International
continued
Australia
Underlying profit before tax in HBOS Australia (‘HBOSA’) increased by 24% to £278m (2005 £224m) notwithstanding the considerable investment in people, technology and branches. Profit growth was achieved in all businesses by the delivery of strong growth in income, lending and market shares. Lending increased by 24% to £24.5bn (2005 £19.7bn) with deposits increasing by 28% to £11.5bn (2005 £9.0bn).
Financial Performance
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net interest income | 501 | 413 |
| Non-interest income | 166 | 143 |
| Fees and commission income | 113 | 99 |
| Fees and commission expense | (12) | (6) |
| Net earned premiums on insurance contracts | 21 | 16 |
| Operating lease rental income | 9 | 10 |
| Other operating income | 35 | 24 |
| Net operating income | 667 | 556 |
| Operating expenses | (331) | (302) |
| Staff | (171) | (145) |
| Accommodation, repairs and maintenance |
(21) | (18) |
| Technology | (24) | (12) |
| Marketing and communication | (21) | (22) |
| Depreciation: | ||
| Property and equipment and intangible assets | (16) | (16) |
| Other | (53) | (65) |
| Underlying operating expenses | (306) | (278) |
| Operating lease depreciation | (6) | (7) |
| Change in investment contract liabilities | (11) | (11) |
| Net claims incurred oninsurance contracts | (2) | (1) |
| Net change in insurance contract liabilities | (6) | (5) |
| Operating profit before provisions | 336 | 254 |
| Impairment losses on loans and advances | (59) | (33) |
| Operating profit | 277 | 221 |
| Share of profits of associates and jointly controlled entities | 1 | 3 |
| Underlying profit before tax | 278 | 224 |
| Net interest margin | 2.33% | 2.39% |
| Impairment losses as a % of average advances | 0.27% | 0.19% |
| Cost:income ratio | 47.7% | 52.3% |
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Operating Income and Margins
Underlying net operating income increased by 21% to £642m (2005 £532m) assisted by a 24% growth in lending.
Net interest income increased by 21% to £501m (2005 £413m). Increased asset and deposit growth was partially offset by a decline in margin. Since HBOSA launched its aggressively priced products, competition has intensified, reducing margins. The interest margin declined to 2.33% (2005 2.39%).
| Movement in margin | Basis points |
|---|---|
| Net interest margin for the year ended 31 December 2005 | 239 |
| Lending margins | (6) |
| Net interest margin for the yearended 31 December 2006 | 233 |
Underlying non-interest income rose by 18% to £141m (2005 £119m) benefiting from growth in the Retail, Commercial and Corporate businesses, and the full year contribution of Insurance & Investment income following the purchase of RACV Financial Services in March 2005. This is reflected in the 14% increase in fee and commission income and the 31% increase in net earned premiums on insurance contracts.
Operating Expenses
Underlying operating expenses increased by 10% to £306m (2005 £278m). Our continuing investment in physical distribution (particularly business banking centres), brand recognition, customer facing staff, new products and back office infrastructure is designed to underpin our growth ambitions. Notwithstanding this, the cost:income ratio improved to 47.7% (2005 52.3%) as a result of the 20% growth in net operating income. As we continue to pursue our goal of providing an alternative to the existing established financial service providers, we will accelerate our investment spend during 2007, expanding our retail and business banking physical presence as well as investing further in our strategic business brands and support functions.
Credit Quality and Provisions
Impaired loans as a percentage of closing advances increased to 1.00% (2005 0.66%) primarily as a result of a small number of impaired corporate transactions on which the ultimate recovery rate is expected to be high. Provisions as a percentage of impaired loans fell to 46% (2005 62%). Impairment losses as a percentage of average advances rose to 0.27% (2005 0.19%).
| As at 31.12.2006 |
As at 31.12.2005 | |
|---|---|---|
| Loans and advances
to customers |
£24.5bn | £19.7bn |
| Impairment provisions on advances | £113m | £80m |
| Impairment provisions as a % of closing advances | 0.46% | 0.41% |
| Classification of advances*: | % | % |
| Agriculture, forestry and fishing | 3 | 2 |
| Energy | 3 | 4 |
| Manufacturing industry | 3 | 3 |
| Construction and property | 24 | 23 |
| Hotels, restaurants and wholesale and retail trade | 9 | 8 |
| Transport, storage and communication | 2 | 2 |
| Financial | 3 | 3 |
| Other services etc. | 7 | 8 |
| Individuals: | ||
| Home mortgages | 38 | 42 |
| Other personal lending | 6 | 5 |
| Overseas residents | 2 | |
| 100 | 100 | |
| Impaired loans | £245m | £130m |
| Impaired loans as a % of closing advances | 1.00% | 0.66% |
| Impairment provisions as a % of impaired loans | 46% | 62% |
| Risk weighted assets | £21.0bn | £16.4bn |
| Customer deposits | £11.5bn | £9.0bn |
* Before impairment provisions.
Operational Performance
The significant investment being made in the national expansion of our Australian operations is designed to support future profit growth in each of our Retail, Commercial and Insurance & Investment businesses. At the same time, further investments will support the growth of our Asset Finance and Corporate businesses in their specialist markets.
Lending and Deposit Growth
Lending grew by 24% to £24.5bn (2005 £19.7bn) with continued growth in the residential and commercial books. Customer deposits grew by 28% to £11.5bn (2005 £9.0bn) as a result of the continued success of Retail and Commercial deposit initiatives notwithstanding intense competition.
Retail Business
Our Retail business, operating under the BankWest brand, continued its push to build national market share with its ‘Betterdeal’ strategy and ‘hero’ product offerings. Lending increased by 16% to £8.6bn (2005 £7.4bn) and deposits increased by 17% to £4.9bn (2005 £4.2bn). Our share of the mortgage broker new loan market increased to 16% (2005 13%).
In 2006, BankWest achieved the biggest credit card market share percentage gain of all banks nationally. Growth was driven by the two market-leading products, the updated Lite MasterCard and the Zero MasterCard.
BankWest continues to be a market leader in deposits growth. The TeleNet direct deposit product grew strongly, passing £1bn in balances, and during the year a Kid’s Bonus Saver, offering interest rates up to 10%, was launched with encouraging results. Transactional services available to East Coast customers were increased significantly by the rollout of more than 350 BankWest-branded ATMs in the first half of 2006 as the BankWest 7-Eleven partnership was implemented.
Retail’s success was recognised in Money magazine’s Best of the Best for 2007 awards, with seven products judged as the ‘Best of the Best’ and a further six products in the top three of their respective categories.
Commercial Business
Our Business Bank, operating under the BankWest brand, continued to outgrow the market in 2006 and in the process became Australia’s fastest growing participant. Lending increased by 46% to £7.0bn (2005 £4.8bn) and deposits increased by 38% to £6.6bn (2005 £4.8bn).
Deposits grew significantly, again outperforming the market, driven primarily by the contribution of Specialist Deposit Services and by the launch of Business Bonus and Business TeleNet products. Transactional banking facilities were upgraded as a result of improvements to our internet and trading platforms. Our physical distribution has also continued to expand, particularly on the East Coast, with nine Business Banking Centres opened in 2006.
During the year BankWest Business claimed two major awards in the 2006 Business Review Weekly (‘BRW’) Business Banking Awards. The BankWest Business TeleNet Saver won the Online Business Saving Account award and the BankWest Business Bonus Account won the Business Transaction Account category as voted by the independent consumer information provider InfoChoice. BankWest Business products also achieved top three positions in two other BRW award categories.
Corporate Business
Our Corporate business, operating under the BOS International brand, continued to grow with lending increasing by 28% to £5.1bn (2005 £4.0bn). We hold a leading position as an arranger of transactions across the leveraged and acquisition finance, property, project and infrastructure markets. BOS International is well placed to continue to take advantage of opportunities in the active mergers, acquisitions and resource sectors.
Asset Finance Business
Capital Finance, our Asset Finance business, performed well with lending increasing by 9% to £3.8bn (2005 £3.5bn). The business continues to grow market share organically and future growth is underpinned by a strong pipeline of quality lending approvals and the launch of new products. A motor finance and insurance placement service was launched during 2006 and has received outstanding dealer support demonstrating our commitment to the motor trade.
Insurance & Investment Business
Sales of insurance products as measured by Gross Written Premiums (‘GWP’) increased by 30% to £21.7m (2005 £16.7m), driven by the strong lending growth in Retail and an extension of relationships with corporate distribution partners. This growth includes a solid contribution from the life insurance products launched in 2005.
Our financial planning business benefited from the full year contribution of RACV Financial Services acquired in 2005 and additional recruitment during 2006 with commission income nearly doubling compared to the previous year. In January 2007, St Andrew’s acquired the Queensland based financial planners, Whittaker Macnaught, which will boost funds under management and advice by £0.6bn.
Risks and Uncertainties
Risks and uncertainties faced in Australia in the execution of the HBOSA strategy include the economic conditions in Australia, competitor reaction, and our ability to attract and retain the talent necessary to continue our growth.
If economic growth slows considerably, market credit growth will fall short of expectations. However, the East Coast expansion strategy is based on building market share from a low base, and consequently it would take a significant and broad based economic downturn to cut markedly into asset growth. Nevertheless, credit quality could be adversely affected.
Inflation risks persist where the Reserve Bank of Australia (‘RBA’) may tighten monetary policy in 2007, which would constrain housing market loan growth and cause repayment difficulties for highly geared households.
We will maintain a dynamic approach to our strategy with a view to minimising the impact of any competitor reaction whilst ensuring that we are seen as the leader in our product and service proposition.
To ensure HBOSA is an employer of choice we have a People strategy which will support our business plans. The strategy includes creating an environment that attracts, retains and rewards high performance individuals and developing leaders who can transition through rapid change.
Prospects
The Australian economy, with its strong fundamentals and employment prospects, continues to benefit from the growth in global demand for resources, providing a sound platform for our growth strategy. The market therefore continues to offer good opportunities, even though recent rate increases are expected to constrain the growth of the housing market and consumer credit in 2007.
Although a large part of our national expansion in Australia is focused on organic growth on the East Coast, the importance of the West Australian market remains a key part of our growth plans. HBOSA announced during the year a move to a new purpose-built Perth based BankWest head office in 2009, recognising the importance of Australia’s fastest growing State to our long-term plans.
We will pursue our goal of becoming a significant national financial services provider by accelerating our current growth strategy and continuing to drive competition in the Australian market. At the same time, our focus on market leading products and services continues to be reflected in the strong growth of our customer base and in improved customer satisfaction. Through the expansion of our national physical presence, and the investment in the infrastructure and people to support it, we are well positioned to deliver further growth in shareholder value.
