Business Context and Reporting Period
Company: Lloyds TSB Group plc (Lloyds Banking Group)
Filing Type: Form 6-K (Regulatory News Service Announcement)
Reporting Period: Year ended 31 December 2006
Announcement Date: 23 February 2007
The Group reported strong performance in 2006, delivering growth in profits and high returns across its three main divisions: UK Retail Banking, Insurance and Investments, and Wholesale and International Banking. Results are presented under International Financial Reporting Standards (IFRS), with supplementary reporting for Scottish Widows using European Embedded Value (EEV) principles. Management emphasizes a strategy of deepening customer relationships, improving productivity, and maintaining robust capital ratios.
Key Financial Metrics
| Metric (GBPm unless stated) | 2006 | 2005 | Change (%) |
|---|---|---|---|
| Statutory Results | |||
| Total Income (net of insurance claims) | 11,104 | 10,540 | 5 |
| Trading Surplus | 5,803 | 5,069 | 14 |
| Profit Before Tax | 4,248 | 3,820 | 11 |
| Profit Attributable to Equity Shareholders | 2,803 | 2,493 | 12 |
| Earnings Per Share (Basic) | 49.9p | 44.6p | 12 |
| Post-tax Return on Average Equity | 26.6% | 25.6% | - |
| Underlying Results (Excluding volatility/one-offs) | |||
| Profit Before Tax | 3,713 | 3,450 | 8 |
| Earnings Per Share | 46.9p | 44.2p | 6 |
| Cost:Income Ratio | 50.8% | 52.8% | - |
| Balance Sheet | |||
| Total Assets | 343,598 | 309,754 | 11 |
| Loans and Advances to Customers | 188,285 | 174,944 | 8 |
| Customer Deposits | 139,342 | 131,070 | 6 |
| Shareholders' Equity | 11,155 | 10,195 | 9 |
| Capital & Liquidity | |||
| Total Capital Ratio | 10.7% | 10.9% | - |
| Tier 1 Capital Ratio | 8.2% | 7.9% | - |
| Dividend Per Share (Total) | 34.2p | 34.2p | 0 |
Material Changes vs. Prior Period
- Profit Growth: Statutory profit before tax rose 11% to GBP4,248 million. Underlying profit (excluding volatility and one-off items) increased 8% to GBP3,713 million.
- Efficiency Gains: The cost:income ratio improved to 50.8% from 52.8%, driven by income growth of 6% outpacing cost growth of 2%. Staff numbers fell by 6% to 62,630.
- Impairment Charges: Impairment losses on loans and advances increased 20% to GBP1,555 million. This was primarily due to higher retail impairments (up 16%) reflecting market-wide deterioration in unsecured consumer credit quality, though the rate of growth is expected to slow in 2007.
- Divisional Performance:
- UK Retail Banking: Profit before tax (excluding redress provisions) up 5%. Sales volumes up 16%, with a strategic shift toward non-lending products.
- Insurance and Investments: Profit before tax (excluding mortality reserve strengthening) up 11%. Scottish Widows saw a 24% increase in the present value of new business premiums.
- Wholesale and International Banking: Profit before tax up 8%, driven by a 46% increase in cross-selling income.
- Capital Repatriation: Scottish Widows repatriated GBP540 million in the second half of 2006, totaling approximately GBP750 million for the year.
Guidance, Outlook, and Risks
- Outlook for 2007: Management expects continued profitable growth but anticipates challenges from a slower rate of growth in the unsecured consumer credit market and increasing regulatory costs. The Group forecasts that the rate of growth in unsecured retail lending impairment charges will be significantly lower in 2007 than in 2006.
- Productivity: The Groupwide productivity improvement programme is ahead of schedule. Net annual benefits are expected to reach GBP250 million by 2008.
- Capital Strategy: The Group expects to maintain satisfactory capital ratios during the transition to Basel 2 in 2008. Further capital repatriation from Scottish Widows is planned for 2007.
- Risks and Contingencies:
- Credit Risk: Continued monitoring of unsecured consumer lending and bankruptcy rates.
- Market Risk: Exposure to interest rate, exchange rate, and equity market volatility, particularly impacting insurance results under IFRS.
- Regulatory Risk: Uncertainty regarding the regulatory treatment of certain issues for capital purposes under Basel 2.
- Pension Deficit: The defined benefit pension schemes' gross deficit improved to GBP2,099 million. The Group has agreed to fund the actuarial deficit over ten years.
Investor Verification Checklist
- Impairment Trends: Verify the stabilization of unsecured retail lending impairments in 2007 as projected by management.
- Capital Ratios: Confirm the maintenance of Total Capital (10.7%) and Tier 1 (8.2%) ratios during the Basel 2 transition.
- Scottish Widows Capital: Monitor the execution of further capital repatriation from Scottish Widows in 2007.
- Cost Control: Assess the realization of the projected GBP250 million in net annual productivity benefits by 2008.
- Dividend Policy: Note the total dividend of 34.2p per share, representing a yield of approximately 6% based on the year-end share price.