International
continued
Ireland
Underlying profit before tax in Ireland increased by 43% to £149m (2005 £104m). This strong performance was achieved in a year of significant investment in our Retail proposition with the opening of 24 new branches and the re-branding of the Retail business to the Halifax brand.
Strong growth was recorded in all businesses. Our customer focused proposition, building on a healthy Irish economy enabled us to grow lending by 31% to £15.9bn (2005 £12.1bn) and customer deposits by 32% to £5.8bn (2005 £4.4bn). We were successful in increasing market share in both our core businesses, most notably capturing 8% (2005 7%) of net lending in the mortgage market. This was achieved with only a slight reduction in overall margins and with credit quality maintained.
Financial Performance
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net interest income | 268 | 203 |
| Non-interest income | 49 | 39 |
| Fees and commission income | 14 | 15 |
| Fees and commission expense | (3) | |
| Operating lease rental income | 12 | 13 |
| Other operating income | 23 | 14 |
| Net operating income | 317 | 242 |
| Operating expenses | (143) | (108) |
| Staff | (73) | (55) |
| Accommodation, repairs and maintenance | (9) | (11) |
| Technology | (3) | (3) |
| Marketing and communication | (15) | (6) |
| Depreciation: | ||
| Property and equipment and intangible assets | (6) | (5) |
| Other | (27) | (16) |
| Underlying operating expenses | (133) | (96) |
| Operating lease depreciation | (10) | (12) |
| Impairment on investment securities | (2) | (5) |
| Operating profit before provisions | 172 | 129 |
| Impairment losses on loans and advances | (28) | (21) |
| Operating profit | 144 | 108 |
| Share of profits/(losses) of associates and jointly controlled entities | 5 | (4) |
| Underlying profit before tax | 149 | 104 |
| Net interest margin | 1.73% | 1.77% |
| Impairment losses as a % of average advances | 0.20% | 0.20% |
| Cost:income ratio | 43.6% | 42.7% |
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Operating Income and Margins
Net operating income grew by 31% to £317m (2005 £242m). Net interest income grew by 32% to £268m (2005 £203m) reflecting lending growth of 31%, with a small contraction in margin due to a change in product mix.
| Movement in margin | Basis points |
|---|---|
| Net interest margin for the year ended 31 December 2005 | 177 |
| Change in product mix | (2) |
| Retail | (2) |
| Net interest margin for the yearended 31 December 2006 | 173 |
Margins in business banking remained stable in the period, reflecting the quality of our customer proposition while mortgage margins were resilient despite our market leading pricing in this segment.
Non-interest income increased by 26% to £49m (2005 £39m). The increase was largely due to one off profits realised from our Venture Capital portfolio being further augmented by the profit from the disposal of a small number of properties.
Operating Expenses
Underlying operating expenses increased by 39% to £133m (2005 £96m) reflecting the continuing investment in both infrastructure and people as part of our Retail expansion. Notwithstanding this investment, the cost:income ratio increased only marginally to 43.6% (2005 42.7%).
Credit Quality and Provisions
Credit performance continued to be strong in the period with impaired loans as a percentage of closing advances decreasing to 1.87% (2005 1.98%).
| As at 31.12.2006 |
As at 31.12.2005 | |
|---|---|---|
| Loans and advances to customers | £15.9bn | £12.1bn |
| Impairment provisions on advances | £113m | £91m |
| Impairment provisions as a % of closing advances | 0.71% | 0.75% |
| Classification of advances*: | % | % |
| Agriculture, forestry and fishing | 1 | |
| Manufacturing industry | 4 | 5 |
| Construction and property | 27 | 25 |
| Hotels, restaurants and wholesale and retail trade | 13 | 15 |
| Transport, storage andcommunication | 2 | 2 |
| Financial | 2 | 2 |
| Other services etc. | 6 | 8 |
| Individuals: | ||
| Home mortgages | 28 | 25 |
| Other personal lending | 6 | 7 |
| Overseas residents | 11 | 11 |
| 100 | 100 | |
| Impaired loans | £297m | £240m |
| Impaired loans as a % of closing advances | 1.87% | 1.98% |
| Impairment provisions as a % of impaired loans | 38% | 38% |
| Risk weighted assets | £14.4bn | £11.2bn |
| Customer deposits | £5.8bn | £4.4bn |
* Before impairment provisions.
Operational Performance
Lending and Deposit Growth
Overall, lending grew by 31% to £15.9bn (2005 £12.1bn). Strong demand for our products was experienced across all businesses, with Business Banking lending up 30% and Retail up 35%. Deposits growth kept pace with lending growth, increasing by 32% to £5.8bn (2005 £4.4bn).
Business Banking
Our Business Banking operations had another excellent year with strong performance across all divisions (Property Banking, Business Banking and Regional Banking) in terms of both volumes and profit. Above market lending growth of 30% to £11.3bn (2005 £8.7bn) allowed us to further increase our market share in Business Banking and the pipeline remains strong at £2bn going into 2007.
Our Integrated and Acquisition Finance business is developing well with a number of deals completed in the second half of the year. The delivery of additional penetration through our branch network offers further opportunity to build on the franchise. We have established a dedicated development team which will leverage our expertise to maximise the growth potential in this new market.
Retail
Our Retail businesses (Intermediary Homeloans, Asset Finance and Retail branch network) have performed well in 2006 with lending growth of 35% to £4.6bn (2005 £3.4bn). Increases in interest rates have not materially affected mortgage volumes, margins or credit quality. Margin performance, in particular, remains strong despite the lead pricing positions we have taken in a number of market segments.
The roll out of the new Retail network has progressed through 2006 with approximately 400 new colleagues recruited and trained, and with 24 of the planned 46 branches and our Customer Service Centre in Dundalk now open for business. The remaining branch openings are planned to be completed by the end of 2007. The new Retail product suite has been well received by customers with our offering to be further enhanced through the delivery of a Personal Current Account during 2007. We have made significant progress in terms of customers with 44,000 new retail customers acquired over the last 12 months.
Risks and Uncertainties
The key risks and uncertainties faced by Ireland are the ability of the Irish economy to sustain strong fundamentals in the face of increasing interest rates and the overall economic reliance on the property sector. A correction to house prices, if significant, would result in a contraction in the housing market, most likely resulting in a deterioration in consumer confidence and feeding a further contraction in consumer spending. To mitigate against the impacts of economic contraction, we are diversifying our business, broadening our product suite and are rolling out a full service retail bank. There are, however, a number of key challenges to the success of this Retail proposition. An immediate challenge is to complete the roll out of the branch network. We have already commenced the retail branch roll out with 24 branches now open. Customer reaction has been positive and we have secured over 44,000 new customers since the launch of the Retail network in January 2006. The success of our strategy will also depend on the competitor reaction of both incumbent banks and new entrants to the Irish market. We believe however, that increased competition in the market is to be welcomed, encouraging switching to the better value products and services that we offer.
Prospects
The Irish economy continues to enjoy above average GDP growth and, more generally, the continued strength of the economic, political and fiscal conditions in Ireland makes this an attractive market in which we have the credentials to prosper.
In our goal to become a full service provider, we will ensure growth is suitably paced to maintain an appropriate balance between investment and profitability. To this end we will pursue a strategy of targeted organic growth across our key businesses. We will achieve this through the delivery of market leading products and enhanced distribution, supported by investment in people and infrastructure. The scale of the opportunity is substantial, the size of prize being highlighted by the positive customer reaction to our new Retail branch presence.
