RNS Number:8698X
Abbey National PLC
22 April 2004
Abbey
2004 Quarter One Trading Statement
This statement provides a summary of business and financial trends up to 31
March 2004, and is released ahead of a conference call with analysts at 8:30
this morning.
Abbey is also today holding its AGM, at 11am, at the Barbican Hall, Barbican
Centre, London. The meeting will deal with the proposed resolutions as outlined
in the Notice of Meeting, and will provide a summary of the business and
financial performance in 2003.
Unless otherwise stated, the statement relates to the 3 months to end March,
compared to a pro-rata equivalent of second half 2003 (e.g. PFS trading profit
before tax of #433 million divided by 2).
Summary
"We are making good progress and the restructuring efforts remain on schedule 14
months into our 3 year plan. It is tough work and is inevitably having some
negative impact on current trading. We continue to drive the business hard as we
push on with our plans. We believe that the huge changes we are making across
the entire company will start to have a positive impact from the second half of
the year."
Luqman Arnold, CEO
Financial highlights from today's statement include:
* return to profit at a Group statutory level, representing a sharp
recovery from the losses of 2002 and 2003, as a result of lower PBU and
PFS charges;
* PFS trading profit before tax in the first quarter, slightly lower
than a pro-rata equivalent of second half 2003 reflecting the
anticipated reduction in net interest margin, largely offset by lower
expenses and the non-recurrence of the product mis-selling provision of
#50 million;
* a further 17% reduction in Portfolio Business Unit (PBU) assets since
December 2003 to #10.2 billion from #12.3 billion, with risk weighted
assets falling by 13%, and disposals made across most asset classes.
Exit costs in the debt securities and loan portfolios have been
consistent with mark-to-market disclosures made at the year-end. The PBU
achieved a small profit before tax in the first quarter;
* gross mortgage lending of #6.7 billion, ahead of the same period last
year and equivalent to a 10.1% estimated market share, broadly
consistent with recent performance. Net lending of #2.1 billion was down
16%, due to increased capital repayments (consistent with overall market
trends);
* the first quarter performance across other product areas was mixed.
Given the disruption from change currently being effected around the
business, progress was satisfactory in some areas, such as unsecured
personal loans and protection, but below our future aspirations in
others, such as savings and investments; and
* PFS credit quality remains very strong with no evidence of
deterioration.
The first half PFS Banking spread is likely to be around 160 basis points (2003
Half 2: 1.75%), primarily reflecting the expected reduction in asset spread. The
decline in the second half of 2004 is expected to slow materially, as described
herein.
Despite the restructuring being on schedule, the outlook for Abbey's PFS trading
profit is moderately weaker than originally expected reflecting year to date
results below our forecasts. Business results are expected to improve during the
year as the planned turnaround becomes more visible. Nevertheless, we remain
appropriately cautious given the early stage in the year, the challenge of
reversing revenue trends in the second half of the year, and the potential for
unforeseen volatility in some parts of the life assurance and treasury
businesses.
The equity tier 1 ratio has improved slightly since the year-end, in line with
the profitability trends given, and the continued success in winding down the
PBU. Progress continues to be made to finalise the impact on Abbey of the Life
companies' realistic balance sheets and related matters, with much greater
clarity anticipated by the time of the Interims.
In terms of the PFS transformation programme, we have continued to make good
progress in the first quarter, including:
* announcing the closure of a further 3 operational sites, bringing the
total to 10, as we move work from smaller sites to larger centres;
* successfully transitioning all equity and bond funds previously
managed by Abbey National Asset Managers to State Street Global Advisers
at the end of January 2004. Five of our larger retail funds have moved
into the multi manager environment in April and we plan to rationalise
the existing fund range on offer, removing complexity for customers;
* further progress in the pilot of our advice model for savings and
investments;
* over 10,500 staff now actively using the new customer relationship
management system, up from 8,000 at the year-end, with 12,000 staff
expected to be online by September;
* making progress in re-writing customer letters in plain, everyday
language, with the total re-written now almost 2,500, covering well over
half of our correspondence. We expect to have completed the re-write
exercise by June;
* launching a successful 'managing your borrowing' campaign, talking to
customers about their borrowing needs in the round. This led to an
increase in branch originated unsecured loan business compared to the
same point last year;
* a further improvement to our mortgage range, with the launch of a new
specialist unit to handle large loans, the introduction of a new 15 year
fixed rate mortgage, and our innovative new reward mortgage;
* a range of initiatives launched this month to support new savings
business including the re-pricing and promotion of Flexible Saver, and
the promotion of multi-manager commencing; and
* the re-branding of branch fascias, with c.400 completed to date. We
will have launched trials of new branch and cash machine formats by the
time we report our interim results, marking the beginning of a five-year
branch refurbishment programme. In addition, our new Branch Distribution
Director is now in place, marking another important step in
strengthening our branch performance.
Despite the scale of change and disruption to the business, customer
satisfaction scores remain steady in the middle of the range of our peer group.
There is still much work to do, including systems enhancements in general
insurance and unsecured personal lending. Nevertheless, by the second half of
this year, we aim to be materially closer to our goal of having the right
people, in the right places, with the right tools to meet the needs of our
customers better. In addition, the burden of change that our people have been
asked to cope with in recent months should be declining, allowing them more time
to focus on serving our customers and driving business growth.
Personal Financial Services - Financial Update
PFS trading profit before tax for the 3 months to the end of March was slightly
lower than a pro-rata equivalent of second half 2003 earnings.
By profit & loss line, the main highlights include:
* a reduction in trading income, primarily due to lower net interest
income in Banking and Savings as anticipated;
* the PFS Banking spread expected to be around 1.60% for the half year.
Spread narrowing is expected to slow materially in the second half,
reflecting stable SVR margins, an element of liability margin widening,
and the higher mortgage new business and retention margins now being
achieved. This should allow Banking and Savings net interest income to
stabilise and potentially improve in that period;
* the largest element of the first half spread reduction is on the asset
side, reflecting a full period impact of SVR re-alignment completed in
November 2003, and lower redemption fee income due to lower levels of
early redemptions given rising interest rates, and lower average fees.
In addition, there is a smaller proportion of the book on SVR following
recent periods of new business growth and an increased proportion of
customers maturing to lower margin non-SVR products at the end of their
incentive period. As at the end of March, the proportion of the mortgage
book on free-to-go SVR stood at c.15%, compared to 18% at December 2003.
The liability spread has been comparatively stable with the cost of
funding asset growth from wholesale sources offset by deposit margin
actions;
* Investment and Protection trading income in line with the half 2 2003
run-rate, before the potential impact of any current year experience
variances in the life businesses, which are reviewed semi-annually. The
first quarter result does include reductions in "expected return" as a
result of lower embedded value balances, discount rate and projected
investment returns (following the move to an "active embedded value
basis" at the 2003 year end). Higher protection and investment sales are
targeted as the year progresses;
* higher trading income in Treasury Services(1), benefiting from a
favourable trading environment and normal seasonal trends;
* Group Infrastructure trading income in line with the second half 2003
run-rate. The adverse impact on net interest income of maturing interest
rate hedges, protecting earnings on the Group's capital, has been
allocated to the business lines, and therefore negatively impacts margin
and net interest income in these segments;
* trading costs are lower than the second half 2003 run-rate and
consistent with cost guidance for the year as a whole. Underlying
inflation and investment spend continues to be offset by cost savings;
and
* total trading provisions materially better than the second half
run-rate, benefiting from the non-recurrence of the product provision
raised in December 2003. We remain comfortable with credit quality, with
a further 12% reduction in 3 month+ arrears cases to 7,200 and
properties in possession falling to 291.
Mortgage credit quality March 2004 December 2003
3 month+ mortgage arrears (cases) 7,200 8,200
Properties in Possession (cases) 291 325
New Business:
- % First Time Buyers 19% 17%
- LTV > 90% 8% 9%
- Average LTV (on new business) 57% 57%
PFS non-trading items reported at the Interims will include any life assurance
items relating to investment variances and the finalisation of the 'realistic
balance sheets' and related matters. In addition for the full year,
implementation costs relating to the restructuring programme are expected to be
lower than in 2003, reflecting the non-recurrence of material asset write downs,
offset by increased costs in relation to the ongoing cost programme and
mandatory regulatory change projects.
(1) In our 2004 reporting, all of the short-term market portfolios are being
moved to a mark to market accounting basis. In doing so, this switches income
from net interest to non-interest income, and will mean that substantially all
of Treasury Services income from 2004 will be reported as non-interest income
Personal Financial Services - New Business update
3 months to 3 months to 3 months to
Mar 2004 Mar 2003 Dec 2003
Banking and Savings
Gross mortgage lending #6.7bn #6.5bn #8.2bn
Capital repayments #4.6bn #4.0bn #5.2bn
Net mortgage lending #2.1bn #2.5bn #3.0bn
Market share - gross mortgage lending (estimate) 10.1% 11.4% 10.7%
Market share - net mortgage lending (estimate) 9.2% 12.6% 10.9%
Total net deposit flows #(1.2)bn #0.9bn #0.3bn
Bank account openings 99,000 117,000 80,000
Gross unsecured personal loan lending #0.7bn #0.4bn #0.4bn
Credit card openings 40,000 78,000 46,000
Investment Sales
Investment - annualised equivalent #26m #47m #43m
Insurance Sales
Protection - annualised equivalent #31m #32m #33m
General Insurance new policy sales 93,000 104,000 114,000
New business highlights for the 3 months to March include:
* gross mortgage lending of #6.7 billion slightly ahead of last year
(March 2003: #6.5 billion). The estimated share of capital repayments
was slightly lower than the equivalent period last year despite a
widening of margins on retention products, but at #4.6 billion was up in
absolute terms, reflecting the size of the market. As a result, net
mortgage lending was lower at #2.1 billion (March 2003: #2.5 billion),
representing an estimated market share of 9.2%. New business volumes
have remained robust despite a 10 basis point increase in new business
pricing;
* deposit outflows of #1.2 billion which are unsatisfactory. Of this,
approximately 1/3 relates to Abbey branded household liability, largely
driven by less profitable accounts. The balance of the outflow relates
to Abbey Business, Cater Allen and Offshore banking operations. The
repayment of #50 billion of PBU wholesale funding has provided greater
freedom to compete less aggressively for negative margin new deposit
business, which has influenced the headline figures. We expect to see
improvement in underlying flows through the remainder of the year;
* robust bank account openings consistent with the 2003 half 2 run-rate,
and strong unsecured personal loan growth, mostly through cahoot;
* annualised investment sales of #26 million in the quarter were poor,
and weaker than expected. The business is currently being completely
re-engineered, and has suffered from an adverse reaction to with-profit
bonus news flow. Improving trends are targeted in the latter part of
2004 and in 2005, as the benefits of the re-engineering process begin to
bear fruit; and
* protection sales of #31 million consistent with 2003 levels but
benefiting from improved margins and with a sustained strong market
share of the IFA channel.
Portfolio Business Unit
March 2004 December 2003
Assets Assets
# bn # bn
Debt securities 0.7 1.0
Loan portfolio 1.7 2.0
Leasing businesses 4.3 4.7
Private Equity 0.1 0.4
Other 0.2 0.2
Wholesale Banking exit portfolios 7.0 8.3
First National 1.7 2.1
European Banking and other 1.5 1.9
Total PBU assets (1) 10.2 12.3
(1) Excludes the net assets of the international life assurance businesses.
PBU assets have been reduced by 17% since the year-end, down from #12.3 billion
to #10.2 billion. There have been some notable areas of progress, namely
aircraft ABS where exposures have been reduced to nil, and private equity where
all assets, except for deferred consideration and #57 million of residual
position, have been sold. In total, sub-investment grade exposures stood at #0.9
billion compared to #1.3 billion in December 2003, comprising mainly of asset
finance lending. In March, we announced the completion of sale of Royal Saint
Georges Banque to GE Capital Bank France.
Losses on sale to date have been broadly consistent with the provisioning and
mark to market disclosures included in the 2003 full year results announcement.
There has been no material change in credit quality of the remaining PBU assets
during the quarter. The PBU achieved a small profit in the first quarter.
However, for the remainder of 2004, a loss for the PBU is probable reflecting
further wind down costs, provisions and losses on asset disposals, albeit at a
level substantially lower than in 2003.
Future diary dates
2004 Interim Results 29th July 2004
2004 Q3 Trading Statement 27th October 2004
Contacts
Thomas Coops (Communications Director) 020 7756 5536
Jon Burgess (Head of Investor Relations) 020 7756 4182
Matthew Young (Media Relations) 020 7756 4232
For more information contact: investor@abbey.com.
The telephone number for the conference call replay facility is 0845 245 5205
(overseas: +44 1452 55 00 00). The pin number required is 1243595#, with the
replay facility available until close of business Friday 23rd April.
Important notice
This announcement should be read in conjunction with the Full Year Results
release for the year ended December 31st 2003, released on February 26th 2004.
This document contains certain "forward-looking statements" with respect to
certain of Abbey National plc's ('Abbey') plans and its current goals and
expectations relating to its future financial condition, performance and
results. By their nature, all forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances which are
beyond Abbey control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, the policies and actions of regulatory
authorities, the impact of competition, inflation, deflation, the timing, impact
and other uncertainties of future acquisitions or combinations within relevant
industries, as well as the impact of tax and other legislation and other
regulations in the jurisdictions in which Abbey and its affiliates operate. As a
result, Abbey's actual future financial condition, performance and results may
differ materially from the plans, goals, and expectations set forth in Abbey's
forward-looking statements.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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