International

Strategy

Our strategy in Australia is to grow by offering a highly individual and differentiated selling proposition based on simple products, aggressive pricing, distinctive marketing and speed of service

We are determined to provide an alternative to established financial service providers. This is increasingly being recognised by Australian consumers. We will continue to increase national brand awareness of our strategic businesses: Retail, Commercial and Insurance & Investment, and deliver solid scalable value generating growth. Our niche businesses, Corporate Banking and Asset Finance, will continue to grow strongly in their selected markets and support our aim of becoming a significant national financial services provider.

Our strategy in Ireland is to achieve sustainable profit growth through the creation of a full service bank which will provide the platform for our Retail and Business propositions

Our primary strategic objective is to deliver sustainable profitable organic growth through the creation of a full service offering in the Irish marketplace. This strategy will position us as the 4th largest full service bank in Ireland by the end of 2009. We intend to deliver a nationwide network of Halifax retail branches distinguished by a unique approach to retail banking in Ireland. In tandem the delivery of the full service offering will, we believe, secure the platform and the opportunity to aggressively expand our business banking franchise.

Delivering value generating growth in Europe & North America through expanded infrastructure and through an expansion of our products and sector specialisms

ENA’s primary strategic objective is to deliver sustainable profitable organic growth through co-ordinated and targeted investment and expanded activity across our specialist sectors. Our aim is to broaden the ENA footprint across our key geographies and sectors by investing in an expanded network while continuing to develop opportunities in new markets. This investment, combined with the recruitment of sector and product specialists and development of enhanced risk management techniques, will create a platform for organic growth across ENA.

To maintain a cost discipline while recognising the need to invest for growth

International recognises the importance of cost discipline in its businesses and while planning to invest appropriately to grow across the overseas businesses, the business as usual activities will be targeting operational efficiencies.

Our performance in 2006

Underlying profit before tax increased by 34% to £820m (2005 £610m), with all three businesses contributing to this growth. In Australia, strong growth in income came from market share gains and corporate lending. Ireland saw significant volume uplifts and higher profits notwithstanding the roll out costs of the retail branch network. Europe & North America benefited from strong growth across all of the businesses.

Lending increased by 24% to £53.0bn (2005 £42.9bn) and deposits increased by 32% to £18.3bn (2005 £13.9bn).

Financial Performance

Income Statement

	Year ended 31.12.2006 £m	Year ended 31.12.2005 £m
Net interest income	1,239	1,018
Non-interest income	929	503
Fees and commission income	237	206
Fees and commission expense	(191)	(176)
Net earned premiums on insurance contracts	488	187
Change in value of in-force long term assurance business	104	59
Operating lease rental income	36	32
Investment and other operating income	255	195
Net operating income	2,168	1,521
Operating expenses	(1,128)	(723)
Staff	(350)	(283)
Accommodation, repairs and maintenance	(43)	(39)
Technology	(33)	(19)
Marketing and communication	(45)	(35)
Depreciation:
Property and equipment and intangible assets	(33)	(28)
Other	(139)	(124)
Sub total	(643)	(528)
Recharges:
Technology	(1)	(1)
Accommodation	(1)
Underlying operating expenses	(645)	(529)
Operating lease depreciation	(24)	(25)
Change in investment contract liabilities	(12)	109
Net claims incurred on insurance contracts	(113)	(127)
Net change in insurance contract liabilities	(334)	(151)
Impairment on investment securities	(2)	(6)
Operating profit before provisions	1,038	792
Impairment losses on loans and advances	(221)	(180)
Operating profit	817	612
Share of profits/(losses) of associates and jointly controlled entities	3	(2)
Underlying profit before tax	820	610
Net interest margin	2.49%	2.65%
Impairment losses as a % of average advances	0.46%	0.48%
Cost:income ratio	38.3%	40.0%

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Balance Sheet and Asset Quality Information

	As at 31.12.2006	As at 31.12.2005
Loans and advances to customers	£53.0bn	£42.9bn
Impairment provisions on advances	£272m	£310m
Impairment provisions as a % of closing advances	0.51%	0.72%
Classification of advances*:	%	%
Agriculture, forestry and fishing	1	1
Energy	2	2
Manufacturing industry	3	3
Construction and property	19	18
Hotels, restaurants and wholesale and retail trade	8	8
Transport, storage and communication	2	1
Financial	2	3
Other services etc.	5	6
Individuals:
Home mortgages	27	27
Other personal lending	5	6
Overseas residents	26	25
	100	100
Impaired loans	£620m	£549m
Impaired loans as a % of closing advances	1.17%	1.28%
Impairment provisions as a % of impaired loans	44%	56%
Risk weighted assets	£47.1bn	£38.7bn
Customer deposits	£18.3bn	£13.9bn

* Before impairment provisions.

The results of our International businesses are converted to sterling monthly at the average exchange rate for the month. The average exchange rates for the respective reporting periods were:

	Year ended 31.12.2006	Year ended 31.12.2005
£1 : Australian dollar	2.45	2.39
£1 : euro	1.47	1.46
£1 : US dollar	1.84	1.82

The closing exchange rates used in the conversion of the International balance sheets were:

	As at 31.12.2006	As at 31.12.2005
£1 : Australian dollar	2.49	2.35
£1 : euro	1.49	1.46
£1 : US dollar	1.97	1.72

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