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Name | Symbol | Market | Type |
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Halifax 9.375bd | LSE:HALP | London | Bond |
Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
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0.375 | 0.26% | 147.125 | 142.25 | 152.00 | 147.125 | 146.75 | 146.75 | 0 | 11:10:37 |
RNS Number:2803B HBOS PLC 01 August 2007 1 August 2007 HBOS plc Interim Results 2007 Stock Exchange Announcement Contents Highlights 3 Chief Executive's Report 4 Financial Highlights 12 Key Divisional Statistics 15 Summary Consolidated Income Statement 17 Summary Consolidated Balance Sheet 17 Divisional Reviews Retail 18 Corporate 24 Insurance & Investment 29 International 37 Treasury & Asset Management 51 Financial Review 54 Financial Information 66 Consolidated Income Statement 67 Consolidated Balance Sheet 68 Consolidated Statement of Recognised Income and Expense 69 Consolidated Cash Flow Statement 70 Notes to the Accounts 72 Independent review report to HBOS plc 75 Supplementary Embedded Value Information for the UK Investment Business 76 Expected Timetable 80 Contacts 81 Page 2 HBOS plc 2007 Interim Results Group Highlights * Profit before tax up 13% to #2,997m. * Underlying profit before tax up 13% to #2,962m. * Basic earnings per share up 22%(1) to 55.1p. * Underlying earnings per share up 16%(1) to 54.6p. * Interim dividend up 23% to 16.6p, with the expected full year dividend payout ratio increasing from 41% to around 46%. * Share buyback totals #394m year to date out of our current #500m programme. * Group post tax RoE increases to 21.0% (H1 2006 20.5%). * Group net interest margin at 168bps (H2 2006 171bps, H1 2006 174bps). * Lending grows at an annualised 10% to #395.2bn; customer deposits grow at an annualised 14% to #227.1bn. * Impaired loans flat at 2.19% of advances (end 2006 2.18%); closing provisions represent 0.79% of advances (end 2006 0.82%). * Underlying operating income up 11% at #6,427m (H1 2006 #5,797m). * Underlying net interest income 1% lower at #3,626m (H1 2006 #3,647m). On a like-for-like basis(2), underlying net interest income is 4% higher. * Underlying non-interest income 30% higher at #2,801m (H1 2006 #2,150m). * Group underlying operating expenses up 8% at #2,563m (H1 2006 #2,369m). * Group cost:income ratio improves to 39.9% (H1 2006 41.3%). * Tier 1 capital ratio 8.0%, total capital ratio 12.0% (end 2006 8.1% and 12.0%). Divisional Highlights * Underlying profit before tax in Retail down 8%, Corporate up 54%, Insurance & Investment up 10%, International up 12% and Treasury & Asset Management up 24%. * Annualised lending; Retail up 4%, Corporate up 14%, International up 34%. * Retail estimated market shares; UK gross mortgage lending 19%, UK net mortgage lending 8%, new Current Accounts 24%, Household Sector Liquid Assets 16%, and new Credit Card accounts 10%. * Annualised customer deposit growth; Retail up 9%, Corporate up 12% and International up 27%. * General Insurance sales fall 1% (excluding Paymentshield); Household up 8%, Repayment down 9% and Motor up 9%. * UK Investment sales rise 11% to #1,004m APE; Bancassurance up 16%, Intermediary down 10% and Wealth Management up 32%. * Cost:income ratios; Retail 38.8% (H1 2006 38.5%), Corporate 22.8% (H1 2006 27.1%), International 47.0% (H1 2006 44.1%) and Treasury & Asset Management 47.2% (H1 2006 46.4%). * Net interest margins; Retail 173bps (H2 2006 176bps, H1 2006 180bps), Corporate 212bps (H2 2006 213bps, H1 2006 237bps), and International 190bps (H2 2006 198bps, H1 2006 197bps). * Impaired loans; Retail 2.67% (end 2006 2.72%) of closing advances, Corporate 1.58% (end 2006 1.30%) and International 1.17% (end 2006 1.19%). Supplementary EV * Underlying earnings per share on a Full EV basis 5% higher than reported under IFRS. Information(3) * Total Group embedded value (net of tax) on a Full EV basis of #7.4bn, #2.7bn higher than reported under IFRS. * New Business Contribution from UK Investment Business on a Full EV basis #255m higher than under IFRS (H1 2006 #235m). (1) Growth in basic EPS is higher than growth in underlying EPS because we have excluded from the latter the net favourable items detailed in the reconciliation on page 14. (2) Excluding the impact of the sale of Drive, the acquisition of Lex and non-interest income bearing Treasury investments analysed on page 56. (3) The Full EV basis shows the Group's results had investment contracts been accounted for on an Embedded Value basis rather than the IFRS reporting basis. This is further explained in the supplementary Embedded Value information on pages 76 to 79. Page 3 CHIEF EXECUTIVE'S REPORT Profit momentum In the first half of 2007, HBOS has again delivered another strong set of results, with further momentum in underlying earnings from the Group's increasingly balanced range of businesses. Reported profit before tax increased by 13% to #2,997m (H1 2006 #2,654m) and underlying profit before tax increased by 13% to #2,962m (H1 2006 #2,612m). Each division, with the exception of Retail, delivered double digit underlying profit growth. This profit performance, together with the positive contribution from recent share buyback programmes, delivered underlying earnings per share up 16% to 54.6p (H1 2006 47.0p) and an increase in post tax return on equity to 21.0% (H1 2006 20.5%). These results demonstrate that we are now benefiting from five years of diversifying our earnings base, allowing us to deliver double digit earnings growth even in tougher retail markets. We have also yet again delivered on our pledge of achieving further improvements in our cost:income ratio. This has fed straight through to improved returns for our shareholders. The 16% increase in underlying earnings per share at the same time as a further reduction in the cost:income ratio demonstrates the strength and diversity of the HBOS UK and International operating model. Dividends and Capital Since our last step change in capital management in 2005, HBOS has returned #2.4bn of surplus capital to shareholders via share buybacks and maintained a dividend payout ratio of around 41%, with dividends increasing closely in line with earnings. It is clear that HBOS has a strong capital generation capability, as a natural consequence of returns on equity running above 20%, increased capital generation from our Investment businesses, and the benefits to be derived from the move to Basel II. The combination of this strong capital generation and our confidence in future earnings momentum, has led us to conclude that we should now enhance our approach to capital management still further. We intend therefore, without sacrificing any of our current capacity to support growth, to step up our dividend payout ratio from 41% to around 46% in 2007. As a result, we have today declared an interim dividend of 16.6p, an increase of 23% over the first half of 2006, and it is our intention that the full year dividend for 2007 will increase to reflect the enhanced 46% payout ratio. Following this step change in the level of dividend payout, our policy will be to increase dividends broadly in line with underlying earnings growth. We will also continue to use share buybacks as a flexible tool by which we return capital in excess of the amount required to support growth in any particular year. Our Tier 1 ratio of 8.0% at 30 June 2007 (end 2006 8.1%) remains at our Basel I target level and our total capital ratio was 12.0% (end 2006 12.0%). We expect to brief the market on the benefits to emerge over time from our future Basel II capital position at our 2007 Preliminary Results in February 2008, after confirmation from the FSA of our new capital requirements. In the meantime we remain on track to complete our 2007 share buyback programme of #500m, #394m of shares having been bought back for cancellation year to date. Page 4 Growth Advances to customers increased by an annualised 10% to #395.2bn (end 2006 #376.8bn). While Retail advances grew by 4%, Corporate and International both delivered excellent growth rates with advances increasing by 14% and 34%, respectively. Customer deposits have also grown strongly by an annualised 14% to #227.1bn (end 2006 #211.9bn) and investment funds under management have grown by an annualised 10% to #139.6bn (end 2006 #132.8bn). Margins The Group net interest margin reduced by 3bps in the first half of 2007 to 168bps (H2 2006 171bps, H1 2006 174bps). In Retail, an overall 3bps fall in the margin reflects strong competition in the mortgage market, offset by increased margins from banking and savings products. In Corporate, margins fell 1bp as our selective hold appetite continues to focus on managing overall returns. In International, margins have declined 8bps mainly as a result of business mix changes as we source a higher proportion of income from retail markets in Australia and Ireland. In the UK Investment Business, new business profitability improved to 29% APE (H2 2006 27%, H1 2006 26%). Efficiency Underlying operating income increased by 11% to #6,427m (H1 2006 #5,797m) whilst underlying operating expenses increased by 8% to #2,563m (H1 2006 #2,369m). Underlying net interest income increased by 4% on a like-for-like basis but fell 1% on the comparative period, primarily reflecting lower growth in Retail and the impact of the Drive and Lex transactions in 2006. Underlying non-interest income increased by 30%, reflecting strong realisations in Corporate, partially offset by lower fee income in Retail. Positive operating 'jaws' thus delivered a reduction in the Group cost:income ratio to 39.9% (H1 2006 41.3%). This improvement in our cost:income ratio was achieved despite expenses incurred in the first stages of our efficiency programme and we are on track to deliver our goal of a mid-thirties cost:income ratio by 2010. Allowing for the timing of our investments supporting our International expansion and our efficiency programme, we continue to expect that cost growth for the year as a whole will be around 7%. Credit Quality The credit environment across the Group remains benign by historic standards and in line with previous trends. Impaired loans as a % of advances were stable at 2.19% (end 2006 2.18%) whilst impairment losses increased by 11% to #963m (H1 2006 #864m) representing 0.25% of average customer advances (H1 2006 0.24%). In Retail, we believe unsecured impairments have now peaked, with the combination of impaired loans as a % of advances being slightly lower than six months ago and an increase in provision coverage of impaired loans in the first half of 2007 supporting the view that unsecured impairment losses will be lower in the second half. Secured impairments and provisioning continue to reflect the strong collateral in our book. Page 5 Corporate credit conditions remain robust with impairment losses in the first half of 2007 lower than in the second half last year. In International, credit conditions also remain robust. Taxation and Regulation As a result of the 2007 Finance Act, the main UK corporation tax rate will reduce from 30% to 28% from April 2008. This has resulted in a net benefit of #97m to reported attributable profit arising from a reduction in deferred tax net liabilities of #110m offset by a #13m (#18m pre-tax) reduction to the value of leasing assets. This one-off net benefit has been excluded from our underlying results. Regulatory pressure across the UK retail banking industry is currently tempering the prospects for more positive momentum in non-interest income. In the middle of 2006, we reduced Credit Card default fees in response to an OFT ruling and Mortgage exit fees in response to a FSA determination, the combined impact of which is expected to be a #65m reduction in fee income throughout 2007. 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 particular, unauthorised overdraft 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, and were reported outside of our underlying results as they relate predominantly to fees charged in prior years. On 27 July it was announced that we, along with seven other major UK current account providers, had reached agreement with the OFT to start legal proceedings in the High Court of England and Wales for a declaration to resolve legal uncertainties concerning the level, fairness and lawfulness of unauthorised overdraft charges. In the meantime, we and the other major UK current account providers are seeking a stay of all current and potential future Court proceedings regarding these fees which are brought against us in the UK, prior to the resolution of the test case. We have also obtained the consent of the Financial 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. The 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. The Competition Commission review of Payment Protection Insurance is expected to run well into next year and in the meantime it is likely that growth in this market will not only be curbed by the appetite for unsecured credit but also by the uncertainty of the review's outcome. Finally, we welcome the Competition Commission's enquiry into the regulatory regime, including price controls for SME banking services. This is a market in which we are currently under-represented and thus we intend to press for measures that will also help stimulate more customer choice. Page 6 Divisional Performance Retail Underlying profit before tax decreased by 8% to #1,043m (H1 2006 #1,133m). Underlying net operating income was unchanged against the first half of 2006, net interest income growth being held back by lower mortgage net lending and non-interest income falling as the full year effect of changes to Credit Card fees in 2006 emerges. Underlying operating expenses also remained flat compared to the first half of 2006 reflecting further productivity improvements and the cost:income ratio remained broadly stable at 38.8% (H1 2006 38.5%). Advances increased by an annualised 4% reflecting our lower net mortgage share and our continuing caution in unsecured markets, whilst deposits increased by an annualised 9%. The overall movement in net interest margin to 173bps (H2 2006 176bps, H1 2006 180bps) reflects strong pressure on mortgages largely offset by better margins on liability products. In Mortgages, our estimated gross lending market share in the first half of 2007 was lower at 19% (2006 21%) as a consequence of the pricing strategy introduced in the second half of 2006 which was designed to trade an element of gross share for improved margins and lower principal repaid. Our estimated share of principal repaid, however, remained at 24% (2006 24%), the new pricing strategy proving to be largely unsuccessful. The combination of these factors saw our estimated share of net lending reduce to 8% (2006 17%). Having taken corrective action to our pricing strategy, the strength of the HBOS franchise has been demonstrated by the speed with which we have returned to our 15-20% net lending range in May and June. We also expect to trade in this range through the second half of the year. The mortgage market has gone through a significant structural change over the last year, which has seen declining margins and shortening average lives. In part, this is a natural consequence of our continuing preference to take around 30% of our lending from the specialist sector where the returns are higher but the average life shorter, owing to the highly intermediated nature of the specialist market. However, HBOS, with our five brand distribution strengths and our low cost base, is particularly well placed to emerge from the current changes in the mortgage market as a clear long term winner. Elsewhere in Retail, we continue to make good progress with product sales across the Retail product range. The real strength of the HBOS franchise is best illustrated by our performance on the liability side of the balance sheet over the past six months. In Bank Accounts, our high interest current account, backed up with a high profile TV campaign, has been very successful and we have increased our share of new current accounts to 24%. Savings inflow has also been extremely encouraging. We are successfully exploiting our position as the "clear number one" in Savings and we are seeing growth in customer numbers and balances ahead of the market. In total we have opened over 900,000 new savings accounts, with around 16% of these by new customers. Savings balances increased by an annualised 11%. Retail credit trends are robust and in line with our previous guidance. Retail impaired loans as a % of closing advances decreased to 2.67% (end 2006 2.72%). Secured impaired loans as a % of closing advances were slightly higher at 1.86% (end 2006 1.84%) reflecting a modest increase in specialist arrears offset by continuing improvements in mainstream arrears. Secured impairment losses were again minimal, reflecting the strong collateral in the book. Page 7 Retail unsecured impaired loans as a % of advances decreased to 12.9% (end 2006 13.2%) giving us confidence that, when coupled with recent trends in respect of IVAs and insolvencies, unsecured impairments have now peaked. Unsecured impairment losses in the first half of 2007 increased by 33%, strengthening unsecured provision coverage from 71% to 76%, our expectation being that the improving trend of unsecured impairments will lead to a lower charge in the second half. Underlying profit before tax increased 54% to #1,243m (H1 2006 #809m) with a continued excellent performance from the core UK operations now supplemented by strong growth from our European operations. Corporate Underlying net operating income increased by 42%, reflecting good lending fee income and very strong revenues from the investment portfolio. Underlying net interest income was broadly stable with the net interest margin at 212bps (H2 2006 213bps, H1 2006 237bps), the corresponding period last year benefiting from the inclusion of Lex as a joint venture and from higher levels of early redemption premia. The strength of the Corporate franchise is demonstrated by the achievement of a stable margin against the second half of 2006, whilst still delivering good growth in lending. Underlying operating expenses increased by 19% which included the consolidation of Lex from 31 May 2006. Excluding Lex, the increase in underlying expenses was 13% as a result of performance based remuneration and continued investment in enhanced risk management capabilities. We continue to approach the UK corporate market from a selective and cautious standpoint. Despite the strong deal flow in the market, we have not participated in deals with sub-optimal risk-adjusted returns or weaker covenants. However, the strength of our franchise and, in particular, our partnership approach with clients, has supported strong ongoing growth. Lending originations grew at an annualised 22% but, as in previous years, we utilised sell down, this time to a hold level of 14% annualised growth. Both the origination and hold growth rates are ahead of the 2006 outcome, reflecting the strength of both our origination franchise and our distribution capabilities. Customer deposits increased by an annualised 12% to #41.9bn (end 2006 #39.5bn) as we completed the move to focus our deposit gathering on sources suitable for funding purposes. The book value of the investment portfolio increased to #2.9bn (end 2006 #2.6bn) despite strong first half realisations. The stock of unrealised gains is broadly unchanged from the start of the year and the portfolio continues to be exceptionally well diversified across more than 600 investments. Page 8 Corporate credit quality remains robust. While impaired loans as a % of advances increased to 1.58% (end 2006 1.30%), impairment losses as a % of average advances improved to 0.25% against the second half of 2006 (H1 2006 0.22%, H2 2006 0.29%). Forward looking credit indicators remain favourable although we continue to exercise caution in our underwriting and pricing disciplines at this stage in the credit cycle. In particular, given the potential for reduced liquidity in the secondary markets, we continue to underwrite and price our originating activity on the assumption that we would be comfortable holding the business on our balance sheet if required to do so. Insurance & Investment Underlying profit before tax increased by 10% to #316m (H1 2006 #287m). Underlying profit before tax for the General Insurance business reduced to #107m (H1 2006 #163m) as a result of a significant increase in claims arising directly from the storms in January and the floods in June, the latter event estimated to have cost #60m in claims. The recent flooding in south and central England in July will give rise to further significant claims. Our current expectation is that the claims arising from this latest event will be modestly higher than that for the June floods. General Insurance sales fell 1% to #868m GWP (H1 2006 #874m excluding Paymentshield of #45m). Household Insurance sales increased by 8%, as strong volume growth in our branch network and improved cross sales with intermediaries more than offset a competitive pricing environment. Motor Insurance sales increased 9%, benefiting from esure's prominent position in the growing internet segment. Repayment Insurance sales fell by 9% as a consequence of reduced consumer credit volumes and the uncertainty arising from the Competition Commission enquiry into Payment Protection Insurance. Underlying profit before tax for our Investment Business increased by 69% to #209m (H1 2006 #124m), reflecting the growth in profits from investment business as the existing book of business grows in relative size. UK Investment sales increased by 11% to #1,004m APE (H1 2006 #904m). Bancassurance sales increased by 16% as further productivity gains allowed us to consolidate our position as the market leader. In the Intermediary market, our more selective value based approach which saw us withdraw from the Group pensions market in the first half of 2007, resulted in 10% lower sales. Wealth Management enjoyed an outstanding first half with sales up 32%. New business profitability improved to 29% of APE (H2 2006 27%, H1 2006 26%), well above our 25% benchmark. On pages 76 to 79, we have provided supplementary embedded value ('Full EV') information for our Investment Business. On a Full EV basis, in the six months to 30 June 2007, Group underlying profit before tax was #136m higher than under IFRS and underlying earnings per share was 2.5p or 5% higher. The total net of tax embedded value for our UK Investment Business at 30 June 2007 was #6,681m, #2,735m (end 2006 #2,525m) higher than reported under IFRS. International Underlying profit before tax in International increased by 12% to #327m (H1 2006 #293m, restated to exclude our European corporate business which transferred to Corporate in the first half of 2007 and Drive which was sold in December 2006). This is a particularly strong result given the significant levels of investment we are making across the division. Profits from our overseas operations (i.e. International, Corporate Europe and overseas Treasury offices) now account for 13% of Group underlying profit before tax. Page 9 In Australia, underlying profit before tax increased 4% to #144m (H1 2006 #139m). In local currency the increase was 16%. Underlying net operating income increased by 18% reflecting strong lending and deposit growth (annualised 40% and 35% respectively) in a buoyant economy, with some margin erosion due to business mix and a competitive commercial environment. Underlying expenses increased by 29% in line with the continuing investment in our distribution network and the recently announced branch expansion on the East Coast, where we plan to open more than 125 retail branches and 35 business banking centres over the next 3 to 4 years. Impaired loans as a % of closing advances were largely unchanged at 0.99% (end 2006 1.00%). Impairment losses as a % of average advances were also unchanged at 0.13% (H1 2006 0.13%). In Ireland, underlying profit before tax increased by 14% to #80m (H1 2006 #70m). Underlying net operating income increased by 16% reflecting strong lending and deposit growth (annualised 23% and 10% respectively). Underlying expenses increased by 24% in line with our investment in the Retail expansion, with a market leading personal current account launched in May and we are on track to achieve our branch roll-out target for the remainder of the year. Impaired loans as a % of advances decreased slightly to 1.82% (end 2006 1.87%) and impairment losses as a % of average advances decreased to 0.06% (H1 2006 0.09%) reflecting a generally benign credit environment. In Europe & North America, underlying profit before tax increased by 23% to #103m (H1 2006 #84m) driven by growth in European Financial Services ('EFS') and North America. Underlying net operating income increased by 22% primarily reflecting annualised 34% lending growth, at broadly stable margins. Underlying operating expenses increased by 22% due to investment in the expansion of our distribution capabilities, particularly in North America and Spain. Impaired loans as a % of advances increased to 0.49% (end 2006 0.47%). Credit performance remains strong with impairment losses as a % of average advances stable at 0.04% (H1 2006 0.05%). Treasury & Asset Management Underlying profit before tax increased by 24% to #194m (H1 2006 #156m). Underlying net operating income increased by 24% driven by strong sales and trading income. Underlying operating expenses increased by 26% as we continue to invest in the expansion of our Treasury operations, particularly in support of International growth. A notable feature of the first half's performance was the increasing use of non-interest income bearing investments that have the effect of reducing net interest income in favour of non-interest income returns. In the first half of 2007, Treasury arranged 5 capital issues on behalf of HBOS plc raising approximately #2.0bn in sterling equivalent and supported the raising of #11.6bn from existing funding programmes, comprising #3.2bn of covered bonds and #8.4bn of securitisations. Total funds under management of our Asset Management businesses increased to #112.3bn (end 2006 #107.8bn). The increase was after the transfer of #4.2bn of client funds as part of an agreed sale of Equitable Life funds. Excluding this transfer, funds under management increased by an annualised 16%, driven by strong support for Insight's Liability Driven Investment and Fixed Income products and Invista's property funds. Page 10 Outlook and Strategy The UK economy continues to grow at a rate above its long term trend. This, together with inflation above the MPC target rate, is fuelling market expectations of at least one more increase in Base Rates, additionally impacting affordability in the second half of 2007. House price growth is therefore expected to slow in the second half. We expect to see a similar controlled slowdown in the commercial property market over the next 12 months. On the liability side of the balance sheet, the outlook remains positive and we expect to see continued strong growth right across the range of our savings and investment businesses during the rest of 2007. Our strategy is based around four clear strands: Growing the UK franchise, targeted international growth, cost leadership and capital discipline. With annualised growth currently running at around 10% and mortgage lending back on track, we are seeing good progress across the range of UK growth opportunities, with a particularly pleasing performance on the liability side of the balance sheet. In Corporate, the strength and reputation of our franchise, together with our investment in enhanced risk management capability, has enabled us to continue to be selective in our hold appetite while still participating in value enhancing opportunities. Internationally we are delivering well on our growth agenda and making significant investments in retail and commercial distribution in Australia and Ireland to support our long term ambitions. Cost leadership and improving efficiency are clear hallmarks of value creation at HBOS. We have made another substantial improvement to our cost:income ratio in the first half of 2007 and we are on track to achieve the mid-thirties cost:income ratio by the end of 2010. Our view on the importance of capital discipline and efficiency at HBOS is unchanged. We will complete our #500m share buyback programme this year. In addition, today's 23% interim dividend increase demonstrates how our capital discipline and efficiency is translated into a higher payout ratio for our shareholders. Above all, today's dividend increase points to the confidence we have in our future. Page 11 FINANCIAL HIGHLIGHTS 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 Divisional underlying profit before tax* Retail 1,043 1,133 1,231 2,364 Corporate 1,243 809 967 1,776 Insurance & Investment 316 287 294 581 International 327 293 324 617 Treasury & Asset Management 194 156 194 350 Group Items (161) (111) (130) (241) Drive 45 45 90 Group underlying profit before tax 2,962 2,612 2,925 5,537 Profit attributable to ordinary shareholders 2,063 1,729 2,091 3,820 Balance Sheet Loans and advances to customers ('Advances') 395,210 361,631 376,808 376,808 Total assets 624,090 570,433 591,029 591,029 Customer deposits 227,117 208,137 211,857 211,857 Debt issued(1) 204,190 189,523 203,342 203,342 Shareholders' equity (excluding minority interests) 21,521 19,088 20,685 20,685 Capital Adequacy % % % % Tier 1 capital ratio 8.0 8.1 8.1 8.1 Total capital ratio 12.0 12.2 12.0 12.0 Performance Ratios % % % % Post tax return on mean equity(2) (3) 21.0 20.5 21.0 20.8 Cost:income ratio(2) (4) 39.9 41.3 40.7 41.0 Net interest margin(3) (4) 1.68 1.74 1.71 1.72 Per Ordinary Share Earnings (basic)(5) 55.1p 45.3p 55.3p 100.6p Earnings (underlying)(5) 54.6p 47.0p 53.5p 100.5p Dividends 16.6p 13.5p 27.9p 41.4p Dividend growth 23% 15% 15% 15% Net asset value 541p 469p 516p 516p Share Information Closing number of ordinary shares in issue (millions) 3,745 3,801 3,764 3,764 Average number of ordinary shares in issue for basic 3,746 3,819 3,796 and underlying EPS (millions) 3,773 Value of shares bought back for cancellation (#m) 394 502 480 982 Average price per share of buyback #10.45 #9.57 #10.51 #10.01 * Refer to Definition of Underlying on page 13. Notes 1 - 5 refer to page 14. Page 12 Definition of Underlying References to underlying incorporate the following adjustments: * Excluding Retail banking fee refunds, the impact of the change in corporation tax rate, the profit on sale of Drive, mortgage endowment compensation, goodwill impairment, policyholder tax payable, the impact of short term fluctuations ('STFs') and changes to economic assumptions for Long Term Assurance Business accounted for on an embedded value basis; * Netting against income of operating lease depreciation, impairment on investment securities, changes in insurance and investment contract liabilities, change in unallocated surplus and net claims incurred on insurance contracts; and * Including share of profits of associates and jointly controlled entities within underlying non-interest income. The following table summarises the movements between 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 Retail banking fee refunds (79) Impact of the 2008 change in corporation tax (18) rate on the value of leasing assets (6) 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 (7) (33) (92) 11 (81) Profit before tax 2,997 2,654 3,052 5,706 Notes 6 - 7 refer to page 14. Page 13 Notes (1) The figures for debt issued comprise debt securities in issue and other borrowed funds. (2) Calculated on an underlying basis. (3) Annualised. (4) Excluding the impact of Drive. (5) Basic earnings per share is based on profit attributable to ordinary shareholders of #2,063m (H1 2006 #1,729m) and weighted average number of ordinary shares in issue of 3,746m (H1 2006 3,819m). Underlying earnings per share is based on underlying profit attributable to ordinary shareholders of #2,046m (H1 2006 #1,794m). 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 Profit attributable to shareholders 2,114 1,759 2,120 3,879 Preference dividends (51) (30) (29) (59) Profit attributable to ordinary shareholders 2,063 1,729 2,091 3,820 Retail banking fee refunds 55 Impact of the 2008 change in corporation tax rate on: the value of leasing assets (6) 13 deferred tax net liabilities(6) (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 (3) (3) held for sale attributable to ordinary shareholders Underlying profit attributable to ordinary 2,046 1,794 2,022 3,816 shareholders (6) As a result of the 2007 Finance Act, the main UK corporation tax rate will reduce from 30% to 28% from April 2008. This has resulted in a net benefit to profit attributable to ordinary shareholders of #97m in H1 2007, comprising a #110m reduction in deferred tax net liabilities and a #13m (#18m pre-tax) reduction to the value of leasing assets which contain tax variation clauses that pass on the benefit of tax changes to customers. (7) Short term fluctuations represent the impact of fluctuations in investment returns relative to those based on longer term assumptions and variances in policyholder tax payable from an expected charge for the period. Page 14 KEY DIVISIONAL STATISTICS Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 Retail Underlying profit before tax (#m)(1) 1,043 1,133 1,231 2,364 Gross mortgage lending (#bn) 33.6 35.2 38.4 73.6 Net mortgage lending (#bn) 4.3 10.3 8.5 18.8 Gross mortgage lending market share (estimated) (%) 19 22 21 21 Principal repaid mortgage lending market share (estimated) (%) 24 23 24 24 Net mortgage lending market share (estimated) (%) 8 21 14 17 Stock of mortgages market share (estimated) (%) 20 21 21 21 Customer deposits (#bn) 151.3 135.9 144.6 144.6 Share of UK Household Sector Liquid Assets (estimated) (%) 16 16 16 16 Loans and advances to customers (#bn) 242.1 229.1 237.7 237.7 Risk weighted assets (#bn) 109.6 112.2 112.4 112.4 Impairment losses as a % of average advances (%) 0.28 0.26 0.22 0.48 Impairment provisions as a % of impaired loans (%) 32 32 33 33 Impairment provisions as a % of closing advances (%) 0.86 0.92 0.89 0.89 Impaired loans as a % of closing advances (%) 2.67 2.91 2.72 2.72 Net interest margin (%)(2) 1.73 1.80 1.76 1.78 Cost:income ratio (%)(3) 38.8 38.5 38.2 38.4 Corporate Underlying profit before tax (#m)(1) 1,243 809 967 1,776 Loans and advances to customers (#bn) 95.8 86.0 89.6 89.6 Customer deposits (#bn) 41.9 41.1 39.5 39.5 Risk weighted assets (#bn) 111.9 100.7 106.5 106.5 Impairment losses as a % of average advances (%) 0.25 0.22 0.29 0.50 Impairment provisions as a % of impaired loans (%) 49 61 63 63 Impairment provisions as a % of closing advances (%) 0.78 0.82 0.82 0.82 Impaired loans as a % of closing advances (%) 1.58 1.35 1.30 1.30 Net interest margin (%)(2) 2.12 2.37 2.13 2.25 Cost:income ratio (%)(3) 22.8 27.1 26.8 26.9 Insurance & Investment Underlying profit before tax (#m)(1) Insurance & Investment 316 287 294 581 General Insurance 107 163 141 304 Investment Business 209 124 153 277 General Insurance sales (Gross Written Premiums) (#m) 868 919 975 1,894 Investment sales (Annual Premium Equivalent) (#m)(4) 1,004 904 913 1,817 Page 15 Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 International Underlying profit before tax (#m)(1) 327 293 324 617 Loans and advances to customers (#bn) 56.8 42.7 48.7 48.7 Customer deposits (#bn) 19.8 14.3 17.5 17.5 Risk weighted assets (#bn) 47.7 37.2 41.3 41.3 Impairment losses as a % of average advances (%) 0.09 0.11 0.12 0.22 Impairment provisions as a % of impaired loans (%) 42 43 42 42 Impairment provisions as a % of closing advances (%) 0.49 0.51 0.51 0.51 Impaired loans as a % of closing advances (%) 1.17 1.18 1.19 1.19 Net interest margin (%)(2) 1.90 1.97 1.98 1.97 Cost:income ratio (%)(3) 47.0 44.1 45.0 44.6 Investment sales (Annual Premium Equivalent) (#m)(4) 41 39 64 103 Treasury & Asset Management Underlying profit before tax (#m)(1) 194 156 194 350 Risk weighted assets (#bn) 15.4 14.5 15.0 15.0 Net interest margin (bps)(2) 5 7 6 7 Cost:income ratio (%)(3) 47.2 46.4 47.7 47.1 Asset Management funds under management (#bn) 112.3 96.6 107.8 107.8 Total Group funds under management (#bn) 139.6 110.1 132.8 132.8 (1) Refer to Definition of Underlying on page 13. (2) Annualised. (3) Calculated on an underlying basis. (4) Annual Premium Equivalent ('APE') is calculated as annual premiums plus 10% of single premiums. Page 16 SUMMARY 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 Underlying net interest income (1) 3,626 3,647 3,753 7,400 Underlying non-interest income (1) 2,801 2,150 2,567 4,717 Underlying net operating income (1) 6,427 5,797 6,320 12,117 Underlying operating expenses (1) (2,563) (2,369) (2,539) (4,908) Impairment losses on loans and advances (963) (864) (878) (1,742) Underlying operating profit (1) 2,901 2,564 2,903 5,467 Non-operating income 61 48 22 70 Underlying profit before taxation (1) 2,962 2,612 2,925 5,537 Retail banking fee refunds (79) Impact of the change of corporation tax rate on (18) 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 taxation 2,997 2,654 3,052 5,706 Tax on profit (858) (865) (907) (1,772) Profit after taxation 2,139 1,789 2,145 3,934 Profit of disposal group classified as held for 4 5 5 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 SUMMARY CONSOLIDATED BALANCE SHEET As at As at As at 30.06.2007 30.06.2006 31.12.2006 #m #m #m Assets Loans and advances to customers 395,210 361,631 376,808 Investment securities 120,864 113,271 117,031 Other assets 108,016 95,531 97,190 Total Assets 624,090 570,433 591,029 Liabilities Customer accounts 227,117 208,137 211,857 Debt securities in issue 181,477 169,449 183,650 Other borrowed funds 22,713 20,074 19,692 Other liabilities 170,902 153,480 154,659 Total Liabilities 602,209 551,140 569,858 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 (1) Refer to Definition of Underlying on page 13. Page17 RETAIL Underlying profit before tax in Retail decreased by 8% to #1,043m (H1 2006 #1,133m). Underlying net operating income remained flat at #2,717m (H1 2006 #2,729m), primarily as a result of lower net lending share in Mortgages and downward pressure on fee income, in particular in respect of Credit Card default fees. Lending increased by 4% (annualised) and customer deposits increased by 9% (annualised). Underlying operating expenses remained flat and, as a consequence, the cost: income ratio remained stable at 38.8% (H1 2006 38.5%). Impairment losses increased by 15%, strengthening provision coverage in respect of unsecured impairments. Impairments in our unsecured portfolio have, we believe, now reached their peak. 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 2,087 2,047 2,141 4,188 Underlying non-interest income 630 682 670 1,352 Mortgages and Savings 256 241 252 493 Banking 220 217 211 428 Business Banking 20 13 18 31 Personal Loans 66 57 52 109 Credit Cards 116 152 134 286 Other 22 24 25 49 Fees and commission income 700 704 692 1,396 Fees and commission expense (55) (31) (35) (66) Other operating income 14 8 12 20 Share of profits of associates and jointly (7) 1 1 2 controlled entities Impairment on investment securities (22) Underlying net operating income 2,717 2,729 2,811 5,540 Underlying operating expenses (1,053) (1,052) (1,075) (2,127) Staff (524) (524) (532) (1,056) Accommodation, repairs and maintenance (4) (5) (5) (10) Technology (25) (25) (29) (54) Marketing and communication (87) (94) (85) (179) Depreciation: Property and equipment and intangible assets (37) (34) (35) (69) Other (43) (50) (51) (101) Sub total (720) (732) (737) (1,469) Recharges: Technology (129) (131) (132) (263) Accommodation (137) (122) (140) (262) Other shared services (67) (67) (66) (133) Underlying operating profit before provisions 1,664 1,677 1,736 3,413 Impairment losses on loans and advances (678) (592) (505) (1,097) Underlying operating profit 986 1,085 1,231 2,316 Non-operating income 57 48 48 Underlying profit before tax 1,043 1,133 1,231 2,364 Net interest margin 1.73% 1.80% 1.76% 1.78% Impairment losses as a % of average advances 0.28% 0.26% 0.22% 0.48% Cost:income ratio 38.8% 38.5% 38.2% 38.4% Page 18 Operating Income and Margins Total underlying net operating income remained flat at #2,717m (H1 2006 #2,729m). Net interest income grew by 2% to #2,087m (H1 2006 #2,047m) but underlying non-interest income declined by 8% to #630m (H1 2006 #682m). Fees and commission income fell by #4m to #700m (H1 2006 #704m) including a #36m reduction in Credit Card related fees, attributable to the industry wide changes following the OFT enquiry in the second half of 2006. The table below summarises the movements in net interest margins and spreads. Net Interest Margins and Spreads 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: Interest receivable 7,914 6,881 7,450 14,331 Interest payable (5,895) (4,908) (5,376) (10,284) Capital earnings 68 74 67 141 2,087 2,047 2,141 4,188 Average Balances: Total interest earning assets 242,895 229,840 240,812 235,371 Interest bearing - deposits 158,638 142,367 149,090 145,756 liabilities - other 84,257 87,473 91,722 89,615 Total interest bearing liabilities 242,895 229,840 240,812 235,371 Average Rates: % % % % Gross yield on interest earning assets 6.57 6.04 6.14 6.09 Cost of interest bearing liabilities (4.89) (4.31) (4.43) (4.37) Net Interest Spread 1.68 1.73 1.71 1.72 Capital earnings 0.05 0.07 0.05 0.06 Net Interest Margin 1.73 1.80 1.76 1.78 Movement in margin Basis points Net interest margin for the half year ended 31 December 2006 176 Mortgages and Savings (8) Banking 6 Credit Cards (1) Net interest margin for the half year ended 30 June 2007 173 In aggregate, product spreads fell by 3bps. The highly competitive conditions in the mortgage market and shorter asset lives on existing business have led to an 8bps fall in the combined Mortgages and Savings spread. This has been partially offset by the favourable movement in the Banking spread of 6bps due to a combination of growth in balances and improved product spreads. There was also a reduction of 1bp in the contribution from Credit Cards. Operating Expenses Cost management remains a core competence in Retail and we continue to maintain a tight rein on costs which is evident in our first half performance. The ongoing benefits of cost management programmes initiated in prior years have enabled us to not only absorb volume related increases in the underlying cost base but also reinvest an element of the savings in the future development of the Retail business. Growth in underlying operating expenses has been contained to just #1m taking total operating expenses to #1,053m (H1 2006 #1,052m). Consequently, combined with the flat position in income, our cost:income ratio remained broadly stable at 38.8% (H1 2006 38.5%). Credit Quality and Provisions With 92.9% (end 2006 92.7%) of loans secured on residential property, Retail's overall credit quality remains strong with total impaired loans falling slightly to 2.67% (end 2006 2.72%) of closing advances. Page 19 Impairment losses as a % of average advances were 0.28% (H1 2006 0.26%). Total impairment losses increased by 15% to #678m (H1 2006 #592m) with the unsecured impairment charge comprising #690m (H1 2006 #520m). Total provisions coverage of impaired loans was broadly unchanged at 32% (end 2006 33%) with closing provisions as a % of closing advances decreasing to 0.86% (end 2006 0.89%). Secured Impairments Total impaired secured loans increased to #4,183m (end 2006 #4,047m), representing 1.86% (end 2006 1.84%) of asset balances. Mortgages in arrears but not in possession increased marginally to 1.73% (end 2006 1.70%) of the debt value as a result of increased arrears in our Specialist book, in line with expectations given interest rate increases, partially offset by a further reduction in Mainstream mortgages. Arrears Cases 000s Total Mortgages % Value of Debt #m* Total Mortgages % 30.06.2007 31.12.2006 30.06.2007 31.12.2006 30.06.2007 31.12.2006 30.06.2007 31.12.2006 Mainstream 28.0 28.3 1.20 1.17 2,351 2,362 1.42 1.46 Specialist 8.7 7.8 1.93 1.76 1,512 1,366 2.59 2.40 Total 36.7 36.1 1.32 1.26 3,863 3,728 1.73 1.70 * Value of debt represents total book value of mortgages in arrears. Secured provisions as a % of closing advances decreased to 0.15% (end 2006 0.19%). Improvements in the Loan to Value (LTV) of the impaired portfolio and roll rates have supported a reduction of provisions coverage to 8% (end 2006 10%). The average LTV of the impaired portfolio has decreased slightly to 55% (end 2006 57%) with the equivalent figures for the impaired Mainstream and Specialist portfolios at 49% (end 2006 52%) and 65% (end 2006 68%) respectively. Unsecured Impairments Impaired unsecured loans declined to #2,277m (end 2006 #2,411m), representing 12.86% of closing advances (end 2006 13.17%). Provisions as a % of closing advances increased to 9.83% (end 2006 9.29%), provisions coverage as a % of impaired loans being strengthened to 76% (end 2006 71%) and impairment losses in the first half of 2007 increasing to #690m (H1 2006 #520m). Our expectation is that this marks the peak of unsecured impairments and thus that the corresponding impairment charge will be lower in the second half. Personal Loans Impaired personal loans decreased to 16.2% of closing advances (end 2006 17.0%). Provisions as a % of closing advances have increased to 12.7% (end 2006 11.5%). Credit Cards Impaired loans and provisions have decreased to 15.0% (end 2006 15.4%) and 11.3% (end 2006 11.4%) of closing advances respectively. We are encouraged by stability in arrears roll rates, overdrawn limits and utilisation levels. 30.06.2007 30.06.2006 31.12.2006 % % % Credit utilisation(1) 27.2 27.9 28.1 Overdrawn limits(2) 7.0 6.9 6.9 Arrears roll rates(3) 57.5 56.5 58.1 (1) percentage of total available credit lines that are drawn down (restated to exclude unutilised expired cards). (2) percentage of accounts in excess of credit limit. (3) percentage of credit card balances in arrears that have worsened in the period. Bank Accounts Impaired assets have decreased slightly to 5.2% of closing advances (end 2006 5.3%) and provisions increased to 3.9% (end 2006 3.6%) of closing advances reflecting our continued focus on the acquisition of good quality new business. Business Banking For Business Banking, impaired assets remained at 5.3% (end 2006 5.3%) and provisions increased slightly to 3.6% (end 2006 3.5%) of closing advances respectively. This is in line with expectations given the current stage in the evolution of this business. Page 20 Non-operating Income Non-operating income of #57m (H1 2006 #48m) comprises realised gains of #29m (H1 2006 #26m) from the sale of shares in Rightmove, and profit on the sale and leaseback of premises of #28m (H1 2006 #22m). As at As at As at Balance Sheet and Asset Quality Information 30.06.2007 30.06.2006 31.12.2006 Loans & advances to customers #242.1bn #229.1bn #237.7bn Classification of advances* % % % Residential mortgages 92.4 92.5 92.1 Other personal lending: Secured Personal Loans 0.5 0.7 0.6 Unsecured Personal Loans 3.7 3.5 3.7 Credit cards 2.8 2.9 3.0 Banking 0.6 0.4 0.6 Total 100.0 100.0 100.0 * Before impairment provisions. Impairment provisions on advances #m #m #m Secured 340 446 408 Unsecured 1,740 1,659 1,700 Total 2,080 2,105 2,108 Impairment provisions as a % of closing advances % % % Secured 0.15 0.21 0.19 Unsecured 9.83 9.43 9.29 Total 0.86 0.92 0.89 Impairment provisions as a % of impaired loans % % % Secured 8 10 10 Unsecured 76 73 71 Total 32 32 33 Impaired loans #m #m #m Secured 4,183 4,380 4,047 Unsecured 2,277 2,288 2,411 Total 6,460 6,668 6,458 Impaired loans as a % of closing advances % % % Secured 1.86 2.07 1.84 Unsecured 12.86 13.00 13.17 Total 2.67 2.91 2.72 Risk weighted assets #109.6bn #112.2bn #112.4bn Customer deposits #151.3bn #135.9bn #144.6bn Operational Performance Lending and Deposit Growth Overall Retail lending increased by an annualised 4% to #242.1bn (end 2006 #237.7bn) and deposits increased by an annualised 9% to #151.3bn (end 2006 #144.6bn). Mortgages The first half mortgage performance has been heavily influenced by our retention strategy, which was introduced in the latter part of 2006 and designed to trade an element of gross share for improved principal repaid. Two initiatives were introduced to improve retention; paying procuration fees to intermediaries for mortgage transfers and a change in pricing for transfers and remortgage business. While the payment of procuration fees to Page 21 intermediaries has been largely successful, the change in pricing strategy has not. As anticipated, gross lending fell to #33.6bn (H1 2006 #35.2bn), resulting in an estimated market gross share of 19% (2006 21%). Principal repaid, however, did not improve as anticipated, continuing to reflect previous high levels of gross lending in addition to the current market trend towards shorter asset lives. Our estimated share of principal repaid was unchanged at 24% (2006 24%). As a consequence of the above, net lending of #4.3bn (H1 2006 #10.3bn) resulted in an estimated market share of 8% (2006 17%). However, having taken the corrective action to change the pricing of our remortgage business, volumes picked up significantly in the second quarter and we finished the half with a strong pipeline. In May and June, estimated net lending share was within our expected 15%-20% range and we anticipate operating within this range in the second half of 2007. Our stock of mortgage assets ended the half year at #224bn (end 2006 #219bn), representing a market share of 20% (end 2006 21%). The share of our new business which was taken up by specialist lending remained stable at 29%, slightly ahead of the industry average. Our reduced reliance on remortgage business has resulted in a marginal increase to our new business LTV ratio to 65% (end 2006 64%). Our overall book LTV fell slightly to 43% (end 2006 44%). Unsecured Personal Loans The personal loan gross lending market has remained flat year-on-year. We therefore continue to focus on the acquisition of better quality business at returns that reflect the associated risk, maintaining our estimated share of gross lending at 9% (H1 2006 9%). Balances have remained unchanged at #6.6bn (end 2006 #6.6bn), also maintaining our share of stock at 9%. Credit Cards In the first half of 2007, in line with our reduced appetite for Credit Card growth, we acquired 296,000 new accounts (380,000 including those acquired through our joint venture partners), resulting in an estimated market share of 10% of new credit card accounts. We continue to focus on higher quality segments of the market. Outstanding balances fell by 4% to #6.7bn (end 2006 #7.0bn) compared with a reduction of 2.7% in the market as a whole, reflecting the proactive tightening of credit availability to higher risk accounts. Retail Savings Savings deposits have grown by an annualised 11% to #131bn (end 2006 #124bn), slightly ahead of market growth, further consolidating our position as the UK's largest savings provider with an estimated share of Household Sector Liquid Assets of 16% (end 2006 16%). Our multi-brand strategy has enabled us to compete successfully whilst at the same time protecting margins. During the first half we delivered #1.2bn inflow into ISAs, helping to maintain our estimated share of stock at 21%. We also achieved an inflow of #1.1bn into Fixed Rate and #1.1bn into Internet/Telephone based accounts. Our product range continues to offer value and choice, ensuring we remain attractive to new and existing customers alike. This has enabled us to increase the size of our customer base, with over 140,000 new to franchise customers and over 900,000 new accounts opened in total during the first half. We continue to innovate with the launch of the Halifax Christmas Saver, and we were the first savings institution to announce plans to reunite dormant account holders with around #50m of their deposits in advance of the Government scheme that is expected to be introduced in 2009. Bank Accounts The launch of the Ultimate Reward Current Account, which offers a package of benefits in return for a monthly fee, coupled with our #100 switching incentive, has helped continue the sales momentum enjoyed last year. The competitiveness of our product range has been recognised by Your Money with the award of the Best Banking Provider 2007, and the Best Student Banking Provider 2007 for the second year running. We have acquired 516,000 (H1 2006 400,000) new Bank Accounts of which 77% (H1 2006 77%) were full facilities current accounts. We have an estimated market share of new current accounts of 24% (H1 2006 20%). Regulatory Enquiry into Bank Charges 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, the cost of such refunds amounted to #79m, which we have reported outside of our underlying results as they relate predominantly to fees charged in prior years. The heightened publicity has also resulted in a growing propensity for customers to Page 22 challenge current year banking fees more generally, the impact of which has been included in our underlying results. Business Banking We continue to win quality business banking accounts from the competition, with 7,300 switchers in the first half of 2007 (H1 2006 8,450). The focus on higher value new business has helped underlying income increase by 16% compared to the first half of 2006. We continue to see the SME market as an attractive opportunity for growth in England & Wales. We welcome the Competition Commission's forthcoming review of SME banking services. This is a market in which we are currently under-represented and thus we intend to press for measures that will also help stimulate more customer choice. Prospects We expect to build on the strong first half performances of our Savings and Banking businesses. We will also maintain our focus on growth in good quality Credit Cards and Unsecured Personal Loans. In Mortgages, the anticipated slow down in house prices, together with a subdued unsecured loan market and the anticipated benefits of Basel II in respect of secured assets, is likely to lead to continued competition and associated downward pressure on margins. In this environment, we will seek to optimise shareholder value through the careful management of our business mix in specific product segments and distribution channels. As in the recent past, this will see us pursue greater share in higher margin product segments and less share in lower margin segments. We will also seek to positively influence retention rates on existing business, but only in so far as such actions enhance value. As previously guided, we expect to trade within a 15%-20% net lending range for the second half of 2007. We remain confident in respect of our growth prospects across all of our Retail businesses despite the current headwinds being experienced in Mortgages and banking fees. Whilst recognising the need to choose the right time for growth in markets, our uniquely strong sales and distribution model gives us the ability to achieve profitable growth and market share. Page 23 CORPORATE Underlying profit before tax in Corporate increased by 54% to #1,243m (H1 2006 #809m). This performance demonstrates continued success in growing our non-interest income revenue streams. It also reflects selective asset growth under our Asset Class model, combined with continued cost discipline across the business. With continued competitive pressure on margins prevailing in many segments of the UK market, we retain an appropriate risk appetite in order to protect returns, and continue to see good opportunities for growth in both the UK and in Europe. As announced in March 2007, the Group's European Corporate business now forms part of the Corporate Division's results. 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 Underlying net interest income 992 1,003 961 1,964 Underlying non-interest income 922 348 705 1,053 Commitment fees 29 24 21 45 Guarantee fees 12 14 13 27 International fees 8 23 26 49 Transaction fees 30 33 30 63 Underwriting fees 87 58 35 93 Other 77 45 59 104 Fees and commission income 243 197 184 381 Fees and commission expense (17) (19) (4) (23) Profit on sale of investment securities 253 69 155 224 Operating lease rental income 646 379 642 1,021 Other operating income 187 48 111 159 Share of profits of associates and jointly 108 19 137 156 controlled entities Operating lease depreciation (493) (287) (509) (796) Impairment on investment securities (5) (58) (11) (69) Underlying net operating income 1,914 1,351 1,666 3,017 Underlying operating expenses (436) (366) (446) (812) Staff (259) (206) (261) (467) Accommodation, repairs and maintenance (3) (3) (1) (4) Technology (8) (10) (6) (16) Marketing and communication (16) (14) (18) (32) Depreciation: Property and equipment and intangible assets (23) (13) (18) (31) Other (52) (42) (55) (97) Sub total (361) (288) (359) (647) Recharges: Technology (26) (23) (27) (50) Accommodation (27) (25) (28) (53) Other shared services (22) (30) (32) (62) Underlying operating profit before provisions 1,478 985 1,220 2,205 Impairment losses on loans and advances (235) (176) (253) (429) Underlying profit before tax 1,243 809 967 1,776 Net interest margin 2.12% 2.37% 2.13% 2.25% Impairment losses as a % of average advances 0.25% 0.22% 0.29% 0.50% Cost:income ratio 22.8% 27.1% 26.8% 26.9% Page 24 Operating Income and Margins Underlying net operating income increased by 42% to #1,914m (H1 2006 #1,351m). Underlying net interest income fell by 1% to #992m (H1 2006 #1,003m) and underlying non-interest income increased by 165% to #922m (H1 2006 #348m). Underlying net interest income growth is distorted by the inclusion of Lex, now a wholly owned subsidiary but previously reported as a joint venture until 31 May 2006. Adjusting for Lex, underlying net interest income on a like-for-like basis increased by 2%. A table has been included below setting out the overall impact of Lex on the Income Statement. Lending margins have narrowed slightly due to the high level of liquidity available in the market, but the impact on the net interest margin has been offset by improvements in deposit margins. Movement in margin Basis points Net interest margin for the half year ended 31 December 2006 213 Lending margins (4) Deposit margins 2 Capital earnings 1 Net interest margin for the half year ended 30 June 2007 212 Net fees and commission income increased by 27% to #226m (H1 2006 #178m) mainly arising from an increase in underwriting fees. Net operating lease income increased by 66% to #153m (H1 2006 #92m), primarily as a result of the inclusion of Lex as a wholly owned subsidiary. Corporate investment portfolio revenues (i.e. profits on the sale of investment securities, other operating income, share of profits of associates and jointly controlled entities, less impairment on investment securities) increased to #543m (H1 2006 #78m). Against the #392m recorded in the second half of 2006, the increase was #151m or 39%. Profits on the sale of investment securities increased to #253m (H1 2006 #69m), mainly reflecting realisations within the Fund Investment portfolio. Other operating income increased to #187m (H1 2006 #48m), as a result of profitable disposals from our Joint Venture portfolio as well as revenues across other asset classes. Profits from associates and jointly controlled entities increased to #108m (H1 2006 #19m), although lower than recorded in the second half of 2006. As at 30 June 2007, the book value of the investment portfolio increased by an annualised 23% to #2.9bn (end 2006 #2.6bn) and unrealised gains in the investment portfolio remain broadly unchanged from the beginning of the period. Operating Expenses The cost:income ratio at 22.8% (H1 2006 27.1%) continues to improve as a result of strong income growth and our focus on cost discipline, whilst ensuring that an appropriate level of investment is made in the business. Underlying operating expenses increased by 19% to #436m (H1 2006 #366m), although on a like-for-like basis excluding Lex, the increase was 13% as a result of performance based remuneration and continued investment in enhanced risk management capabilities. Credit Quality and Provisions Impaired loans as a % of advances increased to 1.58% (end 2006 1.30%), mainly in our traditional commercial book where our assessment of a number of small credits has been reviewed in the light of the current interest rate environment. Impairment losses increased by 34% to #235m (H1 2006 #176m) relative to the first half last year, although this charge was 7% less than the second half of 2006 (H2 2006 #253m). Impairment losses as a % of average advances moved to 0.25% (H2 2006 0.29%, H1 2006 0.22%) whilst impairment provisions as a % of impaired loans decreased to 49% (end 2006 63%). Page 25 Lex Vehicle Finance ('Lex') On 31 May 2006, Lex became a wholly owned subsidiary, having previously been a 50% owned joint venture. The table below shows the results of Lex which have been included in the Corporate 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 (32) (4) (33) (37) Operating lease rental income 287 39 291 330 Operating lease depreciation (206) (28) (207) (235) Profits from associates and jointly 8 8 controlled entities Underlying operating expenses (27) (3) (28) (31) Underlying profit before tax 22 12 23 35 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 #95.8bn #86.0bn #89.6bn Impairment provisions on advances #748m #702m #735m Impairment provisions as a % of closing advances 0.78% 0.82% 0.82% Classification of advances*: % % % Agriculture, forestry and fishing 1 1 1 Energy 2 2 2 Manufacturing industry 5 6 5 Construction and property: Property investment 19 18 17 Property development 6 6 6 Housing associations 2 3 3 Housebuilders 2 3 2 Other property 6 4 6 Hotels, restaurants and wholesale and retail trade 10 13 11 Transport, storage and communication 8 10 7 Financial 6 4 5 Other services 12 11 15 Individuals 3 3 3 Overseas residents 18 16 17 100 100 100 Impaired loans #1,518m #1,157m #1,163m Impaired loans as a % of closing advances 1.58% 1.35% 1.30% Impairment provisions as a % of impaired loans 49% 61% 63% Risk weighted assets #111.9bn #100.7bn #106.5bn Customer deposits #41.9bn #41.1bn #39.5bn * Before impairment provisions. Page 26 Operational Performance Our Asset Class model brings focus and specialisation to diverse asset classes and further reinforces our ability to form deep, lasting customer relationships, with an overall view to creating competitive advantage. Our strategy allows clients to benefit from the combination of expertise, versatility and long term commitment. In the first half of 2007, pre-sell down lending increased at an annualised rate of 22%. Our cautious approach at this stage of the cycle complements our focus on the quality of our lending and returns rather than volume, and has resulted in lending growth after sell downs of an annualised 14% to #95.8bn (end 2006 #89.6bn). Customer deposits increased by an annualised 12% to #41.9bn (end 2006 #39.5bn). Real Estate Real Estate accounts for 31% (end 2006 31%) of our lending book. The real estate market continues to grow as a result of high liquidity levels and stability of UK and European property values. New business is well spread, predominantly across the UK, and margins have been protected through leveraging our strong reputation which is built on sector expertise and risk understanding. Commercial Commercial business accounts for 23% (end 2006 23%) of our lending book. It is principally focused on relationship banking for UK businesses with an annual turnover of greater than #1m. It offers a differentiated banking proposition in the UK market place, challenging the long held dominance of the Big 4. In the second half of 2007, we plan to extend this differentiation by refining our operational model to improve our market facing capability, complemented by an enhancement of our product offering. Joint Ventures 12% (end 2006 11%) of our lending book supports transactions with associated and joint venture partners, predominantly in the property, house builder and hotel sectors. These sectors have seen good growth in the first half of 2007. Our approach remains very selective, with a focus on partners with good track records across varying economic environments. Integrated, Structured, Acquisition Finance ('ISAF') Some 9% (end 2006 10%) of our lending book supports individual transactions in the private equity market, which has continued to enjoy strong growth in the first half of 2007, particularly in Europe. High levels of liquidity have resulted in some downward pressure on margins and increased leverage levels but our approach remains very selective and weighted towards the highest quality private equity houses. We also continue to build in a significant level of protection through covenants and by selling down to hold levels with which we are comfortable. The average hold level across the portfolio is below #25m. Our strategy in Integrated Finance in 2007 has been to seek robust businesses with significant downside defensibility and well spread earnings, run by excellent management teams. ISAF continued to benefit in a healthy market for exits with significant gains and realisations alongside active investment across the equity businesses and an attractive pipeline of new business opportunities. Specialised Industry Finance (formerly Infrastructure, Housing and Oil & Gas) This part of our business accounts for 16% (end 2006 16%) of our lending book. In the first half of 2007, our Infrastructure and Oil & Gas businesses have performed well, although the markets experienced high liquidity and pressure on margins. Expansion of our presence in European markets offers the opportunity for additional growth and in the second half of 2007 we will fully integrate parts of our European product into the existing structure together with the asset finance transport sectors, thus providing an improved product and service offering to customers. Asset & Motor Finance The Asset & Motor Finance asset class accounts for 9% (end 2006 9%) of our lending book and continues to experience steady growth, consolidating its position as a leader within its chosen markets. The inclusion of Lex as a wholly owned subsidiary together with our other asset and motor activities brings a strong cohesive proposition upon which to build. In the first half of 2007, margin pressures were evident but the opportunities for additional profitable growth continue to be available. Further investment in systems and process engineering present major opportunities. Page 27 Deposits Deposits increased by an annualised 12% to #41.9bn (end 2006 #39.5bn). This strong growth has restored our balances to pre-June 2006 levels when we took the decision to price away volatile, expensive deposits. As a consequence, our deposit book is now more stable and the margins have improved. In the second half of 2007, we have a number of initiatives planned to enhance our position in England & Wales and to increase our penetration of certain niche markets. Prospects Our strategy is one of measured growth, strong returns, and sound credit quality, with a focus on increasing non-interest income in order to generate significant and sustainable shareholder value. We will continue to challenge competitors in our chosen markets by offering an informed and more integrated approach to customers, through our asset class strategy. We continue to focus on increasing our market share in the mid value sector within England & Wales and in Europe. In Scotland we are market leaders across all our target markets, a position we continue to build on. Our Integrated, Structured and Acquisition Finance and Joint Venture businesses, which provide a 'one-stop' for senior debt, mezzanine and equity finance, continue to generate attractive growth and returns. In our Specialised Industry Finance business, we continue to work closely with the public sector in the provision of social and economic infrastructure. Each of these businesses has good expansion prospects in Europe. Revenues from our investment portfolio have been exceptionally strong in the first half of 2007, and may not be repeated in full in the second half. Nonetheless, we remain confident that overall 2007 will see a substantial increase in the contribution from our investment portfolio and that the portfolio is well positioned to sustain its contribution to earnings in future years. With the prospect of higher interest rates, our underwriting and pricing practices are well positioned should there be a turn in the corporate credit cycle. Given the potential for reduced liquidity in the secondary markets, we continue to underwrite and price our originating activity on the assumption that we would be comfortable holding the business on our balance sheet if required to do so. Our differentiation from others in our chosen markets emanates from two core themes: the importance of developing and deepening relationships with both customers and introducers, and the continual drive to be innovative and entrepreneurial in our dealings with our target markets. The development of these core themes gives us confidence that the positive trends evident in the first half of 2007 will continue for the rest of the year. Page 28 INSURANCE & INVESTMENT Underlying profit before tax in Insurance & Investment increased by 10% to #316m (H1 2006 #287m). General Insurance profits fell to #107m (H1 2006 #163m) reflecting the January storms and June flooding, which together gave rise to an estimated claims cost of #80m. Investment profit increased by 69% to #209m (H1 2006 #124m) benefiting from the growth in profits from the in-force book and increased contributions from new business. On the Full Embedded Value ('EV') basis, underlying profit before tax in Insurance & Investment was #452m (H1 2006 #435m), #136m (H1 2006 #148m) higher than reported under IFRS. This equates to a 2.5p (5%) uplift to Group underlying earnings per share. Balance sheet embedded value, net of tax for the UK Investment Business was #6,681m (end 2006 #6,384m) and was #2,735m (end 2006 #2,525m) higher than reported under IFRS. Investment sales increased by 11% to #1,004m APE (Annual Premium Equivalent), whilst General Insurance sales (excluding Paymentshield) fell 1% to #868m GWP (Gross Written Premium). 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 (50) (42) (51) (93) Underlying non-interest income 775 747 747 1,494 Fees and commission income 30 64 27 91 Fees and commission expense (412) (415) (369) (784) Change in value of in-force assurance business 124 117 62 179 Net income from long term business 549 448 499 947 Investment earnings on surplus assets attributable 54 59 54 113 to shareholders using long term assumptions Net earned premiums on General Insurance ('GI') 631 630 685 1,315 contracts Net GI claims incurred and net change in (246) (174) (224) (398) GI contract liabilities Investment and other operating income in GI 42 37 31 68 Share of profits/(losses) of associates and 3 (19) (18) (37) jointly controlled entities Underlying net operating income 725 705 696 1,401 Underlying operating expenses (409) (418) (402) (820) Staff (179) (170) (189) (359) Accommodation, repairs and maintenance (10) (10) (10) (20) Technology (19) (18) (16) (34) Marketing and communication (23) (16) (23) (39) Depreciation: Property and equipment and intangible assets (29) (27) (24) (51) Other (95) (131) (88) (219) Sub total (355) (372) (350) (722) Recharges: Technology (23) (22) (23) (45) Accommodation (18) (17) (18) (35) Other shared services (13) (7) (11) (18) Underlying profit before tax 316 287 294 581 Underlying profit before tax (IFRS basis) 316 287 294 581 Additional contribution from new business 255 239 235 474 Lower contribution from existing business (123) (94) (128) (222) Additional investment earnings on net assets 4 3 7 10 Increase in underlying profit before tax 136 148 114 262 Underlying profit before tax (Full EV basis) 452 435 408 843 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 contracts, net change in insurance contract liabilities and change in unallocated surplus into a single caption called net income from long term business. Page 29 General Insurance Business Financial Performance General Insurance profit of #107m is #56m (34%) lower than the first half of 2006 (H1 2006 #163m) reflecting the cost of two major weather events in the first half of 2007. The January wind storms resulted in #20m of claims costs whilst the heavy rains and resultant floods in June have cost an estimated #60m. Underlying non-interest income fell by #47m (22%) to #167m (H1 2006 #214m) with business growth being more than offset by the costs of the two major weather events detailed above. Underlying operating expenses increased by 11% to #71m (H1 2006 #64m) reflecting additional investment in marketing and sales resource as we seek to capitalise on growth opportunities in household insurance. 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 11 13 14 27 Underlying non-interest income 167 214 199 413 Fees and commission income 21 23 (7) 16 Fees and commission expense (288) (288) (258) (546) Net earned premiums on General 631 630 685 1,315 Insurance contracts Change in value of in-force assurance business 4 5 10) (5) Investment and other operating income 42 37 31 68 Net General Insurance claims incurred and (246) (174) (224) (398) net change in insurance contract liabilities Share of profits/(losses) of associates and 3 (19) (18) (37) jointly controlled entities Underlying net operating income 178 227 213 440 Underlying operating expenses (71) (64) (72) (136) Underlying profit before tax 107 163 141 304 Operational Performance General Insurance sales, as measured by GWP, fell by 1% to #868m (H1 2006 #874m excluding sales through Paymentshield which was sold in November 2006). Both Motor (up 9%) and Household (up 8%) delivered strong performances offset by lower sales in Repayment Insurance (down 9%). General Insurance Sales Gross Written Premiums 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 Household 260 241 284 525 Repayment: 1st party 254 272 256 528 3rd party 186 212 193 405 Motor 152 140 158 298 Other 16 9 21 30 Total excluding Paymentshield 868 874 912 1,786 Paymentshield 45 63 108 Total 868 919 975 1,894 Page 30 Household Insurance After many years of benign claims experience, competition has continued to intensify during the first half of 2007, putting downward pressure on premium rates especially in direct channels. Growing our share of the household insurance market remains an important strategic priority allowing us to leverage our leading mortgage market position. We have therefore increased our investment in marketing activity to raise product and brand awareness and are already seeing the benefits with policy sales increasing by 20% bringing our total policies in force to 2.7m (end 2006 2.6m excluding Paymentshield). Despite pricing pressures, sales grew by 8% to #260m GWP (H1 2006 #241m excluding Paymentshield) reflecting the strength of our branch franchise where sales grew 31%, representing 37% of total new business in the period. Direct telephone sales volumes also grew strongly (up 16%). Claims experience has been significantly affected by the January and June weather events (currently estimated at a combined cost of #80m). As a result, the Household Insurance loss ratio increased to 79% (H1 2006 45%) with benign claims conditions benefiting the prior year result. Excluding the impact of these weather events the loss ratio would have been in line with the first half of 2006. The recent flooding in south and central England will give rise to further significant claims. We are still assessing the full impact but our current expectation is that the cost will be modestly higher than that for the June floods. These weather events again provide examples of the strength of our industry leading claims management service, which continues to be a source of competitive advantage, enhancing the customer experience and at the same time, through our speed of response, driving down claims costs. Repayment Insurance Sales of Repayment Insurance fell by 9% to #440m GWP (H1 2006 #484m) primarily as a result of lower unsecured personal loan and credit card volumes, with sales to Group customers down by 7% to #254m (H1 2006 #272m). In February, the OFT announced their decision to refer Payment Protection Insurance ('PPI') to the Competition Commission ('CC'). The CC has now commenced its investigation which will be concluded in 2008. We are proactively engaging with the CC to highlight the extensive improvements in transparency which the FSA's intervention has brought to the market, and to demonstrate the value of PPI products to customers. Motor Insurance Sales of Motor Insurance, at esure, increased by 9% to #152m GWP (H1 2006 #140m). Sales have increased across our motor brands, with the increased prominence of web-based business being an important factor. esure's state of the art technology and internet infrastructure, together with the strength of its brands, makes us ideally placed to benefit from increasing levels of internet business. The Sheilas' Wheels brand continues to go from strength to strength, while sales of esure and Sainsbury's products also increased significantly. Strong price competition has continued and we have not yet seen evidence of a sustained rise in premium rates amongst our main competitors. Page 31 Investment Business Financial Performance Underlying profit before tax in the Investment Business increased by 69% to #209m (H1 2006 #124m). Underlying net operating income increased by 14% to #547m (H1 2006 #478m) whilst underlying operating expenses decreased by 5% to #338m (H1 2006 #354m) generating strong positive operating "jaws". Underlying profit before tax on the Full EV basis increased by 27% to #345m (H1 2006 #272m). 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 (61) (55) (65) (120) Debt financing costs (64) (64) (64) (128) Other net interest income 3 9 (1) 8 Underlying non-interest income 608 533 548 1,081 Fees and commission income 9 41 34 75 Fees and commission expense (124) (127) (111) (238) Change in value of in-force assurance business 120 112 72 184 Net income from long term business* 549 448 499 947 Investment earnings on surplus assets attributable 54 59 54 113 to shareholders using long term assumptions Underlying net operating income 547 478 483 961 Underlying operating expenses (338) (354) (330) (684) Core operating expenses (276) (289) (272) (561) Overheads associated with development activity (24) (26) (30) (56) Development expenditure (38) (39) (28) (67) Underlying profit before tax 209 124 153 277 Underlying profit before tax (IFRS basis) 209 124 153 277 Additional contribution from new business 255 239 235 474 Lower contribution from existing business (123) (94) (128) (222) Additional investment earnings on net assets 4 3 7 10 Increase in underlying profit before tax 136 148 114 262 Underlying profit before tax (Full EV basis) 345 272 267 539 * "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. Under IFRS, insurance contracts (i.e. investment business which carries significant insurance risk as well as 'with-profit' contracts) are accounted for on an embedded value ('EV') basis, whereas investment contracts (i.e. investment business which does not carry significant insurance risk) are accounted for under IAS 39. Consequently, on an IFRS basis the Income Statement incorporates two very different profit recognition patterns depending on the nature of the contract. The table below sets out the contribution from each type of contract. 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 insurance contracts* 306 253 227 480 Contribution from investment contracts* 29 48 48 Development expenditure (38) (39) (28) (67) Overheads associated with development activity (24) (26) (30) (56) Debt financing cost (64) (64) (64) (128) Underlying profit before tax 209 124 153 277 * The other income and costs line item previously disclosed separately (#(7)m for the full year 2006) has been allocated to the contribution from insurance contracts and the contribution from investment contracts line items. Page 32 Insurance Contracts (accounted for on an EV basis) The contribution from insurance contracts increased by 21% to #306m (H1 2006 #253m). The contribution from new business increased by 35% to #142m (H1 2006 #105m) reflecting continued growth in insurance contract sales (up 14%), and in particular, strong growth in sales of higher margin bonds sold in our Bancassurance channel. The expected contribution from existing business increased by 6% to #76m (H1 2006 #72m) as a result of the growth of the in-force book. Actual vs expected experience was #34m (H1 2006 #17m) reflecting the partial recognition of the positive impact of changes to non-unit reserving due to the FSA Policy Statement PS06/14, partly offset by adverse persistency experience. 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 76 72 63 135 Actual vs expected experience 34 17 (1) 16 110 89 62 151 Contribution from new business 142 105 111 216 Investment earnings on surplus assets attributable 54 59 54 113 to shareholders using long term assumptions Contribution from insurance contracts 306 253 227 480 Investment Contracts (accounted for on an IAS 39 basis) Under IAS 39, profit recognition on investment contracts is deferred to later years with a loss typically recorded in the year of sale. The contribution from investment contracts increased to #29m (H1 2006 #nil) reflecting a 26% increase in the contribution from existing business to #153m (H1 2006 #121m) and a modest 2% increase in initial profit strain from new business to (#124m). 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 153 121 156 277 Contribution from new business (124) (121) (108) (229) Contribution from investment contracts 29 48 48 Full EV Basis Supplementary Information To assist in the understanding of the underlying performance and value generation of the Investment Business, supplementary information is set out on pages 76 to 79, providing Income Statement and Balance Sheet information for our UK Investment Business on a consistent EV accounting basis for both insurance and investment contracts. We refer to this basis as the 'Full EV' basis. Page 33 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 Half year Half year Half year Year (Full EV basis) ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 % APE % APE % APE % APE Bancassurance 34 33 33 33 Intermediary 10 9 10 10 Wealth Management 38 35 36 36 Total 29 26 27 27 Life & Pensions 29 27 25 26 Mutual Funds 27 23 36 29 Total 29 26 27 27 New business profitability increased to 29% (H2 2006 27%, 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 as volumes have grown. The rise in Intermediary margins to 10% reflects our increasing focus on profitable products and segments in this channel. Operational Performance Investment sales increased by 11% to #1,004m APE (H1 2006 #904m) reflecting strong growth in Bancassurance, up 16%, and Wealth Management, up 32%, partially offset by a 10% fall in Intermediary. 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 30.06.2007Total 30.06.2006 30.06.2006 30.06.2006 30.06.2006 Single Annual APE Single Annual Total Total Total APE #m #m #m #m #m #m #m #m Investment Bonds 4,101 4 4,105 414 2,942 9 2,951 303 Individual Pensions 1,393 115 1,508 254 1,020 126 1,146 228 Group Pensions 49 52 101 57 38 66 104 70 Annuities 167 167 17 130 130 13 Protection 2 23 25 23 29 20 49 23 Mutual Funds 945 144 1,089 239 1,023 165 1,188 267 Total 6,657 338 6,995 1,004 5,182 386 5,568 904 Bancassurance 3,460 193 3,653 539 2,459 218 2,677 464 Intermediary 1,528 99 1,627 252 1,540 125 1,665 279 Wealth Management 1,669 46 1,715 213 1,183 43 1,226 161 Total 6,657 338 6,995 1,004 5,182 386 5,568 904 Insurance Contracts** 2,238 31 2,269 255 1,794 45 1,839 224 Investment Contracts 4,419 307 4,726 749 3,388 341 3,729 680 Total 6,657 338 6,995 1,004 5,182 386 5,568 904 * APE is calculated as annual premiums plus 10% of single premiums. ** Accounted for on an EV basis under IFRS reporting. Page 34 Movement in assets under management The following table analyses the movement in assets under management. Half year Half year Half year ended ended ended 30.06.2007 30.06.2006 31.12.2006 #bn #bn #bn Opening assets under management 76.1 68.1 71.5 Premiums (new and existing business) 7.2 6.4 5.8 Maturities & claims (0.9) (0.4) (2.0) Lapses (i.e. surrenders and repurchases) (4.7) (3.9) (3.5) Net inflow of business 1.6 2.1 0.3 Investment return (net of charges) 2.0 1.3 4.3 Increase in assets under management 3.6 3.4 4.6 Closing assets under management 79.7 71.5 76.1 Lapse rate (i.e. annualised lapses as % of average assets) 12% 11% 9% Assets under management increased by #3.6bn (an annualised 10%) to #79.7bn (end 2006 #76.1bn). Premiums increased by 13% to #7.2bn (H1 2006 #6.4bn) whilst lapses also increased, primarily in the Intermediary channel as a result of higher lapses on with-profit bonds. 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. Bancassurance Sales through the Bancassurance channel increased by 16% to #539m APE (H1 2006 #464m), a strong performance reinforcing our position as the clear No. 1 bancassurer in the UK with simple value for money 'no load' products provided alongside full financial advice, offering our customers a compelling proposition. Leveraging the scale and operational benefits from manufacturing the majority of our products remains at the heart of our model. We have seen growth in sales through both of our Bancassurance sales forces. Sales through our mass market branch based Personal Financial Advisers ('PFA') increased by 7% to #353m (H1 2006 #331m) with sales in our Bank of Scotland Investment Service ('BOSIS') high net worth sales force up by 15% to #117m (H1 2006 #102m). We believe that our sales forces remain the most productive in the market, with productivity again increasing to #710,000 APE per active PFA in our branches (H1 2006 #700,000) and #880,000 APE (H1 2006 #850,000) per BOSIS client manager. Bond sales have been very strong in our Bancassurance channel, increasing by 67% to #277m (H1 2006 #166m), with the successful re-launch of our inheritance tax proposition being an important factor. This has more than offset a fall in sales of mutual funds, which partly reflected lower pre-tax year end sales of ISAs. Intermediary We are refocusing our strategy in the Intermediary channel around individual pensions and investment business, our core areas of strength. As a result, we ceased writing new Group Pensions business in April 2007. As expected, these changes have impacted sales in the short term, which fell by 10% to #252m (H1 2006 #279m). Our primary objective is to focus on increasing profitability and we have made progress in this regard, with new business margins rising to 10% APE (H1 2006 9%). One of our key objectives in the Intermediary channel is to deliver continued improvements in service quality and to increase utilisation of e-processing so as to optimise both service standards and efficiency. Excellent progress continues to be made in this regard with Clerical Medical winning a five-star award in the Investment Providers and Packagers category of the FT Adviser Online Service Awards in June 2007. Page 35 Wealth Management Sales at St. James's Place ('SJP') have continued to grow strongly, increasing by 32% to #213m (H1 2006 #161m). This follows two years of exceptional growth, emphasising the strength of the business model in realising the significant market opportunities presented by increasing wealth alongside advisory opportunities following Pensions 'A' Day. Sales of pensions have been particularly strong, up 45%. Fund performance and business retention continue to be strong, with funds under management up an annualised 25% to #17.3bn (end 2006 #15.4bn). Partner numbers increased to 1,187 (end 2006 1,157). Prospects Our objective remains unchanged, namely to become the UK's leading insurance and investment group. Our long term ambition is to grow market share in all the sectors in which we operate but in doing so our emphasis will continue to be on profitable growth. Our strategy is based on the core strengths of our existing multi-channel, multi-brand operating model, leveraging the strength of the Group's brands and customer base, but also further extending our presence in 3rd party channels. In General Insurance, the medium term prospects for our combined personal lines businesses remain strong, subject to a degree of regulatory uncertainty until the Competition Commission enquiry reports. We will continue to leverage our market leading position in mortgages to target further growth in Household Insurance, through the development of our product propositions and brand offerings. In Motor Insurance, we will utilise the strength of the esure, Sheilas' Wheels and Sainsbury's brands alongside our efficient internet infrastructure to deliver profitable growth. In Investment, demographic trends and increasing wealth point to significant long term growth potential. Our multi-brand, multi-channel operating model and distribution strength represent a clear source of competitive advantage. In our mass market Bancassurance channel, our focus is on growing capacity through the recruitment and retention of high quality advisers whilst developing direct access to our one million strong existing customer base. We will continue our focused strategy targeting profitable segments of the Intermediary channel and aligning our products and broker consultants accordingly. Finally, we will continue to focus on exploiting the significant growth opportunities in the wealth sector through both SJP and BOSIS. Page 36 This information is provided by RNS The company news service from the London Stock Exchange END IR PBMBTMMTMMFR
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