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