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Analog Devices Inc | TG:ANL | Tradegate | Ordinary Share |
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RNS Number:1147O Abbey National PLC 30 July 2003 PART 2 4. CAPITAL DISCLOSURES 4.1: Group capital As at As at 30 June 2003 31 December 2002 # m # m Balance Sheet: ________ ________ Distributable reserves and shareholders' funds 5,905 6,196 Life assurance reserves - non distributable 115 153 Less: Goodwill recognised (1) (1,001) (1,277) ________ ________ Equity Tier 1 5,019 5,072 Tier 1 capital instruments 2,159 2,174 ________ ________ Total Tier 1 capital 7,178 7,246 Undated subordinated debt 3,054 3,065 Dated subordinated debt 2,737 2,745 General provisions and other 435 394 ________ ________ Total Tier 2 capital 6,226 6,204 Less: Personal Financial Services: Investments in life assurance businesses (3,611) (3,384) Personal Financial Services: Non-life assurance businesses (170) (166) Portfolio Business Unit (572) (807) ________ ________ Total supervisory deductions (4,353) (4,357) ________ ________ Total regulatory capital 9,051 9,093 Risk Weighted Assets: Personal Financial Services 48,291 46,019 Portfolio Business Unit 17,651 32,686 ________ ________ Total group risk weighted assets 65,942 78,705 Banking book 60,150 72,900 Trading book 5,792 5,805 ________ ________ Total group risk weighted assets 65,942 78,705 Capital ratios: Risk asset ratio (%) 13.7% 11.6% Tier 1 ratio (%) 10.9% 9.2% Equity Tier 1 ratio (%) 7.6% 6.4% ________ ________ (1) Goodwill recognised in the table above differs to that quoted in Section 6.2 due to the differing regulatory treatment of goodwill amortisation and other adjustments. The main driver of the decrease since December 2002 is the disposal of First National Bank. Balance Sheet As at 30 June 2003, the equity Tier 1 ratio was 7.6%, and the Group's risk asset ratio was 13.7%. The increase in the Equity Tier 1 ratio over the previous year resulted from the reduction in Portfolio Business Unit risk weighted assets. Abbey National's Tier 1 capital decreased by #68 million to #7,178 million, as the reduction in retained earnings offset the write back of goodwill in relation to the First National businesses disposed of in the period. The Group's Tier 1 capital includes a #115 million non-distributable reserve, representing the unrealised organic embedded value post-tax profits generated by the life assurance businesses. Supervisory deductions primarily represent capital utilised in non-banking businesses, and mainly represents the equity investment and retained earnings in life assurance and insurance companies. Deductions relating to the life assurance businesses comprise the following: # m ________ Embedded value of the longer-term assurance business 2,550 Contingent loan to Scottish Provident 539 Contingent loan to Scottish Mutual 500 Other net assets of shareholders' funds 232 Subordinated debt 200 ________ Total life assurance supervisory deductions (1) 4,021 (1) Total deduction includes #410 million in the Portfolio Business Unit. Risk weighted assets Personal Financial Services risk weighted assets have increased by #2.3 billion. Retail Banking's mortgage book net of securitisations grew resulting in a net increase in risk weighted assets of #1.4 billion. Treasury Services risk weighted assets increased by #0.5 billion, with the Short Term Markets desk utilising a proportion of the funds generated by Wholesale Banking PBU for liquidity management. The remaining increase of #0.4 billion principally relates to unsecured lending by cahoot and Abbey National business. Portfolio Business Unit risk weighted assets have decreased by #15.0 billion driven by the Wholesale Banking asset portfolio disposals and the sale of First National Bank. Capital ratios Reconciliation of Equity Tier 1 # m % ________ ________ Equity Tier 1 as at 1 January 2003 6.4 Capital impacts: - Loss after tax (1) (28) - - Writeback of FNB goodwill on sale 190 + 0.2 - Dividends and other (2) (215) - 0.2 ________ ________ (53) - Risk weighted asset impacts: - Personal Financial Services growth 2,272 - 0.2 - Sale of First National businesses (3,875) + 0.4 - Wholesale Banking PBU risk weighted asset reduction (11,277) + 1.0 - Other PBU 117 - ________ ________ (12,763) + 1.2 ________ Equity Tier 1 as at 30 June 2003 7.6 (1) Loss after tax for regulatory capital purposes excludes goodwill amortisation, and the write-down of the Scottish Provident contingent loan. (2) Dividends include ordinary dividends, preference dividends, scrip dividends and movements in minority interests (including joint ventures). Potential impact of life assurance on Equity Tier 1 The following analysis illustrates the impact on the Group's equity Tier 1 ratio should the investments in the long-term assurance business (per supervisory deductions) be supported by Group capital in the same proportion as its banking businesses (circa 39% equity) - rather than being treated as a deduction from total capital as required by current Financial Services Authority regulations. Balance Sheet Equity Tier 1 # m % ________ ________ Equity Tier 1 as reported 5,019 7.6 Less: Illustrative equity funded element of life assurance investment (1,568) -2.3 ________ ________ Banking Equity Tier 1 ratio 3,451 5.3 Potential impact of Basel II Capital Accord Certain specific features of the draft Basel II provisions are discussed below: * The Operational Risk sections of Basel II are expected to require the allocation of an additional amount of capital. The charge under the standardised approach will be based on gross income by business line multiplied by a factor (denoted beta) for that business line. The proposed betas range from 12% to 18%. * The effective risk weighting of mortgages are expected to fall under Basel II from its current level of 50%, to 35% under the standardised approach, and even further under an internal ratings based approach. Until the Basel II calibration exercises are complete and regulator constraints made known, it is not possible to accurately estimate the extent of this fall for our mortgage book, but for Abbey National, this is likely to be a benefit. However, the full benefit of using an internal ratings based approach may not be realised in the first two years following implementation as the total capital charge for credit, operational and market risk may be limited to 90% of the current minimum in year one or 80% in year two. It is also possible that the treatment of mortgage-backed securitisations for an originator (such as Abbey National) may result in some capital disadvantage relative to current treatment for these transactions. * Basel lI is expected to require that all current capital deductions be taken 50% from Tier 1 and 50% from Tier 2. For bancassurers (such as Abbey National) this will lead to a material fall in the 'stated' Tier 1 and Equity Tier 1 ratios. Abbey National's illustrative Banking Equity Tier 1 ratio, as shown in the previous section, is expected to be similar in nature to net Tier 1 measures derived post Basel II. Potential impact of International Accounting Standards (IAS) Abbey National, in line with all companies listed in the European Union, will be required to prepare its accounts under IAS from 2005. This represents a significant change from existing UK GAAP in a number of areas particularly life assurance, derivatives and pensions. The accounting rules for derivatives and life assurance in particular have not been finalised nor has the treatment for regulatory purposes been set by the Financial Services Authority. It is therefore too early to predict the effect of adopting IAS on either the results or the capital position of Abbey National. A significant project is underway to make the necessary changes to reporting systems to enable compliance with IAS. Notional Portfolio Business Unit (PBU) equity release Assets RWAs # bn # bn ________ ________ Balance as at 31 December 2002 60.0 32.7 Balance as at 30 June 2003 25.7 17.7 ________ ________ Movement 34.3 15.0 Gross notional equity release @ equity tier 1 ratio of 6.4% (1) #1.0bn Plus: Impact of First National sale after tax #0.2bn Less: Other PBU losses after tax (@ 30%) #(0.4)bn ________ Net notional equity release #0.8bn (1) Group reported equity tier 1 ratio as at 31 December 2002 The table above is intended to demonstrate the notional release of equity capital from the PBU to the Group. To date the release has been positive at around #0.8 billion, despite losses incurred in reducing the Wholesale Banking exit portfolios. This includes the profit on sale of the First National businesses to GE Consumer Finance, but is not offset by the associated goodwill write-down, which was already deducted from capital. Estimated remaining Wholesale unrealised mark to market deficits are disclosed in section 3.2.4 and 3.2.5, but do not cover leasing exposures or private equity. In addition, future periods will see lower pre-provision earnings in line with asset levels, and will be subject to further restructuring charges associated with the wind-down process. Tax relief should be available in respect of most but not all categories of loss. Subject to market conditions, we remain confident of meaningful capital release from the wind-down on the PBU. As flagged in the pre-close statement, the extent to which this capital will be needed by the ongoing PFS businesses will be influenced significantly by Basel II, International Accounting Standards and related regulatory and accounting changes currently being developed industry-wide. The overall position should become clearer in a similar timeframe to the achievement of certainty on the quantum of PBU capital release. 4.2: Analysis of life assurance capital Value of long-term assurance business As at As at 30 June 2003 31 December 2002 # m # m ________ ________ Net present value of future profits 1,211 1,209 Net assets held by long-term assurance funds 1,339 1,107 ________ ________ Embedded value of the long-term assurance business 2,550 2,316 Contingent loans to Scottish Provident's with profits sub fund 539 619 (1) ________ ________ Total value of long-term assurance business 3,089 2,935 (1) The Scottish Provident with profits fund has a liability to repay a debt to the Group in respect of a contingent loan established as part of the de-mutualisation scheme. A condition of the arrangement is that the surplus emerging on the non-participating fund accrues to the benefit of the with profits fund until such time as the obligations under the loan are fully discharged; and that recourse for repayments on the loan is restricted to the surplus emerging on the Scottish Provident non-participating fund. The carrying value of the debt is covered by the current value of the future earnings on the non-participating fund. At 30 June 2003, the value of the aforementioned loan was #453 million, which is net of an #80 million provision for shareholders tax as noted in section 6.1. In addition, during 2003 the surplus transferred to the with profits fund from the non-participating fund totalled #86 million replacing part of the existing contingent loan of #86 million with an equal contingent amount. Payment of the new #86 million is contingent on the solvency of the with profits fund. (2) In addition, during 2001 Scottish Mutual received capital support from the Group in the form of a contingent loan of #500 million, not included in the table, that forms part of the net assets of the shareholders funds and therefore total supervisory deductions. This was used to support the new business strain, and was structured as a contingent loan to ease repayment at a later date. The shareholders' interest in the long-term business operations is represented by the embedded value. The embedded value is the total of the net assets of the long-term operations and the present value of the projected releases to shareholders arising from the business in force. During 2003 the present value of the in-force business was largely unchanged. The increase in net assets is largely attributable to the capital injections made during 2003 offset by the guaranteed liability / MVA adjustments and capital required to support new business. Movements in embedded value of the long-term assurance business # m ________ Opening value as at 1 January - as previously stated 2,316 Transfers to shareholders' funds 52 Embedded value charges and rebasing after tax 37 Investment variances and other adjustments (30) Capital injections 220 Dividends paid to Abbey National Group (45) ________ Closing value as at 30 June 2003 2,550 The increase in the value of long-term business of #55 million pre-tax (#37 million after tax) represents the value added before consideration of market movements. The embedded value charges and rebasing of #32 million pre-tax (#30 million after tax) are represented by the adjustments to period end market values, guaranteed liabilities / market value adjustments and restructuring costs discussed in Section 6.1. During 2003, injections into the long-term funds included #220 million to Scottish Provident, in three separate tranches - #120 million in January 2003, #25 million and #75 million in March 2003. Abbey National Life repaid #45 million from the long-term fund in March 2003. Life assurance cashflows As at 30 June 2003 # bn ________ Injections made 310 Dividends paid to Group (181) ________ Net cashflows from Group 129 In total, including the shareholders fund, injections totalled #310 million, with #181 million dividends paid back to the Abbey National Group. In March 2003, injections into the Abbey National Life shareholder fund totalled #90 million while dividends out of the Abbey National Life shareholders fund totalled #135 million (in addition to injections and dividends discussed on previous page). Further, Scottish Mutual International Fund Managers paid a dividend of #1 million to the Abbey National Group in February 2003. Also, during July 2003, Scottish Mutual received a capital injection of #30 million into its long-term fund. Estimated life assurance ratios As at 30 June 2003 As at 31 December 2002 ANL SMA (1) SP ANL SMA (1) SP % % % % % % ________ ________ ________ ________ ________ ________ Free asset ratio 5.2 0.6 1.8 3.7 1.8 0.8 Solvency ratio 213 115 146 192 157 129 (1) Scottish Mutual International is included as part of Scottish Mutual (SMA) in the above table. The Abbey National Group manages its capital requirements on a consolidated basis. Capital is held centrally and allocated to business segments as required. The ratios have been calculated according to the Financial Services Authority (FSA) guidelines in force at that time. The ratios include the negative impact in Scottish Mutual of reducing the implicit item for solvency purposes as granted by the FSA in the regulatory returns by #75 million to #175 million in the period ended 30 June 2003. The Scottish Mutual ratios also include the negative impact of taking out hedges in markets lower than at 30 June 2003. The improvement in the Scottish Provident ratio is due to the benefit from capital injections in the period partially offset by adjustments to the 31 December 2002 estimate quoted above arising in the finalisation of the returns to the FSA. At current levels for every 100-point move in the FTSE 100 index the solvency ratio varies by approximately 3% in Scottish Mutual and 7% in Scottish Provident. The Abbey National Life solvency position is relatively insensitive to equity movements. Given the dynamic relationship of the fund investment and risk management, these figures may vary considerably. As at 30 June, to maintain minimum solvency across all businesses would require capital injections of #64 million at a FTSE 100 level of 3,300. 5. PFS PRODUCT GROUPING P&L ANALYSIS Total Personal Financial Services (PFS) 6 months to 6 months to 6 months to 30 June 2003 30 June 2002 31 Dec 2002 Restated # m # m # m ________ ________ ________ Net interest income 926 929 914 Non-interest income 489 598 572 Less: Depreciation of operating lease assets - (24) 1 ________ ________ ________ Total trading income 1,415 1,503 1,487 Operating expenses (760) (756) (821) Provisions for bad and doubtful debts (64) (76) (74) Amounts written off fixed asset investments - - 2 Contingent liabilities and commitments (3) (8) (38) ________ ________ ________ Trading profit before tax 588 663 556 Adjust for: - Embedded value charges and rebasing (102) (234) (319) - Restructuring costs (54) - (34) - Asset write-downs (72) - (37) - Goodwill charges (9) (33) (778) ________ ________ ________ Profit before tax 351 396 (612) Trading profit by product grouping: Banking and Savings 475 470 492 Investment and Protection 106 181 191 General Insurance 29 45 47 Treasury Services 98 84 64 Group Infrastructure (120) (117) (238) ________ ________ ________ Trading profit before tax 588 663 556 ________ ________ ________ Trading cost: income ratio 53.7% 50.3% 55.2% 5.1: Banking and Savings 6 months to 30 June 2003 Retail Bank cahoot Cater Allen Total and Offshore # m # m # m # m ________ ________ ________ ________ Net interest income 809 20 37 866 Non-interest income 211 6 3 220 ________ ________ ________ ________ Total trading income 1,020 26 40 1,086 Operating expenses (494) (22) (29) (545) Provisions for bad and doubtful debts (51) (13) - (64) Provisions for contingent liabilities and commitments (2) - - (2) ________ ________ ________ ________ Trading profit before tax 473 (9) 11 475 Adjust for: - Asset write-downs (53) - - (53) - Restructuring costs (29) - - (29) ________ ________ ________ ________ Profit / (loss) before tax 391 (9) 11 393 6 months to 30 June 2002 Retail Bank cahoot Cater Allen Total and Offshore # m # m # m # m ________ ________ ________ ________ Net interest income 816 10 55 881 Non-interest income 233 - 4 237 Depreciation of operating lease assets (24) - - (24) ________ ________ ________ ________ Total trading income 1,025 10 59 1,094 Operating expenses (492) (21) (36) (549) Provisions for bad and doubtful debts (68) (6) - (74) Provisions for contingent liabilities and commitments (1) - - (1) ________ ________ ________ ________ Profit / (loss) before tax 464 (17) 23 470 5.2: Investment and Protection 6 months to 30 June 2003 Abbey Scottish Scottish Other Total National Mutual Provident Life # m # m # m # m # m ________ ________ ________ ________ ________ Net interest income 4 13 25 1 43 Non-interest income 45 6 21 18 90 ________ ________ ________ ________ ________ Total trading income 49 19 46 19 133 Operating expenses (5) (1) (1) (19) (26) Provisions for contingent liabilities and commitments (1) - - - (1) ________ ________ ________ ________ ________ Trading profit before tax 43 18 45 - 106 Adjust for: - Restructuring costs - - (5) - (5) - Embedded value charges and rebasing 4 33 (139) - (102) ________ ________ ________ ________ ________ Profit / (loss) before tax 47 51 (99) - (1) 6 months to 30 June 2002 - Restated Abbey Scottish Scottish Other Total National Mutual Provident Life # m # m # m # m # m ________ ________ ________ ________ ________ Net interest income 3 12 27 - 42 Non-interest income 116 45 (6) 13 168 ________ ________ ________ ________ ________ Total trading income 119 57 21 13 210 Operating expenses (4) (2) - (22) (28) Provisions for contingent liabilities and commitments (1) - - - (1) ________ ________ ________ ________ ________ Trading profit before tax 114 55 21 (9) 181 Adjust for: - Embedded value charges and rebasing (14) (162) (58) - (234) ________ ________ ________ ________ ________ Profit / (loss) before tax 100 (107) (37) (9) (53) 5.3: General Insurance 6 months to 6 months to 30 June 2003 30 June 2002 # m # m ________ ________ Net interest income (3) (2) Non-interest income 59 72 ________ ________ Total trading income 56 70 Operating expenses (27) (25) ________ ________ Trading profit before tax 29 45 Adjust for: - Asset write-downs (15) - ________ ________ Profit before tax 14 45 5.4: Treasury Services 6 months to 6 months to 30 June 2003 30 June 2002 # m # m ________ ________ Net interest income 81 68 Non-interest income 77 71 ________ ________ Total operating income 158 139 Operating expenses (60) (55) ________ ________ Trading profit before tax 98 84 Adjust for: - Restructuring costs (5) - ________ ________ Profit before tax 93 84 5.5: Group Infrastructure 6 months to 6 months to 30 June 2003 30 June 2002 Restated # m # m ________ ________ Net interest income (61) (60) Non-interest income 43 50 ________ ________ Total operating income (18) (10) Operating expenses (102) (99) Provisions for bad and doubtful debts - (2) Provisions for contingent liabilities and commitments - (6) ________ ________ Trading loss before tax (120) (117) Adjust for: - Restructuring costs (15) - - Asset write-downs (4) - - Goodwill charges (9) (33) ________ ________ Loss before tax (148) (150) 5.6: Summarised PBU profit and loss 6 months to 30 June 2003 Wholesale First Other Total Banking National PBU businesses Exit Portfolios # m # m # m # m ________ ________ ________ ________ Net interest income 37 163 40 240 Non-interest income (141) (36) (26) (203) Depreciation on operating lease assets (121) - - (121) ________ ________ ________ ________ Total operating income (225) 127 14 (84) Operating expenses (45) (88) (36) (169) Provisions for bad and doubtful debts (38) (41) (3) (82) Amounts written off fixed asset investments (145) - - (145) Provisions for contingent liabilities and (2) - (13) (15) commitments ________ ________ ________ ________ Loss before tax (455) (2) (38) (495) 6 months to 30 June 2002 - Restated Wholesale First Other Total Banking National PBU businesses Exit Portfolios # m # m # m # m ________ ________ ________ ________ Net interest income 174 236 25 435 Non-interest income 169 (27) (8) 134 Depreciation on operating lease assets (84) (3) - (87) ________ ________ ________ ________ Total operating income 259 206 17 482 Operating expenses (51) (90) (20) (161) Provisions for bad and doubtful debts (20) (59) (1) (80) Amounts written off fixed asset investments (222) - - (222) Provisions for contingent liabilities and - (3) - (3) commitments ________ ________ ________ ________ (Loss) / profit before tax (34) 54 (4) 16 The tables above are provided for information purposes only. Comments on movements have been explained in narrative elsewhere in the document. 6. OTHER MATERIAL ITEMS 6.1: Impact of embedded value charges and rebasing (PFS and PBU) 6 months to 6 months to 6 months to 30 June 2003 30 June 2002 31 Dec 2002 Restated # m # m # m ________ ________ ________ Trading earnings from life assurance businesses 79 205 181 Less: Adjustment to period end market values (19) (125) (196) Less: Guaranteed liability / market value adjustments (8) (156) (206) Less: Change in equity backing assumption - - (64) Less: Scottish Provident contingent loan adjustment (80) - - Less: Restructuring costs (5) - - Add: One-off benefit of funds under management transfer - 25 90 ________ ________ ________ Earnings from life assurance businesses (33) (51) (195) Trading earnings for the six months to 30 June 2003 consists of PFS earnings of #106 million and a PBU loss of #27 million. Descriptions of each of the adjustments are contained below: Adjustment to period end market values Prior to 31 December 2002, the embedded value of the life assurance business was calculated using a smoothed economic basis designed to reflect the underlying performance of the business without the distortions caused by short-term fluctuations in the financial markets. This smoothed basis uses long-term assumptions as to investment returns, bonus rates, mortality and lapse rates. The Group's previous accounting policy was to rebase the trend line when values diverged from the expectation by more than 20% over two successive year-ends. The accounting policy was amended at the 31 December 2002 year-end so that period end market values are used with the variances from the trend line shown as an adjustment to reflect period end market values. In addition, for the purposes of calculating smoothed embedded value, the trend line for future investment returns is based on year-end market values. The smoothed result has been included within trading earnings. Guaranteed liabilities (MVAs and GAOs) The life assurance businesses has historically issued a number of with profits policies containing Guaranteed Annuity Options (GAOs) and other with profits policies where the normal Market Value Adjustments (MVAs) are not applied if the policyholder redeems the policy on specified future dates. Both of these types of policies therefore have a guaranteed future minimum value. Following falls in stock market values and interest rates, the value of these liabilities is substantially above the current and assumed future value of the assets that support them. After adjusting for the effect of normal lapse, mortality and bonus assumptions, provision was made at the end of 2002 for this shortfall together with an allowance for the option value that has effectively been given to the policyholder. Hedges have now largely been taken out to considerably reduce the effect of future market volatility on this provision. During the period, the additional cost of taking out the hedges in markets lower than those ruling at 31 December 2002 was offset by the reduction in MVA liabilities arising from a lower bonus assumption for the near term. Out of the total liabilities of the with profit policies in force of #16.4 billion, there is #5.0 billion of MVA-free and premium guarantee business outstanding in Scottish Mutual and Scottish Mutual International and #2.2 billion of guaranteed annuity business written in Scottish Mutual and Scottish Provident. Equity backing ratio (EBR) One of the assumptions within the smoothed embedded value used in calculating future investment returns is the EBR. As equities are assumed to produce higher investment returns, a reduction in the EBR assumption will reduce the value of embedded value. The actual EBR was reduced from 47% at 30 June 2002 to 34% at 31 December 2002 and 25% at 30 June 2003. Accordingly, the EBR assumption within the embedded value model was reduced in December 2002 from 70% to 30%. In addition, hedging has now been put in place, which would have reduced the EBR ratio to circa 10% at a FTSE 100 level of 3,000. Scottish Provident contingent loan adjustment A provision of #80 million has been made in respect of the Scottish Provident contingent loan. This provision has arisen as a result of changes in the Finance Act and affects the pre-tax results. In practice this means that the value of the Scottish Provident in-force business at acquisition is reduced. Restructuring costs Certain one off costs relating to redundancies and premises closures have been incurred in the period under review. One-off benefits of funds management transfer. During 2002 responsibility for Scottish Provident funds management was transferred from Aberdeen Asset Management to Abbey National Asset Managers, which had the effect of considerably reducing asset management costs. The benefit of this was reflected in the expenses assumption for in-force business within embedded value giving a one-off benefit of #115 million in 2002, but is excluded from the smoothed results due to its one-off nature and scale. At the Interims 2002, a #25 million benefit was reported as part of assumption changes, but has been restated as a non-trading item. 6.2: Goodwill charges Opening balance Goodwill Amortisation Write-down Closing balance 1 Jan 2003 acquired / 30 June 2003 disposed # m # m # m # m # m ________ ________ ________ ________ ________ Goodwill asset: Abbey National business 13 - (1) - 12 Scottish Provident 253 - (6) - 247 Flemings Premier Banking 101 - (3) - 98 Other 9 - - - 9 ________ ________ ________ ________ ________ 376 - (10) - 366 Goodwill in reserves: National and Provincial 528 - - - 528 Abbey National business 5 - - - 5 Scottish Mutual 85 - - - 85 First National 190 (190) - - - Other 7 - - - 7 ________ ________ ________ ________ ________ 815 (190) - - 625 ________ ________ ________ ________ ________ 1,191 (190) (10) - 991 Prior to 1 January 1998, goodwill arising on acquisition of subsidiary undertakings and purchases of businesses was taken directly to reserves. As of 1 January 2003 the cumulative amount of goodwill taken to profit and loss reserve in previous periods by the Group and not subsequently recognised in the profit and loss account was #815 million. This has reduced by #190 million following the sale of the First National retail finance and consumer finance businesses, completed on 10 April, with this offsetting the surplus to net assets of around #200 million. In addition, the amount of goodwill on the balance sheet as at 1 January 2003 was #376 million. These goodwill assets would normally be amortised over a period of 20 years. This has been reduced by the amortisation of goodwill for the period of #10 million (2002: #33 million). This lower charge results from the significant impairment write-off taken at the 2002 year-end. 6.3: Pension fund deficit 6 months to Full Year 30 June 2003 31 Dec 2002 # m # m ________ ________ Regular cost 39 85 Amortisation of surpluses arising on pension schemes (1) (3) Amortisation of deficits arising on pension schemes 20 16 Amortisation of surplus arising from fair value adjustment on acquisition of National and Provincial 1 2 ________ ________ P&L charge 59 100 The main Abbey National defined benefit pension scheme was closed to new members in March 2002 and replaced with a defined contribution scheme where the company's obligations are limited to its initial payments into the fund. This has resulted in lower regular costs as employees have left the schemes. In January 2003 the equity backing ratio of pension scheme assets was reduced to 50% from 80%. Contributions paid to the pension schemes in 2003 are based upon the 50% Equity Backing Ratio. An annual review of the pensions schemes as at 31 March 2003 is in progress, and the current estimated scheme deficit is reflected in the amortisation charge included in the profit and loss. FRS 17 disclosure As at 30 June As at 31 Dec 2003 2002 # m # m ________ ________ Total market value of assets 2,007 1,880 Present value of scheme liabilities (2,840) (2,722) ________ ________ FRS 17 scheme deficit (833) (842) Related deferred tax asset 250 253 ________ ________ Net FRS 17 scheme deficit (583) (589) The deficit under FRS 17, Retirement Benefits, which is more prescriptive in the actuarial assumptions to be used in valuing a pension scheme than SSAP24, is estimated at 30 June 2003 to be #583 million after tax. 6.4: Analysis of 'non-trading items' The following tables are provided for information purposes to assist in reconciling the 'non-trading' below the line items as discussed in this document, to the statutory profit and loss classifications: For the six months ended 30 June 2003 Personal Financial Services Non-interest Operating Provisions for Contingent Amounts Total income expenses bad & doubtful liabilities & written off debts commitments fixed asset investments # m # m # m # m # m # m ________ ________ ________ ________ ________ ________ EV charges & rebasing (22) - (80) - - (102) Restructuring costs (5) (47) - (2) - (54) Asset write-downs - (62) - - (10) (72) Goodwill charges - (9) - - - (9) ________ ________ ________ ________ ________ ________ Total (27) (118) (80) (2) (10) (237) Portfolio Business Unit Non-interest Operating Provisions for Contingent Amounts Total income expenses bad & doubtful liabilities & written off debts commitments fixed asset investments # m # m # m # m # m # m ________ ________ ________ ________ ________ ________ EV charges & rebasing (5) - - - - (5) Restructuring costs - (25) - (3) - (28) Asset write-downs - - - - - - Goodwill charges - (1) - - - (1) ________ ________ ________ ________ ________ ________ Total (5) (26) - (3) - (34) Total - Abbey National Non-interest Operating Provisions for Contingent Amounts Total income expenses bad & doubtful liabilities & written off debts commitments fixed asset investments # m # m # m # m # m # m ________ ________ ________ ________ ________ ________ EV charges & rebasing (27) - (80) - - (107) Restructuring costs (5) (72) - (5) - (82) Asset write-downs - (62) - - (10) (72) Goodwill charges - (10) - - - (10) ________ ________ ________ ________ ________ ________ Total (32) (144) (80) (5) (10) (271) For the 6 months ended 30 June 2002 Personal Financial Services Non-interest Operating Provisions for Contingent Amounts Total income expenses bad & doubtful liabilities & written off debts commitments fixed asset investments # m # m # m # m # m # m ________ ________ ________ ________ ________ ________ EV charges & rebasing (234) - - - - (234) Goodwill charges - (33) - - - (33) ________ ________ ________ ________ ________ ________ Total (234) (33) - - - (267) Portfolio Business Unit Non-interest Operating Provisions for Contingent Amounts Total income expenses bad & doubtful liabilities & written off debts commitments fixed asset investments # m # m # m # m # m # m ________ ________ ________ ________ ________ ________ EV charges & rebasing (22) - - - - (22) ________ ________ ________ ________ ________ ________ Total (22) - - - - (22) Total - Abbey National Non-interest Operating Provisions for Contingent Amounts Total income expenses bad & doubtful liabilities & written off debts commitments fixed asset investments # m # m # m # m # m # m ________ ________ ________ ________ ________ ________ EV charges & rebasing (256) - - - - (256) Goodwill charges - (33) - - - (33) ________ ________ ________ ________ ________ ________ Total (256) (33) - - - (289) 7. STATUTORY FINANCIAL INFORMATION Consolidated profit and loss account 6 months to 6 months to Full Year 30 June 2003 30 June 2002 2002 Restated # m # m # m ________ ________ ________ Net interest income 1,166 1,364 2,689 Non-interest income 246 487 811 ________ ________ ________ Total income 1,412 1,851 3,500 Administrative expenses (excluding depreciation on operating lease assets) (1,037) (917) (1,992) Goodwill impairments and amortisation (10) (33) (1,202) Depreciation of operating lease assets (121) (111) (280) Provisions for bad and doubtful debts (226) (156) (514) Provisions for contingent liabilities and commitments (20) (11) (50) Amounts written off fixed asset investments (155) (222) (511) ________ ________ ________ Operating (loss) / profit (157) 401 (1,049) Income from associated undertakings 6 9 17 Profit on disposal of Group undertakings 7 2 48 ________ ________ ________ (Loss) / profit on ordinary activities before tax (144) 412 (984) Tax on (loss) / profit on ordinary activities 26 (144) (152) ________ ________ ________ (Loss) / profit on ordinary activities after tax (118) 268 (1,136) Minority interests - non equity (28) (31) (62) ________ ________ ________ (Loss) / profit attributable to shareholders (146) 237 (1,198) Transfer from / (to) non-distributable reserve 38 95 263 Preference dividends (28) (31) (62) Ordinary dividends (120) (255) (362) ________ ________ ________ Retained (loss) / profit for the period (256) (46) (1,359) Profit on ordinary activities before tax includes: For acquired operations - - 4 ________ ________ ________ Average number of ordinary shares in issue (millions) 1,449 1,439 1,442 (Losses) / earnings per ordinary share - basic (12.0)p 14.3p (87.4)p (Losses) / earnings per ordinary share - diluted (11.9)p 14.2p (86.9)p Dividends per ordinary share 8.33p 17.65p 25.0p ________ ________ ________ Group key statistics Net asset value per ordinary share (1) 383p 474p 387p Tier 1 capital 10.9% 8.7% 9.2% Equity Tier 1 capital 7.6% 6.7% 6.4% ________ ________ ________ (1) Net asset value is calculated as closing ordinary shareholders' equity, divided by closing number of ordinary shares in issue. Consolidated balance sheet as at 30 June 2003 30 June 30 June 31 Dec 2003 2002 2002 Restated # m # m # m Assets ________ ________ ________ Cash, treasury bills and other eligible bills 2,376 5,819 1,879 Loans and advances to banks 8,106 16,632 6,601 Loans and advances to customers not subject to securitisation 81,604 84,727 81,912 Loans and advances subject to securitisation 24,061 18,074 24,156 Non returnable finance on securitised advances (16,666) (12,881) (15,160) Loans and advances to customers after non-returnable finance 88,999 89,920 90,908 Net investment in finance leases 3,330 4,700 3,447 Debt securities 36,782 71,102 59,807 Equity shares and similar interests 803 972 963 Long-term assurance business 2,550 1,911 2,316 Fixed assets excluding operating lease assets 698 1,527 747 Operating lease assets 2,646 2,513 2,573 Other assets 5,725 15,027 7,069 Assets of long-term assurance funds 30,283 30,449 29,411 ________ ________ ________ Total assets 182,298 240,572 205,721 Liabilities Deposits by banks 20,850 41,470 24,174 Customer accounts 76,389 79,488 76,766 Debt securities in issue 28,914 58,670 48,079 Other liabilities 11,704 15,189 12,969 Subordinated liabilities 6,500 6,797 6,532 Reserve capital instruments 763 297 771 Liabilities of long-term assurance funds 30,283 30,449 29,411 ________ ________ ________ Total liabilities 175,403 232,360 198,702 Minority interests - non-equity 597 648 627 Non-equity shareholders' funds 748 750 748 Equity shareholders' funds 5,550 6,814 5,644 ________ ________ ________ Total liabilities, minority interests and shareholders' funds 182,298 240,572 205,721 The #24.1 billion loans and advances subject to securitisation represent residential mortgage assets that have been transferred directly to standalone securitisation vehicles or to a master trust for the purposes of issuing mortgage-backed securities. The #16.7 billion non-returnable finance on securitised advances relates to mortgage assets that have been securitised. The balance represents residential mortgage asset in the master trust against which mortgage-backed securities have not been issued. Consolidated statement of total recognised gains and losses for the six months to 30 June 2002 6 months to 6 months to Full Year 30 June 2003 30 June 2002 2002 Restated # m # m # m ________ ________ ________ (Loss)/profit attributable to the shareholders (146) 237 (1,198) Translation differences on foreign currency net investment (2) (2) (2) ________ ________ ________ Total recognised (losses)/gains relating to the period (148) 235 (1,200) Consolidated cash flow statement for the six months to 30 June 2003 6 months to 6 months to Full Year 30 June 2003 30 June 2002 2002 # m # m # m ________ ________ ________ Net cash (outflow) / inflow from operating activities (29,125) 5,928 (10,952) Returns on investments and servicing of finance Interest paid on subordinated liabilities (144) (162) (337) Preference dividends paid (28) (32) (63) Payments to non-equity minority interests (28) (31) (62) ________ ________ ________ (200) (225) (462) Net cash outflow from returns on investments and servicing of finance Taxation UK corporation tax paid 19 (177) (481) Overseas tax paid (3) (3) (15) ________ ________ ________ Total taxation received/(paid) 16 (180) (496) Capital expenditure and financial investment Purchases of investment securities (2,893) (7,013) (16,636) Sales of investment securities 26,908 4,458 12,926 Redemptions and maturities of investment securities 1,071 5,312 14,977 Purchases of tangible fixed assets (228) (540) (909) Sales of tangible fixed assets 1 39 79 Transfers to life assurance funds (227) (330) (882) ________ ________ ________ 24,632 1,926 9,555 Net cash inflow from capital expenditure and financial investment Acquisitions and disposals 4,788 (1,071) (536) Equity dividends paid (104) (410) (648) ________ ________ ________ Net cash inflow/(outflow) before financing 7 5,968 (3,539) Financing Issue of ordinary share capital - 13 17 Issue of loan capital - 400 392 Issue of reserve capital instrument - - 485 Issue of preferred securities - - 15 Repayment of minority interests (15) - - Repayment of loan capital (60) (114) (222) ________ ________ ________ Net cash (outflow)/inflow from financing (75) 299 687 ________ ________ ________ (Decrease) / increase in cash (68) 6,267 (2,852) Reconciliation of movement in shareholders' funds 30 June 31 December 2003 2002 # m # m ________ ________ Shareholders' funds as at beginning of the year 6,392 7,521 Loss retained for the period (294) (1,622) Increases in share capital including share premium 8 109 Capitalised reserves on exercise of share options - (7) Goodwill written off - 373 Goodwill written back on disposal 190 13 Other movements 2 5 ________ ________ Shareholders' funds as at the end of the period 6,298 6,392 Taxation 6 months to 6 months to 30 June 2003 30 June 2002 Restated # m # m ________ ________ Taxation at UK corporation tax rate of 30% (2002: 30%) (43) 124 Effect of non-allowable provisions and other non-equalised items 31 (3) Effect of non-UK profits and losses 5 17 Adjustment to prior year tax provisions (19) 6 ________ ________ Total taxation (26) 144 ________ ________ Effective rate (1) 18.2% 35.0% (1) The effective tax rate is obtained by dividing taxes by (loss) / profit before taxes. The effect of non-allowable provisions and other non-equalised items includes the effect of capital losses realised within the Wholesale Banking exit portfolios for which no tax relief has been recognised and the non-deductible write down of the Scottish Provident contingent loan. INDEPENDENT REVIEW REPORT TO ABBEY NATIONAL PLC Introduction We have been instructed by the company to review the financial information for the six months ended 30 June 2003, which comprises the consolidated profit and loss account, the consolidated balance sheet, the consolidated cash flow statement and the consolidated statement of total recognised gains and losses. We have read the other information contained in the 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 Bulletin 1999/4 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review 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 formed. 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 the guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board for use in the United Kingdom. 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 United Kingdom auditing standards 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 2003. Deloitte & Touche Chartered Accountants and Registered Auditors London 29 July 2003 FORWARD LOOKING STATEMENTS This document contains certain "forward-looking statements" with respect to certain of Abbey National's plans and its current goals and expectations relating to its future financial condition, performance and results. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond Abbey National's control including among other things, UK domestic and global economic and business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities, the impact of competition, inflation, deflation, the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which Abbey National and its affiliates operate. As a result, Abbey National's actual future financial condition, performance and results may differ materially from the plans, goals, and expectations set forth in Abbey National's forward-looking statements. Other information 1. The financial information in this interim statement does not constitute statutory accounts as defined in s240 of the Companies Act 1985. The financial information for the full preceding year is based on the statutory accounts for the year ended 31 December 2002. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under s237(2) or (3) Companies Act 1985. Those accounts have been delivered to the Registrar of Companies. 2. The financial information in this release is prepared on the basis of the accounting policies as stated in the previous year's financial statements. 3. The interim statement was approved by the board of directors of Abbey National plc on 29 July 2003. 4. The ex-dividend date for Ordinary shares is 20 August 2003; the record date is 22 August 2003; the payment date is 6 October 2003; the scrip election date is 5 September 2003. 5. The scrip price will be calculated utilising the average of the mid-market price of Abbey National plc shares over the period 20 - 22 August 2003. The scrip share price can be obtained from 26 August 2003 on the Abbey National web site: www.abbeynational.com or by telephoning Abbey National Shareholder Services on 0870 532 9430. 6. A quarterly trading update will be issued in October 2003 that will provide guidance on underlying financial and business trends up to the end of the third quarter. 7. The 2003 preliminary results announcement will be released on 26 February 2004. 8. This report will also be available on the Abbey National web site: www.abbeynational.com from 30 July 2003. Jon Burgess Head of Investor Relations For further information contact: investor@abbeynational.co.uk Tel: (020) 7756 4181 (020) 7756 4184 Abbey National plc Registered Office: Abbey National House, 2 Triton Square, Regent's Place, London NW1 3AN This information is provided by RNS The company news service from the London Stock Exchange END IR NKCKBBBKBPOB x
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