LYG

Business Context and Reporting Period

This filing (Form 6-K) dated November 3, 2008, concerns Lloyds TSB Group plc (now Lloyds Banking Group plc) and its proposed acquisition of HBOS. The document serves as a shareholder circular announcing revised terms for the acquisition and a coordinated capital raising exercise with HM Treasury in response to global financial market turmoil. The financial data referenced primarily covers the six months ended June 30, 2008, and the first nine months of 2008.

Key Financial Metrics

Lloyds TSB Performance (Six Months to June 30, 2008)

• Underlying Income: Increased by 9% compared to the same period in 2007.
• Profit Before Tax: Increased by 11% compared to the same period in 2007.
• Cost:Income Ratio: Improved to 46.6% (down from 48.6% in the prior year).
• Economic Profit: £1,013 million, a 7% increase year-over-year.
• Post-Tax Return on Equity: 26.8% (up from 26.1% in the prior year).
• Asset Growth: Retail assets grew by 8%; wholesale liabilities grew by 18.2%.

HBOS Performance (Six Months to June 30, 2008)

• Net Operating Income: Approximately £2.4 billion.
• Profit Before Taxation: £848 million.
• Total Assets: £681.4 billion.
• Shareholders' Equity: £21.1 billion.

Capital Raising and Liquidity

• Lloyds TSB Capital Raise: Approximately £5.5 billion total (£4.5 billion in ordinary shares via Placing and Open Offer; £1 billion in new preference shares from HM Treasury).
• HBOS Capital Raise: Approximately £11.5 billion total (£8.5 billion in ordinary shares; £3 billion in preference shares).
• Combined Capital Raise: £17 billion.
• Projected Core Tier 1 Ratio (Enlarged Group): Estimated at 8.8% as of June 30, 2008, adjusting for capital raises and negative capital adjustments of up to £10 billion related to HBOS.

Material Changes and Revised Terms

Due to deteriorating global financial markets between September 18, 2008, and October 13, 2008, the terms of the acquisition were significantly revised:

• Exchange Ratio: Reduced from 0.833 Lloyds TSB shares per HBOS share to 0.605 Lloyds TSB shares per HBOS share.
• Valuation: Based on October 29, 2008 closing prices, the revised terms value HBOS at approximately £5.9 billion.
• Ownership Structure: Depending on shareholder participation in the capital raise, HM Treasury could own up to 43.5% of the enlarged group if shareholders do not participate in the open offer clawback. If shareholders fully participate, HM Treasury would own 0% of the ordinary shares.
• Profit Impact: Statutory profit before tax for Lloyds TSB in the first nine months of 2008 saw a substantial reduction due to market dislocation, insurance volatility, and higher impairments in corporate lending, despite revenue growth exceeding cost growth in each division.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• Strategic Rationale: The acquisition aims to create the UK's leading financial services group with significant synergy benefits.
• Cost Synergies: The Board expects total annual pre-tax cost savings of greater than £1.5 billion by the end of 2011 (approx. 15.7% of the combined 2008 cost base).
• Earnings Accretion: The acquisition is expected to lead to accretion in cash earnings per share of over 20% in 2010.
• Dividend Policy: No cash dividends on ordinary shares can be paid while the HM Treasury preference shares are outstanding. The Board intends to repurchase these preference shares during 2009 to resume dividends.

Risks and Contingencies

• Capital Adjustments: Preliminary assessment indicates net negative capital adjustments of up to £10 billion (after tax) may be required for HBOS assets, impacting Core Tier 1 capital.
• Integration Costs: One-off integration costs are expected to be around 140% of the synergy run rate, with costs significantly exceeding benefits in 2009.
• Regulatory Conditions: The transaction is conditional on shareholder approval, regulatory clearances (including antitrust), and the successful completion of the capital raising by both entities.
• Market Conditions: Continued economic uncertainty and market dislocation pose risks to the trading performance and asset valuations.

Key Facts for Investor Verification

• Verify the final outcome of the shareholder vote scheduled for November 19, 2008, regarding the acquisition and capital raising resolutions.
• Confirm the actual level of shareholder participation in the Placing and Open Offer to determine HM Treasury's final ownership stake.
• Monitor the final fair value assessment of HBOS assets post-acquisition to validate the £10 billion negative capital adjustment estimate.
• Track the progress of the £1.5 billion cost synergy realization and the timeline for repurchasing HM Treasury preference shares to resume dividends.
• Review the 2009 interim report for the comprehensive assessment of HBOS asset fair values and the actual Core Tier 1 capital ratio of the enlarged group.