RNS Number:2804B
HBOS PLC
01 August 2007
INTERNATIONAL
Underlying profit before tax in International increased by 12% to #327m (H1 2006
#293m), with all three International divisions contributing to this growth. In
Australia, strong volume and income growth supported the significant investment
in our East Coast expansion plans. In Ireland the rollout of our branch based
retail business gained momentum with the launch in May 2007 of the personal
current account. In Europe & North America strong profit growth was driven by
Corporate USA and European Financial Services.
Financial Performance
Income Statement Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Net interest income 504 414 468 882
Underlying non-interest income 207 187 217 404
Fees and commission income 92 81 74 155
Fees and commission expense (79) (80) (109) (189)
Change in value of in-force long term 35 25 79 104
assurance business
Net income from long term business 134 137 134 271
Investment earnings on surplus assets 3 2 1 3
attributable to shareholders using
long term assumptions
Operating lease rental income 8 10 11 21
Other operating income 19 20 33 53
Share of profits/(losses) of associates and 2 1 4 5
jointly controlled entities
Operating lease depreciation (7) (8) (9) (17)
Impairment on investment securities (1) (1) (2)
Underlying net operating income 711 601 685 1,286
Underlying operating expenses (334) (265) (308) (573)
Staff (183) (144) (157) (301)
Accommodation, repairs and maintenance (23) (19) (21) (40)
Technology (25) (16) (16) (32)
Marketing and communication (24) (20) (23) (43)
Depreciation:
Property and equipment and intangible assets (20) (16) (16) (32)
Other (58) (49) (74) (123)
Sub total (333) (264) (307) (571)
Recharges:
Technology (1) (1) (1)
Accommodation (1) (1)
Underlying operating profit before provisions 377 336 377 713
Impairment losses on loans and advances (50) (43) (53) (96)
Underlying profit before tax 327 293 324 617
Net interest margin 1.90% 1.97% 1.98% 1.97%
Impairment losses as a % of average advances 0.09% 0.11% 0.12% 0.22%
Cost:income ratio 47.0% 44.1% 45.0% 44.6%
Note: The presentation of the income statement has been simplified by combining
a number of predominantly policyholder related items such as investment and
other operating income, the change in investment contract liabilities, net
claims incurred on insurance contract liabilities, and net change in insurance
contract liabilities into a single caption called net income from long term
business.
Page 37
As at As at As at
Balance Sheet and Asset Quality Information 30.06.2007 30.06.2006 31.12.2006
Loans and advances to customers #56.8bn #42.7bn #48.7bn
Impairment provisions on advances #281m #217m #246m
Impairment provisions as a % of closing advances 0.49% 0.51% 0.51%
Classification of advances*: % % %
Agriculture, forestry and fishing 2 1 2
Energy 1 1 1
Manufacturing industry 3 3 3
Construction and property 22 21 21
Hotels, restaurants and wholesale and retail trade 8 8 9
Transport, storage and communication 2 2 2
Financial 2 2 2
Other services etc. 6 7 6
Individuals:
Home mortgages 30 30 29
Other personal lending 4 5 5
Overseas residents 20 20 20
100 100 100
Impaired loans #662m #503m #581m
Impaired loans as a % of closing advances 1.17% 1.18% 1.19%
Impairment provisions as a % of impaired loans 42% 43% 42%
Risk weighted assets #47.7bn #37.2bn #41.3bn
Customer deposits #19.8bn #14.3bn #17.5bn
* Before impairment provisions.
The results of our International businesses are converted to sterling monthly at
the average exchange rate for the month. The average exchange rates for the
respective reporting periods were:
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#1 : Australian dollar 2.44 2.41 2.48 2.45
#1 : Euro 1.48 1.46 1.48 1.47
#1 : US dollar 1.97 1.79 1.90 1.84
The closing exchange rates used in the conversion of the International balance
sheets were:
As at As at As at
30.06.2007 30.06.2006 31.12.2006
#1 : Australian dollar 2.36 2.49 2.49
#1 : Euro 1.49 1.45 1.49
#1 : US dollar 2.01 1.85 1.97
Page 38
Australia
Underlying profit before tax increased by 4% to #144m (H1 2006 #139m). In local
currency, however, underlying profit before tax increased by 16% to A$368m (H1
2006 A$316m), reflecting the continued success of our growth strategy and the
underlying strength and diversity of our businesses. We continue to invest
heavily in future growth as outlined by our recently announced East Coast
expansion programme. This level of investment will continue to increase in the
second half of the year and into 2008.
Financial Performance
Income Statement Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Net interest income 290 237 264 501
Underlying non-interest income 78 75 67 142
Fees and commission income 71 64 56 120
Fees and commission expense (7) (3) (10) (13)
Net income from long term business 7 6 7 13
Operating lease rental income 3 4 5 9
Other operating income 6 5 13 18
Share of profits/(losses) of associates and 1 2 2
jointly
controlled entities
Operating lease depreciation (3) (3) (4) (7)
Underlying net operating income 368 312 331 643
Underlying operating expenses (188) (146) (160) (306)
Staff (111) (82) (89) (171)
Accommodation, repairs and maintenance (13) (10) (11) (21)
Technology (18) (10) (14) (24)
Marketing and communication (12) (11) (10) (21)
Depreciation:
Property and equipment and intangible (10) (8) (8) (16)
assets
Other (24) (25) (28) (53)
Underlying operating profit before provisions 180 166 171 337
Impairment losses on loans and advances (36) (27) (32) (59)
Underlying profit before tax 144 139 139 278
Net interest margin 2.20% 2.36% 2.30% 2.33%
Impairment losses as a % of average advances 0.13% 0.13% 0.14% 0.27%
Cost:income ratio 51.1% 46.8% 48.3% 47.6%
Operating Income and Margins
Net interest income increased by 22% to #290m (H1 2006 #237m) reflecting the
strong growth in both assets and deposits. The decline in the net interest
margin primarily reflects the change in portfolio mix associated with the
strategic growth of our Retail and Commercial businesses, combined with a move
towards a lower risk/reward profile within our Corporate and Asset Finance
businesses and an increasingly competitive retail environment. Annualised growth
in advances and deposits were 40% and 35% respectively. Underlying non-interest
income rose by 4% to #78m (H1 2006 #75m).
Movement in margin Basis points
Net interest margin for the half year ended 31 December 2006 230
Portfolio mix (6)
Retail competition (3)
Other (1)
Net interest margin for the half year ended 30 June 2007 220
Page 39
Operating Expenses
Underlying operating expenses increased 29% to #188m (H1 2006 #146m). We
continue to invest significantly in people, processes, and IT governance and
infrastructure. A significant part of this investment is in preparation for our
East Coast expansion.
Credit Quality and Provisions
Impaired loans as a % of closing advances remained stable at 0.99% (end 2006
1.00%), the most significant part of the impaired loans continuing to reflect a
small number of corporate transactions. Impairment provisions as a % of
impaired loans were unchanged at 46% (end 2006 46%).
Balance Sheet and Asset Quality Information As at As at As at
30.06.2007 30.06.2006 31.12.2006
Loans and advances to customers #29.4bn #21.0bn #24.5bn
Impairment provisions on advances #135m #98m #113m
Impairment provisions as a % of closing advances 0.46% 0.47% 0.46%
Classification of advances*: % % %
Agriculture, forestry and fishing 3 3 3
Energy 2 2 3
Manufacturing industry 2 3 3
Construction and property 26 24 24
Hotels, restaurants and wholesale and retail trade 9 8 9
Transport, storage and communication 2 3 2
Financial 3 3 3
Other services etc. 8 9 7
Individuals:
Home Mortgages 39 41 38
Other personal lending 4 4 6
Overseas residents 2 2
100 100 100
Impaired loans #292m #205m #245m
Impaired loans as a % of closing advances 0.99% 0.98% 1.00%
Impairment provisions as a % of impaired loans 46% 48% 46%
Risk weighted assets #24.4bn #17.8bn #21.0bn
Customer deposits #13.5bn #9.2bn #11.5bn
* Before impairment provisions.
Operational Performance
The significant investment in the business, including our East Coast expansion
programme, is designed to support future profit growth in each of our Retail,
Commercial and Insurance and Investment businesses. At the same time, further
targeted investments are supporting the growth of our Asset Finance and
Corporate businesses in their specialist markets.
Lending and Deposit Growth
Advances grew by an annualised 40% to #29.4bn (end 2006 #24.5bn) with continued
growth in the retail and commercial books. Customer deposits grew by an
annualised 35% to #13.5bn (end 2006 #11.5bn) as a result of the continued
success of the retail and commercial deposit initiatives.
Page 40
Retail Business
Our Retail business, operating under the BankWest brand, continued its push to
build national market share with its "Betterdeal" strategy and "hero" product
offerings. Lending was up an annualised 33% to #10.0bn (end 2006 #8.6bn) and
deposits up an annualised 21% to #5.4bn (end 2006 #4.9bn).
Mortgages growth outstripped market growth with a resulting strong gain in
market share to over 3% based on May APRA statistics. Customer satisfaction has
improved during the period. Continued development to expand our product range
led to the launch of a new rewards card, the BankWest 'More' MasterCard, which
targets general rewards customers to complement our successful Lite MasterCard
and Zero MasterCard.
Commercial Business
Commercial, also under the BankWest brand, performed strongly in the first half
of 2007, with more than double the market growth. Lending grew by an annualised
58% to #9.0bn (end 2006 #7.0bn) and deposits on an annualised basis grew by 46%
to #8.1bn (end 2006 #6.6bn). Our strategy of developing a team of in-house
specialist bankers with industry-specific knowledge and expertise helped drive
growth and brand awareness. Business banking, which supports the lower-end SME
sector, more than doubled lending approvals compared to June 2006. The new
Online International Trade platform has been launched as one of a number of
initiatives in the highly competitive SME market.
Corporate Business
Our BOS International brand lending grew by an annualised 36% to #6.0bn (end Dec
2006 #5.1bn). The first half of 2007 has seen strong growth in numbers and value
of transactions following a strong year in 2006. We have continued to compete
as an arranger and underwriter in competitive M&A financing and Project Finance
markets and have increased the number of high-value transactions. Our agency and
syndication business has doubled in size since June 2006, and has successfully
established itself as a lead arranger of transactions. We are continuing to
leverage our UK experience in the local market.
Asset Finance Business
Our Asset Finance business under the Capital Finance brand, grew lending by an
annualised 32% to #4.4bn (end 2006 #3.8bn). All business units had significant
increases in new business over the corresponding period in 2006. The Personal
Finance - Motor business has performed well despite pressure from our
competitors. Business Finance has benefited from strong broker introduced
business and the ongoing success of our strategic alliances. The property
business has also continued to grow strongly while maintaining credit quality.
Insurance & Investment Business
Our financial planning business continued to grow strongly. Excluding the
acquisition of Whittaker Macnaught in January 2007, funds under advice grew by
18% supported by the recruitment of additional advisors in our existing
business. This performance was further supported by a strong performance in
Whittaker Macnaught in the period since its acquisition. Sales volumes were
driven by the strong lending growth and the extension of relationships with
corporate distribution partners.
Page 41
Prospects
The global economic backdrop, including historically high commodity prices,
remains conducive to solid growth in Australia's economy into 2008. Growth in
most of Australia's key export markets is expected to continue. Household
consumption is accelerating and filling the minor void left by the slow down in
business investment. Sustained, strong employment growth and a 30-plus year low
in the unemployment rate are the legacies of a prolonged period of stable
economic conditions and support further consolidation in household consumption.
The outlook for the Australian wealth management market remains positive due to
the continued growth in managed funds supported by recent changes in government
policy. The Australian managed funds market is now the fourth largest in the
world.
During the first half of 2007 we have continued to invest heavily in our growth
strategy. In July we announced that BankWest will open more than 125 retail
stores and 35 business banking centres with the first branches expected to be
opened in the final quarter of 2007. This will require further investment in the
current year and into 2008 and, as previously noted, is expected to slow profit
growth in the near term.
Western Australia remains an important part of our growth plans and focus will
ensure we take advantage of our strong market position in Australia's fastest
growing state. Work has started on BankWest's new headquarters in Perth, due to
be completed in 2009.
We will continue to accelerate our national growth by driving competition in the
Australian market. Our focus on market leading products and service has resulted
in a significant increase in customer numbers. As we expand our physical
presence on the East Coast, we are well placed to build on the market share we
have established.
Page 42
Ireland
Underlying profit before tax increased by 14% to #80m (H1 2006 #70m). This
growth was achieved at a time of continued investment in our franchise as we
expand our retail branch network and business banking distribution. Strong
growth has been achieved across all portfolios, with annualised lending growth
of 23% marking the fourth successive half-year period of growth in excess of
20%.
Financial Performance
Income Statement Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Net interest income 151 123 145 268
Underlying non-interest income 12 18 24 42
Fees and commission income 6 7 7 14
Operating lease rental income 5 6 6 12
Other operating income 5 11 12 23
Share of profits/(losses) of associates and 5 5
jointly controlled entities
Operating lease depreciation (4) (5) (5) (10)
Impairment on investment securities (1) (1) (2)
Underlying net operating income 163 141 169 310
Underlying operating expenses (73) (59) (74) (133)
Staff (37) (37) (36) (73)
Accommodation, repairs and maintenance (7) (5) (4) (9)
Technology (3) (2) (1) (3)
Marketing and communication (8) (4) (11) (15)
Depreciation:
Property and equipment and intangible assets (4) (4) (2) (6)
Other (14) (7) (20) (27)
Underlying operating profit before provisions 90 82 95 177
Impairment losses on loans and advances (10) (12) (16) (28)
Underlying profit before tax 80 70 79 149
Net interest margin 1.67% 1.70% 1.76% 1.73%
Impairment losses as a % of average advances 0.06% 0.09% 0.11% 0.20%
Cost:income ratio 44.8% 41.8% 43.8% 42.9%
Operating Income and Margins
Underlying net operating income increased by 16% to #163m (H1 2006 #141m), the
headline growth rate being reduced by the investment disposal that was a feature
of the first half of 2006. Net interest income grew by 23% to #151m (H1 2006
#123m). The increase reflected strong growth in advances, moderated by a decline
in margin resulting from changes to funding costs and the expansion of our
retail product offering.
Movement in margin Basis points
Net interest margin for the half year ended 31 December 2006 176
Change in funding costs (6)
Retail (3)
Net interest margin for the half year ended 30 June 2007 167
The Retail business has seen a small decline in mortgage margins reflecting the
increased level of competition in the market place and our positioning as a
market leader in our main products. While competition intensifies, it is
affordability of our products, our longer opening hours and the quality of our
service that have been identified by our customers as the key points of
differentiation. Within Business Banking, margins remain robust.
Page 43
Operating Expenses
Underlying operating expenses increased by 24% to #73m (H1 2006 #59m). We
continue to build infrastructure with a further 7 Retail branches opened in the
first half of the year, together with the establishment of Business Banking hubs
in Kilkenny, Wexford and Drogheda.
Credit Quality and Provisions
Credit quality remained strong with impaired loans as a % of closing advances
continuing to trend downwards at 1.82% (end 2006 1.87%). In addition to the
favourable portfolio performance, the impairment charge for the first half
reflects a number of recoveries against the impaired portfolio.
Balance Sheet and Asset Quality Information As at As at As at
30.06.2007 30.06.2006 31.12.2006
Loans and advances to customers #17.7bn #13.9bn #15.9bn
Impairment provisions on advances #121m #100m #113m
Impairment provisions as a % of closing advances 0.68% 0.72% 0.71%
Classification of advances*: % % %
Agriculture, forestry and fishing 1 1
Energy 1 1
Manufacturing industry 4 5 4
Construction and property 29 26 27
Hotels, restaurants and wholesale and retail trade 12 14 13
Transport, storage and communication 2 2 2
Financial 2 1 2
Other services etc. 6 7 6
Individuals:
Home Mortgages 27 27 28
Other personal lending 6 7 6
Overseas residents 10 10 11
100 100 100
Impaired loans #322m #263m #297m
Impaired loans as a % of closing advances 1.82% 1.89% 1.87%
Impairment provisions as a % of impaired loans 38% 38% 38%
Risk weighted assets #16.1bn #12.7bn #14.4bn
Customer deposits #6.1bn #4.9bn #5.8bn
* Before impairment provisions.
Page 44
Operational Performance
Lending and Deposit Growth
Demand remained buoyant in the first half, with overall lending up 23% on an
annualised basis to #17.7bn (end 2006 #15.9bn). Deposits also grew strongly,
showing an annualised increase of 10% to #6.1bn (end 2006 #5.8bn).
Business Banking
Within the banking franchise, the core divisions of Business, Property and
Regional Banking all contributed to another excellent performance. Advances
growth was strong in the first half, gross lending increased by an annualised
23% to #12.6bn (end 2006 #11.3bn) with pipeline showing similar strength, up 15%
from December 2006. The recently launched Integrated and Acquisition Finance
business has been successful in securing a number of large ticket, high profile
deals in the first half of 2007.
Retail
Our Retail businesses (Retail Network, Intermediary Mortgage and Asset Finance)
have enjoyed strong growth in the first half of 2007 against the backdrop of an
increasingly competitive marketplace and a softening residential property
market. Advances increased by an annualised 22% to #5.1bn (end 2006 #4.6bn),
with the pipeline increasing by 12% from December 2006. We have increased our
share of gross lending in the mortgage market from 7.4% to 7.7% in the period.
On 21 May 2007, BOSI became a full-service bank with the launch of the new
Halifax Current Account (HCA). The launch has been very well received by the
market with the first six weeks of trading ahead of expectations. We continue
the roll-out of our branch network, with 32 branches now open for business, and
we are on track to achieve our roll-out target for the remainder of the year.
Prospects
The underlying economic conditions in Ireland continue to be positive with
projections showing strong growth in GDP for the remainder of 2007 and 2008, low
unemployment and stability in consumer confidence, albeit that there will
continue to be some softening in the housing market as a result of the
increasing interest rate environment.
House price growth has slowed over the period as a result of uncertainties in
stamp duty reform and continuing interest rate increases. This slowdown in
growth to more sustainable levels is welcome and there are signs of renewed
activity in the mortgage market now that the stamp duty issue has been resolved.
We believe this will build through the second half of the year.
Prospects for our core Business Banking businesses are good, with benign market
conditions and a healthy pipeline. The Integrated and Acquisition Finance
offering has attracted considerable early success and we will continue to build
on this momentum through the remainder of the year.
In our Retail and Intermediary division, the sales pipeline is strong and
trending upwards as we increase our nationwide footprint. Affordability, on the
back of eight consecutive rises in the ECB rate, is in the forefront of customer
minds and as the best buy tables demonstrate, our products are ideally placed to
meet this demand. Therefore, in the mortgage market particularly, we expect to
increase our market share for the second year in a row as we continue to grow
both our intermediary brand (Bank of Scotland Ireland) and our retail brand
(Halifax).
With the launch of the new Halifax current account and with 32 branches now
open, the rollout of the Retail proposition is on target. While it is still
early days, initial signs for the business are encouraging, and we believe we
are well positioned to benefit from the opportunities in the Irish market.
Page 45
Europe & North America ('ENA')
Underlying profit before tax increased by 23% to #103m (H1 2006 #84m) largely
driven by the targeted expansion of our Corporate USA business and increased
distribution in our European Financial Services business ('EFS'). Our European
Retail businesses continue to invest in the infrastructure required to support
increasing distribution capacity with the ongoing expansion of the Banco Halifax
Hispania ('BHH') branch retail network in Spain and the expansion of
distribution channels for our market leading online mortgage product in BoS
Netherlands ('BoSNL').
Financial Performance
Income Statement Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Net interest income 63 54 59 113
Underlying non-interest income 117 94 126 220
Fees and commission income 15 10 11 21
Fees and commission expense (72) (77) (99) (176)
Change in value of in-force long term 35 25 79 104
assurance business
Net income from long term business* 127 131 127 258
Investment earnings on surplus assets 3 2 1 3
attributable to shareholders using
long term assumptions
Other operating income 8 4 8 12
Share of losses of associates and jointly 1 (1) (1) (2)
controlled entities
Underlying net operating income 180 148 185 333
Underlying operating expenses (73) (60) (74) (134)
Staff (35) (25) (32) (57)
Accommodation, repairs and maintenance (3) (4) (6) (10)
Technology (4) (4) (1) (5)
Marketing and communication (4) (5) (2) (7)
Depreciation:
Property and equipment and intangible (6) (4) (6) (10)
assets
Other (20) (17) (26) (43)
Sub total (72) (59) (73) (132)
Recharges:
Technology (1) (1) (1)
Accommodation (1) (1)
Underlying operating profit before provisions 107 88 111 199
Impairment losses on loans and advances (4) (4) (5) (9)
Underlying profit before tax 103 84 106 190
Net interest margin 1.47% 1.43% 1.48% 1.46%
Impairment losses as a % of average advances 0.04% 0.05% 0.06% 0.12%
Cost:income ratio 40.6% 40.5% 40.0% 40.2%
*Net income from long term business is explained in the note on page 29. This
effectively represents the annual management charge on long term assurance
business together with premiums, net of claims and changes in liabilities, in
respect of protection business.
Operating Income and Margins
Net interest income increased by 17% to #63m (H1 2006 #54m) reflecting strong
growth in customer advances across our banking businesses. The decrease in net
interest margin to 1.47% (H2 2006 1.48%) reflects a slight change in the
business mix of our loan book in the US, largely offset by an improvement in our
Retail business, in part due to improved funding rates.
Page 46
Movement in margin Basis points
Net interest margin for the half year ended 31 December 2006 148
Lending margin Corporate (3)
Lending margin Retail 2
Net interest margin for the half year ended 30 June 2007 147
Underlying non-interest income increased by 24% to #117m (H1 2006 #94m), and
reflects business growth in EFS and returns from equity realisations in the US.
Operating Expenses
Underlying operating expenses increased by 22% to #73m (H1 2006 #60m), and
remain broadly in line with the second half of 2006. The increase from the first
half of 2006 reflects continued investment to support the phased expansion of
our sales and distribution channels, particularly in the USA, and to meet
ongoing legislative changes in key markets. In BHH, investment continued in the
retail branch network, with the opening of branches in Majorca and Calahonda,
taking the number of branches in Spain to 21. Investment by BHH also included
the establishment of a sales presence in Dublin in 2007 to maximise growth
opportunities arising from the buoyant Irish expatriate market for Spanish
banking facilities. The first half of 2007 has also seen us open a new office in
Toronto. Despite these investments, the cost:income ratio of 40.6% remains
broadly unchanged (H1 2006 40.5%).
Credit Quality and Provisions
Credit quality remains strong across the division. Impaired loans as a % of
closing advances increased to 0.49% (end 2006 0.47%), reflecting moderate
increases across our diversified portfolio. Impairment losses as a % of average
advances improved marginally to 0.04% (H1 2006 0.05%). Impairment provisions as
a % of impaired loans remain broadly in line with 2006 at 52% (end 2006 51%).
Page 47
As at As at As at
30.06.2007 30.06.2006 31.12.2006
Balance Sheet and Asset Quality Information
Loans and advances to customers #9.7bn #7.8bn #8.3bn
Impairment provisions on advances #25m #19m #20m
Impairment provisions as a % of closing advances 0.26% 0.24% 0.24%
Classification of advances*: % % %
Hotels, restaurants and wholesale and retail trade 2 3 1
Financial 1 1
Other services 1
Individuals:
Home mortgages 6 7 7
Overseas residents:
Manufacturing industry 3 1
Construction and property 7 5 6
Hotels, restaurants and wholesale and retail trade 2 2 1
Transport, storage and communication 1 1 1
Financial 3 3 3
Other services 16 16 16
Individuals:
Home mortgages 60 62 62
100 100 100
Impaired loans #48m #35m #39m
Impaired loans as a % of closing advances 0.49% 0.45% 0.47%
Impairment provisions as a % of impaired loans 52% 54% 51%
Risk weighted assets #7.2bn #6.7bn #5.9bn
Customer deposits #0.2bn #0.2bn #0.2bn
* Before impairment provisions.
Operational Performance
Lending and Deposit Growth
ENA experienced robust growth levels in the first half of 2007, with an
annualised increase in lending of 34% to #9.7bn (end 2006 #8.3bn). This
reflects strong annualised growth of 76% in Corporate and 17% in Retail.
The particularly strong growth experienced in Corporate USA enhances the spread
of the portfolio both geographically and by business, with 34% of lending in
Corporate and 66% in Retail. In Retail, our lending portfolio is almost wholly
in the form of residential mortgages while Corporate continues to benefit from a
diverse portfolio spread across a range of specialist sectors (e.g. Oil & Gas,
Gaming, Real Estate).
Page 48
As at As at As at
Advances 30.06.2007 30.06.2006 31.12.2006
#bn #bn #bn
Corporate 3.3 2.4 2.4
Retail 6.4 5.4 5.9
9.7 7.8 8.3
Corporate
Our Corporate USA business, based in eight major economic centres across the
USA, has delivered strong lending growth and profits despite the impact of a
weakening US dollar. Lending grew by an annualised 76% to #3.3bn (end 2006
#2.4bn), reflecting the momentum generated in our mainstream corporate business
following the disposal of our investment in Drive Financial Services in December
2006. The US business has continued to focus on its chosen specialist sectors,
while expanding the regional banking partnership initiative which identifies US
regional banks with whom we can partner in commercial lending opportunities. In
July we opened a new corporate office in Miami and have plans to open a further
office before the end of the year.
Retail
BoSNL, our market leading online mortgage sales business, saw lending grow by an
annualised 21% to #5.2bn (end 2006 #4.7bn). The expansion of our intermediary
distribution channels has contributed significantly to this growth. In Spain, in
a difficult market, BHH has grown its lending by an annualised 14%, as we
continue our strategy of rolling out retail branches in key UK and Irish
expatriate destinations across Spain.
European Financial Services
Our European investment business has performed well despite the continuing slow
market conditions in our core German market which is undergoing significant
legislative change. While sales levels in the German investment market are down
15% compared with the same period last year, our sales have risen by 5% to #41m
(H1 2006 #39m). In addition, we continue to enter into new distribution
agreements and this, coupled with ongoing product innovation, leaves EFS well
placed to take advantage of an improvement in market conditions. Funds under
management increased by an annualised 8% to #10.0bn (end 2006 #9.6bn).
Investment Sales* Half year Half year Half year Half year Half year Half year Half year Half year
ended ended ended ended ended ended ended ended
30.06.2007 30.06.2007 30.06.2007 30.06.2007 30.06.2006 30.06.2006 30.06.2006 30.06.2006Total
Single Annual Total Total APE Single Annual Total APE
#m #m #m #m #m #m #m #m
Life: 81 28 109 36 79 25 104 33
With profits 13 5 18 6 33 5 38 9
Unit Linked 68 21 89 28 46 13 59 18
Protection 2 2 2 7 7 6
Individual Pensions 5 5 5 6 6 6
Total 81 33 114 41 79 31 110 39
* APE is calculated as annual premiums plus 10% of single
premiums.
Page 49
Profit increased by 44% to #56m (H1 2006 #39m), driven by the value of new
business and profits emerging from the in-force business, particularly that of
Heidelberger Leben. The vast majority of investment business in EFS is
accounted for on an EV basis under IFRS. The table below analyses the EV profit
contribution of EFS.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Contribution from existing business:
Expected contribution 25 21 23 44
Actual vs expected experience 12 6 13 19
37 27 36 63
Contribution from new business 16 10 26 36
Investment earnings on net assets using long term 3 2 1 3
assumptions
Underlying profit before tax 56 39 63 102
New business profitability, as measured on the embedded value basis under IFRS
was 39% (H2 2006 41%, H1 2006 26%).
Prospects
We continue to pursue our strategy of targeted organic growth while exploring
opportunities to develop new markets. Moving forward, our plans include
expanding the depth of our presence in current markets by increasing
distribution channels through the development of new products, new relationships
and extending our physical presence. Our newly established business based in
Toronto will initially focus on specialist corporate sectors such as corporate
finance, real estate, infrastructure and natural resources and with a pipeline
of business already in place, we are optimistic about our growth prospects.
We operate in established, affluent and accessible markets which are forecast to
maintain robust growth and which suit HBOS products and risk appetite. The
continued attractiveness of the economic, political and fiscal conditions in our
markets will play a major role in the pace of our expansion, as will our ability
to continue to attract high quality, talented colleagues. With our current low
market penetrations the scale of the opportunity is substantial.
Page 50
TREASURY & ASSET MANAGEMENT
Underlying profit before tax increased by 24% to #194m (H1 2006 #156m)
reflecting strong revenue growth, offset in part by our investment in the
development of new product capabilities and distribution. Asset quality remains
high and no credit provisions were required in the period.
Financial Performance
Income Statement Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Net interest income 93 105 100 205
Underlying non-interest income 267 186 229 415
Net trading income 105 106 143 249
Fees and commission income 128 90 96 186
Fees and commission expense (21) (23) (20) (43)
Other operating income 55 13 9 22
Share of profits of associates and jointly 1 1
controlled entities
Underlying net operating income 360 291 329 620
Underlying operating expenses (170) (135) (157) (292)
Staff (99) (77) (94) (171)
Accommodation, repairs and maintenance (1) (1) (1)
Technology (5) (5) (5) (10)
Marketing and communication (2) (3) (3) (6)
Depreciation:
Property and equipment and intangible assets (2) (2) (2) (4)
Other (40) (37) (41) (78)
Subtotal (149) (124) (146) (270)
Recharges:
Technology (3) (3) (3) (6)
Accommodation (7) (7) (7) (14)
Other shared services (11) (1) (1) (2)
Underlying operating profit 190 156 172 328
Non-operating income 4 22 22
Underlying profit before tax 194 156 194 350
Net interest margin (bps)* 5 7 6 7
Cost:income ratio 47.2% 46.4% 47.7% 47.1%
Insight's funds under management #102.1bn #88.7bn #98.6bn #98.6bn
of which, overlay funds under management #8.1bn #5.0bn #5.0bn
Invista's funds under management #10.2bn #7.9bn #9.2bn #9.2bn
Risk weighted assets #15.4bn #14.5bn #15.0bn #15.0bn
* Net interest margin has been calculated as net interest income divided
by average interest earning assets excluding securities classified as trading
assets but including lending to other members of the group.
Operating Income and Margins
Underlying net operating income increased by 24% to #360m (H1 2006 #291m). Net
interest income decreased by 11% to #93m (H1 2006 #105m), #24m of this reduction
being due to the use of non-interest bearing investments, where the return is
reported through non-interest income rather than net interest income.
Underlying non-interest income increased by 44% to #267m (H1 2006 #186m). This
strong growth includes the income from the non-interest bearing investments
referred to above and the inclusion of the Payment & International Services
business, previously reported in Corporate, from 1 January 2007, which accounts
for #11m of the increase.
Page 51
Operating Expenses
Underlying operating expenses increased by 26% to #170m (H1 2006 #135m). The
increase reflects the ongoing development of the business and the operating
expenses relating to the Payment & International Services business, which
accounts for #10m of the increase.
Asset Quality and Provision
Within our Treasury operations, we maintain a cautious policy to avoid
sub-investment grade investments, with 99% of our inter-bank and structured
investment portfolios rated A or above. During the period no credit provisions
were required.
Non-operating Income
Following a strategic review of the non-core Channel Islands business, Insight
announced in May 2007 the sale of its Guernsey based retail business (with
#0.5bn of assets under management) to Syndicate Asset Management. Completion
took place at the end of June with a gain on sale of #4m.
Operational Performance
Funding
Treasury continues to be active in supporting the Group's capital and funding
plans, arranging five capital issues on behalf of HBOS plc: two floating rate
lower Tier 2 subordinated debt issues (Euro1,000m and US$1,000m); two fixed/
floating rate subordinated debt issues (AUD$600m and CAD$500m); and a US$750m
Tier 1 perpetual preference share issue.
Approximately #11.6bn of funds were raised from existing programmes during the
first half of the year. This comprised approximately #3.2bn from covered bonds
and approximately #8.4bn from securitisations. These transactions included the
first securitisation of UK residential mortgages originated by Birmingham
Midshires through the Pendeford programme and the continued development of the
covered bond market in the United States. HBOS also completed an unfunded
synthetic securitisation.
Sales and Trading
UK Sales performance was strong with revenues increasing by 38% to #90m (H1 2006
#65m), primarily as a result of increased Corporate sales revenues, which
accounts for #9m of the increase, and the inclusion of the Payment &
International Services business. UK Trading revenues are in line with the first
half of 2006 at #90m (H1 2006 #91m), resulting from increased structured
transaction business revenue being offset by widening of credit spreads.
Insight
The restructure of the UK Equity platform in the middle of last year is having
the desired result, turning around the below benchmark performance of 2006 to
deliver 2007 year to date performance well ahead of benchmark. Global Equity
performance continues to be very strong. With the exception of UK Fixed Income
(which had previously experienced 3 years of solid out performance), our cash
and fixed income funds delivered above benchmark performance for the first half
of the year. Our Absolute Return funds continue to perform well, ahead of their
benchmark. Of the other asset classes, performance has generally been good;
overall 13 out of the 18 asset classes that Insight manages are ahead of
benchmark for the half year to June 2007.
Insight saw gross inflows of #14.9bn (H1 2006 #10.7bn). Net inflows totalled
#6.0bn (H1 2006 #7.4bn) with Institutional Fixed Income and Liability Driven
Investment ('LDI') mandates again the driving force behind these strong sales
figures. Within the gross inflows, #3.1bn (H1 2006 nil) related to overlay
mandates, where we are appointed to manage the risks of pension schemes'
liabilities rather than the underlying portfolio of assets. Overall assets
under management increased to #102.1bn (end 2006 #98.6bn) which incorporates a
transfer out of #4.2bn as part of the agreed sale of Equitable Life funds.
Insight achieved recognition as one of the market leaders in the Institutional
pension market by recently winning several prestigious industry awards. At the
Financial Times Business Pension and Investment Provider Awards 2007, Insight
was named UK Fixed Income Manager of the Year and LDI Manager of the Year. At
the Global Pension Awards Insight was crowned LDI Manager of the Year.
Page 52
Invista
Invista's assets under management increased to #10.2bn (end 2006 #9.2bn).
Invista now manages a total of 19 funds, 5 on behalf of the HBOS Group, invested
across the UK and Continental Europe in commercial and residential property
assets. During the first half of 2007, Invista continued to deliver strong
investment performance for its clients and saw strong fund flows into its range
of open-ended client funds. Furthermore it was successfully awarded a mandate to
manage the newly launched St. James's Place Authorised Property Unit Trust in
January 2007, and a further mandate to manage #325m of residential property on
behalf of the Wellcome Trust.
Invista successfully completed two balance sheet investments, using the proceeds
raised at IPO. The first of which was the acquisition of a Euro348m portfolio of
French assets through a 50/50 JV with a long standing joint venture partner. The
second was the acquisition of a #127.5m UK residential portfolio with a joint
venture partner. The residential portfolio has a long-term lease with the
Ministry of Defence and a gross yield of around 6.7%. These acquisitions are
consistent with the strategy that the company set out to investors at the time
of IPO.
Prospects
Treasury's primary focus is to deliver a top quality service and performance to
our other divisions and our clients, and we will continue to invest in our
capabilities to do so. Access to customers, product innovation and strong
standing in the market underpins our confidence in continued profitable growth
prospects. Our cautious approach to risk will, however, remain unaltered.
Insight's leading position in the Fixed Income and LDI markets in the UK
provides the ideal platform to expand into Europe. Early signs are very
promising as we have already secured a number of mandates for Absolute Return,
Fixed Income and Global Equity. With the continued strong performance of
Insight's Absolute Return funds, we plan to generate additional sales as pension
schemes increasingly look for alternative solutions to run their investment
portfolios.
Invista has successfully built a platform for growth and is now well positioned
to benefit from its presence in the UK and European commercial and residential
property markets. It has successfully begun its programme of balance sheet
deployment which will enable it to set up and launch new and innovative funds
for its clients. Central to Invista's growth strategy are the areas of UK
residential and Europe, where there are plans to establish a physical presence
which will begin with the opening of an office in Paris during 2007.
Page 53
FINANCIAL REVIEW
Group underlying profit before tax increased by 13% to #2,962m (H1 2006
#2,612m). Underlying net operating income rose by 11% driven by strong growth
in underlying non-interest income. Underlying operating expenses rose by 8% and
impairment losses by 11%.
Basic earnings per share increased by 22% to 55.1p (H1 2006 45.3p). Underlying
earnings per share rose 16% to 54.6p (H1 2006 47.0p) and the interim dividend
increased by 23% to 16.6p. The interim dividend will be paid on 8 October 2007
to ordinary shareholders on the register at the close of business on 10 August
2007. The table below reconciles underlying profit before tax and profit before
tax.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Underlying profit before tax 2,962 2,612 2,925 5,537
Adjusted for:
Retail banking fee refunds (79)
Impact of the 2008 change in corporation tax (18)
rate on the value of leasing assets
Profit on sale of Drive 180 180
Mortgage endowment compensation (95) (95)
Goodwill impairment (2) (55) (55)
Policyholder tax payable 167 134 86 220
Short term fluctuations (33) (92) 11 (81)
Profit before tax 2,997 2,654 3,052 5,706
The publicity generated by the OFT market study into current account charges has
generated an industry wide increase in customer requests for refunds of current
account service fees. In the first half of 2007, such refunds, including
amounts agreed in principle but not yet paid, together with the associated
administration costs, amounted to #79m, reported outside of our underlying
results as they relate predominantly to fees charged in prior years.
As a result of the 2007 Finance Act, the main UK corporation tax rate will
reduce from 30% to 28% in April 2008. This change affects the income
recognition of leases that contain tax variation clauses resulting in an
estimated reduction in the underlying lease receivables at June 2007 of #18m
(pre-tax). The change in tax rate also reduces the deferred tax net liabilities
of the Group by #110m at June 2007. The net benefit to profit attributable to
ordinary shareholders of #97m has been excluded from the underlying results.
The table below reconciles underlying profit attributable to ordinary
shareholders to profit attributable to ordinary shareholders.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Underlying profit attributable to ordinary 2,046 1,794 2,022 3,816
shareholders
Adjusted for:
Retail banking fee refunds (55)
Impact of the 2008 change in corporation tax rate on:
the value of leasing assets (13)
deferred tax net liabilities 110
Profit on sale of Drive 180 180
Mortgage endowment compensation (67) (67)
Goodwill impairment (2) (55) (55)
Short term fluctuations (23) (65) 8 (57)
Profit of disposal group classified as held for sale 3 3
attributable to ordinary shareholders
Profit attributable to ordinary shareholders 2,063 1,729 2,091 3,820
Page 54
Divisional financial performance can be summarised as follows:
Half year ended 30 June 2007 Retail Corporate Insurance International Treasury Group Drive Half year Half year
& & Items
Investment Asset ended ended
Mgmt 30.06.2007 30.06.2006
#m #m #m #m #m #m #m #m #m
Underlying net interest income 2,087 992 (50) 504 93 3,626 3,647
Underlying non-interest income 630 922 775 207 267 2,801 2,150
Underlying net operating 2,717 1,914 725 711 360 6,427 5,797
income
Underlying operating expenses (1,053) (436) (409) (334) (170) (161) (2,563) (2,369)
Impairment losses on loans and (678) (235) (50) (963) (864)
advances
Underlying operating profit 986 1,243 316 327 190 (161) 2,901 2,564
Non-operating income 57 4 61 48
Underlying profit before tax 1,043 1,243 316 327 194 (161) 2,962 2,612
Half year ended 30 June 2006
Underlying profit before tax 1,133 809 287 293 156 (111) 45 2,612
Increase/(decrease) in (8)% 54% 10% 12% 24% (45)% 13%
underlying profit before tax
Taxation
As a result of the 2007 Finance Act, the main UK corporation tax rate will
reduce from 30% to 28% in April 2008. This has resulted in a reduction to the
deferred tax net liabilities of the Group of #110m at June 2007, which has been
excluded from our underlying results.
The tax charge for the period of #858m (H1 2006 #865m) includes #167m (H1 2006
#134m) in respect of the tax charge levied on life companies for policyholder
tax and a decrease of #110m in respect of the change in the main UK corporation
tax rate. Excluding these items results in an effective rate of 28.3% (H1 2006
29.0%). The tax charge of #858m includes overseas tax of #80m (H1 2006 #82m).
Post Tax Return on Mean Equity
Group post tax return on mean equity ('ROE') increased to 21.0% (H1 2006 20.5%).
This increase was driven by a 14% increase in the underlying post tax profit
attributable to ordinary shareholders compared to just a 12% increase in mean
equity, the latter benefiting from the cumulative impact of the share buyback
programme.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Underlying profit attributable to 2,046 1,794 2,022 3,816
ordinary shareholders
Mean Equity 19,665 17,611 19,059 18,375
% % % %
Group post tax return on mean equity 21.0 20.5 21.0 20.8
Note: ROE is calculated by dividing underlying profit attributable to
ordinary shareholders by the monthly average of ordinary shareholders' funds.
Page 55
Net Interest Income
Underlying net interest income fell by 1% to #3,626m compared to the
corresponding period last year. On a like-for-like basis*, excluding the impact
of the disposal of Drive, the acquisition of Lex and non-interest income bearing
Treasury investments, underlying net interest income has grown by 4% to #3,682m
(H1 2006 #3,531m).
The Group net interest margin fell 3bps against H2 2006, 1 bp of which was due
to the impact of non-interest income bearing Treasury investments and the
remainder reflecting the reduction in the Retail margin of 3bps and a fall in
International of 8bps.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Interest receivable 15,561 12,187 14,555 26,742
Interest payable (11,935) (8,540) (10,802) (19,342)
Underlying net interest income (including Drive) 3,626 3,647 3,753 7,400
Drive (120) (134) (254)
Underlying net interest income (excluding Drive) 3,626 3,527 3,619 7,146
Average balances
Interest earning assets:
- Loans and advances 383,723 366,556 379,216 372,938
- Securities and other liquid assets 50,589 43,457 42,037 42,741
434,312 410,013 421,253 415,679
Drive (1,164) (1,523) (1,345)
434,312 408,849 419,730 414,334
Group net interest margin (excluding Drive) 1.68% 1.74% 1.71% 1.72%
Divisional net interest margins:
Retail 1.73% 1.80% 1.76% 1.78%
Corporate 2.12% 2.37% 2.13% 2.25%
International 1.90% 1.97% 1.98% 1.97%
Treasury & Asset Management 0.05% 0.07% 0.06% 0.07%
* Net interest income on a like-for-like basis is calculated as follows:
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Net interest income (excluding Drive) 3,626 3,527 3,619 7,146
Lex 32 4 33 37
Non-interest bearing Treasury investments 24
Net interest income (like-for-like basis) 3,682 3,531 3,652 7,183
Page 56
Non-interest Income
Underlying non-interest income increased by 30% to #2,801m (H1 2006 #2,150m).
Net fees and commissions have increased by 9% where growth in Corporate, due to
higher underwriting fees, and in Treasury & Asset Management, have more than
offset a fall in Retail in respect of lower Credit Card default fees. Profits
on the sale of investment securities increased to #316m, mainly reflecting
realisations within the Corporate Fund Investment portfolio. Net operating lease
income increased by 65% reflecting the full consolidation of Lex which became a
fully owned subsidiary on 31 May 2006.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Fees and commission income 1,193 1,116 1,059 2,175
Fees and commission expense (539) (514) (498) (1,012)
Net earned premiums on insurance contracts 3,051 2,976 2,672 5,648
Net trading income 141 131 148 279
Change in value of in-force long term assurance business 159 142 140 282
Other operating income:
Profit on sale of investment securities 316 92 215 307
Operating lease rental income 655 389 653 1,042
Net investment income related to insurance and 3,481 1,819 4,487 6,306
investment business
Other income 178 44 104 148
Non-interest income 8,635 6,195 8,980 15,175
Impairment on investment securities (27) (59) (12) (71)
Operating lease depreciation (500) (295) (517) (812)
Change in investment contract liabilities (2,423) (927) (1,983) (2,910)
Net claims incurred on insurance contracts (1,433) (1,263) (1,065) (2,328)
Net change in insurance contract liabilities (1,388) (1,202) (2,692) (3,894)
Change in unallocated surplus (169) (301) (268) (569)
Share of profits of associates and jointly controlled 106 2 124 126
entities
Underlying non-interest income 2,801 2,150 2,567 4,717
Underlying non-interest income analysed by division:
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Retail 630 682 670 1,352
Corporate 922 348 705 1,053
Insurance & Investment 775 747 747 1,494
International 207 187 217 404
Treasury & Asset Management 267 186 229 415
Underlying non-interest income (excluding Drive) 2,801 2,150 2,568 4,718
Drive (1) (1)
Underlying non-interest income (including Drive) 2,801 2,150 2,567 4,717
Page 57
Operating Expenses
Underlying operating expenses increased by 8% to #2,563m (H1 2006 #2,369m). The
increase of #194m over last year includes planned investments in International
and Treasury & Asset Management, the implementation costs of our cost efficiency
programme and the full consolidation of Lex which became a wholly owned
subsidiary on 31 May 2006.
Staff costs increased by 10% against the corresponding period last year due in
part to increased performance based remuneration in Corporate and the
continuation of our East Coast expansion in Australia.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Staff 1,404 1,271 1,403 2,674
Accommodation, repairs and maintenance 224 205 216 421
Technology 134 115 123 238
Marketing and communication 187 180 187 367
Depreciation:
Property and equipment and intangible assets 210 190 190 380
Other 404 408 420 828
Underlying operating expenses 2,563 2,369 2,539 4,908
Operating lease depreciation 500 295 517 812
Change in investment contract liabilities 2,423 927 1,983 2,910
Net claims incurred on insurance contracts 1,433 1,263 1,065 2,328
Net change in insurance contract liabilities 1,388 1,202 2,692 3,894
Change in unallocated surplus 169 301 268 569
Total 8,476 6,357 9,064 15,421
Underlying operating expenses analysed by division:
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Retail 1,053 1,052 1,075 2,127
Corporate 436 366 446 812
Insurance & Investment 409 418 402 820
International 334 265 308 573
Treasury & Asset Management 170 135 157 292
Group Items 161 111 130 241
Underlying operating expenses (excluding Drive) 2,563 2,347 2,518 4,865
Drive 22 21 43
Underlying operating expenses (including Drive) 2,563 2,369 2,539 4,908
Page 58
Cost:income Ratio
In the first half of 2007, the Group cost:income ratio improved to 39.9% (H1
2006 41.3%, restated to exclude Drive).
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Underlying operating expenses 2,563 2,347 2,518 4,865
Underlying net interest income 3,626 3,527 3,619 7,146
Underlying non-interest income 2,801 2,150 2,568 4,718
Underlying net operating income 6,427 5,677 6,187 11,864
% % % %
Group cost:income ratio 39.9 41.3 40.7 41.0
Divisional cost:income ratios are summarised below:
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
% % % %
Retail 38.8 38.5 38.2 38.4
Corporate 22.8 27.1 26.8 26.9
International 47.0 44.1 45.0 44.6
Treasury & Asset Management 47.2 46.4 47.7 47.1
Group Items
Group Items principally comprise the expenses of managing the Group, including
technology so far as it is not devolved to divisions, accommodation and other
shared services such as cheque clearing, mailing, etc. The costs of technology,
accommodation and other shared services (other than those borne directly by
Group functions) are subsequently recharged to divisions according to their
usage and are shown under the operating expense analysis for each division.
Group Items has increased by 45% compared to the corresponding period last year
due in part to the implementation costs of the cost efficiency programme.
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Staff 160 135 156 291
Accommodation, repairs and maintenance 183 167 178 345
Technology 52 41 50 91
Marketing and communication 35 33 34 67
Depreciation:
Property and equipment and intangible assets 99 97 95 192
Other 116 94 106 200
Sub total 645 567 619 1,186
Less Recharges:
Technology (182) (180) (185) (365)
Accommodation (189) (171) (194) (365)
Other shared services (113) (105) (110) (215)
Total 161 111 130 241
Page 59
Group Embedded Value Information (IFRS Basis)
The sources of profit from all long term assurance business accounted for as
insurance contracts on an embedded value ('EV') basis under IFRS 4 are set out
below. This table includes that part of our Repayment Insurance business
accounted for on an EV basis but excludes investment contracts accounted for
under IAS 39.
Half year ended Half year ended
30.06.2007 30.06.2006
UK UK
UK General UK General
Investment Europe Insurance Total Investment* Europe Insurance Total
#m #m #m #m #m #m #m #m
Expected contribution from existing 76 25 2 103 72 21 11 104
business
Actual vs expected experience on 34 12 24 70 17 6 23
existing business
110 37 26 173 89 27 11 127
Contribution from new business 142 16 4 162 105 10 14 129
Investment earnings on net assets 54 3 5 62 59 2 3 64
using long term assumptions
Contribution from insurance 306 56 35 397 253 39 28 320
contracts**
Half year ended Half year ended
31.12.2006 31.12.2006
UK UK
UK General UK General
Investment Europe Insurance Total Investment* Europe Insurance Total
#m #m #m #m #m #m #m #m
Expected contribution from existing 63 23 (6) 80 135 44 5 184
business
Actual vs expected experience on (1) 13 33 45 16 19 33 68
existing business
62 36 27 125 151 63 38 252
Contribution from new business 111 26 11 148 216 36 25 277
Investment earnings on net assets 54 1 3 58 113 3 6 122
using long term assumptions
Contribution from insurance 227 63 41 331 480 102 69 651
contracts**
* As explained on page 32, contribution from insurance contracts has been
restated to allocate the other income and costs line item previously disclosed
separately.
** On an underlying basis
The embedded value of long term assurance business accounted for under IFRS 4,
which excludes investment contract business accounted for under IAS 39, is set
out below.
As at As at
30.06.2007 31.12.2006
UK UK
UK General UK General
Investment Europe Insurance Total Investment Europe Insurance Total
#m #m #m #m #m #m #m #m
Shareholder funds 2,322 92 2,414 2,315 69 52 2,436
Value of in-force business (net of 1,624 441 193 2,258 1,544 419 162 2,125
tax)
Total embedded value (net of tax) 3,946 533 193 4,672 3,859 488 214 4,561
Shareholder funds as a % of total 59% 17% 52% 60% 14% 24% 53%
EV
Page 60
Half year ended 30.06.2007
UK
UK General
Investment Europe Insurance Total
#m #m #m #m
Opening embedded value 3,859 488 214 4,561
Contribution from insurance contracts 306 56 35 397
Developments costs, associated overheads and financing costs (126) (126)
Underlying embedded value profit before tax 180 56 35 271
Short term investment fluctuations (39) 6 (33)
Underlying tax charge (30) (17) (5) (52)
Shareholder tax rate change 54 54
Dividends paid (51) (51)
Other capital movements (78) (78)
Movement in embedded value in the period 87 45 (21) 111
Closing embedded value 3,946 533 193 4,672
The economic assumptions (gross of tax) used in the calculation of the embedded
values are unchanged from those used at the end of 2006. These are as follows:
As at As at
30.06.2007 31.12.2006
% %
Risk discount rate* 8.0 8.0
Return on fixed income securities 5.0 - 5.5 5.0 - 5.5
Return on equities 7.5 7.5
Expense inflation rate 3.0 3.0
* Included in the risk discount rate is an investment risk component which is
chosen so as to avoid capitalising any investment risk premiums over the long
term view of the risk free rate of return.
Page 61
Balance Sheet Analysis
Loans and advances to customers increased by an annualised 10% to #395.2bn (end
2006 #376.8bn). The increase was 4% in Retail, 14% in Corporate and 34% in
International on an annualised basis.
Customer deposits increased by an annualised 14% to #227.1bn (end 2006 #211.9bn)
and wholesale funding increased by 5% on an annualised basis to #219.0bn (end
2006 #214.2bn).
Retail Corporate International Treasury & Total Total
Asset Mgmt 30.06.2007 31.12.2006
#bn #bn #bn #bn #bn #bn
Loans and advances to customers 242.1 95.8 56.8 0.5 395.2 376.8
Impairment provisions 2.1 0.7 0.3 3.1 3.1
Loans and advances to customers 244.2 96.5 57.1 0.5 398.3 379.9
(before provisions)
Risk weighted assets 109.6 111.9 47.7 15.4 285.5* 276.0*
Customer deposits 151.3 41.9 19.8 14.1 227.1 211.9
* Includes risk weighted assets of #0.9bn (end 2006 #0.8bn) attributable to
Insurance & Investment.
Classification of advances
The mix of the Group's gross lending portfolio at the period end is summarised
in the following table:
As at As at As at
30.06.2007 30.06.2006 31.12.2006
% % %
Energy 1 1
Manufacturing industry 2 2 2
Construction and property 11 10 11
Hotels, restaurants and wholesale and retail trade 3 3 3
Transport, storage and communication 1 1 2
Financial 2 3 2
Other services 6 6 5
Individuals:
Residential Mortgages 61 63 61
Other personal lending 5 7 6
Overseas residents 8 5 7
Total 100 100 100
Page 62
Credit Quality & Provisions
The total charge for loan impairment losses against Group profits was #963m (H1
2006 #864m) representing 0.25% of average advances (H1 2006 0.24%).
Total
#m
At 1 January 2007 3,089
Amounts written off during the period (926)
New impairment provisions less releases 1,003
Exchange movements 8
Discount unwind on impaired advances (65)
Closing balance at 30 June 2007 3,109
New impairment provisions less releases 1,003
Recoveries of amounts previously written off (40)
Net charge to income statement 963
Impairment provisions as a % of closing advances are analysed in the following
table:
As at 30.06.2007 As at 30.06.2006 As at 31.12.2006
As % of As % of #m As % of
closing closing closing
#m advances #m advances advances
Retail 2,080 0.86 2,105 0.92 2,108 0.89
Corporate 748 0.78 702 0.82 735 0.82
International 281 0.49 217 0.51 246 0.51
Drive 66 5.08
Total impairment provisions 3,109 0.79 3,090 0.85 3,089 0.82
Impaired loans as a % of closing advances and impairment provisions as a % of
impaired loans are analysed by division in the following table:
Advances Impaired Impaired loans Impairment Impairment
loans as % of closing provisions provisions as %
advances of impaired
loans
#bn #m % #m %
As at 30 June 2007
Retail: Secured 224.4 4,183 1.86 340 8
Unsecured 17.7 2,277 12.86 1,740 76
Total 242.1 6,460 2.67 2,080 32
Corporate 95.8 1,518 1.58 748 49
International 56.8 662 1.17 281 42
Treasury & Asset Management 0.5
Total 395.2 8,640 2.19 3,109 36
As at 31 December 2006
Retail: Secured 219.4 4,047 1.84 408 10
Unsecured 18.3 2,411 13.17 1,700 71
Total 237.7 6,458 2.72 2,108 33
Corporate 89.6 1,163 1.30 735 63
International 48.7 581 1.19 246 42
Treasury & Asset Management 0.8
Total 376.8 8,202 2.18 3,089 38
Page 63
Capital Structure
Tier 1 and Total regulatory capital ratios remain strong at 8.0% (end 2006 8.1%)
and 12.0% (end 2006 12.0%) respectively. This position has been achieved
notwithstanding a share buyback of #394m (including costs) in the first half of
2007.
Risk weighted assets increased by an annualised 7% to #285.5bn (end 2006
#276.0bn). The RWAs at 30 June 2007 are based on new prudential rules relating
to the consolidation of participations(1). Had the new rules been applied at
December 2006 the RWAs would have been #5.0bn lower at #271.0bn and therefore
the actual annualised growth in RWAs over the first half of 2007 would have been
around 11%. RWAs are quoted after capital relief achieved by securitisations.
New securitisations during the six months to June 2007 have provided an
additional #7.5bn of capital relief and this has been offset by #3.5bn due to
the redemption of existing loan securitisations.
In addition to retained earnings, Tier 1 capital was strengthened by #374m by
the issuance of non-innovative preference shares of US$750m in May 2007. These
increases were offset by #394m of ordinary shares bought back in the period.
Tier 1 gearing at the half year was 26.0% (end 2006 25.0%) in line with our
benchmark range of 25% +/- 2%.
The change resulting from the new prudential rules on the consolidation of
participations(1) has reduced Tier 1 capital by a net #216m.
Tier 2 capital was increased during the period by a dated subordinated debt
issue of Euro1bn in March 2007, AUD$600m in May 2007, US$1bn in June 2007 and
CAD$500m in June 2007. In sterling equivalent terms at 30 June 2007, this new
issuance totalled #1,660m.
Supervisory deductions mainly reflect investments in subsidiary undertakings
that are not within the banking group for regulatory purposes together with
deductions relating to the securitisation of loans. These unconsolidated
investments are primarily Clerical Medical, St James's Place, St. Andrew's
Group, Heidelberger Leben and the Group's investment in Crest Nicholson, a
housebuilder. Total supervisory deductions increased to #6,211m from #5,666m as
a result of the investment in Crest Nicholson, increases in the embedded value
of life policies held and increased securitisations outlined above.
(1) As part of Prudential Sourcebook for Banks, Building Societies and
Investment Firms (BIPRU), rules on the consolidation of participations have been
implemented from 1 January 2007. The change principally requires 'proportional'
consolidation of jointly controlled entities and associates and results in a
reduction of risk weighted assets and minority interests and goodwill balances
relating to these participations.
Page 64
Capital Structure As at As at As at
30.06.2007 30.06.2006 31.12.2006
#m #m #m
Risk Weighted Assets
Banking book - on balance sheet 260,369 246,982 253,839
Banking book - off balance sheet 16,102 13,218 14,272
Trading book 9,016 6,977 7,901
Total Risk Weighted Assets 285,487 267,177 276,012
Tier 1
Ordinary share capital 936 950 941
Preference share capital 2,781 2,465 2,422
Eligible reserves 18,981 17,307 18,496
Minority interests (equity) 124 808 1,058
Preferred securities 3,178 3,249 3,189
Less: goodwill & other intangible assets (3,034) (3,119) (3,677)
Total Tier 1 capital 22,966 21,660 22,429
Tier 2
Available for sale reserve 161 154 168
Undated subordinated debt 5,562 5,911 5,598
Dated subordinated debt 9,174 8,002 7,914
Collectively assessed impairment provisions 2,485 2,502 2,711
Total Tier 2 capital 17,382 16,569 16,391
Supervisory deductions:
Unconsolidated investments - Life (4,444) (4,182) (4,260)
Unconsolidated investments - Other (506) (561) (510)
Investments in other banks and other deductions (1,261) (757) (896)
Total supervisory deductions (6,211) (5,500) (5,666)
Total regulatory capital 34,137 32,729 33,154
Tier 1 capital ratio (%) 8.0 8.1 8.1
Total capital ratio (%) 12.0 12.2 12.0
Page 65
FINANCIAL INFORMATION
(In accordance with the Listing Rules of the Financial Services Authority)
Basis of Preparation
The Group is adopting IFRS 7 'Financial Instruments: Disclosures' and the
'Capital disclosure amendment' to IAS 1 'Presentation of financial statements'
together with the following IFRICs for reporting purposes in its 2007 Annual
Report and Accounts. IFRIC 7 'Applying the Restatement Approach under IAS 29
Financial Reporting in Hyperinflationary Economies', IFRIC 8 'Scope of IFRS 2
Share-based Payment', IFRIC 9 'Reassessment of Embedded Derivatives' and 'IFRIC
10 'Interim Financial Reporting and Impairment' and the standards above have
been adopted by the European Union and are applicable to the Group for the
financial year to 31 December 2007.
As explained in the 2006 Annual Report and Accounts there is no financial impact
from the implementation of these standards and interpretations by the Group and
they are primarily concerned with disclosure in the financial statements.
Accordingly, there have been no significant changes to the accounting policies
as described in the 2006 Annual Report and Accounts. The financial information
has been prepared on the basis of the accounting policies adopted in the
financial statements for the year ended 31 December 2006.
Section 240 Statement
The comparative figures for the year ended 31 December 2006 do not constitute
the company's statutory accounts for that financial year within the meaning of
section 240 of the Companies Act 1985 but are derived from the 2006 accounts.
Those accounts, which were prepared in accordance with International Financial
Reporting Standards as adopted by the European Union, have been reported on by
the company's auditors and their report was unqualified and does not contain
statements under Section 237(2) or (3) of the Companies Act 1985.
Page 66
Consolidated Income Statement
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Interest receivable 15,549 12,187 14,555 26,742
Interest payable (11,935) (8,540) (10,802) (19,342)
Net interest income 3,614 3,647 3,753 7,400
Fees and commission income 1,193 1,116 1,059 2,175
Fees and commission expense (539) (514) (498) (1,012)
Net earned premiums on insurance contracts 3,051 2,976 2,672 5,648
Net trading income 141 131 148 279
Change in value of in-force long term assurance business 159 142 140 282
Net investment income related to insurance and investment 3,615 1,861 4,584 6,445
business
Other operating income 1,143 525 972 1,497
Net operating income (Note 1) 12,377 9,884 12,830 22,714
Change in investment contract liabilities (2,423) (927) (1,983) (2,910)
Net claims incurred on insurance contracts (1,433) (1,263) (1,065) (2,328)
Net change in insurance contract liabilities (1,388) (1,202) (2,692) (3,894)
Change in unallocated surplus (169) (301) (268) (569)
Administrative expenses (Note 2) (2,432) (2,179) (2,444) (4,623)
Depreciation and amortisation: (710) (485) (707) (1,192)
Intangible assets other than goodwill (94) (80) (81) (161)
Property and equipment (116) (110) (109) (219)
Operating lease assets (500) (295) (517) (812)
Goodwill impairment (2) (55) (55)
Operating expenses (8,557) (6,357) (9,214) (15,571)
Impairment losses on loans and advances (963) (864) (878) (1,742)
Impairment on investment securities (27) (59) (12) (71)
Operating profit 2,830 2,604 2,726 5,330
Share of profits of jointly controlled entities 97 (2) 114 112
Share of profits of associated undertakings 9 4 10 14
Non-operating income (Note 3) 61 48 202 250
Profit before taxation 2,997 2,654 3,052 5,706
Tax on profit (Note 4) (858) (865) (907) (1,772)
Profit after taxation (continuing operations) 2,139 1,789 2,145 3,934
Profit of disposal group classified as 4 5 5
held for sale
Profit for the year 2,143 1,789 2,150 3,939
Attributable to:
Parent company shareholders 2,114 1,759 2,120 3,879
Minority interests 29 30 30 60
2,143 1,789 2,150 3,939
Basic earnings per share - continuing operations 55.1p 45.3p 55.2p 100.5p
Basic earnings per share - disposal group 0.1p 0.1p
Basic earnings per share - total 55.1p 45.3p 55.3p 100.6p
Diluted earnings per share - continuing operations 54.6p 44.9p 54.5p 99.4p
Diluted earnings per share - disposal group 0.1p 0.1p
Diluted earnings per share - total 54.6p 44.9p 54.6p 99.5p
Details of dividends are set out in Note 5.
Page 67
Consolidated Balance Sheet
As at As at As at
30.06.2007 30.06.2006 31.12.2006
#m #m #m
Assets
Cash and balances at central banks 1,780 1,653 1,966
Items in course of collection 1,074 1,074 880
Financial assets held for trading 58,250 42,187 49,139
Disposal group assets held for sale 1,388
Derivative assets 12,205 9,441 8,612
Loans and advances to banks 9,001 16,656 11,593
Loans and advances to customers 395,210 361,631 376,808
Investment securities 120,864 113,271 117,031
Interests in jointly controlled entities 652 133 420
Interests in associated undertakings 141 181 181
Goodwill and other intangible assets 2,739 2,736 2,689
Property and equipment 1,506 1,492 1,573
Investment properties 5,324 4,626 5,010
Operating lease assets 4,707 4,826 4,681
Deferred costs 899 632 853
Value of in-force long term assurance business 3,267 2,994 3,104
Other assets 5,396 5,705 3,887
Prepayments and accrued income 1,075 1,195 1,214
Total Assets 624,090 570,433 591,029
Liabilities
Deposits by banks 37,530 33,805 30,557
Customer accounts 227,117 208,137 211,857
Financial liabilities held for trading 22,346 23,625 22,334
Disposal group liabilities held for sale 909
Derivative liabilities 15,061 10,064 10,755
Notes in circulation 859 841 857
Insurance contract liabilities 26,074 22,709 24,977
Investment contract liabilities 53,441 48,100 49,486
Unallocated surplus 1,712 1,275 1,543
Net post retirement benefit liabilities 543 1,905 912
Current and deferred tax liabilities 3,115 2,337 2,670
Other liabilities 7,249 5,990 6,387
Accruals and deferred income 2,782 2,622 3,071
Other provisions 190 207 201
Debt securities in issue 181,477 169,449 183,650
Other borrowed funds 22,713 20,074 19,692
Total Liabilities 602,209 551,140 569,858
Shareholders' Equity
Issued share capital and share premium (Note 6) 4,059 3,903 3,995
Other reserves 1,146 875 1,161
Retained earnings 16,316 14,310 15,529
Shareholders' Equity (excluding minority interests) 21,521 19,088 20,685
Minority interests 360 205 486
Shareholders' Equity 21,881 19,293 21,171
Total Liabilities and Shareholders' Equity 624,090 570,433 591,029
Page 68
Consolidated Statement of Recognised Income and Expense
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Net actuarial gains from defined benefit plans (net of 261 163 163
tax)
Foreign exchange translation 63 (98) 75 (23)
Available for sale investments
Net change in fair value (net of tax) 87 95 95 190
Net gains transferred to the income (129) (64) (107) (171)
statement (net of tax)
Cash flow hedges
Effective portion of changes in fair value 74 (87) 296 209
taken to equity (net of tax)
Net gains/(losses) transferred to the income (118) 203 (117) 86
statement (net of tax)
Revaluation of existing net assets upon acquisition of (15) (15)
jointly controlled entity
Net income recognised directly in equity 238 49 390 439
Profit for the year 2,143 1,789 2,150 3,939
Total recognised income and expense 2,381 1,838 2,540 4,378
Attributable to:
Parent company shareholders 2,352 1,808 2,510 4,318
Minority interests 29 30 30 60
2,381 1,838 2,540 4,378
Page 69
Consolidated Cash Flow Statement
Half year Half year Year
ended ended ended
30.06.2007 30.06.2006 31.12.2006
#m #m #m
Profit before taxation 2,997 2,654 5,706
Adjustments for:
Impairment losses on loans and advances 963 864 1,742
Depreciation and amortisation 710 485 1,192
Goodwill impairment 2 55
Interest on other borrowed funds 609 578 1,157
Pension charge for defined benefit schemes 72 82 164
Exchange differences 295 1,618 3,157
Movements in derivatives held for trading 659 2,227 4,081
Other non-cash items (741) (282) (902)
Net change in operating assets (32,937) (26,790) (53,452)
Net change in operating liabilities 26,158 28,385 44,743
Net cash flows from operating activities before tax (1,213) 9,821 7,643
Income taxes paid (449) (426) (991)
Cash flows from operating activities (1,662) 9,395 6,652
Cash flows from investing activities 186 (7,283) (10,319)
Cash flows from financing activities 1,115 (799) (2,106)
Net (decrease)/increase in cash and cash equivalents (361) 1,313 (5,773)
Opening cash and cash equivalents 8,191 13,964 13,964
Closing cash and cash equivalents 7,830 15,277 8,191
Analysis of Cash and Cash Equivalents Half year Half year Year
ended ended ended
30.06.2007 30.06.2006 31.12.2006
#m #m #m
Cash and balances at central banks repayable on demand 457 598 663
Loans and advances to banks repayable in less than 3 months 7,373 14,679 7,528
Closing cash and cash equivalents 7,830 15,277 8,191
Page 70
Consolidated Cash Flow Statement (continued)
Half year Half year Year
ended ended ended
30.06.2007 30.06.2006 31.12.2006
#m #m #m
Investing Activities
Sale and maturity of investment securities 16,327 9,397 24,448
Purchase of investment securities (15,751) (14,093) (31,260)
Sale of other intangible assets 18 14 27
Purchase of other intangible assets (142) (98) (194)
Sale of property and equipment 108 62 60
Purchase of property and equipment (158) (138) (280)
Sale of investment properties 57 1 2
Purchase of investment properties (6)
Sale of operating lease assets 319 294 800
Purchase of operating lease assets (881) (2,346) (1,804)
Cash contribution to defined benefit pension schemes (75) (95) (860)
Investment in subsidiary undertakings (228) (1,241)
Disposal of subsidiary undertakings 479 87
Investment in jointly controlled entities and associated (219) (97) (202)
undertakings
Disposal of jointly controlled entities and associated undertakings 55 16 29
Dividends received from jointly controlled entities 43 24 57
Dividends received from associated undertakings 6 10 12
Cash flows from investing activities 186 (7,283) (10,319)
Financing Activities
Issue of shares 64 441 548
Share capital buyback, including costs (394) (502) (982)
Issue of other borrowed funds 3,944 867 1,571
Repayments of other borrowed funds (530) (80) (777)
Minority interest acquired 287
Minority interest disposed (129) (30)
Equity dividends paid (1,101) (960) (1,501)
Dividends paid to minority shareholders in (25) (16) (22)
subsidiary undertakings
Interest on other borrowed funds relating to servicing of finance (686) (541) (1,153)
Movement in own shares (28) (8) (47)
Cash flows from financing activities 1,115 (799) (2,106)
Page 71
Notes to the Accounts
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
1. Net operating income
Net operating income includes:
Dividend income on financial investments
designated as:
Available for sale 14 18 7 25
Loans and receivables 1 (1)
Net realised gains on sale of financial
instruments designated as:
Available for sale 184 92 152 244
Loans and receivables 1 1
2. Administrative expenses
Administrative expenses include:
Retail banking fee refunds 79
Mortgage endowment compensation 95 95
79 95 95
Administrative expenses also include:
Staff costs 1,404 1,271 1,403 2,674
Accommodation, repairs and maintenance 224 205 216 421
Technology 134 115 123 238
Marketing and communication 187 180 187 367
3. Non-operating income
Profit on sale and leaseback of certain premises 28 22 22
Profit on the part disposal of Rightmove plc 29 17 17
Profit on the dilution of shareholding in Invista 22 22
Real Estate Investment Management Holdings plc
Profit on the sale of Retail Financial Services 9 9
Limited
Profit on the sale of Drive Financial Services LP 180 180
Profit on the sale of Insight Investment 4
Management (C.I.) Limited
61 48 202 250
Taxation
4.
As a result of the 2007 Finance Act, the main UK corporation tax rate will reduce from 30% to 28% in April
2008. This has resulted in a reduction to deferred tax net liabilities of the Group of #110m at June
2007.
The tax charge for the period of #858m (H1 2006 #865m) includes #167m (H1 2006 #134m) in respect of the
tax charge levied on life companies for policyholder tax and a decrease of #110m in respect of the change
in the corporation tax rate. Excluding these items results in an effective rate of 28.3% (H1 2006 29.0%).
The tax charge of #858m includes overseas tax of #80m (H1 2006 #82m).
A reconciliation of the actual tax charge to the expected tax charge at the standard rate of corporation
tax of 30% is detailed below:
Page 72
Half year Half year Half year Year
ended ended ended ended
30.06.2007 30.06.2006 31.12.2006 31.12.2006
#m #m #m #m
Expected tax charge at 30% 899 796 916 1,712
Expenses not deductible/(income not chargeable) (22) 17 (8) 9
for tax purposes
Net effect of differing tax rates overseas (1) (6) 22 16
Book gains covered by capital losses/indexation (35) (13) (96) (109)
Policyholder tax/differing tax rates for life 117 96 58 154
assurance business
Impairment on investment securities 12 22 1 23
Adjustments in respect of previous periods (4) (48) 41 (7)
Reduction in deferred tax from change in (110)
UK tax rate
Other 2 1 (27) (26)
Total income tax on profit 858 865 907 1,772
5. Dividends
After the balance sheet date an interim dividend of 16.6 pence per ordinary share issued was proposed by
the Directors. This interim dividend has not been provided for but the estimated impact on retained
earnings, based on the number of shares in issue at 30 June 2007, is #622m.
At 30 June 2007 #51m (H1 2006 #30m) of preference dividends have been charged directly to retained
earnings in respect of preference shares classified as equity (as shown in Note 6) along with #1,048m of
ordinary dividends.
6. Preference shares
Included in issued share capital and share premium is #1,267m of preference shares classified as equity
as detailed below:
As at As at As at
30.06.2007 30.06.2006 31.12.2006
#m #m #m
6.0884% preference shares issued May 2005 750 750 750
6.475% preference shares issued June 2005 198 198 198
6.3673% preference shares issued June 2006 350 350 350
1,298 1,298 1,298
Less: issue costs (31) (31) (31)
1,267 1,267 1,267
Page 73
7. Capital Funding
During the period the Group has reduced its share capital and share premium by #394m through the share buy
back programme.
On 21 May 2007 HBOS issued 7,500 American Depository Receipts representing US$750m 6.657% Fixed-to-Floating
Rate preference shares. These are non-innovative non-equity preference shares that are classified as Tier 1
securities.
During the period HBOS has issued four tranches of subordinated debt; on 20 March 2007 Euro1bn Subordinated
Callable Notes 2017, on 27 April 2007 AUD$600m subordinated notes, on 6 June 2007 US$1bn Subordinated
Callable Notes 2017 and on 20 June 2007 CAD$500m Callable Fixed to Floating Rate Notes 2017.
The Group has also issued debt securities and other funding instruments in support of its ongoing
securitisation and funding programmes.
8. Contingent Liabilities
On 27 July 2007 it was announced that the Company, along with seven other major UK current account providers,
had reached agreement with the Office of Fair Trading to start legal proceedings in the High Court of England
and Wales for a declaration (or declarations) to resolve legal uncertainties concerning the level, fairness
and lawfulness of unauthorised overdraft charges (the "test case"). It was also announced that the Company
and those other providers will seek a stay of all current and potential future Court proceedings which are
brought against them in the UK concerning these charges and have obtained the consent of the Financial
Services Ombudsman not to proceed with consideration of the merits of any complaints concerning these charges
that are referred to him prior to the resolution of the test case. A definitive outcome of the test case is
unlikely to be known for at least 12 months. Given the very early stage of these proceedings and the
uncertainty as to their outcome, it is not practicable at this time to estimate any potential financial
effect.
Page 74
Independent review report to HBOS plc
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2007 which comprises the financial information set
out on pages 66 to 74. We have read the other information contained in the
Interim Results 2007 Stock Exchange Announcement ("interim report") and
considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the company in accordance with the terms of our
engagement to assist the company in meeting the requirements of the Listing
Rules of the Financial Services Authority. Our review has been undertaken so
that we might state to the company those matters we are required to state to it
in this report and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the company for
our review work, for this report, or for the conclusions we have reached.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin 1999/
4: Review of interim financial information issued by the Auditing Practices
Board for use in the UK. A review consists principally of making enquiries of
group management and applying analytical procedures to the financial information
and underlying financial data and, based thereon, assessing whether the
accounting policies and presentation have been consistently applied unless
otherwise disclosed. A review excludes audit procedures such as tests of
controls and verification of assets, liabilities and transactions. It is
substantially less in scope than an audit performed in accordance with
International Standards on Auditing (UK and Ireland) and therefore provides a
lower level of assurance than an audit. Accordingly, we do not express an audit
opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2007.
KPMG Audit Plc
Chartered Accountants
Edinburgh
31 July 2007
Page 75
SUPPLEMENTARY EMBEDDED VALUE INFORMATION FOR THE UK INVESTMENT BUSINESS
Introduction
The introduction of IFRS in 2005 resulted in a change to the timing of reported
profit recognition in respect of Investment Business. Under IFRS, insurance
contracts continue to be accounted for on an Embedded Value ('EV') basis but
investment contracts are now all accounted for under IAS 39. This has the
effect of delaying the recognition of profit in respect of some investment
contracts and, in particular, has resulted in the reporting of losses in the
year of their sale.
To assist in the understanding of the underlying performance and value
generation of our UK Investment Business, the supplementary information set out
below provides the financial results for our UK Investment Business as if both
insurance and investment contracts (including mutual funds) were accounted for
on an EV basis. We refer to this as the 'Full EV' basis. The Full EV basis
uses the same methodology as that which is applied to the calculation of EV on
insurance contract business under IFRS. The economic assumptions used for the
Full EV basis are the same as used under the reported IFRS basis set out on page
61.
Applying the Full EV basis results in the earlier recognition of profit on new
investment contract business, but subsequently a lower contribution from
existing business, when compared to the recognition of profits on investment
contracts under IAS 39. Differences between actual and expected experience on
existing business often have a greater impact on a Full EV basis, as changes in
experience can result in significant adjustments to modelled future cashflows.
In contrast, under IAS 39, variations in experience compared to expectations are
recognised in the income statement in the year in which they arise.
No additional information has been provided in relation to General Insurance or
European Financial Services as the investment business not already accounted for
on an EV basis under IFRS on these businesses is immaterial.
Key Financial Highlights
The key highlights of the Full EV basis are as follows:
* Group embedded value on a Full EV basis was #7,407m as at 30
June 2007 (end 2006 #7,086m), #2,735m higher than reported under IFRS.
* Underlying earnings per share on the Full EV basis increased
15% to 57.1p (H1 2006 49.6p), 2.5p (5%) higher than reported under IFRS.
* Overall, underlying profit before tax for the UK Investment
Business increased 27% to #345m (H1 2006 #272m), #136m higher than reported
under IFRS.
* Contribution from new business in the UK Investment Business
increased by 25% to #273m (H1 2006 #219m), #255m higher than reported under
IFRS.
A comparison of the Group's financial results on a Full EV basis and the IFRS
basis is set out below.
Half year ended Half year ended Half year ended Half year ended
30.06.2007 30.06.2007 30.06.2006 30.06.2006
Full EV Basis IFRS Basis Full EV Basis IFRS Basis
Underlying profit before tax #3,098m #2,962m #2,760m #2,612m
Underlying EPS 57.1p 54.6p 49.6p 47.0p
Post tax return on mean equity 20.6% 21.0% 20.4% 20.5%
As at As at As at As at
30.06.2007 30.06.2007 31.12.2006 31.12.2006
Full EV Basis IFRS Basis Full EV Basis IFRS Basis
Group embedded value (net of tax)* #7,407m #4,672m #7,086m #4,561m
Net asset value 580p 541p 561p 516p
* Includes Europe of #533m (end 2006 #488m) and UK General Insurance of
#193m (end 2006 #214m).
Page 76
UK Investment Business
Full EV Information
Underlying profit before tax for our UK Investment Business on the Full EV basis
was 27% higher in the first half of 2007 at #345m (H1 2006 #272m), primarily due
to a strong increase in the contribution from new business in 2007. The table
below analyses this result:
Half year ended 30.06.2007 Half year ended 30.06.2006
Life & Life & Mutual Life & Life & Mutual
Pensions Pensions Funds Pensions Pensions Funds
Insurance Investment Investment Insurance Investment Investment
Contracts Contracts Contracts Total Contracts Contracts Contracts Total
#m #m #m #m #m #m #m #m
Contribution from
existing business
Expected contribution 76 64 31 171 72 50 26 148
Actual vs expected 34 (51) (14) (31) 17 (25) (26) (34)
experience
110 13 17 140 89 25 114
Contribution from new 142 71 60 273 105 60 60 225
business
Investment earnings on 54 4 58 59 3 62
net assets
Contribution from 306 88 77 471 253 88 60 401
Investment Business
Development expenditure (38) (38) (39) (39)
Overheads associated (24) (24) (26) (26)
with development
activity
Debt Financing cost (64) (64) (64) (64)
Underlying profit 180* 88 77 345 124 88 60 272
before tax
* Development costs, overheads and financing costs have been attributed to
Life & Pensions Insurance Contracts business for presentational purposes only.
The contribution from new business under the Full EV basis increased by 21% in
H1 2007 to #273m (H1 2006 #225m), reflecting strong growth in volumes and
increased margins. Increased sales of bonds through the Bancassurance channel
and strong sales growth through Wealth Management were the primary drivers.
The contribution from existing business increased by 23% to #140m (H1 2006
#114m). The expected contribution improved by 16% to #171m (H1 2006 #148m)
whilst negative Actual vs Expected experience was broadly stable. This
reflected the positive impact of changes to non-unit reserving due to the FSA
Policy Statement PS06/14 offset by adverse persistency experience.
Page 77
Reconciliation of IFRS to Full EV
A reconciliation of underlying profit before tax on the Full EV basis with the
reported IFRS basis is set out below.
Half year ended 30.06.2007 Half year ended 30.06.2006
Life & Life & Mutual Life & Life & Mutual
Pensions Pensions Funds Pensions Pensions Funds
Insurance Investment Investment Insurance Investment Investment
Contracts Contracts Contracts Total Contracts Contracts Contracts Total
#m #m #m #m #m #m #m #m
Underlying profit 180 34 (5) 209 124 23 (23) 124
before tax (IFRS
basis)
Additional 128 127 255 106 133 239
contribution from
new business
Lower contribution (78) (45) (123) (44) (50) (94)
from existing
business
Additional 4 4 3 3
investment earnings
on net assets
Increase in 54 82 136 65 83 148
underlying profit
before tax
Underlying profit 180* 88 77 345 124 88 60 272
before tax (Full EV
basis)
* Development costs, overheads and financing costs have been attributed to
Life & Pensions Insurance Contracts business for presentational purposes only.
Moving to the Full EV basis results in earlier recognition of profits from sales
of new investment contracts, offset in part by the subsequent recognition of
lower profits on existing investment contracts. The Full EV basis, unlike the
IFRS basis, recognises profits on new business at the point of sale with the
contribution from existing business consisting only of subsequent changes in the
net present value of future cashflows and changes in experience compared to that
initially modelled at the point of sale.
The contribution from new investment contracts under the Full EV basis was #255m
higher than under the reported IFRS result, the Full EV contribution being #131m
compared to a loss of #124m under the IFRS basis.
Under the Full EV basis, the contribution from existing investment contracts in
H1 2007 was #123m lower than under the IFRS basis, the Full EV basis
contribution being #30m compared to #153m under the IFRS basis. The lower
contribution from existing business under the Full EV basis includes #(65)m of
actual versus expected experience on investment contracts, which largely
reflects worse than expected persistency on Intermediary business. Improving
retention performance in the Intermediary channel is a key objective and a
specialised existing business team was formed in late 2006 for this purpose.
New Business Profitability
New business profitability is reported by reference to the Full EV basis. New
business profitability by channel and product type on the Full EV basis is set
out below.
New business profitability for the UK Investment Business (including both Life &
Pensions and Mutual Funds) calculated by reference to the Full EV basis is set
out below.
Half year ended 30.06.2007 Half year ended 30.06.2006
New Business New Business New Business New Business New Business New Business
Contribution Profitability Contribution Profitability
APE* APE*
#m %APE #m %APE
#m #m
Bancassurance 524 177 34 455 152 33
Intermediary 238 24 10 271 24 9
Wealth Management 188 72 38 139 49 35
Total 950 273 29 865 225 26
Life & Pensions 731 213 29 609 165 27
Mutual Funds 219 60 27 256 60 23
Total 950 273 29 865 225 26
* Excluding business (#54m APE in 2007, #39m in 2006) distributed but not
manufactured by the Group.
Page 78
New business profitability increased to 29% (H1 2006 26%). Bancassurance
margins remain strong, reflecting the efficiency of our model and the
productivity of our sales forces. In Wealth Management, at the same time that
we have delivered a significant increase in business volumes, profitability has
increased to 38%, reflecting reductions in unit costs (particularly on pensions
business). The rise in Intermediary margins to 10% reflects our increasing
focus on profitable products and segments in this channel.
Overall Life & Pensions margins increased to 29% (H1 2006 26%) due to strong
sales of bonds through the Bancassurance channel and improvements in margins on
pensions business, particularly through our Wealth Management channel. The
increase in Mutual Funds profitability largely reflects efficiencies from larger
case sizes and changes in the mix of funds.
Balance Sheet Information
The total net of tax embedded value of UK Investment Business on the Full EV
basis is as follows:
As at 30.06.2007 As at 31.12.2006
Life & Life & Mutual Life & Life & Mutual
Pensions Pensions Funds Pensions Pensions Funds
Insurance Investment Investment Insurance Investment Investment
Contracts Contracts Contracts Total Contracts Contracts Contracts Total
#m #m #m #m #m #m #m #m
Shareholder funds 2,322 456 246 3,024 2,315 469 230 3,014
Value of in-force business 1,624 1,389 44 3,657 1,544 1,249 577 3,370
(net of tax)
Total embedded value (net of 3,946 1,845 890 6,681 3,859 1,718 807 6,384
tax)*
* Total embedded value excludes subordinated debt liabilities for the UK
Investment Business of #992m (end 2006 #987m).
The table below analyses the movement in embedded value of our UK Investment
Business on the Full EV basis:
Half year ended 30.06.2007
Life & Life & Mutual
Pensions Pensions Funds
Insurance Investment Investment
Contracts Contracts Contracts Total
#m #m #m #m
Opening embedded value 3,859 1,718 807 6,384
Contribution from Investment business 306 88 77 471
Development costs, associated overheads and financing (126) (126)
costs *
Underlying profit before tax 180 88 77 345
Short term investment fluctuations (39) 34 17 12
Underlying tax charge (30) (40) (31) (101)
Shareholder tax rate change 54 44 15 113
Dividends paid (39) (39)
Other capital movements (78) 40 5 (33)
Movement in embedded value 87 127 83 297
Closing embedded value 3,946 1,845 890 6,681
* Development costs, overheads and financing costs have been attributed to
Life & Pensions Insurance Contracts business for presentational purposes only.
Page 79
DIVIDEND REINVESTMENT PLAN
Shareholders who have already completed a Mandate Form to receive their
entitlement to dividends in ordinary shares need take no action as they will
automatically receive ordinary shares in respect of the interim dividend of
16.6p per ordinary share for the year ending 31 December 2007. Shareholders who
have not already completed a Mandate Form and also wish to participate in the
Dividend Reinvestment Plan ('DRIP') in respect of the interim dividend are
required to complete and return a Mandate Form to our Plan Administrator -
Computershare Investor Services PLC, PO Box 1909, The Pavilions, Bridgwater
Road, Bristol BS99 7DS. A Mandate Form and a copy of the Terms and Conditions
of the HBOS plc Dividend Reinvestment Plan can be obtained from our Plan
Administrator on 0870 702 0102 or downloaded from the HBOS plc website.
EXPECTED TIMETABLE
1 August 2007 2007 Interim Results Announcement
8 August 2007 Ordinary shares quoted ex-dividend
8 August 2007 6.475% preference shares quoted ex-dividend
10 August 2007 Ordinary shares record date for the interim dividend 2007
10 August 2007 6.475% preference shares record date
10 September 2007 Return date for mandates for the DRIP for the interim dividend 2007
17 September 2007 6.475% preference shares dividend payment
8 October 2007 Ordinary shares interim dividend payment
10 October 2007 6.0884% preference shares quoted ex-dividend
12 October 2007 6.0884% preference shares record date
26 October 2007 Last date by which CREST entitlement statements and new ordinary share
certificates will be posted and shareholder accounts credited in respect of the
DRIP purchases for interim ordinary dividend 2007
31 October 2007 9.25% & 9.75% preference shares quoted ex-dividend
2 November 2007 9.25% & 9.75% preference shares record date
13 November 2007 6.0884% preference shares dividend payment
30 November 2007 9.25% & 9.75% preference shares dividend payment
27 February 2008 2007 Preliminary Results Announcement
Page 80
CONTACTS
Investor Relations Charles Wycks
Director of Investor Relations
(0131) 243 5509
(020) 7905 9600
charleswycks@hbosplc.com
John Hope
Director, Investor Relations
(0131) 243 5508
(020) 7905 9600
johnhope@hbosplc.com
Press Office Shane O'Riordain
General Manager, Group Communications
(020) 7905 9600
07770 544585 (mobile)
shaneo'riordain@hbosplc.com
Page 81
This information is provided by RNS
The company news service from the London Stock Exchange
END
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