Q3 Trading Statement

RNS Number:4180R
Abbey National PLC
29 October 2003


                                    Abbey
                      2003 Quarter Three Trading Statement

This statement provides a summary of business and financial trends up to 30th
September, and is released ahead of a conference call with analysts at 9:30 this
morning.  A replay facility of the conference call will be available from
midday.

Unless otherwise stated, the statement relates to the 3 months to end September,
compared to a pro-rata equivalent of first half 2003 earnings.

Abbey is on track in its 3 year change programme. Much has been accomplished in
just 8 months, though substantial execution risk still remains.  In September,
we relaunched our core personal financial services (PFS) business, announcing a
range of product, service and communication changes.  These form part of a
radical shift in how we intend to think about and treat customers. They mark the
visible start of actions aimed at capturing the revenue growth opportunity that
Abbey's under-leveraged potential presents.  In the Portfolio Business Unit, we
continue to make good progress, with the assets expected to be substantially
removed by the end of 2004, a year ahead of the original schedule.

Financial highlights from today's statement include:

*  third quarter trading profit before tax for the ongoing PFS businesses 
   around 15% below the pro-rata first half 2003 due to a reduction in income 
   and the impact of expense phasing, both as expected.  Income was weaker (as 
   flagged at the Interims) principally in Treasury Services (which reported
   unusually strong performance in half one) but also in Banking and Savings 
   (from narrowing of the mortgage and savings spread).  Costs were also ahead 
   of the first half run-rate but below the second half run rate in 2002, 
   reflecting cost programme benefits;

*  a further marked reduction in Portfolio Business Unit (PBU) assets to 
   #20 billion at end September, some 67% lower than December 2002.  The 22%
   reduction since the interim stage reflects significant sales of both debt
   securities and loans, but excludes the sale of the Italian business, which
   should complete in the next 3 months.  Exit costs continue to be better than
   originally anticipated.  The 'mark to market' disclosures for wholesale bond 
   and loan portfolios updated herein show that our loss expectations have 
   improved in those portfolios by some #100 million since the interims;

*  strong net mortgage lending of #6.5 billion year to date, up 55% on the same 
   point last year, and equivalent to an estimated net lending market share of 
   9.4%, and an estimated 10.7% share of gross lending;

*  new business levels across other product lines remain consistent with first 
   half performance - while below our future aspirations, these are satisfactory 
   given the current demands of the change programme on front line staff; and

*  PFS credit quality remains strong, with some further improvement since the 
   interim stage.

At this point in its restructuring programme, Abbey is prioritising fundamental
change and improvement, with consequent lower visibility of quarterly earnings
trends.  Subject to this caveat, Abbey is anticipating the fourth quarter PFS
trading result to be modestly weaker than the third quarter, reflecting:

*  an increase in costs, largely marketing and other activity to support the 
   business relaunch.  Nevertheless, for the full year, we expect to contain
   trading expenses to around the comparable 2002 level.  This means that cost
   programme benefits (which remain on track) should now largely offset business
   relaunch costs, as well as inflation and increased pension costs previously
   flagged; and

*  it is possible that revenues will decline a little more from third quarter 
   levels reflecting the full impact of the spread narrowing in mortgages and 
   savings (full year spread expected to be around 1.54%), with the fourth
   quarter expected to be slow for Treasury Services.



The momentum of change established early in the year has been sustained through
the third quarter, including:

*  re-launching the business, announcing a radical shift in how we mean to treat 
   our customers with the aim of turning banking on its head - including  
   simplifying the product range, reducing the number of brands, launching a new
   catalogue presenting the full range of services and beginning the re-write of
   all customer letters in a friendlier style with no jargon;

*  the launch of innovative new products including Wrap through intermediaries 
   and Multi-Manager;

*  launch of the outreach programme ahead of schedule, with a 60 strong team now 
   in place and making over 30,000 proactive customer calls per week with
   capacity due to increase before the year end;

*  the appointment of Tony Wyatt as Customer Operations Director, completing the 
   Executive Director team, and the completion of the review of the next layer 
   of management, with substantive changes made and additional recruitment well 
   progressed (including new heads of advertising, general insurance, risk and 
   compliance);

*  progress made on offshoring and onshore consolidation plans, including a 
   pilot to move data input processing on protection products to Bangalore from 
   Glasgow and Edinburgh; and

*  continuing progress towards exceeding #200 million gross annualised cost 
   savings, with third quarter cost savings of #36 million included in the
   profit guidance above.

The priorities for the remaining part of 2003 include:

*  developing our plans for delivering revenue growth in 2004 and 2005;

*  further progress toward improving, simplifying and removing inconsistencies 
   in other accounts and services, and completing the re-write of all customer 
   letters;

*  progressing and intensifying cost programme initiatives; and

*  continuing progress in IT rollouts and recruitment and training of customer 
   facing staff.

The short-term impact of organisational change, system rollouts, staff training
and related initiatives, whilst representing essential actions for future
growth, will remain a drag on performance through the first half in 2004.  The
full year results presentation will provide more guidance on our priorities and
plans to deliver revenue growth, related reinvestment costs and updated cost
saving targets.

Personal Financial Services - Financial Update

PFS trading profit before tax for the 3 months to the end of September was
around 15% below a pro-rata equivalent of first half earnings.

By product line, the main highlights include:

*  Banking & Savings trading profit before tax down around 7% versus the first 
   half run-rate, with fourth quarter profit expected to be adversely affected 
   by higher costs from the business relaunch with some continued revenue impact 
   from spread changes (see below);

*  earnings from the Life businesses running at similar levels to the first 
   half, and continuing to represent the majority of the year on year PFS
   decline.  Second half experience variances, if any, will be assessed at the 
   year end as usual, though a continuation of certain negatives reported in 
   half one is likely;

*  a modest improvement in General Insurance trading profit before tax in the 
   third quarter, although the second half result is unlikely to exceed the
   equivalent 2002 level;

*  Treasury Services profit before tax around 40% lower than the exceptionally 
   strong first half run-rate, and likely to deliver a full year result broadly 
   comparable with that of 2002; and

*  charges in Group infrastructure slightly higher than those reported in the 
   first half, and substantially below 2002.


By profit & loss line, the main highlights include:

*  a slight reduction in trading income, with an increase in non-interest income 
   offset by lower net interest income in Treasury Services and to a lesser 
   extent Banking & Savings;

*  the retail banking spread is expected to be around 1.54% for the full year 
   (first half of 1.61%).  This reflects the re-alignment of SVR pricing over
   the last 12 months, as well as improved gross lending combined with higher
   redemption levels.  This changes the mix of the overall book, albeit the SVR
   asset has remained relatively static in the third quarter, and now represents
   circa 20% of the total mortgage asset.  Funding lending growth creates 
   pressure on deposit margins.  This has also been impacted by base rate falls 
   in the first half.  This growth is being funded from wholesale and more 
   expensive retail funding sources resulting in a higher cost of marginal 
   funding, compounded by the widening of the LIBOR differential to base rates 
   as market expectations have shifted towards a possible rate rise;

*  costs on a trading basis were ahead of the first half run-rate, and 
   incorporated #36 million of savings from the cost programme, up 57% on the 
   first half run rate.  As referred to in the summary, fourth quarter costs are 
   expected to increase due primarily to marketing and other activity around the 
   business relaunch.  Other cost increases in the second half principally 
   relate to phasing of higher pension accruals and ongoing project spend 
   previously capitalised; and

*  further improvements in credit quality across all products, with 3 month plus 
   mortgage arrears cases falling to 9,971, 32% lower than the same point in 
   2002 and a reduction of 10% since the interim stage.

Mortgage credit quality                                 Sep 2003          Jun 2003          Dec 2002

3 month+ mortgage arrears (cases)                          9,971            11,100            13,500
Properties in Possession (cases)                             411               414               419
New Business:
- % First Time Buyers                                        17%               16%               18%
- LTV > 90%                                                   9%                9%               14%
- Average LTV (on new business)                              57%               56%               61%

As reported at the interim stage, the trading profit guidance above excludes '
one-off' charges.  Amongst other things, these will reflect investment variances
in the life funds and current period restructuring costs (which are expected to
be higher in the second half as more expensive restructuring activities are
undertaken).  There remains material risk of additional life company charges and
/ or capital requirements during the next 15 months particularly as the impact
of emerging regulatory standards and any changes in lapse data becomes clearer.

Personal Financial Services - New Business Update

                                                     9 months to       9 months to       6 months to
                                                       Sep 2003          Sep 2002          Jun 2003
Banking & Savings
Gross mortgage lending                                  #20.9bn           #15.1bn           #12.9bn
Mortgage capital repayments                             #14.4bn           #10.9bn           #9.1bn
Net mortgage lending                                     #6.5bn            #4.2bn            #3.8bn
Market share - gross mortgage lending (estimated)         10.7%              9.6%             10.6%
Market share - net mortgage lending (estimated)            9.4%              7.4%              9.1%

Total net deposit flows                                  #1.0bn            #0.6bn            #1.5bn

Bank account openings                                   316,000           341,000           206,000

Credit card openings                                    205,000           207,000           151,000

Gross unsecured personal lending                         #1.3bn            #1.1bn            #0.8bn

Investment Sales

New business premiums - excluding with profits          #1,044m           #1,610m             #694m
New business premiums - with profits (1)                   #65m             #192m              #43m
Annualised equivalent - excluding with profits            #141m             #225m              #95m

Insurance Sales

Protection - annualised equivalent                         #91m              #85m              #61m

General Insurance new policy sales                      373,000           413,000           257,000

(1) Includes sale of Prudential Bond for which only commission is earned,
totalling #63 million in the 9 months to September 2003.


New business highlights for the 9 months to September include:

*  gross mortgage lending of #20.9 billion (Sep 2002: #15.1 billion) up 38%, 
   with capital repayments at #14.4 billion also significantly higher than the
   same period in 2002.  Overall, net lending market share was estimated at 
   9.4%, with net lending up significantly to #6.5 billion (Sep 2002: #4.2 
   billion).  The second half of the year is expected to be the third 
   consecutive 6 month period of 10% plus gross lending market share, 
   demonstrating Abbey's increased presence in this market without relaxing 
   lending criteria and with mortgage new business margins relatively stable;

*  deposit outflows in the quarter, in part as a result of re-pricing the
   Abbey business range and increased bond maturities in the period.;

*  strong bank account openings, particularly in the Abbey brand, with good
   account balance growth, and although lower, credit card openings still over
   50,000 in the quarter;

*  investment sales at similar levels to those reported at the interim stage, 
   largely reflecting market trends in the personal sector and absence of
   new product launches.  However, the run-rate of sales of the Flexible 
   Investment Bond has increased in the third quarter, and protection sales 
   remain strong; and

*  general insurance sales broadly in line with first half performance, but down 
   on the same period last year as a result of lower motor volumes through
   direct response, and an increased proportion of introduced mortgage business
   resulting in lower cross sales at point of sale.

Portfolio Business Unit

                                                        Sep 03 Assets       Jun 03 Assets       Dec 02 Assets
                                                                 # bn                # bn                # bn

Debt securities                                                   3.1                 6.9                32.3
Loan portfolio                                                    3.4                 5.0                 8.4
Leasing businesses                                                5.4                 5.6                 5.7
Private Equity                                                    0.5                 0.6                 0.8
Other                                                             0.0                 0.3                 1.4
Wholesale Banking exit portfolios                                12.4                18.4                48.6
First National                                                    2.7                 3.0                 8.0
European Banking and other (1)                                    4.9                 4.3                 3.4
Total PBU assets                                                 20.0                25.7                60.0

(1) Includes c. #3bn related to our Italian business, the sale of which is
expected to complete in the next 3 months

PBU assets have been reduced by #5.7 billion, or 22%, since the interim stage,
with a similar percentage reduction in risk weighted assets of #3.9 billion.  In
addition, we reached an agreement for the sale of the Italian mortgage business
(#3.0 billion of assets) in September.  Overall, PBU assets of #20.0 billion are
now 67% lower than the start of the year, with a corresponding reduction in risk
weighted assets of 58% to #13.8 billion.

In the third quarter, losses attributable to the sale of wholesale assets have
been better than implied by the unrealised mark to market (MTM) deficits
disclosed at the interim stage. The MTM reduction in the third quarter (set out
below), results from realised losses and an underlying reduction in loss
estimates (the latter in the region of #100 million) both due to slightly better
market conditions as well as successful execution of asset sales.  Other
revenues, expenses and provision charges for the PBU are in line with our
expectations.

Fourth quarter disposal progress is expected to continue consistent with the
revised PBU timetable.  Aside from disposal and restructuring costs incurred,
decisions on provisioning (general and specific) which impact the timing of P&L
loss recognition, will primarily be made in the fourth quarter.  Dependant on
such decisions, the Group statutory results for 2003 as a whole may well show a
loss.


Wholesale Bank

Unrealised mark to market deficits                     As at Sep 2003       As at Jun 2003      As at Dec 2002
                                                                 # m                   # m                 # m
Loan portfolio                                                  (290)               (394)                (491)
Debt securities                                                  (82)               (180)                (664)
Total deficit                                                   (372)               (574)              (1,155)

Asset portfolios not included in the above:             assets net of
                                                           provisions
                                                                  #bn

Finance & other operating leasing                                 2.9
Porterbrook                                                       2.0
IEM and other aircraft leasing                                    0.5
Private Equity                                                    0.5

Whilst good progress has already been made, meaningful risk exposures and
unrealised MTM deficits on certain portfolios remain.

Credit Exposure                                                Sep 03              Jun 03              Dec 02
                                                                 # bn                # bn                # bn

AAA                                                               2.8                 4.6                15.5
AA                                                                2.6                 3.0                 7.4
A                                                                 1.6                 3.6                13.6
BBB                                                               1.9                 2.8                 8.5
Total investment grade                                            8.9                14.0                45.0

BB and B                                                          1.2                 1.2                 2.2
CCC                                                               0.6                 0.5                 0.6
Total sub investment grade                                        1.8                 1.7                 2.8

The sub-investment grade exposures were reduced by 24% in the third quarter,
with sales of around #0.4 billion.  However, #0.5 billion of internal downgrades
offset these sales, but reflect previous periods' credit impairment already
captured in the mark to market assessments, rather than further asset
impairment.

In the third quarter, total aircraft exposures (including leasing and ABS
exposures net of provisions) have been reduced by a further #207 million, and
exposure to US and UK power projects by #126 million.

Other PBU businesses

Subject to approval by the Bank of Italy, the sale of our Italian mortgage
business is expected to complete in the next 3 months for a cash premium of up
to #46 million, equivalent to a premium of approximately 50% to regulatory net
assets.

Capital

The equity tier 1 ratio has continued to improve since the interim stage, and
whilst expected to fall somewhat by the year end as a result of the broadly one
third / two thirds anticipated split of dividend payment, will remain
significantly above the December 2002 level.

The redemption of $200 million preference capital in July is expected to reduce
second half preference dividends by around #4 million, with exchange rate
movements further benefiting the charges.

Subject to market conditions, we remain confident of a meaningful capital
release from the PBU wind-down.  The extent to which capital retention in the
PFS business is required will be influenced significantly by Basel II,
International Accounting Standards and related regulatory and accounting changes
currently being developed industry-wide.

The probable timeframe for clarification on the accounting and regulatory
issues, as well as the extent of PBU capital release, still remains 2005.  In a
similar timeframe, the path of improvement in PFS cashflows and the extent of
the PFS investment opportunities should also be more visible.






Luqman Arnold, CEO, said:

"2003 is about putting the foundations in place that will position Abbey as a
strong and credible competitor in the market, and help pave the way to a return
to growth in the second half of 2004.  We are 8 months through our 3 year change
programme - and we are on track.

We have done everything we said we would do at our Interim results in July.  We
have re-launched the business, signalling our intent to deliver a truly
different banking experience for our customers.  We have launched a range of
innovative investment services - setting the pace in the market for the first
time in many years. And we have continued to make many changes behind the
scenes, increasing the cost savings we have secured, overhauling our
telecommunications and IT capability, and focusing on recruitment and training
of front line staff.

The scale of the changes we are implementing does bring with it execution risk,
and will, as we predicted at the interim stage, have a short-term impact on
business performance and service levels through the first half of 2004.  These
changes are essential to revitalise the franchise, and build a stronger position
from which we can compete thereafter.

We remain convinced that we can rebuild value for our shareholders.  In the PBU
we are ahead of plan.  In PFS our priority is to deliver a distinctive customer
experience - turning banking on its head - and the recent business re-launch was
the first step down this road."





Future diary dates:

2003 Full Year Preliminary Results Announcement               26th February 2004
2003 AGM                                                      22nd April 2004
2004 Interim Results                                          29th July 2004

Note - as previously stated, Abbey does not intend to release a pre-close
trading statement later this year.

Contacts

Thomas Coops          (Communications Director)                020 7756 5536
Jon Burgess           (Head of Investor Relations)             020 7756 4182
Matt Young            (Media Relations)                        020 7756 4232

For more information contact:    [e-mail].  The telephone number for
the conference call replay facility is 01296 618 700 (pin 650473).

Important notice

This announcement should be read in conjunction with the Interim Results release
for the half year ended June 30th 2003, released on 30th July 2003.

This document contains certain "forward-looking statements" with respect to
certain of Abbey National plc's ('Abbey') plans and its current goals and
expectations relating to its future financial condition, performance and
results.  By their nature, all forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances which are
beyond Abbey control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, the policies and actions of regulatory
authorities, the impact of competition, inflation, deflation, the timing, impact
and other uncertainties of future acquisitions or combinations within relevant
industries, as well as the impact of tax and other legislation and other
regulations in the jurisdictions in which Abbey and its affiliates operate.  As
a result, Abbey's actual future financial condition, performance and results may
differ materially from the plans, goals, and expectations set forth in Abbey's
forward-looking statements.


                      This information is provided by RNS
            The company news service from the London Stock Exchange
END

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