Divisional results:
WHOLESALE AND INTERNATIONAL BANKING

Our business

During 2008, our businesses within the Wholesale and International Banking arena covered a broad scope, serving thousands of customers, ranging from start-ups and small enterprises to large organisations and global corporations.

Combining the respective strengths of some 3,000 people in Corporate Banking and Products & Markets, Corporate Markets plays an integral role in leveraging and expanding the customer franchise and building deep, long-lasting relationships with around 26,000 corporate customers and was awarded jointly with Commercial Banking the 'Real Finance/CBI FDs' Excellence Awards – Bank of the Year' for the fourth year running.

Commercial Banking is a growing business with some 6,000 people serving nearly one million customers across the UK from one-person start-ups to large, established enterprises. Lloyds TSB has increased its lending to SMEs by nearly 20 per cent in 2008.

We also participate in specialist markets with a range of solutions including personal and international expatriate and private banking, motor and leisure finance and auto leasing.

Following the acquisition of HBOS, the Wholesale and International Banking division has been renamed 'Wholesale'. The Group's international businesses, with the exception of corporate in North America (including Canada), will form part of the new Wealth and International division.

The new 'Wholesale' division operates a multi brand strategy primarily through the Lloyds TSB and Bank of Scotland brands but also trades through a number of more specialist brands including Lloyds TSB Development Capital and Black Horse.

Key Highlights

Resilient profit performance despite the turbulence in global financial markets. The division remained profitable even after absorbing the increased impact of its exposure to assets affected by current capital markets uncertainties and a significant rise in corporate impairments. The impact of recent market dislocation, however, has been to reduce profit before tax in 2008 by £1,270 million (2007: £280 million), to £274 million.

Continued strong relationship banking momentum. Excluding the impact of market dislocation, profit before tax decreased by two per cent, to £1,544 million, reflecting good levels of core business momentum which were offset by a significant increase in corporate impairment levels reflecting the challenging economic environment and additional write-offs relating to a number of high profile financial services company collapses.

Strong progress in expanding our Corporate Markets franchise, with a 34 per cent increase in Corporate Markets income, excluding market dislocation, supported by an 85 per cent increase in cross-selling income. This was largely offset however by the significant rise in impairments.

Good franchise growth in Commercial Banking, with a further increase in our market share of higher value customers, supporting a seven per cent growth in income, which was partially offset by an £89 million increase in impairments.

Significant lending growth, as our Corporate Markets and Commercial Banking businesses continued to provide substantial support to our mid-corporate market and SME customers.

Our risk management remains strong with satisfactory asset quality, despite a rise of £936 million in impairment losses, largely as a result of the £253 million year-on-year impact of market dislocation, a number of high profile financial services company collapses and an increase in the level of impairments reflecting the economic slowdown in the UK.

DIVISIONAL performance

Continuing businesses

	2008 £m	2007^† £m	Change %
Net interest income	3,303	2,380	39
Other income	829	1,644	(50)
Total income	4,132	4,024	3
Operating expenses	(2,350)	(2,152)	(9)
Trading surplus	1,782	1,872	(5)
Impairment	(1,508)	(572)
Profit before tax	274	1,300	(79)
Cost:income ratio	56.9%	53.5%
Cost:income ratio, excluding market dislocation	46.5%	51.1%
Post-tax return on average risk-weighted assets	0.16%	1.14%
	31 December 2008 £bn	31 December 2007 £bn	Change %
Total assets	238.8	163.3	46
Risk-weighted assets	115.7	92.8	25
Customer deposits	82.9	72.3	15

† Restated, see Summarised segmental analysis .

Our strategy

The acquisition of the HBOS corporate and commercial customer base provides the new 'Wholesale' division with a significant and exciting opportunity to accelerate our relationship-led wholesale banking strategy.

Our strategic vision is to be recognised as the UK's leading, 'through the cycle', wholesale bank. As a relationship bank, we place our customers at the forefront of this vision and we strive to understand and meet their needs whilst maintaining satisfactory asset quality. The way we manage our customer relationships is the vital ingredient which differentiates us from our competition.

Making 'Wholesale' a great place for our customers to bank remains our number one priority and we seek to achieve this by deepening and maintaining profitable customer relationships. Building insight into customer needs and providing them with a broad range of banking and capital markets solutions will enable us to become our customers' first choice so we prosper together.

Key Performance Indicators

†The 2007 figures have been restated (see Summarised segmental analysis). The 2006 figures are as originally published.

*Before impact of market dislocation.

Divisional Summary

In Wholesale and International Banking, the Group has continued to make progress in its strategy to develop the Group's strong corporate and small to medium business customer franchises, however the division has continued to be significantly affected by the impact of market dislocation and the increase in impairments relating to the deteriorating economic environment and a number of high profile financial services company collapses. In Corporate Markets, further good progress has been made in developing our relationship banking franchise supported by a strong cross-selling performance and in Commercial Banking, strong growth in business volumes, further customer franchise improvements and good progress in improving operational efficiency, were offset by the significant increase in impairment levels.

Overall, the division remained profitable, however profit before tax decreased by 79 per cent to £274 million, largely reflecting the £990 million reduction in profits, compared to last year, as a result of market dislocation. A strong revenue performance in our relationship banking businesses contributed to overall income growth, excluding the impact of market dislocation, of 20 per cent, driven by strong Corporate Markets and Commercial Banking income growth of 34 per cent and seven per cent respectively. This exceeded cost growth of nine per cent, which largely reflected further investment in building the Corporate Markets business, higher depreciation charges in Asset Finance and the impact of exchange rate movements. The cost:income ratio, excluding the impact of market dislocation, improved to 46.5 per cent, from 51.1 per cent last year.

The charge for impairment losses was £936 million higher at £1,508 million, as a result of an increase of £253 million in the impact of market dislocation, and a significant increase in the level of impairments reflecting the economic slowdown in the UK and the impact of a number of high profile financial services company collapses. Despite this increase in the impairment charge, we believe that we remain relatively well positioned to withstand the economic slowdown as a result of our prudent credit management policy over the last few years.

Profit before tax by business unit

	2008 £m	2007^† £m	Change %
Corporate Markets
– Before impact of market dislocation	1,002	1,010	(1)
– Impact of market dislocation	(1,270)	(280)
	(268)	730
Commercial Banking	454	469	(3)
Asset Finance	2	39	(95)
International Banking	149	138	8
Other	(63)	(76)
Profit before tax
– Before market dislocation	1,544	1,580	(2)
– Market dislocation	(1,270)	(280)
	274	1,300	(79)

† Restated, Summarised segmental analysis.

Corporate Markets

	2008 £m	2007^† £m	Change %
Net interest income	1,784	982	82
Other income	(316)	620
Total income	1,468	1,602	(8)
Operating expenses	(691)	(632)	(9)
Trading surplus	777	970	(20)
Impairment	(1,045)	(240)
Profit before tax	(268)	730

† Restated, see Summarised segmental analysis.

In Corporate Markets, profit before tax fell by £998 million, compared to last year, reflecting a combination of the impact of market dislocation and a substantial increase in impairment charge. Excluding the impact of market dislocation, profit before tax decreased by £8 million. On this basis, income increased by 34 per cent, supported by strong growth in corporate lending and an 85 per cent increase in cross-selling income. This growth in cross-selling income has continued to be supported by the Group's ability to leverage its strong funding capabilities and obtain funding at market leading rates, which has enabled the Corporate Markets business to continue to grow during a difficult 2008. Throughout this period, Corporate Markets has continued to invest in building its product capabilities and has been fulfilling substantially increased customer demand for interest rate and currency derivative products. This has enabled the business to further deepen its customer relationships, with Corporate Banking the only UK bank lender to have a positive net promoter score (TNS survey) as well as being awarded with 'Real Finance/CBI FDs' Excellence Awards – Corporate Bank of the Year' for the fourth year running.

Operating expenses increased by nine per cent to £691 million, reflecting significant further investment in people to support the substantial business growth in our Corporate Markets relationship business. The substantial increase in the impairment charge reflects an increase in the level of impairments as a result of the economic slowdown in the UK, market dislocation and the impact of a number of high profile financial services company collapses during the second half of the year.

Credit Market positions in Corporate Markets

The Group's high quality business model means that it has relatively limited exposure to assets affected by current capital markets uncertainties. The following table shows credit market positions in Corporate Markets, on both a gross and net basis.

Credit market positions

Financial instruments held at fair value through profit or loss
	31 December 2008		2008	31 December 2007
	Net exposure £m	Gross exposure £m	P & L impact £m	Net exposure £m	Gross exposure £m
Available-for-sale assets
– ABS CDO	60	60	92	130	130
Loans and advances
– ABS*	318	318	103	–	–
– ABS CDO**	128	128	–	–	–
– secondary loan trading*	310	310	15	–	–
– SIV capital notes	–	–	84	78	78
– SIV liquidity backup facilities	22	22	11	370	370
– investment grade bank bonds*	2,566	2,566	9	–	–
– ABS
– trading book*	–	–	97	474	474
– monoline hedged**	–	–	275	–	470
– major global bank cash collateralised	–	1,867	–	–	1,861
– secondary loan trading*	–	–	40	665	863
– other***	1,279	1,533	544	3,895	3,895
Market dislocation			1,270

*Items reclassified from trading to loans and advances on 1 July 2008 in accordance with amendment to IAS 39.

**Restructured ABS CDO removing monoline wrap and recorded within loans and advances.

***£2,265 million exposure was reclassified to loans and advances on 1 July 2008 in accordance with amendment to IAS 39.

Commercial Banking

	2008 £m	2007† £m	Change %
Net interest income	968	908	7
Other income	463	429	8
Total income	1,431	1,337	7
Operating expenses	(789)	(769)	(3)
Trading surplus	642	568	13
Impairment	(188)	(99)	(90)
Profit before tax	454	469	(3)

†Restated, see Summarised segmental analysis .

Profit before tax in Commercial Banking fell by £15 million, or three per cent, as strong growth in business volumes, growth in the Commercial Banking customer franchise and further improvements in operational efficiency and effectiveness, were more than offset by an £89 million increase in the impairment charge, primarily reflecting the impact of recent deterioration in the UK economy. Income increased by seven per cent to £1,431 million, reflecting disciplined growth in lending and deposit balances, and an increased focus on the more valuable higher turnover customer relationships which have substantially greater product needs. During 2008, Commercial Banking has continued to extend lending support throughout its customer franchise and, as a result, the Group's lending to SME customers increased by 20 per cent to £20.5 billion. Over the last 12 months, the Group has increased its market share of high value customers in the £0.5 to £2 million turnover range by 2 percentage points to 18 per cent, as a result of continuing to make good progress in attracting customers 'switching' from other financial services providers.

Costs were three per cent higher. Cost management remains a priority and the business is now starting to capture significant benefits from recent investments in improved IT infrastructure, allowing further improvement in relationship manager productivity. Asset quality in the Commercial Banking portfolios has remained satisfactory with 90 per cent of the portfolio supported by security, however the impairment charge rose by £89 million partly reflecting the impact of recent deterioration in the UK economy. The impairment charge as a percentage of average lending remained below one per cent in 2008.

Asset Finance

	2008 £m	2007† £m	Change %
Net interest income	305	283	8
Other income	463	423	9
Total income	768	706	9
Operating expenses	(496)	(439)	(13)
Trading surplus	272	267	2
Impairment	(270)	(228)	(18)
Profit before tax	2	39	(95)

† Restated, see Summarised segmental analysis

Profit before tax in Asset Finance decreased by 95 per cent to £2 million reflecting the significant combined impacts of higher impairments and lower residual values in response to the deteriorating economic conditions. Income increased by £62 million, or nine per cent, as a result of continued margin improvement across the Black Horse consumer businesses and growth in Autolease, our contract hire fleet business. Costs increased by £57 million, or 13 per cent, largely reflecting the impact of higher operating lease depreciation on the enlarged Contract Hire Fleet and exceptional residual value losses, but were otherwise flat year-on-year reflecting tight cost management and discipline. The impairment charge increased by £42 million to £270 million reflecting the impact of the economic slowdown in the UK.

International Banking

	2008 £m	2007† £m	Change %
Net interest income	245	201	22
Other income	201	179	12
Total income	446	380	17
Operating expenses	(291)	(244)	(19)
Trading surplus	155	136	14
Impairment	(6)	2
Profit before tax	149	138	8

† Restated, see Summarised segmental analysis.

Profit before tax in International Banking grew by eight per cent to £149 million reflecting strong income growth from meeting the needs of our customers, as the Group has increased its focus on growing its customer franchise in the increasingly global mobile affluent and high net worth wealth management market. Total income grew to £446 million, up 17 per cent (10 per cent excluding the impact of exchange rate movements), reflecting strong customer franchise growth, improved lending volumes at increased margins and strong growth in customer deposits. Costs increased by 19 per cent (nine per cent excluding the impact of exchange rate movements) reflecting increased investment in our target Private Banking and Expatriate Banking markets, and the trading surplus increased by 14 per cent.

CORPORATE BANK OF THE YEAR

Lloyds TSB (Commercial/Corporate Markets) won Bank of the Year for the fourth consecutive year, receiving great feedback for the quality of service and degree to which relationship managers understood the customers’ business. (Real FD/CBI FDs’ Excellence Awards, April 2008)

AWARDS FOR COMMERCIAL

Lloyds TSB (Commercial) won two awards in the 2008 National Association of Commercial Finance Brokers Awards, scooping Business Bank of the Year and Commercial Mortgage Provider of the Year. The winners were nominated by NACFB members in its annual survey. (December 2008)