Chairman's Report
Avid readers of company reports, myself included, have to develop an ability to speed read to the bit which tells you whether, as a shareholder, your lot has improved.
This year we attempt to break that mould and to provide facts and opinions, sans spin. In this we are encouraged and to a degree obliged, to improve our annual reporting by the requirements of the Business Review arising from a European Directive. In this year’s Annual Report therefore, we detail the results and discuss our performance and prospects in the context of the risks and uncertainties in 2006 and those we face in the coming year. We have also set out in greater detail than ever before our approach to Corporate Responsibility. This reflects the real understanding that our business will only prosper if we seek to serve the interests of all our key stakeholders. Shareholders, customers, suppliers, colleagues and society in general all require HBOS to be responsible, forward thinking and prepared to be measured against pre-determined standards.
Shareholder returns
The returns for shareholders have improved in 2006, with the HBOS share price closing the year at £11.32, 14% ahead for the year, outperforming both the banks’ index and the FTSE 100. Underlying earnings per share have increased by 16% and the proposed dividend per share by 15%. These results are good but each year arguably they are tougher to achieve. In 2006 we have seen some of the competitor banks improve their operating performance and this being reflected in their improving share price, even if on occasion obscured by bid speculation. We do not take for granted increasing returns for our shareholders as an automatic consequence of effort. We fully expect to have to work harder than ever so as to achieve relative share price recognition.
Management and strategy
2006 was the year of management transition as Andy Hornby succeeded James Crosby as Chief Executive. Jo Dawson and Benny Higgins joined the Board in May as Chief Executive Insurance & Investment and Chief Executive Retail respectively. There has been no need to make grand statements about new strategic directions. As the Chief Executive details in his review, the strategy is unchanged and continues to deliver value for our customers and our shareholders. The Board is confident that this strategy, primarily driven by capturing the growth opportunities in the UK with additional contributions from our developing international business, is right for this stage of HBOS’s journey. The results being achieved point to the importance of continuity of strategy and the clear twin focus on top line revenue growth coupled with tight cost control.
Shareholder feedback
Each year we commission an independent audit of UK and International investor opinion. This is not sanitised and is delivered direct to the Board. Investor comments on strategy, performance, management and prospects are received on a non attributable basis. They provide a fascinating insight into what investors think of us, helping guide our support and challenge to the Executive team.
Investor opinion in 2006 was encouraging. First there was a clear understanding and endorsement of our strategy. Our primary focus on UK growth supplemented by careful, organic expansion internationally, looks to be very acceptable to our shareholders, if not racy enough for some tastes. Even for those for whom faster growth is always preferable to capital repatriation, there is no sense in which shareholders expect us to rush to grow inorganically. Management gets the thumbs up for managing the business well with cost control and capital discipline singled out as areas of particular merit. Loud and clear however, comes the message that investors want to see and meet with the new management team following Andy Hornby’s appointment as Chief Executive. Our communications programme for 2007 will seek to address that requirement by giving greater access to divisional management teams as well as the Chief Executive and Finance Director.
Regulation
The year has seen significant regulatory attention and a broader external agenda than in previous years. Regulatory enquiries and reviews abound with the Office of Fair Trading, the Competition Commission, Her Majesty’s Treasury and the Financial Services Authority all consuming time and resource. In the main these have the wholly benign aim of eradicating unfair practices and increasing the transparency in pricing of products and services for customers. The law of unintended consequences is however lurking in the wings with a real need to ensure that financial exclusion, less competition and higher barriers to entry are not the end result of changes to pricing and cost recovery.
Your board
Sir Brian Ivory retires from the Board at this year’s AGM after serving nine years on the Board of Bank of Scotland and, from 2001, HBOS plc. Sir Brian has given outstanding service to HBOS in a number of ways but I would like to pay particular tribute to the extraordinary energy and skill he has exercised as Chairman of the HBOS Remuneration Committee since its formation in 2001; during this time he has worked tirelessly to ensure that the Group’s remuneration policies are fair, transparent and align the interests of management with those of shareholders. David Shearer has also decided to stand down from the Board at this year’s AGM to ensure that no conflicts arise in the future between his position as a Non-executive Director of HBOS and his other business interests. David joined the Board in 2004 and during this time has also served on the Audit Committee, bringing considerable expertise to the work of the Committee. I would like to express the appreciation of the Board to both Sir Brian and David for their contribution to the affairs of HBOS plc.
This year we welcome Richard Cousins to the Board as a Non-executive Director. Richard brings a wealth of experience in a number of sectors and is currently Chief Executive of Compass Group plc.
2007
Our shareholders tell us that our cautious approach to growth in 2006 had their support and that they expect us to judge the time for a faster pace with sustainable returns as our guide. In 2007 we do see an opportunity for a marginally faster pace of growth consistent with the maintenance of returns at our target level. The balance of capital allocation for growth and share buybacks therefore edges in favour of additional organic growth with a consequent lower buyback amount in prospect.
In the following pages you will find a management team confident in their ability to continue to achieve good returns for shareholders. As ever, management alone cannot achieve the desired greater performance without the strength of the colleagues around the Group. The Board is delighted to see the formal recognition and reporting of our focus on colleague development in the Chief Executive’s statement. Unashamedly we want our entire team to be the best there is in banking.
Dennis Stevenson
Chairman
