10,317 10,218
Other interest and dividends 2,035 2,077 2,539
Insurance premiums 2,015 1,671 1,604
Commissions and fees 2,281 2,248 2,118
Realised gains from sales of investments 163 183 139
Foreign exchange trading income 173 158 141
Securities and other trading losses (2,370) (2,307) (253)
Other income 1,899 1,415 920
Total revenues 15,874 15,762 17,426
Interest expense 5,376 6,427 7,046
Total revenues, net of interest expense 10,498 9,335 10,380
Policyholder benefits and claims expense 1,565 2,228 1,735
Movement in undistributed earnings to policyholders (1,518) (2,427) (317)
Provisions for bad and doubtful debts 1,029 747 541
Amounts written off fixed asset investments 87 60 32
Total benefits, claims and provisions 1,163 608 1,991
Non-insurance compensation and benefits 2,418 2,014 1,870
Insurance underwriting, operating and acquisition expenses 766 511 552
Other operating expenses 2,099 2,632 2,084
Depreciation 758 622 414
Amortisation of intangible fixed assets
Goodwill - 248 210
Customer related intangibles 193 219 219
Value of long-term assurance business acquired 725 305 285
918 772 714
6,959 6,551 5,634
Profit on sale and closure of businesses - 39 -
Income before tax 2,376 2,215 2,755
Provision for income taxes** 576 526 720
Minority interests, net of income taxes 62 57 49
Cumulative effect of accounting changes (net) 13 - -
Net income under US GAAP 1,751 1,632 1,986
Exchange translation and other differences - (98) (13)
Minimum pension liability (3,277) - -
Available-for-sale securities:
Net unrealised gains (losses) - Insurance activities 196 (49) 30
Related amortisation of deferred acquisition costs (174) (16) 2
Net unrealised (losses) gains - Banking activities (210) (238) 94
Taxation 56 92 (38)
(132) (211) 88
Comprehensive income under US GAAP (1,658) 1,323 2,061
Earnings per share (pence) 31.4p 29.5p 36.2p
Diluted earnings per share (pence) 31.3p 29.2p 35.8p
* restated (see page F-67)
** Significant items affecting the Group's effective tax rate under US GAAP
include the fact that tax is levied on UK life assurance and pension
businesses under specialised rules not based on the profit and loss
account. In addition, under US GAAP a tax provision is required for
unrealised gains that are attributable to the policyholders. The amount
provided will vary depending upon the fluctuations of the stock market and
this movement can result in significant changes in the effective rate of
tax.
F-70
48 Differences between UK GAAP and US GAAP (continued)
Condensed US GAAP Balance sheet
The following table provides a condensed balance sheet for the Group,
incorporating the US GAAP adjustments arising.
2002 2001*
GBPm GBPm
Assets
Cash and due from banks 8,547 7,388
Deposits at interest with banks 11,678 11,709
Securities purchased under resale agreements 1,696 1,383
Treasury bills and other eligible bills 1,879 2,782
Trading account assets 41,412 38,714
Investments 16,635 15,126
Loans, net of provisions 134,202 122,485
Tangible fixed assets 4,085 3,429
Intangible fixed assets - goodwill 3,981 3,878
- customer related intangibles 589 772
- value of long-term assurance business acquired 2,282 3,007
- pension liability related intangible 221 -
Deferred acquisition costs 846 795
Separate account assets 18,945 22,068
Other assets 7,391 9,690
Total assets 254,389 243,226
Liabilities
Deposits 141,777 133,419
Trading account liabilities 5,583 3,476
Debt securities in issue 29,133 23,233
Policyholder liabilities 23,763 23,465
Undistributed policyholder allocations 1,890 3,478
Commitments and contingencies 192 251
Deferred tax 1,426 3,154
Long-term debt 10,168 8,108
Separate account liabilities 18,945 22,068
Other liabilities 10,591 8,495
Minority interests 731 546
Total liabilities 244,199 229,693
Shareholders' equity:
Common stock 1,416 1,411
Additional paid-in capital 4,848 4,670
Retained earnings 7,623 7,837
Treasury stock (154) (251)
Accumulated other comprehensive income (3,543) (134)
Total shareholders' equity 10,190 13,533
Total liabilities and shareholders' equity 254,389 243,226
* restated (see page F-67)
F-71
48 Differences between UK GAAP and US GAAP (continued)
Condensed Consolidated Statement of Cash flows in accordance with SFAS No. 95
2002 2001* 2000*
GBPm GBPm GBPm
Cash flows from operating activities
Net income before minority interests and effect of accounting changes 1,800 1,689 2,035
Adjustments required to reconcile net income to net cash provided by operating
activities:
Amortisation of intangible fixed assets 918 772 714
Depreciation of tangible fixed assets 758 622 414
Provision for bad and doubtful debts 354 56 (39)
Change in trading account assets (3,176) (2,004) 861
Change in trading account liabilities 2,107 174 38
Change in deferred acquisition costs (51) (97) (60)
Change in other assets (91) (2,776) 801
Change in policyholder liabilities (97) 583 310
Change in undistributed policyholder allocations (1,588) (2,427) (164)
Change in other liabilities (266) 100 (481)
Net gain on sale of investment securities (164) (183) (139)
Profit on disposal of tangible fixed assets (47) (67) (6)
Other, net 61 (788) (136)
Total adjustments (1,282) (6,035) 2,113
Net cash provided by (used in) operating activities 518 (4,346) 4,148
Cash flows from investing activities
Change in deposits at interest with banks 102 (986) 474
Change in securities purchased under resale agreements (313) 3,554 2,912
Change in loans and advances to customers (11,743) (12,211) (9,510)
Purchases of investment securities (47,885) (48,842) (24,659)
Proceeds from sale and maturity of investment securities 46,880 42,282 25,731
Purchases of tangible fixed assets (1,352) (1,140) (1,031)
Proceeds from sale of tangible fixed assets 359 293 87
Additions to interests in joint ventures (21) (44) -
Acquisition of subsidiary undertakings (117) (180) (5,110)
Disposal of subsidiary undertakings - 40 83
Net cash used in investing activities (14,090) (17,234) (11,023)
Cash flows from financing activities
Dividends paid - equity (1,903) (1,738) (1,522)
Dividends paid to minorities - equity (18) (17) (12)
Dividends paid to minorities - non-equity (43) (40) (36)
Issue of ordinary shares 77 194 74
Sale (purchase) of treasury stock 97 (4) (41)
Issue of preferred securities - - 509
Issue of long-term debt 2,120 742 952
Redemption of long-term debt (55) (131) (55)
Minority investment in subsidiaries 167 - -
Change in deposits 7,925 16,458 4,287
Change in short-term borrowings 5,969 6,326 5,065
Policyholders' deposits 1,602 1,987 1,978
Policyholders' withdrawals (1,207) (1,287) (1,499)
Net cash provided by financing activities 14,731 22,490 9,700
Change in cash and cash equivalents 1,159 910 2,825
Cash and cash equivalents at beginning of period 7,388 6,478 3,653
Cash and cash equivalents at end of period 8,547 7,388 6,478
Cash paid during the year for income taxes 951 829 864
Cash paid during the year for interest 5,321 6,755 6,102
Non-cash investing and financing activities:
Loan notes issued in respect of acquisitions - 9 1,077
* restated (see page F-67)
F-72
48 Differences between UK GAAP and US GAAP (continued)
Balance sheet presentation
Certain classification differences exist in financial reporting under UK GAAP
and US GAAP. For the Group, such differences primarily arise in the balance
sheet and the following comparison lists the line items in which such
differences occur.
UK GAAP US GAAP
Cash and balances at central banks Cash and due from banks
Items in course of collection from banks Cash and due from banks
Treasury bills and other eligible bills Classified as "Trading account assets" where appropriate
Loans and advances to banks Loans to banks due on demand classified as "Cash and due from
banks"; Reverse repos classified as "Securities purchased under
resale agreements"
Loans and advances to customers Reverse repos classified as "Securities purchased under resale
agreements"
Debt securities Classified as "Trading account assets" and "Investments" where
appropriate
Equity shares Classified as "Trading account assets" and "Investments" where
appropriate
Other assets Classified as "Trading account assets" where appropriate
Prepayments and accrued income Other assets
Items in course of transmission to banks Cash and due from banks
Debt securities in issue Classified as "Trading account liabilities" where appropriate
Other liabilities Classified as "Trading account liabilities" where appropriate
Accruals and deferred income Other liabilities
Other provisions for liabilities and charges Commitments and contingencies
Subordinated liabilities Long-term debt
Merger reserve Classified as "Additional paid-in capital"
Long-term assurance business Classifications are discussed on pages F-89 to F-92
Consolidated Statement of Cash flows
The Group's UK GAAP cash flow statement on page F-7 is prepared under the
provisions of FRS 1(Revised). This is similar in many respects to SFAS No. 95
'Statement of Cash Flows', as amended by SFAS No. 104 'Statement of Cash Flows -
Net Reporting of Certain Cash Receipts and Cash Payments and Classification of
Cash Flows from Hedging Transactions'. Two principal differences arise between
the standards with regard to the definition of cash and the classification of
items within the cash flow statement.
F-73
48 Differences between UK GAAP and US GAAP (continued)
FRS 1 (Revised) defines cash as cash in hand and repayable on demand. Under SFAS
No. 95, cash and cash equivalents are defined as short term, highly liquid
investments that are both readily convertible to known amounts of cash; and so
near their maturity that they present insignificant risk of changes in value
because of changes in interest rates.
For the purposes of SFAS No. 95, the Group's cash and cash equivalents of
GBP8,547 million (2001: GBP7,388 million; 2000: GBP6,478 million) comprise items
reported under the following UK balance sheet categories: cash and balances at
central banks; items in the course of collection from banks; loans and advances
to banks repayable on demand and items in the course of transmission to banks.
Under UK GAAP the results, assets and liabilities of the long-term assurance
business are presented on a one-line basis and accordingly movements in cash
flows are aggregated into one line within the reconciliation of operating
profit. Under US GAAP, the insurance activities have been disaggregated and
accordingly the cash flows have been allocated to the appropriate line items
within the cash flow statement. Cash attributable to the long-term assurance
business is included within cash and cash equivalents above.
Differences between UK and US GAAP with regard to classification of items within
the cash flow statement are summarised below:
Classification under Classification under
Cash flow FRS 1 (Revised) SFAS No. 95
Net change in loans and advances, including Operating activities Investing activities
lease financing
Net change in deposits and debt securities in Operating activities Financing activities
issue
Dividends paid to equity and non-equity Returns on investments and servicing of Financing activities
minority interests finance
Tax paid Taxation Operating activities
Capital expenditure and financial investment Capital expenditure and financial Investing activities
investment
Purchases/proceeds from disposal of subsidiary Acquisitions and disposals Investing activities
and associated undertakings
Dividends paid - equity Equity dividends paid Financing activities
Under FRS 1 (Revised), transactions designated as hedges are reported under the
same heading as the related assets or liabilities. Details of withdrawal and
usage restrictions in respect of cash and balances at central banks are
discussed on pages 91 and F-59.
Notes to the UK/US GAAP reconciliation
a Goodwill and customer related intangible assets
Under UK GAAP on 1 January 1998, the Group adopted FRS 10, 'Goodwill and
Intangible Assets'. In respect of acquisitions since 1 January 1998, goodwill is
included in the consolidated balance sheet under intangible fixed assets and
amortised over its estimated useful economic life on a straight-line basis.
Prior to 1 January 1998, the Group charged goodwill directly against reserves.
In the case of the acquisition of Scottish Widows in 2000, in view of the
strength of the Scottish Widows brand and the position of the business as one of
the leading providers of life, pensions, unit trust and fund management
products, the directors consider that it is appropriate to assign an indefinite
life to the goodwill. This goodwill is not being amortised through the profit
and loss account; however it is subjected to annual impairment reviews in
accordance with FRS 11 'Impairment of Fixed Assets and Goodwill'. Should any
impairment be identified, it would be charged to the profit and loss account
immediately.
Under US GAAP, from 1 January 2002 the Group adopted the remaining provisions of
SFAS No. 142 and accordingly all goodwill arising in respect of acquisitions is
capitalised but no longer amortised and is subject to regular review for
impairment; in periods prior to 1 January 2002, goodwill arising in respect of
acquisitions was amortised over periods of up to 20 years. Goodwill amortised
prior to the full adoption of SFAS No. 142 is not permitted to be reinstated.
The Group has performed the required impairment tests and no impairments were
recorded against goodwill upon adoption of SFAS No. 142.
F-74
48 Differences between UK GAAP and US GAAP (continued)
a Goodwill and customer related intangible assets (continued)
The treatment of the Group's major acquisitions is detailed below:
Abbey Life
In 1988, Lloyds Bank Plc transferred a minority interest in five businesses to
Abbey Life Group plc, a life insurance company, in return for a majority
interest in the enlarged Abbey Life Group. Under UK GAAP, this transaction was
accounted for as a merger. Under US GAAP, the same transaction would be
accounted for as an acquisition. Accordingly the net assets of Abbey Life Group
plc (later renamed Lloyds Abbey Life plc) have been fair valued in accordance
with US GAAP and a purchase price determined based on the fair value of the
minority interest transferred. In 1996, Lloyds TSB Group plc acquired the
remaining minority interest in Lloyds Abbey Life plc. Under UK and US GAAP the
transaction is treated as an acquisition. However, certain differences arise
under US GAAP regarding the determination of fair value of life insurance
companies and accordingly an adjustment has been made for the items affected.
Cheltenham & Gloucester
Under UK and US GAAP, the purchase of the business of Cheltenham & Gloucester
Building Society by Lloyds Bank Plc in August 1995 is treated as an acquisition.
Certain differences arise under US GAAP regarding the fair value of the net
assets. In addition, the net assets acquired include GBP521 million relating to
customer related intangibles, which has been amortised over 7 years.
TSB Group plc
The business combination of Lloyds Bank Plc and TSB Group plc in December 1995
was accounted for as a merger as permitted under UK GAAP at that time, although
legally TSB Group plc was deemed to have acquired Lloyds Bank Plc. Under US
GAAP, the same transaction would have been accounted for as an acquisition of
TSB Group plc by Lloyds Bank Plc. Accordingly, for US GAAP, the net assets of
TSB Group plc have been fair valued as at the date of the business combination
and a purchase price determined based on the value of TSB Group plc shares at
that time. The net assets include GBP1,596 million relating to customer related
intangibles, which is being amortised over 11 years.
Scottish Widows
In March 2000, the Group acquired the business of Scottish Widows' Fund and Life
Assurance Society, a life insurance and pensions provider. Under UK and US GAAP,
the purchase is treated as an acquisition. However certain differences arise
under US GAAP regarding the determination of fair value of the life insurance
business. Accordingly adjustments have been made for these items.
The movement in US GAAP goodwill is summarised as follows:
2002 2001
UK GAAP US GAAP US GAAP UK GAAP US GAAP US GAAP
adjustment adjustment
GBPm GBPm GBPm GBPm GBPm GBPm
Cost
Balance at 1 January 2,640 2,348 4,988 2,635 2,363 4,998
Exchange and other adjustments 28 (36) (8) (3) (15) (18)
Change in accounting principle - 23 23 - - -
Acquisitions 103 (10) 93 8 - 8
Balance at 31 December 2,771 2,325 5,096 2,640 2,348 4,988
Amortisation
Balance at 1 January (74) (1,036) (1,110) (36) (830) (866)
Exchange and other adjustments (4) 9 5 1 3 4
Change in accounting principle - (10) (10) - - -
Charge for the year (59) 59 - (39) (209) (248)
Balance at 31 December (137) (978) (1,115) (74) (1,036) (1,110)
Net book value 2,634 1,347 3,981 2,566 1,312 3,878
F-75
48 Differences between UK GAAP and US GAAP (continued)
a Goodwill and customer related intangible assets (continued)
The movement in goodwill by segment is as follows:
Change in accounting
Balance at 1 practice* Balance at 31
January Exchange Additions December
GBPm GBPm GBPm GBPm GBPm
UK Retail Banking and 653 - 7 - 660
Mortgages
Insurance and Investments 2,194 - - - 2,194
Wholesale Markets and 1,031 (3) 86 13 1,127
International Banking
3,878 (3) 93 13 3,981
* The unamortised deferred credit in respect of negative goodwill has, under
the transitional provisions of SFAS No. 141, has been written off in 2002
and recognised in the income statement as the effect of a change in
accounting principle.
Net income and earnings per share amounts for the years ended 31 December 2002,
2001 and 2000, adjusted to exclude the amortisation expenses related to goodwill
assets which are no longer amortised, are as follows:
Net income (GBPm) Basic earnings per share Diluted earnings per share
(pence) (pence)
2002 2001* 2000* 2002 2001* 2000* 2002 2001* 2000*
Amounts as reported 1,751 1,632 1,986 31.4 29.5 36.2 31.3 29.2 35.8
Add back goodwill - 248 210 - 4.5 3.8 - 4.4 3.8
amortisation
Adjusted amounts 1,751 1,880 2,196 31.4 34.0 40.0 31.3 33.6 39.6
*restated (see page F-67)
Under US GAAP, the intangible asset representing the value of customer
relationships associated with an acquisition is capitalised separately and
amortised in the consolidated income statement over the estimated average life
of the customer relationships. At 31 December 2002, the weighted average
original life of those relationships is estimated as 11 years.
2002 2001
GBPm GBPm
Customer related intangible assets
Balance at 1 January 772 991
Additions 10 -
Amortisation (193) (219)
Balance at 31 December 589 772
Estimated amortisation in each of the years 2003 to 2006 is GBP147 million and
GBP1 million in 2007.
b Pension and other post-retirement costs
The measurement of the US GAAP pension cost is undertaken in accordance with the
requirements of SFAS No. 87 and SFAS No. 109. The disclosures reflect the
amendments arising from SFAS No. 132 'Employers' Disclosures about Pensions and
Other Postretirement Benefits'.
For the reconciliations below, the Group has applied SFAS No. 87 to the Lloyds
TSB Group Pension Schemes No's 1 and 2 with effect from 31 December 1997 as it
was not feasible to apply it as of January 1989, the date specified in the
standard. The Scottish Widows pension scheme has been included from 3 March
2000, the date of acquisition.
Other post-retirement costs include a liability of GBP83 million (2001: GBP75
million) in respect of post-retirement healthcare.
F-76
48 Differences between UK GAAP and US GAAP (continued)
b Pension and other post-retirement costs (continued)
The components of the pension expense which arise under US GAAP are estimated
as:
2002 2001 2000
GBPm GBPm GBPm
Service cost 256 212 211
Interest cost 655 545 516
Expected return on plan assets (817) (778) (720)
Net amortisation and deferral (79) (89) (92)
Net pension charge (credit) 15 (110) (85)
Change in projected benefit obligation
2002 2001 2000
GBPm GBPm GBPm
Projected benefit obligation as at 1 January 11,020 9,300 8,602
Acquisition of Scottish Widows - - 278
Service cost 256 212 211
Interest cost 655 545 516
Amendments 59 67 -
Net actuarial loss (gain) 565 1,014 (7)
Benefits paid (372) (118) (300)
Projected benefit obligation as at 31 December 12,183 11,020 9,300
Change in plan assets
2002 2001
GBPm GBPm
Plan assets at fair value as at 1 January 11,335 13,047
Actual return on plan assets (1,905) (1,597)
Employer contributions 37 3
Benefits paid (372) (118)
Plan assets at fair value at 31 December 9,095 11,335
2002 2001
GBPm GBPm
Funded status (3,088) 315
Unrecognised net actuarial loss 5,529 2,248
Unrecognised prior service cost 221 182
Unrecognised transition asset (107) (213)
Prepaid benefit cost 2,555 2,532
Minimum pension liability (4,867) -
Intangible asset recognised 221 -
(2,091) 2,532
Recognised under UK GAAP 2,931 (433)
US GAAP adjustment 840 2,099
The minimum pension liability of GBP4,867 million has been recognised in other
comprehensive income, net of the related intangible asset of GBP221 million and
deferred taxes of GBP1,369 million.
F-77
48 Differences between UK GAAP and US GAAP (continued)
b Pension and post-retirement costs (continued)
The assets of the pension schemes are invested primarily in equities and fixed
interest securities. In accordance with SFAS No. 87, the excess of the plan
assets over the projected benefit obligation at the transition date (1 January
1998) is recognised as a reduction to pension expense on a prospective basis
over approximately 15 years, which was the average remaining service period of
employees expected to receive benefits under the plans.
The financial assumptions used to calculate the projected benefit obligation at
31 December 2000 and 2001 are as follows:
2002 2001
Discount rate 5.60% 6.00%
Return on assets 6.60% 6.60%
Rate of pay increase 3.83% 4.04%
c Share compensation schemes
In accordance with SFAS No. 123 the Group accounts for share compensation
schemes based on their estimated fair value at the date of grant. The following
disclosures only reflect options granted from 1 January 1995 onwards. In the
initial phase-in period, the amounts will not be representative of the effect on
reported net income for future years. The SFAS No. 123 charge for the fair value
of share options issued since 1 January 1996 is:
2002 2001 2000
GBPm GBPm GBPm
Balance at 1 January (164) (118) (87)
Charge for options granted in year (9) (9) (13)
Charge for options granted in prior years (35) (37) (18)
Total charge for the year (44) (46) (31)
Balance at 31 December (208) (164) (118)
During the period from 1 January 1995 to 31 December 2002 the Group operated the
following stock compensation plans:
Executive scheme
The Executive share option schemes are long-term incentive schemes and are
available to certain senior executives of the Group, with grants usually made
annually. Options are granted within limits set by the rules of the schemes.
These limits relate to the number of shares under option and the price payable
on the exercise of options. From 18 April 2001, the aggregate value of the award
based upon the market price at the date of grant must not exceed four times the
executive's annual remuneration and, normally, the limit for the grant of
options to an executive in any one year would be equal to one and a half year's
remuneration with a maximum performance multiplier of three and a half. Prior to
18 April 2001, the normal limit was equal to one year's remuneration and no
performance multiplier was applied.
Options are normally exercisable between three and ten years from the date of
grant. However, the exercise of the options is subject to the satisfaction of
the following performance conditions:
For options granted after March 2001
The performance condition is linked to the performance of Lloyds TSB Group plc's
total shareholder return (calculated by reference to both dividends and growth
in share price) against a comparator group of sixteen companies.
The performance condition is measured over a three year period commencing at the
end of the financial year preceding the grant of the option and continuing until
the end of the third subsequent year. If the performance condition is not then
met, it will be measured at the end of the fourth financial year. If the
condition has not then been met, the options will lapse.
To meet the performance conditions, the Group's ranking against the comparator
group must be at least ninth. The full grant of options will only become
exercisable if the Group is ranked first. A performance multiplier will be
applied below this level to calculate the number of shares in respect of which
options granted to executive directors will become exercisable, and will be
calculated on a sliding scale. If Lloyds TSB Group plc is ranked below median
the options will not become exercisable.
F-78
48 Differences between UK GAAP and US GAAP (continued)
c Share compensation schemes (continued)
Options granted to senior executives other than executive directors will not be
so highly leveraged and as a result, different performance multipliers may be
applied to their options. For the majority of executives, options will be
granted with the performance condition but no performance multiplier.
For options granted up to March 2001
Options granted Performance conditions
Prior to March 1996 None
March 1996 - August 1999 That Lloyds TSB Group plc's ranking based on shareholder return (calculated by reference
to both dividends and growth in share price) over the relevant period should be in the
top fifty companies of the FTSE 100 and that there must have been growth in earnings per
share which is equal to the aggregate percentage change in the Retail Price Index plus
two percentage points for each complete year of the relevant period.
March 2000 - March 2001 As for March 1996 - August 1999 except that there must have been growth in the earnings
per share equal to the change in the Retail Price Index plus three percentage points for
each complete year of the relevant period.
In respect of options granted between 1996 and March 2001, the relevant period
for the performance conditions begins at the end of the financial year of the
date of grant and will continue until the end of the third financial year
following commencement or, if not met, the end of such later year in which the
conditions are met. Once the conditions have been satisfied the options will
remain exercisable without further conditions. If they are not satisfied by the
tenth anniversary of the grant the option will lapse.
The effect of the performance conditions on the value of the executive share
options has been determined by assuming that the earnings per share condition
will be satisfied at all times and by using a stochastic projection model to
determine the effect of the market-based condition. The compensation cost
accrued in the US GAAP financial statements has therefore been based on a best
estimate of the number of options that are likely to vest. To the extent that
actual forfeitures are different from the estimate, the calculation of the
compensation cost will be revised as appropriate.
As at 31 December 2002, no options granted under the Executive share scheme have
lapsed as a result of a failure to satisfy the performance conditions.
Executive scheme 2002 2001 2000
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise price Number of exercise price
options price options (pence) options (pence)
(pence)
Outstanding at 15,153,496 651.07 11,216,636 615.23 8,472,746 623.44
1 January
Granted 6,940,024 711.53 6,067,500 687.22 4,260,747 553.92
Exercised (369,721) 420.49 (1,196,024) 387.11 (1,065,674) 435.46
Forfeited (733,158) 781.17 (934,616) 793.48 (451,183) 614.97
Outstanding at 20,990,641 670.58 15,153,496 651.07 11,216,636 615.23
31 December
The weighted average fair value of options granted in the year was GBP1.41
(2001: GBP1.50; 2000: GBP1.29). Of the options outstanding at 31 December 2002
4,409,916 were exercisable (2001: 3,789,890; 2000: 3,410,961) and had a weighted
average exercise price of GBP6.84 (2001: GBP6.04; 2000: GBP4.04).
F-79
48 Differences between UK GAAP and US GAAP (continued)
c Share compensation schemes (continued)
Share retention plan
In 2001, the Group adopted the Lloyds TSB Group plc Share Retention Plan.
Options granted under this scheme are not subject to any performance conditions
and are exercisable between 3 and 10 years from the date of grant. The option
granted in 2001 was made specifically to facilitate the recruitment of Mr
Daniels and has a total exercise price of GBP1.
Share retention plan 2002
Number of shares
Outstanding at 1 January and 31 December 216,763
The weighted average remaining vesting period as at 31 December 2002 was 2
years.
Save-As-You-Earn scheme
Eligible employees may enter into contracts through the Save-As-You-Earn (SAYE)
scheme to save up to GBP250 per month and, at the expiry of a fixed term of
three or five years, have the option to use these savings within six months of
the expiry of the fixed term to acquire shares in the Group at a discount, which
is currently 20 per cent of the market price at the date the options were
granted. Grants in periods up to 31 December 2001 also had options exercising
after seven years.
SAYE scheme 2002 2001 2000
Weighted Weighted Weighted
average average average
Number of options exercise Number of options exercise Number of exercise
price price options price
(pence) (pence) (pence)
Outstanding at 106,806,493 479.30 136,169,743 404.03 141,451,803 393.90
1 January
Granted 35,113,451 508.28 23,850,747 548.29 55,205,646 455.64
Exercised (18,847,753) 409.39 (44,897,336) 283.69 (26,567,632) 179.71
Forfeited (18,524,044) 547.53 (8,316,661) 500.73 (33,920,074) 621.48
Outstanding at 104,548,147 489.55 106,806,493 479.30 136,169,743 404.03
31 December
The weighted average fair value of options granted in the year was GBP1.75
(2001: GBP2.24; 2000: GBP1.65). Of the options outstanding at 31 December 2002
3,923,030 were exercisable (2001: 1,411,511; 2000: 835,316) and had a weighted
average exercise price of GBP5.87 (2001: GBP3.81; 2000 GBP4.75).
The ranges of exercise prices, weighted average fair values and weighted average
contractual life for the options granted under the Executive and SAYE schemes
outstanding at 31 December 2000, 2001 and 2002 are shown in the table below:
2002 2001 2000
Executive SAYE Executive SAYE Executive SAYE
Exercise price 242.50-887.50 160.40-768.00 242.50-887.50 160.40-768.00 242.50-887.50 160.40-768.00
(pence)
Fair value (pence) 63-209 67-295 63-209 67-295 63-209 63-295
Weighted average
remaining life 7.7 2.8 7.9 2.8 7.6 2.6
(years)
F-80
48 Differences between UK GAAP and US GAAP (continued)
c Share compensation schemes (continued)
The ranges of exercise prices, weighted average exercise prices, weighted
average remaining contractual life and number of options outstanding at 31
December 2002 for the Executive and SAYE schemes are as follows:
Executive scheme SAYE Scheme
Weighted Weighted Weighted Weighted
average average Number of average average Number of
exercise price remaining life options exercise price remaining life options
(pence) (years) (pence) (years)
Exercise
price range
GBP1 to GBP2 - - - 180.71 0.2 19,218
GBP2 to GBP3 244.64 2.2 382,625 261.97 0.9 4,410,068
GBP3 to GBP4 321.00 3.2 416,491 - - -
GBP4 to GBP5 - - - 453.55 3.0 59,723,713
GBP5 to GBP6 542.56 6.7 4,759,270 549.40 2.9 34,713,068
GBP6 to GBP7 661.38 8.3 4,123,727 632.00 1.4 2,997,438
GBP7 to GBP8 720.05 9.1 8,694,228 733.65 1.5 2,684,642
GBP8 to GBP9 871.64 5.7 2,614,300 - - -
The fair value calculations are based on the following assumptions:
Executive SAYE
Risk-free interest rate 5.25% 4.62%
Expected life 5 years 3 or 5 years
Expected volatility 40% 40%
Expected dividend yield 6.4% 6.4%
Details of options outstanding in respect of stock compensation plans operated
prior to 1 January 1995 are as follows:
2002 Weighted Number of shares
average option as to which Number of Number of Weighted
price at options were options options average
Number of 31 December exercisable at lapsed exercised exercise
options at (pence) 31 December during year during year price
31 December (pence)
Lloyds TSB Group
Staff Share Save - - - 28,086 37,869 161.0
Scheme
Lloyds TSB Group
plc Executive 48,680 207.0 48,680 - 40,566 141.7
Share Option
Scheme (1989)
Lloyds TSB Group
plc Executive 110,897 282.5 110,897 - 26,671 282.5
Share Option
Scheme
Lloyds Bank Plc
Senior 87,880 200.7 87,880 - 35,152 200.6
Executives' UK
Share Option
Scheme 1987
Lloyds TSB Group
Rollover Scheme - - - - 18,678 146.6
(formerly Lloyds
Abbey Life)
247,457 247,457 28,086 158,936
F-81
48 Differences between UK GAAP and US GAAP (continued)
c Share compensation schemes (continued)
2001 Number of shares
Weighted as to which Weighted
average option options were Number of Number of average
Number of price at exercisable at options options exercise price
options at 31 December 31 December lapsed exercised (pence)
31 December (pence) during year during year
Lloyds TSB Group
Staff Share Save - - - 10,839 476,580 210.6
Scheme (1989)
Lloyds TSB Group
Staff Share Save 65,955 161.0 65,955 7,190 755,460 161.0
Scheme
Lloyds TSB Group
plc Executive 89,246 177.3 89,246 - 95,070 203.3
Share Option
Scheme (1989)
Lloyds TSB Group
plc Executive 137,568 282.5 137,568 - 17,344 282.5
Share Option
Scheme
Lloyds Bank Plc
Senior 123,032 200.7 123,032 2,704 200,096 161.5
Executives' UK
Share Option
Scheme 1987
Lloyds TSB Group
Rollover Scheme 18,678 139.0 18,678 258,099 37,540 146.6
(formerly Lloyds
Abbey Life)
434,479 434,479 278,832 1,582,090
d Earnings per share
Basic earnings per share under US GAAP differ from UK GAAP (see Note 10) only to
the extent that income calculated under US GAAP differs from UK GAAP.
Diluted earnings per share measures the effect that existing share options would
have on the basic earnings per share if they were to be exercised, by increasing
the number of ordinary shares, although any options that are anti-dilutive are
excluded from this calculation. An option is considered anti-dilutive when the
value of the exercise price exceeds the market price. Under US GAAP certain
incentive plan shares, for which the trustees have waived all dividend and
voting rights, have also been included in the calculation of diluted earnings
per share.
2002 2001* 2000*
Basic
Net income (US GAAP) GBP1,751m GBP1,632m GBP1,986m
Weighted average number of ordinary shares in issue 5,570m 5,533m 5,487m
Earnings per share 31.4p 29.5p 36.2p
Diluted
Net income (US GAAP) GBP1,751m GBP1,632m GBP1,986m
Weighted average number of ordinary shares in issue 5,600m 5,595m 5,548m
Earnings per share 31.3p 29.2p 35.8p
The weighted average number of anti-dilutive shares excluded from the
calculation of diluted earnings per share was 17 million at 31 December 2002
(2001: 9 million; 2000: 14 million).
*restated (see page F-67)
F-82
48 Differences between UK GAAP and US GAAP (continued)
e Derivatives held for risk management purposes
Under UK GAAP, the Group uses a variety of financial instruments to hedge
exposures in its banking book; these hedges are accounted for on an accruals
basis, in line with the underlying instruments being hedged. Any gains or losses
that would occur if these instruments were carried at market value are therefore
not recognised.
For the purposes of US GAAP, the Group believes that derivatives that are hedges
under UK GAAP do not qualify for hedge accounting under the provisions of SFAS
No. 133; prior to the adoption of SFAS No. 133, such exposures did not qualify
for hedge accounting under US GAAP either and therefore there was no transition
adjustment in respect of SFAS No. 133. Accordingly these exposures have been
marked to market, with the resulting gains and losses taken directly to income.
The movement in the US GAAP adjustment arising is summarised below:
2002 2001* 2000*
GBPm GBPm GBPm
Balance at 1 January (417) (251) (168)
Exchange and other adjustments 14 (6) 3
Net losses recognised in the year 396 230 84
Unrecognised losses arising during the year (91) (390) (170)
305 (160) (86)
Balance at 31 December (98) (417) (251)
* restated (see page F-67)
These activities are discussed more fully on pages 60 to 63 and in Note 45e on
page F-57.
f Investment securities
Under UK GAAP investment securities are held at amortised cost except within the
long-term insurance businesses where the securities are held at market value,
with unrealised gains and losses taken to the income statement in the period to
which they relate.
Under SFAS No. 115 all debt securities and equity shares are classified and
disclosed as either held-to-maturity, available-for-sale or trading. Those
classified as held-to-maturity are measured at amortised cost.
Available-for-sale securities are measured at fair value with unrealised gains
and losses excluded from the income statement and reported net of tax and
minority interests as a separate component of other comprehensive income.
Trading securities are measured at fair value with unrealised gains and losses
included in the income statement. Debt securities and equity shares categorised
as available-for-sale under US GAAP give rise to an adjustment to accumulated
other comprehensive income as detailed on page F-69.
The disclosures for investment securities in the tables below include those held
within the banking business as reported in Notes 16 and 17 and those held within
the insurance business. Securities held by the general insurance business are
included within Notes 16 and 17 under UK GAAP; for the purposes of US GAAP they
are classified within insurance activities. At 31 December 2002, the book and
market values of these securities was GBP297 million (2001 GBP273 million). The
Group had no held-to-maturity securities at 31 December 2002 or 31 December
2001.
2002 2001
GBPm GBPm
Proceeds from sales of available-for-sale investment debt securities and equity shares 15,502 15,989
Gross realised gains (197) (210)
Gross realised losses 34 27
Net amount sold 15,339 15,806
Realised gains and losses are computed using the weighted average cost method.
There were no material gains recorded on securities transferred from
available-for-sale to trading.
F-83
48 Differences between UK GAAP and US GAAP (continued)
f Investment securities (continued)
2002 Gross Gross
Amortised unrealised unrealised Carrying
cost gains losses value
GBPm GBPm GBPm GBPm
Available-for-sale investment securities:
UK government 622 54 - 676
Securities of the US Treasury and US government
agencies 1,740 3 (7) 1,736
European governments 106 - - 106
Other government securities 1,159 928 (874) 1,213
Other public sector securities 70 3 - 73
Bank and building society certificates of deposit 3,147 1 - 3,148
Corporate debt securities 4,288 157 (25) 4,420
Mortgage backed securities 893 - (1) 892
Other asset backed securities 2,817 12 (9) 2,820
Other debt securities 1,478 9 (3) 1,484
Debt securities 16,320 1,167 (919) 16,568
Equity shares 38 34 (5) 67
16,358 1,201 (924) 16,635
Of which:
Banking 11,603 931 (899) 11,635
Insurance 4,755 270 (25) 5,000
16,358 1,201 (924) 16,635
2001 Gross Gross
Amortised unrealised unrealised Carrying
cost gains losses value
GBPm GBPm GBPm GBPm
Available-for-sale investment securities:
UK government 516 24 (3) 537
Securities of the US Treasury and US
government agencies 13 - - 13
European governments 105 - - 105
Other government securities 2,045 256 (53) 2,248
Other public sector securities 54 1 (2) 53
Bank and building society certificates of deposit 4,670 8 (1) 4,677
Corporate debt securities 3,214 64 (41) 3,237
Mortgage backed securities 521 6 - 527
Other asset backed securities 2,328 6 (2) 2,332
Other debt securities 1,328 3 (4) 1,327
Debt securities 14,794 368 (106) 15,056
Equity shares 41 29 - 70
14,835 397 (106) 15,126
Of which:
Banking 10,754 298 (56) 10,996
Insurance 4,081 99 (50) 4,130
14,835 397 (106) 15,126
F-84
48 Differences between UK GAAP and US GAAP (continued)
f Investment securities (continued)
Maturity of investment debt securities:
Due within 1 Due between 1 Due between Due over No fixed
year and 5 years 5 and 10 years 10 years maturity Total
GBPm GBPm GBPm GBPm GBPm GBPm
2002
Available-for-sale
Amortised cost 3,833 4,941 3,837 3,471 238 16,320
Fair value 3,847 4,941 3,873 3,657 250 16,568
2001
Available-for-sale
Amortised cost 5,070 2,189 3,213 4,145 177 14,794
Fair value 5,083 2,185 3,250 4,358 180 15,056
g Own shares
Own shares held of GBP154 million at 31 December 2002 (2001: GBP251 million)
have been netted off against Additional Paid-in Capital within Shareholders'
equity in accordance with ARB No. 51.
h Deferred taxation
In accordance with the provisions of SFAS No. 109, the US GAAP deferred tax
liability is:
2002 2001*
GBPm GBPm
Deferred tax liabilities:
Assets used in the business (21) 2
Assets leased to customers 1,696 1,596
Pension schemes - 776
Value of business acquired 543 728
Deferred acquisition costs 209 190
Pension profit recognition 167 102
Unrealised gains on trading securities - 149
Other 277 353
Total liabilities 2,871 3,896
Deferred tax assets:
Goodwill (335) (333)
General loan loss allowance (104) (106)
Tax losses - pensions business (1,362) (1,230)
- other (265) (367)
Specific loan loss allowance (67) (92)
Pension schemes (602) -
Unrealised losses on trading securities (20) -
Other (417) (305)
Total assets (3,172) (2,433)
Valuation allowance 1,727 1,691
1,426 3,154
* restated (see page F-67)
F-85
48 Differences between UK GAAP and US GAAP (continued)
h Deferred taxation (continued)
Valuation allowance
Scottish Widows has a significant with-profits pensions business. This business
is subject to UK corporation tax on the basis of a notional return determined by
the UK taxation authorities. To the extent that the actual return from the
business is less than the notional return, tax losses accumulate which may be
carried forward and offset against excess returns in future years. The value of
these losses at 31 December 2002 was GBP1,170 million (2001: GBP1,230 million).
Excess returns have only occurred once in the thirteen years since this basis of
taxation was introduced and are only likely to be triggered in the future if
interest rates increase significantly or the actuarial valuation basis alters
significantly. Given the current low interest rate environment and in view of
the fact that the actuarial valuation basis is currently considered unlikely to
alter significantly, in the opinion of management it is more likely than not
that these losses will not be realised and therefore a full valuation allowance
has been established against this balance.
A further valuation allowance of GBP222 million (2001: GBP128 million) has been
established against other tax losses which are not expected to be utilised in
the foreseeable future. Under UK tax legislation, certain capital losses may
only be offset against taxable gains of a particular type and consequently the
associated deferred tax assets are less certain of realisation. Assessments have
been made as to the likelihood of gains arising that can be offset against these
losses and, to the extent that it is more likely than not that these losses will
not be realised, appropriate valuation allowances have been established. In
relation to other tax losses, the pattern of utilisation of losses over previous
years has been reviewed together with gains that may be realised in the
foreseeable future and an appropriate valuation allowance established to the
extent that it is more likely than not that these losses will not be realised.
A deferred tax asset of GBP335 million (2001: GBP333 million) has been
recognised as a result of the different accounting and tax treatments for
goodwill arising upon acquisition of companies and businesses. There is
currently no expectation that these businesses will be disposed of and therefore
in the opinion of management it is more likely than not that these losses will
not be realised. Accordingly, a full valuation allowance has been established
against this balance.
Tax losses
The Group has the following tax losses available to be carried forward and
offset against the future taxable profits of certain subsidiaries. The majority
of the losses may be carried forward indefinitely.
2002 2001
GBPm GBPm
Trading losses 403 403
Capital losses 370 447
Pensions business 3,900 4,100
4,673 4,950
US GAAP reconciliation
The following tables reconcile the UK GAAP tax charge and deferred tax liability
to the US GAAP tax charge and deferred tax liability as disclosed on pages F-70
and F-71.
2002 2001* 2000*
GBPm GBPm GBPm
UK GAAP Profit and loss tax charge 764 875 1,082
Deferred tax - US GAAP (25) (52) 75
Deferred tax - US GAAP reconciling items (163) (297) (437)
US GAAP Profit and loss tax charge 576 526 720
* restated (see note 1 and page F-67)
F-86
48 Differences between UK GAAP and US GAAP (continued)
h Deferred taxation (continued)
2002 2001*
GBPm GBPm
UK GAAP Deferred tax liability 1,317 1,411
Deferred tax - UK pension (asset) liability (854) 152
Deferred tax - US GAAP 60 85
Deferred tax - US GAAP reconciling items 1,151 1,550
Other items ** (248) (44)
US GAAP Deferred tax liability 1,426 3,154
* restated (see note 1 and page F-67)
** Under UK GAAP applicable to banking groups, the Group accounts for its life
assurance operations using the embedded value basis of accounting and the
shareholder's and policyholders' interests are accounted for as one-line
items. Under US GAAP the constituent parts of the shareholder's and
policyholders' interests are separately disclosed and as a result of this
reclassification the total deferred tax liability has been increased. There
is no impact on the underlying shareholder's equity.
i Loan impairment
At 31 December 2002, the Group estimated that there was no difference between
the carrying value of its loan portfolio on the basis of SFAS No. 114 and its
value in the UK GAAP financial statements. Impaired loans are those reported as
non-performing on page F-23, less those loans which are outside the scope of
SFAS No. 114, and amounted to GBP629 million (2001: GBP472 million). The
impairment reserve in respect of these loans estimated in accordance with the
provisions of SFAS No. 114 was GBP412 million (2001: GBP249 million). During the
year ended 31 December 2002, impaired loans, including those excluded from SFAS
No. 114, averaged GBP1,247 million (2001: GBP1,198 million) and interest income
recognised on these loans was GBP31 million (2001: GBP27 million).
j Significant Group concentrations of credit risk
SFAS No. 107 'Disclosure about Fair Value of Financial Instruments' states that
concentrations of credit risk exist if a number of counterparties are engaged in
similar activities and have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. The Group's exposure to credit risk is
concentrated in the United Kingdom where the majority of the Group's activities
are conducted and is detailed further in Note 15.
k Repos and reverse repos
The Group enters into reverse repo transactions which are accounted for as
collateralised loans. It is the Group's policy to seek collateral which is at
least equal to the amount loaned. At 31 December 2002, the fair value of
collateral accepted under reverse repo transactions that the Group is permitted
by contract or custom to sell or repledge was GBP1,295 million (2001: GBP1,042
million). Of this, GBP139 million (2001: GBP230 million) was sold or repledged
as at 31 December 2002. The remainder has been held for continuing use within
the business. The Group also enters into repos which are accounted for as
secured borrowings. As at 31 December 2002, the carrying value of assets that
have been pledged as collateral under repo transactions where the secured party
is permitted by contract or custom to sell or repledge was GBP1,552 million
(2001: GBP1,408 million).
l Variable interest entities
Lloyds TSB Group holds a number of variable interests in variable interest
entities. Certain of these are consolidated under UK GAAP and form part of the
Lloyds TSB Group's consolidated accounts and are detailed further in Note 21.
Lloyds TSB Group does not believe it is the primary beneficiary in respect of
other significant interests held in variable interest entities that have not
been consolidated under UK GAAP. At 31 December 2002, the aggregate total and
Lloyds TSB Group's maximum exposure to loss in respect of such interests is
analysed as follows:
Total assets Maximum exposure to loss
GBPm GBPm
Asset-backed commercial paper conduits 840 910
The Lloyds TSB Group continues to review the implications of FASB Interpretation
No. 46 'Consolidation of Variable Interest Entities' in order to determine
whether it will become necessary to consolidate any such entities for US GAAP
purposes.
F-87
48 Differences between UK GAAP and US GAAP (continued)
m Segmental analysis
Under UK GAAP, if an entity has two or more classes of business, or operates in
two or more geographical segments which differ substantially from each other,
Statement of Standard Accounting Practice No 25 "Segmental Reporting" requires
that information concerning the results and net assets of the different classes
of business and geographical segments should be given in the accounts. In
determining whether an entity has different classes of business the accounting
standard recommends that a number of factors should be taken into account,
including the nature of products and services, the markets in which they are
sold, the distribution channels for the products and the manner in which the
entity's activities are organised. Ultimately, however, SSAP 25 states that the
determination of an entity's classes of business depends upon the judgement of
the directors. The Group's segmental analysis prepared in accordance with UK
GAAP is shown in Note 2 on pages F-15 to F-17.
In order to give a more meaningful presentation of the performance of the
Group's operations and to take into account the similarities of products and
services, customer bases, distribution channels and regulatory regimes, the
results of a small number of businesses have been reflected in different
reporting segments for financial reporting purposes compared with the management
accounts. The effect of this is shown below.
Under US GAAP, SFAS No. 131 "Disclosure about Segments of an Enterprise and
Related Information" defines an operating segment as a component of the business
that engages in business activities from which it may earn income or incur
expenses and whose operating results are regularly reviewed by the enterprise's
chief operating decision maker to make decisions about resource allocation and
to assess its performance. SFAS No. 131 permits the aggregation of operating
segments if the segments demonstrate similar economic characteristics and if the
segments are similar in the following respects: the nature of the products and
services offered; the nature of the production processes; the type or class of
customer for their products or services; the distribution channels; and the
nature of the regulatory environment.
UK Retail Banking 2002 2001 2000
and Mortgages Figures Figures Figures
Figures disclosed Figures disclosed Figures disclosed
based on in based on in based on in
management Businesses segmental management Businesses segmental management Businesses segmental
accounts transferred analysis accounts transferred analysis accounts transferred analysis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 2,819 521 3,340 2,610 492 3,102 2,502 449 2,951
Other operating
income 836 240 1,076 857 278 1,135 866 277 1,143
Total income 3,655 761 4,416 3,467 770 4,237 3,368 726 4,094
Operating expenses (2,202) (468) (2,670) (2,177) (430) (2,607) (2,005) (396) (2,401)
Trading surplus 1,453 293 1,746 1,290 340 1,630 1,363 330 1,693
Provisions for bad
and
doubtful debts (496) (67) (563) (357) (58) (415) (288) (44) (332)
Income from joint
ventures (11) - (11) (10) - (10) 2 - 2
Profit before tax 946 226 1,172 923 282 1,205 1,077 286 1,363
Wholesale Markets
and International Banking 2002 2001 2000
Figures Figures Figures
Figures disclosed Figures disclosed Figures disclosed
based on in based on in based on in
management Businesses segmental management Businesses segmental management Businesses segmental
accounts transferred analysis accounts transferred analysis accounts transferred analysis
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Net interest income 2,424 (521) 1,903 2,334 (489) 1,845 2,091 (449) 1,642
Income from
long-term assurance
business 11 - 11 12 - 12 8 - 8
Other operating
income 1,578 (240) 1,338 1,421 (225) 1,196 1,268 (278) 990
Total income 4,013 (761) 3,252 3,767 (714) 3,053 3,367 (727) 2,640
Operating expenses (2,185) 468 (1,717) (1,961) 438 (1,523) (1,769) 406 (1,363)
Trading surplus 1,828 (293) 1,535 1,806 (276) 1,530 1,598 (321) 1,277
Provisions for bad
and doubtful debts (540) 67 (473) (396) 58 (338) (272) 44 (228)
Amounts written-off
fixed asset investments (57) - (57) (22) - (22) (14) - (14)
Profit on sale of
businesses - - - 39 - 39 - - -
Profit before tax 1,231 (226) 1,005 1,427 (218) 1,209 1,312 (277) 1,035
F-88
48 Differences between UK GAAP and US GAAP (continued)
n Insurance activities
The following tables summarise the adjustments to the profit and loss account
and balance sheet which would arise from the application of US GAAP to the
Group's insurance business.
Profit and loss account 2002 2002 2002 2001* 2001 2001* 2000* 2000 2000*
Life General Total Life General Total Life General Total
Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Income from long-term assurance (i) 303 - 303 29 - 29 (443) - (443)
business
Other interest and dividends (i) 1,187 - 1,187 1,019 - 1,019 948 - 948
Insurance premiums (i) 1,525 - 1,525 1,232 - 1,232 1,205 - 1,205
Other income (i) (2,101) - (2,101) (2,005) - (2,005) 258 - 258
Policyholder benefits and claims (i) (1,394) - (1,394) (2,033) - (2,033) (1,585) (12) (1,597)
expense
Movement in undistributed
policyholder allocations 1,588 - 1,588 2,427 - 2,427 317 - 317
Insurance underwriting, operating
and
acquisition expenses (i) (760) 2 (758) (697) (4) (701) (734) 13 (721)
Depreciation (i) (16) - (16) (23) - (23) (16) - (16)
Amortisation of value of long-term
assurance business acquired (ii) (725) - (725) (305) - (305) (285) - (285)
Revenue and expense recognition - (3) (3) - 24 24 - (26) (26)
Equalisation provision - 10 10 - 8 8 - 4 4
Total adjustments before tax (393) 9 (384) (356) 28 (328) (335) (21) (356)
Balance sheet 2002 2002 2002 2001 * 2001 2001 *
Life General Total Life General Total
Note GBPm GBPm GBPm GBPm GBPm GBPm
Long-term assurance business attributable to the (ii) (6,228) - (6,228) (6,366) - (6,366)
shareholder
Long-term assurance assets attributable to policyholders (iii) (45,340) - (45,340) (46,389) - (46,389)
Cash and due from banks 2,117 - 2,117 2,604 - 2,604
Trading account assets (iv) 24,664 - 24,664 25,620 - 25,620
Tangible fixed assets 157 - 157 163 - 163
Deferred acquisition costs (v) 709 (13) 696 660 (15) 645
Value of long-term assurance business acquired (ii) 2,282 - 2,282 3,007 - 3,007
Separate account assets (viii) 18,945 - 18,945 22,067 - 22,067
Other assets 1,014 33 1,047 1,190 36 1,226
Indebtedness of related parties 1,588 - 1,588 1,919 - 1,919
Long-term assurance liabilities to policyholders (iii) 45,340 - 45,340 46,389 - 46,389
Debt securities in issue (154) - (154) (99) - (99)
Policyholder liabilities (vi) (23,632) - (23,632) (23,401) - (23,401)
Undistributed policyholder allocations (vii) (1,890) - (1,890) (3,478) - (3,478)
Equalisation provision - 41 41 - 31 31
Other liabilities (429) - (429) (835) - (835)
Separate account liabilities (viii) (18,945) - (18,945) (22,067) - (22,067)
Indebtedness to related parties (333) - (333) (1,023) - (1,023)
Total adjustments before tax (135) 61 (74) (39) 52 13
* restated (see note 1)
F-89
48 Differences between UK GAAP and US GAAP (continued)
n Insurance activities (continued)
(i) Revenue recognition
Under UK GAAP applicable to banking groups, the Group accounts for its life
assurance operations using the embedded value basis of accounting. An embedded
value is an actuarially determined estimate of the economic value of a life
assurance company, excluding any value which may be attributed to future new
business. The embedded value is the sum of the net assets of the life assurance
company and the present value of the in-force business. The value of the
in-force business is calculated by projecting future net cash flows using
appropriate economic and actuarial assumptions and the result discounted at a
rate which reflects the shareholders' overall risk premium. The change in the
embedded value during any reporting period adjusted for any dividends declared
or capital injected, and grossed up at the underlying rate of corporation tax,
is reflected in the Group's profit and loss account as income from long-term
assurance business.
US GAAP requires that results of the life assurance business should be reported
on a gross basis and reflected in appropriate captions in the income statement.
Premiums from conventional with-profits policies and other protection-type life
insurance policies are recognised as revenue when due from the policyholder.
Premiums from unitised with-profits life insurance policies and investment
contracts, which have minimal mortality risk, are reported as increases in
policyholder account balances when received. Revenues derived from these
policies consist of mortality charges, policy administration charges, investment
management fees and surrender charges that are deducted from policyholders'
accounts and are disclosed within other income.
Under US GAAP, premiums and policy charges received that relate to future
periods are deferred until the period to which they relate. For limited payment
annuities, the excess of the gross premium over the US GAAP net benefit premium
is deferred and amortised in relation to the expected future benefit payments.
For investment contracts, policy charges that benefit future periods are
deferred and amortised in relation to expected gross profits.
(ii) Value of long-term assurance business acquired
Under US GAAP the value of the long-term assurance business acquired ('VOBA') is
calculated at acquisition by discounting future earnings to a present value. In
subsequent years the VOBA is amortised over the premium recognition period for
with-profits life insurance and other protection-type insurance policies using
assumptions consistent with those used in computing policyholder benefit
provisions. VOBA for investment-type policies and unitised insurance policies is
amortised in relation to expected gross profits. Expected gross profits are
evaluated regularly against actual experience and revisions made to allow for
the effect of any changes.
2002 2001
GBPm GBPm
Balance at 1 January 3,007 3,312
Interest accrued on unamortised balance (108) (92)
Amortisation (617) (213)
Balance at 31 December 2,282 3,007
Over the next 5 years the amount of VOBA expected to be amortised prior to
interest accruals is:
2003 GBP190m
2004 GBP173m
2005 GBP167m
2006 GBP161m
2007 GBP155m
(iii) Balance sheet
Under UK GAAP applicable to banking groups, in order to reflect the different
nature of the shareholder's and policyholders' interests in the long-term
assurance business these are shown separately as one-line items in the Group's
balance sheet. The value of the long-term assurance business attributable to the
shareholder comprises the net assets of the life assurance companies and the
value of the in-force business. The assets attributable to policyholders mainly
comprise the investments held in the long-term assurance funds either on behalf
of policyholders, or which have not yet been allocated to either the
policyholders or the shareholder. Liabilities to policyholders mainly comprise
policyholder benefit provisions.
F-90
48 Differences between UK GAAP and US GAAP (continued)
n Insurance activities (continued)
(iii) Balance sheet (continued)
Under US GAAP the constituent parts of the shareholder's and policyholders'
interests in the long-term assurance business are separately disclosed.
Significant differences also arise regarding the valuation of the constituent
assets and liabilities, which are discussed further in the notes which follow.
(iv) Investments
Under UK GAAP applicable to banking groups, debt securities and equity shares
held within the long-term assurance funds are included in the Group's balance
sheet at market value; investment properties are included at existing use value.
Under US GAAP, debt securities are classified as trading, available-for-sale or
held-to-maturity; equity shares may only be classified as trading or
available-for-sale. Securities classified as trading are carried at current
market value. Securities classified as available-for-sale are carried at current
market value, and unrealised gains and losses arising are held as a separate
component of shareholders' equity. Securities classified as held-to-maturity are
carried at amortised cost. In addition, US GAAP requires that all freehold and
long leasehold properties should be carried at depreciated historic cost.
For those securities classified as available-for-sale, the disclosures required
under SFAS No. 115 are presented in aggregate with the banking business on pages
F-83 to F-85.
(v) Deferred acquisition costs
Under UK GAAP applicable to banking groups, the cost of acquiring new and
renewal life assurance business is recognised in the embedded value calculation
as incurred.
Under US GAAP the costs incurred by the Group in the acquisition of new and
renewal life insurance business are capitalised. These consist of the
acquisition costs, principally commissions, marketing and advertising and the
administration costs associated with the processing and policy issuance,
typically underwriting, together these are capitalised as an asset and amortised
in relation to the profit margin of the policies acquired.
Deferred acquisition costs for conventional with-profits life insurance and
other protection type insurance policies are amortised in relation to premium
income using assumptions consistent with those used in computing policyholder
benefits provisions. Investment, universal life, and separate account contracts
are amortised in proportion to the estimated gross profits arising from the
contracts.
(vi) Policyholder liabilities
Under UK GAAP applicable to banking groups, future policyholder benefit
provisions included in the Group's balance sheet are calculated using net
premium methods for conventional with-profits life insurance and other
protection-type policies and are based on fund value for unitised with-profits
insurance policies and investment-type policies. Net premiums are calculated
using assumptions for interest, mortality, morbidity and expenses. These
assumptions are determined as prudent best estimates at the date of valuation.
Liabilities are not established for future annual and terminal bonus
declarations.
Under US GAAP, for unitised with-profits insurance and other investment-type
policies, the liability is represented by the policyholder's account balance
before any applicable surrender charges. Policyholder benefit liabilities for
conventional with-profits life insurance and other protection-type insurance
policies are developed using the net level premiums method. Assumptions for
interest, mortality, morbidity, withdrawals and expenses were prepared using
best estimates at date of policy issue (or date of company acquisition by the
Group, if later) plus a provision for adverse deviation based on Group
experience. Interest assumptions range from 4 per cent to 7 per cent.
(vii) With-profits business
With-profits policies entitle the policyholder to participate in the surplus
within the with-profits life fund of the insurance company which issued the
policy. Regular bonuses are determined annually by the issuing company's
Appointed Actuary and its board of directors. The bonuses that may be declared
are highly correlated to the overall performance of the underlying assets and
liabilities of the fund in which the contracts participate and are the subject
of normal variability and volatility. Terminal bonuses are paid on maturity of
the contract and are designed to provide policyholders with a share of the total
performance of the issuing company during the period of the contract.
F-91
48 Differences between UK GAAP and US GAAP (continued)
n Insurance activities (continued)
(vii) With-profits business (continued)
The contract for conventional with-profits business written into the
with-profits fund provides that approximately 90 per cent of the surplus arising
from the net assets of the fund are allocated to policyholders in the form of
annual bonuses. For unitised with-profits business written into the with-profits
fund all of the surplus is allocated to policyholders as bonus.
Under UK GAAP all amounts in the with-profits fund not yet allocated to
policyholders or shareholders are recorded in the liabilities attributable to
policyholders on the Group's balance sheet.
Under US GAAP a liability is established for undistributed policyholder
allocations. The excess of assets over liabilities in the with-profits fund is
allocated to the policyholders and shareholders in accordance with the
proportions prescribed by the contracts. The remaining liability comprises the
obligation of the insurance company to the policyholders.
(viii) Separate account assets and liabilities
Under UK GAAP, segregated accounts are established for policyholder business for
which policyholder benefits are wholly or partly determined by reference to
specific investments or to an investment-related index. This is referred to as
linked business. Linked business can either be unit-linked, property-linked or
index-linked. In the case of the unit-linked and property-linked business the
policyholders bear the investment risk. The Group bears the investment risk
relating to the index-linked business.
Under US GAAP only those assets where the policyholder bears the investment risk
are reported as separate account assets and liabilities.
F-92
49 Parent company disclosures
a Company profit and loss account 2002 2001 2000
GBPm GBPm GBPm
Net interest income 15 6 8
Dividends received from group undertakings 1,908 1,872 1,685
Total income 1,923 1,878 1,693
Operating expenses (39) (60) (39)
Profit on ordinary activities before tax 1,884 1,818 1,654
Taxation credit 28 75 45
Profit on ordinary activities after tax 1,912 1,893 1,699
Dividends (1,908) (1,872) (1,683)
Profit for the year 4 21 16
b Company balance sheet 2002 2001
GBPm GBPm
Fixed assets
Investments
Shares in group undertakings 9,091 11,960
Loans to group undertakings 1,723 759
Own shares 18 23
10,832 12,742
Current assets
Debtors falling due within one year
Amounts owed by group undertakings 1,375 1,369
Other debtors 89 47
Tax recoverable 11 29
Cash balances with group undertakings 250 114
1,725 1,559
Current liabilities
Amounts falling due within one year
Amounts owed to group undertakings 1,801 1,760
Other creditors 103 62
Dividend payable 1,311 1,306
Loan capital 14 -
3,229 3,128
Net current liabilities (1,504) (1,569)
Total assets less current liabilities 9,328 11,173
Creditors: amounts falling due after more than one year
Loan capital 1,356 413
Net assets 7,972 10,760
Capital and reserves
Called-up share capital 1,416 1,411
Share premium account 1,093 959
Revaluation reserve 3,025 5,894
Profit and loss account 2,438 2,496
Shareholders' funds (equity) 7,972 10,760
F-93
49 Parent company disclosures (continued)
c Company cash flow statement 2002 2001 2000
GBPm GBPm GBPm
Net cash inflow (outflow) from operating activities 20 (68) (149)
Returns on investments and servicing of finance:
Dividends received from group undertakings 1,903 1,736 1,375
Interest paid on subordinated liabilities (loan capital) (34) (41) (34)
Net cash inflow from returns on investments and servicing of finance 1,869 1,695 1,341
Taxation:
UK corporation tax received 79 62 64
Capital expenditure and financial investment:
Capital lending to subsidiaries (964) (100) -
Repayments of capital lending by subsidiaries - 100 -
Net cash outflow from capital expenditure and financial investment (964) - -
Equity dividends paid (1,903) (1,738) (1,522)
Net cash outflow before financing (899) (49) (266)
Financing:
Issue of ordinary share capital net of GBP62 million
(2001: GBP182 million; 2000: GBP128 million) charge in respect of the QUEST 77 197 70
Issue of subordinated liabilities (loan capital) 958 - -
Repayments of subordinated liabilities (loan capital) - (100) -
Net cash inflow from financing 1,035 97 70
Increase (decrease) in cash 136 48 (196)
d Reconciliation to US GAAP 2002 2001
GBPm GBPm
Shareholders' funds (UK GAAP) 7,972 10,760
Dividends 1,311 1,306
Own shares (18) (23)
Revaluation of shares in group undertakings 925 1,378
Shareholders' equity (US GAAP) 10,190 13,421
e Reconciliation of the movements in shareholders' equity under US GAAP 2002 2001 2000
GBPm GBPm GBPm
Profit after tax (UK GAAP) 1,912 1,893 1,699
Share compensation schemes (44) (46) (31)
Net income (US GAAP) 1,868 1,847 1,668
Dividends paid (1,903) (1,738) (1,522)
(35) 109 146
Issue of shares 77 194 70
Movement in own shares 5 1 11
Share compensation schemes 44 46 31
Revaluation of shares in group undertakings (3,322) (519) 383
(3,231) (169) 641
Shareholders' equity at 1 January 13,421 13,590 12,949
Shareholders' equity at 31 December 10,190 13,421 13,590
F-94
GLOSSARY
Term Used US Equivalent or Brief Description
Accounts......................................... Financial statements.
Associates....................................... Long-term equity investments accounted for by the equity method.
ATM.............................................. Automatic Teller Machine.
Attributable profit.............................. Net income.
Broking.......................................... Brokerage.
Building society................................. A building society is a mutual institution set up to lend money to its
members for house purchases. See also "Demutualisation".
Called-up share capital.......................... Ordinary shares, issued and fully paid.
Contract hire.................................... Leasing.
Cashpoint........................................ Automatic Teller Machine.
Creditors........................................ Payables.
Dealing.......................................... Trading.
Debtors.......................................... Receivables.
Demutualisation.................................. Process by which a mutual institution is converted into a public limited
company.
Economic profit.................................. See definition under "Operating and Financial Review and Prospects -
Economic profit".
Embedded value .................................. See definition under "Operating and Financial Review and Prospects - Critical
accounting policies".
Endowment mortgage............................... An interest-only mortgage to be repaid by the proceeds of an endowment
insurance policy which is assigned to the lender providing the mortgage.
The sum insured, which is payable on maturity or upon the death of the
policyholder, is used to repay the mortgage.
Estate agency.................................... Real estate agent.
Fees and commissions payable..................... Fees and commissions expense.
Fees and commissions receivable.................. Fees and commissions income.
Finance lease.................................... Capital lease.
Freehold......................................... Ownership with absolute rights in perpetuity.
Guaranteed annuity............................... See "Business - Guaranteed Annuity Options".
Guaranteed annuity option........................ See "Business - Guaranteed Annuity Options".
Hire purchase.................................... See "Business - Wholesale Markets and International Banking - Asset finance".
Interchange...................................... System allowing customers of different Automatic Teller Machine (ATM)
operators to use any ATM that is part of the system. The LINK network
is an interchange in the UK.
107
Term Used US Equivalent or Brief Description
Interest payable................................. Interest expense.
Interest receivable.............................. Interest income.
ISA ............................................. Individual Savings Account.
Leasehold........................................ Land or property which is rented from the owner for a specified term
under a lease. At the expiry of the term the land or property reverts back to
the owner.
Lien............................................. Under UK law, a right to retain possession pending payment.
Life assurance................................... Life insurance.
LINK network..................................... See "Interchange".
Loan capital..................................... Long-term debt.
Members.......................................... Shareholders.
Memorandum and articles of association........... Articles and bylaws.
National Insurance............................... A form of taxation payable in the UK by employees, employers and
the self-employed, used to fund benefits at the national level
including state pensions, medical benefits through the National
Health Service (NHS), unemployment and maternity. It is part of the UK's
national social security system and ultimately controlled by the Department
of Social Security.
NBNZ............................................. The National Bank of New Zealand Limited.
Nominal value.................................... Par value.
One-off.......................................... Non-recurring.
Ordinary shares.................................. Common stock.
Overdraft........................................ A line of credit, contractually repayable on demand unless a fixed-term has
been agreed, established through a customer's current account.
Preference shares................................ Preferred stock.
Premises......................................... Real estate.
Profit & loss account............................ Income statement.
Profit & loss account reserve.................... Retained earnings.
Provisions....................................... Reserves.
Recurring premium................................ Premiums which are payable throughout the duration of a policy or for
some shorter fixed period.
Reinsurance...................................... The insuring again by an insurer of the whole or part of a risk that it
has already insured with another insurer called a reinsurer.
SERPS............................................ State Earnings Related Pension Scheme, a UK government pension scheme.
Share capital.................................... Capital stock.
Shareholders' funds.............................. Stockholders' equity.
Share premium account............................ Additional paid-in capital.
Shares in issue.................................. Shares outstanding.
108
Term Used US Equivalent or Brief Description
Single premium................................... A premium in relation to an insurance policy payable once at the
commencement of the policy.
Stakeholder pension.............................. See "Operating and Financial Review and Prospects - Line of business
information - Life, pensions and unit trusts operating profit - 2001 compared
with 2000".
Superannuation................................... An occupational pension scheme.
Tangible fixed assets............................ Property and equipment.
Undistributable reserves......................... Restricted surplus.
Unit-linked products............................. See "Business - Guaranteed Annuity Options".
Unit trust....................................... Mutual fund.
VaR.............................................. Value at Risk, see definition under "Operating and Financial Review
and Prospects - Market risk in banking operations - Trading Value at Risk
(VaR)".
VcV.............................................. Variance/covariance methodology, see definition under "Operating and
Financial Review and Prospects - Market risk - Trading Value at Risk (VaR)".
Weighted sales................................... The sum of regular premiums plus one-tenth of single premiums paid by
customers on life insurance, pensions and unit trusts.
With-profits bond................................ See "Operating and Financial Review and Prospects - Line of business
information - Life, pensions and unit trusts operating profit - 2001 compared
to 2000"
With-profits fund................................ See "Business - Insurance and Investments - Life assurance, pensions and
investments".
109
FORM 20-F CROSS-REFERENCE SHEET
Form 20-F Item Number and Caption Location Page
Part I
Item 1. Identity of Directors, Senior Management and Advisors
A. Directors and senior management Not applicable.
B. Advisors Not applicable.
C. Auditors Not applicable.
Item 2. Offer Statistics and Expected Timetable
A. Offer statistics Not applicable.
B. Method and expected timetable Not applicable.
Item 3. Key Information
A. Selected Financial Data "Selected Consolidated Financial Data"................. 4
B. Capitalisation Not required for annual report.
C. Reason for the offer and use of Proceeds Not applicable.
D. Risk factors "Risk Factors"......................................... 102
Item 4. Information on the Company
A. History and development of the Company "Business"............................................. 7
B. Business overview "Business Overview".................................... 3
C. Organisation structure "Lloyds TSB Group Structure"........................... 105
D. Property, plant and equipment "Properties"........................................... 12
Item 5. Operating and Financial Review and Prospects
A. Operating results "Operating and Financial Review and Prospects"......... 17
B. Liquidity and capital resources "Operating and Financial Review and
Prospects-Liquidity and Capital Resources"............. 67
C........Research and development, patents and Not applicable.
licenses, etc.
D. Trend information "Operating and Financial Review and Prospects -
Overview and Trend Information"........................ 18
Item 6. Directors, Senior Management and Employees
A. Directors and senior management "Management and Employees-Directors and senior
management"............................................ 76
B. Compensation "Management and Employees-Compensation"................ 78
C. Board practices "Management and Employees-Board practices"............. 83
D. Employees "Management and Employees-Employees"................... 85
E........Share ownership "Management and Employees-Share ownership"............. 85
Item 7. Major Shareholders and Related Party Transactions
A. Major shareholders "Major Shareholders and Related Party Transactions-
Major shareholders".................................... 89
B. Related party transactions "Major Shareholders and Related Party Transactions-
Related party transactions"............................ 89
C. Interests of experts and counsel Not applicable.
110
Form 20-F Item Number and Caption Location Page
Item 8. Financial Information
A. Consolidated Financial Statements "Consolidated Financial Statements and Notes".......... F-1
"Business - Legal actions"............................. 12
"Dividends"............................................ 96
B. Significant changes "Operating and Financial Review and Prospects"......... 17
Item 9. The Offer and Listing
A. Offer and listing details "Listing Information".................................. 94
B. Plan of distribution Not applicable.
C. Markets "Listing Information".................................. 94
D. Selling shareholders Not applicable.
E. Dilution Not applicable.
F. Expenses of the issue Not applicable.
Item 10. Additional Information
A. Share capital Not required for annual report.
B. Memorandum and Articles of Association "Memorandum and Articles of Association"............... 96
C. Material contracts Not applicable.
D. Exchange controls "Exchange Controls".................................... 96
E. Taxation "Taxation"............................................. 97
F. Dividends and paying agents Not applicable.
G. Statements by experts Not applicable.
H. Documents on display "Where You Can Find More Information".................. 101
I. Subsidiary information "Lloyds TSB Group Structure"........................... 105
Item 11. Quantitative and Qualitative Disclosures about Market "Operating and Financial Review and Prospects -
Risk Enterprise-wide risk management"....................... 48
Item 12. Description of Securities Other than Equity Securities
A. Debt securities Not applicable.
B. Warrants and rights Not applicable.
C. Other securities Not applicable.
D. American Depositary Shares Not applicable.
Part II
Item 13. Defaults, Dividends Arrearages and Delinquencies Not applicable.
Item 14. Material Modifications to the Rights of Security Not applicable.
Holders and Use of Proceeds
Item 15. Controls and Procedures "Management and Employees - Corporate Governance"...... 87
Item 16. [Reserved by the Securities and Exchange Commission]
Part III
Item 17. Financial statements Not applicable.
Item 18. Financial statements "Consolidated Financial Statements and Notes".......... F-1
Item 19. Exhibits "List of Exhibits", "Exhibits Index" and the pages
following.............................................. 112
111
LIST OF EXHIBITS
1 Memorandum and articles of association of Lloyds TSB Group plc.*
2 (i) Limited Partnership Agreements dated 4 February 2000, relating
to the preference securities.*
(ii) Trust Deed dated 25 April 2001, relating to the perpetual
capital securities.*
4 (a)(i) Transfer Agreement between Scottish Widows' Fund and Life
Assurance Society and Lloyds TSB Group plc dated 23 June
1999, relating to the transfer of the business of Scottish
Widows Fund and Life Assurance Society.*
(ii) Deed of Amendment between Scottish Widows' Fund and Life
Assurance Society and Lloyds TSB Group plc dated 17 November
1999, amending the Transfer Agreement dated 23 June 1999,
relating to the transfer of the business of Scottish Widows
Fund and Life Assurance Society.*
(iii) Share Purchase Agreement among Lloyds TSB Bank plc, Chartered
Trust Holdings plc and others dated 31 August 2000,
relating to the acquisition of the Chartered Trust Group plc.*
(b)(i) Service agreement dated 6 September 1991 between Lloyds TSB Bank
plc and Michael E. Fairey and subsequent amendments.
(ii) Service agreement dated 9 February 2000 between Lloyds TSB Bank
plc and Archie G. Kane and subsequent amendments.
(iii) Service agreement dated 7 March 2000 between Lloyds TSB Bank plc
and Michael D. Ross and subsequent amendments.
(iv) Service agreement dated 19 October 2001 between Lloyds TSB Bank
plc and J. Eric Daniels and subsequent amendments.
(v) Service agreement dated 30 May 2002 between Lloyds TSB Bank plc
and Philip R. Hampton and subsequent amendments.
(vi) Service agreement dated 5 February 2003 between Lloyds TSB Bank
plc and Stephen C. Targett.
(vii) Service agreement dated 28 July 2000 between Lloyds TSB
Group plc and Maarten A. van den Bergh and subsequent
amendments.
(viii) Service agreement dated 7 April 2003 between Lloyds TSB Group
plc and David P. Pritchard.
(ix) Service agreement dated 30 May 2003 between Lloyds TSB Group plc
and Peter G. E. Ayliffe.
8 List of subsidiaries, their jurisdiction of incorporation and the names
under which they conduct business.
10.1 Certificates pursuant to section 906 of the Sarbanes-Oxley Act 2002
(subsection (a) and (b) of section 1350, Chapter 63 of Title 18, United
States Code)
* Previously filed with the SEC, together with Lloyds TSB Group's
registration statement, on 25 September 2001.
The exhibits shown above are listed according to the number assigned to
them by the Form 20-F
112
SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorised the
undersigned to sign this annual report.
LLOYDS TSB GROUP plc
By: /s/ P R Hampton
Name: Philip R Hampton
Title: Group Finance Director
Dated: 23 June 2003
113
Certifications required under Section 302 of the Sarbanes-Oxley Act
I, Eric Daniels, certify that:
1. I have reviewed this annual report on Form 20-F of Lloyds TSB Group plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ J E Daniels
J. E. Daniels, Group Chief Executive
Date: 23 June 2003
114
I, Philip Hampton, certify that:
1. I have reviewed this annual report on Form 20-F of Lloyds TSB Group plc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ P R Hampton
P. R. Hampton, Group Finance Director
Date: 23 June 2003
115
Exhibit 4(b)(i)
6 January 2003
Mr. M.E. Fairey
Deputy Group Chief Executive
Lloyds TSB Group plc
71 Lombard Street
London EC3P 3BS
STRICTLY PERSONAL
I am pleased to tell you that, following a review of executive
remuneration, the Board has agreed to increase your salary to
GBP498,000 with effect from 1st January 2003.
I can also advise you that your 1incentive opportunity has been
increased from 75% to 100% with effect from 1st January 2003. The
targets against which the bonus opportunity will be determined will
be submitted to the Remuneration on the 24th January and advised to
you shortly thereafter.
Thank you again for your efforts during 2002.
SEE THE DIRECTORS' REMUNERATION REPORT IN THE LLOYDS TSB GROUP PLC REPORT
AND ACCOUNTS FOR 2002 FOR DISCLOSABLE DETAILS OF THE TARGETS.
P.B. Ellwood
Group Chief Executive
LLOYDS TSB ACT 1998
Under the Lloyds TSB Act 1998 all contracts of employment with TSB Bank plc were
transferred to and vested in Lloyds Bank Plc.
Therefore, with effect from 28th June, 1999, Mr. Fairey's employing company
became Lloyds Bank Plc.*
A.J. Michie
Company Secretary
December 2001
* Lloyds Bank Plc changed its name to Lloyds TSB Bank plc on 28th June, 1999
28 August 1991
Mr. M. Fairey
Springwood
9 Silverthorne Drive
Longdean Park
Hemel Hempstead
Hertfordshire HP3 8BU
Dear Mr Fairey
On behalf of TSB Bank plc - Retail Banking and Insurance Division, I am pleased
to offer you employment as Director of Credit, reporting to Charles Love, Branch
Banking Director, with effect from a date to be agreed. This offer is subject to
satisfactory references and medical report
You will be based initially in central London, then in central Birmingham from a
date in early 1992 to be determined by the Bank. The Bank will provide full
relocation assistance as set out in the enclosed extract from the staff manual.
However, please note that the Relocation Grant does not apply to external
recruits such as yourself.
Pending relocation of your home to the West Midlands, the Bank will assist you
with accommodation in Birmingham through until Summer 1993.
Your salary will be GBP85,000 per annum, to be reviewed on the basis of
performance on 1 January 1992, and annually in January thereafter.
You will be entitled to participate in the:
Senior Management Bonus Scheme
Group Profit Sharing Scheme
Company Car Scheme with a Band 5 car
Non-Contributory TSB Group Senior Executive Pension Scheme -
explanatory TSB Group Pension
Scheme booklet, and Memorandum on TSB Group Senior Executive Pension
Scheme.
Staff House Purchase Scheme The rules are set out in the Staff
Manual. In accordance with those rules, staff can purchase their
prime place of residence with a mortgage of up to GBP50,000 subsidized
to a 5% net rate of interest, with a maximum subsidy of 10%. The
mortgage must be with TSB Retail Banking & Insurance.
I also confirm that, on relocation to Birmingham, your mortgage
subsidy limit will be increased to GBP75,000 to assist with the
purchase of a new prime place of residence.
-2-
The other benefits we provide include:
Free medical insurance (BUPA) and health screening every two years for
you;
- Other banking benefits, e.g., interest-free season ticket loan
- 30 days annual holiday.
Please note the following conditions of employment. You will be required to:
- work those hours which are necessary for the satisfactory performance
of your duties and responsibilities;
- be mobile - you may be required to transfer to any TSB Bank plc -
Retail Banking and Insurance Division office or place of work within
the United Kingdom;
- maintain a TSB current account into which your salary will be paid in
arrears around the 20th of each month;
- comply with the TSB Code of Conduct for Share Transactions;
- give the Bank 6 months' notice of termination of employment, and you
are entitled to 12 month' notice of termination from the Bank;
- retire on attaining 60 years of age.
Other terms and conditions of employment are contained in the Staff Manual,
which is available in the Personnel Department.
In order to accept this offer of employment, please sign and return to me one
copy of this letter, along with completed application form, completed medical
questionnaire, and the names of two professional referees I have your permission
to contact. One of the referees must be a senior person from your current
employer.
In the meantime, I look forward to working with you in the exciting times which
lie ahead for you and our organisation.
Yours sincerely
A. T. Muir
Director of Personnel Services
I accept this offer on the terms and conditions outlined above.
Signed by Mr. M.E. Fairey on 6th September, 1991
Exhibit 4(b)(ii)
PBE/MAH
6 January 2003
Mr. A.G. Kane
Group Executive Director
IT & Operations
Lloyds TSB Group plc
71 Lombard Street
London EC3P3BS
STRICTLY PERSONAL
I am pleased to tell you that, following a review of executive remuneration, the
Board has agreed to increase your salary to GBP397,50O with effect from 1st
January 2003.
I can also advise you that your incentive opportunity has been increased from
75% to 100% with effect from 1st January 2003. The targets against which the
bonus opportunity will be determined will be submitted to the Remuneration
Committee on the 24th January and advised to you shortly thereafter.
Thank you again for your efforts during 2002.
SEE THE DIRECTORS' REMUNERATION REPORT IN THE LLOYDS TSB
GROUP PLC REPORT AND ACCOUNTS FOR 2002 FOR DISCLOSABLE
DETAILS OF THE TARGETS.
P.B. Ellwood
Group Chief Executive
THIS EXECUTIVE SERVICE AGREEMENT is made the [9th] day of [February] 2000
BETWEEN Lloyds TSB Bank plc of 71 Lombard Street, London, EC3P 3BS ("the
Employer") and Archibald Gerard Kane of Radway Fields Radway Warwickshire CV3S
OUQ ("the Executive").
IT IS AGREED as follows:-
1. Appointment and Place of Work
1.1 The Employer shall employ the Executive as Group Executive Director, IT &
Operations or in such other capacity in the business of the Employer or any
Group Company as the Employer may from time to time reasonably require.
1.2 The Executive's initial place of work shall be 71 Lombard Street, London,
EC3P 3BS Provided that the Employer may require the Executive to carry out
his duties at such other place of business of any Group Company within or
outside the United Kingdom as the Employer may specify.
2. Remuneration and Other Benefits
2.1 Remuneration
(a) The Executive's salary shall be GBP300,000 per annum or such higher
salary as may be notified to him from time to time.
(b) The Executive agrees to waive payment of any director's fees payable
in respect of any directorships held by him in any member of the
Group.
(c) The Executive may also receive the following remuneration at the
Employer's discretion: -
(i) payment or shares under any staff profit sharing scheme, in
accordance with the rules thereof
(ii) a personal bonus in respect of each financial year of the
Employer on such terms as may be notified to the Executive by
the Employer.
The Executive acknowledges that, save for specific awards or entitlements
notified to the Executive individually or by a general notice to staff,
staff profit sharing schemes and bonuses are not contractual
entitlements, and may therefore be reduced, varied or withdrawn by the
Employer at any time at its discretion.
(d) The Executive may participate in any all-employee Save as you Earn
employee share schemes offered by the Employer, and also, at the
discretion of the Employer, in any executive share option schemes
established by the Employer, subject in each case to being eligible
to participate under their rules. The Executive acknowledges
that on termination of his employment he will have no right of
action, otherwise than pursuant to the express rules of such schemes,
against the Employer or any member of the Group in any way
arising from his no longer being able to participate in such
schemes.
2.2 Motor Car
The Executive shall be entitled to participate in any Car Scheme (as
described in the Employer's Staff Manual) operated by the Employer from
time to time. Upon termination of his employment, the Executive shall
return any car provided by the Employer.
3. Commencement and Duration
3.1 The Executive's employment under this Agreement shall be treated as having
commenced on the 1st day of January 2000 and shall continue indefinitely
until terminated:-
(a) by not less than 12 months' notice given by the Employer to the
Executive; or
(b) by not less than 6 months' notice given by the Executive to the
Employer; or
(c) by retirement under clause 3.2; or
(d) under clause 7.
3.2 The Executive's retirement age shall be sixty years, and his employment
shall terminate at that age automatically and without the requirement for
any notice to be given.
3.3 The date on which any continuous period of employment began with the
Employer or a previous employer which counts as part of the Executive's
continuous period of employment with the Employer for the purposes of the
law relating to redundancy and unfair dismissal and for the purposes of
commencement of pensionable service, is 17 March 1986.
3.4 On the termination of this Agreement or on the Employer giving notice under
clause 6.8, the Executive shall resign from any offices as a director of
any member of the Group and from all other appointments or offices which he
holds as nominee or representative of any member of the Group. As security
for such obligation the Executive irrevocably appoints the Employer to be
his attorney to sign any documents or do any things necessary or requisite
to effect such resignation(s). Such resignation(s) shall be without
prejudice to any claims which the Executive may have against the Employer
arising out of this Agreement or its termination.
4. Duties of and Warranties by the Executive
During the period of this Agreement, the Executive shall:-
(a) perform his duties faithfully, diligently and with due care, and use
all reasonable endeavours to promote the interests of the Group;
(b) save to the extent that may be agreed by the Employer in writing: (i)
devote the whole of his time, ability and attention to his duties
during normal office hours and during such other time as may
reasonably be required for the effective performance of such duties;
and (ii) not take up any remunerated external appointment;
(c) keep the Chief Executive of Lloyds TSB Group plc promptly informed of
the conduct of his duties, his plans for the future performance of his
duties and of any conflict of interest to which he is or may become
subject, and comply with any policy directions or reasonable other
directions given to him by the Chief Executive;
(d) comply with the Model Code appended to Chapter 16 of the Listing Rules
of the London Stock Exchange and all other codes of conduct from time
to time adopted by the Employer;
(e) comply with all applicable rules, regulations and codes imposed or
recommended by any industry or regulatory body relevant to that part
of the business of any Group Company with which the Executive is
involved;
(f) save with the prior written agreement of the Employer, neither
participate nor have a financial interest in any business which
competes with, or is a material customer or supplier to, any part of
the Group Provided that the Executive may hold up to 3% of the equity
or share capital of any such business;
(g) other than reasonable corporate hospitality and seasonal or occasional
gifts of limited value, not directly or indirectly receive any benefit
from any person having business transactions with any member of the
Group.
5. Pension Arrangements
5.1 The Executive shall be entitled to be a member of the Lloyds TSB Group
Pension Scheme No.2 ("the Scheme"). The Employer shall be entitled at
any time to terminate the Scheme or the Executive's membership of it
subject to providing him with the benefit of a pension scheme ("the
New Scheme") the benefits of which taken as a whole shall be no less
favourable than the benefits provided to the Executive under the
Scheme and to ensuring that the Executive is fully credited in the New
Scheme for his pensionable service in the Scheme as if such
pensionable service had been under the New Scheme.
5.2 In the event of the Executive ceasing to be employed by the Employer
by reason of redundancy (as defined by Section 139 of the Employment
Rights Act 1996 or any reenactment or amendment thereof for the time
being in force) and being entitled to a redundancy payment under such
legislation, then, provided that he is a member of the Scheme or any
New Scheme and at the time he ceases to be employed shall be aged 50
or more, the Employer shall procure (by making such payments to the
trustees of the Scheme or any New Scheme as they may require or
otherwise) that an immediate pension shall be payable to the Executive
from the date of cessation of employment (based on his final
pensionable salary and pensionable service at the time of cessation)
but without any reduction for commencement of payment before the age
of 60, but limited always to the highest amount which will not
prejudice continued approval of the Scheme or New Scheme by the
Commissioners of Inland Revenue as an exempt approved scheme for the
purposes of the Income and Corporation Taxes Act 1988 (or any
re-enactment or amendment thereof for the time being in force).
5.3 A Contracting-Out Certificate pursuant to the provisions of the
Pensions Act 1995 is in force in respect of the Executive's
employment.
6. Miscellaneous Conditions of Employment
6.1 The provisions of the Employer's Staff Manual (access to which has
been and will remain available to the Executive) shall not apply to
the Executive's employment with the Employer or form part of this
Agreement except for the following provisions:-.
Paragraph 1.16 Mobility
Paragraph 1.18 Personal Dealing
Paragraph 1.22 Sick Pay
Paragraph 1.23 Sickness absence reporting
Paragraph 1.24 Smoking Policy
Paragraph 2.3 Expenses
Paragraph 2.8 Pay periods
Paragraph 2.9 Relocation
The whole of Section 3 (Staff Benefits) except for Paragraph 3.1.3
(Pension Scheme).
The whole of Section 5 (Attendance and Leave) except for Paragraph 5.1
(Career Break Scheme).
The whole of Section 6 (Miscellaneous).
If there is any conflict between this Agreement and such provisions,
then this Agreement shall prevail.
6.2 If employment of the Executive under this Agreement is terminated by
reason of the liquidation of the Employer for the purpose of
reconstruction or amalgamation and the Executive is offered employment
with any concern or undertaking resulting from the reconstruction or
amalgamation on terms and conditions not less favourable than the
terms of this agreement, then the Executive shall have no claim
against the Employer in respect of the termination of his employment
under this Agreement (whether or not the notice required by Clause 3
shall have been given),
6.3 Any disciplinary matter affecting the Executive will be dealt with by
the Chief Executive of Lloyds TSB Group plc.
6.4 If the Executive has any grievance relating to his employment he may
refer such grievance in writing to the Chief Executive of Lloyds TSB
Group plc. If the Executive is dissatisfied with the Chief Executive's
treatment of his grievance, he may refer the matter to the Chairman of
Lloyds TSB Group plc.
6.5 There are no collective agreements affecting the employment of the
Executive.
6.6 The Executive shall be entitled to 30 working days holiday in each
year, with pro rata entitlement during the year in which the
Executive's employment is treated as commencing and during the year in
which it is terminated. Holidays shall be taken at such reasonable
times as the Chief Executive shall approve.
6.7 The Executive's hours of work are the normal hours of work of the
Employer (currently 9.00 am to 5.00 pm each weekday) together with
such additional hours as may be necessary to enable the Executive to
fulfil his duties.
6.8 The Employer may by giving notice to the Executive cease to provide
him with work for any period up to six months, during which time the
Executive shall hold himself available to deal with requests for
information and advice on matters relating to his work but shall not
attend the premises of any Group Company unless directed to do so and
shall comply with such directions as he may be given by the Employer
regarding contact with any customer or supplier of any Group Company
with whom, during the twelve month period preceding the date of the
notice, he shall have had contact in the course of his duties. The
Executive acknowledges that the right of the Employer to cease to
provide him with work in such circumstances is necessary for the
protection of the legitimate business interests of the Employer.
7. Termination
The Employer may terminate the Executive's employment at any time
forthwith by written notice to the Executive (and without any
requirement of prior notice) if the Executive shall:-
(a) commit any material breach, or continue (after warning) to commit
any breach, of his obligations under this Agreement;
(b) be guilty of any material misconduct or material neglect in the
discharge of his duties;
(c) have a bankruptcy order made against him or make any arrangement
or composition with his creditors or have an interim order made
against him pursuant to the Insolvency Act 1986 (or any
re-enactment or amendment thereof for the time being in force);
(d) be convicted of any criminal offence which in the reasonable
opinion of the Employer affects his position as an employee under
this Agreement;
(e) bring the name or reputation of the Employer, or any Group
Company in whose business he shall have been involved, into
material disrepute
(f) be or become prohibited by law from becoming or remaining a
director; or
(g) be disqualified or disbarred from membership of, or be found to
have committed any serious disciplinary offence by, or be found
not to be a fit and proper person by, any professional or
regulatory body governing the conduct by the Executive of his
duties or the business of any Group Company.
8. Confidential and Other Information
8.1 Except in the proper performance of his duties, the Executive
shall not without the written consent of the Employer either
during or after the termination of this Agreement disclose to any
person or use for any purpose any confidential information
relating to the business of any member of the Group.
8.2 Following the termination of his employment the Executive shall
return to the Employer on demand all items of property belonging
to or relating to the business of any member of the Group which
came into his possession during his employment.
9. Copyright
9.1 The Executive shall promptly disclose to the Employer all
copyright works originated, conceived, written or made by him
alone or with others during the course of his employment (except
only those works originated, conceived, written or made by him
wholly outside his normal working hours and wholly unconnected
with his appointment) and shall until such rights shall be fully
and absolutely vested in the Employer hold them in trust for the
Employer.
9.2 The Executive assigns to the Employer by way of future assignment
all copyright and other proprietary rights (if any) for the full
terms thereof throughout the world in respect of all works
originated, conceived, written or made by the Executive during
the course of his employment (except only those works originated,
conceived, written or made by the Executive wholly outside his
normal working hours and wholly unconnected with his duties under
this Agreement).
9.3 It is agreed that for the purpose of Section 2(1B) of the
Registered Designs Act 1949 and the Copyright Designs and Patents
Act 1988 all designs created by the Executive during the course
of his employment (except only those which are created by the
Executive wholly outside his normal working hours and wholly
unconnected with his duties under this Agreement) shall be
treated as being created by the Executive in the course of his
employment and accordingly the Employer shall for the purpose of
that Act be the original proprietor of any such designs.
9.4 The Executive will at the request and expense of the Employer do
all things necessary or desirable to substantiate the rights of
the Employer under this Clause 9, and as security for such
obligation irrevocably appoints the Employer to be his attorney
to sign or execute any such instrument or do any thing as may be
necessary or desirable to effect such substantiation and the
assignment referred to in clause 9.2.
10. Notices Any notice under this Agreement shall be in writing and
shall either be given personally or be sent by prepaid first
class post by the Employer to the Executive at his address stated
above or at his other last known address, or by the Executive to
the Employer at its address stated above or its other last known
address. Any notice sent by post shall be deemed to have been
received forty-eight hours after the date of posting.
11. Miscellaneous
11.1 This Agreement shall be in substitution for all existing
contracts of service or consultancy between the Employer or any
Group Company and the Executive, which (without prejudice to any
accrued rights thereunder) shall be treated as cancelled on the
date the Executive's employment is treated as commencing under
this Agreement.
11.2 This Agreement comprises the whole agreement between the Employer
and the Executive relating to his employment hereunder and
association with the Group, to the exclusion of all other
warranties, representations made in good faith, undertakings and
collateral contracts.
12. Interpretation
In this Agreement:-
12.1 Where the context permits, references to the singular shall
include references to the plural and vice versa.
12.2 The Employer's Staff Manual shall mean the current manual
entitled "People Policies and Practice", as may be amended or
replaced by Lloyds TSB Group plc from time to time at its
discretion. Upon any amendment or replacement, the references to
the paragraphs and sections of the now current Employer's Staff
Manual in Clause 6.1 shall be construed so as to be references to
the provisions of the amended or replaced Employer's Staff Manual
dealing with the same subject matter.
12.3 Clause headings are inserted for convenience only and shall not
affect the construction of this Agreement.
12.4 "Group Company" means any of Lloyds TSB Group plc and its
subsidiaries (as defined by Section 736 of the Companies Act
1985), and "Group" means all of them.
SIGNED by the Executive and the duly authorised representative of the Employer
on the first date mentioned above.
SIGNED by the Executive }
in the presence of: }
SIGNED on behalf of the }
Employer in the presence of: }
Exhibit 4(b)(iii)
6 January 2003
Mr. M.D. Ross
Deputy Group Chief Executive
and Chief Executive, Scottish Widows plc
69 Morrison Street
Edinburgh
STRICTLY PERSONAL
I am pleased to tell you that, following a review of executive remuneration, the
Board has agreed to increase your salary to GBP443,000 with effect from 1st
January 2003.
I can also advise you that your incentive opportunity has been increased from
75% to 100% with effect from 1st January 2003. The targets against which the
bonus opportunity will be determined will be submitted to the Remuneration
Committee on the 24th January and advised to you shortly thereafter.
Thank you again for your efforts during 2002.
SEE THE DIRECTORS' REMUNERATION REPORT IN THE LLOYDS TSB
GROUP PLC REPORT AND ACCOUNTS FOR 2002 FOR DISCLOSABLE
DETAILS OF THE TARGETS.
P.B. Ellwood
Group Chief Executive
THIS EXECUTIVE SERVICE AGREEMENT is made the 7th day of March 2000
BETWEEN Lloyds TSB Bank plc of 71 Lombard Street, London, EC3P 3BS ("the
Employer") and Michael D. Ross of 8 Comiston Rise Edinburgh EH10 6HQ ("the
Executive").
IT IS AGREED as follows:
1. Appointment and Place of Work
1.1 The Employer shall employ the Executive as a Deputy Group Chief
Executive or in such other capacity in the business of the
Employer or any Group Company as the Employer may from time to
time reasonably require.
1.2 The Executive's initial place of work shall be 69 Morrison Street
Edinburgh EH3 8YF Provided that the Employer may require the
Executive to carry out his duties at such other place of business
of any Group Company within or outside the United Kingdom as the
Employer may specify.
2. Remuneration and Other Benefits
2.1 Remuneration
(a) The Executive's salary shall be GBP365,000 per annum or such
higher salary as may be notified to him from time to time.
(b) The Executive agrees to waive payment of any director's fees
payable in respect of any dircetorships held by him in any member
of the Group.
(c) The Executive may also receive the following remuneration at tile
Employer's discretion:-
(i) payment or shares under any staff profit sharing scheme, in
accordance with the rules thereof;
2
(ii) a personal bonus in respect of each financial year of the
Employer on such terms as may be notified to the Executive by the
Employer.
The Executive acknowledges that, save for specific
awards or entitlements notified to the Executive
individually or by a general notice to staff, staff profit
sharing schemes and bonuses are not contractual entitlements,
and may therefore be reduced, varied or withdrawn by the
Employer at any time at its discretion.
(d) The Executive may participate in any all-employee Save as you
Earn employee share schemes offered by the Employer, and also, at
the discretion of the Employer, in any executive share option
schemes established by the Employer, subject in each case to
being eligible to participate under their rules. The Executive
acknowledges that on termination of his employment he will have
no right of action, otherwise than pursuant to the express rules
of such schemes, against the Employer or any member of the Group
in any way arising from his no longer being able to participate
in such schemes.
2.2 Motor Car
The Executive shall be entitled to participate in any Car Scheme (as
described in the Employer's Staff Manual) operated by the Employer
from time to time. Upon termination of his employment, the Executive
shall return any car provided by the Employer.
3. Commencement and Duration
3.1 The Executive's employment under this Agreement shall be treated
as having commenced on the 3rd day of March 2000 and shall
continue indefinitely until terminated: -
3
(a) by not less than 24 months' notice given by the Employer to the
Executive for the first 2 years of the Executive's employment
under this Agreement which notice period shall decrease by one
month per month during the third year of the Executive's
employment under this Agreement and thereafter by not less than
12 months' notice given by the Employer to the Executive ; or
(b) by not less than 6 months' notice given by the Executive to the
Employer; or
(c) by retirement under clause 3.2; or
(d) under clause 7.
3.2 The Executive's retirement age shall be sixty years, and his
employment shall terminate at that age automatically and without
the requirement for any notice to be given.
3.3 The date on which any continuous period of employment began with
the Employer or a previous employer which counts as part of the
Executive's continuous period of employment with the Employer for
the purposes of the law relating to redundancy and unfair
dismissal and for the purposes of commencement of pensionable
service, is the 7th day of September 1964.
3.4 On the termination of this Agreement or on the Employer giving
notice under clause 6.8,the Executive shall resign from any
offices as a director of any member of the Group and from all
other appointments or offices which he holds as nominee or
representative of any member of the Group. As security for such
obligation the Executive irrevocably appoints the Employer to be
his attorney to sign any documents or do any things necessary or
requisite to effect such resignation(s). Such resignation(s)
shall be without prejudice to any claims which the Executive may
have against the Employer arising out of this Agreement or its
termination.
3.5 If the Executive shall terminate his employment under this
Agreement on the first anniversary of this Agreement by giving
notice under 3.1 (b) he will be entitled to receive an amount
equal to one year's salary subject to deduction of tax and
National Insurance.
4
4. Duties of and Warranties by the Executive
During the period of this Agreement, the Executive shall:-
(a) perform his duties faithfully, diligently and with due care, and use
all reasonable endeavours to promote the interests of the Group;
(b) save to the extent that may be agreed by the Employer in writing: (i)
devote the whole of his time, ability and attention to his duties
during normal office hours and during such other times as may
reasonably be required for the effective performance of such duties;
and (ii) not take up any remunerated external appointment;
(c) keep the Chief Executive of Lloyds TSB Group plc promptly informed of
the conduct of his duties, his plans for the future performance of his
duties and of any conflict of interest to which he is or may become
subject, and comply with any policy directions or reasonable other
directions given to him by the Chief Executive;
(d) comply with the Model Code appended to Chapter 16 of the Listing Rules
of the London Stock Exchange and all other codes of conduct from time
to time adopted by the Employer;
(e) comply with all applicable rules, regulations and codes imposed or
recommended by any industry or regulatory body relevant to that part
of the business of any Group Company with which the Executive is
involved;
(f) save with the prior written agreement of the Employer, neither
participate nor have a financial interest in any business which
competes with, or is a material customer or supplier to, any part of
the Group Provided that the Executive may hold up to 3% of the equity
or share capital of any such business;
(g) other than reasonable corporate hospitality and seasonal or occasional
gifts of limited value, not directly or indirectly receive any benefit
from any person having business transactions with any member of the
Group.
5
5. Pension Arrangements
5.1 The Executive shall be entitled to remain a member of the Scottish
Widows Retirement Benefits Scheme ("the Scheme"). The Employer shall
be entitled at any time to terminate the Scheme or the Executive's
membership of it subject to providing him with the benefit of a
pension scheme ("the New Scheme") the benefits of which taken as a
whole shall be no less favourable than the benefits provided to the
Executive under the Scheme and to ensuring that the Executive is fully
credited in the New Scheme for his pensionable service in the Scheme
as if such pensionable service had been under the New Scheme.
5.2 In the event of the Executive ceasing to be employed by the Employer
by reason of redundancy (as defined by Section 139 of the Employment
Rights Act 1996 or any reenactment or amendment thereof for the time
being in force) and being entitled to a redundancy payment under such
legislation, then, provided that he is a member of the Scheme or any
New Scheme and at the time he ceases to be employed shall be aged 50
or more, the Employer shall procure (by making such payments to the
trustees of the Scheme or any New Scheme as they may require or
otherwise) that an immediate pension shall be payable to the Executive
from the date of cessation of employment (based on his final
pensionable salary and pensionable service at the time of cessation)
but without any reduction for commencement of payment before the age
of 60, but limited always to the highest amount which will not
prejudice continued approval of the Scheme or New Scheme by the
Commissioners of Inland Revenue as an exempt approved scheme for the
purposes of the Income and Corporation Taxes Act 1988 (or any
re-enactment or amendment thereof for the time being in force).
5.3 A Contracting-Out Certificate pursuant to the provisions of the
Pensions Act 1995 is in force in respect of the Executives employment.
6. Miscellaneous Conditions of Employment
6.1 The provisions of the Employer's Staff Manual (access to which has
been and will remain available to the Executive) shall not apply to
the Executive's employment with the Employer or form part of this
Agreement except for the following provisions:-
6
Paragraph 1.16 Mobility
Paragraph 1.18 Personal Dealing
Paragraph 1.22 Sick Pay
Paragraph 1.23 Sickness absence reporting
Paragraph ~ .24 Smoking Policy
Paragraph 2.3 Expenses
Paragraph 2.8 Pay periods
Paragraph 2.9 Relocation
The whole of Section 3 (Staff Benefits) except for Paragraph 3.1.3
(Pension Scheme).
The whole of Section 5 (Attendance and Leave) except for Paragraph 5.1
(Career Break Scheme).
The whole of Section 6 (Miscellaneous).
If there is any conflict between this Agreement and such provisions, then
this Agreement shall prevail.
6.2 If employment of the Executive under this Agreement is terminated by
reason of the liquidation of the Employer for the purpose of
reconstruction or amalgamation and the Executive is offered employment
with any concern or undertaking resulting from the reconstruction or
amalgamation on terms and conditions not less favourable than the
terms of this agreement, then the Executive shall have no claim
against the Employer in respect of the termination of his employment
under this Agreement (whether or not the notice required by Clause 3
shall have been given).
6.3 Any disciplinary matter affecting the Executive will be dealt with by
the Chief Executive of Lloyds TSB Group pie.
6.4 If the Executive has any grievance relating to his employment he may
refer such grievance in writing to the Chief Executive of Lloyds TSB
Group plc. If the Executive is dissatisfied with the Chief Executive's
treatment of his grievance, he may refer the matter to the Chairman of
Lloyds TSB Group plc.
7
6.5 There are no collective agreements affecting the employment of this
Executive.
6.6 The Executive shall be entitled to 30 working days holiday in each
year, with pro rata entitlement during the year in which the
Executive's employment is treated as commencing and during the year in
which it is terminated. Holidays shall be taken at such reasonable
times as the Chief Executive shall approve.
6.7 The Executive's hours of work are the normal hours of work of the
Employer (currently 9.00 am to 5.00 pm each weekday) together with
such additional hours as may be necessary to enable the Executive to
fulfil his duties.
6.8 The Employer may by giving notice to the Executive cease to provide
him with work for any period up to six months, during which time the
Executive shall hold himself available tO deal with requests for
information and advice on matters relating to his work but shall not
attend the premises of any Group Company unless directed to do so and
shall comply with such directions as he may be given by the Employer
regarding contact with any customer or supplier of any Group Company
with whom, during the twelve month period preceding the date of the
notice, he shall have had contact in the course of his duties. The
Executive acknowledges that the right of the Employer to cease to
provide him with work in such circumstances is necessary for the
protection of the legitimate business interests of the Employer.
7. Termination
The Employer may terminate the Executive's employment at any time
forthwith by written notice to the Executive (and without any
requirement of prior notice) if the Executive shall:-
(a) commit any material breach, or continue (after warning) to commit any
breach, of his obligations under this Agreement;
(b) be guilty of any material misconduct or material neglect in the
discharge of his duties;
(c) have a bankruptcy order made against him or make any arrangement or
composition with his creditors or have an interim order made against
him pursuant to the Insolvency Act 1986 (or any re-enactment or
amendment thereof for the time being in force);
(d) be convicted of any criminal offence which in the reasonable opinion
of the Employer affects his position as an employee under this
Agreement;
8
(e) bring the name or reputation of the Employer, or any Group Company in
whose business he shall have been involved, into material disrepute;
(f) be or become prohibited by law from becoming or remaining a director;
or
(g) be disqualified or disbarred from membership of, or be found to have
committed any serious disciplinary offence by, or be found not to be a
fit and proper person by, any professional or regulatory body
governing the conduct by the Executive of his duties or the business
of any Group Company.
8. Confidential and Other Information
8.1 Except in the proper performance of his duties, the Executive shall
not without the written consent of the Employer either during or after
the termination of this Agreement disclose to any person or use for
any purpose any confidential information relating to the business of
any member of the Group.
8.2 Following the termination of his employment the Executive shall return
to the Employer on demand all items of property belonging to or
relating to the business of any member of the Group which came into
his possession during his employment.
9. Copyright
9.1 The Executive shall promptly disclose to the Employer all copyright
works originated, conceived, written or made by him alone or with
others during the course of his employment (except only those works
originated, conceived, written or made by him wholly outside his
normal working hours and wholly unconnected with his appointment) and
shall until such rights shall be fully and absolutely vested in the
Employer hold them in trust for the Employer.
9
9.2 The Executive assigns to the Employer by way of future assignment all
copyright and other proprietary rights (if any) for the full terms
thereof throughout the world in respect of all works originated,
conceived, written or made by the Executive during the course of his
employment (except only those works originated, conceived, written or
made by the Executive wholly outside his normal working hours and
wholly unconnected with his duties under this Agreement).
9.3 It is agreed that for the purpose of Section 2(IB) of the Registered
Designs Act 1949 and the Copyright Designs and Patents Act 1988 all
designs created by the Executive during the course of his employment
(except only those which are created by the Executive wholly outside
his normal working hours and wholly unconnected with his duties under
this Agreement) shall be treated as being created by the Executive in
the course of his employment and accordingly the Employer shall for
the purpose of that Act be the original proprietor of any such
designs.
9.4 The Executive will at the request and expense of the Employer do all
things necessary or desirable to substantiate the rights of the
Employer under this Clause 9, and as security for such obligation
irrevocably appoints the Employer to be his attorney to sign or
execute any such instrument or do any thing as may be necessary or
desirable to effect such substantiation and the assignment referred to
in clause 9.2.
10. Notices Any notice under this Agreement shall be in writing and shall
either be given personally or be sent by prepaid first class post by
the Employer to the Executive at his address stated above or at his
other last known address, or by the Executive to the Employer at its
address stated above or its other last known address. Any notice sent
by post shall be deemed to have been received forty-eight hours after
the date of posting.
10
11. Miscellaneous
11.1 This Agreement shall be in substitution for all existing contracts of
service or consultancy between the Employer or any Group Company and
the Executive, which (without prejudice to any accrued rights
thereunder) shall be treated as cancelled on the date the Executive's
employment is treated as commencing under this Agreement.
11.2 This Agreement comprises the whole agreement between the Employer and
the Executive relating to his employment hereunder and association
with the Group, to the exclusion of all other warranties,
representations made in good faith, undertakings and collateral
contracts.
12. Interpretation
In this Agreement:-
12.1 Where the context permits, references to the singular shall include
references to the plural and vice versa.
12.2 The Employer's Staff Manual shall mean the current manual entitled
"People Policies and Practice", as may be amended or replaced by
Lloyds TSB Group plc from time to time at its discretion. Upon any
amendment or replacement, the references to the paragraphs and
sections of the now current Employer's Staff Manual in Clause 6.1
shall be construed so as to be references to the provisions of the
amended or replaced Employer's Staff Manual dealing with the same
subject matter.
12.3 Clause headings are inserted for convenience only and shall not affect
the construction of this Agreement.
12.4 "Group Company" means any of Lloyds TSB Group plc and its subsidiaries
(as defined by Section 736 of the Companies Act 1985), and "Group"
means all of them.
SIGNED by the Executive and the duly authorised representative of the
Employer on the first date mentioned above.
SIGNED by the Executive }
in the presence of: } SIGNED on behalf of the }
Employer in the presence of: }
Exhibit 4(b)(iv)
3 February 2003
Personal - Addressee Only
Mr J.E.Daniels
Group Executive Director
UK Retail Banking
BONUS OPPORTUNITY - 2003
Your bonus opportunity in 2003 will be based on a maximum award of 100% of
salary throughout the year, effective from 1 January 2003.
SEE THE DIRECTORS' REMUNERATION REPORT IN THE LLOYDS TSB GROUP PLC REPORT AND
ACCOUNTS FOR 2002 FOR DISCLOSABLE DETAILS OF THE TARGETS.
P.B. Ellwood
Group Chief Executive
PERSONAL
Mr. J.E. Daniels
Group Executive Director
UK Retail Banking
30th December, 2002
I am pleased to notify you that the remuneration committee of the board has
agreed that your salary as Group Chief Executive from 1st June, 2003 will be
GBP700,000 per annum.
The remuneration committee has still to decide upon the bonus arrangements for
2003 and we shall be writing to you about that in due course.
A.J. Michie
Secretary
LLOYDS TSB GROUP plc SHARE RETENTION PLAN ("THE PLAN")
This is to certify that on 2 November, 2001 JOHN ERIC DANIELS was granted,
subject to the rules of the plan, an option to acquire 216,763 fully paid
ordinary shares of 25p each in Lloyds TSB Group plc, subject to the memorandum
and articles of association of the company, for a total price of GBP1. The
option is personal to Mr. Daniels and is not transferable.
Subject to the rules of the plan, the vesting date for the option is 31 December
2004 and the exercise period is six months after the vesting date.
This option may be exercised only in accordance with the rules of the plan.
The common seal of Lloyds TSB Group plc was affixed to this deed
Director
Secretary
THIS EXECUTIVE SERVICE AGREEMENT is made the 19th day of October 2001
BETWEEN Lloyds TSB Bank plc of 71 Lombard Street, London, EC3P 3BS ('the
Employer") and
Eric Daniels of 7711 Carlton Place, Mclean, VA 22102. USA ("the Executive")
IT IS AGREED as follows
I Preconditions
The Executive's employment will be subject to:-
1.1 the Executive not being prevented from taking up employment under this
Agreement by any obligation or duty owed to a third party, whether
contractual or otherwise; and
1.2 the Employer successfully obtaining a work permit on the Executive's behalf
to entitle him to work in the UK.
2 Appointment, Directorship and Place of Work
2.1 The Employer shall employ the Executive as Group Executive Director, UK
Retail Banking.
2.2 In the position of Group Executive Director, UK Retail Banking the
Executive shall be appointed as a director to the Board of the Employer.
2.3 The Executive's normal place of work shall be 71 Lombard Street London EC3P
3BS provided that the Employer may require the Executive to carry out his
duties at such other place of business of any Group Company within a radius
of 25 miles from 71 Lombard Street aforesaid as the Employer may specify.
Notwithstanding the previous sentence, the Executive may be required to
attend such other places from time to time as may be reasonably necessary
in order to fulfil his duties under this Agreement.
3 Remuneration and Other Benefits
3.1 Remuneration
(a) The Executive's salary shall be GBP450,000 per annum or such higher
salary as may be notified to him from time to time. The next annual
review, at which time the salary will be reviewed, will be on or
about 1 January 2003.
(b) The Executive agrees to waive payment of any director's fees payable
in respect of any directorship held by him in any member of the Group.
(c) The Executive will also receive the following remuneration
(i) during March 2003, subject to the Executive being in the
employment of the employer on 31 December 2002 or, if earlier,
being in employment at the time of his death (provided that none
of the following events have occurred ("the Provisos") (i) the
Executive has received notice terminating his employment in
circumstances which would entitle the Employer to terminate this
Agreement without giving a period of notice or (ii) the Executive
has given notice to terminate his employment or this Agreement
unless he gave notice in circumstances in which he is entitled
to terminate this Agreement without notice by reason of the
Employer's conduct including pursuant to Clause 8.3 hereof), a
single, non-recurring payment of GBP450,000 (less any payment
made to the Executive under the annual incentive arrangements
set out in Clause 3.1(d) hereof or other similar arrangement in
relation to all or part of the year 2002) ("the 2002 Bonus").
Notwithstanding the foregoing if the Executive is not entitled
to receive the 2002 Bonus solely because the Employer
terminated his employment pursuant to Clause 4.1(a) hereof
such that employment terminated prior to 31 December 2002, the
Employer shall nonetheless pay the 2002 Bonus provided none of
the notice events described in the Provisos have occurred;
(ii)a housing allowance of equal to GBP100,000 per annum payable
in 12 equal monthly instalments for three years from the
date of this Agreement. For the avoidance of doubt, the Executive
will receive this payment whether he rents or purchases a
property and only if he is in the employment of the Employer on
any relevant payment date.
(d) The Executive may also receive:
(I) payment or shares under any staff profit sharing scheme,
subject to and in accordance with the rules thereof:
(ii)a payment under the annual incentive award arrangements
(the "Award") at the Employer's sole discretion. The Award
is a maximum of 75 per cent of the basic annual salary set
out in Clause 3.1(a) hereof and the amount payable to the
Executive, if any, will be dependent upon such terms determined
by the Employer including, but not limited to, achievement of
targets notified to him. Any Award will be paid during March of
the year following the announcement of annual results.
The Executive acknowledges that, save for the non-recurring
payment referred to in Clause 3.1(c)(i) above and specific
awards or entitlements notified to the Executive individually
or by a general notice to staff, staff profit sharing schemes
and bonuses are not contractual entitlements, and may therefore
be reduced, varied or withdrawn by the Employer at any time at
its discretion.
(e) For the avoidance of doubt, any and all payments made to the Executive
pursuant to this Clause 3.1 or otherwise shall be subject to such
deductions for tax and National lnsurance as the Employer is required
to make by law or the tax and/or National Insurance authorities.
3.2 Motor Car The Executive will be entitled to a company car, or in the
alternative, a cash allowance (currently GBP1,000 per month) payable
each month. Upon termination of his employment, the Executive shall
return any car provided by the Employer.
3.3 Life Cover The Executive will be eligible to be provided with Life
Assurance which in the event of his death during employment would
provide a payment equivalent to four times his basic annual salary set
out in Clause 3.1(a) hereof. This cover is subject to the provisions
of the insurer which govern such cover and on such terms as the
Employer may from time to time decide. The insurer will require the
Executive to undergo a medical examination before cover can commence.
3.4 Private Medical insurance If the Executive complies with any
eligibility requirements or other conditions set by the Employer and
any insurer appointed by the Employer, the Executive and his wife and
children (if eligible) may participate in the Employer's private
health insurance arrangements at the Employer's expense and subject to
the terms of those arrangements from time to time.
3.5 Relocation Costs The Employer will pay to the Executive the following
amounts, less any deduction the Employer is required by law to make,
in respect of the cost of relocating from Virginia to the UK:
(a) GBP75,000 upon commencement of his employment under this Agreement;
and
(b) GBP175,000 upon the earlier of (i) the sale of the Executive's
principal residence in the United States of America or (ii) the
purchase by the Executive of a residence in the United Kingdom at a
purchase price in excess of GBP1,000,000, subject to the Employer
receiving proof of the sale or purchase (as the case may be) having
taken place.
3.6 Education Allowance During employment with the Employer the Employer
will make payments to the Executive for the cost of annual school fees
in respect of the Executive's child's (Christopher) education up to
the end of the academic year in which the child's eighteenth birthday
falls in the sum of GBP33,000 per academic year, less any deduction
the Employer is required by law to make.
3.7 Tax & Financial Planning Support During employment with the Employer
the Employer will make payments to the Executive for the cost of
obtaining professional advice relating to tax and financial planning
(including for the avoidance of doubt the annual cost of US and UK tax
preparation) in the sum of GBP25,000 per annum, less any deduction
which the Employer is required by law to make.
3.8 Legal & Financial Costs relating to this Agreement The Employer will
make a contribution to the Executive of up to a maximum cost to the
Employer of GBP10,000 for the reasonable costs incurred by the
Executive, in relation to (a) legal costs and disbursements and (b)
financial advice, both relating to the Executive entering into this
Agreement subject to the Employer receiving proof of expenditure, less
any deduction which the Employer is required by law to make.
4 Commencement and Duration
4.1 The Executive's employment under this Agreement shall commence on the
1st day of November 2001 (the "Commencement Date") and shall continue
indefinitely until terminated:-
(a) by not less than 1a months' notice given by the Employer
to the Executive (provided that prior to the expiry of the
period of 18 months commencing with the Commencement Date the
foregoing notice period shall be 24 months); or
(b) by not less than 6 months' notice given by the Executive
to the Employer; or
(c) by retirement under Clause 4.2 hereof; or
(d) under Clause 8 hereof.
4.2 The Executive's retirement age shall be sixty years, and his
employment shall terminate at the end of the month in which he attains
that age automatically and without the requirement for any notice to
be given.
4.3 No previous employment counts as continuous employment with the
Employer.
4.4 On the termination of this Agreement or on the "garden leave"
provisions of Clause 7.7 hereof operating, the Executive shall resign
from any offices as a director of any member of the Group and from all
other appointments or office which he holds as nominee or
representative of any member of the Group. Further, the Executive
shall, at any other time when asked to do so by the Employer resign
from any offices as a director of any member of the Group (other than
as a director of the Employer) and from all other appointments or
offices which he holds as a nominee or representative of any member of
the Group. As security for such obligation the Executive irrevocably
appoints the Employer to be his attorney to sign any documents or do
any things necessary or requisite to effect such resignation(s). Such
resignation(s) shall be without prejudice to any claims which the
Executive may have against the Employer arising out of this Agreement
or its termination. The termination of any appointments, directorship,
or other office, held by the Executive will not terminate the
Executive's employment or amount to a breach of this Agreement by the
Employer.
5 Duties of and Warranties by the Executive
5.1 During the period of this Agreement the Executive will not do anything
which could cause him to be disqualified from continuing to act as a
director of any member of the Group.
5.2 During the period of this Agreement, the Executive shall:-
(a) perform his duties faithfully, diligently and with due care, and use
his best endeavours to promote the interests of the Group;
(b) devote the whole of his time, attention and skill to his duties during
normal office hours and during such other times as may reasonably be
required for the effective performance of his duties under this
Agreement;
(c) accept any offices or directorships as reasonably required by the
Board;
(d) comply with all rules and regulations issued by the Employer copies of
which shall be provided to the Executive and which may not be
inconsistent with the express terms of this Agreement:
(e) obey the directions of the Board;
(f) not take up any remunerated external appointments, not be directly or
indirectly engaged in the conduct of any trade, profession or other
occupation (whether as an employee, consultant, agent or otherwise) of
similar nature to or in competition with that carried on by the
Employer or any other Group Company for whom the Executive performed
services;
(g) keep the Group Chief Executive of the Employer promptly informed of
the conduct of his duties, his plans for the future performance of his
duties and of any conflict of interest to which he is or may become
subject, and comply with any policy directions or reasonable other
directions given to him by the Group Chief Executive;
(h) comply with the Model Code appended to Chapter 16 of the Listing Rules
of the London Stock Exchange and all other codes of conduct from time
to time adopted by any relevant Group Company
(i) comply with all applicable rules, regulations and codes imposed or
recommended by any industry or regulatory body relevant to that part
of the business of any Group Company with which the Executive is
involved;
(j) save with the prior written agreement of the Employer, neither
participate nor have a financial interest in any business which
competes with, or is a material customer or supplier to, any part of
the Group Provided that the Executive may hold up to one (1) % of the
equity or share capital of any such business;
(k) other than reasonable corporate hospitality and seasonal or occasional
gifts of limited value, not directly or indirectly receive any benefit
from any person having business transactions with any member of the
Group.
6 Pension Arrangements
6.1 The Executive will be eligible to join the Lloyds TSB Group Pension
Scheme No.2, Section B ("the Scheme"). Membership is subject to and in
accordance with the rules of the Scheme as amended from time to time.
If the Executive joins the Scheme, he will be entitled to a pension
based on a 1/60ths accrual rate and the Employer will ensure that he
is provided with pension benefits calculated as if the "Permitted
Maximum" as defined in Section 590C of the Income and Corporation
Taxes Act 1988 did not apply, but otherwise calculated in accordance
with the terms of the Scheme and subject to Inland Revenue limits.
6.2 In the event of the Executive ceasing to be employed by the Employer
by reason of redundancy (as defined by Section 139 of the Employment
Rights Act 1996 or any re-enactment or amendment thereof for the time
being in force) and being entitled to a redundancy payment under such
legislation, then, if at the time he ceases to be employed he shall be
aged 50 or more, the Employer shall procure (by making such payments
to the trustees of the Scheme as they may require or otherwise) that
an immediate pension shall be payable to the Executive from the date
of cessation of employment based on his Final Pensionable Salary (as
defined in the Scheme Rules) and pensionable service at the time of
cessation but without any reduction for commencement of payment before
the age of 60.
6.3 If the Executive remains in the Employer's employment for three years
from the Commencement Date and at that date has not given notice to
terminate his employment, or if the Executive is made redundant (as
defined above), before the completion of that period or he terminates
his employment pursuant to Clause 8.3 hereof or his employment is
terminated by the Employer before that date pursuant to Clause 4.1 (a)
hereof the Employer will procure that the Executive's pension at
Normal Retirement Date (as defined in the Scheme Rules) is augmented
by an additional 3/60ths of his Final Pensionable Salary (also as
defined in the Scheme Rules) on the third anniversary of the
Commencement Date or on the date of termination of employment
whichever is the earlier. To the extent consistent with Inland Revenue
limits and the Scheme Rules, the Employer will direct the trustees of
the Scheme to provide this augmentation.
6.4 Any pension due under this Clause 6 which cannot be paid from the
Scheme will be paid by the Employer or its successor. The Executive
will not be able to commute any part of any pension payable by the
Employer or its successor as a consequence of this clause for a cash
sum at retirement.
6.5 A Contracting-Out Certificate pursuant to the provisions of the
Pensions Act 1995 is in force in respect of the Executive's
employment.
7 Miscellaneous Conditions of Employment
7.1 The provisions of the Employer's Staff Manual (access to which has
been and will remain available to the Executive) shall not apply to
the Executive's employment with the Employer or form part of this
Agreement except for the following provisions:-
Paragraph 1.16 Mobility (subject to Clause 2.3 hereof) Paragraph 1.18
Personal Dealing
Paragraph 1.22 Sick Pay Paragraph 1.23 Sickness absence reporting
Paragraph 1.24 Smoking Policy
Paragraph 2.3 Expenses
Paragraph 2.8 Pay periods
Paragraph 2.9 Relocation (subject to Clause 3.5 hereof)
The whole of Section 3 (Staff Benefits) except for Paragraph 3.1.3 (Pension
Scheme).
The whole of Section 5 (Attendance and Leave) except for Paragraph 5.1
(Career Break Scheme).
The whole of Section 6 (Miscellaneous).
If there is any conflict between this Agreement and such provisions, then
this Agreement shall prevail.
7.2 Subject to Clause 8.3 hereof if employment of the Executive under this
Agreement is terminated by reason of the liquidation of the Employer
for the limited purpose of reconstruction or amalgamation and the
Executive is offered employment with any concern or undertaking "New
Employer" resulting from the reconstruction or amalgamation and not
involving any third party or parties (other than the New Employer) on
terms and conditions materially no less favourable overall than the
terms of this Agreement, then the Executive shall have no claim
against the Employer in respect of the termination of his employment
under this Agreement (whether or not the notice required by Clause 4
hereof shall have been given).
7.3 Any disciplinary matter affecting the Executive will be dealt with by
the Group Chief Executive of the Employer.
7.4 If the Executive has any grievance relating to his employment he may
refer such grievance in writing to the Group Chief Executive of the
Employer. If the Executive is dissatisfied with the Group Chief
Executive's treatment of his grievance, he may refer the matter to the
Chairman of the Employer
7.5 There are no colIective agreements affecting the employment of the
Executive.
7.6 The Executive shall be entitled to all English Public and Bank
Holidays and 30 working days holiday in each year, with pro rata
entitlement during the year in which the Executive's employment is
treated as commencing and during the year in which it is terminated.
Holidays shaIl be taken at such reasonable times as the Group Chief
Executive of the Employer shall approve.
7.7 (i) At any time after notice to terminate the employment is given by
either party under Clause 4.1 hereof, or if the Executive resigns
without giving due notice and the Employer does not accept his
resignation, the Employer may require the Executive to comply with
Clauses 7.7(ii) and (iii) hereof for a maximum period of six months
(the "Garden Leave Period");
(ii) During the Garden Leave Period the Employer may cease to provide the
Executive with work, during which time the Executive shall hold
himself available to deaI with requests for information and advice on
matters relating to this work but he shall not be employed or
otherwise engaged in the conduct of any activity on behalf of any
other person and he shall not attend the premises of any Group Company
unless directed to do so by the Group Chief Executive of the Employer
and will not unless requested by the Board:
(a) contact or have any communication with any customer or client of the
Employer or any other Group Company in relation to the business of the
Employer or any other Group Company; or
(b) contact or have any communication with any employee, officer,
director, agent or consultant of the Employer or any other Group
Company in relation to the business of the Employer or any other Group
Company; or
(c) remain or become involved in any aspect of the business of the
Employer or any other Group Company except as required by such
companies.
The Executive acknowledges that the right of the Employer to
cease to provide him with work in such circumstances is necessary
for the protection of the legitimate business interests of the
Employer.
During the Garden Leave Period the Executive shall remain bound
by the provisions of Clauses 5.2 hereof (other than Clause 5.2(b)
hereof if the Employer so requires).
(iii)The Employer may require the Executive to resign immediately from any
directorship which he holds in the Group Companies, unless he is
required to perform duties to which any such directorship relates in
which case he may retain such directorships while those duties are
ongoing. The Executive hereby irrevocably appoints the Employer to be
his attorney to execute any instrument and do anything in his name and
on his behalf to effect his resignation if he fails to do so in
accordance with this Clause 7.7 (iii):
7.8 Without prejudice to the Executive's rights to remuneration and other
benefits hereunder, the Employer shall have the right at any time to
require the Executive not to attend at any place of work or otherwise
to suspend the Executive from the performance of any duties under this
Agreement. During the period of such suspension the Employer may
assign his duties, titles or powers to another. Further, during such
period of suspension the Employer shall be under no obligation to vest
in or assign to the Executive any powers or duties or to provide any
work to the Executive.
8 Termination and Severance
8.1 The Employer may terminate the Executive's employment at any time
forthwith by written notice to the Executive (and without any
requirements of prior notice) if the Executive shall:-
(a) commit any material breach, or continue (after written warning) to
commit any breach, of his obligations under this Agreement;
(b) be guilty of any material misconduct or material neglect in the
discharge of his duties;
(c) have a bankruptcy order made against him or make any arrangement or
composition with his creditors or have an interim order made against
him pursuant to the Insolvency Act 1986 (or any re-enactment or
amendment thereof for the time being in force);
(d) be convicted of any criminal offence (other than an offence under Road
Traffic laws which does not carry any custodial sentence) which in the
reasonable opinion of the Employer affects his position as an employee
under this Agreement;
(e) bring the name or reputation of the Employer, or any Group Company in
whose business he shall have been involved, into material disrepute;
(f) be or become prohibited by law from becoming or remaining a director;
or
(g) be disqualified or disbarred from membership of, or be found to have
committed any serious disciplinary offence by, or be found not to be a
fit and proper person by, any professional or regulatory body
governing the conduct by the Executive of his duties or the business
of any Group Company; or
(h) not be entitled to work in the UK.
8.2 If the Executive (owing to sickness, injury or otherwise) does not
perform his duties hereunder for a period of at least 130 days or at
least 130 days in aggregate in any period of twelve months the
Employer shall (without prejudice to any provision hereof) be entitled
by giving to the Executive not less than 3 months' notice (given at
the expiry of such period (or aggregate days of non performance) or at
any time thereafter while the Executive continues not to perform his
duties hereunder) to terminate his employment and without prejudice to
the protections provided to the Executive under all disability
discrimination laws applying to him.
8.3 If at anytime during the Executive's employment with the Employer
(a) he is removed by the Employer as a director of the Employer (other
than pursuant to a provision of this Agreement); or
(b) without his written consent, there is any material diminution in his
duties for which he is responsible as provided in Clause 2.1 hereof,
or if at any time prior to the expiry of the period of 18 months
commencing with the Commencement Date
(c) there shall occur a "change of circumstances" of the Employer as
defined in Clause 16 hereof and by virtue of that "change of
circumstances" in his reasonable judgment there has been a material
and adverse effect on his prospects for promotion within the enlarged
Group or a material diminution in his status within the Employer,
then the Executive may, within 30 days of such event or events and
in his absolute discretion, treat his employment with the
Employer as terminated by reason of the Employer's fundamental
breach of this Agreement by serving notice upon the Employer that
this Agreement has been terminated by him pursuant to Clause 8.3.
9 Confidential and Other Information
9.1 Without prejudice to the common law duties which he owes to the
Employer the Executive agrees that he will not, except in the proper
performance of his duties, copy use or disclose to any person any of
the Employer's trade secrets or confidential information. This
restriction will continue to apply after the termination of the
Employment without limit in time but will not apply to trade secrets
or confidential information which become public other than through
unauthorised disclosure by the Executive. The Executive will use his
best endeavours to prevent the unauthorised copying use or disclosure
of such information.
For the purposes of this Agreement trade secrets and
confidential information include any information in whatever form
(written, oral, visual and electronic) concerning the
confidential affairs of the Employer.
9.2 In the course of his employment the Executive is likely to obtain
trade secrets and confidential information belonging or relating to
other Group Companies and other persons. He will treat such
information as if it falls within the terms of Clause 9.1 hereof and
Clause 9.1 hereof will apply with any necessary amendments to such
information. If requested to do so by the Employer the Executive will
enter into an agreement with other Group Companies and any other
persons in the same terms as Clause 9.1 hereof with any amendments
necessary to give effect to this provision.
9.3 Nothing in this Agreement will prevent the Executive from making a
"protected disclosure" in accordance with the provisions of the
Employment Rights Act 1996.
10 Copyright
10.1 The Executive shall promptly disclose to the Employer all copyright
works originated, conceived, written or made by him alone or with
others during the course of his employment (except only those works
originated, conceived, written or made by him wholly outside his
normal working hours and wholly unconnected with his appointment) and
shall until such rights shall be fully and absolutely vested in the
Employer hold them in trust for the Employer.
10.2 The Executive assigns to the Employer by way of future assignment all
copyright and other proprietary rights (if any) for the full terms
thereof throughout the world in respect of all works originated,
conceived, written or made by the Executive during the course of his
employment (except only those works originated, conceived, written or
made by the Executive wholly outside his normal working hours and
wholly unconnected with his duties under this Agreement).
10.3 It is agreed that for the purpose of Section 2(1B) of the Registered
Designs Act 1949 and the Copyrights Designs and Patents Act 1988 all
designs created by the Executive during the course of his employment
(except only those which are created by the Executive wholly outside
his normal working hours and wholly unconnected with his duties under
this Agreement) shall be treated as being created by the Executive in
the course of his employment and accordingly the Employer shall for
the purpose of that Act be the original proprietor of any such
designs.
10.4 The Executive will promptly inform the Employer if he makes or is
involved in making an Invention during the Employment and will give
the Employer sufficient details of it to allow the Employer to assess
the Invention and to decide whether the Invention belongs to the
Employer. The Employer will treat any Invention which does not belong
to it as confidential.
"Invention" means any invention (whether patentable or not within the
meaning of the Patent Act 1977 or other applicable legislation in any
other country) relating to or capable of being used in the business of
the Employer or any other Group Company.
If an Invention belongs to the Employer, the Executive will act as a
trustee for the Employer in relation to that Invention and will, at
the request and expense of the Employer, do everything necessary to
vest all right, title and interest in it in the Employer or its
nominee with full title guarantee and to secure full patent or other
appropriate protection anywhere in the world.
10.5 The Executive will at the request and expense of the Employer do all
things necessary or desirable to substantiate the rights of the
Employer under this Clause 10, and as security for such obligation
irrevocably appoints the Employer to be his attorney to sign or
execute any such instrument or do any thing as may be necessary or
desirable to effect such substantiation and the assignment referred to
in Clause 10.a hereof.
11 Notices Any notice under this Agreement shall be in writing and shall
either be given personally or be sent by prepaid first class post by
the Employer to the Executive at his address stated above or at his
other last known address, or by the Executive to the Employer at its
address stated above or its other last known address. Any notice sent
by the Employer by post shall be deemed to have been received
forty-eight hours after the date of posting.
12 Miscellaneous
12.1 This Agreement shall be in substitution for all existing contracts of
service or consultancy between the Employer or any Group Company and
the Executive, which (without prejudice to any accrued rights
thereunder) shall be treated as cancelled on the date the Executive's
employment is treated as commencing under this Agreement.
13 Governing Law and Jurisdiction This Agreement is governed by and will
be interpreted in accordance with the law of England and Wales. Each
of the parties submits to the exclusive jurisdiction of the English
courts as regards any claim or matter arising under this Agreement
14 Contracts (Rights of Third Parties) Act 1999 No person other than the
parties to this Agreement shall have any right to enforce any term of
this Agreement under the Contracts (Rights of Third Parties) Act 1999
however this does not affect any rights conferred by this Agreement on
any Group Company.
15 Data Protection Act 1998 For the purposes of the Data Protection Act
1998 (the "Act") the Executive gives his consent to the holding,
processing and disclosure of personal data (including sensitive data
within the meaning of the Act) provided by the Executive to the
Employer for all purposes relating to the performance of this
Agreement including, but not limited to:
- administering and maintaining personnel records;
- paying and reviewing salary and other remuneration and benefits;
- providing and administering benefits (including if relevant, pension,
life assurance, permanent health insurance and medical insurance);
- undertaking performance appraisals and reviews;
- maintaining sickness and other absence records;
- taking decisions as to the Executive's fitness for work;
- providing references and information to future employers, and if
necessary, governmental and quasi-governmental bodies for social
security and other purposes, the Inland Revenue and the Contributions
Agency;
- providing information to future purchasers of the Employer or of the
business in which the Executive works; and
- transferring information concerning the Executive to a country or
territory outside the EEA.
The Executive acknowledges that during his employment he will have
access to and process, or authorise the processing of personal
data and sensitive personal data relating to employees, customers
and other individuals held and controlled by the Employer. The
Executive agrees to comply with the terms of the Act in relation to
such data and to abide by the Employer's data protection policy
issued form time to time.
16 Interpretation
In this Agreement:-
16.1 where the context permits, references to the singular shall include
references to the plural and vice versa;
16.2 the Employer's Staff Manual shall mean the current manual of the
Employer entitled "People Policies and Practice", as may be amended or
replaced by the Employer from time to time at its discretion. Upon any
amendment or replacement, the references to the paragraphs and
sections of the now current Employer's Staff Manual in Clause 6.1
hereof shall be construed so as to be references to the provisions of
the amended or replaced Employers Staff Manual dealing with the same
subject matter;
16.3 Clause headings are inserted for convenience only and shall not affect
the construction of this Agreement;
16.4 "Group Company" means any of Lloyds TSB Group plc and its subsidiaries
(as defined by Section 736 of the Companies Act 1985), and "Group"
means all of them;
16.5 "Board" means board of directors of the Employer or any duly
authorised committee of the same;
16.6 "Change of Circumstances" shall be deemed to have occurred on:
(i) the date of the acquisition by any person, company or group of
connected persons by a series of transactions or otherwise of shares
of Lloyds TSB Group plc which,
together with shares held or acquired by the persons acting in
concert (as defined in the City Code on Takeovers and Mergers) with
that person, company or group of connected persons carry 30 per cent
or more of the voting rights attributable to the ordinary share
capital of Employer or Lloyds TSB Group plc; or
(ii) the date of the acquisition by any person or company of substantially
the whole of the assets of Employer or Lloyds TSB Group plc or of
substantially the whole of Employer's UK retail banking business or,
subject to Clause 7.2, this Agreement being subject to a "relevant
transfer" pursuant to the Transfer of Undertakings (Protection of
Employment) Regulations 1981 (SI 1981/1974) as amended; or
(iii)the consummation of a merger, consolidation, recapitalisation or
reorganisation affecting all or substantially the whole of Lloyds TSB
Group plc's assets or substantially the whole of Employer's UK retail
banking business or the issue of ordinary shares of Employer or Lloyds
TSB Group plc in connection with the acquisition of the shares, stock
or assets of another entity;
provided, however, that a Change of Circumstances shall not occur under any
of (i), (ii) or (iii) above if (a) upon consummation of the relevant
transaction the holders of the outstanding ordinary share capital of
Lloyds TSB Group plc immediately prior thereto are directly or
indirectly entitled to at least 70 per cent of the voting rights
attributable to the relevant ordinary share capital (as enlarged, if
applicable) outstanding immediately after the relevant transaction of
Employer or Lloyds TSB Group plc or, if applicable, of the entity that
succeeds to alt or substantially the whole of the assets of Employer
or Lloyds TSB Group plc or substantially the whole of Employer's UK
retail banking business or that acquires a direct or indirect majority
shareholding in Employer or Lloyds ISS Group plc ("Sufficient
Interest"); and (b) a Sufficient Interest exists in relation to a
company which owns or manages directly or indirectly substantially the
whole of Employer's UK retail banking business; and
16.7 "Commencement Date" has the meaning given in Clause 4.1 hereof.
EXECUTED by the Executive and a representative of the Employer duly and fully
authorized by the Board of the Employer to enter into this Agreement on the
first date mentioned above.
EXECUTED as a deed by the Executive }
in the presence of: }
EXECUTED as a deed on behalf of the }
Employer by: }
Director
Director/Secretary
Lloyds TSB Group plc
Share retention plan
RULES
Date of Adoption : 25 October 2001
RULES OF THE LLOYDS TSB GROUP PLC SHARE RETENTION PLAN
Meanings of words used
In these Rules:
"Associated Company" means any company which is associated with the Company
(within the meaning of Section 416 of the Income and Corporation Taxes
Act 1988);
"Business Day" means a day on which the London Stack Exchange is open for
the transaction of business:
"Committee" means the Remuneration Committee or any other committee
appointed by the board of directors of the Company;
"Company" means Lloyds TSB Group plc;
"Dealing Regulations" means any statute, regulation or code adapted by the
Company based an the Model Code for security transactions by directors
of listed companies contained in the United Kingdom Listing
Authority's Listing Rules
'Employee" means any employee or executive director of any Participating
Company;
"Exercise Period" means a period commencing on the date of grant of an
Option and expiring at the close of business on the day before the
10th anniversary of the date of grant or such earlier date as may be
specified in respect of an Option;
"Group Company" means:
- the Company; and
- its Subsidiaries from time to time; and
- any Associated Company
which in each case is designated by the Committee as a Group Company;
"Option" means a right to acquire Shares granted under the Plan and for the
time being subsisting;
"Optionholder" means an Employee who has been selected. for participation
in the Plan as described in Rule 2 and granted an Option (or the
personal representatives at any such Employee or individual);
"Participating Company" means the Company and any Subsidiary and Associated
Company designated by the Committee as a Participating Company;
"Plan" means "The Lloyds TSB Group plc Share Retention Plan" in its present
form or as from time to time altered in accordance with these Rules;
"Reconstruction or Takeover means any takeover, merger or reorganisation:
"Rules" means these Rules as amended from time to time;
"Share" means an ordinary share in the capital of the Company;
'Subsidiary" means a company which is a subsidiary of the Company within
the meaning of Section 736 of the Companies Act 1985:
"Trust" means the Lloyds TSB Group Employee Share Ownership Trust or any
other trust nominated by the Committee;
"Vesting Date" means in relation to an Option the date determined by the
Committee under Rule 2.2.2 and which in relation to the grant of an
Option to Mr Daniels will be 31 December 2004.
2 Operation of the Plan
2.1 Time of operation
2.1.1The Committee may decide at any time when the Plan will be operated.
2.1.2The Plan may not be operated at a time precluded by the Dealing
Regulations.
2.1.3The Plan may be operated at any time on or after the Plan is adopted
by the Company until 31 December 2010.
2.2 Eligibility and operation
2.2.1Subject to Rule 2.2.3, any Employee may be selected by the Committee
to be granted an Option under the Plan. An Employee may not be granted
more than one Option under the Plan.
2.2.2When the Committee resolve to grant an Option to an Employee, they
will determine the Vesting Date and Exercise Period applicable to that
Option and the number of Shares subject to the Option.
2.2.3Unless and until the Company's shareholders approve the Plan,
participation in the Plan will be restricted to Mr Daniels.
2.2.4 No payment to the Company will be required on the grant of an Option.
2.2.5 A deed will be executed on the grant of an Option.
2.3 Notice
The Committee will notify an Optionholder of his selection for
participation in the Plan, the Vesting Date and Exercise Period and
the number of Shares placed under Option.
2.4 Disposal restrictions
Except for the transmission of an Option on the death of an Optionholder to
his persona' representatives, neither an Option nor any rights in
respect of it may be transferred, assigned or otherwise disposed of by
an Optionholder to any other person.
3 Variations to Options, reconstructions and takeovers
3.1 Variations of share capital
In the event of any variation in the equity share capital of the Company,
including a variation in consequence of a capitalisation or rights
issue, sub-division, consolidation or reduction of share capital, the
number and/or nominal amount of Shares under Option may be adjusted in
such manner as the Committee considers appropriate (including
retrospective adjustments).
3.2 Reconstructions, takeovers and demergers
3.2.1If there is a Reconstruction or Takeover of the Company or a demerger,
the Committee may make such arrangements as it considers necessary
including determining that an Option will become exercisable either
immediately or at a date specified by the Committee and for such
period as the Committee may determine.
3.2.2In the event of a Reconstruction or Takeover involving the exchange of
Shares for shares in another company or in mare than one company, or
in the case of a demerger where holders of Shares become entitled to
shares in another company, the Committee may determine that the Option
should be adjusted (including retrospective adjustments) or replaced
by an option over the appropriate number of shares in that other
company or companies.
3.2.3In relation to the Option granted to Mr Daniels, Rules 3.2.1 and 3.2.2
shall be without prejudice to the right of Mr Daniels to serve notice
under clause 8.3(c) of his contract of employment dated 19 October
2001 which, in accordance with Rules 4.1.3, 4.3.1 and 4.3.2, shall
have the effect of accelerating the date on which the Option granted
to him becomes exercisable.
3.3 The Committee
For the purpose of dealing with Options under Rule 3.2 the Committee will
comprise the members of the Committee in office immediately before the
Reconstruction or Takeover or demerger, but excluding any executive
directors.
3.4 Notice
The Committee will notify Optionholders of any action taken under this
Rule 3.
4 Exercise and lapse - general rules
4.1 Exercise - general rule
Except as set out in the rest of this Rule 4 or where the Committee has
determined to permit exercise under Rule 3.2, an Optionholder's Option
will only be exercisable
4.1.1after the Vesting Date; and
4.1.2if the Optionholder remains an Employee from the date he is granted
the Option under Rule 2.2 until and including the Vesting Date; and
4.1.3provided he has not given notice of resignation to his employer on or
before the Vesting Date (except where he has given notice of
resignation in circumstances in which he is entitled to terminate his
contract of employment without notice by reason of his employer's
conduct or, in the case of an Option granted to Mr Daniels, in
accordance with clause 8.3 of his contract of employment dated 19
October 2001).
4.2 Lapse
An Option will lapse on the earliest of any of the following:
4.2.1on the date the Optionholder ceases to be an Employee on or before the
Vesting Date for any of the reasons specified in Rule 4.3.2;
4.2.2if the Optionholder gives notice of resignation to his employer on or
before the Vesting Date (except where he gives notice in circumstances
in which he was entitled to terminate his contract of employment
without notice by reason of his employer's conduct or, in the case of
an Option granted to Mr Daniels, in accordance with clause 8.3 of his
contract of employment dated 19 October 2001), an the date on which he
gives such notice:
4.2.3if the Optionholder ceases to be an Employee on or before the Vesting
Date for any reason other than those specified in Rule 4.3.2, the end
of the period of 6 months after the date on which the Option first
becomes exercisable under Rule 4.3.1;
4.2.4if the Optionholder ceases to be an Employee after the Vesting Date,
the end of the period of 6 months after the Optionholder ceases to be
an Employee;
4.2.5any date specified by the Committee far lapse of Options under Rule
3.2; and
4.2.6 the end of the Exercise Period.
4.3 Leaving employment
4.3.1General rules If an Optionholder ceases to be an Employee on or before
the Vesting Date for any reason other than those specified in Rule
4.3.2, his Option will become exercisable for the period of 6 months
from the date of cessation of employment.
4.3.2 Exceptions
If the Optionholder ceases to be an Employee on or before the Vesting
Date for any of the reasons specified in this Rule 4.3.2, his Option
will lapse on the date of cessation of employment:
(i) death:
(ii) cessation of employment by way of resignation (unless he
resigned in circumstances in which he was entitled to
terminate his contract of employment without notice by reason
of his employer's conduct or, in the case of an Option granted
to Mr Daniels, in accordance with clause 8.3 of his contract
of employment dated 19 October 2001);
(iii)in the case of an Option granted to Mr Daniels, termination of
his employment by his employer in accordance with clauses 8.1
or 8.2 of his contract of employment dated 19 October 2001.
4.4 Meaning of ceasing to be an Employee
For the purposes of this Rule 4 an Optionholder will not be treated as
ceasing to be an Employee if on that date he is or becomes employed by
or is an executive director of another Group Company.
4.5 Priority
In the event of any conflict between any of the provisions of this Rule
4, the provision which results in the shortest exercise period and/or
the earliest lapsing of the Option will prevail.
5 Acquiring Shares
The Company may make such arrangements as it considers appropriate in
respect of its obligations to provide Shares on exercise of an Option.
Any Participating Company may provide money to the trustee of the
Trust or any other person to enable them or him to acquire Shares to
be held for the purposes of the Plan, or enter into any guarantee or
indemnity for those purposes, to the extent permitted by Section 153
of the Companies Act 1985.
6 Withholding
The Company, any Group Company and/or the trustee of the Trust may, at any
time, withhold any amounts and make such arrangements (including sale
of any Shares on behalf of an Optionholder) as are necessary or
desirable to meet any liability to taxation, social security
contributions or other appropriate levies in respect of Options.
7 Exercise procedure
7.1 Exercise
An Option is only validly exercised if exercised in accordance with this
Rule 7.
7.2 Time and manner of exercise
To exercise an Option, the Optionholder must deliver to the Company or
other duly appointed person:
7.2.1the deed identifying the number of Shares over which the Option is
being exercised and the sum of GBP1 to exercise the Option;
7.2.2a notice in writing, in the prescribed form, completed and signed by
the Optionholder or by his duly appointed agent; and
7.2.3if the Committee so requires, a sum equal to a reasonable estimate
made by the Company of any income tax or Employees National Insurance
Contributions payable by any Group Company on the exercise of the
Option or on the gain made on eventual sale of the Shares acquired
under it.
The Optionholder will disclose to the Company, in a farm satisfactory to
it, any details necessary to calculate correctly any tax or Employees
National Insurance Contributions liability in respect of his Option
and, failing that, any Group Company may withhold tax and Employees
National Insurance Contributions at the maximum level.
7.3 Date of exercise
The date of valid exercise of an Option is the date of receipt of the
documents and payment referred to in Rule 7.2.
However, if the exercise of an Option is precluded, or the Company
Secretary reasonably believes it is precluded, by any Dealing
Regulation, the date of exercise will be the first Business Day after
the day when the Optionholder is permitted, or the Company Secretary
determines the Optionholder is permitted, to exercise or, if earlier
and subject to the giving of any clearance required under any Dealing
Regulation, two Business Days before the Exercise Period expires
provided that the Option may not in any circumstances be exercised
after the end of the Exercise Period.
7.4 Transfer of Shares
Subject to Rules 7.1 to 7.3, the Company will procure the transfer of the
Shares to an Optionholder (or as he may direct) within 30 days of the
date on which the Option is validly exercised in accordance with Rule
7.3.
8 General
8.1 Reimbursement
The Company may require each Participating Company to reimburse the
Company for any costs incurred in connection with the Options made to
Optionholders employed by that Participating Company.
8.2 Rights
Optionholders will be entitled to all rights attaching to the Shares by
reference to a record date on or after the date of transfer. They will
not be entitled to rights before that date.
8.3 Consents
All transfers of Shares will be subject to any necessary consents under
any relevant enactments or regulations for the time being in force in
the United Kingdom or elsewhere, and it will be the individual's
responsibility to comply with any requirements to be fulfilled in
order to obtain or obviate the necessity far any such consent.
8.4 Articles of Association
Any Shares acquired on the exercise of Options will be subject to the
Articles of Association of the Company from time to time in force.
8.5 Notices
Any notice or other document required La be given to an Optionholder under
or in connection with the Plan may be delivered or sent by post to him
at his home address according to the records of his employing company
or such other address as may appear to the Company to be appropriate.
Any notice or other document required to be given to the Company under or
in connection with the Plan may be delivered or sent by post to it at
its registered office (or such other place or places as the Committee
may from time to time determine and notify to Optionholders).
Notices sent by post will be deemed to have been given on the date of
receipt where the notice is given by the Optionholder, and on the
second Business Day following the date of posting where given by the
Company.
8.6 Committee's decision final and binding
The decision of the Committee in connection with any interpretation of the
Rules or in any dispute relating to any matter relating to the Plan
will be final and conclusive.
8.7 Costs
The costs of introducing and administering the Plan will be borne by the
Company.
8.8 Limitation of liability
The rights and obligations of an Optionholder under the terms and
conditions of his office or employment will not be affected by his
participation in the Plan or any right he may have to participate in
the Plan. An individual who participates in the Plan waives all and
any rights to compensation or damages in consequence of the
termination of his office or employment with any company for any
reason whatsoever insofar as those rights arise, or may arise, from
his ceasing to have rights under the Plan as a result of such
termination or from the lass or diminution in value of such rights or
entitlements. If necessary the Optionholder's terms of employment will
be deemed to be varied accordingly.
8.9 Administration of the Plan
The Committee may, from time to time, make or vary regulations for the
administration and operation of the Plan.
9 Amendments and termination
9.1 Committee's powers of amendment
The Committee may at any time alter, vary or add to the provisions of the
Plan in any respect in relation to the operation of the Plan generally
or in respect of any Optionholder. Any change enabling the issue of
Shares on exercise of Options requires the consent of the Company in
general meeting.
9.2 Employees' share scheme
No amendment or operation of the Plan will be effective to the extent
that the Plan would cease to be an "employees' share scheme" as
defined in Section 743 of the Companies Act 1985.
9.3 Notice
As soon as reasonably practicable after making any alteration or
addition, the Committee will give written notice to any Optionholder
affected by the alteration or addition.
9.4 Termination of the Plan
The Committee may terminate the Plan at any time, and it will terminate on
31 December 2010. The termination of the Plan will not affect existing
Options.
10 Governing law
English law governs the Plan and its construction and administration. Any
Group Company and all Optionholders will submit to the jurisdiction of
the English Courts in relation to any matter arising in connection
with the Plan.
Exhibit 4(b)(v)
PBE/MAH
6 January 2003
Mr. P.R. Hampton
Group Finance Director
Lloyds TSB Group plc
71 Lombard Street
London EC3P3BS
STRICTLY PERSONAL
I am pleased to tell you that, following a review of executive remuneration, the
Board has agreed to increase your salary to GBP483,000 with effect from 1st
January 2003.
I can also advise you that your incentive opportunity has been increased from
75% to 100% with effect from 1st January 2003. The targets against which the
bonus opportunity will be determined will be submitted to the Remuneration
Committee on the 24th January and advised to you shortly thereafter.
Thank you again for your efforts during 2002.
SEE THE DIRECTORS' REMUNERATION REPORT IN THE LLOYDS TSB GROUP PLC REPORT AND
ACCOUNTS FOR 2002 FOR DISCLOSABLE DETAILS OF THE TARGETS.
P.B. Ellwood
Group Chief Executive
THIS EXECUTIVE SERVICE AGREEMENT is made the 30th day of May 2002
BETWEEN Lloyds TSB Bank plc of 71 Lombard Street, London, EC3P 3BS ("the
Employer") and
Philip Roy Hampton ("the Executive").
IT IS AGREED as follows:-
I Preconditions
The Executive's employment will be subject to:-
1.1 the Executive not being prevented from taking up employment under this
Agreement by any obligation or duty owed to a third party, whether
contractual or otherwise; and
1.2 the Executive having been approved as an "Approved Person" by the
Financial Services Authority under the Financial Services and Markets
Act 2000 in respect of the appointment contemplated by this Agreement.
If such approval is not received by the Company on or before 1st June
2002 this Agreement shall not become effective and neither party shall
have any claim for compensation, costs or otherwise against the other
in connection herewith.
2 Appointment, Directorship and Place of Work
2.1 The Employer shall employ the Executive as Group Finance Director,
2.2 In the position of Group Finance Director the Executive shall be
appointed as a director to the Board of the Employer.
2.3 The Executive's normal place of work shall be 71 Lombard Street London
EC3P 3BS provided that the Employer may require the Executive to carry
out his duties at such other place of business of any Group Company
within a radius of 25 miles from 71 Lombard Street aforesaid as the
Employer may specify. Notwithstanding the previous sentence, the
Executive may be required to attend such other places from time to
time as may be reasonably necessary in order to fulfil his duties
under this Agreement.
3 Remuneration and Other Benefits
3.1 Remuneration
(a) The Executive's salary shall be GBP460,000 per annum or such higher
salary as may be notified to him from time to time. The next annual
review, at which time the salary will be reviewed, will be on or about
1 January 2003.
(b) The Executive agrees to waive payment of any director's fees payable
in respect of any directorship held by him in any member of the Group.
(c) The Executive may also receive, at the Employer's discretion, a
payment under the annual incentive award arrangements (the "Award").
The Award is a maximum of 75 per cent of the basic annual salary set
out in Clause 3.1(a) hereof and the amount payable to the Executive,
if any, will be dependent upon such terms determined by the Employer
including, but not limited to, achievement of targets notified to him.
Any Award will be paid during March of the year following the
announcement of annual results.
The Executive acknowledges that, save for specific awards or
entitlements notified to the Executive individually or by a general
notice to staff bonuses are not contractual entitlements, and
may therefore be reduced, varied or withdrawn by the Employer
at any time at its discretion.
(d) The Executive may participate in any all-employee Save as you Earn
employee share schemes offered by the Employer, and also, at the
discretion of the Employer, in any executive share option schemes
established by the Employer, subject in each case to being eligible to
participate under their rules. The Executive acknowledges that on
termination of his employment he will have no right of action,
otherwise than pursuant to the express rules of such schemes, against
the Employer or any member of the Group in any way arising from his no
longer being able to participate in such schemes.
(e) For the avoidance of doubt, any and all payments made to the Executive
pursuant to this Clause 3.1 or otherwise shall be subject to such
deductions for tax and National Insurance as the Employer is required
to make by law or the tax and/or National Insurance authorities.
3.2 Motor Car
The Executive will be entitled to a company car, or in the alternative, a
cash allowance (currently GBP1,000 per month) payable each month. Upon
termination of his employment, the Executive shall return any car
provided by the Employer
3.3 Life Cover
The Executive will be eligible to be provided with Life Assurance which in
the event of his death during employment would provide a payment
equivalent to four times his basic annual salary set out in Clause 3.1
(a) hereof. This cover is subject to the provisions of the insurer
which govern such cover and on such terms as the Employer may from
time to time decide. The insurer will require the Executive to undergo
a medical examination before cover can commence.
3.4 Private Medical Insurance
If the Executive complies with any eligibility requirements or other
conditions set by the Employer and any insurer appointed by the
Employer, the Executive and his wife and children (if eligible) may
participate in the Employer's private health insurance arrangements at
the Employer's expense and subject to the terms of those arrangements
from time to time.
4 Commencement and Duration
4.1 The Executive's employment under this Agreement shall commence on 1st
June 2002 (the "Commencement Date") and shall continue indefinitely
until terminated:-
(a) by not less than 12 months' notice given by the Employer to the
Executive; or
(b) by not less than 6 months' notice given by the Executive to the
Employer; or
(c) by retirement under Clause 4.2 hereof; or
(d) under Clause 8 hereof.
4.2 The Executive's retirement age shall be sixty years, and his
employment shall terminate at the end of the month in which he attains
that age automatically and without the requirement for any notice to
be given.
4.3 No previous employment counts as continuous employment with the
Employer.
4.4 On the termination of this Agreement or on the "garden leave"
provisions of Clause 7.7 hereof operating, the Executive shall resign
from any offices as a director of any member of the Group and from all
other appointments or office which he holds as nominee or
representative of any member of the Group. Further, the Executive
shall, at any other time when asked to do so by the Employer, resign
from any offices as a director of any member of the Group (other than
as a director of the Employer) and from all other appointments or
offices which he holds as a nominee or representative of any member of
the Group. As security for such obligation the Executive irrevocably
appoints the Employer to be his attorney to sign any documents or do
any things necessary or requisite to effect such resignation(s). Such
resignation(s) shall be without prejudice to any claims which the
Executive may have against the Employer arising out of this Agreement
or its termination. The termination of any appointments, directorship,
or other office, held by the Executive will not terminate the
Executive's employment or amount to a breach of this Agreement by the
Employer.
5 Duties of and Warranties by the Executive
5.1 During the period of this Agreement the Executive will not do anything
which could cause him to be disqualified from continuing to act as a
director of any member of the Group.
5.2 During the period of this Agreement, the Executive shall:-
(a) perform his duties faithfully, diligently and with due care, and use
his best endeavours to promote the interests of the Group;
(b) devote the whole of his time, attention and skill to his duties during
normal office hours and during such other times as may reasonably be
required for the effective performance of his duties under this
Agreement;
(c) accept any offices or directorships as reasonably required by the
Board;
(d) comply with all rules and regulations issued by the Employer copies of
which shall be provided to the Executive and which may not be
inconsistent with the express terms of this Agreement;
(e) obey the directions of the Board;
(f) not take up any remunerated external appointments, not be directly or
indirectly engaged in the conduct of any trade, profession or other
occupation (whether as an employee, consultant, agent or otherwise) of
similar nature to or in competition with that carried on by the
Employer or any other Group Company for whom the Executive performed
services;
(g) keep the Group Chief Executive of the Employer promptly informed of
the conduct of his duties, his plans for the future performance of his
duties and of any conflict of interest to which he is or may become
subject, and comply with any policy directions or reasonable other
directions given to him by the Group Chief Executive;
(h) comply with the Model Code appended to Chapter 16 of the Listing Rules
of the London Stock Exchange and all other codes of conduct from time
to time adopted by any relevant Group Company;
(i) comply with all applicable rules, regulations and codes imposed or
recommended by any industry or regulatory body relevant to that part
of the business of any Group Company with which the Executive is
involved;
(j) save with the prior written agreement of the Employer, neither
participate nor have a financial interest in any business which
competes with, or is a material customer or supplier to, any part of
the Group Provided that the Executive may hold up to one (1) % of the
equity or share capital of any such business;
(k) other than reasonable corporate hospitality and seasonal or occasional
gifts of limited value, not directly or indirectly receive any benefit
from any person having business transactions with any member of the
Group.
6 Pension Arrangements
6.1 The Executive will be eligible to join the Lloyds TSB Group Pension
Scheme No.2, Section B ("the Scheme"). Membership is subject to and in
accordance with the rules of the Scheme as amended from time to time.
If the Executive joins the Scheme, he will be entitled to a pension
based on a 1/45ths accrual rate and the Employer will ensure that he
is provided with pension benefits calculated as if the "Permitted
Maximum" as defined in Section 590C of the Income and Corporation
Taxes Act 1988 did not apply, but otherwise calculated in accordance
with the terms of the Scheme and subject to Inland Revenue limits.
6.2 In the event of the Executive ceasing to be employed by the Employer
by reason of redundancy (as defined by Section 139 of the Employment
Rights Act 1996 or any re-enactment or amendment thereof for the time
being in force) and being entitled to a redundancy payment under such
legislation, then, if at the time he ceases to be employed he shall be
aged 50 or more, the Employer shall procure (by making such payments
to the trustees of the Scheme as they may require or otherwise) that
an immediate pension shall be payable to the Executive from the date
of cessation of employment based on his Final Pensionable Salary (as
defined in the Scheme Rules) and pensionable service at the time of
cessation but without any reduction for commencement of payment before
the age of 60.
6.3 Any pension due under this Clause 6 which cannot be paid from the
Scheme will be paid by the Employer or its successor. The Executive
will not be able to commute any part of any pension payable by the
Employer or its successor as a consequence of this clause for a cash
sum at retirement.
6.4 A Contracting-Out Certificate pursuant to the provisions of the
Pensions Act 1995 is in force in respect of the Executive's
employment.
7 Miscellaneous Conditions of Employment
7.1 The provisions of the Employer's Staff Manual (access to which has
been and will remain available to the Executive) shall not apply to
the Executive's employment with the Employer or form part of this
Agreement except for the following provisions:-
Paragraph 1.16 Mobility (subject to Clause 2.3 hereof)
Paragraph 1.18 Personal Dealing
Paragraph 1 .22 Sick Pay
Paragraph 1 .23 Sickness absence reporting
Paragraph 1.24 Smoking Policy
Paragraph 2.3 Expenses
Paragraph 2.8 Pay periods
Paragraph 2.9 Relocation (subject to Clause 3.5 hereof)
The whole of Section 3 (Staff Benefits) except for Paragraph 3.1.3
(Pension Scheme).
The whole of Section 5 (Attendance and Leave) except for Paragraph 5.1
(Career Break Scheme).
The whole of Section 6 (Miscellaneous).
If there is any conflict between this Agreement and such provisions, then
this Agreement shall prevail.
7.2 If employment of the Executive under this Agreement is terminated by
reason of the liquidation of the Employer for the limited purpose of
reconstruction or amalgamation and the Executive is offered employment
with any concern or undertaking ("New Employer") resulting from the
reconstruction or amalgamation on terms and conditions no less
favourable overall than the terms of this Agreement, then the
Executive shall have no claim against the Employer in respect of the
termination of his employment under this Agreement (whether or not the
notice required by Clause 4 hereof shall have been given).
7.3 Any disciplinary matter affecting the Executive will be dealt with by
the Group Chief Executive of the Employer.
7.4 If the Executive has any grievance relating to his employment he may
refer such grievance in writing to the Group Chief Executive of the
Employer. If the Executive is dissatisfied with the Group Chief
Executive's treatment of his grievance, he may refer the matter to the
Chairman of the Employer.
7.5 There are no collective agreements affecting the employment of the
Executive.
7.6 The Executive shall be entitled to all English Public and Bank
Holidays and 30 working days holiday in each year, with pro rata
entitlement during the year in which the Executives employment is
treated as commencing and during the year in which it is terminated.
Holidays shall be taken at such reasonable times as the Group Chief
Executive of the Employer shall approve.
7.7 (i) At any time after notice to terminate the employment is given by
either party under Clause 4.1 hereof, or if the Executive resigns
without giving due notice and the Employer does not accept his
resignation, the Employer may require the Executive to comply with
Clauses 7.7(ii) and (iii) hereof for a maximum period of six months
(the "Garden Leave Period");
(ii) During the Garden Leave Period the Employer may cease to provide the
Executive with work, during which time the Executive shall hold
himself available to deal with requests for information and advice on
matters relating to this work but he shall not be employed or
otherwise engaged in the conduct of any activity on behalf of any
other person and he shall not attend the premises of any Group Company
unless directed to do so by the Group Chief Executive of the Employer
and will not unless requested by the Board:
(a) contact or have any communication with any customer or client of the
Employer or any other Group Company in relation to the business of the
Employer or any other Group Company; or
(b) contact or have any communication with any employee, officer,
director, agent or consultant of the Employer or any other Group
Company in relation to the business of the Employer or any other Group
Company; or
(c) remain or become involved in any aspect of the business of the
Employer or any other Group Company except as required by such
companies.
The Executive acknowledges that the right of the Employer to cease to
provide him with work in such circumstances is necessary for the
protection of the legitimate business interests of the Employer.
During the Garden Leave Period the Executive shall remain bound by the
provisions of Clauses 5.2 hereof (other than Clause 5.2 (b) hereof if
the Employer so requires).
(iii)The Employer may require the Executive to resign immediately from any
directorship which he holds in the Group Companies, unless he is
required to perform duties to which any such directorship relates in
which case he may retain such directorships while those duties are
ongoing. The Executive hereby irrevocably appoints the Employer to be
his attorney to execute any instrument and do anything in his name and
on his behalf to effect his resignation if he fails to do so in
accordance with this Clause 7.7 (iii).
7.8 Without prejudice to the Executive's rights to remuneration and other
benefits hereunder, the Employer shall have the right at any time to
require the Executive not to attend at any place of work or otherwise
to suspend the Executive from the performance of any duties under this
Agreement. During the period of such suspension the Employer may
assign his duties, titles or powers to another. Further, during such
period of suspension the Employer shall be under no obligation to vest
in or assign to the Executive any powers or duties or to provide any
work to the Executive.
8 Termination and Severance
8.1 The Employer may terminate the Executive's employment at any time
forthwith by written notice to the Executive (and without any
requirements of prior notice) if the Executive shall:-
(a) commit any material breach, or continue (after written warning) to
commit any breach, of his obligations under this Agreement;
(b) be guilty of any material misconduct or material neglect in the
discharge of his duties;
(c) have a bankruptcy order made against him or make any arrangement or
composition with his creditors or have an interim order made against
him pursuant to the Insolvency Act 1986 (or any re-enactment or
amendment thereof for the time being in force);
(d) be convicted of any criminal offence which in the reasonable opinion
of the Employer affects his position as an employee under this
Agreement;
(e) bring the name or reputation of the Employer, or any Group Company in
whose business he shall have been involved, into material disrepute;
(f) be or become prohibited by law from becoming or remaining a director;
(g) be disqualified or disbarred from membership of, or be found to have
committed any serious disciplinary offence by, or be found not to be a
fit and proper person by, any professional or regulatory body
governing the conduct by the Executive of his duties or the business
of any Group Company; or
(h) not be entitled to work in the UK.
8.2 If the Executive (owing to sickness, injury or otherwise) does not
perform his duties hereunder for a period of at least 130 days or at
least 130 days in aggregate in any period of twelve months the
Employer shall (without prejudice to any provision hereof) be entitled
by giving to the Executive not less than 3 months' notice (given at
the expiry of such period (or aggregate days of non performance) or at
any time thereafter while the Executive continues not to perform his
duties hereunder) to terminate his employment and without prejudice to
the protections provided to the Executive under all disability
discrimination laws applying to him.
9 Confidential and Other Information
9.1 Without prejudice to the common law duties which he owes to the
Employer the Executive agrees that he will not, except in the proper
performance of his duties, copy use or disclose to any person any of
the Employer's trade secrets or confidential information. This
restriction will continue to apply after the termination of the
Employment without limit in time but will not apply to trade secrets
or confidential information which become public other than through
unauthorised disclosure by the Executive. The Executive will use his
best endeavours to prevent the unauthorised copying use or disclosure
of such information.
For the purposes of this Agreement trade secrets and confidential
information include any information in whatever form (written, oral,
visual and electronic) concerning the confidential affairs of the
Employer.
9.2 In the course of his employment the Executive is likely to obtain
trade secrets and confidential information belonging or relating to
other Group Companies and other persons. He will treat such
information as if it falls within the terms of Clause 9.1 hereof and
Clause 9.1 hereof will apply with any necessary amendments to such
information. If requested to do so by the Employer the Executive will
enter into an agreement with other Group Companies and any other
persons in the same terms as Clause 9.1 hereof with any amendments
necessary to give effect to this provision.
9.3 Nothing in this Agreement will prevent the Executive from making a
"protected disclosure" in accordance with the provisions of the
Employment Rights Act 1996.
10 Copyright
10.1 The Executive shall promptly disclose to the Employer all copyright
works originated, conceived, written or made by him alone or with
others during the course of his employment (except only those works
originated, conceived, written or made by him wholly outside his
normal working hours and wholly unconnected with his appointment) and
shall until such rights shall be fully and absolutely vested in the
Employer hold them in trust for the Employer.
10.2 The Executive assigns to the Employer by way of future assignment all
copyright and other proprietary rights (if any) for the full terms
thereof throughout the world in respect of all works originated,
conceived, written or made by the Executive during the course of his
employment (except only those works originated, conceived, written or
made by the Executive wholly outside his normal working hours and
wholly unconnected with his duties under this Agreement).
10.3 It is agreed that for the purpose of Section 2(1B) of the Registered
Designs Act 1949 and the Copyrights Designs and Patents Act 1988 all
designs created by the Executive during the course of his employment
(except only those which are created by the Executive wholly outside
his normal working hours and wholly unconnected with his duties under
this Agreement) shall be treated as being created by the Executive in
the course of his employment and accordingly the Employer shall for
the purpose of that Act be the original proprietor of any such
designs.
10.4 The Executive will promptly inform the Employer if he makes or is
involved in making an Invention during the Employment and will give
the Employer sufficient details of it to allow the Employer to assess
the Invention and to decide whether the Invention belongs to the
Employer. The Employer will treat any Invention which does not belong
to it as confidential.
"Invention" means any invention (whether patentable or not within the
meaning of the Patent Act 1977 or other applicable legislation in any
other country) relating to or capable of being used in the business of
the Employer or any other Group Company.
If an Invention belongs to the Employer, the Executive will act as a
trustee for the Employer in relation to that Invention and will, at
the request and expense of the Employer, do everything necessary to
vest all right, title and interest in it in the Employer or its
nominee with full title guarantee and to secure full patent or other
appropriate protection anywhere in the world.
10.5 The Executive will at the request and expense of the Employer do all
things necessary or desirable to substantiate the rights of the
Employer under this Clause 10, and as security for such obligation
irrevocably appoints the Employer to be his attorney to sign or
execute any such instrument or do any thing as may be necessary or
desirable to effect such substantiation and the assignment referred to
in Clause 10.2 hereof
11 Notices
Any notice under this Agreement shall be in writing and shall either be
given personally or be sent by prepaid first class post by the
Employer to the Executive at his address stated above or at his other
last known address, or by the Executive to the Employer at its address
stated above or its other last known address. Any notice sent by the
Employer by post shall be deemed to have been received two business
days after the date of posting.
12 Miscellaneous
12.1 This Agreement shall be in substitution for all existing contracts of
service or consultancy between the Employer or any Group Company and
the Executive, which (without prejudice to any accrued rights
thereunder) shall be treated as cancelled on the date the Executive's
employment is treated as commencing under this Agreement.
13 Governing Law and Jurisdiction
This Agreement is governed by and will be interpreted in accordance with
the law of England and Wales. Each of the parties submits to the
exclusive jurisdiction of the English courts as regards any claim or
matter arising under this Agreement.
14 Contracts (Rights of Third Parties) Act 1999
No person other than the parties to this Agreement or any Group Company
shall have any right to enforce any term of this Agreement under the
Contracts (Rights of Third Parties) Act 1999.
15 Data Protection Act 1998
For the purposes of the Data Protection Act 1995 (the "Act") the Executive
gives his consent to the holding, processing and disclosure of
personal data (including sensitive data within the meaning of the Act)
provided by the Executive to the Employer for all purposes relating to
the performance of this Agreement including, but not Limited to:
- administering and maintaining personnel records;
- paying and reviewing salary and other remuneration and benefits;
- providing and administering benefits (including if relevant, pension,
life assurance, permanent health insurance and medical insurance);
- undertaking performance appraisals and reviews;
- maintaining sickness and other absence records;
- taking decisions as to the Executive's fitness for work;
- providing references and information to future employers, and if
necessary, governmental and quasi-governmental bodies for social
security and other purposes, the Inland Revenue and the Contributions
Agency;
- providing information to future purchasers of the Employer or of the
business in which the Executive works; and
- transferring information concerning the Executive to a country or
territory outside the EEA.
The Executive acknowledges that during his employment he will have access
to and process, or authorise the processing of personal data and
sensitive personal data relating to employees, customers and other
individuals held and controlled by the Employer. The Executive agrees
to comply with the terms of the Act in relation to such data and to
abide by the Employer's data protection policy issued form time to
time.
16 Interpretation
In this Agreement:-
16.1 where the context permits, references to the singular shall include
references to the plural and vice versa;
16.2 the Employer's Staff Manual shall mean the current manual of the
Employer entitled "People Policies and Practice", as may be amended or
replaced by the Employer from time to time at its discretion. Upon any
amendment or replacement, the references to the paragraphs and
sections of the now current Employer's Staff Manual in Clause 7.1
hereof shall be construed so as to be references to the provisions of
the amended or replaced Employers Staff Manual dealing with the same
subject matter;
16.3 Clause headings are inserted for convenience only and shall not affect
the construction of this Agreement;
16.4 "Group Company" means any of Lloyds TSB Group plc and its subsidiaries
(as defined by Section 736 of the Companies Act 1985), and "Group"
means all of them;
16.5 "Board" means board of directors of the Employer or any duly
authorised committee of the same: and
16.6 "Commencement Date" has the meaning given in Clause 4.1 hereof.
EXECUTED by the Executive and a representative of the Employer duly and fully
authorized by the Board of the Employer to enter into this Agreement on the
first date mentioned above.
EXECUTED as a deed by the Executive }
in the presence of: }
EXECUTED as a deed on behalf of the }
Employer by: }
Exhibit 4(b)(vi)
5 February 2003
Mr Stephen Craig Targett
E11 Montevetro
100 Battersea Church Road
London SW11 3YL
LLOYDS TSB GROUP plc SHARE PLAN 2003
I am writing to confirm the arrangements in respect of your option grant and
confirm that you wilt be granted an option over Lloyds TSB Group plc shares with
a market value at the date of grant of GBP 1,000,000, in accordance with the
rules of the Lloyds TSB Group plc Share Plan 2003. The grant will be made on the
first business day after you become an employee with us subject to any dealing
restrictions which apply.
P.B. Ellwood
Group Chief Executive
THIS EXECUTIVE SERVICE AGREEMENT is made the 5th day of February 2003
BETWEEN
(1) Lloyds TSB Bank plc of 71 Lombard Street, London, EC3P 3BS ("the
Employer"), and
(2) Stephen Craig Targett of E11 Montevetro, 100 Battersea Church Road,
London, SW11 3YL ("the Executive")
IT IS AGREED as follows
1 Preconditions
The Executive's employment will be subject to
1.1 the Executive not being prevented from taking up employment under this
Agreement by any obligation or duty owed to a third party whether
contractual or otherwise;
1.2 the Executive having been approved as an "Approved Person" by the
Financial Services Authority under the Financial Services and Markets Act
2000 in respect of the appointment contemplated by this Agreement ("FSMA
Approval"),
1.3 the Executive undergoing a medical examination with a medical
practitioner nominated by the Employer, the result of which ("Medical
Results") are satisfactory to the Employer, and
1.4 a work permit being granted to the Employer for the Executive in
respect of the appointment contemplated by this Agreement
and if either the Employer notifies the Executive that the Medical Results
are not satisfactory to the Employer, or such work permit has not been
granted by 31 March 2003, or FSMA Approval has not been received by 31
March 2003 this Agreement shall not become effective and neither party
shall have any claim for compensation costs or otherwise against the other
in connection herewith
2 Appointment, Directorship and Place of Work
2.1 The Employer shall employ the Executive as Group Executive Director,
Wholesale & International Banking Designate of the Employer and as Group
Executive Director, Wholesale & International Banking with effect from the
conclusion of the Company's next Annual General Meeting.
2.2 The Employer shall procure the appointment of the Executive a director
of the Company with effect from the Commencement Date until the next
Annual General Meeting. The Board will propose to the shareholders of the
Company at the next Annual General Meeting of the Company that the
Executive be re-appointed as a director of the Company ("re-appointed").
2.3 The Executive's normal place of work shall be 71 Lombard Street London
EC3P 3BS until a date to be notified in March or April 2003 and thereafter
25 Gresham Street, London EC2 provided that the Employer may require the
Executive to carry out his duties at such other place of business of any
Group Company within a radius of 25 miles from 25 Gresham Street aforesaid
as the Employer may specify. Notwithstanding the previous sentence, the
Executive may be required to attend such other places from lime to time as
may be reasonably necessary in order to fulfil his duties under this
Agreement.
3 Remuneration and Other Benefits
3.1 Remuneration
(a) The Executive's salary shall be GBP450,000 per annum or such higher
salary as may be notified to him from time to time. The next annual
review, at which time the salary will be reviewed, will be on or
about 1 January 2004.
(b) The Executive agrees to waive payment of any director's fees
payable in respect of any directorship held by him in any member of
the Group.
(c) The Executive may also receive, at the Employer's discretion, a
payment under the annual incentive award arrangements (the
"Award"). The Award is a maximum of 100 per cent of the basic
annual salary set out in Clause 3,1(a) hereof and the amount
payable to the Executive, if any, will be dependent upon such terms
determined by the Employer including, but not limited to,
achievement of targets notified to him. Any Award will be paid
during March of the year following the announcement of annual
results.
The Executive acknowledges that (and notwithstanding the terms of
Clause 8.3 hereof), save for specific awards or entitlements
notified to the Executive individually or by a general notice to
staff bonuses are not contractual entitlements, and may therefore
be reduced, varied or withdrawn by the Employer at any time at its
discretion.
(d) The Executive may participate in any all-employee Save as you
Earn employee share schemes offered by the Employer, and also,
at the discretion of the Employer, in any executive share
option schemes established by the Employer, subject in each
case to being eligible to participate under their rules and in
each case his participation will be in accordance with the rules
of the relevant scheme from time to time. The Executive
acknowledges that on termination of his employment he will have
no right of action, otherwise than pursuant to the express rules of
such schemes, against the Employer or any member of the Group in
any way arising from his no longer being able to participate in
such schemes.
(e) The Executive will be eligible to participate in the
Employer's flexible benefits and share plan (Flavours) subject
to and in accordance with the rules of Flavours from time to time.
3.2 Motor Car
The Executive will be entitled to a company car subject to and in
accordance with the rules of the Employer from time to time, or in the
alternative, a cash allowance (currently GBP1,000 per month) payable each
month. Upon termination of his employment, the Executive shall return any
car provided by the Employer.
3.3 Life Cover
The Executive will be eligible to be provided with Life Assurance which in
the event of his death during employment would provide a payment
equivalent to four times his basic annual salary set out in Clause 3.1(a)
hereof. This cover is subject to the provisions of the insurer which
govern such cover and on such terms as the Employer may from time to time
decide. The insurer will require the Executive to undergo a medical
examination before cover can commence.
3.4 Private Medical Insurance
If the Executive complies with any eligibility requirements or other
conditions set by the Employer and any insurer appointed by the Employer,
the Executive and his wife and children (if eligible) may participate in
the Employer's private health insurance arrangements at the Employer's
expense and subject to the terms of those arrangements from time to time.
3.5 Relocation Costs
The Employer shall reimburse to the Executive in a timely manner all the
reasonable costs which the Executive shall incur in respect of relocating
from Australia to the UK up to a maximum cost to the Employer of GBP50,000
(fifty thousand pounds) and subject to the Employer receiving proof of
expenditure.
3.6 Costs relating to this Agreement
The Employer shall within 31 days of the Commencement Date (subject to the
fulfillment of the preconditions set out in Clause 1 above) pay the
Executive the sum of GBP25,000 (twenty-five thousand pounds) as a
contribution to the costs incurred by the Executive in relation to
obtaining advice in respect of this Agreement.
3.7 Deductions
For the avoidance of doubt, any and all payments made to the Executive
pursuant to Clause 3.1, Clause 3.5, Clause 3.6 or otherwise shall be
subject to such deductions for tax and National Insurance as the Employer
is required to make by law or the tax and/or National insurance
authorities.
4 Commencement and Duration
4.1 Subject to Clause 1 above, the Executive's employment under this
Agreement shall commence on 10 March 2003 (the "Commencement Date") and
shall continue indefinitely until terminated:-
(a) by not less than 12 months' notice given by the Employer to the
Executive; or
(b) by not less than 6 months' notice given by the Executive to the
Employer; or
(c) by retirement under Clause 4.2 hereof; or
(d) under Clause 8 hereof.
4.2 The Executive's retirement age shall be sixty years, and his employment
shall terminate at the end of the month in which he attains that age
automatically and without the requirement for any notice to be given.
4.3 No previous employment counts as continuous employment with the
Employer.
4.4 On the termination of this Agreement or on the "garden leave"
provisions of Clause 7.7 hereof operating, the Executive shall resign from
any offices as a director of any member of the Group and from all other
appointments or office which he holds as nominee or representative of any
member of the Group. Further, the Executive shall, at any other time when
asked to do so by the Employer, resign from any offices as a director of
any member of the Group (other than as a director of the Employer) and
from all other appointments or offices which he holds as a nominee or
representative of any member of the Group. As security for such obligation
the Executive irrevocably appoints the Employer to be his attorney to sign
any documents or do any things necessary or requisite to effect such
resignation(s). Such resignation(s) shall be without prejudice to any
claims which the Executive may have against the Employer arising out of
this Agreement or its termination. The termination of any appointments,
directorship, or other office, held by the Executive will not terminate
the Executive's employment or amount to a breach of this Agreement by the
Employer.
5 Duties of and Warranties by the Executive
5.1 During the period of this Agreement the Executive will not do anything
which could cause him to be disqualified from continuing to act as a
director of any member of the Group or lose FSMA Approval.
5.2 During the period of this Agreement, the Executive shall
(a) perform his duties faithfully, diligently and with due care, and
use his best endeavours to promote the interests of the Group;
(b) devote the whole of his time, attention and skill to his
duties during normal office hours and during such
other times as may reasonably be required for the effective
performance of his duties under this Agreement;
(c) accept any offices or directorships as reasonably required by the
Board;
(d) comply with all rules and regulations issued by the Employer
copies of which shall be provided to the Executive and which may
not be inconsistent with the express terms of this Agreement;
(e) obey the directions of the Board
(f) not take up any remunerated external appointments, not be directly
or indirectly engaged in the conduct of any trade, profession or
other occupation (whether as an employee, consultant, agent or
otherwise) of similar nature to or in competition with that carried
on by the Employer or any other Group Company for whom the
Executive performed services,
(g) keep the Group Chief Executive of the Employer promptly informed of
the conduct of his duties, his plans for the future performance of
his duties and of any conflict of interest to which he is or may
become subject, and comply with any policy directions or reasonable
other directions given to him by the Group Chief Executive
(h) comply with the Model Code appended to Chapter 16 of the Listing
Rules of the United Kingdom Listing Authority and all other codes
of conduct from time to time adopted by, or applicable top any
relevant Group Company
(i) comply with all applicable rules, regulations and codes imposed or
recommended by any industry or regulatory body relevant to that
part of the business of any Group Company with which the Executive
is involved,
(j) save with the prior written agreement of the Employer, neither
participate nor have a financial interest in any business which
competes with, or is a material customer or supplier to, any part
of the Group Provided that the Executive may hold up to one (1) %
of the equity or share capital of any such business;
(k) other than reasonable corporate hospitality and seasonal or
occasional gifts of limited value, not directly or indirectly
receive any benefit from any person having business transactions
with any member of the Group.
5.3 The Executive warrants to the Employer that the information disclosed
by him to the Employer prior to the date of this Agreement concerning the
remuneration and benefits provided to him by his previous employer
(including information on shares and share options) was, at the time of
disclosure, full, complete and accurate.
6 Pension Arrangements
The Executive shall be entitled to be a member of the Lloyds TSB Group
Pension Scheme No.2 Pension Investment Plan ("the Scheme") subject to the
terms and conditions of its deed and rules from time to time.
The Employer shall pay a contribution of 15% per annum of the Executive's
annual basic salary (payable pursuant to in Clause 3.1(a) hereof) to the
Scheme subject to Inland Revenue limits.
The Employer shall be entitled at any time to terminate the Scheme or the
Executive's membership of it subject to providing him with the benefit of
a pension scheme ("The New Scheme") the benefits of which taken as a whole
shall be not less favourable than the benefits provided to the Executive
under the Scheme.
A Contracting-Out Certificate pursuant to the provisions of the Pensions
Act 1995 is in force in respect of the Executive's employment.
7 Miscellaneous Conditions of Employment
7.1 The provisions of the Employer's Staff Manual (access to which has been
and will remain available to the Executive) shall not apply to the
Executives employment with the Employer or form part of this Agreement
except for the following provisions:-
Paragraph 1.16 Mobility (subject to Clause 2.3 hereof)
Paragraph 1.18 Personal Dealing
Paragraph 1.22 Sick Pay
Paragraph 1.23 Sickness absence reporting
Paragraph 1.24 Smoking Policy
Paragraph 2.3 Expenses
Paragraph 2.8 Pay periods
Paragraph 2.9 Relocation (subject to Clause 3.5 hereof)
The whole of Section 3 (Staff Benefits)
The whole of Section 5 (Attendance and Leave) except for Paragraph 5.1
(Career Break Scheme).
If there is any conflict between this Agreement and such provisions, then
this Agreement shall prevail.
7.2 If employment of the Executive under this Agreement is terminated by
reason of the liquidation of the Employer for the limited purpose of
reconstruction or amalgamation and the Executive is offered employment
with any concern or undertaking ("New Employer") resulting from the
reconstruction or amalgamation on terms and conditions no less favourable
overall than the terms of this Agreement, then the Executive shall have no
claim against the Employer in respect of the termination of his employment
under this Agreement (whether or not the notice required by Clause 4
hereof shall have been given).
7.3 Any disciplinary matter affecting the Executive will be dealt with by
the Group Chief Executive of the Employer.
7.4 If the Executive has any grievance relating to his employment he may
refer such grievance in writing to the Group Chief Executive of the
Employer. If the Executive is dissatisfied with the Group Chief
Executive's treatment of his grievance, he may refer the matter to the
Chairman of the Employer.
7.5 There are no collective agreements affecting the employment of the
Executive.
7.6 The Executive shall be entitled to all English Public and Bank Holidays
and 30 working days holiday in each year, with pro rata entitlement
during the year in which the Executive's employment is treated as
commencing and during the year in which it is terminated. Holidays shall
be taken at such reasonable times as the Group Chief Executive of the
Employer shall approve.
7.7 (i) At any time after notice to terminate the employment is
given by either party under Clause 4.1 hereof, or if the Executive
resigns without giving due notice and the Employer does not accept
his resignation, the Employer may require the Executive to
comply with Clauses 7.7(ii) and (iii) hereof for a maximum period
of six months (the "Garden Leave Period');
(ii) During the Garden Leave Period the Employer may cease to provide
the Executive with work, during which time the Executive shall
hold himself available to deal with requests for information and
advice on matters relating to this work but he shall not be
employed or otherwise engaged in the conduct of any activity on
behalf of any other person and he shall not attend the premises
of any Group Company unless directed to do so by the Group Chief
Executive of the Employer and will not unless requested by the
Board:
(a) contact or have any communication with any customer or client
of the Employer or any other Group Company in relation to the
business of the Employer or any other Group Company; or
(b) contact or have any communication with any employee, officer,
director, agent or consultant of the Employer or any other Group
Company in relation to the business of the Employer or any other
Group Company; or
(c) remain or become involved in any aspect of the business of
the Employer or any other Group Company except as required by
such companies.
The Executive acknowledges that the right of the Employer to cease to
provide him with work in such circumstances is necessary for the
protection of the legitimate business interests of the Employer.
During the Garden Leave Period the Executive shall remain bound by the
provisions of Clauses 5.2 hereof (other than Clause 5.2 (b) hereof if the
Employer so requires).
(iii) The Employer may require the Executive to resign immediately from
any directorship which he holds in the Group Companies, unless he
is required to perform duties to which any such directorship
relates in which case he may retain such directorships while those
duties are ongoing. The Executive hereby irrevocably appoints the
Employer to be his attorney to execute any instrument and do
anything in his name and on his behalf to effect his resignation if
he fails to do so in accordance with this Clause 7.7 (iii).
7.8 Without prejudice to the Executive's rights to remuneration and other
benefits hereunder, the Employer shall have the right at any time to
require the Executive not to attend at any place of work or otherwise to
suspend the Executive from the performance of any duties under this
Agreement. During the period of such suspension the Employer may assign
his duties, titles or powers to another. Further, during such period of
suspension the Employer shall be under no obligation to vest in or assign
to the Executive any powers or duties or to provide any work to the
Executive.
8 Termination and Severance
8.1 The Employer may terminate the Executive's employment at any time
forthwith by written notice to the Executive (and without any requirements
of prior notice) if the Executive shall:-
(a) commit any material breach, or continue (after written warning) to
commit any breach, of his obligations under this Agreement;
(b) be guilty of any material misconduct or material neglect in the
discharge of his duties;
(c) have a bankruptcy order made against him or make any arrangement or
composition with his creditors or have an interim order made
against him pursuant to the Insolvency Act 1986 (or any
re-enactment or amendment thereof for the time being in force);
(d) be convicted of any criminal offence which in the reasonable
opinion of the Employer affects his position as an employee under
this Agreement;
(e) bring the name or reputation of the Employer, or any Group Company
in whose business he shall have been involved, into material
disrepute;
(f) be or become prohibited by law from becoming or remaining a
director;
(g) be disqualified or disbarred from membership of, or be found to
have committed any serious disciplinary offence by, or be found not
to be a fit and proper person by, any professional or regulatory
body governing the conduct by the Executive of his duties or the
business of any Group Company
(h) ceases to have FSMA Approval;
(i) not be entitled to work in the UK.
8.2 If the Executive (owing to sickness, injury or otherwise) does not
perform his duties hereunder for a period of at east 130 days or at least
130 days in aggregate in any period of twelve months the Employer shall
(without prejudice to any provision hereof) be entitled by giving to the
Executive not less than 3 months' notice (given at the expiry of such
period (or aggregate days of non performance) or at any time thereafter
while the Executive continues not to perform his duties hereunder) to
terminate his employment and without prejudice to the protections provided
to the Executive under all disability discrimination laws applying to him.
8.3 Subject to Clause 8.4 to Clause 8.8 below, if the Employer terminates
the Executive's employment Without Cause the Employer agrees that if the
Executive would have received an Award (as defined in Clause 3.1(c)) had
he been in the employment of the Employer during the whole of the
Severance Period the Employer shall pay the Executive an amount equal to
the amount of such Award (if any) as would have been paid to the Executive
had he been so employed ("Bonus Payment") and the Bonus Payment shall be
made on the date it would have been paid to the Executive had he been in
the employment of the Employer during the period to which the Award
relates. Insofar as the Severance Period shall overlap with two Bonus
Periods the amount of the Bonus Payment will be pro-rated on a time basis
and the previous sentence shall be construed accordingly.
8.4 Notwithstanding the terms of Clause 8.3, the amount of any Bonus
Payment shall be determined by the Employer having taken into account the
duty of the Executive to mitigate his loss as applies to damages
recoverable under the common law of England and Wales for breach of
contract as if the Bonus Payment was a payment of. and calculated in
accordance with the principle for quantifying, common law damages arising
from the Employer terminating the Executive's employment in breach of
contract.
8.5 The Bonus Payment shall be reduced by an amount equal to any and all
bonus paid to the Executive by the Employer or any other Group Company
following the Termination Date.
8.6 The Bonus Payment shall be subject to such deductions for tax and
National Insurance as the Employer is required to make by Law or the tax
and/or National Insurance authorities.
8.7 The Employer and the Executive agree that the Employer's obligations to
the Executive under Clause 8.3 constitute a genuine pre-estimate of the
damages arising from the termination of the Employee's employment Without
Cause in respect of loss of bonus and that if the Employer shall fully
perform, when due, all of its said obligations, such performance shall be
in bull and final settlement of all and any claims which the Executive
might have against the Employer and each Group Company arising out of the
Executive's employment under this Agreement or its termination in respect
of loss of bonus and the Executive hereby waives all such clams on the
above terms (except to the extent that the Executive may not by law in
this Agreement waive any statutory claims).
8.8 In this Clause 8
"Bonus Payment" has the meaning given in Clause 8.3;
"Bonus Period' means a period in respect of which an Award payable
pursuant to Clause 3.1(c) above relates;
"Severance Period" shall mean either the period of 12 months beginning
with the Termination Date or the date on which the Employer has given the
Executive notice, whichever is the shorter;
"Termination Date" shall mean the date on which the Executive's employment
terminates;
"Without Cause" means termination other than (i) pursuant to Clause 4.1,
Clause 4.2, Clause 8.1, or Clause 8.2 hereof, (ii) by operation of law
(including but not limited to termination by virtue of the Transfer of
Undertakings (Protection of Employment) Regulations 1981 or any successor
thereto), (iii) where the Employer is entitled by law to terminate the
Executive's employment without notice, (iv) by mutual consent, or (v)
death.
8.9 For the avoidance of doubt the Executive agrees that during the
Severance Period he will remain bound by the provisions of Clause 9 and
Clause 10 of this Agreement and if he breaches such provisions the Bonus
Payment shall cease to be payable.
8.10 Notwithstanding any other provision of this Agreement, the Employer
shall in determining the amount of any compensation payable to the
Executive for loss arising from a termination of the Executive's
employment under this Agreement in breach of this Agreement apply the same
rule concerning the duty of a person to mitigate his loss as applies to
damages for breath of contract recoverable under the common law of England
and Wales ("duty to mitigate"). The Executive hereby acknowledges his duty
to mitigate.
8.11 If the Executive is not re-appointed as contemplated by Clause 2.2
above, then the Executive may, within 30 days of the Annual General
Meeting referred to in that Clause 2.2 and in his absolute discretion,
treat his employment with the Employer as terminated by reason of the
Employer's fundamental breach of this Agreement by serving notice on the
Employer stating that this Agreement has been terminated by the Employer
by reason of its fundamental breach with effect from the date of that
Annual General Meeting.
9 Confidential and Other Information
9.1 Without prejudice to the common law duties which he owes to the
Employer the Executive agrees that he will not, except in the proper
performance of his duties, copy use or disclose to any person any of the
Employer's trade secrets or confidential information. This restriction
will continue to apply after the termination of the Employment without
limit in time but will not apply to trade secrets or confidential
information which become public other than through unauthorised disclosure
by the Executive. The Executive will use his best endeavours to prevent
the unauthorised copying use or disclosure of such information.
For the purposes of this Agreement trade secrets and confidential
information include any information in whatever form (written, oral,
visual and electronic) concerning the confidential affairs of the
Employer.
9.2 In the course of his employment the Executive is likely to obtain trade
secrets and confidential information belonging or relating to other Group
Companies and other persons. He will treat such information as if it falls
within the terms of Clause 9.1 hereof and Clause 9.1 hereof will apply
with any necessary amendments to such information. If requested to do so
by the Employer the Executive will enter into an agreement with other
Group Companies and any other persons in the same terms as Clause 9.1
hereof with any amendments necessary to give effect to this provision.
9.3 Nothing in this Agreement will prevent the Executive from
making a "protected disclosure" in accordance with the
provisions of the Employment Rights Act 1996.
10 Copyright etc
10.1 The Executive shall promptly disclose to the Employer all copyright
works originated, conceived, written or made by him alone or with others
during the course of his employment (except only those works originated,
conceived, written or made by him wholly outside his normal working hours
and wholly unconnected with his appointment) and shall until such rights
shall be fully and absolutely vested in the Employer hold them in trust
for the Employer.
10.2 The Executive assigns to the Employer by way of future assignment all
copyright and other proprietary rights (if any) for the full terms thereof
throughout the world in respect of all works originated, conceived,
written or made by the Executive during the course of his employment
(except only those works originated, conceived, written or made by the
Executive wholly outside his normal working hours and wholly unconnected
with his duties under this Agreement).
10.3 It is agreed that for the purpose of Section 2(1B) of the Registered
Designs Act 1949 and the Copyrights Designs and Patents Act 1988 all
designs created by the Executive during the course of his employment
(except only those which are created by the Executive wholly outside his
normal working hours and wholly unconnected with his duties under this
Agreement) shall be treated as being created by the Executive in the
course of his employment and accordingly the Employer shall for the
purpose of that Act be the original proprietor of any such designs.
10.4 The Executive will promptly inform the Employer if he makes or is
involved in making an Invention during the Employment and will give the
Employer sufficient details of it to allow the Employer to assess the
Invention and to decide whether the Invention belongs to the Employer. The
Employer will treat any Invention which does not belong 10 it as
confidential.
"Invention" means any invention (whether patentable or not within the
meaning of the Patent Act 1977 or other applicable legislation in any
other country) relating to or capable of being used in the business of the
Employer or any other Group Company.
If an Invention belongs to the Employer, the Executive will act as a
trustee for the Employer in relation to that Invention and will, at the
request and expense of the Employer, do everything necessary to vest all
right, title and interest in it in the Employer or its nominee with full
title guarantee and to secure full patent or other appropriate protection
anywhere in the world.
10.5 The Executive will at the request and expense of the Employer do all
things necessary or desirable to substantiate the rights of the Employer
under this Clause 10, and as security for such obligation irrevocably
appoints the Employer to be his attorney to sign or execute any such
instrument or do any thing as may be necessary or desirable to effect such
substantiation and the assignment referred to in Clause 10.2 hereof.
11 Notices
Any notice under this Agreement shall be in writing and shall either
be given personally or be sent by prepaid first class post by the
Employer to the Executive at his address stated above or at his
other last known address, or by the Executive to the Employer at its
address stated above or its other last known address. Any notice
sent by the Employer by post shall be deemed to have been received
two business days after the date of posting.
12 Miscellaneous
This Agreement shall be in substitution for all existing
contracts of service or consultancy between the Employer or any Group
Company and the Executive, which (without prejudice to any accrued rights
thereunder) shall be treated as cancelled on the date the Executive's
employment is treated as commencing under this Agreement.
13 Governing Law and Jurisdiction
This Agreement is governed by and will be interpreted in accordance with
the law of England and Wales. Each of the parties submits to the exclusive
jurisdiction of the English courts as regards any claim or matter arising
under this Agreement.
14 Contracts (Rights of Third Parties) Act 1999
No person other than the parties to this Agreement or any Group
Company shall have any right to enforce any term of this Agreement under
the Contracts (Rights of Third Parties) Act 1999.
15 Data Protection Act 1998
For the purposes of the Data Protection Act 1998 (the "Act") the Executive
gives his consent to the holding, processing and disclosure of personal
data (including sensitive data within the meaning of the Act) provided by
the Executive to the Employer for all purposes relating to the performance
of this Agreement including, but not limited to:
- administering and maintaining personnel records;
- paying and reviewing salary and other remuneration and benefits;
- providing and administering benefits (including if relevant,
pension, life assurance, permanent health insurance and medical
insurance);
- undertaking performance appraisals and reviews;
- maintaining sickness and other absence records;
- taking decisions as to the Executive's fitness for work;
- providing references and information to future employers, and if
necessary, governmental and quasi-governmental bodies for social
security and other purposes, the Inland Revenue and the
Contributions Agency:
- providing information to future purchasers of the Employer or of
the business in which the Executive works; and
- transferring information concerning the Executive to a country or
territory outside the EEA.
The Executive acknowledges that during his employment he will have
access to and process, or authorise the processing of personal data
and sensitive personal data relating to employees, customers and
other individuals held and controlled by the Employer. The Executive
agrees to comply with the terms of the Act in relation to such data
and to abide by the Employer's data protection policy issued form
time to time.
16 Interpretation
In this Agreement:-
16.1 where the context permits, references to the singular shall include
references to the plural and vice versa;
16.2 the Employer's Staff Manual shall mean the current manual of the
Employer entitled "People Policies and Practice", as may be amended or
replaced by the Employer from time to time at its discretion. Upon any
amendment or replacement, the references to the paragraphs and sections of
the now current Employer's Staff Manual in Clause 7.1 hereof shall be
construed so as to be references to the provisions of the amended or
replaced Employer's Staff Manual dealing with the same subject matter;
16.3 Clause headings are inserted for convenience only and shall not affect
the construction of this Agreement;
16.4 "Group Company' means any of the Company and its subsidiaries (as
defined by Section 736 of the Companies Act 1985), and 'Group" means all
of them;
16.5 "Board" means board of directors of the Employer or any duly
authorised committee of the same;
16.6 "Commencement Date" has the meaning given in Clause 4,1 hereof;
"Company" means Lloyds TSB Group plc; and
16.8 "FSMA Approval" has the meaning given in Clause 1.2 hereof.
EXECUTED by the Executive and a representative of the Employer duly and fully
authorized by the Board of the Employer to enter into this Agreement on the
first date mentioned above.
EXECUTED as a DEED by the
Executive
In the presence of:
Witness's signature
Name
Address
Occupation
EXECUTED as a DEED on behalf of
the Employer:
Director
Director/Secretary
LLOYDS TSB GROUP plc SHARE PLAN 2003 ("THE PLAN")
This is to certify that on 11 March 2003, STEPHEN CRAIG TARGETT was granted,
subject to the rules of the plan, an option to acquire 331,125 fully paid
ordinary shares of 25p each in Lloyds TSB Group plc, subject to the memorandum
and articles of association of the company, for a total price of GBP1. The
option is personal to Mr. Targett and is not transferable.
Subject to the rules of the plan, the vesting date for the option is 31
December 2005 and the exercise period expires six months after the vesting date.
This option may be exercised only in accordance with the rules of the plan.
The common seal of Lloyds TSB Group plc was affixed to this deed
Director
Secretary
SHARE PLAN 2003
Rules
RULES OF THE LLOYDS TSB GROUP PLC SHARE PLAN 2003
Meanings of words used
In these Rules:
'Associated Company" means any company which is associated with the
Company (within the meaning of Section 416 of the Income and Corporation
Taxes Act 1988);
'Business Day" means a day on which the London Stock Exchange is open for
the transaction of business;
"Committee" means a committee of the board of directors of the Company;
"Company" means Lloyds TSB Group plc:
"Dealing Regulations" means any statute, regulation or code adopted by, or
applicable to, the Company (including the Model Code for security
transactions by directors of listed companies contained in the United
Kingdom Listing Authority's Listing Rules and the Code of Market Conduct
issued by the Financial Services Authority);
"Employee" means any employee or executive director of any Participating
Company;
"Exercise Period" means the period determined by the Committee under Rule
2.2.2 during which the Optionholder may exercise his Option after the
Vesting Date and which in relation to the grant of an Option to Mr Targett
will be the period of six months after the Vesting Date (i.e. ending on 30
June 2006);
"Group Company" means:
* the Company; and
* its Subsidiaries from time to time: and any Associated Company
which in each case is designated by the Committee as a Group Company;
"Option" means a right to acquire Shares granted under the Plan and for
the time being subsisting;
"Optionholder" means an Employee who has been selected for participation
in the Plan as described in Rule 2 and granted an Option (or the personal
representatives of any such Employee or individual):
"Participating Company" means the Company and any Subsidiary and
Associated Company designated by the Committee as a Participating Company;
"Plan" means "The Lloyds TSB Group plc Share Plan 2003" in its present
form or as from time to time altered in accordance with these Rules;
"Reconstruction or Takeover" means any takeover, merger or reorganisation;
"Rules" means these Rules as amended from time to time;
"Share" means an ordinary share in the capital of the Company;
"Subsidiary" means a company which is a subsidiary of the Company within
the meaning of Section 736 of the Companies Act 1985:
"Trust" means the Lloyds TSB Group Employee Share Ownership Trust or any
other trust nominated by the Committee;
"Vesting Date" means in relation to an Option the date determined by the
Committee under Rule 2.2.2 and which in relation to the grant of an Option
to Mr Targett will be 31 December 2005.
2 Operation of the Plan
2.1 Time of operation
2.1.1 The Committee may decide at any time when Options may be granted
under the Plan. In respect of the grant of an Option to Mr Targett,
the Plan will be operated, subject to Rule 2.1.2 below, on the
first Business Day after Mr Targett becomes an Employee.
2.1.2 Options may not be granted under the Plan at a time precluded by
the Dealing Regulations.
2.2 Eligibility and operation
2.2.1 Any Employee may be selected by the Committee to be granted an
Option under the Plan.
2.2.2 When the Committee resolves to grant an Option to an Employee, it
will determine the Vesting Date and the Exercise Period applicable
to that Option and the number of Shares subject to the Option.
Note: The number of shares placed under an option to Mr Targett
will be GBP1,000,000 divided by the market value of a share, being
the middle market quotation of a share (as derived from the Daily
Official List of the London Stock Exchange) on the Business Day
immediately preceding the date of grant.
2.2.3 Unless and until the Company's shareholders approve the Plan,
participation in the Plan will be restricted to Mr Targett and will
only be operated once.
2.2.4 No payment to the Company will be required on the grant of an
Option.
2.2.5 A deed will be executed on the grant of an Option.
2.3 Notice
The Committee will notify an Optionholder of his selection for
participation in the Plan, the Vesting Date and Exercise Period and the
number of Shares placed under Option.
2.4 Disposal restrictions
Except for the transmission of an Option on the death of an Optionholder
to his personal representatives, neither an Option nor any rights in
respect of it may be transferred, assigned or otherwise disposed of by an
Optionholder to any other person.
3 Variations to Options, reconstructions and takeovers
3.1 Variations of share capital
In the event of any variation in the equity share capital of the Company,
including a variation in consequence of a capitalisation or rights issue,
sub-division, consolidation or reduction of share capital, the number
and/or nominal amount of Shares under Option may be adjusted in such
manner as the Committee, acting reasonably, considers appropriate
(including retrospective adjustments).
3.2 Reconstructions, takeovers and demergers
3.2.1 If there is a Reconstruction or Takeover of the Company or a
demerger, the Committee, acting reasonably, may make such
arrangements as it considers necessary including determining that
an Option will become exercisable either immediately or at a date
specified by the Committee and for such period as the Committee may
reasonably determine.
3.2.2 In the event of a Reconstruction or Takeover involving the exchange
of Shares for shares in another company or in more than one
company, or in the case of a demerger where holders of Shares
become entitled to shares in another company, the Committee, acting
reasonably, may determine that the Option should be adjusted
(including retrospective adjustments) or replaced by an option over
the appropriate number of shares in that other company or
companies.
3.3 The Committee
For the purpose of dealing with Options under Rule 3.2 the Committee wilI
comprise the members of the Committee in office immediately before the
reconstruction, takeover or demerger, but excluding any executive
directors.
3.4 General
In making any adjustment or arrangement under Rules 3.1 or 3.2 the
Committee will so far as is practicable ensure that the Optionholder is
not prejudiced as a result of the event giving rise to the adjustment or
arrangement.
3.5 Notice
The Committee will notify Optionholders of any action taken under this
Rule 3.
4 Exercise and lapse -general rules
4.1 Exercise - general rule
Except as set out in the rest of this Rule 4 or where the Committee has
determined to permit exercise under Rule 3.2, an Optionhorder's Option
will only be exercisable
4.1.1 during the Exercise Period; and
4.1.2 if the Optionholder remains an Employee from the date he is granted
the Option under rule 2.2 until and including the Vesting Date; and
4.1.3 provided he has not given notice of resignation to his employer on
or before the Vesting Date (except where he has given notice of
resignation in circumstances in which he is entitled to terminate
his contract of employment without notice by reason of his
employer's conduct, including in the case of Mr Targett termination
in accordance with clause 8.11 of his contract of employment dated
5 February 2003).
4.2 Lapse
An Option will lapse on the earliest of any of the following:
4.2.1 on the date the Optionholder ceases to be an Employee on or before
the Vesting Date for any of the reasons specified in Rule 4.3.2:
4.2.2 if the Optionholder gives notice of resignation to his employer on
or before the Vesting Date (except where he gives notice in
circumstances in which he was entitled to terminate his contract of
employment without notice by reason of his employer's conduct,
including in the case of Mr Targett termination in accordance with
clause 8.11 of his contract of employment dated 5 February 2003),
on the date on which he gives such notice;
4.2.3 if the Optionholder ceases to be an Employee on or before the
Vesting Date for any reason other than those specified in Rule
43.2, the end of the period of 6 months after the date on which the
Option first becomes exercisable under Rule 43.1 or in the case of
death 12 months from the date of death;
4.2.4 if the Optionholder ceases to be an Employee after the Vesting
Date, the end of the period of 6 months after the Option holder
ceases to be an Employee;
4.2.5 any date specified by the Committee for lapse of Options under Rule
3.2;
4.2.6 the end of the Exercise Period; and
4.2.7 in the case of an Option granted to Mr Targett, if he is in breach
of the warranty in clause 5.3 of his contract of employment dated 5
February 2003, on the date the Company becomes aware of such
breach.
4.3 Leaving employment
4.3.1 General rules
If an Option holder ceases to be an Employee on or before the
Vesting Date for any reason other than those specified in Rule
4.3.2, his Option will become exercisable for the period of 6
months (or in the case of death, for the period of 12 months by his
Personal Representative) from the date of cessation of employment.
4.3.2 Exceptions
If the Optionholder ceases to be an Employee on or before the
Vesting Date for any of the reasons specified in this Rule 4.3.2,
his Option will Lapse on the date of cessation of employment:
(i) cessation of employment by way of resignation (unless he
resigned in circumstances in which he was entitled to
terminate his contract of employment without notice by
reason of his employer's conduct, including in the case of
Mr Targett termination in accordance with clause 8.11 of
his contract of employment dated 5 February 2003);
(ii) in the case of an Option granted to Mr Targett, termination
of his employment by his employer in accordance with clause
8.1 of his contract of employment dated 5 February 2003.
4.4 Meaning of ceasing to be an Employee
For the purposes of this Rule 4 an Optionholder will not be treated as
ceasing to be an Employee if on that date he is or becomes employed by or
is an executive director of another Group Company.
4.5 Priority
In the event of any conflict between any of the provisions of this Rule 4,
the provision which results in the shortest exercise period and/or the
earliest lapsing of the Option will prevail.
5 Acquiring Shares
The Company may make such arrangements as it considers appropriate in
respect of its obligations to provide Shares on exercise of an Option. Any
Participating Company may provide money to the trustee of the Trust or any
other person to enable them or him to acquire Shares to be held for the
purposes of the Plan, or enter into any guarantee or indemnity for those
purposes, to the extent permitted by Section 153 of the Companies Act
1985.
6 Withholding
The Company, any Group Company and/or the trustee of the Trust may, at any
time, withhold any amounts and make such arrangements (including sale of
any Shares on behalf of an Optionholder) as are necessary or desirable to
meet any liability to taxation, social security contributions or other
appropriate levies in respect of Options.
7 Exercise procedure
7.1 Exercise
An Option is only validly exercised if exercised in accordance with this
Rule 7.
7.2 Time and manner of exercise
To exercise an Option, the Optionholder must deliver to the Company or
other duly appointed person:
7.2.1 the deed identifying the number of Shares over which the Option is
being exercised and the sum of GBP1 to exercise the Option;
7.2.2 a notice in the prescribed form; and
7.2.3 if the Committee so requires, a sum equal to a reasonable estimate
made by the Company of any income tax or Employees National
Insurance Contributions payable by any Group Company on the
exercise of the Option or on the gain made on eventual sale of the
Shares acquired under it.
The Optionholder will disclose to the Company, in a form satisfactory to
it, any details necessary to calculate correctly any tax or Employees
National Insurance Contributions liability in respect of his Option and,
failing that, any Group Company may withhold tax and Employees National
Insurance Contributions at the maximum level.
7.3 Date of exercise
The date of valid exercise of an Option is the date of receipt of the
documents and payment referred to in Rule 7.2.
However, if the exercise of an Option is precluded, or the Company
Secretary reasonably believes it is precluded, by any Dealing Regulation,
the date of exercise will be the first Business Day after the day when the
Optionholder is permitted, or the Company Secretary determines the
Optionholder is permitted, to exercise or, if earlier and subject to the
giving of any clearance required under any Dealing Regulation, two
Business Days before the Exercise Period expires provided that the Option
may not in any circumstances be exercised after the end of the Exercise
Period.
7.4 Transfer of Shares
Subject to Rules 7.1 to 7.3, the Company will procure the transfer of the
Shares to an Optionholder (or as he may direct) within 30 days of the date
on which the Option is validly exercised in accordance with Rule 7.3.
8 General
8.1 Reimbursement
The Company may require each Participating Company to reimburse the
Company for any costs incurred in connection with the Options made to
Optionholders employed by that Participating Company.
8.2 Rights
Optionholders will be entitled to all rights attaching to the Shares by
reference to a record date on or after the date of transfer. They will not
be entitled to rights before that date.
8.3 Consents
All transfers of Shares will be subject to any necessary consents under
any relevant enactments or regulations for the time being in force in the
United Kingdom or elsewhere, and it will be the individual's
responsibility to comply with any requirements to be fulfilled in order to
obtain or obviate the necessity for any such consent.
8.4 Articles of Association
Any Shares acquired on the exercise of Options will be subject to the
Articles of Association of the Company from time to time in force.
8.5 Notices
Any notice or other document required to be given to an Optionholder under
or in connection with the Plan may be delivered or sent by post to him at
his home address according to the records of his employing company or such
other address as may appear to the Company to be appropriate or sent by
e-mail (or other electronic means) to any address which according to the
records of his employing company is used by him (or such other e-mail or
electronic address as he may from time to time specify).
Any notice or other document required to be given to the Company under or
in connection with the Plan may be delivered or sent by post to it at its
registered office (or such other place or places as the Committee may from
time to time determine and notify to Optionholders) or if the Directors
allow and subject to such conditions as they may specify, sent by e-mail
(or other electronic means) to the e-mail (or electronic) address for the
time being notified by the Company.
Notices sent by post will be deemed to have been given on the date of
receipt where the notice is given by the Optionholder, and on the second
Business Day following the date of posting where given by the Company.
Notices sent by e-mail (or other electronic means), in the absence of
evidence to the contrary, will be deemed to have been received on the
first day after sending.
8.6 Costs
The costs of introducing and administering the Plan will be borne by the
Company.
8.7 Limitation of liability
Nothing in this Plan will form part of a persons contract of employment.
The rights and obligations of a person under the terms and conditions of
his employment will not be affected by his participation in the Plan.
No person will have any right to compensation or damages or any other sum
or benefit in respect of his ceasing to participate, or ceasing to be
eligible to participate, in the Plan or in respect of any loss or
reduction of any rights or expectation under the Plan in any circumstances
and participation in the Plan is permitted only on the basis that all or
any such right as might otherwise arise is excluded and waived.
Nothing in this Plan will confer any benefit on a person who is not an
Optionholder or an Employee and no such third party will have any rights
under the Contracts (Rights of Third Parties) Act 1999 to enforce any term
of this Plan but this does not affect any right or remedy of a third party
which exists or is available apart from that Act.
9 Amendments and termination
9.1 Employees' share scheme
No amendment or operation of the Plan will be effective to the extent that
the Plan would cease to be an "employees' share scheme" as defined in
Section 743 of the Companies Act 1985.
9.2 Notice
As soon as reasonably practicable after making any alteration or addition,
the Committee will give written notice to any Option holder affected by
the alteration or addition.
9.3 Termination of the Plan
The Committee may terminate the Plan at any time, and it will terminate on
31 December 2010. The termination of the Plan will not affect existing
Options.
10 Governing law
English law governs the Plan and its construction and administration. Any
Group Company and all Optionholders will submit to the jurisdiction of the
English Courts in relation to any matter arising in connection with the
Plan.
Exhibit 4(b)(vii)
PERSONAL
Mr. M.A. van den Bergh
7 Albury Road
Burwood Park
Walton on Thames
Surrey KT12 5DY
28th July, 2000
LLOYDS TSB GROUP plc and LLOYDS TSB BANK plc
I am delighted that the directors have confirmed your appointment to the board
as Deputy Chairman from 1st October, 2000 and Chairman from 18th April, 2001.
All directors of the company also serve on the Lloyds TSB Bank plc board. You
will, therefore, be appointed to the same positions of the bank. The two boards
meet simultaneously.
I understand that you already have a copy of our note on the role of the
chairman, but I enclose another, for ease of reference.
Your remuneration as Deputy Chairman will be GBP250,000 per annum and you will
have the following benefits:
* membership of the group's medical plan; ) In that regard, we
* life cover equivalent to four times remuneration; ) shall provide
) details in due course.
* private use of a motor car. As you know, a Mercedes has been ordered for
delivery to you around the end of August; and
* participation in the group's profit sharing and sharesave arrangements.
Executive directors' holiday entitlement is 30 days a year and it would be
appropriate for that to apply to you as well.
I enclose a schedule and attachments relating to your appointment and should be
grateful if you would kindly complete and return the various items. I am sorry
about the formalities.
You mentioned that you intend to purchase some Lloyds TSB Group shares before
1st October. It would be most helpful if you were to let me have details of the
transaction when it has taken place.
A.J. Michie
Secretary
ROLE OF THE CHAIRMAN
1. To chair meetings of the shareholders, board and the chairman's
committee and to ensure that the meetings and agenda are appropriate.
2. To represent the board and to be its spokesman, internally and
externally, and, in conjunction with the Group Chief Executive, to develop
the group's public relations policy.
3. To be available to the Group Chief Executive, directors and chairmen of
boards of subsidiary and associated companies and to senior executives of
the group for consultation and guidance.
4. To be available to the auditors and the heads of internal audit and
compliance.
5. To ensure that there are satisfactory arrangements for the succession
planning relating to the posts of Chairman and Group Chief Executive.
6. To ensure that the board and, through the Group Chief Executive, the
group conform to the highest standards.
July, 2002
12 February, 2002
Mr. M. van den Bergh,
Chairman,
Lombard Street.
PERSONAL
Dear Maarten,
I am pleased to advise you of a change to your current terms and conditions of
employment.
On your retirement from Lloyds TSB Group plc, the Group will calculate the
annual rate of pension which would be payable if:
- the group had set aside GBP50,000 per annum in respect of you from 1
Janaury 2002 until the date of your retirement with an additional
proportionate amount for incomplete years of service and
- on your retirement, the Group had used this amount together with interest
to purchase an annual pension for you, together with an annual pension of
2/3 of your pension for your spouse payable on your death, on a basis
determined by the Group after obtaining actuarial advice.
The group will provide you with an annual pension equal to the amount so
calculated. The pension will be paid monthly by Lloyds TSB Bank plc. You will
be responsible for the payment of any income tax due when in receipt of the
pension. You will be advised each year of the accrued pension that will be
provided on your behalf. The amount will be determined by the Actuary and once
advised is guaranteed. This advice will be provided to you at the end of each
year.
The Remuneration Committee agreed these terms on the understanding you would
not participate in the flexible benefits scheme, when introduced in January
2003, or the Share Investment Plan which will also operate in 2003.
Please will you confirm your acceptance of these terms by signing and returning
the attached copy of this letter.
Yours sincerely,
N.J. MITCHINSON
Director of Group Human Resources
PERSONAL
Mr. M.A. van den Bergh
Chairman
30th December, 2002
I am pleased to notify you that the remuneration committee of the board has
agreed that your salary should be increased from GBP400,000 to GBP422,500 per
annum from 1st January, 2003.
Your pension benefit remains unchanged.
A.J. Michie
Secretary
b.c.c. Mr. N.J. Mitchinson, Director of Group Human Resources
Mr. T.M.D. Wilson, Compensation & Benefits Director
Norman,
I should be grateful if you would kindly arrange payment, as usual,
and let me know when it has been done.
Exhibit 4(b)(viii)
PERSONAL
Mr. D.P. Pritchard
Lloyds TSB Group plc
25 Gresham Street
London
EC2V 7HN
7th April 2003
DEPUTY CHAIRMAN
As you know, I am delighted that the directors have confirmed your appointment
as Deputy Chairman from 16th April 2003.
Your remuneration will be GBP233,520 per annum and your holiday entitlement and
eligibility to participate in the flexible benefit scheme, share incentive
plan, share save scheme and car scheme will remain on the same terms as for a
group executive director.
You should expect to devote three days a week to the job, although there is
flexibility on how this time is put together. You would generally be available
to advise and help represent me at home and abroad and attend the meetings of
the chairman's committee and the board. A more detailed note about the role of
the Deputy Chairman is attached.
There will be a small portfolio of subsidiary company directorships, which you
and I should agree upon from time to time. We are also arranging for you to be
invited to attend meetings of the audit and nomination committees of the board.
You may be familiar with our practice of avoiding lengthy contracts of service
and so the provisions of the employer's staff manual, "people, policies and
practice", will continue to apply to you to the extent that they are not
inconsistent with this letter.
Your appointment as a director and Deputy Chairman is subject to the
termination provisions of the articles of association and the Companies Act,
without payment of compensation. However, we need informally to have an
understanding on the likely duration, which, I suggest, should be for an
initial term of two years.
I am looking forward to continuing to work with you, particularly in your new
capacity.
With kind regards
Maarten van den Bergh
ROLE OF THE DEPUTY CHAIRMAN
A. Purpose of the role
To support the Chairman, representing the board and acting as a
spokesman, internally and externally.
In the Chairman's absence, chairing appropriate committees, ensuring that
the meetings and agendas are appropriate.
To be available to the Group Chief Executive, directors and senior
executives and chairmen of boards of subsidiary and associated companies
for consultation and advice.
B. Key accountabilities
1. To deputise for the Chairman in the discharging of his duties (as
described in the attached note "role of the Chairman").
2. To advise and help represent the Chairman at home and overseas and
attend the meetings of the board, the chairman's committee and any
other committees as requested by the Chairman or the board.
3. To be the Group's point of contact with the Lloyds TSB charitable
foundations and their chairmen.
4. To be the Chairman's point of contact with governmental and other
institutions in the UK and the European Union and, where
appropriate and in conjunction with the executive, to represent
the group's interests and point of view to official enquiries and
review bodies.
5. To hold a number of subsidiary chairmanships or directorships as
requested by the Chairman of the board.
6. To administer the Chairman's office, involving:
* monitoring complaint letters addressed to the Chairman,
identifying issues arising therefrom and reviewing copies of
the ultimate response sent to the customer by the executive.
* preparation, agreement and monitoring of the budget for the
office.
* managing staff and pay review processes.
C. Profile (and expansion on A and B above)
The practice of the Deputy Chairman being a retired executive materially
enhances the incumbent's ability to brief the Chairman on business issues
and provide (constructive) challenge at chairman's committee and board
meetings.
In order to maintain an appropriate degree of awareness, the Deputy
Chairman may wish to receive 'off the record' briefings from time to
time, from senior executives including executive directors, going beyond
'being available for consultation and advice'.
The Deputy Chairman would act as host, in turn with the Chairman, at
dinners around the country with selected group executives, to contribute
a two-way flow of information with front line management, providing a
"bottom up" feel for business issues, particularly in the branch network.
The Deputy Chairman would host corporate banking lunches, where
attendance is appreciated by valuable business customers and underlines
the importance the group attaches to their relationship.
Chairmanship/board membership of major subsidiaries: an important channel
to identify the "flavour" of the business and the mood of executive
management, as well as reflecting the group view to outside non-executive
directors of these subsidiaries.
Chairmanship/board memberships of other subsidiary companies without
external directors, ensuring a non-executive awareness of transactions
routed through these companies for tax or regulatory reasons.
Operationally, this should facilitate formal approval of resolutions
requiring to be passed by these companies.
* * * * * * * * * * *
To summarise, the key role of the Deputy Chairman, drawing on his
professional experience, is to be aware of the overall "mood" of the
company and its "behavioural drivers". While all non-executive directors,
the audit committee and auditors have a role to play in this respect,
their ability to look from outside is limited as compared with the
continuous presence of a Deputy Chairman with practical knowledge of the
company and its business.
11th November, 2002
cg:role dep chairman
LLOYDS TSB GROUP plc
ROLE OF THE CHAIRMAN
1. To chair meetings of the shareholders, board and the chairman's
committee and to ensure that the meetings and agenda are appropriate.
2. To represent the board and to be its spokesman, internally and
externally, and, in conjunction with the Group Chief Executive, to
develop the group's public relations policy.
3. To be available to the Group Chief Executive, directors and chairmen of
boards of subsidiary and associated companies and to senior executives of
the group for consultation and guidance.
4. To be available to the auditors and the heads of internal audit and
compliance.
5. To ensure that there are satisfactory arrangements for the succession
planning relating to the posts of Chairman and Group Chief Executive.
6. To ensure that the board and, through the Group Chief Executive, the
group conform to the highest standards.
Confirmed by the board in October 2002
Exhibit 4(b)(ix)
THIS EXECUTIVE SERVICE AGREEMENT is made the day of 30th day of May 2003
BETWEEN
(1) Lloyds TSB Bank plc of 25 Gresham Street, London, EC2V 7HN ("the
Employer"); and
(2) Peter George Edwin Ayliffe of 16 Besbury Close, Dorridge, SoIihuII,
West Midlands B93 8NT ("the Executive").
IT IS AGREED as follows:-
1 Preconditions
1.1 The Executive's employment will be subject to the Executive having been
approved as an "Approved Person" by the Financial Services Authority
under the Financial Services and Markets Act 2000 in respect of the
appointment contemplated by this Agreement ("FSMA Approval").
2 Appointment, Directorship and Place of Work
2.1 The Employer shall employ the Executive as Group Executive Director, UK
Retail Banking or in such other capacity in the business of the Employer
or any Group Company as the Employer may from time to time reasonably
require.
2.2 The Executive's normal place of work shall be 25 Gresham Street, London
EC2V 7HN provided that the Employer may require the Executive to carry
out his duties at such other place of business of any Group Company
within or outside the United Kingdom as the Employer may specify.
3 Remuneration and Other Benefits
3.1 Remuneration
(a) The Executive's salary shall be GBP375,000 per annum or such
higher salary as may be notified to him from time to time.
(b) The Executive agrees to waive payment of any director's fees
payable in respect of any directorship held by him in any member
of the Group.
(c) The Executive may also receive the following remuneration at the
Employer's discretion:
(i) payment of cash or shares under the Employer's flexible
benefits and share plan (Flavours) subject to and in
accordance with the terms thereof from time to time;
(ii) a personal bonus in respect of each financial year of the
Employer on such terms as may be notified to the
Executive by the Employer.
The Executive acknowledges that save for specific awards or entitlements
notified to the Executive individually or by a general notice to staff
bonuses are not contractual entitlements, and may therefore be reduced,
varied or withdrawn by the Employer at any time at its discretion.
(d) The Executive may participate in any all-employee Save as you
Earn employee share schemes offered by the Employer, and also, at
the discretion of the Employer, in any executive share option
schemes established by the Employer, subject in each case to
being eligible to participate under their rules and in each case
his participation will be in accordance with the rules of the
relevant scheme from time to time. The Executive acknowledges
that on termination of his employment he will have no right of
action, otherwise than pursuant to the express rules of such
schemes, against the Employer or any member of the Group in any
way arising from his no longer being able to participate in such
schemes.
3.2 Motor Car
The Executive will be entitled to a company car subject to and in
accordance with the rules of the Employers motor car scheme from time to
time, or in the alternative, a cash allowance (currently GBP1,000 per
month) payable each month. Upon termination of his employment, the
Executive shall return any car provided by the Employer.
3.3 Private Medical insurance
If the Executive complies with any eligibility requirements or other
conditions set by the Employer and any insurer appointed by the Employer,
the Executive and his wife and children (if eligible) may participate in
the Employer's private health insurance arrangements subject to the terms
of those arrangements from time to time.
3.4 Deductions
For the avoidance of doubt, any and all payments made to the Executive
pursuant to Clauses 3.1, 3.2 or 3.3 shall be subject to such deductions
for tax and National Insurance as the Employer is required to make by law
or the tax and/or National insurance authorities.
4 Commencement and Duration
4.1 Subject to Clause 1 above, the Executive's employment under this
Agreement shall commence on 1 June 2003 (the "Commencement Date")
and shall continue indefinitely until terminated:
(a) by not less than 12 months' notice given by the Employer to the
Executive; or
(b) by not less than 6 months' notice given by the Executive to the
Employer; or
(c) by retirement under Clause 4.2 hereof; or
(d) under Clause 8 hereof.
4.2 The Executive's retirement age shall be sixty years, and his employment
shall terminate at the end of the month in which he attains that age
automatically and without the requirement for any notice to be given.
4.3 The date on which any continuous period of employment began with the
Employer or a previous employer which counts as part of the Executive's
continuous period of employment with the Employer for the purposes of
the law relating to redundancy and unfair dismissal and for the purposes
of commencement of pensionable service, is 1 April 1985.
4.4 The Executive shall, at any time when asked to do so by the Employer,
including but not limited to, on the termination of this Agreement or on
the "garden leave" provisions of Clause 7.7 hereof operating, resign
immediately on request from the Employer from all offices as a director
of any member of the Group and from alt other appointments or offices
which he holds as nominee or representative of any member of the Group.
As security for such obligation the Executive irrevocably appoints the
Employer to be his attorney to sign any documents or do any things
necessary or requisite to effect such resignation(s). The termination of
any appointment, directorship, or other office, held by the Executive
will not terminate the Executive's employment or amount to a breach of
this Agreement by the Employer.
5 Duties of and Warranties by the Executive
5.1 During the period of this Agreement the Executive will not do anything
which could cause him to be disqualified from continuing to act as a
director of any member of the Group or lose FSMA Approval.
5.2 During the period of this Agreement, the Executive shall:
(a) perform his duties faithfully, diligently and with due care, and
use his best endeavours to promote the interests of the Group;
(b) devote the whole of his time, attention and skill to his duties
during normal office hours and during such other times as may
reasonably be required for the effective performance of his
duties under this Agreement;
(c) accept any offices or directorships as reasonably required by the
Board;
(d) comply with all rules and regulations issued by the Employer
copies of which shall be provided to the Executive and which may
not be inconsistent with the express terms of this Agreement;
(e) obey the directions of the Board;
(f) not without the prior written consent of the Group Chief
Executive of Lloyds TSB Group plc take up any remunerated
external appointments, not be directly or indirectly engaged in
the conduct of any trade, profession or other occupation (whether
as an employee, consultant, agent or otherwise) of similar nature
to or in competition with that carried on by the Employer or any
other Group Company for whom the Executive performed services;
(g) keep the Group Chief Executive of Lloyds TSB Group plc promptly
informed of the conduct of his duties, his plans for the future
performance of his duties and of any conflict of interest to
which he is or may become subject, and comply with any policy
directions or reasonable other directions given to him by the
said Group Chief Executive;
(h) comply with the Model Code appended to Chapter 16 of the Listing
Rules of the United Kingdom Listing Authority and all other codes
of conduct from time to time adopted by, or applicable to, any
relevant Group Company;
(i) comply with all applicable rules, regulations and codes imposed
or recommended by any industry or regulatory body relevant to
that part of the business of any Group Company with which the
Executive is involved;
(j) save with the prior written agreement of the Employer, neither
participate nor have a financial interest in any business which
competes with, or is a material customer or supplier to, any part
of the Group Provided that the Executive may hold up to one (1) %
of the equity or share capital of any such business;
(k) other than reasonable corporate hospitality and seasonal or
occasional gifts of limited value, not directly or indirectly
receive any benefit from any person having business transactions
with any member of the Group.
6 Pension Arrangements
6.1 The Executive shall be entitled to be a member of the Lloyds TSB Group
Pension Scheme No.2 (the "Scheme"). The Employer shall be entitled at any
time to terminate the Scheme or the Executive's membership of it subject
to providing him with the benefit of a pension scheme ("the New Scheme")
the benefits of which taken as a whole shall be no less favourable than
the benefits provided to the Executive under the Scheme and to ensuring
that the Executive is fully credited in the New Scheme for his
pensionable service in the Scheme as if such pensionable service had been
under the New Scheme.
6.2 In the event of the Executive ceasing to be employed by the Employer by
reason of redundancy (as defined by Section 139 of the Employment Rights
Act 1996 or any reenactment or amendment thereof for the time being in
force) and being entitled to a redundancy payment under such legislation,
then, provided that he is a member of the Scheme or any New Scheme and at
the time he ceased to be employed shall be aged SO or more, the Employer
shall procure (by making such payments to the trustees of the Scheme or
any New Scheme as they may require or otherwise) that an immediate
pension shall be payable to the Executive from the date of cessation of
employment (based on his final pensionable salary and pensionable service
at the time of cessation) but without any reduction for commencement of
payment before the age of 60, but limited always to the highest amount
which will not prejudice continued approval of the Scheme or New Scheme
by the Commissioners of Inland Revenue as an exempt approved scheme for
the purposes of the Income Tax (Earnings and Pensions) Act 2003 (or any
re-enactment or amendment thereof for the time being in force).
6.3 A Contracting-Out Certificate pursuant to the provisions of the
Pensions Act 1995 is in force in respect of the Executive's employment.
7 Miscellaneous Conditions of Employment
7.1 The provisions of the Employer's Staff Manual (access to which has been
and will remain available to the Executive) shall not apply to the
Executive's employment with the Employer or form part of this Agreement
except for the following provisions:
Paragraph 1.16 Mobility (subject to Clause 2.2 hereof)
Paragraph 1.18 Personal Dealing
Paragraph 1.22 Sick Pay
Paragraph 1.23 Sickness absence reporting
Paragraph 1.24 Smoking Policy
Paragraph 2.3 Expenses
Paragraph 2.8 Pay periods
Paragraph 2.9 Relocation
The whole of Section 3 (Staff Benefits) except for Paragraph 3.13
(Pension Scheme)
The whole of Section 5 (Attendance and Leave) except for Paragraph 5,1
(Career Break Scheme).
The whole of Section 6 (Miscellaneous).
If there is any conflict between this Agreement and such provisions, then
this Agreement shall prevail.
7.2 If employment of the Executive under this Agreement is terminated by
reason of the liquidation of the Employer for the purpose of
reconstruction or amalgamation and the Executive is offered employment
with any concern or undertaking resulting from the reconstruction or
amalgamation on terms and conditions no less favourable overall than the
terms of this Agreement, then the Executive shall have no claim against
the Employer in respect of the termination of his employment under this
Agreement (whether or not the notice required by Clause 4 hereof shall
have been given).
7.3 Any disciplinary matter affecting the Executive will be dealt with by
the Group Chief Executive of Lloyds TSB Group plc.
7.4 If the Executive has any grievance relating to his employment he may
refer such grievance in writing to the Group Chief Executive of Lloyds
TSB Group plc. If the Executive is dissatisfied with the Group Chief
Executive's treatment of his grievance, he may refer the matter to the
Chairman of Lloyds TSB Group plc.
7.5 There are no collective agreements affecting the employment of the
Executive.
7.6 The Executive shall be entitled to all English Public and Bank Holidays
and 30 working days holiday in each year, with pro rata entitlement
during the year in which the Executive's employment is treated as
commencing and during the year in which it is terminated. Holidays shall
be taken at such reasonable times as the Group Chief Executive of Lloyds
TSB Group plc shall approve.
7.7 (i) At any time after notice to terminate the employment is given
by either party under Clause 4.1 or Clause 8.2 hereof, or if the
Executive resigns without giving due notice and the Employer does
not accept his resignation, the Employer may require the
Executive to comply with Clauses 7.7(ii) to (iv) hereof for a
maximum period of six months (the "Garden Leave Period").
(ii) During the Garden Leave Period the Employer may cease to provide
the Executive with work, during which time the Executive shall
hold himself available to deal with requests for information and
advice on matters relating to this work but he shall not be
employed or otherwise engaged in the conduct of any activity on
behalf of any other person and he shall not attend the premises
of any Group Company unless directed to do so by the Group Chief
Executive of Lloyds TSB Group plc and will not unless requested
by the Board:
(a) contact or have any communication with any customer or
client of the Employer or any other Group Company in
relation to the business of the Employer or any other
Group Company; or
(b) contact or have any communication with any employee,
officer, director, agent or consultant of the Employer or
any other Group Company in relation to the business of
the Employer or any other Group Company; or
(c) remain or become involved in any aspect of the business
of the Employer or any other Group Company except as
required by such companies.
The Executive acknowledges that the right of the Employer to
cease to provide him with work in such circumstances is necessary
for the protection of the legitimate business interests of the
Employer.
(iii) During the Garden Leave Period the Executive shall remain bound
by the provisions of Clause 5.2 hereof (other than Clause 5.2 (b)
hereof if the Employer so requires).
(iv) During the Garden Leave Period the Employer may require the
Executive to resign immediately from any directorship which he
holds in the Group Companies, unless he is required to perform
duties to which any such directorship relates in which case he
may retain such directorships while those duties are ongoing. The
Executive hereby irrevocably appoints the Employer to be his
attorney to execute any instrument and do anything in his name
and on his behalf to effect his resignation if he fails to do so
in accordance with this Clause 7.7 (iv).
(v) The Executive agrees and acknowledges that during any Garden
Leave Period the Employer may appoint another employee to carry
out duties in substitution for the Executive.
7.8 Without prejudice to the Executive's rights to remuneration and other
benefits hereunder, the Employer shall have the right at any time to
require the Executive not to attend at any place of work or otherwise to
suspend the Executive from the performance of any duties under this
Agreement. During the period of such suspension the Employer may assign
his duties, titles or powers to another. Further, during such period of
suspension the Employer shall be under no obligation to vest in or assign
to the Executive any powers or duties or to provide any work to the
Executive.
8 Termination and Severance
8.1 The Employer may terminate the Executive's employment at any time
forthwith by written notice to the Executive (and without any
requirements of prior notice) if the Executive shall:-
(a) commit any material breach, or continue (after written warning)
to commit any breach, of his obligations under this Agreement;
(b) be guilty of any material misconduct or material neglect in the
discharge of his duties;
(c) have a bankruptcy order made against him or make any arrangement
or composition with his creditors or have an interim order made
against him pursuant to the Insolvency Act 1986 (or any
re-enactment or amendment thereof for the time being in force);
(d) be convicted of any criminal offence which in the reasonable
opinion of the Employer affects his position as an employee under
this Agreement;
(e) bring the name or reputation of the Employer, or any Group
Company in whose business he shall have been involved, into
material disrepute;
(f) be or become prohibited by law from becoming or remaining a
director:
(g) be disqualified or disbarred from membership of or be found to
have committed any serious disciplinary offence by, or be found
not to be a fit and proper person by, any professional or
regulatory body governing the conduct by the Executive of his
duties or the business of any Group Company;
(h) ceases to have FSMA Approval.
8.2 If the Executive (owing to sickness1 injury or otherwise) does not
perform his duties hereunder for a period of at least 130 days or at
least 130 days in aggregate in any period of twelve months the Employer
shall (without prejudice to any provision hereof) be entitled by giving
to the Executive not less than 3 months' notice (given at the expiry of
such period (or aggregate days of non performance) or at any time
thereafter while the Executive continues not to perform his duties
hereunder) to terminate his employment and without prejudice to the
protections provided to the Executive under all disability discrimination
laws applying to him.
8.3 Notwithstanding any other provision of this Agreement, the Employer shall
in determining the amount of any compensation payable to the Executive
for loss arising from a termination of the Executive's employment under
this Agreement in breach of this Agreement apply the same rule concerning
the duty of a person to mitigate his loss as applies to damages for
breach of contract recoverable under the common law of England and Wales
("duty to mitigate"). The Executive hereby acknowledges his duty to
mitigate.
9 Confidential and Other Information
9.1 Without prejudice to the common law duties which he owes to the
Employer the Executive agrees that he will not, except in the proper
performance of his duties, copy use or disclose to any person any of the
Employer's trade secrets or confidential information. This restriction
will continue to apply after the termination of the Employment without
limit in time but will not apply to trade secrets or confidential
information which become public other than through unauthorised
disclosure by the Executive. The Executive will use his best endeavours
to prevent the unauthorised copying use or disclosure of such
information.
For the purposes of this Agreement trade secrets and confidential
information include any information in whatever form (written, oral,
visual and electronic) concerning the confidential affairs of the
Employer.
9.2 In the course of his employment the Executive is likely to obtain trade
secrets and confidential information belonging or relating to other Group
Companies and other persons. He will treat such information as if it
falls within the terms of Clause 9.1 hereof and Clause 9.1 hereof will
apply with any necessary amendments to such information. If requested to
do so by the Employer the Executive will enter into an agreement with
other Group Companies and any other persons in the same terms as Clause
9.1 hereof with any amendments necessary to give effect to this
provision.
9.3 Nothing in this Agreement will prevent the Executive from making a
"protected disclosure" in accordance with the provisions of the
Employment Rights Act 1996.
10 Intellectual Property Rights
10.1 The Executive shall promptly disclose to the Employer all copyright
works originated, conceived, written or made by him alone or with others
during the course of his employment (except only those works originated,
conceived, written or made by him wholly outside his normal working hours
and wholly unconnected with his appointment) and shall until such rights
shall be fully and absolutely vested in the Employer (or its nominee)
hold them in trust for the Employer (or its nominee).
10.2 The Executive assigns to the Employer (or is nominee) by way of future
assignment all copyright and other proprietary rights (if any) for the
full terms thereof throughout the world in respect of all works
originated, conceived, written or made by the Executive during the course
of his employment (except only those works originated, conceived, written
or made by the Executive wholly outside his normal working hours and
wholly unconnected with his duties under this Agreement).
10.3 It is agreed that for the purpose of Section 2(1 B) of the Registered
Designs Act 1949 and the Copyrights Designs and Patents Act 1988 all
designs created by the Executive during the course of his employment
(except only those which are created by the Executive wholly outside his
normal working hours and wholly unconnected with his duties under this
Agreement) shall be treated as being created by the Executive in the
course of his employment and accordingly the Employer shall for the
purpose of that Act be the original proprietor of any such designs.
10.4 The Executive will promptly inform the Employer if he makes or is
involved In making an Invention during the Employment and will give the
Employer sufficient details of it to allow the Employer to assess the
Invention and to decide whether the Invention belongs to the Employer.
The Employer will treat any Invention which does not belong to it as
confidential.
"invention" means any invention (whether patentable or not within the
meaning of the Patent Act 1977 or other applicable legislation in any
other country) relating to or capable of being used in the business of
the Employer or any other Group Company.
If an Invention belongs to the Employer, the Executive will act as a
trustee for the Employer (or its nominee) in relation to that Invention
and will, at the request and expense of the Employer, do everything
necessary to vest all right, title and interest in it in the Employer (or
its nominee) with full title guarantee and to secure full patent or other
appropriate protection anywhere in the world.
10.5 The Executive will at the request and expense of the Employer do all
things necessary or desirable to substantiate the rights of the Employer
under this Clause 10, and as security for such obligation irrevocably
appoints the Employer to be his attorney to sign or execute any such
instrument or do any thing as may be necessary or desirable to effect
such substantiation and the assignment referred to in Clause 10.2 hereof.
11 Restrictions after Termination of Employment
11.1 In this clause:
"Garden Leave Period" has the meaning given in Clause 7.7;
"Prohibited Area" means England, Northern Ireland, Scotland and Wales;
"Relevant Date" means the Termination Date or, if earlier, the date on
which the Executive commences any Garden Leave Period;
"Restricted Employee" means a band one employee working in the same
division as the Executive and with a Hay point score of 11000 or above:
"Senior Restricted Employee" means a band one employee with a Hay point
score of 1,500 or above;
"Termination Date" means the date on which the Executive's employment
terminates.
11.2 The Executive is likely to obtain trade secrets and confidential
information and personal knowledge of and influence over employees of the
Group during the course of his employment. To protect these interests of
the Employer, the Executive agrees with the Employer that he will be
bound by the following covenants:
11.2.1 during the period of 6 months commencing on the Relevant Date and
within the Prohibited Area he will not be employed in, or carry
on for his own account or for any other person, whether directly
or indirectly, (or be a director of any company engaged in) any
business which , by virtue of its location or otherwise, is or is
about to be in competition with any business of the Employer or
any other Group Company being carried on by such company at the
Relevant Date provided he was concerned or involved with that
business to a material extent at any time during the 12 months
prior to the Relevant Date;
11.2.2 during the period of 9 months commencing on the Relevant Date he
will not (either on his own behalf or for or with any other
person, whether directly or indirectly,) entice or try to entice
away from the Employer or any other Group Company any person who
was a Restricted Employee or a Senior Restricted Employee of the
Employer or such other company at the Relevant Date and who had
been a Restricted Employee or a Senior Restricted Employee at any
time during the six months prior to the Relevant Date and with
whom he had worked closely at any time during that period.
11.3 Each of the paragraphs contained in Clause 11.2 constitutes an
entirely separate and independent covenant. If any covenant is found to
be invalid this will not affect the validity or enforceability of any of
the other covenants.
11.4 Following the Termination Date, the Executive will not represent
himself as being in any way connected with the businesses of the Employer
or of any other Group Company (except to the extent agreed by such a
company).
11.5 Any benefit given or deemed to be given by the Executive to any Group
Company under the terms of Clause 11 is received and held on trust by the
Employer for the relevant Group Company. The Executive will enter into
appropriate restrictive covenants directly with other Group Companies if
asked to do so by the Employer.
12 Notices
Any notice under this Agreement shall be in writing and shall either be
given personally or be sent by prepaid first class post by the Employer
to the Executive at his address stated above or at his other last known
address, or by the Executive to the Employer at its address stated above
or its other last known address. Any notice sent by the Employer by post
shall be deemed to have been received two business days after the date of
posting.
13 Miscellaneous
13.1 This Agreement shall be in substitution for all existing contracts of
service or consultancy between the Employer or any Group Company and the
Executive, which (without prejudice to any accrued rights thereunder)
shall be treated as cancelled on the date the Executive's employment is
treated as commencing under this Agreement.
13.2 This Agreement comprises the whole agreement between the Employer and
the Executive relating to his employment hereunder and association with
the Group, to the exclusion of all other warranties, representations made
in good faith, undertakings and collateral contracts.
14 Contracts (Rights of Third Parties) Act 1999
No person other than the parties to this Agreement or any Group Company
shall have any right to enforce any term of this Agreement under the
Contracts (Rights of Third Parties) Act 1999.
15 Data Protection Act 1998
For the purposes of the Data Protection Act 1998 (the "Act') the
Executive gives his consent to the holding, processing and disclosure of
personal data (including sensitive data within the meaning of the Act)
provided by the Executive to the Employer for all purposes relating to
the performance o[~] this Agreement including, but not limited to:
- administering and maintaining personnel records;
- paying and reviewing salary and other remuneration and benefits;
- providing and administering benefits (including if relevant,
pension, life assurance, permanent health insurance and medical
insurance);
- undertaking performance appraisals and reviews;
- maintaining sickness and other absence records;
- taking decisions as to the Executive's fitness for work;
- providing references and information to future employers, and if
necessary, governmental and quasi-governmental bodies for social
security and other purposes, the Inland Revenue and the
Contributions Agency;
- providing information to future purchasers of the Employer or of
the business in which the Executive works; and
- transferring information concerning the Executive to a country or
territory outside the EEA.
The Executive acknowledges that during his employment he will have access
to and process, or authorise the processing of personal data and
sensitive personal data relating to employees, customers and other
individuals held and controlled by the Employer. The Executive agrees to
comply with the terms of the Act in relation to such data and to abide by
the Employer's data protection policy issued form time to time.
16 Interpretation
In this Agreement:-
16.1 where the context permits, references to the singular shall include
references to the plural and vice versa;
16.2 the Employer's Staff Manual shall mean the current manual of the
Employer entitled "People Policies and Practice", as may be amended or
replaced by the Employer from time to time at its discretion. Upon any
amendment or replacement, the references to the paragraphs and sections
of the now current Employer's Staff Manual in Clause 7.1 hereof shall be
construed so as to be references to the provisions of the amended or
replaced Employer's Staff Manual dealing with the same subject matter;
16.3 Clause headings are inserted for convenience only and shall not affect
the construction of this Agreement;
16.4 "Group Company" means any of Lloyds TSB Group plc and its subsidiaries
(as defined by Section 736 of the Companies Act 1985), and "Group" means
all of them;
16.5 "Board" means board of directors of the Employer or any duly
authorised committee of the same;
16.6 "Commencement Date" has the meaning given in Clause 4.1 hereof;
16.7 "FSMA Approval" has the meaning given in Clause 1 hereof.
17 Governing Law and Jurisdiction
This Agreement is governed by and will be interpreted in accordance with
the law of England and Wales. Each of the parties submits to the
exclusive jurisdiction of the English courts as regards any claim or
matter arising under this Agreement.
EXECUTED by the Executive and a representative of the Employer duly and fully
authorized by the Board of the Employer to enter into this Agreement on the
first date mentioned above.
EXECUTED as a DEED by the
Executive
in the presence of:
Witness's signature
Name
Address
Occupation
EXECUTED as a DEED on behalf of
the Employer:
Director/Secretary
Exhibit 8
List of principal subsidiaries Country of
registration/incorporation
Banco Lloyds TSB S.A. Brazil
Lloyds TSB Bank plc England
Cheltenham & Gloucester plc England
Lloyds TSB Commercial Finance Limited England
Lloyds TSB Leasing Limited England
Lloyds TSB Private Banking Limited England
The Agricultural Mortgage Corporation PLC England
The National Bank of New Zealand Limited New Zealand
Lloyds TSB Bank (Jersey) Limited Jersey
Lloyds TSB Scotland plc Scotland
Lloyds TSB General Insurance Limited England
Scottish Widows Investment Partnership England
Group Limited
Abbey Life Assurance Company Limited England
Lloyds TSB Insurance Services Limited England
Lloyds TSB Life Assurance Company Limited England
Lloyds TSB Asset Finance Division Limited England
Black Horse Limited England
Scottish Widows plc Scotland
Scottish Widows Annuities Limited Scotland
1st May, 2003
sjh/vb:list of subs
Exhibit 10.1
Lloyds TSB Group plc
25 Gresham Street
London EC2V 7HN
906 CERTIFICATION
23 June 2003
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen,
The certification set forth below is being submitted to the Securities and
Exchange Commission solely for the purpose of complying with Section 1350 of
Chapter 63 of Title 18 of the United States Code. This certification is not to
be deemed filed pursuant to the Securities Exchange Act of 1934 and does not
constitute a part of the Annual Report on Form 20-F (the "Report") accompanying
this letter.
J Eric Daniels, Group Chief Executive, and Philip R Hampton, Group Finance
Director, of Lloyds TSB Group plc, each certifies that, to the best of his
knowledge:
1. the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Lloyds
TSB Group plc.
By: /s/ J E Daniels
J Eric Daniels
Group Chief Executive
By: /s/ P R Hampton
Philip R Hampton
Group Finance Director
A signed original of this written statement required by Section 906 of the
Sarbanes-Oxley Act 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code), or other document authenticating, acknowledging,
or otherwise adopting the signatures that appear in typed form within the
electronic version of this written statement required by Section 906 of the
Sarbanes-Oxley Act 2002 (subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code), has been provided to Lloyds TSB Group plc and
will be retained by Lloyds TSB Group plc and furnished to the Securities and
Exchange Commission or its staff upon request.