RNS Number:9793H
Abbey National PLC
26 February 2003
PART 2
4. OTHER MATERIAL ITEMS AND ACCOUNTING CHANGES
4.1: Impact of embedded value re-basing, and other adjustments
31 December 31 December 31 December
2002 2001 2000
# m # m # m
___________ ___________ ___________
EV earnings based on prior year smoothed methodology 321 345 240
Less: Adjustment to period end market values (321) (259) (102)
Less: Guaranteed liability / MVA adjustment (362) (184) -
Less: Change in equity backing assumption (64) - -
Add: One-off benefit of funds under management transfer 115 - -
___________ ___________ ___________
Post-adjustment embedded value earnings (311) (98) 138
___________ ___________ ___________
The result of all these changes will be to reduce the embedded value asset of
the Life Assurance businesses by post-tax #833 million in total, of which #880
million relates to the year's noted above, and a positive #47 million is due to
prior years.
Adjustment to period end market values
The embedded value of the Life business has in the past been calculated using a
smoothed economic basis designed to reflect the underlying performance of the
business without the distortions caused by short-term fluctuations in the
financial markets. This smoothed basis uses long-term assumptions as to
investment returns, bonus rates, mortality and lapse rates. The Group's previous
accounting policy was to re-base the trend line when values diverged from the
expectation by more than 20% over two successive year-ends.
The accounting policy has now been amended so that period end market values are
used with the variances from the trend line shown as an adjustment to reflect
period end market values. In addition, for the purposes of calculating smoothed
embedded value, the trend line for future investment returns is based on
year-end market values being re-set on an annual basis. The smoothed result has
been included within trading profits.
Guaranteed liabilities (MVAs and GAOs)
The Life business has historically issued a number of "with-profits" policies
containing Guaranteed Annuity Options (GAOs) and other "with-profits" policies
where the normal Market Value Adjustments (MVAs) are not applied if the
policyholder redeems the policy on specified future dates. Both of these types
of policies therefore have a guaranteed future minimum value. Following falls in
stock market values and interest rates, the value of these liabilities is
substantially above the current and assumed future value of the assets that
support them. After adjusting for the effect of normal lapse, mortality and
bonus assumptions, provision has been made for this shortfall together with an
allowance for the option value that has effectively been given to the
policyholder. The additional impact of valuing these options in this manner
compared to recognising losses on embedded value assumptions amount to #233
million in 2002 and #119 million in 2001. Subsequent to the year-end, hedges
have now largely been taken out to considerably reduce the effect of future
market volatility with respect to these liabilities, the cost of which is
effectively similar to this provision.
Out of the total with-profit policies in force of #16.7 billion, there is #4.7
billion of MVA-free and premium guarantee business outstanding in Scottish
Mutual and Scottish Mutual International and #2.6 billion of guaranteed annuity
business written in Scottish Mutual and Scottish Provident.
Equity backing ratio (EBR)
One of the assumptions within the smoothed embedded value used in calculating
future investment returns is the EBR. As equities are assumed to produce higher
investment returns, a reduction in the EBR assumption will reduce the value of
embedded value. As set out in the section on Risk Management, the EBR was
reduced from 50% at 31 December 2001 to a year-end level of 34%. It has been
assumed that the EBR will remain at these lower levels and the EBR assumption
within the embedded value model has therefore been reduced from 70% to 30%. In
addition, hedging has now been put in place, which would have reduced the
effective equity backing ratio to circa 10% at a FTSE 100 level of 3,000.
One-off benefits of funds management transfer
Responsibility for Scottish Provident funds management has now been transferred
from Aberdeen Asset Management to Abbey National Asset Managers, which has the
effect of considerably reducing asset management costs. The benefit of this has
been reflected in the expenses assumption for in-force business within embedded
value giving a one-off benefit of #115 million, but is excluded from the
smoothed results due to its one-off nature and scale.
4.2: Goodwill impairment
Opening Goodwill Amortisation Write-down Closing balance
balance acquired / 31 Dec 2002
1 Jan 2002 disposed
# m # m # m # m # m
___________ ___________ ___________ ___________ ___________
Goodwill asset:
Abbey National business 71 (46) - (12) 13
Scottish Provident 903 - (46) (604) 253
First National 144 - (11) (133) -
Flemings Premier Banking 106 - (5) - 101
Porterbrook 17 - (1) (16) -
Other 2 8 (1) - 9
___________ ___________ ___________ ___________ ___________
1,243 (38) (64) (765) 376
Goodwill in reserves:
N&P 528 - - - 528
Abbey National business 5 - - - 5
Scottish Mutual 85 - - - 85
First National 427 (13) - (224) 190
Cater Allen Offshore 149 - - (149) -
Other 7 - - - 7
___________ ___________ ___________ ___________ ___________
1,201 (13) - (373) 815
___________ ___________ ___________ ___________ ___________
2,444 (51) (64) (1,138) 1,191
___________ ___________ ___________ ___________ ___________
Prior to 1 January 1998, goodwill arising on acquisition of subsidiary
undertakings and purchases of businesses was taken directly to reserves. As of 1
January 2002 the cumulative amount of goodwill taken to profit and loss reserve
in previous periods by the Group and not subsequently recognised in the profit
and loss account was #1,201 million.
In addition, the amount of goodwill on the balance sheet as at 1 January 2002
was #1,243 million. These goodwill assets would normally be amortised over a
period of 20 years.
In accordance with FRS 11 "Impairment of fixed assets and goodwill", the
carrying value of goodwill has been reviewed for impairment where there is some
indication that this could have occurred. In part this has also been informed by
the recently completed strategic review, and associated disposal opportunities
being considered.
The carrying value of a number of subsidiaries has been compared to their
recoverable values and value in use, resulting in a total impairment charge of
#1,138 million. Of this, #765 million relates to on balance sheet goodwill, with
#373 million relating to goodwill previously taken directly into reserves. Once
it has been established that the value of the goodwill has been impaired, the
full impact is reported in the Group's current year profit and loss, regardless
of whether the goodwill has been held as an asset or previously written-off to
reserves (with a corresponding credit to reserves, and thus no overall reserves
impact).
The First National impairment is a result of an assessment of the carrying value
of goodwill against the projected financial performance of the businesses. The
amount of the impairment is consistent with the proposed sale of parts of First
National to GE Consumer Finance announced in February 2003.
Goodwill previously carried in relation to Scottish Provident was supported by
its UK and non-UK business. Given plans to dispose of the offshore business and
likely disposal proceeds, the goodwill has been evaluated in relation to the
ongoing business and trends in the market. Following a reassessment of the
prospects of the UK protection market, an impairment of #604 million has been
recognised, however this is partly offset by the #115 million benefit recognised
in embedded value asset following the transfer of Scottish Provident funds from
Aberdeen Asset Management to Abbey National Asset Managers.
In relation to Cater Allen Offshore the goodwill impairment reflects the reduced
level of profits forecast in the latest plan outputs.
These write-downs do not affect the Group's capital ratios as the full amount of
goodwill recognised on acquisition is deducted to arrive at this ratio.
Furthermore, where goodwill previously written off against reserves is recycled
through the profit and loss account, there is a corresponding credit to reserves
resulting in no net effect on shareholders' funds.
4.3: Pension fund deficit
31 December 31 December 31 December
2002 2001 2000
# m # m # m
___________ ___________ ___________
Regular cost 85 73 79
Amortisation of surpluses arising on pension schemes (3) (9) (12)
Amortisation of deficits arising on pension schemes 16 8 1
Amortisation of surplus arising from fair value adjustment
on acquisition of N&P 2 2 2
___________ ___________ ___________
P&L charge 100 74 70
___________ ___________ ___________
The Abbey National defined benefit pension scheme was closed to new members in
March 2002. This was replaced with a defined contribution scheme where the
company's obligations are limited to its initial payments into the fund. Under
the current accounting standard, SSAP 24, the assets and liabilities of defined
benefit schemes are assessed on an actuarial basis, with any surplus or deficit
on the pension fund being charged to the profit and loss account over the
remaining working lives of scheme members.
The profit and loss charge for 2002 is based on the March 2002 valuation which
indicated a pre-tax deficit of #127 million. A December 2002 valuation estimate
suggests a pre-tax deficit of #700 million, which when amortised over the
average scheme member life of 14 years, would lead to an estimated #34 million
increase in annual costs above the 2002 level of #16 million. Clearly this is
dependent on equity market movements and will be reassessed in an annual review
in March 2003.
FRS 17 disclosure
31 December 31 December
2002 2001
# m # m
___________ ___________
Total market value of assets 1,880 2,246
Present value of scheme liabilities (2,722) (2,467)
___________ ___________
FRS 17 scheme deficit (842) (221)
Related deferred tax asset 253 66
___________ ___________
Net FRS 17 scheme deficit (589) (155)
___________ ___________
A new standard on accounting for pension funds, FRS 17, is currently being
phased in, with the expectation that it will be fully operative in 2005. FRS 17
is more prescriptive in terms of the actuarial assumptions adopted and also
requires the assets of the fund to be marked to market. A further difference in
the accounting treatment is that fund surpluses or deficits will no longer be
charged to the profit and loss account, but reflected immediately in the
statement of total recognised gains and losses. On this basis, the net pension
scheme deficit at 31 December 2002 has been estimated at #589 million post-tax.
Estimated liabilities at the end of 2001 have been restated following
clarification of the treatment of death in service benefit earlier this year.
2002 has seen a significant growth in the deficit, principally due to poor
investment performance resulting from equity market weakness. Future exposure to
equity markets has been reduced following a recent switch to fixed income
assets, reducing the equity backing ratio from 80% to 50%. Assuming that equity
markets are stable, the expectation for 2003 is for an increase in the deficit
of around #30 million.
For illustrative purposes, a 10% additional equity market movement would result
in an estimated #90 million change in the deficit. This assumes that the #1.9
billion pension fund assets, of which 50% is invested in equity funds, perform
in line with the market.
Funding of the pension schemes is based upon actuarial advice of the long-term
funding requirements and anticipated asset returns. In 2003, contributions will
reflect a 50% equity backing ratio and amortisation of the funding deficit over
the remaining service life of employees and are expected to be in line with the
SSAP24 profit and loss charge for the year. The closure of the defined benefit
schemes to new employees in 2002 will result in a reduction in ongoing pension
costs as members leave and are replaced with employees covered by the defined
contribution scheme, where the employer contributions are lower.
4.4: Cost programme implementation
During the second half of 2002, the Group embarked upon a major programme of
cost reduction activity across the organisation. The principal aim of this
activity is to eradicate the duplication of both resources and activities across
the organisation so that a more efficient cost base can be achieved and then
sustained.
Retaining a focus on cost reduction is an ongoing priority for the Group.
Significant changes have already been implemented and further benefits will be
validated through 2003. In total the programme is targeting annualised cost
savings of over #200 million from the PFS businesses by the end of 2005, with a
ratio of implementation costs to savings in line with other cost programmes
running in the sector.
The work to lower our cost base and promote a higher level of cost-consciousness
amongst staff has been a key input into the strategic review of the business.
Regardless of organisational structure, keeping the cost base under close
scrutiny is a top priority as the new strategy is implemented, whilst
acknowledging that an element of the savings will be re-invested in the business
to improve the customer proposition and competitiveness.
4.5: Stock option expensing
Following the publication of FRED 31, it is expected that new rules governing
the accounting treatment of share based payments will come into effect in 2004.
Abbey National considers it appropriate to adopt the new treatment from the 2002
financial year.
The current standard, UITF 17, requires the economic value of employee share
options or conditional share grants, with the exception of Inland Revenue
approved SAYE schemes, to be charged to the profit and loss account over the
period of employment that the performance conditions relate to. Amongst other
things, the proposed new guidance would extend this by proposing that the fair
value of all employee options or conditional share grants be charged to the
profit and loss account. Whilst it is not possible to fully adopt the most
recent proposals, under the provisions of UITF 17 the company has recognised a
charge for the fair value of all employee options or conditional share grants
computed by reference to the grant date and which is charged as an expense over
the performance period. This resulted in a pre-tax charge of #7 million in 2002
and cumulative prior year adjustments of #17 million.
A further provision has also been made in relation to Abbey National ordinary
shares acquired in past years through ESOP Trusts and held at cost against
potential share requirements under various stock based employee compensation
schemes. The significant fall in the value of Abbey National ordinary shares has
led to a pre-tax charge of #37 million in 2002. The company is planning to
reduce the risk of similar charges occurring in the future through revised share
re-purchase and cancellation arrangements, to the extent allowed by the schemes.
4.6: FRS 19 - Deferred tax
During the year, the Group has adopted the new accounting standard FRS 19,
deferred tax. The standard requires deferred tax to be provided on a 'full
provision' basis on most types of timing difference, rather than the 'partial
provision' basis previously required by SSAP 15, accounting for deferred tax. In
accordance with this standard, deferred tax assets for general provisions and
software development costs were credited to the profit and loss account for the
first time. The impact on the 2001 full year restated results was to increase
profit after tax by #24 million.
4.7: UITF Abstract 33 - Reserve Capital Instruments (RCI)
Following the issue of UITF Abstract 33 in February 2002, the treatment of RCI
has changed. They are now treated as subordinated liabilities, with the coupon
payment included as interest payable. The impact on the 2001 full year was a
reduction in profit before tax of #19 million, with-profits attributable to
shareholders remaining unchanged. The change impacts Group Infrastructure.
5. FURTHER DETAILS ON THE PORTFOLIO BUSINESS UNIT
This section provides additional detail on the split between Personal Financial
Services (PFS) and businesses to be managed in the Portfolio Business Unit
(PBU). This follows the recently completed strategic review.
5.1: Profit and loss split by PFS and PBU
31 December 2002
PFS Portfolio Business Unit TOTAL
First European Ops Wholesale
National and exit
Int.Life (1) portfolios
# m # m # m # m # m
________ ________ ________ ________ ________
Gross trading income 3,013 416 63 765 4,257
Less: Depreciation of operating lease assets (23) (5) - (214) (242)
________ ________ ________ ________ ________
Trading income 2,990 411 63 551 4,015
Adjust for:
- Embedded value re-basing (553) - (79) - (632)
- Wholesale Banking losses asset disposals - - - (104) (104)
- Other asset disposals - - - 44 44
- IEM impairment - - - (38) (38)
________ ________ ________ ________ ________
Total income 2,437 411 (16) 453 3,285
Trading expenses (1,577) (182) (48) (104) (1,911)
Adjust for:
- Cost programme implementation (34) (7) - (3) (44)
- Share write-downs (37) - - - (37)
- Goodwill charges (811) (357) (18) (16) (1,202)
________ ________ ________ ________ ________
Total expenses (2,459) (546) (66) (123) (3,194)
Personal Financial Services provisions (194) - - - (194)
Wholesale Bank provisions - - - (760) (760)
Other Portfolio Business Unit provisions - (119) (2) - (121)
________ ________ ________ ________ ________
Loss before tax (216) (254) (84) (430) (984)
________ ________ ________ ________ ________
(1) The results for the international Life businesses include #40 million of
costs netted as part of the calculation of embedded value.
5.2: Wholesale Banking Exit Portfolios
5.2.1: Assets split by PFS and PBU
31 December 2002 31 December 2001
PFS PBU Total PFS PBU Total
# bn # bn # bn # bn # bn # bn
________ ________ ________ ________ ________ ________
Treasury bills and loans to banks 7.0 0.4 7.4 8.8 - 8.8
Loans and advances to customers 4.0 8.0 12.0 9.6 8.5 18.1
Finance leases - 3.1 3.1 - 4.4 4.4
Debt securities 26.1 32.3 58.4 18.5 43.3 61.8
Private equity - 0.8 0.8 - 0.7 0.7
Operating lease assets - 2.6 2.6 - 2.1 2.1
Other assets and prepayments 3.8 1.4 5.2 2.6 3.1 5.7
________ ________ ________ ________ ________ ________
40.9 48.6 89.5 39.5 62.1 101.6
________ ________ ________ ________ ________ ________
Closing risk weighted assets (# bn) 7.3 23.1 30.4 10.4 29.3 39.7
________ ________ ________ ________ ________ ________
An increase in debt securities in the PFS operations was partially offset by a
decrease in loans and advances to customers. Both balances represented
predominantly short dated exposures to high quality counterparties, with debt
securities relating to investments in Certificates of Deposits and loans and
advances relating to reverse repos.
The remainder of this section is aimed at explaining the nature of exposures
within the Wholesale Banking PBU portfolios.
Balance sheet provisions
31 December 31 December 31 December
2002 2001 2000
# m # m # m
________ ________ ________
Specific provisions 745 278 60
General provisions 146 91 48
________ ________ ________
Total balance sheet provisions 891 369 108
________ ________ ________
Total balance sheet provisions more than doubled to #891 million during 2002.
Specific provisions are based on a detailed review of individual impaired
assets.
The level of general provisions also increased significantly, moving towards a
more conservative prudent position given the risks inherent on the balance
sheet. The difference between profit and loss provision charge and balance sheet
provision increase is a reflection of balance sheet provision releases following
asset sales and exchange rate movements. This is detailed in the table below:
Specific General Total
provisions provisions provisions
# m # m # m
________ ________ ________
2002 opening balance 278 91 369
Profit and loss charge in 2002 689 71 760
Release on disposal (203) - (203)
Other (incl. foreign exchange movements) (19) (16) (35)
________ ________ ________
2002 closing balance 745 146 891
________ ________ ________
Coverage ratios
31 December 31 December
2002 2001
# m # m
___________ ___________
Debt securities provided against 919 401
Specific provisions (414) (255)
Coverage (%) 45.0% 63.6%
Loans provided against 836 119
Specific provisions (204) (12)
Coverage (%) 24.4% 10.1%
Total asset provided against 1,755 520
Specific provisions (618) (267)
General provisions (146) (91)
___________ ___________
Total provisions (764) (358)
Coverage (%) 43.5% 68.8%
___________ ___________
The year-on-year decrease in the coverage ratio for debt securities arises due
to the higher proportion of high yield assets included in 2001, which, in line
with recovery rates, are generally highly provided for. In addition 2001
included Enron exposures that were 80% provided for. This is partially offset by
an increase in the coverage ratio for loans.
Total specific provisions in the table of #618 million differs to the total on
the balance sheet of #745 million, due to provisions relating to private equity.
5.2.2: Structure of additional analysis
31 December 2002 31 December 2001
Assets RWAs Assets RWAs
# bn # bn # bn # bn
___________ ___________ ___________ ___________
Debt securities 32.3 11.1 43.3 17.3
Loan portfolio 8.4 7.2 8.5 7.1
Leasing businesses 5.7 3.7 6.5 3.8
Private Equity 0.8 1.1 0.7 1.1
Other 1.4 - 3.1 -
___________ ___________ ___________ ___________
Total 48.6 23.1 62.1 29.3
___________ ___________ ___________ ___________
The group has #15.3 billion of assets in conduit vehicles or covered by credit
enhanced structures. All of these assets are included in the Group Balance
Sheet. The difference in risk weighted assets resulting from the use of these
vehicles and structures is #10.4 billion. The majority of the underlying assets
in these structures are AA or above. In addition, #0.8 billion of high yield
assets are covered by the Newark CBO which is covered in more detail in Section
5.2.5.
5.2.3: Debt securities
31 December 2002 31 December 2001
Assets RWAs Assets RWAs
# bn # bn # bn # bn
___________ ___________ ___________ ___________
Banks and Financial Institutions 6.5 1.5 7.9 1.8
Sovereign & Government Agencies 2.0 0.5 4.3 1.6
Corporates 6.8 5.4 8.6 5.9
ABS and MBS 15.9 3.5 21.0 6.5
High Yield 1.1 0.2 1.5 1.5
___________ ___________ ___________ ___________
Total debt securities 32.3 11.1 43.3 17.3
___________ ___________ ___________ ___________
The reduction in investment debt securities principally reflected sales of
banks, sovereigns and corporate exposures as well as sales and a run-off of the
ABS and MBS portfolios. During the year #3.7 billion of debt securities were
transferred from Abbey National Treasury International Limited, part of the
Wealth Management businesses.
Total PBU debt securities include #0.8 billion of trading debt securities, which
are already marked to market, and are therefore not included in the analysis
below.
Of the current exposures, 68% have a contractual maturity greater than 5 years.
The debt securities portfolio, in 2002, generated #190.5 million of margin
income.
Mark to market analysis
31 December 31 December
2002 2001 (3)
# m # m
___________ ___________
Debt securities 32,015 48,286
Less: Provisions (2) (500) (357)
___________ ___________
Book value of debt securities (1) 31,515 47,929
Add: Book value of related derivatives (142) (66)
___________ ___________
31,373 47,863
___________ ___________
Market value of debt securities 31,640 47,990
Market value of related derivatives (931) (555)
___________ ___________
30,709 47,435
___________ ___________
Mark to market on debt securities 125 61
Mark to market on related derivatives (789) (489)
___________ ___________
(664) (428)
___________ ___________
(1) Total debt securities subject to the mark to market adjustment above of
#31.5 billion differ to the total debt securities figure of #32.3 billion as a
result of #0.8 billion of debt securities held in 'trading' books.
(2) The analysis above is net of #414 million specific and #86 million general
provisions.
(3) For comparative purposes, debt securities transferred from Abbey National
Treasury International Limited in 2002 are included in the mark to market
analysis in 2001.
The mark to market table indicates the possible loss, were a decision made to
sell the portfolio rather than hold the assets to maturity. Of the overall
deficit at 31 December 2002 of #664 million, #431 million relates to positions
where the mark to market, including related derivatives, is less than 90% of
book value, of which #271 million lies between 80-90% of book value.
The overall increase in the deficit year-on-year is largely due to the effect of
the illiquidity of certain CDO positions which combined with other ABS positions
represent 78% of the total deficit.
A large part of the mark to market deficit arises from derivatives. This is not
unusual and has arisen because the vast majority of mark to market positions
relate to fixed rate bonds that are swapped to floating rate on purchase.
Generally, interest rates have fallen since the assets were acquired, reducing
the value of the interest rate swaps. Note that this would have been offset by
the increased value of the fixed rate securities before the impact of credit
widening.
5.2.4: Loan portfolio, and related exposures
31 December 2002 31 December 2001
Assets RWAs Assets RWAs
# bn # bn # bn # bn
___________ ___________ ___________ ___________
Infrastructure 1.6 2.2 1.4 1.8
Project Finance 2.9 3.3 2.5 2.9
Acquisition Finance 2.1 1.3 2.3 1.8
Structured Finance lending 1.8 0.4 2.3 0.6
___________ ___________ ___________ ___________
Total loan portfolio 8.4 7.2 8.5 7.1
___________ ___________ ___________ ___________
The change in the loan portfolio represented additional investments in Project
and Infrastructure Finance assets in the first half of the year partially offset
by a run-off of shorter dated maturities in Acquisition and Structured Finance.
Approximately half of the Project Finance balance relates to property financing
transactions, which are secured on specific property assets.
Concentrations are detailed in Section 5.2.5.
Maturities on infrastructure and property lending are generally long-dated (in
excess of ten years). In total, margin income associated with this business in
2002 equalled #86.2 million.
Leasing businesses
31 December 2002 31 December 2001
Assets RWA's Assets RWA's
# bn # bn # bn # bn
___________ ___________ ___________ ___________
Finance leases 3.1 1.0 4.4 1.6
Operating leases 2.6 2.7 2.1 2.2
___________ ___________ ___________ ___________
Total 5.7 3.7 6.5 3.8
___________ ___________ ___________ ___________
The finance leasing portfolio is predominantly high quality with over 60% of
exposure being to counterparties rated AA or better. The operating lease
portfolio principally represents assets held by the Porterbrook (#2.0 billion)
and IEM (#0.5 billion) subsidiaries.
Private equity
31 December
2002
# m
___________
Opening balance of drawdowns 697
Drawdowns in the current period 311
Disposals (88)
Provisions (123)
___________
Closing balance of drawdowns 797
___________
Of the private equity portfolio, #140 million is US exposures, #87 million is
direct or quoted investment, with the remainder relating to European (including
UK) exposures. Undrawn commitments represent a further exposure in excess of
#650 million (2001: in excess of #1 billion). The decrease is largely due to
drawdowns noted in the above table.
36% of the US exposure has now been provided for.
5.2.5: Wholesale Bank Exit Portfolios credit exposure analysis
The following analysis is net of provisions of #745 million, and includes total
undrawn commitments of #2.0 billion. In total, approximately 75% of the
exposures in the PBU have external ratings. However, for approximately #19
billion of these, internal ratings have been used in the following analysis. In
the vast majority of instances the internal ratings take a more prudent stance.
Credit exposures by credit rating
31 December 2002 31 December 31 December
2002 2001
Average Average of Total Total
Exposure Top 5 Exposure Exposure
exposures
# m # m # bn # bn
___________ ___________ ___________ ___________
AAA 31.0 338.7 15.5 20.0
AA 43.0 475.1 7.4 11.6
A 46.6 299.6 13.6 14.4
BBB 32.1 376.9 8.5 9.3
___________ ___________ ___________ ___________
Total investment grade 45.0 55.3
BB 17.1 59.9 1.6 2.6
B 14.8 43.5 0.6 1.0
CCC 13.5 43.6 0.6 0.4
___________ ___________ ___________ ___________
Total sub-investment grade 2.8 4.0
Equity n/a n/a 0.9 0.7
___________ ___________ ___________ ___________
Total exposure 48.7 60.0
___________ ___________ ___________ ___________
Note: Equity exposures included #0.1 billion in respect of the Newark Junior
note. This does not appear within the private equity balance on the analysis in
Section 5.2.1 as the bonds held within the structure are included in debt
securities.
Total investment grade exposures in the PBU fell by #10.3 billion to #45.0
billion (2001: #55.3 billion) driven by Asset and Mortgage Backed securities
maturities and sales in the AAA and AA books, combined with an element of
downward credit migration. The #0.8 billion decrease in A graded exposures
relates to sales of corporate investment securities, while a similar drop in the
BBB grade reflects sales of telecoms and manufacturing corporates, and a small
reduction in sovereigns.
Exposures below investment grade have also been reduced from #4.0 billion to
#2.8 billion, following the Newark high yield securitisation in May 2002, and
some sovereign bond upgrades.
The concentrations of investment grade exposures relate in large part to UK and
US government and financial services exposures. Within BBB, the top 5
counterparties relate to major international corporates, sovereign bonds and
asset finance lending.
Asset backed securities classified as CDOs represent #3.8 billion of the total
investment grade securities and #80 million of the sub-investment grade
securities. Since 31 December 2002, a further #495 million has migrated downward
into sub-investment grade.
Credit exposures by sector
31 December 2002 31 December 2002
Specific Average Investment Sub- Total
Provisions of Top 5 Grade Investment (net of
exposures Grade provisions)
# m # m # bn # bn # bn
___________ ___________ ___________ ___________ ___________
Banks and Financial Institutions 37 461.6 13.5 0.1 13.6
Sovereign - 308.9 1.9 - 1.9
Corporates:
- Utilities, energy & natural r'ces 40 149.6 1.0 - 1.0
- Aero, defence & airlines - 26.0 0.1 0.1 0.2
- Telecoms 155 87.9 0.5 0.1 0.6
- Manufacturing & transport 21 210.3 1.3 0.1 1.4
- Other 5 125.7 2.2 0.9 3.1
Asset Finance:
- Project Finance (incl. Property) 167 122.9 2.7 0.7 3.4
- Infrastructure Finance - 236.5 2.9 0.2 3.1
- Operating Leasing - 176.9 0.9 0.2 1.1
ABS / MBS:
- Asset / Mortgage Backed 76 175.5 13.4 0.3 13.7
- CDOs 62 126.8 3.8 0.1 3.9
- Federal Agency - 251.3 0.8 - 0.8
___________ ___________ ___________ ___________ ___________
563 45.0 2.8 47.8
___________ ___________ ___________ ___________ ___________
Credit exposure
Equity related (excl. undrawns) 182 (1) - 0.9 0.9
___________ ___________ ___________ ___________ ___________
Total exposure 745 45.0 3.7 48.7
___________ ___________ ___________ ___________ ___________
31 December 2001 31 December 2001
Specific Average Investment Sub- Total
Provisions of Top 5 Grade Investment (net of
exposures Grade provisions)
# m # m # bn # bn # bn
___________ ___________ ___________ ___________ ___________
Banks and Financial Institutions - 546.7 16.2 0.1 16.3
Sovereign 7 568.3 3.5 0.9 4.4
Corporates:
- Utilities, energy & natural r'ces 101 149.8 1.1 0.2 1.3
- Aero, defence & airlines - 17.5 0.1 - 0.1
- Telecoms 64 259.4 1.6 0.3 1.9
- Manufacturing & transport 25 266.5 1.8 0.2 2.0
- Other 33 146.0 1.9 1.6 3.5
Asset Finance:
- Project Finance (incl. Property) - 72.1 1.7 0.1 1.8
- Infrastructure Finance - 230.9 2.4 0.1 2.5
- Operating Leasing - 65.4 0.3 0.2 0.5
ABS / MBS:
- Asset / Mortgage Backed 38 236.7 18.0 0.3 18.3
- CDOs - 167.7 5.5 - 5.5
- Federal Agency - 386.6 1.2 - 1.2
___________ ___________ ___________ ___________ ___________
268 55.3 4.0 59.3
___________ ___________ ___________ ___________ ___________
Credit exposure
Equity related (excl. undrawns) 10 - 0.7 0.7
___________ ___________ ___________ ___________ ___________
Total exposure 278 55.3 4.7 60.0
___________ ___________ ___________ ___________ ___________
(1) Balance includes #55 million specific provisions relating to the Newark CBO.
Total exposures fell by #11.3 billion during 2002 to #48.7 billion (2001: #60.0
billion).
Exposures to Banks and Financial Institutions, and Sovereigns decreased by #5.2
billion to #15.5 billion as a result of active sales in the investment
securities portfolio.
Total corporate exposure of #6.3 billion was reduced by 28% from #8.8 billion,
driven by strong reductions in Telecoms and Manufacturing exposures. The
exposure to utilities has fallen #0.3 billion, with the largest balances
relating to European utilities and oil and gas. However, further exposures
classified as ABS and Project Finance in the table, result in a total exposure
to utilities of #3.4 billion. Similarly, total exposures to Aerospace were #760
million higher as a result of exposures classified as ABS in the table. Strong
reductions in Telecoms exposures have resulted from the active sale of positions
and the issue of the Newark CBO, with the remaining balances relating to major
European fixed line providers. Manufacturing exposures have reduced by #0.6
billion as a result of investment securities sales. Remaining exposures are to
major international manufacturers.
Asset Finance exposures of #7.6 billion are over 58% higher than 2001, driven by
strong growth across the book to predominantly investment grade counterparties.
Exposures to ABS and MBS fell significantly to #18.4 billion (2001: #25 billion)
in large part due to the natural maturity of the book, decreased business
activity, and active sales. Top 5 exposures are all investment grade ABS
counterparties, and mostly AAA. CDO exposures have fallen by #1.6 billion due to
roll-off and, more recently, sales. The small increase in sub-investment grade
CDO exposure is driven by credit migration. Overall the top 5 counterparties are
rated BBB+ or better.
Credit exposures by region
31 December 2002
Investment Sub-investment Total
Grade Grade
# bn # bn # bn
___________ ___________ ___________
Europe 20.2 2.3 22.5
North America 22.0 1.2 23.2
Asia-Pacific 2.6 0.1 2.7
Latin America - 0.1 0.1
Middle East 0.2 - 0.2
___________ ___________ ___________
Total exposure 45.0 3.7 48.7
___________ ___________ ___________
31 December 2001
Investment Sub-investment Total
Grade Grade
# bn # bn # bn
___________ ___________ ___________
Europe 21.6 1.8 23.4
North America 29.7 2.6 32.3
Asia-Pacific 3.7 0.1 3.8
Latin America 0.1 0.2 0.3
Middle East 0.2 - 0.2
___________ ___________ ___________
Total exposure 55.3 4.7 60.0
___________ ___________ ___________
The largest regional fall was to North American exposures, down 28% to #23.2
billion (2001: #32.3 billion). This resulted in large part from the roll-off and
increased sales activity in investment securities, including ABS, CDOs and
corporate bonds. The decrease in sub-investment grade was the result of the
Newark CBO in May 2002, offset by some credit migration in the power sector.
European exposure fell by #0.9 billion to #22.5 billion (2001: #23.4 billion)
with bond sales offset in part by increases in loan portfolios such as
Infrastructure. Sub-investment grade exposures have increased to #2.3 billion
(2001: #1.8 billion) due to increased activity in the European LBO market, and
more generally, downward credit migrations in Europe. Of the European exposure,
55% related to the UK.
Exposures in the Asia-Pacific region decreased by 29% to #2.7 billion (2001:
#3.8 billion), attributable to active selling of concentrations in capital
market exposures to sovereigns and corporates in the region.
The decrease of #0.2 billion in Latin American exposures is the result of the
active sale of sovereign bonds. Middle East exposures have remained relatively
stable, and are not significant.
AAA, AA and A grade by exposure type
31 December 2002 31 December 2001
Average of Top 5 exposures Total exposure Total exposure
# m # bn # bn
___________ ___________ ___________
Banks and Financial Institutions 461.6 13.1 15.6
Sovereign 265.3 1.6 2.4
Corporates 186.0 2.9 2.9
Asset Finance 148.6 2.0 1.3
ABS / MBS 246.7 16.9 23.7
___________ ___________ ___________
Total exposure 36.5 46.0
___________ ___________ ___________
In total, exposures to AAA to A- graded investments fell by 21% to #36.4 billion
with significant reduction in Banks and Financial Institutions ABS / MBS and
CDOs. These reductions reflect sales and maturities particularly in the second
half of 2003. greatest concentrations to individual counterparties are to
international banks. Sovereign exposures are to Japan, the UK and emerging
European countries. The largest exposures within ABS are to the US Government,
US government agencies, securitised property rental and credit card receivables.
Greatest corporate exposures relate to oil and gas, utility and motor
manufacture. The largest Asset Finance exposures relate to the rail industry
and property companies.
BBB grade by exposure type
31 December 2002 31 December 31 December
2002 2001
Specific Average Total Total
provisions of Top 5 exposure Exposure
exposures
# m # m # bn # bn
___________ ___________ ___________ ___________
Banks and Financial Institutions - 39.4 0.4 0.6
Sovereign - 70.7 0.3 1.1
Corporates - 218.8 2.3 3.6
Asset Finance 1 298.8 4.4 3.1
ABS / MBS 58 92.2 1.1 0.9
___________ ___________ ___________ ___________
Total exposure 59 8.5 9.3
___________ ___________ ___________ ___________
In total, exposures to BBB graded investments fell by 9% to #8.5 billion (2001:
#9.3 billion) with strong reductions in exposures to sovereigns and corporates,
offset by growth in Asset Finance and an increase in ABS/MBS due primarily to
downward credit migration.
Sovereign exposures fell #0.8 billion, largely due to bond sales primarily in
Asia. Corporate exposures were reduced by #1.3 billion due to continued bond
sales and the Newark CBO. The Top 5 counterparties are major manufacturing and
service providers, to whom our exposures have continued to reduce in 2003.
Asset Finance exposures at #4.4 billion are #1.3 billion higher than 2001, due
to increased activity in the structured property, project finance and
infrastructure markets as well as new business from the leasing operations.
Exposures are generally well secured on assets, and the largest exposures are to
special finance vehicles relating to major infrastructure projects.
As identified under the credit exposures by credit rating table, sub-investment
grade CDO exposure has increased by #495 million in 2003.
Sub-investment grade credit exposure
31 December 2002 31 December 31 December
2002 2001
Specific Average Total Total
provisions of Top 5 exposure exposure
exposures
# m # m # bn # bn
___________ ___________ ___________ ___________
Banks and Financial Institutions 37 18.6 0.1 0.1
Sovereign - - - 0.9
Corporates 52 50.4 1.2 0.9
Asset Finance 167 59.4 1.1 0.4
ABS / MBS 80 27.8 0.4 0.3
___________ ___________ ___________ ___________
Credit exposure 336 2.8 2.6
___________ ___________ ___________ ___________
High yield (1) 223 38.3 0.1 1.4
Private equity (excluding undrawns) 127 0.8 0.7
___________ ___________ ___________ ___________
Total exposure 686 3.7 4.7
___________ ___________ ___________ ___________
(1) High yield exposure in 2001 includes certain loan counterparties amounting
to #0.2 billion.
In total, sub-investment grade exposures fell by 21% to #3.7 billion (2001: #4.7
billion). The significant fall in high yield exposures following the Newark CBO
in May 2002, and upward credit migration of sovereign risk, have been partly
offset by increased exposures, particularly in corporates and Asset Finance.
Corporate sub-investment grade exposures increased by #0.3 billion due to
increased activity in the European LBO markets and downward credit migration.
Exposures are mostly secured loan exposures to European based corporates.
Sub-investment grade exposures in the Asset Finance book increased by #0.7
billion, mostly driven by credit migration in the power sector and operating
lease assets. Three US based power project deals, in addition to aircraft
leasing and infrastructure deals, impact the Top 5 average balances.
High yield securities
31 December
2002
# bn
___________
Opening balance (net of provisions) at 31 December 2001 1.2
Less:
Asset disposals (0.3)
Additional provisions (0.1)
___________
High yield securities assets 0.8
Amount covered by credit protection through the CBO (0.7)
___________
High yield securities exposure 0.1
___________
The net exposure of assets not covered under the Newark CBO is #9.5 million. The
net exposure of #0.1 billion above also comprises the holding of the Newark
junior note of #57 million net of a balance sheet provision of #55 million.
Dependant on portfolio performance, Abbey National also remains liable to extra
margin contribution of up to #88 million in respect of Newark.
5.3: First National
31 December 2002
Assets RWAs
# bn # bn
___________ ___________
Consumer and Retail Finance Lending 4.8 3.9
Motor Finance 2.9 3.6
Litigation Finance 0.3 0.3
___________ ___________
8.0 7.8
___________ ___________
The consumer and retail finance lending businesses are contracted to be sold to
GE Consumer Finance, as announced on 4 February 2003. Subject to completion the
disposal will release RWAs of #3.9 billion in 2003, and will realise a premium
to net assets of #218 million subject to disposal costs and potential
pre-completion adjustments. This is consistent with the remaining goodwill
carried in reserves.
The risk weighted assets of Motor Finance include 100% of assets held by the PSA
joint venture, while only 50% of the assets are included on the balance sheet.
For Motor Finance and Litigation Funding, consideration is being given to a
range of strategies to maximise value to our shareholders, including disposal
opportunities.
5.4: International operations
All operations focusing on international markets, excluding certain funding and
deposit taking activities, have been designated non-core.
The international Life businesses contributed #5 million to Group trading profit
before tax, and generated circa #0.9 billion of new business premiums
(annualised equivalent of #111 million).
Abbey National France and Abbey National Italy returned to profitability in
2002, in total contributing #8 million.
This information is provided by RNS
The company news service from the London Stock Exchange
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