2006 results - home - lloyds banking group plc€¦ · * excluding reverse repos +8% average...

2006 Results23 February 2007

Sir Victor BlankChairman

Chairman’s overview

• High quality, balanced set of businesses

• Increased trading momentum

• Good balance sheet growth

• Increased focus on non-lending products

• Higher income growth in UK Retail Banking

• Productivity programme extended

• Credit quality remains satisfactory

• Robust capital position


Helen WeirGroup Finance Director

Good underlying results*

Earnings per share 46.9p44.2p 6

Economic profit £1,692m£1,601m 6

* excluding volatility and the pension schemes related credit and, in 2005, profit on sale and closure of businesses, customer redress provisions and the strengthening of mortality reserves

Profit before tax £3,713m£3,450m 8

Post-tax return on equity 25.1%25.5%

20062005 % Change

Total dividend per share 34.2p34.2p

Total shareholder return 24.8%10.9%

2006 – continued progress

• Continuing to deliver good earnings progress…

…across each of our businesses

• Sustaining high returns…

…and driving growth

• Maintaining a robust capital position…

…while continuing to deliver returns to shareholders

AND

• Higher income growth in the second half

Underlying results – strong positive jaws*

Total income, after claims 10,69710,070 6

Operating expenses (5,429)(5,321) (2)

Profit before tax 3,7133,450 8

£m 20062005 % Change

Trading surplus 5,2684,749 11

Impairment (1,555)(1,299) (20)


Accelerating income growth in the second half*

Total income, after claims 5,5355,162 76

Operating expenses (2,819)(2,610) (3)(1)

Profit before tax 1,9611,752 88

£m 2006H22006H1 % Change% Change

Trading surplus 2,7162,552 1111

Impairment (755)(800) (19)(20)


Balanced trading momentum across each division*

Income

Costs

Impairment

Trading surplus

Profit before tax

5,263 4

(2,476) 2

(1,238) (16)

2,787 10

1,549 5

UKRB£m % Change

4,212 8

(2,264) (4)

(308) (64)

1,948 14

1,640 8

W&IB£m % Change

1,596 12

(646) (6)

-

950 15

950 15

I&I£m % Change£m

* excluding volatility and the pension schemes related credit and, in 2005, profit on sale and closure of businesses, customer redress provisions and the strengthening of mortality reserves. I&I excludes insurance grossing adjustments and the impact of capital repatriation

Good income growth*

Net interest income 5,6265,434 4

£m 20062005 % Change

Other income, net of claims 5,0564,631 9

10,69710,070 6

Insurance grossing adjustments 155

Total income, net of claims 10,68210,065 6

Other income 5,2564,828

Non-life insurance claims (200)(197)

* excluding volatility and profit on sale and closure of businesses. Also excludes the strengthening of reserves for mortality in 2005

Good asset and deposit growth

+6%

Average CustomerDeposits

2005 2006

£66.7bn £71.0bn

+17%

Average InterestEarning Assets*

2005 2006

£91.8bn

£107.2bn

* excluding reverse repos

+8%

Average CustomerDeposits

2005 2006

£56.6bn£61.0bn

+7%

Average InterestEarning Assets

2005 2006

£97.6bn£104.7bn

£19.4bn

£78.2bn

£19.7bn

£85.0bn

Mortgages Unsecured

UK Retail Banking Wholesale & International Banking

Net interest margin slightly lower*

* relating to the Group’s banking businesses, excluding volatility, Products and Markets and other

2005H1 2005H2 2006H1 2006H2

Funding (1)bp

Product (2)bp

Mix (8)bp

(11)bp

Year-on-year Margin Movement

3.11

3.00

3.16

3.073.03

2.97

(11)bp

UKRB: income growth driven by liabilities

Strong savings and bancassurance growth

Liability Driven£171 million

Asset Driven£(15) million

£5,057m

£89m

£5,263m

Savings &Investment

Growth

AVA andOther

Current Account Fees

LendingGrowth

20062005 Wealth Other(incl OtherInsurance)

£49m£50m£68m

£(83)m

£33m

LendingRelated

Insurance

I&I: components of growth*

* EEV basis, excluding volatility, other items and, in 2005, the strengthening of reserves for mortality

New businessprofit 346254 36

852727 17

£m 20062005 % Change

Existing business 339226 50

852689 24

Impact of capitalrepatriation -38

Expectedreturn 167209 (20)

IFA

Bancassurance

Other

New Business Sales (PVNBP)

+62%

+14%

£9,740m

2006

£7,842m

2005

+24%

£4,698m

£2,114m

£1,030m

£5,358m

£3,421m

£961m

Strong EEV new business profit growth

7,020 6Life and pensions 287 24+60bp4.1%

2,720 124OEICs 59 156+30bp2.2%

9,740 24Total 346 36+40bp3.6%

PVNBP£m % Change

Newbusiness

profit£m % Change

New businessmargin

2006

Change

I&I: drivers of strong margin growth

2005 Margin

Product Mix

Price/CostManagement

2006 Margin

Life & Pensions OEICs

• Higher leverage of fixed costs• New corporate pensions platform• Withdrawal/re-pricing in

uneconomic sectors

• Lower protection sales

3.5%

(0.2)%

4.1%

0.8%

1.9%

(0.2)%

2.2%

0.5%

W&IB: components of income growth

+8%

£3,893m

£230m£25m£52m £4,212m

CorporateMarkets

BusinessBanking

International/Other

2005 2006AssetFinance

£12m

+15%

+7%+1%

W&IB: diversifying Corporate Markets revenue streams

£1,584m£48m

£1,814m

Sales &Structuring

DebtCapitalMarkets

LargeCorporate

20062005 AcquisitionFinance

Other

£46m£41m £34m

£61m

+15%

Excellent cost control*

UK Retail Banking 2,4762,522 2

Insurance & Investments 646607 (6)

Wholesale & International Banking 2,2642,181 (4)

Central group items 5124

5,4295,321 (2)

5,4375,334 (2)

Insurance grossing adjustments (8)(13)

£m 20062005 % Change

* excluding pension schemes related credit and, in 2005, customer redress provisions

W&IB: investing for growth

Invest to grow

8.2%

3.8%

1.0%

W&IBCost Growth

Investment inInfrastructure

Investment in Efficiency

UnderlyingW&IB Cost

Growth

W&IB RevenueGrowth

Investmentin CM Staff

1.1%

1.4%

0.3%

Productivity programme key activities

Leverage scale and dedicated expertise in procurement

• 60% spend handled via centre of excellence• 93% of spend with top 1,000 suppliers• Renegotiation of major contracts

Transform manufacturing and processing efficiency

• Number of sites reduced by 25% since 2004 • Unit costs down 8% since 2004• Consolidation of Wholesale payment and trade

finance activities

Simplify management structures and organisational

effectiveness

• Proportion of staff more than 7 levels below CEO reduced from 44% to 13%

• Increased ‘spans of control’ by 27%• Programme delivered 1,600 FTE reduction in 2006

Productivity programme ahead of schedule …

Financial Principles

• Self funding

• Payback c. 2 years

• Reinvest c. 50% of gross benefits

2005 2006 2008

... and extended to include 2008 benefits

2007

£(40)m

£47m

£125m

£250m

£142m

£(95)m

Net Benefit

Income growth ahead of costs in all divisions*

2%

Income Costs

Group

Wholesale &InternationalBanking

Insurance &Investments

UK RetailBanking

52.8%

50.8%

2005 2006

* excluding volatility. Also excludes customer redress provisions and the strengthening of reserves for mortality in 2005 and the pension schemes related credit in 2006. I&I excludes insurance grossing adjustments and is adjusted for the impact of the £800 million capital repatriation in December 2005

C:I ratio improved

290bp

C:I ratio improved

220bp

4%

(2)%

12%

6%

4%

8%

6%

GroupCost:Income Ratio

Impairment losses on loans and advances

% of Average Lending2006£m

Variance% 20062005

2005£m

Wholesale & International Banking 308 (64) 0.390.28188

UK Retail Banking 1,238 (16) 1.181.091,065

Total 1,555 0.830.761,299 (20)

- Credit cards 490 (24) 6.995.80396

- Personal loans/overdrafts 740 (13) 5.855.33656

- Mortgages 8 0.010.0213

Central group items 946

Insolvency trends slowing

Total Insolvencies

IVAs

Market

• Higher levels of insolvency

– Rapid take-up of IVAs

• Recent slowdown in IVA growth rate

Lloyds TSB

• Lloyds TSB experience consistent with market

• Credit scoring models include propensity to repay

• Tighter monitoring and management

Source: Insolvency Service (seasonally adjusted)

Number of Individual Insolvencies in England and Wales

5,000

10,000

15,000

20,000

25,000

30,000

35,000

2002 2003 2004 2005 2006

Bankruptcies

Mar 04 Jun 04

Arrears performance by vintage – loans

Month 2 Month 4 Month 6 Month 8 Month 10 Month 12 Month 14 Month 16 Month 18 Month 20 Month 22 Month 24

Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06

Arrears performance by vintage – credit cards

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12

Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06

Step change in collections effectiveness

• 25% reduction in proportion of cards 1 cycle down

• Increased customer contact

• Cost of collections reduced

OutboundCustomerContacts

Inbound Calls

2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 Jun 05

All banks

Lloyds TSB

% card balances between 1 to 4

cycles delinquent

Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06

Source: independent research

Asset quality remains strong

Impaired AssetsImpaired Assets as a

Percentage of Total Lending

2.3%2.0%

30 Jun 2006 31 Dec 200631 Dec 2005

2.1%£4,006m£4,029m

30 Jun 2006 31 Dec 200631 Dec 2005

£4,122m

(3)%

Scottish Widows – strong capital generation

Expected in-force capital release 652 716

New business strain including required capital (287) (283)

£m 2005 2006

Expected capital generated 365 433

Annual dividend (200) (206)

Expected capital generated after annual dividend 165 227

Post-tax return on European Embedded Value 8.0% 9.3%

Risk capital margin cover (year end) 11.9x 17.4x

Capital ratios remain robust

Total capitalratio

10.9% 10.7%

31 December2005

31 December2006

Tier 1 ratio 8.2%7.9%UKRB

W&IB

Other

+8%

Risk-weighted Assets

£144.9bn£156.0bn

£60.4bn £59.1bn

£80.1bn £91.8bn+15%

(2)%

2005 2006

Reducing the pension schemes’ deficit

Net defined benefit scheme deficit 3,294 2,099 (1,195)

Unrecognised actuarial (gains)/losses (485) 263

£m 2005 2006 Difference

Recognised balance sheet deficit 2,910 2,462 (448)

Deferred tax (873) (739)

IAS 19 pension deficit, net of tax 2,037 1,723

Other retirement benefit schemes 101 100

Total pension schemes contributions- normal- deficit

195209

242276

Rigorous application of economic profit metric in decision-making

• EP driving loan pricing in UKRB

• EP driving business decisions in Business Banking

• EP driving relationship decisions and stronger focus on cross-sell in Corporate Markets

• IRRs driving product focus and design in Scottish Widows

Improving our balance sheet management

Active management of balance sheet for optimum risk/return

• Mortgage securitisation of > £10 billion

− UK’s largest RMBS

• First collateralised loan obligation

− a £1 billion transaction

• Capital repatriation programme in Scottish Widows

− £1.7 billion in last 2 years

• $1 billion Preference Share issue

− ‘Subordinated Bond of the Year’ *

* 2006 International Financing Review awards

Capital outlook – introduction of Basel 2

• Credit risk waiver application submitted in December 2006

• Preparations well advanced with parallel running during 2007

• Satisfactory capital ratios to be maintained throughout the transition

• No ‘investment in subsidiaries’ deduction expected from tier 1 capital until 2012

2006 – continued earnings momentum

Continuing to build earnings momentum

• Strong sales growth, improving sales mix• Accelerating Retail revenue• Widening of positive jaws • Double-digit trading surplus growth

Maintaining a robust capital position and dividend

• Capital ratios remain robust• Increased retained earnings• Improving dividend cover

Sustaining high returns

• Improving cost:income ratio• Satisfactory asset quality• ROE remained strong• Increasing economic profit


Eric DanielsGroup Chief Executive

• Building momentum− Two divisions, W&IB and I&I, continue to grow strongly− UKRB building momentum

• Improving productivity− Positive Jaws in every Division− Lower unit costs and better sales and service− Continuing to invest in future growth

• Slowing impairment growth

• Generating sustainable, faster growth− Results show accelerating performance with continuing high

returns

2006 results: building earnings momentum

Our financial progress: consistently improving performance

* 2002-4 figures on a UK GAAP basis excluding discontinued operations. 2005-6 figures are on a full IFRS basis, excluding volatility and one-off items. Growth rates are for comparable accounting standards year-on-year

ROE*PBT*

Income growth* Expenses growth*

0%

3%

6%7%

2002-03 2003-04 2004-05 2005-06

6%

0%2%

4%

2002-03 2003-04 2004-05 2005-06

25.2%

23.1%

25.1%23.5%

25.5%

2002 2003 2004 2005 20062002 2003 2004 2005 2006

£3.2bn £3.1bn

£3.7bn£3.4bn £3.5bn

A business model for high quality, sustained growth

Consistent, sustained, double digit economic profit growthOur goal

Our belief

Our focus

Income

Sustained growth comes from strong

customer franchises

Acquire customers and deepen

relationships in core franchises

Expense

Sustained growth comes from continuous

productivity growth

Leverage a broad set of productivity

disciplines across the Group

Profitability

Sustained growth comes from capital

efficiency

Rigorously apply economic profit

discipline at every level

Employee engagement1 Customer satisfaction2 Sales3 Income4

100

105

100

117

132

1 Year average, indexed to 1002 Average CARE scores for UKRB, Business Banking, Corporate Banking, Scottish Widows and General

Insurance3 UKRB and Scottish Widows data; W&IB data not available on a comparable basis4 2003-04 on a UK GAAP basis. 2005-06 figures on a full IFRS basis

100

Increasingly motivated employees

More satisfied customers Sales growth Income growth

116

100

UK FSNorm


2003 2004 2005 2006 2003 2004 2005 20062003 2004 2005 2006 2003 2004 2005 2006

Building strong customer franchises

Continuous productivity growth


1 Group Defects Per Million Opportunities. Group-wide reporting began in Q1 2004, since when Sigma measurement coverage has increased from 45% of Group processes to 87% in 2006

2 On a continuing basis3 2003 unit costs not available on a consistent basis. Indexed to 1004 2003-04 on a UK GAAP basis; 2005-06 on a full IFRS basis

Applying ‘Sigma’reduces error

rates…

…together with ‘Lean’, we are doing

more for lessReducing unit costs

Number of FTEs2

74,413

65,499

DPMO1 Group Ops unit cost3

Improving cost:income ratio

Cost:income ratio4

100

9250.8%

55.0%

42,711(Jan 2004)

2,555(Dec 2006)

2003 2004 2005 2006 2003 2004 2005 20062003 2004 2005 2006 2003 2004 2005 2006

Invest to protect returns and raise growth

Medium ‘Jaws’

Income GrowthLow High

Low

High

Return

Invest to accelerate growth

Narrow ‘Jaws’

Invest only to fix the business

Widest ‘Jaws’

Invest only in profitable growth

Wide ‘Jaws’

Investing in growth and returns

1 Includes revenue investment and capital investment. Indexed to 100

Growing our investment

Investment expenditure1


2003 2004 2005 2006

100

112


Our goal Consistent, sustained, double digit economic profit growth

Our focus

Income

Acquire customers and deepen

relationships in core franchises

Expense

Leverage a broad set of productivity

disciplines across the Group

Profitability

Rigorously apply economic profit

discipline at every level

• Income up 8%

• Cost:income down 2pp

• Trading surplus up 14%

• PBT up 8%

UKRB

• Income up 12%



• PBT up 15%

1 excluding volatility and central group items2 excluding insurance grossing adjustments and impact of December 2005 capital repatriation and the

strengthening of reserves for mortality

Wholesale & International

• Income up 4%



• PBT up 5%

Insurance and Investments2

Well balanced Group with strength in all Divisions

2006 PBT1

UKRB£1,549m

37% of total

W&IB£1,640m

40% of total

I&I£950m

23% of total

• Improved customer satisfaction

• Improved sales capability

• Rebalanced sales mix

• Acquired new customers

• Innovated with new product and service offers

• Improved our sales efficiency and effectiveness

• Reduced back-office staff

Grow income from existing customer base

Grow income from new customers

Improve productivity

What we did in 2006Our objectives

UKRB: driving growth

Our customer satisfaction scores are improving…

…but we want to move beyond satisfying customers

Branch ‘touch’ scores1

100

107

NPV per customer(stylised)

Today: moving beyond

satisfactionOur goal: advocacy

Now #1 for branch satisfaction amongst the big 4 high street banks2

1 Indexed to 1002 Source: GfK Financial Research Survey (FRS) 3 months ending Dec 2006, 13,995 main current account

holders interviewed

UKRB: moving beyond satisfying customers

2002 2003 2004 2005 2006 Dissatisfaction Satisfaction Advocacy

• Average sales time reduced, to below the European average

• Improved ability to cross-sell at account opening

• Roles clearly defined to staff to focus on sales and service

• Increased sales force training

• Non-customer facing work removed from branches

Improving our branch processes… …has helped drive sales andimprove efficiency

1 Indexed to 1002 Before provisions for customer redress

UKRB: driving growth and efficiency

UKRB cost:income ratio2

50%

47%

2005 2006

Sales per branch FTE1

100

142

2005 2006

42%

58%

Innovative product and service offers

Rebalanced sales mix Savings growth

UKRB sales volumes Growth(2005-2006)

Examples

• ‘Save the change’

• 8% Monthly Saver

• Guaranteed Investment Account

• Simplified OEIC range

• Protection for Life

1 includes Bank Savings, C&G Savings, Wealth Management and Current Accounts

UKRB: capturing our savings opportunity

62%

11%

BancassurancePVNBP

Deposits balance

net inflows1

47%

53%

35%

65%

Lending

Non-Lending

49%

51%

2003 2004 2005 2006

• Success in retail banking requires simultaneous delivery across multiple dimensions:

– Customer advocacy

– Sales and service culture

– Balanced and growing product mix

– Efficient, low-cost processes

• We have developed strong foundations to deliver consistently over time along all of these dimensions

UKRB: where we are focusing to drive future growth


• Improved our bancassurance product range and sales effectiveness

• Focused on the most valuable IFA relationships and improved service

Leverage our distribution strength

Continue to develop better products

Improve capital management

I&I: accelerating growth

• Simplified bancassurance product range

• Launched ‘Protection for Life’

• Improved product profitability and capital efficiency

I&I: leveraging our distribution strength

1 Employee engagement score for I&I Division. Indexed to 1002 Scottish Widows (excluding General Insurance) CARE score. Indexed to 1003 Scottish Widows APE sales (to allow historical comparison). Indexed to 100

Customer satisfaction2Employee engagement1 Sales3

Increasingly motivated employees

Improved customer

satisfaction

100110

100

174

144IFA

Bancassurance100

128

2003 2004 2005 2006 2003 2004 2005 2006 2003 2004 2005 2006

Helping to drive higher

sales

1 End of year Defects Per Million Opportunities = Sigma for Scottish Widows. Measurement began in 20042 Scottish Widows IRRs. Indexed to 1003 I&I PBT per FTE. 2003-04 on a UK GAAP basis; 2005-06 on a full IFRS basis. Indexed to 100

Operational improvements

Improved product returns

DPMO1

Stronger profitability

3,467

10,834

100

136

IRRs2 PBT per FTE3

162

100

I&I: improved productivity delivering returns

2003 2004 2005 2006 2003 2004 2005 2006 2003 2004 2005 2006

• Making the most of our distribution reach– in the core bank franchises and the IFA channel

• Further tailoring products– to meet the needs of customers in different channels

• Further improving our productivity – both within I&I and through leveraging the manufacturing

capabilities across the Group

• Continuing to improve our capital efficiency– and product profitability

I&I: where we are focusing to drive future growth

• Built product and sales capability to deepen customer relationships

• Developed asset distribution capabilities

Grow the Corporate Markets business

• Continued strength in startups• Improved productivity and service• Simplified our offer and operations

Build on the growth momentum in Business

Banking

• Acted early on potential problems• Maintained high quality lending

portfolioMaintain strong asset quality

W&IB: continued growth momentum


Broader product and sales

capabilitiesImproved sales mix Delivered more

productively

W&IB: driving Corporate Markets growth

• We have invested in extending our product capabilities– Leveraged

securitisation

– Structured deposits

• We have invested in building our specialist sales forces– e.g., Financial Markets

sales & structuring team

• Result: Corporate Markets cross sales up 48% in 2006

Income per FTE(indexed to 100)

100

114

Income(indexed to 100)

2005 2006

+9%

+24%100

115

38%

62%

41%

59%

Traditional lending, deposits and leases

Higher value-added products

2003 2004 2005 2006

W&IB: growing higher return Corporate Markets businesses

RWAgrowth

(2005-06)

Lowerreturn

Higherreturn

AFU

Large

FI

Global

FMD

Commercial

SAF

RAROC(2006)

Highergrowth

Lowergrowth

…redirecting capital towards higher returns

We are accelerating growth in our highest return businesses…

Corporate Markets RWAs

SST

HighRAROC

£56bn

£65bn

MediumRAROC

LowRAROC

31% 18%

41% 48%

28%34%

2005 2006

Improving productivity

Risingcustomer

satisfaction

Drivingcustomer

acquisitionGrowing

PBT

Cost:incomeratio4

PBT4 (£m)

61%

71%

136

247

Customersatisfaction2

Switcherrecruitment3

100

106

18,800

8,500

1 Business Banking employee engagement, indexed to 1002 Business Banking average CARE score, indexed to 1003 Number of switchers recruited each year4 2003-04 on a UK GAAP basis; 2005-06 on a full IFRS basis

Moremotivatedemployees

Employeeengagement1

100

W&IB: Business Banking’s model for continued success

112

2003 2004 2005 2006 2003 2004 2005 20062003 2004 2005 2006 2003 2004 2005 2006 2003 2004 2005 2006

• Focusing on the most valuable customer segments– mid market - i.e. SME and mid-corporate clients

• Investing in a broader range of products and skills– to serve the increasingly sophisticated needs of these customers

• Deepening relationships with clients– deploying our broader product and skill range

• Continuing the shift to an ‘originate and distribute’ model

• Further improving back-office productivity– by leveraging group manufacturing skills

W&IB: where we are focusing to drive future growth


• Building strong revenue momentum

• Growing and deepening our franchises

• Enhancing efficiency

• Growing investment

• Strengthening capital disciplines

Summary: what these results indicate for the future

Forward looking statementsForward looking statements

This document is a summary only of certain information contained in the announcement dated 23 February 2007 and should be read in conjunction with the full text of the announcement.

This document contains forward looking statements with respect to the business, strategy and plans of the 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. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. Lloyds TSB Group’s actual future results may differ materially from the results expressed or implied in these forward looking statements as a result of a variety of factors, including UK domestic and global economic and business conditions, risks concerning borrower credit quality, market related risks such as interest rate risk and exchange rate risk in its banking businesses and equity risk in its insurance businesses, inherent risks regarding changing demographic developments, catastrophic weather and similar contingencies outside Lloyds TSB Group’s control, any adverse experience in inherent operational risks, any unexpected developments in regulation or regulatory actions, changes in customer preferences, competition, industry consolidation, acquisitions and other factors. For more information on these and other factors, please refer to Lloyds TSB Group’s Registration Statement on Form 20-F filed with the US Securities and Exchange Commission and to any subsequent reports furnished by Lloyds TSB Group to the US Securities and Exchange Commission or to the London Stock Exchange. The forward looking statements contained in this document are made as of the date hereof, and Lloyds TSB Group undertakes no obligation to update any of its forward looking statements.

2006 results - home - lloyds banking group plc€¦ · * excluding reverse repos +8% average...

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