Corporate
Strategy
Our strategy is one of asset class management, using specialisation within teams to develop a deep understanding of the dynamics of a market, giving us a clear competitive advantage and a distinctive position in the marketplace. This allows a more focused approach to our selected markets. Bringing together the origination and asset management teams in our chosen asset classes ensures that we align our activities and allows us to balance value protection with value creation. Our clients benefit from the combination of expertise, versatility and long term commitment, allowing us to provide superior customer service. This approach, with the aim of delivering significant and sustainable shareholder returns, has seen Corporate’s results grow from strength to strength.
The key aspects of our strategy to deliver our overall objective are:
Selective asset growth, whilst preserving strong margins and exercising vigilant credit risk management
We believe our focus on asset class management will deliver the growth opportunities to allow us to add to the sectors in which we are already market leaders and support strong growth in other selected markets. We continue to seek quality opportunities at the right price and with the right partners, concentrating on returns rather than volumes and an increasing focus on sell downs. Our shareholders benefit from an operating model designed to generate significant and sustainable shareholder returns.
Lead the corporate and social responsibility area
Businesses don’t operate in a vacuum - our success is very much dependent on the success and prosperity of the communities and the society in which we live and work. It’s therefore our responsibility to invest in activities that connect our colleagues and communities in a way that has a positive impact. Our business activities visibly support education and social projects and the number of colleagues engaged in volunteering across Corporate continues to grow.
Cost discipline
Cost discipline for Corporate means driving value for money from all expenditure. We will continue to challenge how we can deliver a superior service, from innovation and delivery of differentiating strategic projects, while minimising costs.
Our performance in 2006
Underlying profit before tax in Corporate increased by 17% to £1,663m (2005 £1,420m). Included within this strong performance, underlying net operating income grew by 9% and underlying expenses by 9%. Net interest margins improved and impairment losses remained flat year-on-year. Our share of profits from associates and joint ventures increased to £157m (2005 £65m).
Financial Performance
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net interest income | 1,861 | 1,695 |
| Non-interest income | 1,709 | 1,386 |
| Commitment fees | 39 | 45 |
| Guarantee fees | 23 | 28 |
| International fees | 49 | 33 |
| Transaction fees | 63 | 62 |
| Underwriting fees | 89 | 61 |
| Other | 99 | 100 |
| Fees and commission income | 362 | 329 |
| Fees and commission expense | (21) | (36) |
| Profit on sale of investment securities | 224 | 163 |
| Operating lease rental income | 1,006 | 682 |
| Other operating income | 138 | 248 |
| Net operating income | 3,570 | 3,081 |
| Operating expenses | (1,571) | (1,253) |
| Staff | (447) | (410) |
| Accommodation, repairs and maintenance | (2) | (2) |
| Technology | (16) | (2) |
| Marketing and communication | (31) | (30) |
| Depreciation: | ||
| Property and equipment and intangible assets | (31) | (22) |
| Other | (91) | (92) |
| Sub total | (618) | (558) |
| Recharges: | ||
| Technology | (50) | (48) |
| Accommodation | (53) | (46) |
| Other shared services | (62) | (65) |
| Underlying operating expenses | (783) | (717) |
| Operating lease depreciation | (788) | (536) |
| Impairment on investment securities |
(69) | (45) |
| Operating profit before provisions | 1,930 | 1,783 |
| Impairment losses on loans and advances | (424) | (428) |
| Operating profit | 1,506 | 1,355 |
| Share of profits of associates and jointly controlled entities | 157 | 65 |
| Underlying profit before tax | 1,663 | 1,420 |
| Net interest margin | 2.22% | 2.15% |
| Impairment losses as a % of average advances | 0.52% | 0.56% |
| Cost:income ratio | 28.9% | 28.7% |
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Operating Income and Margins
Underlying net operating income increased by 9% in 2006 to £2,713m (2005 £2,500m). Net interest income grew by 10% to £1,861m (2005 £1,695m) and underlying non-interest income grew by 6% to £852m (2005 £805m). In a buoyant, competitively priced market, we continue to actively sell down positions that might otherwise dilute returns or result in a concentration of risk, contributing to an improved net interest margin of 2.22% (2005 2.15%).
| Movement in margin | Basis points |
|---|---|
| Net interest margin for the year ended 31 December 2005 | 215 |
| Lending margins | 15 |
| Lex* | (5) |
| Wholesale funding | (1) |
| Capital earnings | (3) |
| Net interest margin for the year ended 31 December 2006 | 222 |
* Reflects the funding cost of operating lease assets included in net interest income.
Net fees and commission income increased by 16% to £341m (2005 £293m). Realised gains from our diversified investment portfolio increased by 37% to £224m (2005 £163m). Notwithstanding this, unrealised gains in the portfolio at the end of the year were higher than at the beginning, providing further confidence that such gains are sustainable going forward. As anticipated, other operating income decreased by 44% to £138m (2005 £248m), 2005 having benefited from a small number of large, non-recurring dividend receipts.
