TIDM63GF TIDM68FF TIDMLLOP
RNS Number : 9849N
Bank of Scotland Plc
27 February 2009
27 February 2009
Bank of Scotland plc Preliminary Results 2008
Stock Exchange Announcement
Contents
+-------------------------------------------------------------------------------+------+
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+-------------------------------------------------------------------------------+------+
| Introduction | 3 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| Financial Highlights | 4 |
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| | |
+-------------------------------------------------------------------------------+------+
| Review of Financial Performance | 7 |
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| | |
+-------------------------------------------------------------------------------+------+
| Segmental Analysis | 9 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| Divisional Reviews | |
+-------------------------------------------------------------------------------+------+
| Retail | 10 |
+-------------------------------------------------------------------------------+------+
| Corporate | 11 |
+-------------------------------------------------------------------------------+------+
| International | 12 |
+-------------------------------------------------------------------------------+------+
| Treasury | 13 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| Additional Information | 16 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| Financial Information: | |
+-------------------------------------------------------------------------------+------+
| Consolidated Income Statement - statutory | 27 |
+-------------------------------------------------------------------------------+------+
| Consolidated Balance Sheet - statutory | 28 |
+-------------------------------------------------------------------------------+------+
| Consolidated Statement of Recognised Income and Expense - statutory | 29 |
+-------------------------------------------------------------------------------+------+
| Consolidated Cash Flow Statement - statutory | 30 |
+-------------------------------------------------------------------------------+------+
| Notes | 31 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| Contacts | 47 |
+-------------------------------------------------------------------------------+------+
FORWARD LOOKING STATEMENTS
This announcement contains forward looking statements with respect to the
business, strategy and plans of Bank of Scotland plc, its current goals and
expectations relating to its future financial condition and performance. By
their nature, forward looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
The Group's actual future results may differ materially from the results
expressed or implied in these forward looking statements as a result of a
variety of factors, including UK domestic and global economic and business
conditions, risks concerning borrower credit quality, market related risks such
as interest rate risk and exchange rate risk in its banking business, changing
demographic trends, unexpected changes to regulation, the policies and actions
of governmental and regulatory authorities in the UK or jurisdictions outside
the UK, including other European countries and the US, exposure to legal
proceedings or complaints, changes in customer preferences, competition and
other factors. Please refer to the latest Annual Report for a discussion of
such factors. The forward looking statements contained in this announcement are
made as at the date of this announcement, and the Group undertakes no obligation
to update any of its forward looking statements.
Introduction
The Bank of Scotland plc ('BoS' plc) 2008 Preliminary Results contained in this
report cover the results of the BOS plc Group (the 'Group') for the year ended
31 December 2008. BoS plc is the banking entity of the HBOS Group. Unless
otherwise stated, the analysis throughout this document compares the year to 31
December 2008 with the year to 31 December 2007.
Background
The continuing global dislocation in financial markets in 2008 has resulted in
exceptional instability and volatility, leading to falling market, investor and
customer confidence. This has had a profound effect on the banking sector
generally and on HBOS specifically. Since the summer of 2007, it had become
increasingly difficult for HBOS to raise funds in wholesale markets. Pressures
on the banking and financial services sectors were evident through increases in
the cost of insurance against bank defaults, deteriorating economic conditions,
increased concerns about credit risk and sustained tight conditions in wholesale
money markets, despite measures taken by central banks to increase liquidity.
The board of HBOS sought to restore confidence and stability through an
agreement to be acquired by Lloyds TSB, as announced on 18 September 2008.
However turbulence in the markets continued, fuelled by concerns about credit
risk and worsening economic conditions. Measures by national authorities and
central banks failed to stem this turbulence and restore inter-bank confidence.
The UK Government decided that it would be appropriate for the UK banking sector
to increase its level of capitalisation. This led to the UK Government
announcing, on 8 October 2008, specific and comprehensive measures to ensure the
stability of the UK financial system. This included a significant
recapitalisation of the UK banking sector together with the introduction of a
guarantee by HM Treasury in respect of future short and medium terms debt
issuance. On 13 October 2008, the terms of the acquisition by Lloyds TSB were
amended and, as part of the UK Government's co-ordinated package of measures,
HBOS announced a Placing and Open Offer to raise GBP11.5bn of new capital
(consisting of GBP8.5bn in ordinary shares and GBP3.0bn in preference shares).
The capital raising, underwritten by the UK Government, was made available to
HBOS on condition that the acquisition by Lloyds TSB completed. On 16 January
2009, the acquisition of HBOS by Lloyds TSB completed and the name of the
combined group was changed to Lloyds Banking Group plc ('LBG').
Basis of Presentation
In order to provide a clearer representation of the Group's underlying business
performance the Group presents its results on a basis referred to as
'underlying' which incorporates the following adjustments:
* Excluding regulatory provisions, the loss on sale of BankWest and St
Andrews, the impact of the change in corporation tax rates, and goodwill
impairment;
* Operating lease depreciation and impairment on investment securities are netted
against income;
* Share of (losses)/profits of associates and jointly controlled entities are
included within underlying non-interest income.
A reconciliation of underlying (loss)/profit before tax to the statutory profit
before tax is shown on page 4.
During 2008, certain businesses were transferred between the Retail, Corporate
and Treasury divisions. The 2008 Preliminary Results are reported in line with
this new structure and the 2007 divisional comparatives have been restated.
There is no impact on the 2007 Group Consolidated Balance Sheet and Income
Statement previously published.
Financial Highlights
+--------------------------------------------------------------+------------+------------+
| Profit Analysis by Division | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | | |
| | GBPm | GBPm |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| Retail | 1,366 | 2,139 |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| Corporate | (6,785) | 2,460 |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| International | 4 | 630 |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| Treasury | | |
+--------------------------------------------------------------+------------+------------+
| Before impact of Market Dislocation | 284 | 428 |
+--------------------------------------------------------------+------------+------------+
| Impact of Market Dislocation(1) | (3,948) | (227) |
+--------------------------------------------------------------+------------+------------+
| | (3,664) | 201 |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| Other Activities | (369) | (346) |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| Underlying (loss)/profit before taxation | | |
+--------------------------------------------------------------+------------+------------+
| Before impact of Market Dislocation | (5,500) | 5,311 |
+--------------------------------------------------------------+------------+------------+
| Impact of Market Dislocation | (3,948) | (227) |
+--------------------------------------------------------------+------------+------------+
| | (9,448) | 5,084 |
+--------------------------------------------------------------+------------+------------+
| Items excluded from underlying (loss)/profit before tax: | | |
+--------------------------------------------------------------+------------+------------+
| Regulatory provisions charge | (200) | (122) |
+--------------------------------------------------------------+------------+------------+
| Goodwill impairment | (142) | |
+--------------------------------------------------------------+------------+------------+
| Loss on sale of BankWest and St Andrews | (845) | |
+--------------------------------------------------------------+------------+------------+
| Impact of the 2008 change in corp. tax rate on | | (10) |
| the value of leasing assets | | |
+--------------------------------------------------------------+------------+------------+
| (Loss)/profit before tax - statutory | (10,635) | 4,952 |
+--------------------------------------------------------------+------------+------------+
| Taxation | 2,448 | (1,318) |
+--------------------------------------------------------------+------------+------------+
| Profit for disposal group classified as held | | 4 |
| for sale | | |
+--------------------------------------------------------------+------------+------------+
| (Loss)/profit for the year | (8,187) | 3,638 |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| Attributable to: | | |
+--------------------------------------------------------------+------------+------------+
| Parent company shareholders | (8,238) | 3,608 |
+--------------------------------------------------------------+------------+------------+
| Minority interests | 51 | 30 |
+--------------------------------------------------------------+------------+------------+
| | (8,187) | 3,638 |
+--------------------------------------------------------------+------------+------------+
Note 1 on page 6.
+---------------------------------------------------------------------+---------------+---------------+
| | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | GBPm | GBPm |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| Results - Statutory | | |
+---------------------------------------------------------------------+---------------+---------------+
| Net operating income | 9,070 | 12,349 |
+---------------------------------------------------------------------+---------------+---------------+
| Operating expenses | (5,974) | (5,653) |
+---------------------------------------------------------------------+---------------+---------------+
| Operating profit before provisions | 3,096 | 6,696 |
+---------------------------------------------------------------------+---------------+---------------+
| Impairment losses on loans and advances | (9,857) | (2,012) |
+---------------------------------------------------------------------+---------------+---------------+
| Impairment losses on investment securities | (2,193) | (60) |
+---------------------------------------------------------------------+---------------+---------------+
| Operating (loss)/profit | (8,954) | 4,624 |
+---------------------------------------------------------------------+---------------+---------------+
| Share of (losses)/profits of jointly controlled entities and | (938) | 241 |
| associates | | |
+---------------------------------------------------------------------+---------------+---------------+
| Non-operating (expense)/income | (743) | 87 |
+---------------------------------------------------------------------+---------------+---------------+
| (Loss)/profit before taxation | (10,635) | 4,952 |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| Results - Underlying(2) | | |
+---------------------------------------------------------------------+---------------+---------------+
| Underlying net interest income | 8,293 | 7,626 |
+---------------------------------------------------------------------+---------------+---------------+
| Underlying non-interest income | (3,569) | 3,796 |
+---------------------------------------------------------------------+---------------+---------------+
| Underlying net operating income | 4,724 | 11,422 |
+---------------------------------------------------------------------+---------------+---------------+
| Underlying operating expenses | (4,417) | (4,413) |
+---------------------------------------------------------------------+---------------+---------------+
| Underlying operating profit before provisions | 307 | 7,009 |
+---------------------------------------------------------------------+---------------+---------------+
| Impairment losses on loans and advances | (9,857) | (2,012) |
+---------------------------------------------------------------------+---------------+---------------+
| Non-operating income | 102 | 87 |
+---------------------------------------------------------------------+---------------+---------------+
| Underlying (loss)/profit before taxation | (9,448) | 5,084 |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| Key Balance Sheet Measures | | |
+---------------------------------------------------------------------+---------------+---------------+
| Shareholders equity (excluding minority interests) | 11,661 | 21,488 |
+---------------------------------------------------------------------+---------------+---------------+
| Total assets | 643,978 | 603,632 |
+---------------------------------------------------------------------+---------------+---------------+
| Risk weighted assets | 326,703 | 307,482 |
+---------------------------------------------------------------------+---------------+---------------+
| Loans and advances to customers | 473,015 | 460,267 |
+---------------------------------------------------------------------+---------------+---------------+
| Customer deposits | 262,201 | 272,687 |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| Risk Asset Ratios | | |
+---------------------------------------------------------------------+---------------+---------------+
| Core Tier 1 capital (3) | 4.7% | 6.4% |
+---------------------------------------------------------------------+---------------+---------------+
| Tier 1 capital | 5.3% | 7.0% |
+---------------------------------------------------------------------+---------------+---------------+
| Total capital | 9.7% | 10.9% |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| | | |
+---------------------------------------------------------------------+---------------+---------------+
| Including the capital injection in February 2009(4) | | |
+---------------------------------------------------------------------+---------------+---------------+
| Core Tier 1 capital(3) | 7.3% | |
+---------------------------------------------------------------------+---------------+---------------+
| Tier 1 capital | 7.9% | |
+---------------------------------------------------------------------+---------------+---------------+
| Total capital | 12.3% | |
+---------------------------------------------------------------------+---------------+---------------+
Notes 2-4 on page 6.
+-----+--------------------------------------------------------------------------------+
| Notes |
+--------------------------------------------------------------------------------------+
| (1) | The following table summarises the impact of Market Dislocation in Treasury |
| | which has been excluded from the underlying results: |
+-----+--------------------------------------------------------------------------------+
+-----+----------------------------------------------+-----------+------------+------------+
| | | | Year | Year |
| | | | ended | ended |
| | | | 31.12.2008 | 31.12.2007 |
| | | | | |
| | | | GBPm | GBPm |
+-----+----------------------------------------------+-----------+------------+------------+
| | Within Net Interest Income | | | |
+-----+----------------------------------------------+-----------+------------+------------+
| | Accretion of negative fair value adjustments | | 96 | |
| | on assets reclassified under the IAS39 | | | |
| | amendment | | | |
+-----+----------------------------------------------+-----------+------------+------------+
| | | | | |
+-----+----------------------------------------------+-----------+------------+------------+
| | Within Non-interest Income | | | |
+-----+----------------------------------------------+-----------+------------+------------+
| | Negative fair value adjustments (NFVA) | | (2,555) | (227) |
+-----+----------------------------------------------+-----------+------------+------------+
| | Impairment losses | | (1,421) | |
+-----+----------------------------------------------+-----------+------------+------------+
| | Closeout costs of Lehman Brothers' | | (68) | |
| | derivative contracts | | | |
+-----+----------------------------------------------+-----------+------------+------------+
| | Total within Non-interest income | | (4,044) | (227) |
+-----+----------------------------------------------+-----------+------------+------------+
| | | | | |
+-----+----------------------------------------------+-----------+------------+------------+
| | Total impact of Market Dislocation | | (3,948) | (227) |
+-----+----------------------------------------------+-----------+------------+------------+
| (2) | See 'Basis of Presentation' on page 3 for a description of the underlying basis. |
+-----+----------------------------------------------+-----------+------------+------------+
+-----+--------------------------------------------------------------------------------+
| (3) | Tier 1 capital less preference share capital and preferred securities, as |
| | shown on page 19. |
+-----+--------------------------------------------------------------------------------+
+-----+--------------------------------------------------------------------------------+
| (4) | Includes the down-streaming from HBOS plc to BoS plc of the net proceeds of |
| | GBP8.4bn ordinary shares from Government re-capitalisation. This was approved |
| | by the board on 26 February 2009. |
+-----+--------------------------------------------------------------------------------+
Review of Financial Performance
The Group operated in difficult market conditions during 2008. The results were
affected by a significant deterioration in credit quality, particularly in the
second half of 2008 as the UK economy deteriorated and residential and
commercial property prices declined. They were also affected by the continuing
dislocation in financial markets which led to further sharp falls in the values
of our Treasury debt securities portfolio. Statutory loss before tax was
GBP10,635m (2007 profit before tax of GBP4,952m).
The income statement commentary that follows is presented on an underlying basis
(see 'Basis of Presentation' on page 3).Underlying loss before tax for the year
to 31 December 2008 was GBP9,448m (2007 profit of GBP5,084m).
Net interest income
Underlying net interest income increased to GBP8,293m (2007 GBP7,626m), mainly
due to growth in Retail, which benefited from improved margins, and to growth in
International and Corporate reflecting increased advances.
Non-interest Income
Underlying non-interest income decreased to negative GBP3,569m (2007 income of
GBP3,796m). Excluding the negative GBP4,044m (2007 negative GBP227m) impact of
Market Dislocation, summarised on page 6, and described in further detail in the
Treasury divisional section, underlying non-interest income decreased to GBP475m
(2007 GBP4,023m). The significant decline is due to Corporate and reflects
significant impairment losses on property related investments made by the Joint
Venture business and private equity fund investments made by the Integrated
Finance business, together with a material decline in the trading performance
generated by jointly controlled entities, particularly in the housebuilding and
property sectors.
Operating Expenses
Underlying operating expenses were broadly stable at GBP4,417m (2007 GBP4,413m).
The slight increase includes additional costs arising from planned investments
in International, partially offset by reduced staff costs in Corporate, benefits
from cost reduction initiatives in Retail, and lower bonus costs across the
Group.
Credit Quality
Impairment losses on loans and advances were GBP9,857m (2007 GBP2,012m). While
increases were seen in all three banking divisions, the most significant
increase was in Corporate. This increase reflects the worsening economic
conditions, which specifically deteriorated in the last quarter of 2008. The
higher impairment losses in Corporate were also the result of applying a
provisioning methodology more consistent with that used by Lloyds TSB. In
Retail, the increase in impairment losses mainly related to secured lending as
the difficult economic conditions resulted in higher mortgage arrears,
particularly in the specialist book. This, together with a material decline in
house prices, resulted in increased provisioning requirements. Similar trends to
the UK were evident in our International division, reflecting the deteriorating
economies.
Items excluded from underlying profit before tax
Regulatory Provisions charge - The regulatory provisions charge of GBP200m is in
respect of the Financial Services Compensation Scheme ('FSCS') relating to
HBOS's share of expenses, primarily the interest payable on the loan taken out
by FSCS to pay compensation to depositors. In 2007 the charge relates to ex
gratia refunds of current account service fees, together with the associated
administration costs.
Loss on sale of BankWest and St Andrews - On 19 December 2008, BankWest and St
Andrews Australia were sold to Commonwealth Bank of Australia for a total
consideration of A$2.4bn. The sale generated a loss of GBP845m, including the
write off of GBP240m of goodwill.
Goodwill impairment - Goodwill impairment principally comprises GBP72m in
respect of the full write down of goodwill held in respect of the acquisition of
the ICC business banking division in Ireland and GBP50m being the write down of
goodwill relating to a specialist area of the UK credit card business to a
recoverable amount of GBP20m.
Taxation
The tax credit for the year was GBP2,448m (2007 tax charge of GBP1,318m). The
2007 tax charge of GBP1,318m includes a credit of GBP76m in respect of the
change in the rate of UK corporation tax. Excluding these and other items
stripped out of underlying (loss)/profit (i.e regulatory provisions, loss on
sale of BankWest and St Andrews, and goodwill impairment), results in an
effective tax rate of 28% (2007 25%). Included within the tax credit of
GBP2,448m is an overseas tax charge of GBP218m (2007 GBP236m).
Balance Sheet Analysis
Loans and advances to customers were GBP473.0bn (2007 GBP460.3bn). On a
like-for-like basis, excluding BankWest and St Andrews which were sold in
December 2008, loans and advances to customers increased by 8% primarily
reflecting growth in Corporate resulting from growth in the first half of 2008
and by foreign currency movements.
Customer deposits decreased to GBP262.2bn (2007 GBP272.7bn) reflecting the sale
of BankWest and St Andrews and net outflows in September and October, partially
offset by the increased use of repos in Treasury. Deposit flows have improved
following the announcement of the LBG acquisition.
Regulatory Capital
On 1 January 2008 BoS Group implemented the Basel II rules for capital adequacy
and the capital ratios throughout this document are shown on a Basel II basis.
The Tier 1 capital ratio at 31 December 2008 is 5.3% (1 January 2008 7.0%) and
the Core Tier 1 ratio is 4.7% (1 January 2008 6.4%). Including the net capital
injection of GBP8.4bn from HBOS plc in February 2009 from the UK Government
re-capitalisation, the Tier 1 Capital ratio would be 7.9% and the Core Tier 1
ratio 7.3% at 31 December 2008.
Liquidity and Funding
Following speculation on HBOS's future in mid-September, the HBOS Group suffered
deposit outflows, further increasing the HBOS Group's reliance on whole funding
markets. The majority of these deposit outflows were non-bank financial
institutions and large corporates, rather than personal account customers. In
recent months this position has stabilised with net inflows evident following
the announcement of the proposed transaction with Lloyds TSB. Further
information is included in the Additional Information section on page 20.
Prospects
The prospects for the Group should now be considered in the context of the
combined LBG and reference should be made to the LBG Preliminary Results
announcement for further information.
Segmental Analysis
A review of the financial and operating performance of the divisions is included
on pages 10-15. The following table summarises the divisional results of the
Group.
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Income Statement | Retail | Corporate | International | Treasury | Other | Year | Year |
| Year ended 31 December 2008 | GBPm | | GBPm | | Activities(2) | ended | ended |
| | | GBPm | | GBPm | GBPm | | 31.12.07(1) |
| | | | | | | 31.12.08 | GBPm |
| | | | | | | | |
| | | | | | | GBPm | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying net interest | 4,242 | 2,298 | 1,477 | 270 | 6 | 8,293 | 7,626 |
| income | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying non-interest | 1,263 | (1,475) | 230 | (3,764) | 177 | (3,569) | 3,796 |
| income | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying net operating | 5,505 | 823 | 1,707 | (3,494) | 183 | 4,724 | 11,422 |
| income | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying operating | (2,011) | (939) | (745) | (170) | (552) | (4,417) | (4,413) |
| expenses | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying operating profit | 3,494 | (116) | 962 | (3,664) | (369) | 307 | 7,009 |
| before provisions | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Impairment losses on loans | (2,230) | (6,669) | (958) | | | (9,857) | (2,012) |
| and advances | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying operating | 1,264 | (6,785) | 4 | (3,664) | (369) | (9,550) | 4,997 |
| profit/(loss) | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Non-operating income | 102 | | | | | 102 | 87 |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying profit/(loss) | 1,366 | (6,785) | 4 | (3,664) | (369) | (9,448) | 5,084 |
| before tax | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Year ended 31 December 2007 | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
| Underlying profit before tax | 2,139 | 2,460 | 630 | 201 | (346) | 5,084 | |
| | | | | | | | |
+------------------------------+---------+-----------+---------------+----------+---------------+----------+--------------+
(1)Retail, Corporate and Treasury have been restated to reflect the divisional
reorganisation.
(2)Other Activities combine the activities of the Insurance & Investment and
Group Items divisions of the HBOS Group which are not individually material to
the Group. HBOS Group's Insurance & Investment operations are primarily
transacted in entities outside the Group, with operations within the Group
limited to sales activities in the banking network. Group Items carries out the
head office and central activities of the Group.
Retail
+------------------------------------------------------+---------------+--+--------------+
| Income Statement | Year | | Year |
| | ended | | ended |
| | 31.12.2008 | | 31.12.2007 |
| | GBPm | | (Restated) |
| | | | GBPm |
+------------------------------------------------------+---------------+--+--------------+
| Net interest income | 4,242 | | 4,113 |
+------------------------------------------------------+---------------+--+--------------+
| Underlying non-interest income | 1,263 | | 1,239 |
+------------------------------------------------------+---------------+--+--------------+
| Underlying net operating income | 5,505 | | 5,352 |
+------------------------------------------------------+---------------+--+--------------+
| Underlying operating expenses | (2,011) | | (2,023) |
+------------------------------------------------------+---------------+--+--------------+
| Underlying operating profit before provisions | 3,494 | | 3,329 |
+------------------------------------------------------+---------------+--+--------------+
| Impairment losses on loans and advances | (2,230) | | (1,277) |
+------------------------------------------------------+---------------+--+--------------+
| Underlying operating profit | 1,264 | | 2,052 |
+------------------------------------------------------+---------------+--+--------------+
| Non-operating income | 102 | | 87 |
+------------------------------------------------------+---------------+--+--------------+
| Underlying profit before tax | 1,366 | | 2,139 |
+------------------------------------------------------+---------------+--+--------------+
| | | | |
+------------------------------------------------------+---------------+--+--------------+
| Cost:income ratio | 36.5% | | 37.8% |
+------------------------------------------------------+---------------+--+--------------+
| | | | |
+------------------------------------------------------+---------------+--+--------------+
Underlying profit before tax in Retail decreased to GBP1,366m (2007 GBP2,139m)
as a result of increased impairment losses on loans and advances.
Total net operating income increased to GBP5,505m (2007 GBP5,352m). Net interest
income was the main driver, increasing to GBP4,242m (2007 GBP4,113m). Net
interest margin increased despite the cost of both wholesale and retail funding
increasing as a consequence of the dislocation in financial markets and a more
competitive retail savings market. The margin improvement mainly reflects the
beneficial impact of higher mortgage acquisition and retention spreads.
Underlying operating expenses decreased to GBP2,011m (2007 GBP2,023m) and
reflect the continued benefit from cost reduction initiatives in prior years
together with further cost reduction measures taken during 2008.
Impairment losses increased to GBP2,230m (2007 GBP1,277m). Secured impairment
losses were GBP1,125m (2007 GBP28m) with the charge for unsecured lending at
GBP1,105m (2007 GBP1,249m).
Operational Performance
Mortgages
Given the slowing market and the increased cost of borrowing, price and criteria
changes have been made to focus asset growth selectively, both to manage the
overall risk profile and improve risk adjusted returns on capital. As a result,
the proportion of high LTV business has been reduced, delivering new business
LTVs of 67% for the full year (2007 65%) against a backdrop where equity for
both home purchasers and remortgage customers has been eroded by negative house
price inflation. Gross lending for 2008 was GBP50bn (2007 GBP73bn), representing
a market share of 20% (2007 20%). Principal repaid was GBP47bn (2007 GBP58bn),
representing a market share of 22% (2007 23%). As a consequence, net lending was
GBP3bn (2007 GBP15bn), representing a 9% (2007 15%) market share.
Unsecured lending
In the current economic environment the cautious approach to unsecured lending
continues with the acquisition strategy being to target the existing customer
base with an appropriate and increased focus on credit risk relative to the
current economic conditions and proactively tighten credit availability to
existing credit card customers.
Savings and Banking
2008 has been characterised by far greater volatility of flows. Despite these
difficult market conditions, HBOS retains its market leading position of
Household Sector Liquid assets with a market share of 13.2% (2007 15.6%) and
this position, combined with the brand and distribution strength together with
innovative products, provides an excellent platform from which to attract future
inflows.
The competitiveness of the range of current accounts has continued to drive the
sales momentum. New bank accounts acquired totalled 960,000 (2007 one million)
and of these 75% (2007 75%) were full facility current accounts.
Corporate
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Income Statement | Year | | Year |
| | ended | | ended |
| | 31.12.2008 | | 31.12.2007 |
| | | | (Restated) |
| | GBPm | | GBPm |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Underlying net interest income | 2,298 | | 2,272 |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Underlying non-interest income | (1,475) | | 1,805 |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Underlying net operating income | 823 | | 4,077 |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Underlying operating expenses | (939) | | (998) |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Underlying operating profit before provisions | (116) | | 3,079 |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Impairment losses on loans and advances | (6,669) | | (619) |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Underlying (loss)/profit before tax | (6,785) | | 2,460 |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| | | | |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| Cost:income ratio | 114.1% | | 24.5% |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
| | | | |
+-------------------------------------------------------------------------------+----------------+-+-----------------+
A significant deterioration in corporate credit conditions, particularly in the
second half of 2008, led to very substantial impairment losses of GBP6,669m
(2007 GBP619m), primarily as a result of exposure to property-related
sectors.Underlying loss before tax was GBP6,785m (2007 profit of GBP2,460m).
Underlying net interest income increased to GBP2,298m (2007 GBP2,272m) due to
growth in the loan book. This was offset by lower margins reflecting slowing of
back book churn, which has impacted the timing of fee recognition, and increased
cost of deposits and higher wholesale funding costs. Underlying non-interest
income decreased to a loss of GBP1,475m (2007 GBP1,805m profit). Pronounced
falls in estimated values of property and other investments resulted in
substantial losses from the investment portfolio, primarily in the private
equity and joint ventures businesses.
Underlying operating expenses decreased to GBP939m (2007 GBP998m) reflecting
lower levels of performance based remuneration and lower headcount.
The level of impairment losses experienced, especially in the last quarter, was
principally a reflection of the acceleration in the deterioration in the economy
and as a result of applying a provisioning methodology more consistent with that
used by Lloyds Banking Group. The shape of the Corporate book, and in particular
its exposure to housebuilders, risk capital (loan stock, preference shares and
ordinary shares) and large single credit exposures, exacerbated the impact.
Operational Performance
The business is organised by the following asset classes:
In Real Estate as UK property values have fallen, increases in advances has been
restricted to a small number of existing customers drawing down existing
commitments.
In Commercial the focus was on existing lending customers and new primarily
deposit led, full banking relationships.
In Asset Solutions the vehicle finance businesses have been materially impacted
in 2008 by residual value and impairment losses on assets.
Specialised Industry Finance ('SIF') businesses performed well in 2008 in a
difficult market environment.
The Joint Ventures business has seen an extremely challenging 2008 across all
sectors in the UK, with housebuilding suffering from falling volume sales and
the negative impact on land values. Commercial property has also been adversely
impacted by the rapid deterioration in credit markets and the underlying economy
significantly reducing values.
Integrated, Structured & Acquisition Finance has been materially impacted by the
reduced deal volumes and falling asset values experienced across the private
equity sector in the UK and continental Europe. The drawn LBO portfolio debt
totalled GBP6.7bn (2007 GBP6.0bn) with undrawn facilities totalling GBP1.3bn
(2007 GBP1.3bn).
International
+---------------------------------------------------+----------------+---+---------------+
| Income Statement | Year | | Year |
| | ended | | ended |
| | 31.12.2008 | | 31.12.2007 |
| | GBPm | | GBPm |
+---------------------------------------------------+----------------+---+---------------+
| Net interest income | 1,477 | | 1,105 |
+---------------------------------------------------+----------------+---+---------------+
| Underlying non-interest income | 230 | | 294 |
+---------------------------------------------------+----------------+---+---------------+
| Underlying net operating income | 1,707 | | 1,399 |
+---------------------------------------------------+----------------+---+---------------+
| Underlying operating expenses | (745) | | (653) |
+---------------------------------------------------+----------------+---+---------------+
| Underlying operating profit before provisions | 962 | | 746 |
+---------------------------------------------------+----------------+---+---------------+
| Impairment losses on loans and advances | (958) | | (116) |
+---------------------------------------------------+----------------+---+---------------+
| Underlying profit before tax | 4 | | 630 |
+---------------------------------------------------+----------------+---+---------------+
| | | | |
+---------------------------------------------------+----------------+---+---------------+
| Cost:income ratio | 43.6% | | 46.7% |
+---------------------------------------------------+----------------+---+---------------+
| | | | |
+---------------------------------------------------+----------------+---+---------------+
Income Statement
Underlying profit before tax was GBP4m (2007 GBP630m) reflecting an increase in
impairment losses, as a result of the deteriorating economic environment.
Operating profit before provisions increased to GBP962m (2007 GBP746m),
reflecting strong income growth across the division.The income statement
includes 2008 results for the BankWest and St Andrews businesses up until their
disposal on 19 December 2008 to Commonwealth Bank of Australia ('CBA'), and the
full year results for all other HBOS Australia businesses.
Operating Income and Margins
Underlying net operating income increased to GBP1,707m (2007 GBP1,399m). Net
interest income increased to GBP1,477m (2007 GBP1,105m) driven by growth in
lending balances, moderated by a decline in margin. The margin decline was
driven by Ireland where higher funding costs, slower churn in the back book
impacting the timing of fee recognition and a changing asset mix resulted in a
lower margin. Whilst significant price increases have been introduced on new
lending across our International banking businesses, these have not yet fully
materialised in the overall margin.
Operating Expenses
Underlying operating expenses increased to GBP745m (2007 GBP653m). This increase
was primarily due to investment in Australia in physical distribution, new
products, brand recognition, customer facing staff and back office
infrastructure in BankWest and St Andrews prior to their sale to CBA and in ENA
due to continued investment in the US infrastructure, establishment of the new
corporate business in Canada and a major strategic investment designed to
increase the deposit taking capability in Europe.
Credit Quality and Provisions
Impairment losses increased from GBP116m in 2007 to GBP958m in 2008. The
extremely challenging economic and market conditions led to rising arrears and
falling asset values. In Europe and North America deteriorating economic
conditions across key markets saw impairment losses increase primarily
reflecting two credit exposures in the US.
Lending and Deposit Growth
Loans and advances declined during 2008 reflecting the GBP27.0bn reduction in
balances in Australia following the sale of BankWest and St Andrews. This was
offset by the effect of currency translation and underlying growth in Ireland,
ENA and the continuing businesses in Australia.
Treasury
+----------------------------------------------------------------------------+------------------+------------------+
| Income Statement | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | | (Restated) |
| | GBPm | GBPm |
+----------------------------------------------------------------------------+------------------+------------------+
| Net interest income (excluding the impact of MD) | 174 | 136 |
+----------------------------------------------------------------------------+------------------+------------------+
| Underlying non-interest income (excluding the impact of MD) | 280 | 479 |
+----------------------------------------------------------------------------+------------------+------------------+
| Underlying net operating income (excluding the impact of MD) | 454 | 615 |
+----------------------------------------------------------------------------+------------------+------------------+
| Underlying operating expenses | (170) | (187) |
+----------------------------------------------------------------------------+------------------+------------------+
| Underlying profit before tax (excluding the impact of MD) | 284 | 428 |
+----------------------------------------------------------------------------+------------------+------------------+
| Impact of market dislocation | (3,948) | (227) |
+----------------------------------------------------------------------------+------------------+------------------+
| Underlying (loss)/profit before tax | (3,664) | 201 |
+----------------------------------------------------------------------------+------------------+------------------+
| | | |
+----------------------------------------------------------------------------+------------------+------------------+
| Cost:income ratio (excluding the impact of MD) | 37.4% | 30.4% |
+----------------------------------------------------------------------------+------------------+------------------+
| | | |
+----------------------------------------------------------------------------+------------------+------------------+
Underlying profit before tax (excluding the impact of Market Dislocation)
decreased to GBP284m (2007 GBP428m). Including the impact of Market Dislocation
of GBP(3,948)m (2007 GBP(227)m) loss before tax was GBP(3,664)m (2007 profit
before tax of GBP201m).
Operating Income
Underlying sales of Treasury products to customers remained robust but operating
income was adversely affected by the impact of dislocated financial markets on
trading revenues.
Operating Expenses
Underlying operating expenses decreased to GBP170m (2007 GBP187m) primarily
reflecting a reduction in performance related staff costs.
Treasury Debt Securities
As part of its investment credit activities Treasury holds a portfolio of debt
securities which are analysed below. The investment credit business has two
functions: firstly it manages part of the Group's prudential liquidity portfolio
and secondly it takes investment positions principally through the Grampian
conduit.
Following the International Accounting Standards Board's ('IASB') decision to
permit the reclassification of Financial Assets, Treasury reclassified certain
securities from assets held for trading into the Available for Sale ('AFS')
portfolio and, subsequently, in light of increasing illiquidity in the markets
for asset backed securities ('ABS'), changed the classification of ABS from AFS,
to Loans and Receivables.
ABS and FRNs with book values (as at 31 December 2008) of GBP10.1bn and GBP3.4bn
respectively were transferred out of Trading into the AFS portfolio with effect
from 1 July 2008. Subsequently, ABS with book values (as at 31 December 2008) of
GBP37.2bn were transferred out of the AFS portfolio and into Loans and
Receivables with effect from 1 November 2008. If these assets had not been
reclassified during the year additional negative fair value adjustments (NFVA)
of GBP981m would have been recognised in the income statement and the AFS
reserve movement would have been reduced by GBP68m (post tax).
Treasury's total debt securities portfolio as at 31 December 2008, net of
negative fair value adjustments ('NFVA') and impairment provisions, is
summarised in the following table:
+------------------------------+-------------+-----------+----------+------------+-------------+
| Asset class | Loans & | Available | Fair | As at | As at |
| | Receivables | for Sale | value | 31.12.2008 | 31.12.2007 |
| | GBPbn | GBPbn | through | GBPbn | GBPbn |
| | | | P/L | | |
| | | | GBPbn | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
| | | | | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Asset Backed Securities: | | | | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Direct | 20.5 | | 3.0 | 23.5 | 23.3 |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Grampian | 16.7 | | | 16.7 | 18.6 |
| conduit | | | | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
| | 37.2 | | 3.0 | 40.2 | 41.9 |
+------------------------------+-------------+-----------+----------+------------+-------------+
| | | | | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Covered Bonds | | 4.1 | | 4.1 | 3.2 |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Bank/Financial Institution | | 16.0 | 1.9 | 17.9 | 17.4(1) |
| Floating Rate Notes (FRNs) | | | | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Bank Certificates of Deposit | | 2.9 | 3.1 | 6.0 | 15.3(1) |
| (CDs) | | | | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Other(2) | | 1.8 | 6.0 | 7.8 | 2.8 |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Total Treasury Assets | 37.2 | 24.8 | 14.0 | 76.0 | 80.6 |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Landale | | 0.7 | | 0.7 | 0.6 |
+------------------------------+-------------+-----------+----------+------------+-------------+
| Total | 37.2 | 25.5 | 14.0 | 76.7 | 81.2 |
| (net of NFVA and impairments | | | | | |
| provisions) | | | | | |
+------------------------------+-------------+-----------+----------+------------+-------------+
1. GBP1.6bn reclassified between CDs and FRNs.
2. Principally Governments and Supra-nationals.
The decrease in ABS was due to paydowns of GBP4.3bn and NFVA and impairment
losses of GBP8.6bn, partially offset by the effects of foreign currency
movements which resulted in an increase of GBP11.3bn. The holding of Bank CDs
have reduced through maturities being replaced with Government backed bonds.
Market Dislocation
For the year to 31 December 2008, losses taken to the income statement due to
the impact of Market Dislocation on the Treasury debt securities portfolio
totalled GBP3,948m (2007 GBP227m), after reclassification, as follows:
+--------------------------------------------------------------+------------+-------------+
| | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | | GBPm |
| | GBPm | |
+--------------------------------------------------------------+------------+-------------+
| | | |
+--------------------------------------------------------------+------------+-------------+
| Negative fair value adjustments | (2,527) | (227) |
+--------------------------------------------------------------+------------+-------------+
| Impairment losses | (1,421) | |
+--------------------------------------------------------------+------------+-------------+
| Total impact of Market Dislocation | (3,948) | (227) |
+--------------------------------------------------------------+------------+-------------+
During the second half of the year a significant deterioration in market
sentiment and liquidity has affected the fair value of the ABS portfolio and in
particular certain asset classes including Alt-A bonds and CDOs. In addition the
adverse trends on credit quality which commenced in the first half of 2008 have
intensified in the second half of 2008 and early 2009 and as a result,
impairment losses of GBP0.8bn have been incurred primarily relating to Alt-A,
GBP0.6bn and ABS CDOs, GBP0.1bn. As a result of these developments, certain
asset classes have been written down significantly at the year end resulting in
the Alt-A portfolio with a book value of 59%, ABS CDOs of 20% and other CBO
positions of 53%.
In addition following the failure of a number of financial institutions in the
second half of 2008 impairment losses of GBP0.6bn have been incurred on the FRN
book relating to exposures to Lehman Brothers, Washington Mutual and Icelandic
Banks.
Cumulative NFVA and Impairment Losses at 31 December 2008
+------------------------------+------------------------------+------------+------------+------------+------------+
| Asset class | Income | Income | AFS | AFS | Cumulative |
| | Statement | Statement | Reserve | Reserve | |
+ +------------------------------+------------+------------+------------+------------+
| | Year | Year | Year | Year | Total |
+ +------------------------------+------------+------------+------------+------------+
| | Ended | Ended | Ended | Ended | |
+ +------------------------------+------------+------------+------------+------------+
| | 31.12.2008 | 31.12.2007 | 31.12.2008 | 31.12.2007 | 31.12.2008 |
| | | | | | |
+ +------------------------------+------------+------------+------------+------------+
| | GBPbn | GBPbn | GBPbn | GBPbn | GBPbn |
+------------------------------+------------------------------+------------+------------+------------+------------+
| | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| NFVA | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Asset Backed | 2.8 | 0.1 | 5.0 | 0.4 | 8.3 |
| Securities | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| FRNs | 0.3 | 0.1 | 1.3 | 0.2 | 1.9 |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Other | (0.6) | | 0.3 | 0.1 | (0.2) |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Total NFVA pre-tax | 2.5 | 0.2 | 6.6 | 0.7 | 10.0 |
+------------------------------+------------------------------+------------+------------+------------+------------+
| | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Impairment losses | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Asset Backed | 0.8 | | | | 0.8 |
| Securities | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| FRNs | 0.6 | | | | 0.6 |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Total Impairment losses | 1.4 | | | | 1.4 |
| pre-tax | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Total NFVA and Impairment | 3.9 | 0.2 | 6.6 | 0.7 | 11.4 |
| losses pre-tax | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Tax on Banking Book NFVA | | | (1.8) | (0.2) | |
+------------------------------+------------------------------+------------+------------+------------+------------+
| Total NFVA taken to AFS | | | 4.8 | 0.5 | |
| reserve | | | | | |
+------------------------------+------------------------------+------------+------------+------------+------------+
Exposure to Asset Backed Securities ('ABS')
+-----------------------------------------+------------+------------+------------+------------+
| Asset class | Net | Average | Net | Average |
| | Exposure | Mark | Exposure | Mark |
| | As at | As at | As at | As at |
| | 31.12.2008 | 31.12.2008 | 31.12.2007 | 31.12.2007 |
| | GBPbn | % | GBPbn | % |
+-----------------------------------------+------------+------------+------------+------------+
| | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| Mortgage Backed Securities | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| US RMBS(1) | 6.9 | 64 | 9.3 | 98 |
+-----------------------------------------+------------+------------+------------+------------+
| Non-US RMBS | 7.9 | 93 | 7.9 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| CMBS(1) | 3.3 | 95 | 3.3 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| | 18.1 | 79 | 20.5 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| Collateralised Debt Obligations | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| CBO(1) | 2.1 | 49 | 3.3 | 98 |
+-----------------------------------------+------------+------------+------------+------------+
| CLO(1) | 3.5 | 91 | 3.2 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| | 5.6 | 68 | 6.5 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| Personal Sector | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| Auto Loans | 1.6 | 98 | 1.5 | 100 |
+-----------------------------------------+------------+------------+------------+------------+
| Credit Cards | 3.5 | 96 | 2.8 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| Personal Loans | 1.1 | 95 | 1.0 | 98 |
+-----------------------------------------+------------+------------+------------+------------+
| | 6.2 | 96 | 5.3 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| FFELP Student Loans(1) | 7.0 | 94 | 5.6 | 98 |
+-----------------------------------------+------------+------------+------------+------------+
| | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| Other ABS | 0.6 | 89 | 0.7 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| Total Uncovered ABS | 37.5 | 82 | 38.6 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| Negative Basis(2) | 2.7 | 70 | 3.3 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
| | | | | |
+-----------------------------------------+------------+------------+------------+------------+
| Total ABS(3)(4) | 40.2 | 81 | 41.9 | 99 |
+-----------------------------------------+------------+------------+------------+------------+
(1) RMBS means Residential Mortgage Backed Securities; CMBS means Commercial
Mortgage Backed Securities; CBO means Collateralised Bond Obligations; CLO means
Collateralised Loan Obligations; FFELP means Federal Family Education Loan
Programme.
(2) Negative basis means bonds held with separate matching credit default
swap (CDS) protection.
(3) The total comprises US securities of GBP24.3bn, and Non-US securities of
GBP15.9bn.
(4)There has been no increase in net exposure as a result of the purchase of ABS
during the year. Any increase in net exposure is the result of exchange rate
movements in excess of paydowns, NFVAs and impairments.
Additional Information
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| 1Non-Interest Income | 17 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| 2Operating Expenses | 18 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| 3Capital Structure | 19 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| 4Risk | 20 |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
| | |
+-------------------------------------------------------------------------------+------+
1.Non-Interest Income
+--------------------------------------------------------------+------------+------------+
| | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | | GBPm |
| | GBPm | |
+--------------------------------------------------------------+------------+------------+
| Fees and commission income | 2,208 | 2,360 |
+--------------------------------------------------------------+------------+------------+
| Fees and commission expense | (382) | (396) |
+--------------------------------------------------------------+------------+------------+
| Net earned premiums on insurance contracts | 215 | 245 |
+--------------------------------------------------------------+------------+------------+
| Net trading income | (2,963) | 185 |
+--------------------------------------------------------------+------------+------------+
| Net investment income related to insurance and investment | 34 | 37 |
| business | | |
+--------------------------------------------------------------+------------+------------+
| Other income | 1,665 | 2,292 |
+--------------------------------------------------------------+------------+------------+
| Non-interest income - statutory | 777 | 4,723 |
+--------------------------------------------------------------+------------+------------+
| | | |
+--------------------------------------------------------------+------------+------------+
| Items included in the above statutory items which are | | |
| excluded from 'underlying (excluding the impact of market | | |
| dislocation)': | | |
+--------------------------------------------------------------+------------+------------+
| Impact of market dislocation | 4,044 | 227 |
+--------------------------------------------------------------+------------+------------+
| Impact of 2008 change in corporation tax on the value of | | 10 |
| leasing assets | | |
+--------------------------------------------------------------+------------+------------+
| | 4,821 | 4,960 |
+--------------------------------------------------------------+------------+------------+
| Less statutory items deducted in calculating 'underlying | | |
| non-interest income': | | |
+--------------------------------------------------------------+------------+------------+
| Impairment on investment securities | (2,193) | (60) |
+--------------------------------------------------------------+------------+------------+
| Operating lease depreciation | (1,178) | (985) |
+--------------------------------------------------------------+------------+------------+
| Change in investment contract liabilities | 17 | (7) |
+--------------------------------------------------------------+------------+------------+
| Net claims incurred on insurance contracts | (76) | (105) |
+--------------------------------------------------------------+------------+------------+
| Net change in insurance contract liabilities | 22 | (21) |
+--------------------------------------------------------------+------------+------------+
| Share of (losses)/profits of associates and jointly | (938) | 241 |
| controlled entities | | |
+--------------------------------------------------------------+------------+------------+
| Underlying non-interest income (excluding the impact of | 475 | 4,023 |
| Market Dislocation) | | |
+--------------------------------------------------------------+------------+------------+
| Impact of Market Dislocation(1) | (4,044) | (227) |
+--------------------------------------------------------------+------------+------------+
| Underlying non-interest income | (3,569) | 3,796 |
+--------------------------------------------------------------+------------+------------+
(1) The total impact of Market Dislocation for the year is GBP(3,948)m. This
figure comprises a GBP(4,044)m charge to non-interest income and a GBP96m credit
to Net Interest Income. Refer to note 1 on page 6.
2.Operating Expenses
+--------------------------------------------------------------+-------------+------------+
| | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | GBPm | GBPm |
+--------------------------------------------------------------+-------------+------------+
| Operating expenses - statutory | 5,974 | 5,653 |
+--------------------------------------------------------------+-------------+------------+
| | | |
+--------------------------------------------------------------+-------------+------------+
| Items included in the above statutory items which are | | |
| excluded from underlying: | | |
+--------------------------------------------------------------+-------------+------------+
| Regulatory provisions | (200) | (122) |
+--------------------------------------------------------------+-------------+------------+
| | 5,774 | 5,531 |
+--------------------------------------------------------------+-------------+------------+
| Items included in statutory definition that are excluded | | |
| from underlying: | | |
+--------------------------------------------------------------+-------------+------------+
| Change in investment contract liabilities | 17 | (7) |
+--------------------------------------------------------------+-------------+------------+
| Net claims incurred on insurance contracts | (76) | (105) |
+--------------------------------------------------------------+-------------+------------+
| Net change in insurance contract liabilities | 22 | (21) |
+--------------------------------------------------------------+-------------+------------+
| Operating lease depreciation | (1,178) | (985) |
+--------------------------------------------------------------+-------------+------------+
| Goodwill impairment | (142) | |
+--------------------------------------------------------------+-------------+------------+
| Underlying operating expenses | 4,417 | 4,413 |
+--------------------------------------------------------------+-------------+------------+
3.Capital Structure
On 1 January 2008 BoS Group implemented the Basel II rules for capital adequacy
and the capital ratios below are therefore shown on a Basel II basis only. The
Tier 1 capital ratio at 31 December 2008 is 5.3% (1 January 2008 7.0%) and the
Core Tier 1 ratio is 4.7% (1 January 2008 6.4%). Including the net capital
injection of GBP8.4bn from HBOS Plc in February 2009 from the Government
re-capitalisation, the Tier 1 Capital ratio would be 7.9% and the Core Tier 1
ratio 7.3% at 31 December 2008.
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| | As at | | |
| | 31.12.2008 | | |
| | (including capital | As at | As at |
| | injection)* | 31.12.2008 | 01.01.2008 |
| | GBPm | GBPm | GBPm |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Risk weighted assets | 326,703 | 326,703 | 307,482 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| | | | |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Capital Resources | | | |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Core Tier 1 | 26,012 | 17,661 | 22,164 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Perpetual non-cumulative preference shares | 1,200 | 1,200 | 1,200 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Innovative Tier 1 | 698 | 698 | 698 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Deductions from Tier 1 | (2,231) | (2,231) | (2,570) |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Total Tier 1 capital | 25,679 | 17,328 | 21,492 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| | | | |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Upper Tier 2 | 7,005 | 7,005 | 4,033 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Lower Tier 2 | 9,339 | 9,094 | 9,695 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Deductions from Tier 2 | (861) | (861) | (960) |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Total Tier 2 capital | 15,483 | 15,238 | 12,768 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| | | | |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Total supervisory deductions | (919) | (919) | (734) |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| | | | |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Total Capital Resources | 40,243 | 31,647 | 33,526 |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| | | | |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Core Tier 1 ratio | 7.3% | 4.7% | 6.4% |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Tier 1 capital ratio (%) | 7.9% | 5.3% | 7.0% |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
| Total capital ratio (%) | 12.3% | 9.7% | 10.9% |
+-------------------------------------------------------+--------------------+-------------------+--------------------+
* Includes the down-streaming from HBOS plc to BoS plc of the net proceeds of
GBP8.4bn ordinary shares from Government re-capitalisation. This was approved by
the board on 26 February 2009. There is no impact on Risk Weighted Assets.
Risk Weighted Assets ('RWA's)
RWAs increased by 6% to GBP326.7bn (1 January 2008 GBP307.5bn) driven by the
following factors:
* Retail RWAs increased by 10% due to economic conditions increasing average risk
weights.
* Corporate RWAs increased by 5% initially due to Loans & Advances growth in the
first quarter of the year. Corporate asset growth subsequently slowed, with the
RWAs reducing in the second half of the year as a result of asset reduction and
impairment provisions offsetting the impact of currency retranslations and
deteriorating economic conditions;
* In International RWAs decreased by 5% with the impact of the sale of Bankwest
reducing RWAs, offset by currency retranslations;
* In Treasury & Asset Management, RWA growth was 49% primarily due to increased
liquidity holdings and increase in average risk weights due to rating downgrades
on asset portfolios.
Tier 1 Capital
Tier 1 capital decreased by GBP4.2bn during the year reflecting the loss
attributable to shareholders and the payment of the 2007 final dividend in May
2008. These reductions were partially offset by the issue of GBP5.5bn of
ordinary share capital in the year. Tier 1 capital was strengthened in February
2009 as a result of the down-streaming from HBOS plc to BoS plc of the net
proceeds of GBP8.4bn ordinary shares from the UK Government sponsored
re-capitalisation of HBOS plc.
Tier 2 capital
The increase in Tier 2 capital during the year is due to subordinated debt
issues totalling GBP3bn. At 31 December 2008 there was a regulatory restriction
on the value of Lower Tier 2 capital however including the capital injection
from HBOS plc the full benefit of Lower Tier 2 is recognised.
4.Risk
Risks and Uncertainties
The divisional reviews on pages 10 to 15 include a review of 2008. The most
significant risks and uncertainties faced by the Group over the next six months
are set out below. These should not be regarded as a complete and comprehensive
statement of all potential risks and uncertainties.
Credit Risk
Credit Risk is the risk of financial loss from counterparty's failure to settle
financial obligations as they fall due.
The Group's business is affected by economic conditions in the UK, where the
majority of earnings are generated, as well as in the other geographical areas
in which it operates.
To manage credit risk, a wide range of policies and techniques are used across
the Group:
* For retail portfolios, extensive use is made of credit scoring in the assessment
of new applications for credit and behavioural scoring in the ongoing assessment
of existing customers. Affordability is a vitally important measure and is
reviewed in combination with either application and/or behavioural scores. HBOS
makes extensive use of credit bureau files to inform the assessment of customer
risk and affordability and to aid responsible lending. Small business customers
are assessed for their credit-worthiness in a similar manner to retail
customers.
* For corporate portfolios, a full credit assessment of the financial strength of
each potential transaction and/or customer is undertaken, including a stress
test of key financial aspects of the transaction, awarding an internal risk
rating which is reviewed regularly. The same approach is also used for larger
SME (small to medium enterprise) customers.
* Within Treasury Division (Treasury), focused credit risk policies are
established and reviewed by senior management. Basel II Advanced IRB compliant
models are used to rate banking and sovereign counterparties. Structured credit
bonds are reviewed individually by an independent credit function prior to
purchase and an internal rating is applied to all exposures with additional
product thresholds and limits in place and monitored across the division.
In common with UK peers HBOS, from 1 January 2008, adopted the Basel II
framework through application of the FSA BIPRU rules. HBOS utilises both
Standardised and Advanced Internal Ratings Based ('AIRB') approaches and is
approved by the FSA to use the AIRB approach for regulatory capital purposes.
During the second half of 2008 the pressures being experienced in wholesale and
liquidity markets spread to become severe economic deterioration in the UK. This
pressure accelerated significantly in quarter four 2008 and saw substantial
issues arising in Corporate lending and Treasury investments.
The Corporate Division's Credit Risk Management was unable to react quickly
enough to contain the deterioration, exacerbated by HBOS historic levels of
exposure concentration within property and property related sectors, giving
little room for manoeuvre in a deteriorating market and resulting in impairment
losses increasing dramatically.
In addition, Treasury has been materially impacted by the reduction in fair
value of our ABS portfolio as a result of credit concerns, poor market sentiment
and liquidity pressures. This has been exacerbated following a strategic
decision of moving away from using Government bonds to provide liquidity,
instead relying on AAA rated Asset backed securities and investment grade bank
FRNs, which whilst effective in liquidity terms, significantly increased the
credit risk profile of the Group.
The credit risk profile within HBOS is susceptible to further increases in
impairments if the UK economy continues to deteriorate. Additional pressure will
also be evident in Treasury's ABS portfolio if US real estate values fall
further, resulting in increasing fair value and impairment losses.
Liquidity
Liquidity risk is the risk that the Group does not have sufficient financial
resources to meet its obligations when they fall due or will have to do so at
excessive cost. In order to ensure that the Group continues to meet its funding
obligations and maintain or grow its business generally, the Group has developed
a suite of liquidity policies supported by a diversified funding mix comprising
both customer deposits and wholesale funding. Details of the composition of the
Group's funding is set out on page 21.
4. Risk (continued)
(Liquidity and funding risk information is collated at divisional and entity
levels for submission into the consolidated HBOS Group position. This
consolidated information is used to manage liquidity and funding risk at the
HBOS Group level. Although the Bank forms a significant part of the HBOS Group,
management of liquidity and funding risk is not undertaken at group
sub-consolidation level. Additionally as HBOS plc, the holding company, is an
important funding vehicle for the HBOS Group its exclusion from any funding
information presents a distorted view of the overall Group funding position.
Accordingly, the information presented below is based on an extract from the
HBOS Group Risk Report).
At 31 December 2008, the Group's liquidity portfolio of marketable assets was
GBP77.3bn (2007 GBP67.0bn), of which GBP39.5bn (2007 GBP13.4bn) has been used
for repo. The assets in the liquidity portfolio are treated in two forms.
Firstly, assets which we know to be eligible under normal arrangements with the
Bank of England, the European Central Bank and the Federal Reserve, which for
internal purposes we describe as primary liquidity. Secondly, a substantial pool
of high quality (secondary) liquidity assets that allow us to manage through
periods of stress taking into account the likely behaviours of depositors and
wholesale markets. The Group routinely uses the repo market as a liquidity
management tool and has well established relationships with a wide range of
market participants. The Group also has access to the standing facilities at a
number of central banks.In addition on 21 April 2008, the Bank of England
launched its Special Liquidity Scheme which allows banks to swap their high
quality mortgage-backed and other securities for UK Treasury Bills for a defined
period. HBOS has used this facility to provide high quality liquidity assets.
Funding
The wholesale funding capacity of the Group is dependent upon factors such as
the strength of the balance sheet, earnings, asset quality, ratings and market
position, as well as market sentiment and perception, most evident in share and
debt price volatility.The HBOS Group relies and intends to rely increasingly on
customer savings and transmission balances, as well as ongoing access to the
wholesale lending markets, central bank liquidity facilities such as the Special
Liquidity Scheme and the Extended Open Market Operations operated by the Bank of
England, and support from HM Treasury's guarantee scheme.
In response to the strain on financial systems, governments including the UK
Government have taken substantial measures to ease the current crisis in
liquidity, such as the measures announced in the UK on 8 October 2008 and 13
October 2008, albeit there can be no assurance that these global measures will
succeed in improving the funding and liquidity of the markets in which the major
banks, including HBOS, operate. Going forward HBOS, as a wholly owned
subsidiary, will be dependent on Lloyds Banking Group for funding and expects
reliance for the foreseeable future on the continued availability of central
bank liquidity facilities (particularly those with the Bank of England) as well
as HM Treasury's guarantee scheme for short- and medium-term debt issuance.
The Group's retail and wholesale funding sources by type of instrument are
analysed below. Tables are prepared on the basis that "retail" is defined using
the current statutory definition, i.e. administered rate products. Wholesale
funding, when issued in a foreign currency but swapped into Sterling, is
included at the swap exchanged amount. Wholesale funding is shown excluding any
Repo activity and the funding raised in the names of the conduits.
+----------------------------------------+------------+------------+------------+------------+
| | As at | As at | As at | As at |
| | 31.12.2008 | 31.12.2008 | 31.12.2007 | 31.12.2007 |
| | GBPbn | % | GBPbn | % |
+----------------------------------------+------------+------------+------------+------------+
| Bank deposits | 13.7 | 3.3 | 33.1 | 6.7 |
+----------------------------------------+------------+------------+------------+------------+
| Customer deposits | 24.0 | 5.7 | 27.8 | 5.6 |
+----------------------------------------+------------+------------+------------+------------+
| Debt Securities in issue: | | | | |
+----------------------------------------+------------+------------+------------+------------+
| Certificates of deposit | 51.0 | 12.2 | 63.9 | 12.9 |
+----------------------------------------+------------+------------+------------+------------+
| Medium term notes | 45.7 | 10.9 | 43.2 | 8.7 |
+----------------------------------------+------------+------------+------------+------------+
| Covered bonds | 29.1 | 7.0 | 24.4 | 4.9 |
+----------------------------------------+------------+------------+------------+------------+
| Commercial paper | 8.9 | 2.1 | 16.8 | 3.4 |
+----------------------------------------+------------+------------+------------+------------+
| Securitisation | 35.8 | 8.6 | 45.9 | 9.3 |
+----------------------------------------+------------+------------+------------+------------+
| | 170.5 | 40.8 | 194.2 | 39.2 |
+----------------------------------------+------------+------------+------------+------------+
| Subordinated debt | 22.2 | 5.3 | 18.1 | 3.7 |
+----------------------------------------+------------+------------+------------+------------+
| Other | 7.6 | 1.8 | 6.9 | 1.3 |
+----------------------------------------+------------+------------+------------+------------+
| Total Wholesale | 238.0 | 56.9 | 280.1 | 56.5 |
+----------------------------------------+------------+------------+------------+------------+
| Retail | 180.1 | 43.1 | 215.4 | 43.5 |
+----------------------------------------+------------+------------+------------+------------+
| Total Group Funding | 418.1 | 100 | 495.5 | 100 |
+----------------------------------------+------------+------------+------------+------------+
4. Risk (continued)
Wholesale funding is analysed by currency as follows:
+----------------------------------------+------------+------------+------------+------------+
| | As at | As at | As at | As at |
| | 31.12.2008 | 31.12.2008 | 31.12.2007 | 31.12.2007 |
| | GBPbn | % | GBPbn | % |
+----------------------------------------+------------+------------+------------+------------+
| US dollar | 52.8 | 22.2 | 105.2 | 37.6 |
+----------------------------------------+------------+------------+------------+------------+
| Euro | 87.4 | 36.7 | 79.6 | 28.4 |
+----------------------------------------+------------+------------+------------+------------+
| Sterling | 80.1 | 33.7 | 70.3 | 25.1 |
+----------------------------------------+------------+------------+------------+------------+
| Other | 17.7 | 7.4 | 25.0 | 8.9 |
+----------------------------------------+------------+------------+------------+------------+
| Total Wholesale Funding | 238.0 | 100 | 280.1 | 100 |
+----------------------------------------+------------+------------+------------+------------+
Wholesale funding is analysed by residual maturity as follows:
+----------------------------------------+------------+------------+------------+------------+
| | As at | As at | As at | As at |
| | 31.12.2008 | 31.12.2008 | 31.12.2007 | 31.12.2007 |
| | GBPbn | % | GBPbn | % |
+----------------------------------------+------------+------------+------------+------------+
| Less than one year | 119.4 | 50.2 | 166.2 | 59.3 |
+----------------------------------------+------------+------------+------------+------------+
| One to two years | 25.2 | 10.6 | 21.6 | 7.7 |
+----------------------------------------+------------+------------+------------+------------+
| Two to five years | 44.1 | 18.5 | 46.3 | 16.5 |
+----------------------------------------+------------+------------+------------+------------+
| More than five years | 49.3 | 20.7 | 46.0 | 16.5 |
+----------------------------------------+------------+------------+------------+------------+
| Total Wholesale Funding | 238.0 | 100 | 280.1 | 100 |
+----------------------------------------+------------+------------+------------+------------+
The increased use of repo activity as a funding tool has materially impacted the
levels of wholesale funding shown in the tables.
FINANCIAL INFORMATION
(In accordance with the Listing Rules of the Financial Services Authority)
Basis of Preparation
a) Principles Underlying Going Concern Assumption
During 2008, global financial markets experienced difficult conditions which
have been characterised by a marked reduction in liquidity. As a consequence of
this, governments and central banks carried out a series of actions to address
the lack of liquidity within their respective banking systems. In the UK these
actions have included the introduction by the Bank of England of liquidity
support, through schemes (collectively "Bank of England facilities") such as the
extended Long-Term Repo open market operations and the Special Liquidity Scheme
('SLS') whereby banks and building societies can exchange eligible securities
for UK Treasury bills; and the creation of a credit guarantee scheme by HM
Treasury, providing a government guarantee for certain short and medium term
senior debt securities issued by eligible banks. During 2008 HBOS plc has made
use of these measures in order to maintain and improve a stable funding
position.
In the context of this continued turbulence and uncertainty in the financial
markets, combined with a deteriorating global economic outlook, HBOS plc has
also taken steps to strengthen its capital position in order to provide a buffer
against further shocks arising from the financial systems and to ensure that it
remains competitive. On 15 January 2009, in conjunction with the takeover of
HBOS plc by Lloyds TSB Group plc (Note 20), HBOS plc raised GBP11,345m (net
after costs) in preference and ordinary share capital.
On 16 January 2009, following completion of the acquisition of the Group by
Lloyds Banking Group plc, the Group became a wholly owned subsidiary and became
dependent upon the ultimate parent and its banking subsidiaries for its capital,
liquidity funding needs.
There is a risk despite the substantial measures taken so far by governments
that further deterioration in the markets could occur. In addition the economic
conditions in the UK are deteriorating more quickly than previously anticipated
placing further strain on the Lloyds Banking Group's capital resources. The key
dependencies on successfully funding the Lloyds Banking Group's balance sheet
include the continued functioning of the money and capital markets at their
current levels; the continued access of the Lloyds Banking Group to central bank
and Government sponsored liquidity facilities including access to HM Treasury's
credit guarantee scheme and access to the Bank of England's various facilities;
limited further deterioration in the Lloyds Banking Group's credit ratings; and
no significant or sudden withdrawal of deposits resulting in increased reliance
on money markets or Government support schemes.
Based upon projections prepared by Lloyds Banking Group plc management which
take into account the acquisition on 16 January 2009 of HBOS plc and its
subsidiaries (Note 20) together with the Lloyds Banking Group's current ability
to fund in the market and the assumption that announced government sponsored
schemes will continue to be available, the directors are satisfied that the Bank
and the Group have adequate resources to continue in business for the
foreseeable future. The Group has received confirmation that it is the current
intention of Lloyds Banking Group plc to ensure that the Company and its
subsidiaries should have at all times for the foreseeable future access to
adequate resources to continue to trade and meet their liabilities as they fall
due.Accordingly, the financial statements of the Bank and the Group have been
prepared on a going concern basis.
b) Section 240 Statement
The financial information for the year ended 31 December 2008 does not
constitute the company's statutory accounts for that financial year within the
meaning of section 240 of the Companies Act 1985 but is derived from the 2008
Annual Report & Accounts. Those accounts, which were prepared in accordance with
International Financial Reporting Standards ('IFRS') and interpretations issued
by the International Financial Reporting Interpretations Committee ('IFRIC') as
adopted by the European Union were approved by the Board of Directors on 26
February 2009 and will be delivered to the Registrar of Companies in due course.
Those accounts have been reported on by the company's auditors, their report is
unqualified and does not contain statements under Section 237(2) or (3) of the
Companies Act 1985.
c) Accounting Policies
There have been no significant changes to the accounting policies as described
in the BoS plc Annual Report & Accounts 2007 ('BoS ARA 2007') except Amendments
to IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 7
'Financial Instruments: Disclosures', which are applicable for the year end 31
December 2008 and are relevant to the Group. The disclosures associated with
these Amendments are set out in Note 11 and in the Treasury Business Review.
In addition, the Group is adopting the following pronouncements, all of which
are applicable to the Group for the financial year to 31 December 2008:
IFRIC 11 'Group and Treasury Share Transactions';
IFRIC 12 'Service Concession Arrangements' (not adopted by the European Union at
the date of preparation of the financial statements); and
IFRIC 14 'The Limit on a Defined Benefit Asset, Minimum Funding Requirements and
their Interaction'.
The application of these pronouncements has not affected the Group's
consolidated financial statements.
Critical Accounting Judgements and Estimates
The preparation of financial statements requires management to make judgements,
estimates and assumptions that affect the reported amounts of assets,
liabilities, income and expenses. Due to the inherent uncertainty in making
estimates, actual results reported in future periods may be based on amounts
which differ from those estimates. Judgements, estimates and assumptions are
continually evaluated and are based on historical experience and other factors,
including expectations of future events that are believed to be reasonable under
the circumstances. Revisions to accounting estimates are recognised in the
period in which the estimate is revised and in any future periods affected.
a)Critical Accounting Judgements
Designation of Financial Instruments
The Group has classified its financial instruments in accordance with IAS 39
'Financial Instruments: Recognition and Measurement'. In some instances the
classification is prescribed whilst in others the Group is able to exercise
judgement in determining the classification as follows:
* Non-derivative financial assets, other than those held for trading, where there
is no active market and which have fixed or determinable payments are classified
as 'loans and receivables';
* The Group's 'trading' portfolio is classified as 'held for trading'. The Group
exercises judgement in determining which financial instruments form part of its
trading book. This is determined at acquisition by the purpose for which the
instrument is acquired;
* The Group exercised judgement when determining that the ongoing market
dislocation and deterioration of the world's financial markets that occurred
during the third quarter of 2008 was a sufficiently rare circumstance to warrant
a reclassification of certain financial assets from 'held for trading' to
'available for sale' for which the Group has the intention and ability to hold
these assets for the foreseeable future. The Group also subsequently
reclassified certain financial assets from 'available for sale' to 'loans and
receivables'. In both cases, the Group has the intention and ability to hold
the financial assets for the foreseeable future and the financial assets
transferred meet the classification criteria of loans and receivables;
* Derivative instruments are automatically classified as 'at fair value through
the income statement' unless they form part of an effective hedging
relationship;
* Instruments that are deemed by the Group on initial recognition to eliminate a
measurement mismatch or where they contain an embedded derivative which is not
separated from the host contract are designated on initial recognition as 'at
fair value through the income statement'. In addition portfolios of assets,
liabilities or both that are managed and the performance evaluated on a fair
value basis in accordance with a documented risk or investment management
strategy are designated on initial recognition 'at fair value through the income
statement'.
* In addition the venture capital exemption is taken for investments where
significant influence or joint control is present and the investing area
operates as a venture capital business. These investments are designated 'at
fair value through the income statement'. This policy is applied consistently
across the Group's portfolios. Judgement is applied when determining whether or
not a business area operates as a venture capital business. The judgement is
based on consideration of whether, in particular, the primary business activity
is investing for current income, capital appreciation or both; whether the
investment activities are clearly and objectively distinct from any other
activities of the Group; and whether the investee operates as a separate
business autonomous from the Group;
* The Group has chosen not to designate any financial assets as 'held to
maturity';
* All other financial assets are classified as 'available for sale'; and
* All other financial liabilities are classified as 'at amortised cost'.
Active Markets
Asset backed securities not traded in an active market are valued using models.
An active market is one where prices are readily and regularly available from an
exchange, broker, pricing service, industry group or regulator and these prices
represent actual and regularly occurring transactions on an arm's length basis.
Where there are no regular transactions occurring (significant liquid markets)
the market is not described as active. A significant increase in the spread
between the amount sellers are 'asking' and buyers are 'bidding' or the presence
of a relatively small number of 'bidding' parties, are indicators that a market
may be inactive. The determination of whether a market is inactive requires
judgement.
More details of the models used to value the securities not traded in an active
market are given in the 'fair values' section in critical accounting estimates
below.
Impairment of Investment Securities
Investment securities are continually reviewed at the specific investment level
for impairment. Impairment is recognised when there is objective evidence that a
specific financial asset is impaired. Objective evidence of impairment might
include a significant or prolonged decline in market value below the original
cost of a financial asset and, in the case of debt securities, including those
reclassified as 'loans and receivables', non-receipt of due interest or
principal repayment, a breach of covenant within the security's terms and
conditions or a measurable decrease in the estimated future cash flows since
their initial recognition.
The disappearance of active markets, declines in market value and ratings
downgrades do not in themselves constitute objective evidence of impairment and,
unless a default has occurred on a debt security, the determination of whether
or not objective evidence of impairment is present at the balance sheet date
requires the exercise of management judgement.
Unarranged Overdraft Charges
In the absence of a legal obligation, judgement is necessary in determining the
existence of a constructive obligation. In respect of the claims made for
refunds of unarranged overdraft charges, the judgement of the Group is that
there is no constructive obligation pending the outcome of the legal case.
Syndications
The Group has elected to treat loans and advances pending syndication as loans
and receivables rather than account for them as trading assets. Accordingly
these are initially recognised at the draw down date at the fair value as
measured at the commitment date, plus directly attributable and incremental
transaction costs.
Deferred tax
Deferred tax assets and liabilities require management judgement in determining
the amounts to be recognised. In particular, when assessing the extent to which
deferred tax assets should be recognised with consideration given to the timing,
nature and level of future taxable income. The recognition of deferred tax
assets relating to tax losses carried forward relies on profit projections and
taxable profit forecasts prepared by management, where a number of assumptions
are required based on the levels of growth in profits and the reversal of
deferred tax balances.
b)Critical Accounting Estimates
Fair Values
The designation of financial instruments for measurement purposes is set out
under the critical accounting judgements above and the valuation methodologies
for financial instruments remain as disclosed in the accounting policy section
in the BoS ARA 2007.
Derivatives and other financial instruments classified as at fair value through
the income statement or available for sale are measured at fair value.
Debt securities measured at fair value and not traded in an active market,
principally comprising asset backed securities ('ABS') in the Treasury division,
are valued using valuation models that include non-market observable
inputs. These models use observed issuance prices in related asset classes,
market correlations, prepayment assumptions and external credit ratings. For
each asset class within the ABS portfolio, the implied spread arrived at by
using this methodology is applied to the securities within that asset class.
Additional assessments are then made on possible deterioration in credit risk
for each individual security and on additional liquidity considerations for
particular asset classes.
Of the total debt securities carried at fair value on the balance sheet, the
fair values of those calculated using models with inputs that are not observable
in the market is GBP3,054m (2007 GBP17,790m).
For debt securities valuations using non-market observable inputs, the effect of
a one hundred basis point move in credit spreads (which based upon experience is
the only key sensitivity) would result in a pre-tax movement of GBP163m (2007
GBP185m) for assets classified as at fair value through the income statement and
a post-tax movement of GBPnil (2007 GBP(351)m, recognised in equity reserves, on
assets classified as available for sale.
On ABS that were valued using models with non-observable market inputs, a
GBP1,056m (2007 GBP78m) pre-tax negative fair value adjustment was recognised in
the income statement within net trading income and a post-tax negative
fair value adjustment of GBP3,572m (2007 GBP158m) on ABS classified as available
for sale was recognised in equity reserves.
Effective Interest Rate
The Group uses statistical and mathematical models to calculate the effective
yield for loans and advances. The Group applies judgement when determining the
expected life of these loans. The underlying products usually allow the customer
to make early repayment before the contractual maturity date. In estimating the
expected life of the loan, the Group takes into account a number of relevant
considerations when the asset is initially recognised to estimate the cash flows
from early redemptions including the type of product, previous experience of
customer behaviour, credit scoring of the customer and anticipated future market
conditions. The cash flows are adjusted in the light of actual experience;
however the effective interest rate is not reassessed. If the estimated life of
the Retail division's portfolio were to increase or decrease by one month then
the carrying value of the Retail portfolio would increase or decrease by GBP6m
(2007 GBP18m) respectively.
Impairment Losses on Loans and Advances
The Group regularly reviews its loan portfolios carried at amortised cost to
assess for impairment. This review is conducted across all asset types and
impairment provisions are established to recognise incurred impairment losses
within the loan portfolios. Impairment loss calculations involve the estimation
of future cash flows of loans and advances based on observable data at the
balance sheet date, historical loss experience for assets with similar credit
risk characteristics and other factors including, inter alia, future prospects
of the customers, value of collateral held and reliability of information. These
calculations may be undertaken on either a portfolio basis or individually for
individually significant exposures. In applying the portfolio basis the Group
makes use of various statistical modelling techniques which are specific to
different portfolio types.
The actual amount of the future cash flows and their timing may differ
significantly from the assumptions made for the purposes of determining the
impairment provisions given the range of asset types, number of customers and
current economic conditions. This uncertainty is exacerbated in the current
economic climate, where the timing of and value realisable from the collateral
held in the form of property is partially uncertain. Consequently these
allowances can be subject to variation.
Goodwill
Goodwill arises on the acquisition of a business. It is subject to a six monthly
impairment review. This compares the recoverable amount, being the higher of a
cash-generating unit's fair value less costs to sell, and its value in use, with
the carrying value. When this indicates that the carrying value is not
recoverable it is written down through the income statement as goodwill
impairment.
The recoverable amount of goodwill carried at 31 December 2008 has been based
upon value in use. This calculation uses cash flow projections based upon the
five year business plan, where the main assumptions used for planning purposes
relate to the current economic outlook and opinions in respect of economic
growth, unemployment, property markets, interest rates and credit quality. Cash
flows thereafter are extrapolated using a growth rate of 2.2% pa, reflecting
management's view of the expected future long term trend in growth rate of the
respective economies concerned, predominantly being the UK, and the long term
performance of the businesses concerned. The pre - tax discount rate used in
discounting the projected cash flows has, in view of current credit conditions,
been increased to within a range of 14.4% - 15.3 % pa (2007 10-12.2% pa),
reflecting, inter alia, the perceived risks within those businesses.
As at 31 December 2008 the carrying value of goodwill held on the balance sheet
is GBP667m (2007 GBP1,041m). Goodwill has been impaired by GBP142m during the
year. The unprecedented levels of market turmoil have adversely impacted the
short-term profitability of the cash generating units. The Group has considered
the impact upon the assumptions used and has conducted sensitivity analysis on
the impairment tests. For example, an increase in the discount rate to 17% would
result in an additional impairment to goodwill of GBP31m; alternatively if
projected cash flows reduced by 20% an additional impairment of GBP31m would
arise.
Consolidated Income Statement
+------------------------------------------------------+-------+------------+------------+
| | Notes | Year | Year |
| | | ended | ended |
| | | 31.12.2008 | 31.12.2007 |
| | | | |
| | | GBPm | GBPm |
+------------------------------------------------------+-------+------------+------------+
| Interest income | | 39,332 | 36,354 |
+------------------------------------------------------+-------+------------+------------+
| Interest expense | | (31,039) | (28,728) |
+------------------------------------------------------+-------+------------+------------+
| Net interest income | 1 | 8,293 | 7,626 |
+------------------------------------------------------+-------+------------+------------+
| Fees and commission income | | 2,208 | 2,360 |
+------------------------------------------------------+-------+------------+------------+
| Fees and commission expense | | (382) | (396) |
+------------------------------------------------------+-------+------------+------------+
| Net earned premiums on insurance contracts | | 215 | 245 |
+------------------------------------------------------+-------+------------+------------+
| Net trading (expense)/income | 2 | (2,963) | 185 |
+------------------------------------------------------+-------+------------+------------+
| Net investment income related to insurance and | | 34 | 37 |
| investment business | | | |
+------------------------------------------------------+-------+------------+------------+
| Other operating income | | 1,665 | 2,292 |
+------------------------------------------------------+-------+------------+------------+
| Net operating income | 3 | 9,070 | 12,349 |
+------------------------------------------------------+-------+------------+------------+
| Change in investment contract liabilities | | 17 | (7) |
+------------------------------------------------------+-------+------------+------------+
| Net claims incurred on insurance contracts | | (76) | (105) |
+------------------------------------------------------+-------+------------+------------+
| Net change in insurance contract liabilities | | 22 | (21) |
+------------------------------------------------------+-------+------------+------------+
| Administrative expenses | 4 | (4,253) | (4,187) |
+------------------------------------------------------+-------+------------+------------+
| Depreciation and amortisation: | | (1,542) | (1,333) |
+------------------------------------------------------+-------+------------+------------+
| Intangible assets other than | | (153) | (130) |
| goodwill | | | |
+------------------------------------------------------+-------+------------+------------+
| Property and equipment | | (211) | (218) |
+------------------------------------------------------+-------+------------+------------+
| Operating lease assets | | (1,178) | (985) |
+------------------------------------------------------+-------+------------+------------+
| Goodwill impairment | 5 | (142) | |
+------------------------------------------------------+-------+------------+------------+
| Operating expenses | | (5,974) | (5,653) |
+------------------------------------------------------+-------+------------+------------+
| Impairment losses on loans and advances | 6a | (9,857) | (2,012) |
+------------------------------------------------------+-------+------------+------------+
| Impairment losses on investment securities | 6b | (2,193) | (60) |
+------------------------------------------------------+-------+------------+------------+
| Operating (loss)/profit | | (8,954) | 4,624 |
+------------------------------------------------------+-------+------------+------------+
| Share of (loss)/profit of jointly controlled | | (651) | 241 |
| entities | | | |
+------------------------------------------------------+-------+------------+------------+
| Share of loss of associates | | (287) | |
+------------------------------------------------------+-------+------------+------------+
| (Loss)/profit on sale of businesses | 19 | (743) | 87 |
+------------------------------------------------------+-------+------------+------------+
| (Loss)/profit before taxation | 7 | (10,635) | 4,952 |
+------------------------------------------------------+-------+------------+------------+
| Tax on (loss)/profit | 8 | 2,448 | (1,318) |
+------------------------------------------------------+-------+------------+------------+
| (Loss)/profit after taxation | | (8,187) | 3,634 |
+------------------------------------------------------+-------+------------+------------+
| Profit of subsidiary acquired with a view to resale | | | 4 |
+------------------------------------------------------+-------+------------+------------+
| (Loss)/profit for the period | | (8,187) | 3,638 |
+------------------------------------------------------+-------+------------+------------+
| | | | |
+------------------------------------------------------+-------+------------+------------+
| Attributable to: | | | |
+------------------------------------------------------+-------+------------+------------+
| Parent company shareholders | | (8,238) | 3,608 |
+------------------------------------------------------+-------+------------+------------+
| Minority interests | | 51 | 30 |
+------------------------------------------------------+-------+------------+------------+
| | | (8,187) | 3,638 |
+------------------------------------------------------+-------+------------+------------+
| | | | |
+------------------------------------------------------+-------+------------+------------+
| | | | |
+------------------------------------------------------+-------+------------+------------+
Consolidated Balance Sheet
+----------------------------------------------------+--------+-------------+------------+
| | Notes | As at | As at |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | GBPm |
+----------------------------------------------------+--------+-------------+------------+
| Assets | | | |
+----------------------------------------------------+--------+-------------+------------+
| Cash and balances at central banks | 18 | 2,502 | 2,944 |
+----------------------------------------------------+--------+-------------+------------+
| Items in course of collection | | 445 | 945 |
+----------------------------------------------------+--------+-------------+------------+
| Financial assets held for trading | | 22,571 | 54,681 |
+----------------------------------------------------+--------+-------------+------------+
| Derivative assets | | 50,517 | 13,794 |
+----------------------------------------------------+--------+-------------+------------+
| Loans and advances to banks | | 12,445 | 4,095 |
+----------------------------------------------------+--------+-------------+------------+
| Loans and advances to customers | 9 | 473,015 | 460,267 |
+----------------------------------------------------+--------+-------------+------------+
| Investment securities | 11 | 67,772 | 51,615 |
+----------------------------------------------------+--------+-------------+------------+
| Interests in jointly controlled entities | | 970 | 1,367 |
+----------------------------------------------------+--------+-------------+------------+
| Interests in associates | | 223 | 372 |
+----------------------------------------------------+--------+-------------+------------+
| Goodwill and other intangible assets | | 1,148 | 1,517 |
+----------------------------------------------------+--------+-------------+------------+
| Property and equipment | | 1,187 | 1,291 |
+----------------------------------------------------+--------+-------------+------------+
| Investment properties | | 43 | 34 |
+----------------------------------------------------+--------+-------------+------------+
| Operating lease assets | | 3,967 | 4,643 |
+----------------------------------------------------+--------+-------------+------------+
| Other assets | | 2,432 | 4,637 |
+----------------------------------------------------+--------+-------------+------------+
| Current tax asset | | 865 | |
+----------------------------------------------------+--------+-------------+------------+
| Deferred tax asset | | 3,182 | |
+----------------------------------------------------+--------+-------------+------------+
| Prepayments and accrued income | | 694 | 1,430 |
+----------------------------------------------------+--------+-------------+------------+
| Total Assets | | 643,978 | 603,632 |
+----------------------------------------------------+--------+-------------+------------+
| | | | |
+----------------------------------------------------+--------+-------------+------------+
| Liabilities | | | |
+----------------------------------------------------+--------+-------------+------------+
| Deposits by banks | | 97,066 | 41,513 |
+----------------------------------------------------+--------+-------------+------------+
| Customer accounts | | 262,201 | 272,687 |
+----------------------------------------------------+--------+-------------+------------+
| Financial liabilities held for trading | | 18,851 | 22,705 |
+----------------------------------------------------+--------+-------------+------------+
| Derivative liabilities | | 40,827 | 12,160 |
+----------------------------------------------------+--------+-------------+------------+
| Notes in circulation | | 957 | 881 |
+----------------------------------------------------+--------+-------------+------------+
| Insurance contract liabilities | | | 24 |
+----------------------------------------------------+--------+-------------+------------+
| Investment contract liabilities | | | 98 |
+----------------------------------------------------+--------+-------------+------------+
| Current tax liabilities | | 23 | 728 |
+----------------------------------------------------+--------+-------------+------------+
| Deferred tax liabilities | | | 965 |
+----------------------------------------------------+--------+-------------+------------+
| Other liabilities | | 2,250 | 2,560 |
+----------------------------------------------------+--------+-------------+------------+
| Accruals and deferred income | | 2,306 | 2,894 |
+----------------------------------------------------+--------+-------------+------------+
| Provisions | | 345 | 172 |
+----------------------------------------------------+--------+-------------+------------+
| Debt securities in issue | 12 | 188,448 | 206,520 |
+----------------------------------------------------+--------+-------------+------------+
| Other borrowed funds | 13 | 18,779 | 17,881 |
+----------------------------------------------------+--------+-------------+------------+
| Total Liabilities | | 632,053 | 581,788 |
+----------------------------------------------------+--------+-------------+------------+
| | | | |
+----------------------------------------------------+--------+-------------+------------+
| Shareholders' Equity | 14 | | |
+----------------------------------------------------+--------+-------------+------------+
| Issued share capital | | 1,324 | 499 |
+----------------------------------------------------+--------+-------------+------------+
| Share premium | | 11,018 | 6,343 |
+----------------------------------------------------+--------+-------------+------------+
| Other reserves | | (4,694) | 1,167 |
+----------------------------------------------------+--------+-------------+------------+
| Retained earnings | | 4,013 | 13,479 |
+----------------------------------------------------+--------+-------------+------------+
| Shareholders' Equity (excluding minority | | 11,661 | 21,488 |
| interests) | | | |
+----------------------------------------------------+--------+-------------+------------+
| Minority interests | | 264 | 356 |
+----------------------------------------------------+--------+-------------+------------+
| Total Shareholders' Equity | | 11,925 | 21,844 |
+----------------------------------------------------+--------+-------------+------------+
| | | | |
+----------------------------------------------------+--------+-------------+------------+
| Total Liabilities and Shareholders' Equity | | 643,978 | 603,632 |
+----------------------------------------------------+--------+-------------+------------+
Consolidated Statement of Recognised Income and Expense
+------------------------------------------------------------+-------------+------------+
| | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | GBPm | |
| | | GBPm |
+------------------------------------------------------------+-------------+------------+
| | | |
+------------------------------------------------------------+-------------+------------+
| Foreign exchange translation | 106 | 8 |
+------------------------------------------------------------+-------------+------------+
| Available for sale investments: | | |
+------------------------------------------------------------+-------------+------------+
| Net change in fair value (net of tax) | (5,897) | (336) |
+------------------------------------------------------------+-------------+------------+
| Net gains transferred to the income statement | (17) | (201) |
| (net of tax) | | |
+------------------------------------------------------------+-------------+------------+
| Impairment recognised in income statement | 915 | 17 |
| (net of tax) | | |
+------------------------------------------------------------+-------------+------------+
| Cash flow hedges: | | |
+------------------------------------------------------------+-------------+------------+
| Effective portion of changes in fair value | (2,801) | (216) |
| taken to equity (net of tax) | | |
+------------------------------------------------------------+-------------+------------+
| Net losses/(gains) transferred to the income | 1,844 | (292) |
| statement (net of tax) | | |
+------------------------------------------------------------+-------------+------------+
| Net expense recognised directly in equity | (5,850) | (1,020) |
+------------------------------------------------------------+-------------+------------+
| (Loss)/profit for the period | (8,187) | 3,638 |
+------------------------------------------------------------+-------------+------------+
| Total recognised income and expense | (14,037) | 2,618 |
+------------------------------------------------------------+-------------+------------+
| | | |
+------------------------------------------------------------+-------------+------------+
| Attributable to: | | |
+------------------------------------------------------------+-------------+------------+
| Parent company shareholders | (14,099) | 2,576 |
+------------------------------------------------------------+-------------+------------+
| Minority interests | 62 | 42 |
+------------------------------------------------------------+-------------+------------+
| | (14,037) | 2,618 |
+------------------------------------------------------------+-------------+------------+
Consolidated Cash Flow Statement
+---------------------+--------+------------+------------+
| | | Year | Year |
| | | ended | ended |
| | | 31.12.2008 | 31.12.2007 |
| | Notes | | GBPm |
| | | GBPm | |
+---------------------+--------+------------+------------+
| (Loss)/profit | | (10,635) | 4,952 |
| before | | | |
| taxation | | | |
+---------------------+--------+------------+------------+
| Adjustments | | | |
| for: | | | |
+---------------------+--------+------------+------------+
| Impairment | | 9,857 | 2,012 |
| losses on | | | |
| loans and | | | |
| advances | | | |
+---------------------+--------+------------+------------+
| Impairment | | 2,193 | 60 |
| losses on | | | |
| investment | | | |
| securities | | | |
+---------------------+--------+------------+------------+
| Depreciation | | 1,542 | 1,333 |
| and | | | |
| amortisation | | | |
+---------------------+--------+------------+------------+
| Goodwill | | 142 | |
| impairment | | | |
+---------------------+--------+------------+------------+
| Interest | | 1,323 | 915 |
| on other | | | |
| borrowed | | | |
| funds | | | |
+---------------------+--------+------------+------------+
| Movement | | 1,613 | (2,276) |
| in | | | |
| derivatives | | | |
| held for | | | |
| trading | | | |
+---------------------+--------+------------+------------+
| Exchange | | 74 | (1,430) |
| differences | | | |
+---------------------+--------+------------+------------+
| Other | | 2,075 | (914) |
| non-cash | | | |
| items | | | |
+---------------------+--------+------------+------------+
| Net | | (35,908) | (80,897) |
| change | | | |
| in | | | |
| operating | | | |
| assets | | | |
+---------------------+--------+------------+------------+
| Net | | 30,382 | 69,111 |
| change | | | |
| in | | | |
| operating | | | |
| liabilities | | | |
+---------------------+--------+------------+------------+
| Net | | 2,658 | (7,134) |
| cash | | | |
| flows | | | |
| from | | | |
| operating | | | |
| activities | | | |
| before tax | | | |
+---------------------+--------+------------+------------+
| Income | | (1,061) | (792) |
| taxes | | | |
| paid | | | |
+---------------------+--------+------------+------------+
| Cash | | 1,597 | (7,926) |
| flows | | | |
| from | | | |
| operating | | | |
| activities | | | |
+---------------------+--------+------------+------------+
| Cash | | 735 | (240) |
| flows | | | |
| from | | | |
| investing | | | |
| activities | | | |
+---------------------+--------+------------+------------+
| Cash | | 2,743 | 4,516 |
| flows | | | |
| from | | | |
| financing | | | |
| activities | | | |
+---------------------+--------+------------+------------+
| Net | | 5,075 | (3,650) |
| increase/(decrease) | | | |
| in cash and cash | | | |
| equivalents | | | |
+---------------------+--------+------------+------------+
| Transfers | | | (27,265) |
| in under | | | |
| HBOS | | | |
| Group | | | |
| Reorganisation | | | |
+---------------------+--------+------------+------------+
| Opening | | 2,911 | 33,826 |
| cash | | | |
| and | | | |
| cash | | | |
| equivalents | | | |
+---------------------+--------+------------+------------+
| Closing | 18 | 7,986 | 2,911 |
| cash | | | |
| and | | | |
| cash | | | |
| equivalents | | | |
+---------------------+--------+------------+------------+
| Investing | | |
| Activities | | |
+------------------------------+------------+------------+
| Sale of other | 397 | 33 |
| intangible | | |
| assets | | |
+------------------------------+------------+------------+
| Purchase of | (276) | (242) |
| other | | |
| intangible | | |
| assets | | |
+------------------------------+------------+------------+
| Sale of | 190 | 180 |
| property and | | |
| equipment | | |
+------------------------------+------------+------------+
| Purchase of | (271) | (297) |
| property and | | |
| equipment | | |
+------------------------------+------------+------------+
| Sale of | | 52 |
| investment | | |
| properties | | |
+------------------------------+------------+------------+
| Purchase of | (18) | |
| investment | | |
| properties | | |
+------------------------------+------------+------------+
| Investment in | | (28) |
| subsidiaries | | |
+------------------------------+------------+------------+
| Disposal of | 1,110 | 115 |
| subsidiaries | | |
+------------------------------+------------+------------+
| Investment in | (472) | (371) |
| jointly | | |
| controlled | | |
| entities and | | |
| associates | | |
+------------------------------+------------+------------+
| Disposal of | 57 | 176 |
| jointly | | |
| controlled | | |
| entities and | | |
| associates | | |
+------------------------------+------------+------------+
| Dividends | 8 | 132 |
| received from | | |
| jointly | | |
| controlled | | |
| entities | | |
+------------------------------+------------+------------+
| Dividends | 10 | 10 |
| received from | | |
| associates | | |
+------------------------------+------------+------------+
| Cash flows from | 735 | (240) |
| investing | | |
| activities | | |
+------------------------------+------------+------------+
| | | |
+------------------------------+------------+------------+
| Financing | | |
| Activities | | |
+------------------------------+------------+------------+
| Issue of | 5,500 | 2,480 |
| ordinary shares | | |
+------------------------------+------------+------------+
| Issue of other | 3,000 | 5,156 |
| borrowed funds | | |
+------------------------------+------------+------------+
| Repayments of | (3,405) | (598) |
| other borrowed | | |
| funds | | |
+------------------------------+------------+------------+
| Interest on | (1,323) | (905) |
| other borrowed | | |
| funds relating | | |
| to servicing of | | |
| finance | | |
+------------------------------+------------+------------+
| Minority | 242 | 98 |
| interest | | |
| acquired | | |
+------------------------------+------------+------------+
| Equity dividend | (1,228) | (1,672) |
| paid | | |
+------------------------------+------------+------------+
| Dividends paid | (43) | (43) |
| to minority | | |
| shareholders in | | |
| subsidiaries | | |
+------------------------------+------------+------------+
| Cash flows from | 2,743 | 4,516 |
| financing | | |
| activities | | |
+---------------------+--------+------------+------------+
+----+---------------------------------------------------------+-------------+------------+
| Notes | | |
+--------------------------------------------------------------+-------------+------------+
| | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | GBPm | |
| | | GBPm |
+--------------------------------------------------------------+-------------+------------+
| 1. | Net Interest Income | | |
+----+---------------------------------------------------------+-------------+------------+
| | | | |
+----+---------------------------------------------------------+-------------+------------+
| | Interest receivable: | | |
+----+---------------------------------------------------------+-------------+------------+
| | Loans and advances to customers | 32,000 | 27,919 |
+----+---------------------------------------------------------+-------------+------------+
| | Loans and advances to banks | 693 | 2,241 |
+----+---------------------------------------------------------+-------------+------------+
| | Investment securities | 619 | 69 |
+----+---------------------------------------------------------+-------------+------------+
| | Lease and hire purchase receivables | 299 | 321 |
+----+---------------------------------------------------------+-------------+------------+
| | Interest receivables on loans and receivables | 33,611 | 30,550 |
+----+---------------------------------------------------------+-------------+------------+
| | Available for sale financial assets | 2,108 | 2,278 |
+----+---------------------------------------------------------+-------------+------------+
| | Interest receivable on derivatives | 3,486 | 3,332 |
+----+---------------------------------------------------------+-------------+------------+
| | Other | 127 | 194 |
+----+---------------------------------------------------------+-------------+------------+
| | Total interest receivable | 39,332 | 36,354 |
+----+---------------------------------------------------------+-------------+------------+
| | | | |
+----+---------------------------------------------------------+-------------+------------+
| | Interest payable: | | |
+----+---------------------------------------------------------+-------------+------------+
| | Deposits from banks | 3,955 | 2,567 |
+----+---------------------------------------------------------+-------------+------------+
| | Customer accounts | 12,388 | 11,680 |
+----+---------------------------------------------------------+-------------+------------+
| | Debt securities in issue | 10,191 | 10,482 |
+----+---------------------------------------------------------+-------------+------------+
| | Other borrowed funds | 392 | 346 |
+----+---------------------------------------------------------+-------------+------------+
| | Interest payable on liabilities held at | 26,926 | 25,075 |
| | amortised cost | | |
+----+---------------------------------------------------------+-------------+------------+
| | Interest payable on derivatives | 3,436 | 3,381 |
+----+---------------------------------------------------------+-------------+------------+
| | Other | 677 | 272 |
+----+---------------------------------------------------------+-------------+------------+
| | Total interest payable | 31,039 | 28,728 |
+----+---------------------------------------------------------+-------------+------------+
| | | | |
+----+---------------------------------------------------------+-------------+------------+
| | Net interest income | 8,293 | 7,626 |
+----+---------------------------------------------------------+-------------+------------+
+----+---------------------------------------------------------+-------------+------------+
| | Year | Year |
| | ended | ended |
| | 31.12.2008 | 31.12.2007 |
| | GBPm | |
| | | GBPm |
+--------------------------------------------------------------+-------------+------------+
| 2. | Net Trading (Expense)/Income | | |
+----+---------------------------------------------------------+-------------+------------+
| | | | |
+----+---------------------------------------------------------+-------------+------------+
| | Equity and commodity instruments and related non | 952 | 92 |
| | hedging derivatives | | |
+----+---------------------------------------------------------+-------------+------------+
| | Interest bearing securities and related non hedging | (4,174) | 58 |
| | derivatives | | |
+----+---------------------------------------------------------+-------------+------------+
| | Foreign exchange and related non hedging derivatives | 90 | 72 |
+----+---------------------------------------------------------+-------------+------------+
| | Net gains and losses from trading financial instruments | (3,132) | 222 |
| | and non hedging derivatives | | |
+----+---------------------------------------------------------+-------------+------------+
| | Gains/(losses) on fair value hedges: | | |
+----+---------------------------------------------------------+-------------+------------+
| | On hedging instruments | 2,413 | 1,180 |
+----+---------------------------------------------------------+-------------+------------+
| | On the hedged items attributable to the | (2,246) | (1,216) |
| | hedged risk | | |
+----+---------------------------------------------------------+-------------+------------+
| | | 167 | (36) |
+----+---------------------------------------------------------+-------------+------------+
| | Cash flow hedge ineffectiveness recognised | 2 | (1) |
+----+---------------------------------------------------------+-------------+------------+
| | Total net trading (expense)/income | (2,963) | 185 |
+----+---------------------------------------------------------+-------------+------------+
+----+----------------------------------------------------------+-------------+------------+
| | | Year | Year |
| | | ended | ended |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | |
| | | | GBPm |
+----+----------------------------------------------------------+-------------+------------+
| 3. | Net Operating Income | | |
| | | | |
+----+----------------------------------------------------------+-------------+------------+
| | Included within net operating income are the following: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Cash flow hedges: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Net (losses)/gains released from equity into | (2,561) | 417 |
| | income (Note 14) | | |
+----+----------------------------------------------------------+-------------+------------+
| | Financial instruments at fair value through the income | | |
| | statement: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Net (losses)/gains from trading financial | (3,132) | 222 |
| | instruments and non hedging derivatives (Note | | |
| | 2) | | |
+----+----------------------------------------------------------+-------------+------------+
| | Net (losses)/gains from designated financial | (261) | 146 |
| | instruments | | |
+----+----------------------------------------------------------+-------------+------------+
| | Available for sale financial instruments: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Dividend income | 108 | 291 |
+----+----------------------------------------------------------+-------------+------------+
| | Net realised gains on sale (Note 14) | 24 | 281 |
+----+----------------------------------------------------------+-------------+------------+
| | Financial instruments designated as loans and | | |
| | receivables: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Net realised gains on sale | 22 | 3 |
+----+----------------------------------------------------------+-------------+------------+
+----+----------------------------------------------------------+-------------+------------+
| | | Year | Year |
| | | ended | ended |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | |
| | | | GBPm |
+----+----------------------------------------------------------+-------------+------------+
| 4. | Administrative Expenses | | |
+----+----------------------------------------------------------+-------------+------------+
| | | | |
+----+----------------------------------------------------------+-------------+------------+
| | a)Administrative expenses include: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Regulatory provisions charge: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Financial Services | 200 | |
| | Compensation Scheme ('FSCS') | | |
| | management | | |
| | expenses levy (Note 4c) | | |
+----+----------------------------------------------------------+-------------+------------+
| | Unauthorised overdraft | | 122 |
| | charges | | |
+----+----------------------------------------------------------+-------------+------------+
| | Colleague costs (Note 4b) | 2,572 | 2,530 |
+----+----------------------------------------------------------+-------------+------------+
| | Accommodation, repairs and maintenance | 465 | 427 |
+----+----------------------------------------------------------+-------------+------------+
| | Technology | 218 | 226 |
+----+----------------------------------------------------------+-------------+------------+
| | Marketing and communication | 326 | 327 |
+----+----------------------------------------------------------+-------------+------------+
| | | | |
+----+----------------------------------------------------------+-------------+------------+
| | b)Colleague costs include: | | |
+----+----------------------------------------------------------+-------------+------------+
| | Wages and salaries | 2,024 | 2,030 |
+----+----------------------------------------------------------+-------------+------------+
| | Social security costs | 179 | 195 |
+----+----------------------------------------------------------+-------------+------------+
| | Pension costs | 264 | 198 |
+----+----------------------------------------------------------+-------------+------------+
| | Other post retirement benefits | | |
+----+----------------------------------------------------------+-------------+------------+
| | Expense arising from share based payments | 105 | 107 |
| | | | |
+----+----------------------------------------------------------+-------------+------------+
| | | 2,572 | 2,530 |
+----+----------------------------------------------------------+-------------+------------+
| | | | |
+----+----------------------------------------------------------+-------------+------------+
| | c) Financial Services Compensation | | |
| | Scheme ('FSCS') | | |
+----+----------------------------------------------------------+-------------+------------+
| | The Financial Services Compensation Scheme ('FSCS') is the UK's statutory |
| | compensation scheme for customers of authorised financial services firms that are |
| | unable to pay claims made against them. Bank of Scotland plc, as an authorised |
| | firm, is obliged to pay levies to the FSCS as part of its funding arrangements, as |
| | explained below. |
| | The FSCS raises levies against firms authorised by the Financial Services |
| | Authority ('FSA') in respect of its management expenses and compensation costs. |
| | Under a new funding system introduced on 1 April 2008, the levies are split into |
| | five broad classes, one of which is protected deposits. Each deposit-taking firm |
| | contributes an amount in respect of these costs, which is proportionate to their |
| | share of the protected deposits for the relevant year. The levies are subject to |
| | the maximum thresholds determined by the FSA. |
| | |
+----+-------------------------------------------------------------------------------------+
| | Since October 2008, the FSCS has contributed to the costs of transferring, and/or |
| | paid compensation to, the customers of certain failed firms (including Bradford & |
| | Bingley plc, Kaupthing Singer & Friedlander Limited, Heritable Bank plc, |
| | Landsbanki's Icesave and London Scottish Bank plc). As a result, the FSCS is now a |
| | creditor of these firms. |
| | To fund these activities, the FSCS has obtained interest-only finance from HM |
| | Treasury of GBP19.7bn (as at 16 December 2008), which is due to be refinanced in |
| | 2011. The FSCS expects the amounts owed to it by failed firms to be reduced as |
| | assets are realised or other payments are made to creditors. In turn, this will |
| | enable the FSCS to reduce its borrowings from HM Treasury. In the meantime, the |
| | FSCS will need to meet its anticipated obligations in respect of interest payments |
| | on its borrowings through management expenses levies on authorised firms. |
| | The FSA, on behalf of the FSCS, has issued guidance regarding the levies to be |
| | made by the FSCS in 2009. This guidance indicates that the FSCS is expected to |
| | raise the next levy before 31 March 2009 and that the annual limit on the FSCS |
| | management expenses levy for 2008/9 has been set at GBP1bn. BoS has accrued a |
| | charge of GBP200m in respect of forecast management expenses levies for the levy |
| | years 2008/09 and 2009/10 that are based upon its share of protected deposits as |
| | at 31 December 2007 and 2008 respectively. |
| | When the existing borrowing with HM Treasury is refinanced in 2011, a repayment |
| | schedule for the outstanding principal will be agreed between HM Treasury and the |
| | FSCS, after which the FSCS will raise compensation costs levies against firms in |
| | respect of these amounts. These levies could be significant. However, no provision |
| | has been made for these costs to date as their amount is unknown and is not |
| | expected to be quantifiable until 2011 at the earliest. |
+----+----------------------------------------------------------+-------------+------------+
+-----+---------------------------------------------------------------------------------+
| 5. | Goodwill Impairment |
+-----+---------------------------------------------------------------------------------+
| | The primary component of goodwill disposed of comprises GBP240m in respect of |
| | the sale of Bank of Western Australia Limited and St Andrews Australia Pty |
| | Limited to Commonwealth Bank of Australia Limited (see Note 19). |
| | The Group carries out semi-annual and, if necessary, other impairment reviews |
| | of cash-generating units to which goodwill is allocated as described in the |
| | accounting policy on goodwill. The critical accounting estimate in respect of |
| | goodwill explains the assumptions used and sensitivity of the impairment |
| | testing. |
| | The goodwill impairment of GBP142m principally comprises GBP72m being the full |
| | write-down of goodwill held in respect of the acquisition of the ICC business |
| | banking division in Ireland and GBP50m being the write-down of goodwill |
| | relating to a specialist area of the UK credit card business to a recoverable |
| | amount, based on a value in use, of GBP20m. The write-downs have been triggered |
| | principally by deteriorating economic conditions. |
| | Cumulative impairment losses charged to the income statement total GBP183m |
| | (2007 GBP41m, 2006 GBP41m and 2005 GBPnil). |
+-----+---------------------------------------------------------------------------------+
+----+---------------------------------------------------------------------------------+
| 6. | Impairment Provisions and Losses |
| | |
+----+---------------------------------------------------------------------------------+
| | a)Impairment provisions and losses on loans and advances to |
| | customers designated as loans and receivables |
+----+---------------------------------------------------------------------------------+
+----+---------------------------------------------------------+------------+------------+
| | | 2008 | 2007 |
| | | GBPm | GBPm |
+----+---------------------------------------------------------+------------+------------+
| | Impairment provisions | | |
+----+---------------------------------------------------------+------------+------------+
| | At 1 January | 3,373 | 1,561 |
+----+---------------------------------------------------------+------------+------------+
| | Transfer in under the HBOS Group Reorganisation | | 1,528 |
+----+---------------------------------------------------------+------------+------------+
| | New impairment provisions less releases | 9,964 | 2,111 |
+----+---------------------------------------------------------+------------+------------+
| | Amounts written off | (2,515) | (1,726) |
+----+---------------------------------------------------------+------------+------------+
| | Disposals of subsidiary undertakings | (115) | |
+----+---------------------------------------------------------+------------+------------+
| | Discount unwind/interest income on impaired loans and | (149) | (129) |
| | advances | | |
| | to customers | | |
+----+---------------------------------------------------------+------------+------------+
| | Foreign exchange translation | 135 | 28 |
+----+---------------------------------------------------------+------------+------------+
| | At 31 December | 10,693 | 3,373 |
+----+---------------------------------------------------------+------------+------------+
| | | | |
+----+---------------------------------------------------------+------------+------------+
| | Impairment provisions are held in respect of: | | |
+----+---------------------------------------------------------+------------+------------+
| | Retail secured lending | 1,219 | 330 |
+----+---------------------------------------------------------+------------+------------+
| | Retail unsecured lending | 1,819 | 1,889 |
+----+---------------------------------------------------------+------------+------------+
| | Corporate | 6,563 | 832 |
+----+---------------------------------------------------------+------------+------------+
| | International | 1,092 | 322 |
+----+---------------------------------------------------------+------------+------------+
| | | 10,693 | 3,373 |
+----+---------------------------------------------------------+------------+------------+
| | | | |
+----+---------------------------------------------------------+------------+------------+
| | Impairment losses | | |
+----+---------------------------------------------------------+------------+------------+
| | New impairment provisions less releases | 9,964 | 2,111 |
+----+---------------------------------------------------------+------------+------------+
| | Recoveries of amounts previously written off | (107) | (99) |
+----+---------------------------------------------------------+------------+------------+
| | Net charge to income statement | 9,857 | 2,012 |
+----+---------------------------------------------------------+------------+------------+
| | | | |
+----+---------------------------------------------------------+------------+------------+
+----+---------------------------------------------------------------------------------+
| | b)Impairment provisions and losses on investment securities |
| | Total impairments on investment securities of GBP2,193m (2007 GBP60m) have been |
| | charged to the income statement, of which GBP1,270m (2007 GBP23m) relates to |
| | available for sale financial assets (Note 14) and GBP923m (2007 GBP37m) relates |
| | to loans and receivables as shown below. |
+----+---------------------------------------------------------------------------------+
+----+---------------------------------------------------------+------------+------------+
| | Impairment provisions and losses on investment | 2008 | 2007 |
| | securities designated as loans and receivables | GBPm | GBPm |
+----+---------------------------------------------------------+------------+------------+
| | Impairment provisions | | |
+----+---------------------------------------------------------+------------+------------+
| | At 1 January | | |
+----+---------------------------------------------------------+------------+------------+
| | New impairment provisions less releases | 923 | 37 |
+----+---------------------------------------------------------+------------+------------+
| | Amounts written off | | (37) |
+----+---------------------------------------------------------+------------+------------+
| | At 31 December | 923 | |
+----+---------------------------------------------------------+------------+------------+
| | | | |
+----+---------------------------------------------------------+------------+------------+
| | Impairment provisions held in respect of: | | |
+----+---------------------------------------------------------+------------+------------+
| | Treasury | 773 | |
+----+---------------------------------------------------------+------------+------------+
| | Corporate | 150 | |
+----+---------------------------------------------------------+------------+------------+
| | | 923 | |
+----+---------------------------------------------------------+------------+------------+
| | Impairment losses | | |
+----+---------------------------------------------------------+------------+------------+
| | New impairment provisions less releases | 923 | 37 |
+----+---------------------------------------------------------+------------+------------+
| | Net charge to income statement | 923 | 37 |
+----+---------------------------------------------------------+------------+------------+
| | | | |
+----+---------------------------------------------------------+------------+------------+
| | |
+----+---------------------------------------------------------+------------+------------+
+----+---------------------------------------------------------------------------------+
| 7. | Segmental Analysis |
+----+---------------------------------------------------------------------------------+
| Year ended 31.12.2008 |
| |
+----+---------------------------------------------------------------------------------+
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | | Retail | Corporate | International | Treasury | Other | Total |
| | | GBPm | GBPm | GBPm | | GBPm | GBPm |
| | | | | | GBPm | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Net interest income - | (2,392) | (1,984) | (3,703) | 8,079 | | |
| | internal | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Net interest income - | 6,634 | 4,282 | 5,180 | (7,809) | 6 | 8,293 |
| | external | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Net fees and | 144 | 62 | 5 | (211) | | |
| | commission | | | | | | |
| | income - | | | | | | |
| | internal | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Net fees and | 988 | 377 | 188 | 210 | 63 | 1,826 |
| | commission | | | | | | |
| | income - | | | | | | |
| | external | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Net trading income - | 48 | (652) | (45) | (2,314) | | (2,963) |
| | external | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Other operating | 65 | 3 | 5 | (73) | | |
| | income - internal | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Other operating | 15 | 1,594 | 102 | 45 | 158 | 1,914 |
| | income - external | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Net operating | 5,502 | 3,682 | 1,732 | (2,073) | 227 | 9,070 |
| | income/(expense) | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Administrative | (635) | (245) | 3 | | 877 | |
| | expenses - internal | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Administrative | (1,321) | (650) | (700) | (165) | (1,417) | (4,253) |
| | expenses - external | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Depreciation and | (55) | (1,215) | (55) | (5) | (212) | (1,542) |
| | amortisation | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Goodwill impairment | (69) | | (73) | | | (142) |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Other operating | | | 7 | | (44) | (37) |
| | expenses | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Operating expenses | (2,080) | (2,110) | (818) | (170) | (796) | (5,974) |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Impairment losses on | (2,230) | (6,669) | (958) | | | (9,857) |
| | loans and advances | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Impairment losses on | | (737) | (35) | (1,421) | | (2,193) |
| | investment securities | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Operating | 1,192 | (5,834) | (79) | (3,664) | (569) | (8,954) |
| | (loss)/profit | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | Share of | 3 | (951) | 10 | | | (938) |
| | (losses)/profits of | | | | | | |
| | jointly controlled | | | | | | |
| | entities and | | | | | | |
| | associates | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | (Loss)/profit on sale | 102 | | (845) | | | (743) |
| | of businesses | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
| | (Loss)/profit before | 1,297 | (6,785) | (914) | (3,664) | (569) | (10,635) |
| | taxation | | | | | | |
+----+-----------------------+---------+-----------+---------------+----------+---------+----------+
+----+--------------------------------------------------------------------------------+
| | In July 2008, the HBOS Group announced a divisional reorganisation under which |
| | the Group's Business Banking became part of the Corporate division, moving |
| | from Retail division. In addition, there was a transfer of Trading Cash |
| | Management from Treasury to Corporate division. Accordingly the 2007 |
| | comparatives have been restated to reflect these new structures and certain |
| | other minor reorganisations. There is no impact on the 2007 Consolidated |
| | Balance Sheet and Income Statement as previously published. |
+----+--------------------------------------------------------------------------------+
+-------------------------------------------------------------------------------------+
| Year ended 31.12.2007 |
| |
+-------------------------------------------------------------------------------------+
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | | Retail | Corporate | International | Treasury | Other | Total |
| | | GBPm | | | | GBPm | |
| | | | GBPm | GBPm | GBPm | | GBPm |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Net interest income - | (910) | 492 | (1,260) | 1,678 | | |
| | internal | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Net interest income - | 5,023 | 1,779 | 2,365 | (1,541) | | 7,626 |
| | external | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Net fees and | 177 | 13 | 2 | (192) | | |
| | commission | | | | | | |
| | income - | | | | | | |
| | internal | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Net fees and | 1,029 | 448 | 175 | 312 | | 1,964 |
| | commission | | | | | | |
| | income - | | | | | | |
| | external | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Net trading income - | 10 | 73 | (2) | 104 | | 185 |
| | external | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Other operating income | 20 | 16 | 6 | (42) | | |
| | - internal | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Other operating income | 34 | 2,024 | 108 | 69 | 339 | 2,574 |
| | - external | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Net operating income | 5,383 | 4,845 | 1,394 | 388 | 339 | 12,349 |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Administrative | (650) | (191) | | | 841 | |
| | expenses - internal | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Administrative | (1,425) | (762) | (604) | (184) | (1,212) | (4,187) |
| | expenses - external | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Depreciation and | (70) | (1,018) | (46) | (3) | (196) | (1,333) |
| | amortisation | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Other operating | | | (15) | | (118) | (133) |
| | expenses | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Operating expenses | (2,145) | (1,971) | (665) | (187) | (685) | (5,653) |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Impairment losses on | (1,278) | (618) | (116) | | | (2,012) |
| | loans and advances | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Impairment losses on | (22) | (37) | (1) | | | (60) |
| | investment securities | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Operating | 1,938 | 2,219 | 612 | 201 | (346) | 4,624 |
| | profit/(loss) | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Share of | (9) | 232 | 18 | | | 241 |
| | profits/(losses) of | | | | | | |
| | jointly controlled | | | | | | |
| | entities and | | | | | | |
| | associates | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Profit on sale of | 87 | | | | | 87 |
| | businesses | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
| | Profit/(loss) before | 2,016 | 2,451 | 630 | 201 | (346) | 4,952 |
| | taxation | | | | | | |
+---+------------------------+----------+-----------+---------------+----------+---------+---------+
+-----+--------------------------------------------------------------------------------+
| 8. | Taxation |
+-----+--------------------------------------------------------------------------------+
| | The tax credit for the year of GBP2,448m (2007 tax charge of GBP1,318m) |
| | results in an effective rate of 23% (2007 27%). Included within the tax credit |
| | of GBP2,448m is an overseas tax charge of GBP218m (2007 GBP236m). |
| | The main UK corporation tax rate reduced from 30% to 28% in April 2008. The |
| | average rate of UK corporation tax for the year to December 2008 is 28.5%. A |
| | reconciliation of the actual tax to the average rate of 28.5% (2007 30%) is |
| | detailed below: |
+-----+--------------------------------------------------------------------------------+
+-----+-------------------------------------------------------+-------------+--------------+
| | | Year | Year |
| | | ended | ended |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | GBPm |
+-----+-------------------------------------------------------+-------------+--------------+
| | (Loss)/profit before tax | (10,635) | 4,952 |
+-----+-------------------------------------------------------+-------------+--------------+
| | Expected tax (credit)/charge at 28.5% (2007 30%) | (3,031) | 1,486 |
+-----+-------------------------------------------------------+-------------+--------------+
| | Effects of: | | |
+-----+-------------------------------------------------------+-------------+--------------+
| | Changes in rates of corporation tax on deferred tax | 10 | (76) |
| | assets and liabilities | | |
+-----+-------------------------------------------------------+-------------+--------------+
| | (Income)/expenses not deductible/(chargeable) for tax | 358 | (22) |
| | purposes | | |
+-----+-------------------------------------------------------+-------------+--------------+
| | Net effect of differing tax rates overseas | 83 | 6 |
+-----+-------------------------------------------------------+-------------+--------------+
| | Gains exempted or covered by losses | (102) | (86) |
+-----+-------------------------------------------------------+-------------+--------------+
| | Impairment on investment securities | 52 | 16 |
+-----+-------------------------------------------------------+-------------+--------------+
| | Adjustments in respect of previous periods | (166) | 2 |
+-----+-------------------------------------------------------+-------------+--------------+
| | Tax losses where no deferred tax provided | 310 | |
+-----+-------------------------------------------------------+-------------+--------------+
| | Other | 38 | (8) |
+-----+-------------------------------------------------------+-------------+--------------+
| | Total income tax on (loss)/profit | (2,448) | 1,318 |
+-----+-------------------------------------------------------+-------------+--------------+
| | | | |
+-----+-------------------------------------------------------+-------------+--------------+
+-----+--------------------------------------------------------------------------------+
| | Deferred tax assets are recognised for tax losses carried forward to the |
| | extent that the realisation of the related tax benefit through future taxable |
| | profits is probable. |
| | At 31 December 2008 a deferred tax liability of GBP156m (2007 GBP171m) |
| | relating to investments in subsidiaries has not been recognised because the |
| | Bank controls whether or not the liability will be incurred and it is |
| | satisfied that it will not be incurred in the foreseeable future. |
+-----+--------------------------------------------------------------------------------+
+-----+--------------------------------------------------------------------------------+
| 9. | Loans and Advances to Customers |
+-----+--------------------------------------------------------------------------------+
+-----+---------------------------------------------------------+------------+------------+
| | | As at | As at |
| | | 31.12.2008 | 31.12.2007 |
| | | | |
| | | GBPm | GBPm |
+-----+---------------------------------------------------------+------------+------------+
| | Retail secured lending | 239,758 | 235,858 |
+-----+---------------------------------------------------------+------------+------------+
| | Retail unsecured lending | 18,592 | 18,908 |
+-----+---------------------------------------------------------+------------+------------+
| | Corporate, International, Treasury and Other Activities | 225,358 | 208,874 |
+-----+---------------------------------------------------------+------------+------------+
| | Gross loans and advances to customers | 483,708 | 463,640 |
+-----+---------------------------------------------------------+------------+------------+
| | Impairment provisions (Note 6a) | (10,693) | (3,373) |
+-----+---------------------------------------------------------+------------+------------+
| | Net loans and advances to customers | 473,015 | 460,267 |
+-----+---------------------------------------------------------+------------+------------+
+-----+--------------------------------------------------------------------------------+
| | Included in loans and advances to customers is GBP56,858m (2007 GBPnil) |
| | subject to repurchase (Note 17). |
| | Loans and advances to customers include advances securitised under the Group's |
| | securitisation and covered bonds programmes. Further details are given in Note |
| | 10. |
+-----+--------------------------------------------------------------------------------+
+-----+--------------------------------------------------------------------------------+
| | The mix of the Group's gross lending portfolio is summarised in the following |
| | table: |
+-----+--------------------------------------------------------------------------------+
+-----+---------------------------------------------------------+------------+------------+
| | | As at | As at |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | GBPm |
+-----+---------------------------------------------------------+------------+------------+
| | Agriculture, forestry and fishing | 574 | 647 |
+-----+---------------------------------------------------------+------------+------------+
| | Energy | 1,318 | 2,269 |
+-----+---------------------------------------------------------+------------+------------+
| | Manufacturing industry | 3,887 | 4,332 |
+-----+---------------------------------------------------------+------------+------------+
| | Construction and property | 46,634 | 41,099 |
+-----+---------------------------------------------------------+------------+------------+
| | Hotels, restaurants and wholesale and retail trade | 12,368 | 12,620 |
+-----+---------------------------------------------------------+------------+------------+
| | Transport, storage and communication | 7,693 | 6,834 |
+-----+---------------------------------------------------------+------------+------------+
| | Financial | 46,521 | 36,572 |
+-----+---------------------------------------------------------+------------+------------+
| | Other services | 12,688 | 14,749 |
+-----+---------------------------------------------------------+------------+------------+
| | Individuals: | | |
+-----+---------------------------------------------------------+------------+------------+
| | Residential mortgages | 238,696 | 235,771 |
+-----+---------------------------------------------------------+------------+------------+
| | Other personal lending | 22,604 | 19,229 |
+-----+---------------------------------------------------------+------------+------------+
| | Non-UK residents | 90,725 | 89,518 |
+-----+---------------------------------------------------------+------------+------------+
| | Total | 483,708 | 463,640 |
+-----+---------------------------------------------------------+------------+------------+
+-----+--------------------------------------------------------------------------------+
| 10. | Securitisation and Covered Bonds |
+-----+--------------------------------------------------------------------------------+
+-----+--------------------------------------------------------------------------------+
| | a) Securitisation |
+-----+--------------------------------------------------------------------------------+
| | Loans and advances to customers include advances securitised under the Group's |
| | securitisation programmes, the majority of which have been sold by subsidiary |
| | companies to bankruptcy remote special purpose entities ('SPE's). As the SPEs |
| | are funded by the issue of debt on terms whereby some of the risks and rewards |
| | of the portfolio are retained by the subsidiary, the SPEs are consolidated |
| | fully and all of these advances are retained on the Group's balance sheet, |
| | with the related notes in issue included within debt securities in issue. |
| | |
+-----+--------------------------------------------------------------------------------+
| | b) Covered Bonds |
+-----+--------------------------------------------------------------------------------+
| | Certain loans and advances to customers have been assigned to bankruptcy |
| | remote limited liability partnerships to provide security to issues of covered |
| | bonds by the Group. The Group retains substantially all of the risks and |
| | rewards associated with these loans and the partnerships are consolidated |
| | fully with the loans retained on the Group's balance sheet, and the related |
| | covered bonds included within debt securities in issue. |
+-----+--------------------------------------------------------------------------------+
| | The Group's principal securitisation and covered bonds programmes, together |
| | with the balances of the advances subject to notes in issue at 31 December, |
| | are listed below. The notes in issue are reported in Note 12. |
+-----+--------------------------------------------------------------------------------+
+----------------+-------------+----------+-------------+----------+----------+----------+----------+--------+
| | | As at 31.12.2008 | As at 31.12.2007 |
+----------------+------------------------+-----------------------------------+------------------------------+
| Securitisation | Type of loan | Gross | Notes in | Gross assets | Notes |
| | | assets | Issue | securitised | in |
| | | securitised | GBPm | GBPm | Issue |
| | | GBPm | | | GBPm |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Permanent | UK residential | 32,613 | 38,490 | 31,577 | 31,540 |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Mound | UK residential | 8,063 | 8,238 | 4,545 | 4,454 |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Swan | Australian | | | 2,726 | 2,689 |
| | residential | | | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Candide | Dutch residential | 5,569 | 5,704 | 2,705 | 2,759 |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Prominent | Commercial loans | 1,053 | 1,149 | 1,107 | 1,108 |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Pendeford | UK residential | 9,888 | 9,870 | 2,508 | 2,551 |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Melrose | Commercial loans | | | 750 | 1,134 |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Balliol | UK residential | 12,701 | 12,549 | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Brae | UK residential | 9,213 | 9,955 | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Dakota | UK residential | 3,988 | 3,885 | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Deva | UK residential | 6,747 | 6,703 | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Penarth | Credit card | 4,189 | 2,633 | | |
| | receivables | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Tioba | UK residential | 2,647 | 2,568 | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Trinity | UK residential | 12,975 | 12,638 | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Wolfhound | Irish residential | 4,083 | 4,107 | | |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Other | UK residential | 68 | 179 | 68 | 182 |
| | mortgages | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| | | 113,797 | 118,668 | 45,986 | 46,417 |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| | | | | | |
+----------------+------------------------+-------------+---------------------+---------------------+--------+
| Covered Bonds | | | | |
+-----------------------------------------+-------------+---------------------+---------------------+--------+
| Covered | UK | 51,756 | 49,408 | 34,711 | 38,315 |
| bonds | residential | | | | |
| | mortgages | | | | |
+----------------+-------------+------------------------+----------+---------------------+-------------------+
| Social | UK | 3,475 | 2,919 | 2,354 | 1,519 |
| Housing | residential | | | | |
| Covered | mortgages | | | | |
| Bonds | | | | | |
+----------------+-------------+------------------------+----------+---------------------+-------------------+
| | | 55,231 | 52,327 | 37,065 | 39,834 |
+----------------+-------------+------------------------+----------+---------------------+-------------------+
| | | | | | |
+----------------+-------------+------------------------+----------+---------------------+-------------------+
| Total | 169,028 | 170,995 | 83,051 | 86,251 |
| securitisation | | | | |
| and covered | | | | |
| bonds | | | | |
+------------------------------+------------------------+----------+---------------------+-------------------+
| Less held by | (97,363) | (94,265) | (1,258) | (1,258) |
| the Group | | | | |
+------------------------------+------------------------+----------+---------------------+-------------------+
| Total | | 71,665 | 76,730 | 81,793 | 84,993 |
+----------------+-------------+----------+-------------+----------+----------+----------+----------+--------+
+-----+-------------------------------------------------------------------------------+
| | The balances reported for the Prominent securitisation above include GBP456m |
| | (2007 GBP459m) advances and GBP456m (2007 GBP459m) notes in issue that arise |
| | from a funded synthetic securitisation. |
| | |
+-----+-------------------------------------------------------------------------------+
| | Cash deposits of GBP12,423m (2007 GBP5,144m) held by the Group are restricted |
| | in use to repayment of the debt securities issue by the SPEs and other legal |
| | obligations. |
| | In addition to the programmes noted above, the Group entered into a synthetic |
| | securitisation, referencing a pool of GBPnil (2007 GBP14,089m), using credit |
| | default swaps of GBPnil (2007 GBP40m). |
| | |
+-----+-------------------------------------------------------------------------------+
| | In total, the Group has securitised GBP97,363m of mortgage assets under |
| | certain securitisation and covered bond programmes and purchased all of the |
| | loan notes in issue relating to those issuances for GBP94,265m. These |
| | transactions did not lead to any derecognition of the mortgage assets as the |
| | Group has retained all of the risks and rewards associated with the loan |
| | notes. See Note 17 for further details about the Group's repurchase |
| | transactions. |
| | |
+-----+-------------------------------------------------------------------------------+
+----+--------------------------------------------------------------------------------+
| | c)Other Special Purpose Entities |
+----+--------------------------------------------------------------------------------+
| | In addition to the SPEs described above, the Group sponsors two conduit |
| | programmes, Grampian and Landale, which invest in asset-backed securities |
| | funded by commercial paper or through banking facilities. Details of the |
| | assets secured under these conduit programmes are given in Note 11. |
| | |
+----+--------------------------------------------------------------------------------+
+-----+---------------------------------+--------------+-------------+-------------+---------+
| 11. | Investment Securities |
+-----+--------------------------------------------------------------------------------------+
| | As at 31.12.2008 |
+-----+--------------------------------------------------------------------------------------+
| | | At fair | Available | Loans and | Total |
| | | value | for sale | receivables | GBPm |
| | | through | GBPm | GBPm | |
| | | the income | | | |
| | | statement | | | |
| | | GBPm | | | |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Listed | | | | |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Debt securities | 346 | 22,064 | 25,325 | 47,735 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Equity shares | 3 | 110 | | 113 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Total listed | 349 | 22,174 | 25,325 | 47,848 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | | | | | |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Unlisted | | | | |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Debt securities | 217 | 3,714 | 13,553 | 17,484 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Equity shares | 293 | 2,147 | | 2,440 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Total unlisted | 510 | 5,861 | 13,553 | 19,924 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Total | 859 | 28,035 | 38,878 | 67,772 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | | | | | |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Comprising: | | | | |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Debt securities | 563 | 25,778 | 38,878 | 65,219 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
| | Equity shares | 296 | 2,257 | | 2,553 |
+-----+---------------------------------+--------------+-------------+-------------+---------+
+----+--------------------------------------------------------------------------------+
| | Included in investment securities is GBP37,263m (2007 GBP8,996m) subject to |
| | repurchase (Note 17). |
| | Following the International Accounting Standards Board's ('IASB') decision in |
| | October 2008 to permit the reclassification of Financial Assets, the Group's |
| | Treasury division reclassified certain securities from assets held for trading |
| | into the Available for Sale ('AFS') portfolio and, subsequently, in light of |
| | increasing illiquidity in the markets for asset backed securities ('ABS'), |
| | changed the classification of ABS from AFS, to loans and receivables. ABS and |
| | Floating Rate Notes ('FRNs') with book values (as at 31 December 2008) of |
| | GBP10,132m and GBP3,410m respectively were transferred out of assets held for |
| | trading into the AFS portfolio with effect from 1 July 2008. Subsequently, ABS |
| | with book values (as at 31 December 2008) of GBP37,173m were transferred out |
| | of the AFS portfolio and into loans and receivables with effect from 1 |
| | November 2008. If these assets had not been reclassified during the year |
| | additional adjustments of GBP(981)m would have been recognised in the income |
| | statement and the AFS reserve movement would have been reduced by GBP68m (post |
| | tax). |
+----+--------------------------------------------------------------------------------+
+-----+------------------------------+----------------+-------------+-------------+---------+
| | As at 31.12.2007 |
+-----+-------------------------------------------------------------------------------------+
| | | At fair value | Available | Loans and | Total |
| | | through | for sale | receivables | GBPm |
| | | the income | GBPm | GBPm | |
| | | statement | | | |
| | | GBPm | | | |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Listed | | | | |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Debt securities | 639 | 31,944 | | 32,583 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Equity shares | 10 | 261 | | 271 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Total listed | 649 | 32,205 | | 32,854 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | | | | | |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Unlisted | | | | |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Debt securities | 151 | 14,833 | 527 | 15,511 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Equity shares | 308 | 2,942 | | 3,250 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Total unlisted | 459 | 17,775 | 527 | 18,761 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Total | 1,108 | 49,980 | 527 | 51,615 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | | | | | |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Comprising: | | | | |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Debt securities | 790 | 46,777 | 527 | 48,094 |
+-----+------------------------------+----------------+-------------+-------------+---------+
| | Equity shares | 318 | 3,203 | | 3,521 |
+-----+------------------------------+----------------+-------------+-------------+---------+
+----+---------------------------------------------------------------------------------+
| | The fair value movement during the year on investment securities held at fair |
| | value through the income statement is a gain of GBP37m (2007 GBP65m) and the |
| | fair value movement during the year on investment securities classified as |
| | available for sale is a loss of GBP8,173m (2007 a loss of GBP432m). |
| | Loans and receivables debt securities include asset backed securities of |
| | GBP17,703m (end 2007 available for sale debt securities GBP18,563m) which are |
| | held in the Group's Grampian conduit. This is a series of bankruptcy remote |
| | special purpose entities ('SPEs') that are funded by the issue of commercial |
| | paper and banking facilities. The commercial paper is included within debt |
| | securities in issue. As some of the rewards and risks of the portfolio are |
| | retained by the Group, including the provision of liquidity facilities by Bank |
| | of Scotland plc to the conduit, the assets and liabilities of the conduit are |
| | consolidated as part of the Group. The Group also has a smaller conduit, |
| | Landale, of which two of the four SPEs are consolidated. These hold available |
| | for sale debt securities of GBP681m (2007 GBP604m). |
+----+---------------------------------------------------------------------------------+
+---+--------------------+--+------------+-----------+------+--+-----------+-----------+---------+
| 12. Debt Securities in Issue |
+------------------------------------------------------------------------------------------------+
| | | As at 31.12.2008 | As at 31.12.2007 |
+---+--------------------+----------------------------------+------------------------------------+
| | | At fair | At | Total | At fair | At | Total |
| | | value | amortised | GBPm | value | amortised | GBPm |
| | | through | cost | | through | cost | |
| | | income | GBPm | | income | GBPm | |
| | | statement | | | statement | | |
| | | GBPm | | | GBPm | | |
+---+-----------------------+------------+-----------+---------+-----------+-----------+---------+
| | Certificates of | | 50,956 | 50,956 | | 63,680 | 63,680 |
| | deposits | | | | | | |
+---+-----------------------+------------+-----------+---------+-----------+-----------+---------+
| | MTNs issued | | 48,630 | 48,630 | | 29,199 | 29,199 |
+---+-----------------------+------------+-----------+---------+-----------+-----------+---------+
| | Covered bonds | | 34,022 | 34,022 | | 39,184 | 39,184 |
+---+-----------------------+------------+-----------+---------+-----------+-----------+---------+
| | Commercial paper | | 12,132 | 12,132 | | 28,648 | 28,648 |
+---+-----------------------+------------+-----------+---------+-----------+-----------+---------+
| | Securitisation | | 42,708 | 42,708 | 1,842 | 43,967 | 45,809 |
+---+-----------------------+------------+-----------+---------+-----------+-----------+---------+
| | | | 188,448 | 188,448 | 1,842 | 204,678 | 206,520 |
+---+-----------------------+------------+-----------+---------+-----------+-----------+---------+
| | Included within Commercial Paper above is GBP2,979m (2007 GBP11,954m) issued by |
| | the Grampian conduit and GBPnil (2007 GBP137m) issued by Landale conduit. |
| | |
+---+--------------------+--+------------+-----------+------+--+-----------+-----------+---------+
+----+-----+--------------------------------------------------------+------------+-------------+
| 13. | Other Borrowed Funds | | |
+----------+--------------------------------------------------------+------------+-------------+
| | | As at | As at |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | GBPm |
+----------+--------------------------------------------------------+------------+-------------+
| | Preferred securities | 403 | 2,417 |
+----------+--------------------------------------------------------+------------+-------------+
| | Preference shares | 1,227 | 1,227 |
+----------+--------------------------------------------------------+------------+-------------+
| | Subordinated liabilities: | | |
+----------+--------------------------------------------------------+------------+-------------+
| | Dated | 11,201 | 10,485 |
+----------+--------------------------------------------------------+------------+-------------+
| | Undated | 5,948 | 3,752 |
+----------+--------------------------------------------------------+------------+-------------+
| | | 18,779 | 17,881 |
+----------+--------------------------------------------------------+------------+-------------+
| | During the year the following subordinated liabilities have been issued: |
| | |
+----+-----------------------------------------------------------------------------------------+
| | On 30 June 2008, GBP1bn dated floating rate subordinated notes were issued by the Bank, |
| | at par, to its parent undertaking HBOS plc. The notes bear interest at a fixed margin |
| | over the three month LIBOR rate. |
| | |
+----+-----------------------------------------------------------------------------------------+
| | On 30 September 2008, GBP2bn undated floating rate subordinated notes were issued by |
| | the Bank, at par, to its parent undertaking HBOS plc. The notes bear interest at a |
| | fixed margin over the three month LIBOR rate. |
+----+-----------------------------------------------------------------------------------------+
| | |
+----+-----+--------------------------------------------------------+------------+-------------+
+------------+-------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| 14. | Reconciliation of Shareholders' Equity |
+------------+---------------------------------------------------------------------------------------------------+
| | | | Other reserves(3) | | | 2007 |
+--------------------------+---------+---------+--------------------------------+----------+-----------+---------+
| | Share | Share | Cash | Available | Other | Retained | Minority | Total |
| | capital | premium | flow | | Reserves | | | |
| | | GBPm | hedge | for sale | GBPm | earnings | interests | GBPm |
| | GBPm | | reserve | reserve | | | | |
| | | | | GBPm | | GBPm | GBPm | |
| | | | GBPm | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| At 1 January | 436 | 3,926 | 416 | 204 | 486 | 6,568 | 369 | 12,405 |
| 2007 | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Foreign exchange | | | | 2 | (6) | | 12 | 8 |
| translation | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Available for | | | | | | | | |
| sale | | | | | | | | |
| investments: | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Net | | | | (432) | | | | (432) |
| change | | | | | | | | |
| in | | | | | | | | |
| fair | | | | | | | | |
| value | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Tax | | | | 96 | | | | 96 |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Realised | | | | (281) | | | | (281) |
| gains on | | | | | | | | |
| sale | | | | | | | | |
| transferred | | | | | | | | |
| to the | | | | | | | | |
| income | | | | | | | | |
| statement | | | | | | | | |
| (Note 3) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Tax | | | | 80 | | | | 80 |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Impairment | | | | 23 | | | | 23 |
| recognised | | | | | | | | |
| in income | | | | | | | | |
| statement | | | | | | | | |
| (Note 6) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Tax | | | | (6) | | | | (6) |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Cash flow | | | | | | | | |
| hedges: | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Effective | | | (313) | | | | | (313) |
| portion | | | | | | | | |
| of | | | | | | | | |
| changes | | | | | | | | |
| in fair | | | | | | | | |
| value | | | | | | | | |
| taken to | | | | | | | | |
| equity | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Tax | | | 97 | | | | | 97 |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Gains | | | (417) | | | | | (417) |
| transferred | | | | | | | | |
| to the | | | | | | | | |
| income | | | | | | | | |
| statement | | | | | | | | |
| (Note 3) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Tax | | | 125 | | | | | 125 |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Profit for the | | | | | | 3,608 | 30 | 3,638 |
| year | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Total recognised | | | (508) | (518) | (6) | 3,608 | 42 | 2,618 |
| income and | | | | | | | | |
| expense | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Transfer in | | | 7 | 1 | 1,085 | 5,011 | 15 | 6,119 |
| under HBOS Group | | | | | | | | |
| Reorganisation | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Dividends paid | | | | | | (1,672) | (43) | (1,715) |
| (Note 15) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Issue of new | 63 | 2,417 | | | | | 98 | 2,578 |
| shares | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Disposal of | | | | | | | (125) | (125) |
| subsidiaries | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| Movement in | | | | | | (36) | | (36) |
| share-based | | | | | | | | |
| compensation | | | | | | | | |
| reserve | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
| At 31 December | 499 | 6,343 | (85) | (313) | 1,565 | 13,479 | 356 | 21,844 |
| 2007 | | | | | | | | |
+------------+-------------+---------+---------+---------+-----------+----------+----------+-----------+---------+
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| | | | Other reserves(3) | | | 2008 |
+--------------------------+---------+---------+---------------------------------+----------+-----------+----------+
| | Share | Share | Cash | Available | Other | Retained | Minority | Total |
| | | premium | flow | for sale | Reserves2 | Earnings | interests | GBPm |
| | capital | GBPm | hedge | reserve1 | GBPm | GBPm | GBPm | |
| | | | | GBPm | | | | |
| | GBPm | | reserve | | | | | |
| | | | | | | | | |
| | | | GBPm | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| At 1 January 2008 | 499 | 6,343 | (85) | (313) | 1,565 | 13,479 | 356 | 21,844 |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Foreign exchange | | | | (23) | 118 | | 11 | 106 |
| translation | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Available for sale | | | | | | | | |
| investments: | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Net | | | | (8,173) | | | | (8,173) |
| change | | | | | | | | |
| in | | | | | | | | |
| fair | | | | | | | | |
| value | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Tax | | | | 2,276 | | | | 2,276 |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Realised | | | | (24) | | | | (24) |
| gains on | | | | | | | | |
| sale | | | | | | | | |
| transferred | | | | | | | | |
| to the | | | | | | | | |
| income | | | | | | | | |
| statement | | | | | | | | |
| (Note 3) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Tax | | | | 7 | | | | 7 |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Impairment | | | | 1,270 | | | | 1,270 |
| recognised | | | | | | | | |
| in | | | | | | | | |
| income | | | | | | | | |
| statement | | | | | | | | |
| (Note 6) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Tax | | | | (355) | | | | (355) |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Cash flow hedges: | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Effective | | | (3,889) | | | | | (3,889) |
| portion | | | | | | | | |
| of | | | | | | | | |
| changes | | | | | | | | |
| in fair | | | | | | | | |
| value | | | | | | | | |
| taken to | | | | | | | | |
| equity | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Tax | | | 1,088 | | | | | 1,088 |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Losses | | | 2,561 | | | | | 2,561 |
| transferred | | | | | | | | |
| to the | | | | | | | | |
| income | | | | | | | | |
| statement | | | | | | | | |
| (Note 3) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Tax | | | (717) | | | | | (717) |
| thereon | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| (Loss)/profit for | | | | | | (8,238) | 51 | (8,187) |
| the year | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Total recognised | | | (957) | (5,022) | 118 | (8,238) | 62 | (14,037) |
| income and expense | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Dividends paid | | | | | | (1,228) | (43) | (1,271) |
| (Note 15) | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Issue of new shares | 825 | 4,675 | | | | | | 5,500 |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| MI acquisitions | | | | | | | 242 | 242 |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| Repayment of equity | | | | | | | (353) | (353) |
| to minority | | | | | | | | |
| shareholders | | | | | | | | |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
| At 31 December 2008 | 1,324 | 11,018 | (1,042) | (5,335) | 1,683 | 4,013 | 264 | 11,925 |
+--------------------------+---------+---------+---------+-----------+-----------+----------+-----------+----------+
+----------+--------------+
| 1 | The |
| | available |
| | for sale |
| | reserve |
| | is |
| | comprised |
| | of |
| | GBP(5,285)m |
| | (2007 |
| | GBP(450)m) |
| | in respect |
| | of treasury |
| | assets and |
| | GBP(50)m |
| | (2007 |
| | GBP137m) in |
| | respect of |
| | corporate |
| | and other |
| | investments. |
+----------+--------------+
| | |
+----------+--------------+
| 2 | Other |
| | reserves |
| | principally |
| | include the |
| | merger |
| | reserve of |
| | GBP494m |
| | arising |
| | from the |
| | combination |
| | of Halifax |
| | and Bank of |
| | Scotland in |
| | 2001. |
+----------+--------------+
| | |
+----------+--------------+
| 3 | The |
| | cumulative |
| | balance |
| | for |
| | foreign |
| | exchange |
| | translation |
| | at 31 |
| | December |
| | 2008 is |
| | GBP67m |
| | (2007 |
| | GBP(28)m). |
+----------+--------------+
+-----+---------------------------------------------------------------------------------+
| 15. | Dividends |
+-----+---------------------------------------------------------------------------------+
| | The following dividends to ordinary shareholders have been charged direct to |
| | retained earnings: |
| | |
+-----+---------------------------------------------------------------------------------+
+----+--------------------------------------------------+----------------+---------------+
| | | Year | Year |
| | | ended | ended |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | GBPm |
+----+--------------------------------------------------+----------------+---------------+
| | Ordinary dividends | | |
+----+--------------------------------------------------+----------------+---------------+
| | 2006 final dividend | | 1,050 |
+----+--------------------------------------------------+----------------+---------------+
| | 2007 interim dividend | | 622 |
+----+--------------------------------------------------+----------------+---------------+
| | 2007 final dividend | 1,205 | |
+----+--------------------------------------------------+----------------+---------------+
| | | | |
+----+--------------------------------------------------+----------------+---------------+
| | Preference dividends paid | 23 | |
+----+--------------------------------------------------+----------------+---------------+
| | | 1,228 | 1,672 |
+----+--------------------------------------------------+----------------+---------------+
+-----+----+----------------------------------------------------+--------------+--------------+
| 16. | Contingent Liabilities and Commitments |
+-----+---------------------------------------------------------------------------------------+
| | | As at | As at |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | GBPm |
+----------+----------------------------------------------------+--------------+--------------+
| | Contingent liabilities | | |
+----------+----------------------------------------------------+--------------+--------------+
| | Acceptances and endorsements | | 43 |
+----------+----------------------------------------------------+--------------+--------------+
| | Guarantees and irrevocable letters of credit | 4,898 | 6,491 |
+----------+----------------------------------------------------+--------------+--------------+
| | | 4,898 | 6,534 |
+----------+----------------------------------------------------+--------------+--------------+
| | Commitments | | |
+----------+----------------------------------------------------+--------------+--------------+
| | Short term trade related transactions | 137 | 115 |
+----------+----------------------------------------------------+--------------+--------------+
| | Undrawn formal standby facilities, credit lines | 83,320 | 99,669 |
| | and other commitments to lend | | |
+----------+----------------------------------------------------+--------------+--------------+
| | | 83,457 | 99,784 |
+-----+----+----------------------------------------------------+--------------+--------------+
+----+--------------------------------------------------------------------------------+
| | a)Unarranged Overdraft Charges |
+----+--------------------------------------------------------------------------------+
| | On 27 July 2007 it was announced that members of the Group, along with seven |
| | other major UK current account providers, had reached agreement with the OFT |
| | to commence legal proceedings in the High Court of England and Wales for a |
| | declaration (or declarations) to resolve legal uncertainties concerning the |
| | fairness and lawfulness of unarranged overdraft charges (the 'Test Case'). It |
| | was also announced that HBOS and those other providers will seek a stay of all |
| | current and potential future court proceedings which are brought against them |
| | in the UK concerning these charges and have obtained the consent of the |
| | Financial Ombudsman Service not to proceed with consideration of the merits of |
| | any complaints concerning these charges that are referred to them prior to the |
| | resolution of the Test Case. By virtue of a waiver granted by the FSA of its |
| | complaints handling rules, HBOS (and other banks, including the banks party to |
| | the Test Case) will not be dealing with or resolving customer complaints about |
| | unarranged overdraft charges while the waiver is in force. On 22 January 2009, |
| | the FSA confirmed that it is extending its waiver regarding unarranged |
| | overdraft charges complaints until 26 July 2009. |
| | The first step in the Test Case was a trial of certain preliminary issues |
| | concerning the legal status and enforceability of contractual terms relating |
| | to unarranged overdraft charges. This preliminary trial concluded on 8 |
| | February 2008 and the judgment was handed down on 24 April 2008. The judgment |
| | held that the contractual terms relating to unarranged overdraft charges |
| | currently used by the Group (i) are not capable of being penalties, but (ii) |
| | are not exempt from assessment for fairness under the Unfair Terms in Consumer |
| | Contract Regulations 1999 ('UTCCRs'). |
| | At a court hearing on 22 and 23 May 2008, the Judge granted HBOS and the other |
| | Test Case banks permission to appeal his decision that current unarranged |
| | overdraft charges are assessable for fairness under the UTCCRs. This appeal |
| | concluded on 5 November 2008. On 26 February 2009, the Court of Appeal |
| | dismissed the banks' appeal and held that the charges are assessable for |
| | fairness. The banks will now be applying to the House of Lords for permission |
| | to appeal this judgment. |
| | A further hearing took place in early July 2008, at which the Court was asked |
| | to consider whether terms and conditions previously used by the Test Case |
| | banks are capable of being penalties and whether the Judge's decision in April |
| | 2008 (that the banks' current contractual terms are capable of being assessed |
| | for fairness under the UTCCRs) can be applied to historic terms. |
| | The Court handed down its judgment on 8 October 2008 on this second stage of |
| | the test case process. The Court ruled that charges applied under Halifax and |
| | Bank of Scotland's previously used terms and conditions cannot be penalties. |
| | However, the Court also ruled that the historic terms and conditions are not |
| | exempt from assessment for fairness under the UTCCRs. The banks intend to |
| | appeal this latter decision. |
| | Further Court hearings will be required before the test case process is |
| | concluded. |
| | A definitive outcome of the Test Case is unlikely to be known for at least |
| | twelve months. |
| | Given the early stage of these proceedings and the uncertainty as to their |
| | outcome, in terms of a contingent liability, it is not practicable at this |
| | time to estimate any potential financial effect. |
+----+--------------------------------------------------------------------------------+
+----+---------------------------------------------------------------------------------+
| | b)Payment Protection Insurance ('PPI') |
+----+---------------------------------------------------------------------------------+
| | The final report from the Competition Commission ('CC') into Payment Protection |
| | Insurance ('PPI') was received on 29 January 2009. The remedies published were |
| | broadly similar to those outlined in the CC's Provisional Decision with some |
| | changes to the sales process. |
| | Whilst the Group believe many of the remedies could improve customer searching |
| | and enable switching, the inability to sell appropriate insurance products at a |
| | point when customers take on increased financial commitment, will likely result |
| | in lower levels of protection for UK consumers. |
| | The Group is actively reviewing its customer propositions in light of the CC's |
| | final report to ensure that the Group continues to offer a valuable protection |
| | product to the Group's customers. |
| | The Group took the decision to launch a regular premium protection product. |
| | This was launched in early February 2009. |
| | The Financial Ombudsman Service ('FOS') has been receiving a large number of |
| | complaints in relation to PPI sold by a number of providers and has written to |
| | the FSA suggesting an industry-wide review of PPI sales standards. In response, |
| | the industry is working on a Statement of Principles to define a consistent way |
| | of handling sales complaints. The FSA is considering FOS' suggestion and a |
| | statement from the FSA in relation to its most recent thematic work in relation |
| | to PPI is expected in the first quarter of 2009. |
+----+---------------------------------------------------------------------------------+
+-----+---------------------------------------------------------------------------------+
| 17. | Securities Borrowing and Lending, Repurchase and Reverse Repurchase Agreements |
+-----+---------------------------------------------------------------------------------+
| | The Group enters into securities lending transactions and repurchase |
| | agreements, whereby cash and securities are temporarily received or transferred |
| | as collateral. Where the securities sold subject to repurchase or pledged as |
| | collateral are retained on the balance sheet the funds received under these |
| | arrangements are recognised as liabilities. These transactions are all in |
| | respect of standard securities borrowing and reverse repurchase agreements |
| | which are undertaken under standard market terms and conditions, or are in |
| | respect of securities exchange transactions under the Bank of England's Special |
| | Liquidity Scheme. Assets and liabilities relating to such arrangements at 31 |
| | December are as follows: |
+-----+---------------------------------------------------------------------------------+
+-----+----------------------------------+------------+------------+------------+------------+
| | | Asset | Related Liability |
+-----+----------------------------------+-------------------------+-------------------------+
| | | As at | As at | As at | As at |
| | | 31.12.2008 | 31.12.2007 | 31.12.2008 | 31.12.2007 |
| | | GBPm | GBPm | GBPm | GBPm |
+-----+----------------------------------+------------+------------+------------+------------+
| | Assets subject to repurchase: | | | | |
+-----+----------------------------------+------------+------------+------------+------------+
| | Financial assets held | 4,369 | 4,711 | 3,425 | 4,523 |
| | for trading | | | | |
+-----+----------------------------------+------------+------------+------------+------------+
| | Loans and advances to customers | 56,858 | | 39,220 | |
+-----+----------------------------------+------------+------------+------------+------------+
| | Investment securities (Note 11) | 37,263 | 8,996 | 31,682 | 7,841 |
+-----+----------------------------------+------------+------------+------------+------------+
| | | 98,490 | 13,707 | 74,327 | 12,364 |
+-----+----------------------------------+------------+------------+------------+------------+
+----+---------------------------------------------------------------------------------+
| | In addition to the above, financial assets pledged as collateral as part of |
| | securities lending transactions amounted to GBP89,109m (2007 GBP11,918m). |
+----+---------------------------------------------------------------------------------+
+----+---------------------------------------------------------------------------------+
| | Securities held as collateral as stock borrowed or under reverse repurchase |
| | agreements amounted to GBP76,018m (2007 GBP39,975m), of which GBP64,378m |
| | (GBP28,817m) had been resold or repledged by the Group as collateral for its |
| | own transactions. These securities are not recognised as assets, and the cash |
| | advanced is recognised within financial assets held for trading, loans and |
| | advances to banks and loans and advances to customers. |
+----+---------------------------------------------------------------------------------+
+-----+--------------------------------------------------+----------------+---------------+
| 18. | Cash and Cash Equivalents | | |
+-----+--------------------------------------------------+----------------+---------------+
| | | Year ended | Year ended |
| | | 31.12.2008 | 31.12.2007 |
| | | GBPm | Restated |
| | | | GBPm |
+-----+--------------------------------------------------+----------------+---------------+
| | Cash and balances at central banks | 2,502 | 2,944 |
+-----+--------------------------------------------------+----------------+---------------+
| | Less: mandatory reserve deposits | (296) | (373) |
+-----+--------------------------------------------------+----------------+---------------+
| | | 2,206 | 2,571 |
+-----+--------------------------------------------------+----------------+---------------+
| | Loans and advances to banks | 12,445 | 4,095 |
+-----+--------------------------------------------------+----------------+---------------+
| | Less: amounts with a maturity of three months or | (6,665) | (3,755) |
| | more | | |
+-----+--------------------------------------------------+----------------+---------------+
| | | 5,780 | 340 |
+-----+--------------------------------------------------+----------------+---------------+
| | | 7,986 | 2,911 |
+-----+--------------------------------------------------+----------------+---------------+
+----+---------------------------------------------------------------------------------+
| | Mandatory reserve deposits are held with local central banks in accordance with |
| | statutory requirements; these deposits are not available to finance the Group's |
| | day to day operations. |
| | Included in total cash and cash equivalents at 31 December 2008 is GBP864m |
| | (2007 GBP658m) of cash held at the central bank as collateral against notes in |
| | circulation of GBP957m (2007 GBP881m). |
| | Mandatory reserve deposits of GBP373m at 31 December 2007 have been |
| | reclassified from loans and advances to banks to cash and balances at central |
| | banks. In addition, total cash and cash equivalents at 31 December 2007 have |
| | been restated to include certain cash deposits held with the central Bank of |
| | Ireland of GBP853m (1 January 2007 GBP535m) and cash held at the central bank |
| | as collateral against notes in circulation of GBP881m (1 January 2007 GBP857m) |
| | which are available to finance the Group's day to day operations. The cashflow |
| | statements have been adjusted accordingly. |
+----+---------------------------------------------------------------------------------+
+-----+---------------------------------------------------------------------------------+
| 19. | Sale of Businesses |
+-----+---------------------------------------------------------------------------------+
| | On 8 October 2008, the HBOS Group agreed the sale of part of its Australian |
| | operations, principally Bank of Western Australia Ltd and St Andrews Australia |
| | Pty Ltd, to Commonwealth Bank of Australia Limited. |
| | The sale completed on 19 December 2008 and results in a pre-tax loss on |
| | disposal of GBP845m (including goodwill written-off of GBP240m) which is |
| | included as non-operating income within the (loss)/profit on sale of businesses |
| | for the year. |
| | Under the share sale agreement HBOS plc has provided certain warranties to |
| | Commonwealth Bank of Australia, that all relevant, material circumstances and |
| | facts in relation to the sale have been disclosed and described in agreement. |
| | The share sale agreement provided for adjustments to the initial purchase price |
| | based on the risk weighted assets of Bank of Western Australia Limited and the |
| | net assets of St Andrew's Australia Pty Limited. As a result, the loss on sale |
| | of these businesses may be subject to adjustment for the contingent element of |
| | the commitment receivable. |
| | Following the sale BoS retains a presence in Australia through Bank of Scotland |
| | International (Australia) Limited and Capital Finance Australia Limited which |
| | are engaged in corporate banking and asset finance activities respectively, |
| | together with the Bank of Scotland plc Sydney branch and therefore this sale |
| | does not constitute a discontinued activity. |
| | As such, the performance of the businesses sold and the loss on disposal |
| | remains within the profit arising from continuing operations of the Group. |
| | These businesses are reported in International for segmental reporting |
| | purposes. |
+-----+---------------------------------------------------------------------------------+
+-----+---------------------------------------------------------------------------------+
| 20. | Events After The Balance Sheet Date |
+-----+---------------------------------------------------------------------------------+
| | a) Lloyds Banking Group |
| | On 18 September 2008, with the support of the UK Government, the boards of HBOS |
| | plc ('HBOS') and Lloyds TSB Group plc ('Lloyds TSB') announced that they had |
| | reached agreement on the terms of the recommended acquisition of HBOS by Lloyds |
| | TSB. The terms of the acquisition were subsequently amended, as announced on 13 |
| | October 2008, at the same time as the announcement of the participation by HBOS |
| | and Lloyds TSB in the Government's action plan to recapitalise some of the |
| | major UK banks. The acquisition was to be implemented by means of a scheme of |
| | arrangement, with a separate scheme of arrangement in relation to preference |
| | shares, under sections 895 to 899 of the Companies Act 2006. |
| | On 12 January 2009 the Court of Session in Edinburgh, Scotland made an order |
| | sanctioning the scheme of arrangement for the acquisition and the preference |
| | share scheme of arrangement. The last day of trading in HBOS ordinary and |
| | preference shares was 14 January 2009. |
| | On 15 January 2009 HBOS raised GBP11.5bn of capital (before costs and expenses) |
| | through an issue of GBP8.5bn of new ordinary shares under a placing with HM |
| | Treasury subject to clawback by existing shareholders, and an issue to HM |
| | Treasury of GBP3bn of new preference shares. Lloyds TSB raised GBP4.5bn (before |
| | costs and expenses) through an issue of GBP3.5bn of new ordinary shares under a |
| | placing with HM Treasury subject to clawback by existing shareholders, and an |
| | issue to HM Treasury of GBP1bn of new preference shares. |
| | On 16 January 2009 the Lloyds TSB acquisition of HBOS completed following final |
| | court approval and Lloyds TSB was renamed Lloyds Banking Group plc. The |
| | exchange of HBOS shares for Lloyds Banking Group shares took place at an |
| | exchange ratio of 0.605 of a new Lloyds Banking Group share for every one HBOS |
| | share held. As a result, the UK Government through HM Treasury owned |
| | approximately 43.4% of the enlarged ordinary share capital of Lloyds Banking |
| | Group. In addition, each class of preference share issued by HBOS, including |
| | the preference shares issued to HM Treasury in the capital raising was replaced |
| | with an equal number of new Lloyds Banking Group preference shares. |
| | HBOS ordinary and preference shares were de-listed from the Official List of |
| | the UK Listing Authority and admission to trading on the London Stock Exchange |
| | was cancelled on 19 January 2009 when trading in the new Lloyds Banking Group |
| | shares commenced. |
| | b) Other |
| | On 26 February 2009, the Board of Bank of Scotland plc ('BoS') approved an |
| | ordinary share capital issuance of GBP8.351bn to HBOS. This passes the ordinary |
| | share capital provided by HM Treasury to HBOS on 15 January 2009 down to BoS. |
| | In addition, this fulfils HBOS requirements under the terms of the HM Treasury |
| | subscription agreement. |
| | In order to facilitate this capital injection, the authorised ordinary share |
| | capital of BoS was increased by 16.0bn ordinary shares of GBP0.25 each and |
| | 13,918,333,333 ordinary shares were issued to HBOS for a total of GBP8.351bn. |
| | |
+-----+---------------------------------------------------------------------------------+
+-----+---------------------------------------------------------------------------------+
| 21. | Ultimate Parent Undertaking |
+-----+---------------------------------------------------------------------------------+
| | From 16 January 2009, Bank of Scotland plc's ultimate parent undertaking and |
| | controlling party is Lloyds Banking Group plc (formerly Lloyds TSB Group plc) |
| | which is incorporated in Scotland. Lloyds Banking Group plc will produce |
| | consolidated accounts for the year ended 31 December 2009. Copies of the annual |
| | report and accounts of Lloyds TSB Group plc for the year ended 31 December 2008 |
| | may be obtained from Lloyds Banking Group's head office at 25 Gresham Street, |
| | London EC2V 7HN. |
| | Prior to 16 January 2009, HBOS plc was the ultimate parent undertaking of Bank |
| | of Scotland plc. Copies of the annual report and accounts of HBOS plc for the |
| | year ended 31 December 2008 may be obtained from HBOS plc's registered office |
| | at The Mound, Edinburgh, EH1 1YZ. |
+-----+---------------------------------------------------------------------------------+
Contacts
+--------------------------+----------------------------------------------------------+
| Investor Relations | Michael Oliver |
| | Director of Investor Relations |
| | 020 7356 2167 |
| | email: michael.oliver@ltsb-finance.co.uk |
| | Douglas Radcliffe |
| | Senior Manager, Investor Relations |
| | 020 7356 1571 |
| | email: douglas.radcliffe@ltsb-finance.co.uk |
| | |
+--------------------------+----------------------------------------------------------+
| Media | Shane O'Riordain |
| | Group Communications Director |
| | 020 7356 1849 |
| | email: shane.o'riordain@lloydsbanking.com |
| | Leigh Calder |
| | Senior Manager, Media Relations |
| | 020 7356 1347 |
| | email: leigh.calder@lloydstsb.co.uk |
+--------------------------+----------------------------------------------------------+
This information is provided by RNS
The company news service from the London Stock Exchange
END
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