Business Context and Reporting Period
Company: Lloyds TSB Group plc (Lloyds Banking Group)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Full year ended 31 December 2002
Filing Date: 14 February 2003
The Group reported 2002 results against a backdrop of significant stock market turbulence and global economic uncertainty. The financial statements reflect changes in accounting policies, including the adoption of FRS 17 (Retirement Benefits), FRS 19 (Deferred Tax), and UITF 33, with comparative figures restated. The Group implemented a rigorous efficiency programme, reducing staff numbers by over 4,000 (excluding acquisitions) while maintaining investment in customer service.
Key Financial Metrics
| Metric | 2002 (GBPm) | 2001 (GBPm) | Change |
|---|---|---|---|
| Total Income | 8,878 | 8,889 | (0.1%) |
| Operating Expenses | 4,915 | 4,776 | +3% |
| Trading Surplus | 3,963 | 4,113 | (4%) |
| Provisions for Bad Debts | 1,029 | 747 | +38% |
| Profit Before Tax | 2,607 | 3,161 | (18%) |
| Profit Attributable to Shareholders | 1,781 | 2,229 | (20%) |
| Earnings Per Share (Basic) | 32.0p | 40.3p | (21%) |
| Post-Tax Return on Equity | 16.7% | 18.1% | -140 bps |
| Total Capital Ratio | 9.6% | 8.8% | +80 bps |
| Tier 1 Capital Ratio | 7.8% | 7.8% | 0 bps |
Cash Flow: Net cash inflow from operating activities was GBP5,394 million. Net cash outflow from capital expenditure and financial investment was GBP2,419 million. Net cash inflow from financing activities was GBP2,305 million.
Liquidity: Total assets increased 7% to GBP252.8 billion. Customer lending grew 9% to GBP134.5 billion, and customer deposits increased 7% to GBP116.3 billion.
Material Changes vs. Prior Period
- Profit Decline: Statutory profit before tax fell by GBP554 million (18%) to GBP2,607 million. This was primarily driven by a GBP952 million adverse investment variance due to a 24% fall in the FTSE All-Share Index, and increased provisions for bad debts.
- Underlying Performance: Excluding investment variance and changes in economic assumptions, profit before tax decreased by only GBP516 million (13%) to GBP3,504 million. On this adjusted basis, the post-tax return on equity was 23.0%.
- Provisions: The charge for bad and doubtful debts rose 38% to GBP1,029 million. Key drivers included GBP100 million in provisions against US corporate customers with accounting irregularities, GBP50 million for Argentina exposure, and GBP205 million for redress to past purchasers of pension and endowment products.
- Shareholder Equity: Shareholders' equity decreased by GBP2,384 million to GBP7,972 million, largely due to a GBP2,331 million reduction in the value of pension scheme assets caused by falling equity markets.
- Dividend: The final dividend was maintained at 23.5p per share, resulting in a total dividend of 34.2p for the year, a 1.5% increase over 2001.
Guidance, Outlook, and Risks
Management Commentary: The Chairman and Group Chief Executive described the underlying performance as "satisfactory" despite the reduction in statutory profits. The Group highlighted strong growth in customer lending and deposits, improved market share in personal lending, credit cards, and mortgages, and rigorous cost control. The efficiency programme delivered benefits in line with forecasts.
Outlook:
- Cost Control: The Group expects operating expenses in 2003, excluding acquisitions and operating lease depreciation, to grow by no more than the rate of inflation.
- Capital Injection: Scottish Widows is well capitalised but may require a capital injection of up to GBP300 million if the FTSE 100 index falls to and remains at approximately 3,000.
- Argentina: The outlook remains uncertain until the new Argentine government takes office in 2003. The Group has provided for 50% of its total exposure (GBP190 million net).
- Brazil: The economic situation has stabilised following the October election, with exposure reduced to GBP1.9 billion net of provisions.
Risks and Contingencies:
- Regulatory Investigation: An investigation is ongoing regarding the sales of the "Extra Income & Growth Plan" product; financial effects will be estimated in 2003.
- Competition Commission: Remedies regarding banking services to SMEs are expected to reduce pre-tax profit by approximately GBP150 million annually.
- Market Risks: Continued volatility in equity markets, interest rate risks, and exchange rate risks in international operations.
Investor Verification Checklist
- Investment Variance Impact: Verify the GBP952 million adverse investment variance and its exclusion from underlying performance metrics.
- Provision Adequacy: Review the GBP205 million provision for redress on past pension/endowment sales and the GBP100 million provision for US corporate irregularities.
- Pension Fund Deficit: Confirm the GBP2,077 million net pension deficit recorded on the balance sheet and the projected cash contributions of GBP150 million in 2003 and GBP300 million in 2004.
- Argentina Exposure: Assess the remaining GBP190 million net exposure to Argentina and the potential for further provisioning.
- Capital Requirements: Monitor the FTSE 100 index levels relative to the GBP300 million potential capital injection threshold for Scottish Widows.
- Accounting Policy Changes: Review the impact of FRS 17, FRS 19, and UITF 33 on comparative figures and future reporting.