RNS Number:1140O
Abbey National PLC
30 July 2003
CHIEF EXECUTIVE'S REVIEW
Overview
Abbey National announced a major change in strategic focus at the 2002 full year
results presentation. This change, to create a 'pure-play' UK personal financial
services business (PFS), with businesses outside this remit to be managed for
value and capital release in the Portfolio Business Unit (PBU), is reflected in
the presentation of 2003 interim results. These include results for PFS on a
trading basis, for which the definition and explanation of its use is set out in
the Basis of Results Presentation.
Our priorities for 2003 were to substantially reduce the risk and assets in the
PBU, to tackle the cost base and to build the foundations for successful
delivery of our PFS strategy. We are on track.
In summary, the main financial and business trends for the half-year to 30 June
2003 include:
* a PFS trading profit of #588 million (2002: #663 million restated). This
is better than indicated in the pre-close statement 6 weeks ago. It is down
11% on the first half of 2002, reflecting lower life assurance earnings, but
up 6% on the second half of last year. The PFS profit before tax was #351
million (2002: #396 million);
* an overall loss before tax of #144 million (2002: profit of #412 million
restated) reflecting the successful and rapid reduction in PBU assets,
combined with PFS related restructuring charges;
* a 57% reduction in PBU assets, from #60.0 billion to #25.7 billion, across
all ratings categories;
* Banking and Savings profit before tax up marginally on the same period
last year, despite the forecast decline in retail banking spread to 1.61%
(Half 2 2002: 1.75%);
* robust new business flows, with a 45% increase in gross and 73% increase
in net mortgage lending. As forecast, investment sales volumes were
significantly weaker;
* strong credit quality with further improvements in arrears and
repossessions in 2003 to date;
* #46 million of estimated cost savings in Half 1 2003, with actions already
taken to achieve estimated annualised savings of #125 million;
* a significant PBU capital release, increasing the Tier 1 ratio to 10.9%
(December 2002: 9.2%); and
* an interim dividend of 8.33 pence, consistent with a third of the 25 pence
base established at the full year 2002 results.
The transformation of the PFS business requires a fundamental root and branch
change, and a substantial amount of progress has been achieved in just 150 days,
which we summarise in this statement. The tangible improvements we are making
will be visible in 2004. We are ahead of plan in winding down the PBU, and
whilst this increases our confidence in delivery, we remain fully aware of the
execution challenges that remain, both in the PBU and PFS.
Financial and Business Highlights - PFS
PFS trading profit before tax of #588 million was down 11% on the same period
last year (2002: #663 million restated), equating to a PFS trading earnings per
share of 24.5 pence. After restructuring costs and other charges explained
below, PFS profit before tax was #351 million (2002: #396 million).
The main drivers of the year on year trading movement were:
* reduced earnings from the Life businesses as a result of the 2002 embedded
value charges and rebasing, and lower new business levels following the
closure of the with profits funds, combined with a #50 million adverse swing
in experience variances and assumption changes;
* reduced General Insurance earnings reflecting a fall in policies in force
and lower retail margin; and
* Banking and Savings profits marginally up, reflecting mortgage lending
growth, a relatively stable 'back book' and progress towards profitability
in cahoot, offsetting a 21 basis points reduction in the retail banking
spread to 1.61%. A further spread reduction is expected in the second half
of the year.
Cost growth was substantially offset by savings made through the cost reduction
programme - with PFS trading expenses down 7% on the second half of 2002, and up
1% on Half 1 2002. Strong credit quality, with a 31% reduction in 3 month plus
arrears cases, has driven a reduction in the first half lending provision charge
to #64 million (2002: #76 million).
In terms of PFS new business flows, the highlights include:
* a 45% increase in gross (#12.9 billion) and 73% increase in net (#3.8
billion) mortgage lending versus the same period last year, equating to a
market share of 10.6% gross and 9.1% net of repayments. Capital repayments
at #9.1 billion equate to approximately 11.5% of the market, in line with
our 11.5% share of stock;
* net deposit inflows of #1.5 billion (2002: #0.1 billion);
* opening over 200,000 new bank accounts, with Abbey National branded
in-credit balances now totalling #4.0 billion, up 23% on the same period
last year, and the issue of 151,000 new credit card accounts;
* a drop in investment and protection sales (annual premium equivalent),
excluding the impact of withdrawing from the with profits market, of 26%.
Whilst sales are down in most product categories reflecting equity market
volatility and investor concerns, sales of protection products are up 11%;
and
* a year on year fall in the General Insurance policies in force, despite
new policy sales of 257,000, as a result of lower renewals.
Charges relating to the PFS business are also being made (as flagged in the
pre-close statement), relating principally to the impact of tax changes on the
Scottish Provident contingent loans (#80 million), the expensing of previously
capitalised costs (#57 million), other embedded value charges and rebasing in
the Life funds (#22 million) and costs associated with the cost and
restructuring programmes (#54 million).
Financial and Business Highlights - PBU
Total PBU assets of #25.7 billion are 57% lower than at the start of the year,
with a corresponding decrease in risk weighted assets of 46% and notional
capital release to date of approximately #0.8 billion. Progress includes:
* a 79% reduction in the debt securities portfolio to #6.9 billion, with the
associated unrealised mark to market deficit reduced from #664 million at
the year end to #180 million as at end June;
* a balanced reduction across all rating categories, including substantial
reductions in single name counterparty risks;
* completion of the sale of #4.8 billion of First National assets to GE
Consumer Finance realising a surplus to net tangible assets of around #200
million; and
* the decision to close First National Motor Finance, Scottish Provident
Ireland and Scottish Mutual International to new business.
Whilst good progress has already been made, sizeable risk exposures and
unrealised mark to market deficits on certain portfolios still remain. The most
problematic areas are in direct and asset backed securities repackaged to
airline leases and to US and UK power project loans that, whilst potentially
stabilising, still appear more challenged today than at the year-end. As a
result, the expected cost of exit overall has not changed materially, although
it is now anticipated that a substantial majority of the assets will have been
sold by the end of 2004.
In terms of the losses incurred in the first six months, these are balanced by a
comparable reduction in unrealised mark to market deficits and reflect the
accelerated disposal progress achieved to date.
The PBU pre tax loss of #(495) million includes losses on asset sales (#568
million including #196 million of provisioning) incurred in reducing the
Wholesale asset portfolios.
Strategic update - Personal Financial Services
We are convinced that we can improve the underlying performance of Abbey
National, and that there is scope to differentiate through service, advice and
choice, to be underpinned by an efficient cost base and competitive pricing. All
our plans and actions are tested against our desired brand positioning and our
economic model, focusing on profitability, acquisition cost and retention.
We can report good progress against the priorities highlighted at the 2002 full
year results presentation, including:
* the appointment of Priscilla Vacassin as Human Resources Director and
Angus Porter as Customer Propositions Director in June and July
respectively;
* initiation of the Customer Board, chaired by Angus Porter, with external
members, namely Vittorio Radice and Waheed Alli, bringing together the three
customer-facing divisions;
* a complete review of the brand and product portfolios;
* the successful pilot of the CRM software 'One on One' in branches,
telephone centres and head office sites, with rollout now underway and
around 1,700 users already trained and online;
* the identification of service issues, such as within certain contact
centres, with corrective action underway;
* significant changes already made to recruitment, induction and training
throughout our sales channels, including appointing recruitment specialists
and re-introducing mandatory induction programmes;
* a substantial reorganisation of customer-facing branch staff, integral to
the new advice model, including plans to increase customer-facing staffing
levels by around 450 FTEs, and significant training and transitioning of
staff into new roles;
* the announcement of 6 site closures, and progress made in terms of the
sourcing and systems review; and
* actions already in place to achieve estimated annualised cost savings of
#125 million.
The scope of the changes being made, and momentum of change in the PFS business
is significant, and a credit to the people in the business who are central to
the progress being delivered.
Capital and Dividends
Capital ratios have improved strongly, reflecting the reduction in PBU risk
weighted assets, to give a Tier 1 ratio of 10.9% and Equity Tier 1 of 7.6% (2002
year end figures were 9.2% and 6.4% respectively).
The interim dividend of 8.33 pence (Interim 2002: 17.65 pence), is in line with
the 25 pence starting point established for the full year 2002, and Abbey
National's desire to maintain its historical target split of interim and final
dividend of approximately one third / two thirds. The ongoing dividend policy
remains as stated at the 2002 full year results.
Subject to market conditions, we remain confident of meaningful capital release
from the wind-down of the PBU. As flagged in the pre-close statement, the extent
to which this capital will be needed by the ongoing PFS businesses will be
influenced significantly by the Basel II, International Accounting Standards and
related regulatory and accounting changes currently being developed
industry-wide. These are discussed in more detail in this statement, but the
overall position should become clearer in a similar timeframe to the achievement
of certainty on the quantum of PBU capital release.
Priorities for the next six months
The scope and momentum of change will continue through the second half of this
year, with key priorities including:
* a full brand relaunch, with a step up in marketing and advertising
activity;
* starting the rollout of a major overhaul of our products and services;
* continuing to invest in our outreach capability, with targeted activity
due to commence early in 2004;
* investing in training and upskilling of our customer-facing people, moving
people into new roles, and fully embedding the advice model across all of
our sales channels;
* continuing to tackle service issues, delivering early visible improvement
by the year end;
* rollout of 2 major IT initiatives, namely CRM capability and branch
operating software, whilst also replacing our telecommunications networks;
* progressing the sourcing review, including the relocation of UK functions
to more scaleable sites, and in addition the decision in principle to
offshore some of our telephone and processing operations to India;
* further cost savings validated, with guidance on reinvestment needs
clarified at the full year;
* further risk reduction and release of capital from the PBU; and
* disclosure of high-level KPIs.
The scale of the changes being implemented does bring with it a degree of
execution risk and could have a short-term impact on underlying business
performance and service levels, particularly in the fourth quarter. However,
these initiatives will mean that we are better placed to compete in the early
part of 2004.
Challenges ahead
"2003 is about putting the foundations in place to deliver the Abbey National of
which customers, employees and shareholders can be proud. We are in the early
stages of a process that will take 3 years. This will include de-risking and
fundamentally re-engineering the business, and strengthening our relationship
with our customers in order to have a solid platform from which we can deliver
growth and rebuild shareholder value.
We are investing in our people, in our systems, in our products, brand and
service - and we are clear about what we are trying to deliver. There is
under-leveraged potential in this business evident in low penetration across a
range of personal financial services products; a cost: income ratio in the mid
50s; and a disappointing return on equity by industry standards.
For the first time we will be pooling all of our expertise and product
capability from within Abbey National, and offering this to our core customer
base. There are key market segments such as general insurance, investment
products, unsecured lending and even mortgages and savings where the company has
underperformed in recent years. This represents an opportunity within our power
to grasp. We have made satisfactory progress in taking costs out of the
business, cost savings that will not damage the customer experience - and there
is more to come.
We believe that Abbey National can deliver a distinctive proposition, and
rebuild value for our shareholders."
Luqman Arnold
BASIS OF RESULTS PRESENTATION
Following the significant strategic change announced at the full year 2002
results, this report reflects the split of the company between the ongoing
Personal Financial Services (PFS) businesses, and those being managed for value
in the Portfolio Business Unit (PBU).
The company is at an early stage of the three year restructuring programme, and
given the scale of changes involved, management regard it as necessary to
continue to present PFS results on the 'Trading Performance' basis, as used in
the full year 2002 results. Specifically 'Trading Performance' excludes the
impact of:
* embedded value charges and rebasing on non-interest income (including
investment variances and other life related adjustments);
* expenses relating to the restructuring programme;
* certain asset write-downs; and
* goodwill charges.
Of particular note, for the life assurance businesses within PFS (comprising
Abbey National Life, Scottish Mutual and Scottish Provident), embedded value
trading results are presented on a smoothed basis, which includes investment
earnings calculated using long-term rates of return, with the complete results
reflected in pre-tax profits.
This approach is being adopted to enable the reader to discern the underlying
performance and trends in the business, with significant items disclosed
separately. The statutory profit and loss account presentation is provided, with
reconciliation between the statutory and trading views included as appropriate.
PFS trading performance is represented in Section 1.1, while the PBU profit
before tax is contained in Section 1.2. Section 1.3 shows how the PFS and PBU
results are aggregated to form Abbey National's consolidated profit and loss.
The consolidated statutory profit and loss is contained in Section 7.
2002 restatements
The interim results for 2002 have been restated for the following presentational
changes introduced at the year-end:
* the impact of embedded value charges and rebasing; and
* the expensing of stock options.
1. GROUP SUMMARY
1.1: Personal Financial Services (PFS) trading profit before tax by business
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
Restated
# m # m # m
___________ ___________ ___________
Personal Financial Services
Retail Bank 473 464 466
cahoot (9) (17) (8)
Cater Allen and Offshore 11 23 34
___________ ___________ ___________
Banking and Savings 475 470 492
Scottish Mutual 18 55 71
Scottish Provident 45 21 25
Abbey National Life 43 114 91
Other - (9) 4
___________ ___________ ___________
Investment and Protection 106 181 191
General Insurance 29 45 47
Treasury Services 98 84 64
Group Infrastructure (120) (117) (238)
___________ ___________ ___________
Trading PFS profit before tax 588 663 556
Adjust for:
- Embedded value charges and rebasing (102) (234) (319)
- Restructuring costs (54) - (34)
- Asset write-downs (72) - (37)
- Goodwill charges (9) (33) (778)
___________ ___________ ___________
PFS profit before tax 351 396 (612)
___________ ___________ ___________
* PFS trading profit before tax of #588 million (2002: # 663 million
restated) was down 11%, largely reflecting reduced earnings from life
assurance businesses. This is due to the impact of embedded value rebasing
on the contribution from the in-force book, and significantly lower new
business levels following the closure of the with profits funds in the
latter part of 2002, combined with a #50 million adverse swing in experience
and assumption changes, of which #39 million relates to Abbey National Life.
* Banking and Savings trading profit before tax increased by #5 million to
#475 million (2002: #470 million). This reflects the impact of a 21 basis
point fall in the Retail Banking spread to 161 basis points (2002: 182 basis
points) offset by increased mortgage volumes and a relatively stable 'back
book', higher fee income and the #8 million improvement in cahoot results,
despite an increase in general provisions resulting from a higher stock of
loans.
* General Insurance trading profit before tax of #29 million was #16 million
lower than 2002, primarily due to a reduction in retail margin following an
increase in the risk premiums payable to the principal underwriter.
* Trading profit before tax of Treasury Services was up 17% to #98 million
(2002: #84 million), benefiting from improvements in global trading
conditions resulting in increased transaction flow.
* Group Infrastructure trading loss before tax deteriorated marginally by #3
million to #(120) million (2002: #(117) million) with increased interest
expense, partly offset by reduced operating costs. Compared to the second
half of 2002, the trading loss before tax has improved significantly, in
large part due to the non-recurrence of one-off items, such as project
spend, head office relocation costs, and increased provisions for contingent
liabilities.
1.2: Portfolio Business Unit (PBU) profit before tax by business
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
Restated
# m # m # m
___________ ___________ ___________
Portfolio Business Unit (PBU)
Wholesale Banking pre-provisions and disposal losses 113 238 234
Provisions, impairments and disposal losses (568) (272) (630)
___________ ___________ ___________
Wholesale Banking (455) (34) (396)
First National (2) 54 (308)
International life assurance businesses (33) (7) (83)
European Banking and other (5) 3 3
___________ ___________ ___________
PBU (loss) / profit before tax (495) 16 (784)
___________ ___________ ___________
PBU assets and risk weighted assets (RWAs) by business
As at 30 June 2003 As at 31 December 2002
Assets RWAs Assets RWAs
# bn # bn # bn # bn
___________ ___________ ___________ ___________
Debt securities 6.9 2.8 32.3 11.1
Loan portfolio 5.0 4.5 8.4 7.2
Leasing businesses 5.6 3.7 5.7 3.7
Private Equity 0.6 0.9 0.8 1.1
Other 0.3 - 1.4 -
___________ ___________ ___________ ___________
Wholesale Banking exit portfolios 18.4 11.9 48.6 23.1
Consumer and Retail Finance Lending - - 4.8 3.9
Motor and Litigation Finance 3.0 3.3 3.2 3.9
___________ ___________ ___________ ___________
First National 3.0 3.3 8.0 7.8
European Banking and other 4.3 2.5 3.4 1.8
___________ ___________ ___________ ___________
Total PBU 25.7 17.7 60.0 32.7
___________ ___________ ___________ ___________
Note, the asset balances in the above table exclude the embedded value of the
international life assurance businesses.
* Overall PBU assets of #25.7 billion are 57% lower than at December 2002.
* The speed and scale of risk and asset reduction in Wholesale Banking
assets has resulted in the acceleration of loss realisation on sale, and
also significantly reduced the pre-provision contribution to profit.
* The outstanding unrealised mark to market deficit (net of provisions) on
the debt securities portfolio is now at #180 million (December 2002: #664
million). The equivalent unrealised mark to market deficit on the loan
portfolio is now estimated at #394 million (December 2002: #491 million) -
but does not include estimates relating to leasing exposures or Private
Equity.
* The reduced contribution from First National reflects the completion of
the sale of much of the business to GE Consumer Finance in April, whilst the
international life assurance write downs reflect the decision to largely
close the Dublin-based operations to new business.
1.3: Summarised consolidated profit and loss account before tax
6 months to 30 June 2003 6 months to 30 June 2002
Restated
Personal Portfolio TOTAL Personal Portfolio TOTAL
Financial Business Financial Business
Services Unit Services Unit
(PFS) (PBU) (PFS) (PBU)
# m # m # m # m # m # m
___________ ___________ ___________ ___________ ___________ ___________
Net interest income 926 240 1,166 929 435 1,364
Non-interest income (1) 462 (203) 259 364 134 498
___________ ___________ ___________ ___________ ___________ ___________
Total income 1,388 37 1,425 1,293 569 1,862
Administrative expenses (869) (168) (1,037) (756) (161) (917)
Goodwill impairment & amortisation (9) (1) (10) (33) - (33)
Depreciation of operating lease - (121) (121) (24) (87) (111)
assets
Provisions for bad & doubtful debts (144) (82) (226) (76) (80) (156)
Provisions for contingent liabilities (5) (15) (20) (8) (3) (11)
& commitments
Amounts written off fixed asset (10) (145) (155) - (222) (222)
investments
___________ ___________ ___________ ___________ ___________ ___________
Profit / (loss) on ordinary 351 (495) (144) 396 16 412
activities before tax ___________ ___________ ___________ ___________ ___________ ___________
(1) Total non-interest income above differs from the statutory consolidated
profit and loss in Section 7 due to income from associated undertakings, and
profit on disposal of Group undertakings being disclosed separately.
* Total loss before tax of #(144) million (2002: profit of #412 million
restated) reflects the accelerated wind down of the PBU and the associated
losses on asset disposals.
Material movements by line include:
* net interest income of #1,166 million (2002: #1,364 million), down 15%
reflecting the wind down of the PBU and lower associated asset balances;
* non-interest income of #259 million (2002: #498 million), down 48%
reflecting loss realisations relating to asset sales from the PBU, largely
debt securities;
* administrative expenses of #1,037 million (2002: #917 million), up 13%
reflecting restructuring costs of #72 million relating to the cost reduction
and restructuring programmes in both PFS and PBU, in addition to asset
write-downs relating to project costs previously capitalised;
* provisions for bad and doubtful debts of #226 million (2002: #156
million), up 45% driven by tax law changes impacting the Scottish Provident
acquisition structure; and
* amounts written off fixed asset investments of #155 million (2002: #222
million) were lower, reflecting non-recurring provisioning raised in 2002
arising from specific counterparty deterioration across a number of
wholesale portfolios.
1.4: Consolidated trading profit and loss
6 months to 30 June 2003 6 months to 30 June 2002 - Restated
Personal Portfolio TOTAL Personal Portfolio TOTAL
Financial Business Financial Business
Services Unit Services Unit
(PFS) (PBU) (PFS) (PBU)
# m # m # m # m # m # m
___________ ___________ ___________ ___________ ___________ ___________
Net interest income 926 240 1,166 929 435 1,364
Non-interest income 489 174 663 598 186 784
___________ ___________ ___________ ___________ ___________ ___________
Gross trading income 1,415 414 1,829 1,527 621 2,148
Depreciation of operating lease assets - (121) (121) (24) (87) (111)
___________ ___________ ___________ ___________ ___________ ___________
Trading income 1,415 293 1,708 1,503 534 2,037
Adjust for:
- EV charges and rebasing (1) (102) (5) (107) (234) (22) (256)
- Losses on asset disposals - (372) (372) - (30) (30)
___________ ___________ ___________ ___________ ___________ ___________
Total income 1,313 (84) 1,229 1,269 482 1,751
Trading expenses (760) (143) (903) (756) (161) (917)
Adjust for:
- Restructuring costs (1) (54) (28) (82) - - -
- Asset write-downs (1) (72) - (72) - - -
- Goodwill charges (1) (9) (1) (10) (33) - (33)
___________ ___________ ___________ ___________ ___________ ___________
Total expenses (895) (172) (1,067) (789) (161) (950)
Provisions (67) (239) (306) (84) (305) (389)
___________ ___________ ___________ ___________ ___________ ___________
Profit / (loss) before tax (2) 351 (495) (144) 396 16 412
___________ ___________ ___________ ___________ ___________ ___________
PFS trading cost: income ratio (3) 53.7% 50.3%
PFS trading earnings per share (4) 24.5p 27.9p
Earnings / (loss) per ordinary share 13.1p (25.1) p (12.0)p 14.9p (0.6)p 14.3p
Dividends per ordinary share 8.33p 17.65p
Tier 1 ratio 10.9% 8.7%
Equity Tier 1 ratio 7.6% 6.7%
Closing risk weighted assets #48.2bn #17.7bn #65.9bn #47.1bn #36.5bn #83.6bn
___________ ___________ ___________ ___________ ___________ ___________
(1) A full breakdown of this charge by profit and loss classification is
contained in Section 6.4.
(2) PFS trading profit of #588 million is derived after deducting provisions
of #67 million and trading expenses of #760 million from trading income of
#1,415 million.
(3) Trading cost: income ratio is calculated as trading expenses divided by
trading income as shown in the table above.
(4) Trading EPS is calculated as profit attributable to shareholders' based
on PFS trading profits less tax attributed at the standard rate of 30% and
less a full attribution of minority interests and preference dividends,
divided by average number of Abbey National ordinary shares.
* The interim dividend is 8.33 pence (2002: 17.65 pence). This is consistent
with the rebasing of the dividend payment at the 2002 full year results to
25 pence reflecting the ongoing cash earnings of the Personal Financial
Services business, and the desired split of approximately one third / two
thirds between interim and final payments.
* The Tier 1 capital ratio improved to 10.9% (December 2002: 9.2%), with the
equity Tier 1 ratio also improving to 7.6% (December 2002: 6.4%).
Personal Financial Services
* Trading income in the Personal Financial Services business of #1,415
million fell by 6% (2002: #1,503 million). Net interest income was broadly
flat at #926 million (2002: #929 million) despite a narrowing in the Retail
Banking spread, and additional interest costs relating to hedging of capital
instruments in Group Infrastructure. Lending growth and an increased
contribution from Treasury Services offset these adverse movements.
Non-interest income (net of depreciation of operating lease assets) fell by
15% to #489 million (2002: #574 million) impacted by significantly lower new
business volumes, experience variances and assumption changes in the life
assurance businesses, in addition to the impact of 2002 embedded value
rebasing.
* Trading expenses (excluding restructuring costs and goodwill charges) of
#760 million were up marginally on the same period in 2002, although 7%
below second half 2002 levels. Benefits arising from the cost reduction
programme are broadly offsetting normal inflationary expense growth, with
increased pension costs, national insurance and salary inflation the main
drivers of underlying growth compared to the first half of 2002.
* Provisions have fallen by #17 million to #67 million (2002: #84 million).
Overall credit quality remains strong, with some further improvement in the
Retail Bank in the first half.
* The trading cost: income ratio at 53.7% compares to 50.3% for the first
half of 2002.
* On a trading basis, earnings per share has decreased by 12% to 24.5 pence
for the half year and compares to the 50.6 pence pro-forma view reported for
the 2002 full year.
Portfolio Business Unit (PBU)
* Trading income in the Portfolio Business Unit was significantly lower at
#293 million (2002: #534 million). This resulted from the lower asset base,
due to the sale of the First National consumer and retail finance businesses
to GE Consumer Finance in April 2003 (#4.8 billion), and the ongoing
Wholesale Banking portfolio wind-down process.
* Trading expenses were 11% lower at #143 million (2002: #161 million)
primarily reflecting the disposal of the First National businesses.
* Provisions charges of #239 million are lower than the #305 million
incurred in the first half of 2002. This reflects the increased credit
provisioning made in 2002 due to specific counterparty deterioration across
a number of Wholesale portfolios, and significant asset disposals. In 2003
to date, much of the cost of credit is being incurred on the non-interest
income line due to losses on disposal. In total, Wholesale Banking related
credit and disposal losses are #568 million (Half 1 2002: #272 million, Half
2 2002: #630 million).
* In total, assets of #25.7 billion have been reduced by #34.3 billion since
December 2002, largely through sales of debt securities, down #25.4 billion
alone, and the completion of the sale of the First National Consumer and
Retail Finance businesses.
Other adjustments
* Embedded value charges and rebasing includes an #80 million charge
relating to tax law changes impacting the Scottish Provident acquisition
structure. Other embedded value impacts relate to investment variances from
the underlying actuarial return assumptions.
* Restructuring costs are the one-off current period expense relating to a
series of projects, which form part of the company's cost and restructuring
programme. Costs incurred in the PFS in the first half of 2003 were #54
million, bringing the cumulative spend to #88 million relating to the cost
programme and implementation of the new strategy. Actions already taken have
achieved a level of savings, which in annualised terms are estimated to
amount to #125 million. In totality, the ratio of cost programme
implementation spend to annualised savings is expected to increase above the
current run-rate and in line with the original guidance, reflecting the
significant investment required to deliver remaining initiatives.
* Asset write-down adjustments relate primarily to a #57 million amount
which has been expensed in relation to costs previously capitalised,
associated with the establishment of outsourced processing platforms for
mortgages and insurance, as part of an ongoing review of these arrangements.
* Goodwill charges in the first half were #10 million, relating
predominantly to the amortisation of Scottish Provident goodwill. The
reduction in the charge results from the substantial write-down of goodwill
in the 2002 full year results.
1.5: Personal Financial Services (PFS) business flows
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
___________ ___________ ___________
Banking and Savings
Mortgages (1)
Gross mortgage lending #12.9bn #8.9bn #13.2bn
Capital repayments #9.1bn #6.7bn #8.7bn
Net mortgage lending #3.8bn #2.2bn #4.5bn
Mortgage stock #82.1bn #73.8bn #78.4bn
Market share - gross mortgage lending (2) 10.6% 9.2% 10.9%
Market share - capital repayments (2) 11.5% 10.8% 11.2%
Market share - net mortgage lending (2) 9.1% 6.3% 10.3%
Market share - mortgage stock (2) 11.5% 11.8% 11.7%
Savings
Retail deposits: (3)
Total net deposit flows #1.5bn #0.1bn #1.7bn
Outstanding deposits #60.8bn #57.5bn #59.3bn
Cash ISA sales (included in deposit inflows) #1.1bn #1.0bn #0.3bn
Investment ISA sales #0.2bn #0.3bn #0.2bn
Market share - total household deposit flows 3.9% -% 5.1%
Market share - outstanding household deposits 7.5% 7.7% 7.6%
Retail deposit flows by business:
Retail Banking #875m #36m #998m
cahoot (4) #246m #(258)m #180m
Other #404m #366m #553m
___________ ___________ ___________
#1,525m #144m #1,731m
Banking
Bank account openings:
- Retail Banking 175,000 177,000 177,000
- cahoot 17,000 27,000 19,000
- Other 14,000 24,000 19,000
___________ ___________ ___________
206,000 228,000 215,000
Bank account stock:
- Retail Banking 3,245,000 3,028,000 3,138,000
- cahoot 164,000 136,000 151,000
- Other 276,000 300,000 296,000
___________ ___________ ___________
3,685,000 3,464,000 3,585,000
PFS bank account customer base 4.2m 4.0m 4.1m
Credit card openings:
- Retail Banking 130,000 112,000 104,000
- cahoot 21,000 28,000 20,000
___________ ___________ ___________
151,000 140,000 124,000
Credit card stock:
- Retail Banking 878,000 673,000 810,000
- cahoot 130,000 98,000 114,000
___________ ___________ ___________
1,008,000 771,000 924,000
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
___________ ___________ ___________
Unsecured gross lending:
- Retail Banking #525m #491m #523m
- cahoot #315m #230m #277m
___________ ___________ ___________
#840m #721m #800m
Unsecured lending stock:
- Retail Banking #1,662m #1,683m #1,662m
- cahoot #629m #296m #464m
___________ ___________ ___________
#2,291m #1,979m #2,126m
SME account openings (net) 20,000 19,000 17,000
SME account stock 111,000 74,000 91,000
Investment and Protection (5)
Investment
New business premiums (excluding with profit bonds) #694m #1,136m #1,071m
New business premiums-value of with profit bonds sold (6) #43m #156m #41m
___________ ___________ ___________
Total investment new business premiums #737m #1,292m #1,112m
Annualised equivalent (excluding with profit bonds) #95m #157m #144m
Annualised equivalent - with profit bonds #-m #16m #4m
___________ ___________ ___________
Total investment annualised equivalent #95m #173m #148m
Branch and Direct new business - annualised equivalent #56m #94m #75m
IFA new business - annualised equivalent #39m #79m #73m
___________ ___________ ___________
#95m #173m #148m
Protection
Annualised equivalent #61m #55m #58m
Branch and Direct new business - annualised equivalent #15m #13m #14m
IFA new business - annualised equivalent #46m #42m #44m
___________ ___________ ___________
#61m #55m #58m
Funds under management #27bn #30bn #27bn
General Insurance
New policy sales 257,000 255,000 291,000
Policies in force 2,096,000 2,124,000 2,028,000
(1) Mortgage data has been adjusted for all periods to remove the impact of the
disposed First National business.
(2) The market share percentages calculated in the table above are based on an
estimated June market position.
(3) Deposit inflows and stock have been defined to include all (both retail
household and non-household) deposits made through the branch network and remote
channels in the Group's retail orientated businesses, which are predominantly UK
based. For market share purposes only personal deposits have been used to
calculate the share of 'UK Household Deposits', in terms of both stock and flow,
using a market size estimated from Office of National Statistics data.
(4) cahoot total account openings totalled 136,000 (2002: 119,000) including
41,000 new personal loan accounts and 35,000 savings accounts.
(5) Investment and Protection business volume information excludes International
businesses transferred to the Portfolio Business Unit for all periods.
(6) Includes sales of the Prudential Bond for which only commission income is
earned, totalling #41 million in the first half of 2003.
Mortgages
Gross mortgage lending of #12.9 billion (2002: #8.9 billion) was up 45%,
representing a market share of 10.6%. Capital repayments at #9.1 billion were
significantly higher than the same period in 2002, impacted by the significant
level of re-mortgage activity in the year, and is now equivalent to our stock
share. Overall, net lending market share was 9.1%, with lending up 73% to #3.8
billion (2002: #2.2 billion), albeit running below the second half of last year.
All the periods have been adjusted to reflect the disposal of the First National
lending businesses, but do include lending to Housing Associations, which
comprises 0.6% and 0.4% of the total net lending and stock market shares.
Savings
Total retail deposit inflows of #1.5 billion were markedly higher than the first
half of 2002, with the estimated market share of household deposit inflows (part
of total retail deposit inflows) also improving significantly to 3.9%. The
business benefited from continued inflows into ISAs, bank accounts, Branch Saver
and Safeway Notice accounts driven by appearances in Best Buy tables,
advertising and savers bypassing bonds in the low interest rate environment. In
addition cahoot delivered strong inflows of #246 million.
Banking
Momentum in terms of bank account openings was sustained with over 200,000
accounts opened in the six months to June. The total stock of bank accounts
increased to 3.7 million, with Abbey National branded in-credit balances now
over #4.0 billion, up 23% on June last year.
Credit card openings of 151,000 were up 22% on the second half of 2002, and 8%
higher than the first half of last year. The total credit card account base is
now in excess of 1 million largely driven by growth in Abbey National branded
cards through the arrangement with MBNA. Unsecured gross lending increased 17%
to #840 million with particularly strong growth experienced in cahoot. As a
result total outstanding unsecured lending balances increased by 8% to #2.3
billion since December 2002.
SME account openings were satisfactory at 20,000, with the total stock of
accounts now 111,000 up 50% on the same point last year, with a 33% increase in
balances.
Investment and Protection
Investment and Protection annualised premium equivalent (APE), excluding with
profits, were 26% below last year's levels.
Investment APEs were significantly lower than 2002 levels at #95 million (2002:
#173 million). The fall in part reflects consumer sentiment given prevailing
equity market volatility, impacting pension and investment sales. In addition,
the decision to cease the production and sale of with profit bonds contributed
to #16 million of the period on period APE reduction.
This fall in new business premiums was marginally offset by sales of the
Prudential bond, with sales through the branch network totalling #41 million.
Although impacted by industry-wide pricing increases, APE sales of Protection
products increased by 11% to #61 million (2002: #55 million).
General Insurance
General Insurance policy sales of 257,000 were up marginally on the same period
in 2002, driven largely by growth in accidental death and personal accident
sales.
The total stock of creditor policies has continued to show a strong year on year
growth, with the portfolio up 7%, whilst the household portfolio reduced
modestly as a result of increased competition and remortgaging levels, resulting
in an overall 1% reduction of policies in force compared to the same point last
year.
2. ANALYSIS OF KEY PERSONAL FINANCIAL SERVICES (PFS) DRIVERS
2.1: Operating income
2.1.1: PFS trading income by product grouping
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
Restated
# m # m # m
___________ ___________ ___________
Retail Bank 1,020 1,025 1,057
cahoot 26 10 20
Cater Allen and Offshore 40 59 59
___________ ___________ ___________
Banking and Savings 1,086 1,094 1,136
Scottish Mutual 19 57 72
Scottish Provident 46 21 26
Abbey National Life 49 119 97
Other 19 13 20
___________ ___________ ___________
Investment and Protection 133 210 215
General Insurance 56 70 76
Treasury Services 158 139 119
Group Infrastructure (18) (10) (59)
___________ ___________ ___________
PFS trading income 1,415 1,503 1,487
___________ ___________ ___________
Less: Embedded value charges and rebasing (1) (22) (234) (319)
Add: Depreciation of operating lease assets - 24 (1)
Add: Restructuring costs - life assurance (1) (5) - -
___________ ___________ ___________
PFS total income 1,388 1,293 1,167
___________ ___________ ___________
(1) A full breakdown of this charge by profit and loss classification is
contained in Section 6.4.
Banking and Savings trading income slightly down at #1,086 million, with the
impact of spread deterioration largely offset by lending volumes and related
fees, a relatively stable overall 'back book' and higher bank account penalty
charges. In the Offshore business, the sale of the debt securities portfolio at
the end of 2002 and a change in deposit transfer pricing negatively impacted net
interest income.
The Investment and Protection businesses have been impacted by a significant
fall in new business volumes reflecting weak investor confidence in the volatile
equity markets. In addition, the lower opening embedded value balance following
the 2002 accounting policy change has impacted non-interest income, and
experience variance and assumption change benefits in 2002 have swung #50
million adversely. As a result trading income has fallen 37% to #133 million
(2002: #210 million).
General Insurance trading income of #56 million has fallen by #14 million due to
a reduction in policies in force, and higher net rates charged by the principal
underwriter without any subsequent full retail repricing.
Treasury Services has benefited from improved global trading conditions through
its Financial Products business, resulting in income up 14% at #158 million
(2002: #139 million).
Group Infrastructure trading income of #(18) million was worse than the same
period last year, but significantly improved on the second half reflecting
increased earnings on surplus capital arising from lower risk weighted assets
following Portfolio Business Unit asset sales, and certain other movements in
intercompany funding arrangements.
2.1.2: Net interest income and Retail Banking spread
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
# m # m # m
___________ ___________ ___________
Banking and Savings 866 881 918
Investment and Protection 43 42 48
General Insurance (3) (2) (1)
Treasury Services 81 68 64
Group Infrastructure (61) (60) (115)
___________ ___________ ___________
PFS net interest income 926 929 914
___________ ___________ ___________
Excluding Retail Banking which is analysed below, net interest income has
remained broadly stable with a reduction in net interest income in Abbey
National Offshore, relating to the sale of debt securities to the PBU, offset by
a #13 million increase in Treasury Services.
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
% % %
___________ ___________ ___________
- Retail Banking net interest income (# m) 809 816 845
- Average spread (1) 1.61 1.82 1.75
- Average asset spread (2) 0.79 0.93 0.92
- Average liability spread (2) 0.82 0.89 0.83
- Average margin (3) 1.82 2.08 1.98
___________ ___________ ___________
Note: Retail Banking spreads and margins exclude unsecured personal loans.
(1) Average spread is defined as interest received (mortgage and overdraft
interest less suspended interest) over average interest earning assets, less
interest payable (savings and in-credit bank accounts) over interest bearing
liabilities (including an element of wholesale funding).
(2) Asset and liability spreads are calculated using the third party interest
payments (such as mortgage interest receivable or savings interest payable) net
of relevant hedging and compared against LIBOR for the period.
(3) Average margin is defined as net interest income (less suspended interest
but including a recapitalisation adjustment) divided by the average interest
earning assets.
The Retail Banking spread of 161 basis points is 21 basis points lower than the
same period last year, and down 14 basis points on the second half of 2002. This
fall was driven by strong gross lending over the last 12 months, combined with
increased redemption activity resulting in a change in the mix of the mortgage
book. In addition, asset growth is being funded at higher marginal deposit
rates. A narrowing of the margin of the standard variable rate (SVR) asset has
also contributed, as has the low, relatively stable base rates in terms of
liability spread compression.
Despite the spread decline, Retail Banking net interest income of #809 million
was down only 1% (2002: #816 million), reflecting good volume growth and only a
limited reduction in the 'back book'. Despite higher levels of redemptions,
associated fees of #93 million compare to #111 million in the second half of
last year, reflecting lower average penalties per customer.
Mortgage asset mix As at As at As at
30 June 2003 30 June 2002 31 Dec 2002
# bn # bn # bn
___________ ___________ ___________
SVR linked
Fixed / Incentive 31 39 34
Tied in SVR 2 4 2
Free-to-go SVR 17 16 18
___________ ___________ ___________
50 59 54
Base rate linked
Incentive 26 11 19
Non-incentive 3 2 3
___________ ___________ ___________
29 13 22
___________ ___________ ___________
Total mortgage asset (1) 79 72 76
___________ ___________ ___________
(1) Quoted mortgage asset excludes #2.9 billion of Social Housing lending.
Of the total mortgage asset, free to go SVR is #17 billion, 22% of the total
asset, down slightly since the year-end position. The spread on this asset to
base rate is now 204 basis points compared to 205 basis points at December.
#29 billion of the mortgage asset is now in products where rates are linked
directly to base rates, up from #22 billion at the year-end, with almost #4
billion being flexible mortgages. Of the base rate linked asset still in the
incentive period, approximately 25% reverts to SVR after the introductory
period, a percentage that will increase in future periods given the structuring
of new product lending since the second half of 2002.
Mortgage new business margins have remained tight through 2003, and the shift
towards fixed rate lending (currently approximately 30% of total new business)
apparent in the second half of last year has continued.
Liability mix As at As at As at
30 June 2003 30 June 2002 31 Dec 2002
# bn # bn # bn
___________ ___________ ___________
Remote 12.7 13.0 13.2
Fixed term and tax free savings 14.9 14.1 14.7
Branch-based deposits 15.3 15.5 15.4
___________ ___________ ___________
Total Retail Banking household liability 42.9 42.6 43.3
Other liability 17.9 14.9 16.0
___________ ___________ ___________
Total PFS liability 60.8 57.5 59.3
___________ ___________ ___________
Overall, branch based deposits have remained broadly stable at #15.3 billion. As
at 30 June 2003, the average spread against base rates was 248 basis points,
compared to 258 basis points at December 2002.
Remote savings balances, including internet and postal, have reduced slightly to
#12.7 billion (December 2002: #13.2 billion) reflecting modest falls in Direct
Saver and Postal account. However, fixed term and tax-free savings balances have
increased to #14.9 billion, reflecting ISA inflows more than offsetting other
maturities.
Balances outside the Retail Bank relate to cahoot, Cater Allen Private Bank and
Abbey National Offshore. Growth in the first six months across all three
businesses largely reflected competitive pricing.
2.1.3: Personal Financial Services (PFS) trading non-interest income by product
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
Restated
# m # m # m
___________ ___________ ___________
Mortgages 81 68 83
Savings 26 33 34
Banking 113 112 101
___________ ___________ ___________
Banking and Savings 220 213 218
Investment and Protection 90 168 167
General Insurance 59 72 77
Treasury Services 77 71 55
Group Infrastructure 43 50 56
___________ ___________ ___________
PFS trading non-interest income (1) 489 574 573
___________ ___________ ___________
(1) Includes depreciation of operating lease assets.
Mortgage lending-related fees of #81 million, were 19% higher than the
equivalent period last year. The increase is driven by increased application and
booking fees due to volume increases and mix changes, higher administration fees
following a revision in tariffs, and increased survey fees from remortgage
activity. In 2002, the time period over which high loan to value fees were
released was reassessed, and a shorter period applied, resulting in a one-off
benefit of #9 million.
Savings-related fee income was down at #26 million (2002: #33 million) due to
the fall in commissions receivable on lower sales of Abbey National Life
policies not being fully offset by fees on sales of the Prudential Bond.
Banking fee income of #113 million, was broadly flat (2002: #112 million).
Reduced Link interchange fees were more than offset by increased banking fees
and commissions from the distribution of credit cards through the MBNA
arrangement. Unsecured lending volumes up by 17%, also contributed positively,
as did increased fees relating to higher business banking balances. This
underlying improvement in banking fee income was offset by the disposal of First
National Vehicle Holdings in April 2002.
General Insurance fee income was down 18% to #59 million (2002: #72 million) as
a result of a net rate payable increase of circa 25% from the principal
underwriter, not passed on fully in retail pricing. A decrease in policies in
force also contributed to this fall.
The trading income of the Investment and Protection businesses are described in
detail in Section 2.1.4, Treasury Services trading income in section 2.1.5 and
Group Infrastructure trading income in section 2.1.6.
2.1.4: Personal Financial Services (PFS) - life assurance income
6 months to 30 June 2003
AN Scottish Scottish Total
Life Mutual Provident
# m # m # m # m
___________ ___________ ___________ ___________
New business contribution to embedded value (EV) 13 3 1 17
Contribution from existing business to EV:
- expected return 21 52 23 96
- experience variances 2 (21) 11 (8)
- changes in assumptions and other items (8) (11) (5) (24)
___________ ___________ ___________ ___________
Increase in value of long-term assurance businesses 28 23 30 81
Non-EV earnings:
ANUTM and ANPIM contribution (1) 20 - - 20
Other income and operating expenses (5) (5) 15 5
___________ ___________ ___________ ___________
Trading earnings from PFS life assurance businesses 43 18 45 106
Less: Embedded value charges and rebasing 4 33 (139) (102)
Less: Restructuring costs - - (5) (5)
___________ ___________ ___________ ___________
Earnings from PFS life assurance businesses 47 51 (99) (1)
___________ ___________ ___________ ___________
New business margin (%) (2) 56% 8% 3% 17%
6 months to 30 June 2002
Restated
AN Scottish Scottish Total
Life Mutual Provident
# m # m # m # m
___________ ___________ ___________ ___________
New business contribution to EV 18 5 9 32
Contribution from existing business to EV:
- expected return 24 61 12 97
- experience variances 15 (7) 5 13
- changes in assumptions and other items 18 - - 18
- integration costs - - (13) (13)
___________ ___________ ___________ ___________
Increase in value of long-term assurance businesses 75 59 13 147
Non-EV earnings:
ANUTM and ANPIM contribution (1) 32 - - 32
Other income and operating expenses 7 (4) 8 11
___________ ___________ ___________ ___________
Trading earnings from PFS life assurance businesses 114 55 21 190
Less: Embedded value charges and rebasing (14) (162) (58) (234)
___________ ___________ ___________ ___________
Earnings from PFS life assurance businesses 100 (107) (37) (44)
___________ ___________ ___________ ___________
New business margin (%) (2) 45% 8% 27% 23%
(1) ANUTM represents Abbey National Unit Trust Managers, while ANPIM represents
Abbey National PEP and ISA Managers.
(2) New business margin is calculated as new business contribution to EV,
divided by related annualised equivalent premiums for Life contracts.
New business contribution to embedded value, representing the profit earned from
sales of new business after allowing for acquisition costs including commission,
fell for Abbey National Life and Scottish Mutual mainly due to the decrease in
sales of with profit bonds. The fall in Scottish Provident is substantially due
to the repricing of the protection products following changes in industry wide
reassurance rates with consequent price increases not coming through in the
first half.
The "expected return" is the profit expected from in-force policies at the start
of the period. The fall in carry forward earnings has been offset by the benefit
of 2002 new business, and earnings from capital injections received in the
latter part of 2002 and to a lesser extent in 2003.
Experience variances capture the difference between actual experiences in the
period compared to the assumptions, except for investment returns and other one
off items, which are excluded from trading earnings. The negative experience
variation for the period is mainly due to reserve strengthening for critical
illness and expenses overrun due to lower than expected levels of new business.
Changes in assumptions and other items represents changes in the policyholder
tax rate from 22% to 20% on certain income gains and losses effective from 1
April 2003. This is an industry-wide issue and has the effect of reducing the
embedded value asset and hence future embedded value earnings.
The contribution from Abbey National Unit Trust Management and Abbey National
PEP and ISA Managers has fallen due to the reduction in sales of single ISAs and
the decline in average fund values leading to lower management charges.
Other income and operating expenses largely represent net earnings on capital
offset by the Group's internal charge for capital. Where capital injections are
made to the shareholder fund, the earnings are recorded as interest income,
whereas injections into the long-term funds impact embedded value (non-interest
income).
The new business margin percentage is influenced by the relative proportions of
life, pension and protections products as well as being impacted by the split
between single and regular premium contracts. In SMA year on year profitability
has been maintained. In Abbey National Life profitability has improved due to
the move away from high volume low margin bond products. In Scottish Provident,
the margin narrowing mainly reflects the fact that raw price increases from
reassurers made at December 2002 were passed on to customers in phases during
the first half of 2003 thereby temporarily reducing margin, although competitor
pressures are also having an impact.
The table below shows the Abbey National Asset Managers funds under management
by company, and split by type of business:
As at 30 June 2003
AN Scottish Scottish Total
Life Mutual Provident
# bn # bn # bn # bn
___________ ___________ ___________ ___________
With profit fund - 8.6 4.3 12.9
Non-profit fund 4.9 8.1 3.0 16.0
___________ ___________ ___________ ___________
Total (1) 4.9 16.7 7.3 28.9
___________ ___________ ___________ ___________
(1) Total funds under management is split #27 billion in Personal Financial
Services, and #1.9 billion in Portfolio Business Unit.
The with profit Scottish Provident fund has been closed since acquisition. The
Scottish Mutual with profit fund was closed on 31 December 2002. The Scottish
Mutual International with profit fund was closed on the 29 April 2003. With
profits business previously written through Abbey National Life was reassured to
Scottish Mutual.
Personal Financial Services life assurance - new business premiums
6 months to 30 June 2003
AN Scottish Scottish Total
Life Mutual Provident
# m # m # m # m
___________ ___________ ___________ ___________
Single
Pension 8 151 11 170
Life and investments:
- ISA and unit trusts 422 3 - 425
- Life and other bonds 7 64 - 71
- With profits (1) - 2 - 2
___________ ___________ ___________ ___________
437 220 11 668
Annual
Pension 6 13 2 21
Life and investments:
- ISA and unit trusts 5 - - 5
- Life and other bonds 1 1 - 2
- Term assurance and protection 15 7 39 61
___________ ___________ ___________ ___________
27 21 41 89
___________ ___________ ___________ ___________
Total new business premiums 464 241 52 757
___________ ___________ ___________ ___________
Annualised equivalent (2) 71 43 42 156
___________ ___________ ___________ ___________
New business margin (3) 56% 8% 3% 17%
___________ ___________ ___________ ___________
6 months to 30 June 2002
AN Scottish Scottish Total
Life Mutual Provident
# m # m # m # m
___________ ___________ ___________ ___________
Single
Pension 10 304 26 340
Life and investments:
- ISA and unit trusts 553 34 - 587
- Life and other bonds 61 100 - 161
- With profits 89 67 - 156
___________ ___________ ___________ ___________
713 505 26 1,244
Annual
Pension 8 23 2 33
Life and investments:
- ISA and unit trusts 11 - - 11
- Life and other bonds 3 1 - 4
- Term assurance and protection 13 8 34 55
___________ ___________ ___________ ___________
35 32 36 103
___________ ___________ ___________ ___________
Total new business premiums 748 537 62 1,347
___________ ___________ ___________ ___________
Annualised equivalent (2) 106 83 39 228
___________ ___________ ___________ ___________
New business margin (3) 45% 8% 27% 23%
___________ ___________ ___________ ___________
(1) Excludes sales of Prudential Bonds where commissions earned only.
(2) Calculated as 10% of single premium new business premiums, plus annual new
business premiums.
(3) New business margin is calculated as new business contribution to embedded
value, divided by related annualised equivalent premiums for Life contracts.
In total annualised new business in the IFA market in which both Scottish Mutual
and Scottish Provident operate has fallen by around 17% compared to 2002
reflecting equity market volatility and investor concerns.
In Scottish Mutual life single premiums are down, mainly due to the closure of
the with profit fund at the end of last year. Sales of the Flexible Investment
Bond have fallen 9% and their contribution to the new business earnings is up
almost 100%. In addition, sales of the Pegasus healthcare products through
Scottish Mutual have been maintained although there has been some margin
erosion.
In Scottish Provident new business in relation to protection products has risen
15% and its position as market leader has been re-established with a market
share of 25% at 31 March 2003. Scottish Provident also, for the fourth time, won
Best Protection Provider at the Financial Adviser Awards 2003.
In Abbey National Life the single ISA sales remain strong but are down 24%
compared to the record levels set last year. In addition, sales of protection
plans have increased 15%.
2.1.5: Treasury Services trading income
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
# m # m # m
___________ ___________ ___________
Net interest income 81 68 64
Dealing profits 80 73 44
Fees and commissions (4) 1 (7)
Other 1 (3) 18
___________ ___________ ___________
Treasury Services trading income 158 139 119
___________ ___________ ___________
Treasury Services trading income of #158 million is 14% higher than the first
half of 2002.
Net interest income increased to #81 million (2002: #68 million), largely
relating to the changes in the short-term funding business as a result of the
wind down of the Portfolio Business Unit.
Dealing profits benefited from an improvement in global trading conditions,
increasing to #80 million (2002: #73 million).
2.1.6: Group Infrastructure trading income
Trading income of #(18) million fell compared to the equivalent period last year
(2002: #(10) million).
Higher earnings on surplus capital resulting from the lower levels of risk
weighted assets following Portfolio Business Unit asset sales was more than
offset by the increased cost of funding capital injections into the life
assurance businesses, and the cost of hedging out floors in capital instruments.
Trading income is significantly improved on the second half of 2002 again
benefiting from the lower levels of risk weighted assets on surplus capital, and
certain other movements in intercompany funding arrangements.
2.2: Operating expenses
2.2.1: Personal Financial Services (PFS) trading expenses
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
Restated
# m # m # m
___________ ___________ ___________
Retail Bank 494 492 510
cahoot 22 21 22
Cater Allen and Offshore 29 36 27
___________ ___________ ___________
Banking and Savings 545 549 559
Scottish Mutual 1 2 1
Scottish Provident 1 - 1
Abbey National Life 5 4 7
Other 19 22 16
___________ ___________ ___________
Investment and Protection 26 28 25
General Insurance 27 25 29
Treasury Services 60 55 55
Group Infrastructure 102 99 153
___________ ___________ ___________
PFS trading expenses 760 756 821
___________ ___________ ___________
Add: Restructuring costs (1) 47 - 34
Add: Asset write-downs (1) 62 - 37
Add: Goodwill amortisation 9 33 31
Add: Goodwill impairment - - 747
___________ ___________ ___________
PFS expenses 878 789 1,670
___________ ___________ ___________
(1) A full breakdown of this charge by profit and loss classification is
contained in Section 6.4.
Banking and Savings trading expenses were down #4 million to #545 million (2002:
#549 million) benefiting from savings from the cost reduction programme and the
refocusing of the Offshore business. This has been partly offset by increased
employment costs including statutory national insurance and pension contribution
increases.
Trading expenses in the Treasury Services business of #60 million, were up 9%
reflecting compensation accruals linked to the increase in trading income.
In Group Infrastructure trading expenses were up 3% to #102 million (2002: #99
million) largely as a result of increased employment-related expenses including
pension costs. Trading expenses were, however, significantly lower than the
second half of last year reflecting benefits associated with the cost reduction
programme, and the non-recurrence of spend relating to projects, corporate
advisory fees and head office relocation costs.
Not included in the amounts above are #98 million (2002: #103 million) of
operating expenses (including #5 million of restructuring costs in 2003)
relating to the life assurance businesses reported as part of embedded value in
non-interest income.
An amount of #57 million (forming part of the asset write-downs balance above)
has been expensed in relation to costs previously capitalised, associated with
the establishment of outsourced processing platforms for mortgages and
insurance, as part of an ongoing review of these arrangements. An additional #65
million of capitalised development costs relating to these partnerships remains
on the balance sheet as at 30 June 2003.
2.2.2: Cost reduction and restructuring programme
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
Restated
# m # m # m
___________ ___________ ___________
PFS trading expenses 760 756 821
Trading expenses included in embedded value (EV) 93 103 98
___________ ___________ ___________
Total PFS trading expense base (incl. EV costs) 853 859 919
Add: Estimated savings achieved from cost programme 46 - 13
___________ ___________ ___________
PFS trading expenses pre cost savings 899 859 932
Estimated annualised cost savings 125 - 35
___________ ___________ ___________
PFS trading expenses, before the impact of the cost reduction programme, were up
4.7% on the first half of last year, but were lower than the second half.
Underlying year on year trends largely relate to increased staff related
expenses, including normal salary inflation and increased national insurance and
pension related contributions.
Implementation costs relating to the cost reduction and strategic restructuring
programme totalled #54 million (including #5 million EV expenses), with
approximately #37 million relating to employment costs, of which redundancy
payments were the most significant component. The balance related to property,
IT and some consultancy spend.
Of the estimated #46 million of savings reported in the period, streamlining and
process re-engineering accounted for approximately #13 million, procurement
related improvements #17 million, #6 million related to centralisation and a
further #7 million of marketing and sales de-duplication savings were also
realised. In total, over 1,000 roles have been removed since the start of the
programme in 2002, albeit offset in part by expansion elsewhere.
Total annualised savings from actions already taken are estimated to be #125
million, up from #35 million at the start of the year. Cumulative implementation
costs to date amount to #88 million, which includes costs relating to the cost
programme and implementation of the new strategy. In totality, the ratio of
implementation spend to savings for the remaining cost programme initiatives is
expected to increase above the current run rate, and in line with previous
guidance, reflecting the significant investment required to deliver remaining
initiatives.
2.2.3: PFS trading expenses and headcount by division
This analysis is included to assist the reader in understanding the cost base
before recharges by the new divisional structure:
Trading expenses by division 6 months to
30 June 2003
# m
___________
Customer Sales 246
Customer Propositions 36
Customer Operations 125
___________
Customer-facing operating expenses 407
Human Resources 20
Information Technology 166
Treasury Services 45
Central 122
___________
PFS trading expenses 760
___________
Headcount by division As at As at
30 June 2003 31 Dec 2002
___________ ___________
Customer Sales 11,539 11,589
Customer Propositions 457 465
Customer Operations 7,579 7,487
___________ ___________
Core PFS divisional full time equivalent (FTE) 19,575 19,541
Human Resources 581 587
Information Technology 2,192 2,384
Treasury Services 434 549
Central 1,738 1,813
___________ ___________
PFS total FTE 24,520 24,874
___________ ___________
The downward trend reflects cost reduction measures partly offset by additional
recruitment in specific areas to meet the restructuring needs of the business.
2.3: Personal Financial Services (PFS) provisions and charges
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
# m # m # m
___________ ___________ ___________
Mortgages 5 7 10
Unsecured personal loans 28 29 18
Credit cards 6 2 2
Banking 18 30 38
Other 7 8 6
___________ ___________ ___________
PFS lending provisions 64 76 74
Provisions for contingent liabilities and commitments 3 8 38
Other provisions - - (2)
___________ ___________ ___________
Total trading PFS provisions 67 84 110
___________ ___________ ___________
Add: Restructuring costs (1) 2 - -
Add: Embedded value charges and rebasing (1) 80 - -
Add: Asset write-downs (1) 10 - -
___________ ___________ ___________
PFS provisions and charges 159 84 110
___________ ___________ ___________
(1) A full breakdown of this charge by profit and loss classification is
contained in Section 6.4.
PFS lending provisions decreased by #12 million to #64 million (2002: #76
million), despite strong growth in assets.
Secured lending provisions of #5 million, were lower compared to 2002,
reflecting further improvements in arrears and properties in possession. Bank
account related provisions fell reflecting improved credit quality and fraud
management.
Provisions for contingent liabilities of #3 million were lower than the same
period last year, and well down on the second half charge of #38 million.
The adjustment to embedded value related to the Scottish Provident contingent
loan and is discussed in further detail in Section 6.1.
2.3.1: Total PFS non-performing loans (NPLs) (1)
As at As at As at
30 June 2003 30 June 2002 31 Dec 2002
# m # m # m
___________ ___________ ___________
Loans provided for 183 216 174
Arrears greater than 90 days not provided 490 677 528
___________ ___________ ___________
Total NPLs 673 893 702
___________ ___________ ___________
Total loans and advances to customers 67,218 61,178 66,072
Total provisions 312 317 306
___________ ___________ ___________
NPLs as a % of loans and advances 1.00% 1.46% 1.06%
___________ ___________ ___________
Provisions as a % of NPLs 46.36% 35.50% 43.59%
___________ ___________ ___________
(1) The table excludes Treasury Services and Life Assurance businesses. In
addition, the figures stated include (where relevant) NPLs and associated loans
and provisions of securitised assets.
In total, the value of non-performing loans reduced to #673 million (December
2002: #702 million) despite strong asset growth. The value of NPLs as a
percentage of loans and advances also improved, to 1.00%, with provisions cover
increasing, to 46%.
2.3.2: Personal Financial Services (PFS) mortgage arrears and properties in
possession
Cases As at 30 June 2003 As at 31 December 2002 As at 30 June 2002
No.cases % of CML No.cases % of CML No.cases % of CML
(000) total industry (000) total industry (000) total industry
average % average % average %
______ ______ ______ ______ ______ ______ ______ ______ ______
1 - 2 months arrears 23.2 1.68 n/a 24.8 1.78 n/a 28.0 2.01 n/a
3 - 5 months arrears 7.4 0.53 n/a 8.7 0.63 0.59 9.8 0.71 0.66
6 - 11 months arrears 3.0 0.22 n/a 3.8 0.27 0.30 4.8 0.35 0.37
12 months + arrears 0.7 0.05 n/a 1.0 0.07 0.15 1.4 0.10 0.16
______ ______ ______ ______ ______ ______ ______ ______ ______
Value As at 30 June 2003 As at 31 December 2002 As at 30 June 2002
# m % of total # m % of total # m % of total
______ ______ ______ ______ ______ ______ ______ ______ ______
1 - 2 months arrears 12.2 0.02 12.7 0.02 14.1 0.02
3 - 5 months arrears 9.7 0.01 11.2 0.01 12.5 0.02
6 - 11 months arrears 7.4 0.01 9.1 0.01 11.8 0.02
12 months + arrears 4.4 0.01 6.3 0.01 8.8 0.01
______ ______ ______ ______ ______ ______
Total arrears 33.7 0.05 39.3 0.05 47.2 0.07
______ ______ ______ ______ ______ ______
Total balance sheet
provisions 198.9 180.7 182
Coverage (times) 5.9x 4.6x 3.9x
______ ______ ______ ______ ______ ______ ______ ______ ______
Mortgage properties in possession
As at 30 June 2003 As at 31 December 2002 As at 30 June 2002
Nos % of loans CML Nos % of loans CML Nos % of loans CML
industry industry industry
average % average % average %
______ ______ ______ ______ ______ ______ ______ ______ ______
No. of repossessions 924 0.07 n/a 1,110 0.08 0.05 1,518 0.11 0.06
No. of sales 929 0.07 n/a 1,414 0.10 0.06 1,614 0.12 0.07
Stock 414 0.03 n/a 419 0.03 0.02 723 0.05 0.04
______ ______ ______ ______ ______ ______ ______ ______ ______
The abbreviation CML stands for Council of Mortgage Lenders. Data for 30 June
2003 is not made publicly available until 30 July 2003.
Mortgage arrears continued to improve in the first half of 2003, with the level
of 3 month + arrears falling to 11,100 from 13,500 in December 2002 driven by
continued favourable market conditions, improved credit quality on new business
and debt management operational efficiencies.
By value, arrears greater than 3 months totalled #21.5 million, 35 % lower than
the same period last year.
The number of repossessions was significantly lower than June 2002, and 17%
lower than December 2002 at 924, with the stock of properties in possession
falling modestly to 414.
New business lending quality also remained strong, with 91% of all new lending
to customers with a loan to value of less than 90%, compared to 81% in the same
period last year.
In total, the average loan to value on the overall book is estimated at 46%
gross of securitised assets.
2.3.3: Personal Financial Services (PFS) - banking and unsecured personal loan
(UPL) arrears
As at As at As at
30 June 2003 30 June 2002 31 Dec 2002
# m # m # m
___________ ___________ ___________
Total banking and UPL arrears (1) (2) 131 149 126
Total banking and UPL asset 2,935 2,595 2,779
Banking and UPL arrears as a % of asset 4.5% 5.7% 4.5%
___________ ___________ ___________
(1) Banking arrears are defined as customers whose balances exceed their
overdraft by over #100.
(2) UPL arrears are defined as accounts that are two monthly instalments in
arrears.
The growth in banking and unsecured personal loan asset has not been at the
expense of credit quality, reflected in the fall in arrears relative to the
asset - 4.5% compared to 5.7% for the equivalent period in 2002. Fraud
mitigation tools and improved risk assessment have assisted in delivering a fall
in the provisions charge.
2.3.4: Provisions for doubtful debts analysis (PFS)
30 June 2003 30 June 2002
Provisions Balance % of Provisions Balance % of
balance loan balance loan
# m assets # m assets
___________ ___________ ___________ ___________
Secured 198 0.3 182 0.3
Personal banking 40 12.7 41 15.1
Unsecured personal loans 46 2.8 73 3.7
Abbey National business 11 2.5 13 1.3
___________ ___________ ___________ ___________
Retail Banking 295 0.5 309 0.4
cahoot 17 2.2 6 1.4
Scottish Provident 80 6.5 - -
Group Infrastructure - - 2 0.8
___________ ___________ ___________ ___________
Total 392 0.7 317 0.5
___________ ___________ ___________ ___________
The increase in balance sheet provisions is largely due to the impact of tax
changes on the Scottish Provident contingent loans, discussed in more detail in
Section 6.1.
Of the #392 million, #208 million are general provisions, up #21 million (11%)
since the 2002 year-end, in part due to a volume related step up in cahoot of
#11 million.
3. PORTFOLIO BUSINESS UNIT (PBU)
3.1: Summarised PBU profit and loss
6 months to 6 months to 6 months to
30 June 2003 30 June 2002 31 Dec 2002
# m # m # m
________ ________ ________
Portfolio Business Unit (PBU)
Wholesale Banking pre-provisions and disposal losses 113 238 234
Provisions, impairments and disposal losses (568) (272) (630)
________ ________ ________
Wholesale Banking (455) (34) (396)
First National (2) 54 (308)
International life assurance businesses (33) (7) (83)
European Banking and other (5) 3 3
________ ________ ________
PBU (loss) / profit before tax (495) 16 (784)
Loss before tax of #455 million (2002: loss of #34 million) in the Wholesale
exit portfolios was driven by the level of asset disposals in the first six
months of 2003. Total assets of #18.4 billion are 62% lower than at December
2002, and 69% lower than June 2002.
First National loss before tax of #2 million was significantly lower than 2002,
resulting from the disposal of the consumer finance businesses in April, and
also increased costs and provisioning in the remaining First National
businesses.
The loss of #38 million (2002: loss of #4 million) in the other PBU businesses
was largely the result of the Dublin based international life assurance
businesses which were largely closed to new business, with embedded value
changes reflecting costs and other factors associated with those decisions.
3.2: Wholesale Banking Exit Portfolios
3.2.1: Provisions and losses on asset disposals
6 months to 30 June 2003 6 months to
30 June 2002
Disposal Provisions (1) Total Total
losses
# m # m # m # m
________ ________ ________ ________
Debt securities:
- Corporates 136 (5) 131 55
- High Yield 4 14 18 127
- CDOs 129 13 142 11
- Other asset backed 58 74 132 23
Loan portfolio:
- Project Finance 10 22 32 4
- Real Estate 4 3 7 -
- Other 10 13 23 13
Leasing businesses - 13 13 -
Private Equity 21 49 70 39
________ ________ ________ ________
Total credit charges 372 196 568 272
(1) The total provisions balance of #196 million includes an impairment of the
IEM operating lease, reported on a statutory basis in depreciation of operating
lease assets. Total actual provisions charge totals #183 million.
The increased total charge of #568 million (2002: #272 million) largely reflects
losses arising from the disposal of the debt investment securities portfolio,
and is slightly better than potential losses anticipated by the unrealised mark
to market deficit disclosed previously.
The provision charge for the first half of 2003 reflects the further
deterioration of certain UK and US power exposures (included in Project
Finance), in addition to stressed airline exposures (included in other Asset
backed securities). In addition, further loss on sale of exposures previously
provided against of approximately #24 million is included.
The private equity total losses and provisions of #70 million relate to the
disposal of 25% of the portfolio and the write-down of the residual portfolio to
fund manager valuations as at March 2003.
3.2.2: Balance sheet provisions and coverage
As at 30 June 2003 As at 31 Dec 2002
# m # m
________ ________
Specific provisions 584 745
General provisions 184 146
________ ________
Total balance sheet provisions 768 891
Total balance sheet provisions reduced to #768 million during the first half of
2003 as a result of asset disposals. Specific provisions are based on a detailed
review of individual impaired assets. The level of general provisions increased,
reflecting the risks inherent in certain sections of the balance sheet. The
difference between the profit and loss provision charge and balance sheet
provision movement is a reflection of balance sheet provision releases following
asset sales and exchange rate movements. This is detailed in the table below:
Specific General Total
provisions provisions provisions
# m # m # m
________ ________ ________
2003 opening balance 745 146 891
Profit and loss charge in 6 months to June 2003 141 42 183
Release on disposal (300) - (300)
Other (incl. foreign exchange movements) (2) (4) (6)
________ ________ ________
2003 closing balance as at 30 June 584 184 768
Coverage ratios
As at 30 June As at 31 December
2003 2002
# m # m
________ ________
Debt securities provided against 363 919
Specific provisions (220) (414)
Coverage (%) 60.6% 45.0%
Loans provided against 785 836
Specific provisions (195) (204)
Coverage (%) 24.8% 24.4%
Total asset provided against 1,148 1,755
Specific provisions (415) (618)
General provisions (124) (146)
________ ________
Total provisions (539) (764)
Coverage (%) 47.0% 43.5%
The increase in the coverage ratio for debt securities arises due to asset sales
and increased provisions for those remaining. There is additionally a small
increase in the coverage ratio for loans.
Total specific and general provisions in the table of #415 million and #124
million respectively differ to the total on the balance sheet of #584 million
and #184 million respectively, due to provisions relating to private equity and
leasing.
3.2.3: Summary portfolio details
As at 30 June 2003 As at 31 December 2002
Assets RWAs Assets RWAs
# bn # bn # bn # bn
________ ________ ________ ________
Debt securities 6.9 2.8 32.3 11.1
Loan portfolio 5.0 4.5 8.4 7.2
Leasing businesses 5.6 3.7 5.7 3.7
Private Equity 0.6 0.9 0.8 1.1
Other 0.3 - 1.4 -
________ ________ ________ ________
Total 18.4 11.9 48.6 23.1
The Wholesale exit portfolios include #3.3 billion (December 2002: #15.3
billion) of assets in conduit vehicles or covered by credit enhanced structures,
all treated as on-balance sheet and reported as part of debt securities. The
difference in risk weighted assets resulting from the use of these vehicles and
structures is #2.3 billion. The assets in the conduit vehicles significantly
reduced since December due to both asset sales and the cancellation of certain
structures. The majority of the underlying assets in these structures are AA or
above. In addition, #0.6 billion of high yield assets are covered by the Newark
collateralised bond obligation, which is covered in more detail in Section
3.2.8.
3.2.4: Debt securities
As at 30 June 2003 As at 31 December 2002
Assets RWAs Assets RWAs
# bn # bn # bn # bn
________ ________ ________ ________
Banks and Financial Institutions 0.6 0.2 6.5 1.5
Sovereign and Government Agencies 0.2 - 2.0 0.5
Corporates 0.2 0.1 6.8 5.4
Asset Backed Securities (excluding CDOs) 3.6 1.4 11.9 2.2
CDOs 1.6 0.9 4.0 1.3
High Yield 0.7 0.2 1.1 0.2
________ ________ ________ ________
Total debt securities 6.9 2.8 32.3 11.1
Mark to market analysis
As at 30 June As at 31 December
2003 2002
# m # m
________ ________
Debt securities and related derivatives 7,176 31,873
Less: Provisions (1) (327) (500)
________ ________
Book value of debt securities and related derivatives (2) 6,849 31,373
________ ________
Market value of debt securities and related derivatives 6,669 30,709
________ ________
Total unrealised mark to market deficit on debt securities (180) (664)
(1) Including #220 million of specific and #107 million of general provisions.
(2) Total debt securities subject to the mark to market adjustment above of #6.8
billion differs to the total debt securities figure of #6.9 billion as a result
of book value of related derivatives.
The mark to market table indicates the estimated possible loss, were the
portfolio assets sold in the current market conditions (including illiquidity
estimates). Of the overall deficit at 30 June 2003 of #180 million (December
2002: #664 million), #124 million relates to positions where the mark to market,
including related derivatives, is less than 80% of book value.
The decrease has been driven by sales of assets, generally at levels better than
the market value at 31 December 2002. In total, asset improvement in the last
six months was #251 million, offset by deterioration in certain parts of the
portfolio totalling #189 million, largely relating to the aircraft asset backed
securities.
A large part of the mark to market deficit continues to arise from derivatives.
This is not unusual and has arisen because the vast majority of mark to market
positions relate to fixed rate bonds that are swapped to floating rate on
purchase. Generally, interest rates have fallen since the assets were acquired,
reducing the value of the interest rate swaps. Note that this would have been
offset by the increased value of the fixed rate securities before the impact of
credit widening.
3.2.5: Loan portfolio, and related exposures
As at 30 June 2003 As at 31 December 2002
Assets RWAs Assets RWAs
# bn # bn # bn # bn
________ ________ ________ ________
Infrastructure 1.5 2.0 1.6 2.2
Project Finance:
- Real Estate 0.7 0.7 1.5 1.5
- Other 1.1 1.1 1.4 1.8
Acquisition Finance 0.3 0.4 2.1 1.3
Structured Finance lending 1.4 0.3 1.8 0.4
________ ________ ________ ________
Total loan portfolio 5.0 4.5 8.4 7.2
The change in the loan portfolio reflected sales across all portfolios with the
most significant reductions being in acquisition and project finance.
Mark to market analysis
As at 30 June As at 31 December
2003 2002
# m # m
________ ________
Loan portfolio and related derivatives 4,982 8,368
Less: Provisions (1) (212) (264)
________ ________
Book value of loan portfolio and related derivatives (2) 4,770 8,104
Market value of loan portfolio and related derivatives 4,376 7,613
________ ________
Total unrealised mark to market deficit on loan portfolio (394) (491)
(1) Including #195 million of specific and #17 million of general provisions.
(2) Total loan portfolio subject to the mark to market adjustment above of #4.8
billion differs to the total loan portfolio figure of #5.0 billion as a result
of book value of related derivatives.
The mark to market table indicates the estimated possible loss, were the
portfolio assets sold in current market conditions.
The overall deficit of #394 million is lower than the year-end position of #491
million due to a combination of asset sales and further provisioning. In total,
the asset improvement was #128 million reflecting an improved outlook based on
progress made to date, largely offset by deterioration in certain parts of the
portfolio totalling #94 million, mostly relating to power sector exposures.
3.2.6: Leasing businesses
As at 30 June 2003 As at 31 December 2002
Assets RWAs Assets RWAs
# bn # bn # bn # bn
________ ________ ________ ________
Finance leases 3.0 1.0 3.1 1.0
Operating leases 2.6 2.7 2.6 2.7
________ ________ ________ ________
Total 5.6 3.7 5.7 3.7
The finance leasing portfolio is predominantly high quality with over 60% of
exposure being to counterparties rated AA or better. The operating lease
portfolio principally represents assets held by the Porterbrook (#1.8 billion)
and IEM (#0.4 billion) subsidiaries. The value of IEM if sold in current market
conditions is expected to be materially lower than current holding value, while
the value of Porterbrook has not yet been tested in the market and therefore may
well differ from the holding value.
3.2.7: Private equity
As at 30 June As at 31 December
2003 2002
# m # m
________ ________
Opening balance of drawdowns (net of provisions) 797 697
Drawdowns in the current period 82 311
Disposals (200) (88)
New provisions (49) (123)
________ ________
Closing balance of drawdowns 630 797
________ ________
Undrawn commitments 449 672
Of the drawn-down private equity portfolio after provisions, #107 million is US
exposures, #66 million is direct or quoted investment, with the remainder
relating to European (including UK) exposures.
37% and 43% of the US and direct exposures respectively have now been provided
for, with the net book value of the portfolio in line with fund managers'
valuations.
Current market conditions imply further private equity losses to the extent that
the portfolio is sold down.
The reduction in undrawn commitments is principally due to sales in the period.
3.2.8: Credit exposure analysis
The analysis that follows defines total exposures as being net of specific
provisions and including total undrawn commitments. In total these comprise #584
million and #1.3 billion respectively. In total, approximately 66% of the
Wholesale exposures in the PBU have external ratings. However, for approximately
#5 billion of these, internal ratings have been used in the following analysis.
In the vast majority of instances the internal ratings take a more prudent
stance.
Credit exposures by credit rating
As at 30 June 2003 As at 31 December 2002
Average Average of Total Average Average of Total
Exposure Top 5 Exposure Exposure Top 5 Exposure
exposures exposures
# m # m # bn # m # m # bn
________ ________ ________ ________ ________ ________
AAA 21.1 138.7 4.6 31.0 338.7 15.5
AA 43.8 258.1 3.0 43.0 475.1 7.4
A 34.8 181.2 3.6 46.6 299.6 13.6
BBB 27.7 208.5 2.8 32.1 376.9 8.5
________ ________ ________ ________ ________ ________
Total investment grade 14.0 45.0
BB 16.2 50.3 0.7 17.1 59.9 1.6
B 14.0 39.6 0.5 14.8 43.5 0.6
CCC 15.1 49.5 0.5 13.5 43.6 0.6
________ ________ ________ ________ ________ ________
Total sub-investment grade 1.7 2.8
Equity n/a n/a 0.7 n/a n/a 0.9
________ ________ ________ ________ ________ ________
Total exposure (1) 16.4 48.7
Note: Equity exposures included a small balance in respect of the Newark Junior
note. This does not appear within the private equity balance on the analysis in
Section 3.2.7 as the bonds held within the structure are included in debt
securities.
(1) Total exposure of #16.4 billion is lower than total assets of #18.4 billion,
as the exposure amounts include amounts due from leasing counterparties rather
than the asset value of leasing businesses.
Total exposures reduced by #32.3 billion to #16.4 billion since December 2002.
Significant asset reductions were evident across all ratings, with notable
reductions in terms of bank exposures and Asset Backed and Mortgage Backed
securities. In addition, good progress has been made in reducing single
counterparty exposures.
Sub-investment grade exposures also fell by a further #1.1 billion,
predominantly due to the sale of the #0.9 billion leveraged loans within the
acquisition finance portfolio. Sub-investment grade assets of #1.7 billion
include #576 million (34%) of assets downgraded from investment grade in the
first six months. Of these, #277 million are internally rated power loans, #122
million are externally rated CBO positions, and #79 million externally rated
aircraft ABS positions.
AAA, AA and A grade by exposure type
As at 30 June 2003 As at 31 December 2002
Average Total Average Total
of Top 5 exposure of Top 5 exposure
exposures exposures
# m # bn # m # bn
________ ________ ________ ________
Banks and Financial Institutions 263.2 3.2 461.6 13.1
Sovereign 72.8 0.4 265.3 1.6
Corporates 160.2 1.3 186.0 2.9
Asset Finance 115.1 1.1 148.6 2.0
Asset Backed Securities/Mortgage
Backed Securities 106.7 5.2 246.7 16.9
________ ________ ________ ________
Total exposure 11.2 36.5
Exposure to AAA to A- graded investments fell by 69% to #11.2 billion, including
a #11.7 billion reduction in Asset Backed and Mortgage Backed securities and a
#9.9 billion reduction in outstandings to Banks and Financial Institutions. Of
the remaining sovereign exposures 85% are to the UK, US and Japan. The greatest
corporate exposures relate to established oil and gas corporations. The #0.9
billion reduction in Asset Finance is mainly due to reductions in the Property
and Project Finance Portfolio.
BBB grade by exposure type
As at 30 June 2003 As at 31 December 2002
Specific Average Total Specific Average Total
provisions of Top 5 exposure provisions of Top 5 exposure
exposures exposures
# m # m # bn # m # m # bn
________ ________ ________ ________ ________ ________
Banks and Financial Institutions - - - - 39.4 0.4
Sovereign - - - - 70.7 0.3
Corporates - 33.2 0.3 - 218.8 2.3
Asset Finance - 208.5 2.5 1 298.8 4.4
ABS / MBS (1) - 8.8 - 58 92.2 1.1
________ ________ ________ ________ ________ ________
Total exposure - 2.8 59 8.5
(1) ABS/MBS is an abbreviation for Asset Backed Securities/Mortgage Backed
Securities.
Exposures to BBB graded investments fell by 67% to #2.8 billion, including the
disposal of all BBB rated sovereign exposures during the first 6 months of 2003.
Corporate exposures have fallen by 87% to #0.3 billion, including a #0.9 billion
reduction in exposure to manufacturing counterparties.
Asset Finance exposures have also fallen, by 43% to #2.5 billion, with the major
exposures in Asset Finance being principally infrastructure projects. Of this
reduction, #1.6 billion is due to sales in the Project Finance and
Infrastructure portfolios.
Credit exposures by sector
As at 30 June 2003 Specific Average Investment Sub- Total
Provisions of Top 5 Grade Investment (net of provisions)
exposures Grade
# m # m # bn # bn # bn
________ ________ ________ ________ ________
Banks and Financial Institutions - 263.3 3.2 - 3.2
Sovereign - 72.8 0.4 - 0.4
Corporates:
- Utilities, energy & natural r'ces - 115.8 0.6 - 0.6
- Aero, defence & airlines - 20.1 - 0.1 0.1
- Telecoms 41 30.3 - 0.1 0.1
- Manufacturing & transport 9 66.8 0.3 0.1 0.4
- Other - 62.0 0.7 0.1 0.8
Asset Finance:
- Project Finance (excl. Property) 189 60.6 0.6 0.6 1.2
- Property 3 75.1 0.5 0.1 0.6
- Infrastructure Finance 6 201.9 2.1 0.2 2.3
- Operating Leasing - 88.6 0.4 0.2 0.6
ABS/MBS:
- Asset / Mortgage Backed 84 87.9 3.5 0.1 3.6
- CDOs 16 87.6 1.6 0.1 1.7
- Federal Agency - 49.7 0.1 - 0.1
________ ________ ________ ________ ________
Credit exposure 348 14.0 1.7 15.7
Equity related (excl. undrawns) 236 (1) - 0.7 0.7
________ ________ ________ ________ ________
Total exposure 584 14.0 2.4 16.4
As at 31 December 2002
Banks and Financial Institutions 37 461.6 13.5 0.1 13.6
Sovereign - 308.9 1.9 - 1.9
Corporates:
- Utilities, energy & natural r'ces 40 149.6 1.0 - 1.0
- Aero, defence & airlines - 26.0 0.1 0.1 0.2
- Telecoms 155 87.9 0.5 0.1 0.6
- Manufacturing & transport 21 210.3 1.3 0.1 1.4
- Other 5 125.7 2.2 0.9 3.1
Asset Finance:
- Project Finance (excl. Property) 167 64.2 1.3 0.6 1.9
- Property - 122.9 1.4 0.1 1.5
- Infrastructure Finance - 236.5 2.9 0.2 3.1
- Operating Leasing - 176.9 0.9 0.2 1.1
ABS/MBS:
- Asset / Mortgage Backed 76 175.5 13.4 0.3 13.7
- CDOs 62 126.8 3.8 0.1 3.9
- Federal Agency - 251.3 0.8 - 0.8
________ ________ ________ ________ ________
Credit exposure 563 45.0 2.8 47.8
Equity related (excl. undrawns) 182 (1) - 0.9 0.9
________ ________ ________ ________ ________
Total exposure 745 45.0 3.7 48.7
(1) Balance includes #67 million (December 2002: #55 million) specific
provisions relating to the Newark collateralised bond obligations.
Asset backed and mortgage backed securities exposures fell from #13.7 billion to
#3.6 billion during the first half of the year. CDO exposures have also fallen
by #2.2 billion to #1.7 billion. Of the remaining #1.7 billion, #800 million is
covered by purchased credit protection.
Additional sector analysis
Aircraft As at 30 June 2003 As at 31 Dec 2002
# m # m
________ ________
IEM 219.6 220.6
Asset backed securities (ABS) 576.7 761.8
Other 121.1 194.3
________ ________
917.4 1,176.7
US and UK power lending
UK 229.8 313.9
US 611.6 818.0
________ ________
841.4 1,131.9
Of which:
________ ________
Power projects lending on credit watch 511.0 351.3
Overall, aircraft exposures (net of provisions) fell by 22% to #917.4 million.
Aircraft ABS exposures fell by 24% to #576.7 million during the first 6 months
of 2003 reflecting asset sales and additional credit provisions raised. Other
aircraft exposure fell from #194.3 million to #121.1 million.
The IEM balance above of #219.6 million relates to rentals receivable, whilst
the corresponding assets have a net book value of #414 million.
Within the Project Finance portfolio exposure to UK and US Power projects fell
by 26% to #841.4 million. This included a 27% fall in UK exposure and a 25% fall
in US power exposure.
Credit exposures by region
As at 30 June 2003 Investment Sub-investment Total
Grade Grade
# bn # bn # bn
________ ________ ________
Europe 7.2 0.8 8.0
North America 6.3 1.4 7.7
Asia-Pacific 0.4 0.1 0.5
Latin America - 0.1 0.1
Middle East 0.1 - 0.1
________ ________ ________
Total exposure 14.0 2.4 16.4
As at 31 December 2002 Investment Sub-investment Total
Grade Grade
# bn # bn # bn
________ ________ ________
Europe 20.2 2.3 22.5
North America 22.0 1.2 23.2
Asia-Pacific 2.6 0.1 2.7
Latin America - 0.1 0.1
Middle East 0.2 - 0.2
________ ________ ________
Total exposure 45.0 3.7 48.7
The majority of the #32.3 billion fall in exposure during the first 6 months of
2003 occurred in Europe (#14.5 billion) and North America (#15.5 billion). The
fall in North American exposure is due to increased sales of investment
securities, predominantly ABS, CDOs and corporate bonds.
In addition to sales of investment securities, the #14.5 billion fall in
European exposures includes significant sales of Project Finance, Infrastructure
and Property transactions.
Exposures in the Asia-Pacific region fell 81% to #0.5 billion. #0.8 billion of
the fall represents sales in Japanese sovereign debt.
Sub-investment grade credit exposure
As at 30 June 2003 As at 31 December 2002
Specific Average Total Specific Average Total
provisions of Top 5 exposure provisions of Top 5 exposure
exposures exposures
# m # m # bn # m # m # bn
________ ________ ________ ________ ________ ________
Banks and Financial Institutions - - - 37 18.6 0.1
Sovereign - - - - - -
Corporates 10 39.5 0.4 52 50.4 1.2
Asset Finance 198 52.5 1.1 167 59.4 1.1
Asset Backed Securities/Mortgage
Backed Securities 100 32.7 0.2 80 27.8 0.4
________ ________ ________ ________ ________ ________
Credit exposure 308 1.7 336 2.8
________ ________ ________ ________ ________ ________
High yield 107 - 0.1 223 38.3 0.1
Private equity (excluding undrawns) 169 0.6 127 0.8
________ ________ ________ ________ ________ ________
Total exposure 584 2.4 686 3.7
Sub-investment grade credit exposures fell 39% to #1.7 billion predominantly due
to reduced corporate exposures. In addition, a #0.9 billion reduction in
Acquisition Finance was offset by downward credit migration of #0.6 billion from
investment grade during the first 6 months of the year.
High yield securities
As at As at
30 June 2003 31 December 2002
# bn # bn
________ ________
Opening asset balance (net of provisions) 0.8 1.2
Less:
Asset disposals (net of disposals) (0.1) (0.3)
Additional provisions - (0.1)
________ ________
High yield securities assets 0.7 0.8
Amount covered by credit protection through the Collateralised Bond
Obligation (0.6) (0.7)
________ ________
High yield securities exposure 0.1 0.1
The net exposure of assets not covered under the Newark collateralised bond
obligation is #0.1 billion. Dependent on portfolio performance, Abbey National
remains liable to extra margin contribution of up to #73 million in respect of
Newark.
3.3: First National
As at 30 June 2003 As at 31 December 2002
Assets RWAs Assets RWAs
# bn # bn # bn # bn
Consumer and Retail Finance Lending - - 4.8 3.9
Motor Finance 2.7 3.0 2.9 3.6
Litigation Finance 0.3 0.3 0.3 0.3
Total First National 3.0 3.3 8.0 7.8
The risk weighted assets of Motor Finance include 100% of assets held by the
Peugeot S.A (PSA) joint venture, while only the Group's 50% share of the total
assets are included in the above table. Motor Finance is now closed to new
business, with asset balances expected to have substantially reduced within the
next three years. Restructuring costs to date are largely redundancy charges,
with further redundancy costs and other costs associated with the risks of
closing to new business also expected to be incurred in future periods.
Litigation Finance represents the funding of the purchase of 'after the event'
insurance policies and other costs incurred by individuals in support of legal
claims. Such loans are backed by insurance policies. The maturity profile of
such loans is determined by the period of settlement of claims, the majority of
which occur within 24 months. The Litigation Finance market has been affected by
a number of external factors including the appointment of administrators to The
Accident Group in May 2003. Litigation Finance has loans to clients of The
Accident Group of #181 million as at 30th June 2003. Abbey National is working
with other banks and insurers to ensure orderly management of claims and
claimant loans. The impact of the collapse of The Accident Group remains
uncertain.
3.4: Other PBU businesses
As at As at
30 June 2003 31 December 2002
# m # m
________ ________
Loss before tax (38) (84)
Total assets (excluding embedded value) 4,049 3,242
Embedded value asset 217 192
New business premiums 163 874
________ ________
The Dublin based international life assurance businesses have been largely
closed to new business. As a result, non-recurring closure costs and changes in
assumptions used in the calculation of embedded value have resulted in a loss
before tax of #33 million (#27 million after tax). In the embedded value asset,
offsetting this loss was a transfer of #52 million into the long-term fund from
the shareholders' fund.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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