Retail
Strategy
Retail’s strategy remains focused on creating shareholder value by delivering superior customer value across a broad spectrum of products and distribution channels. We offer our customers easy to understand, competitively priced and straightforward products which, combined with a rigorous approach to cost control and risk management, enables us to convert growth in sales into growth in shareholder value.
We believe that our uniquely strong sales and distribution model will allow us to combine profitable market shares of between 15% and 20% in all the markets in which we operate with superior customer value and treating customers fairly. Utilising our multi-branded product range and broad distribution model we will:
Grow profitable market share through offering good value products that attract new customers and drive cross sales to existing customers
It is our aim to ensure that we remain at the forefront in banking by continually challenging the traditional high street banks and grow our market share in this segment. Business Banking also offers substantial opportunities for profitable growth and we aim to grow the market shares and profits in this business. As well as attracting new customers with innovative and value added products, we will improve our customer retention, particularly in Mortgages, where we aim to reduce our market share of principal repaid. Actions already taken in this respect include equalising pricing for new and existing customers, and rewarding intermediaries for customer retention.
We have a substantial customer base and it is our objective to target existing customers more effectively, increasing the number of customers holding two or more products by one million over the next five years.
Target growth that achieves the right balance between risk and reward
We continually re-evaluate our credit risk underwriting criteria and have, where necessary, made refinements to our credit scoring techniques and methods to ensure that the level of risk we are accepting on to our balance sheet is commensurately priced for and that we attain the appropriate level of return for the risk being underwritten.
Provide consistently good customer service
Our objective in this respect is to improve our customer ratings for satisfaction with service compared to our banking peers. We achieve this by improving the day-to-day interactions between our colleagues and customers, by streamlining our processes and by introducing new services to meet customer needs. We measure our relative performance through a telephone survey of our customers and those of our banking peers administered by an independent research agency.
Keep tight control of costs
Retail’s credentials in respect of tight cost control are now well established. Our aim is to continue to control costs whilst at the same time increase income and further reduce our cost:income ratio.
Our performance in 2006
Underlying profit before tax in Retail increased by 4% to £2,364m (2005 £2,283m). Underlying net operating income increased by 4% whilst underlying expenses increased by just £3m. As a consequence, the cost:income ratio improved to 38.4% (2005 39.8%), more than offsetting a 6bps fall in net interest margin to 1.78% (2005 1.84%).
Credit experience continued the trends seen in the first half of the year with impairment losses increasing by 11% but impaired loans falling to 2.72% (2005 2.97%) of advances. Within this, secured impairments fell and the growth in unsecured impairments slowed.
Sales performance was strong in Mortgages, Savings and Bank Accounts, with lower unsecured lending reflecting a smaller market and our reduced appetite for such risk.
Financial performance
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net interest income | 4,188 | 4,028 |
| Non-interest income | 1,350 | 1,315 |
| Mortgages and Savings | 493 | 421 |
| Banking | 428 | 431 |
| Business Banking | 31 | 24 |
| Personal Loans | 109 | 109 |
| Credit Cards | 286 | 321 |
| Other | 49 | 47 |
| Fees and commission income | 1,396 | 1,353 |
| Fees and commission expense | (66) | (70) |
| Other operating income | 20 | 32 |
| Net operating income | 5,538 | 5,343 |
| Underlying operating expenses | (2,127) | (2,124) |
| Staff | (1,056) | (1,023) |
| Accommodation, repairs and maintenance |
(10) | (9) |
| Technology | (54) | (70) |
| Marketing and communication | (179) | (182) |
| Depreciation: | ||
| Property and equipment and intangible assets | (69) | (66) |
| Other | (101) | (112) |
| Sub total | (1,469) | (1,462) |
| Recharges: | ||
| Technology | (263) | (262) |
| Accommodation | (262) | (263) |
| Other shared services | (133) | (137) |
| Operating profit before provisions | 3,411 | 3,219 |
| Impairment losses on loans and advances | (1,097) | (991) |
| Operating profit | 2,314 | 2,228 |
| Share of profits of associates and jointly controlled entities | 2 | 9 |
| Non-operating income | 48 | 46 |
| Underlying profit before tax | 2,364 | 2,283 |
| Net interest margin | 1.78% | 1.84% |
| Impairment losses as a % of average advances | 0.48% | 0.47% |
| Cost:income ratio | 38.4% | 39.8% |
Download this table as an Excel spreadsheet
Operating Income and Margins
Total net operating income grew by 4% to £5,538m (2005 £5,343m). Net interest income increased by 4% to £4,188m (2005 £4,028m) and non-interest income was 3% higher at £1,350m (2005 £1,315m).
Fees and commission income grew by 3% to £1,396m (2005 £1,353m). Growth in fees from Mortgages and Savings was partially offset by lower Credit Card default fee income and commissions from the sale of Repayment Insurance in relation to unsecured lending products.
The table below summarises the movements in net interest margins and spreads.
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net Interest Income: | ||
| Interest receivable | 14,331 | 13,421 |
| Interest payable | (10,284) | (9,555) |
| Capital earnings | 141 | 162 |
| 4,188 | 4,028 | |
| Average Balances: | ||
| Total interest earning assets | 235,371 | 219,006 |
| Interest bearing liabilities | ||
| - deposits | 145,756 | 132,043 |
| - other | 89,615 | 86,963 |
| Total interest bearing liabilities | 235,371 | 219,006 |
| Average Rates: | % | % |
| Gross yield on interest earning assets | 6.09 | 6.13 |
| Cost of interest bearing liabilities | (4.37) | (4.36) |
| Net Interest Spread | 1.72 | 1.77 |
| Capital earnings | 0.06 | 0.07 |
| Net Interest Margin | 1.78 | 1.84 |
| Movement in margin | Basis points |
|---|---|
| Net interest margin for the year ended 31 December 2005 | 184 |
| Mortgages and Savings | (9) |
| Banking | 2 |
| Business Banking | 1 |
| Unsecured Personal Loans | (1) |
| Credit Cards | 3 |
| Wholesale funding | (1) |
| Capital earnings | (1) |
| Net interest margin for the year ended 31 December 2006 | 178 |
In aggregate, product spreads fell by 4bps. Our greater appetite for mortgage lending together with increased competition in the Buy to Let market resulted in the combined Mortgages and Savings spread narrowing by 9bps. This was partly offset by spread improvements in both Credit Cards and Banking.
Operating expenses
Our continued commitment to strong cost management resulted in year on year growth in underlying operating expenses of just £3m to £2,127m (2005 £2,124m). This, combined with income growth of 4%, enabled us to further reduce the cost:income ratio to 38.4% (2005 39.8%).
Our robust and sustainable approach to cost management, developing IT processing systems capable of supporting our multiple brands at low cost together with automated sales systems, helps drive sustained improvements in productivity as we grow. This enables us to achieve reductions in unit operating costs and to make suitable investments to support future growth.
Credit quality and provisions
The overall credit quality of the Retail balance sheet remains strong with 92.7% (2005 92.2%) of customer loans secured on residential property. Despite continued challenging conditions for consumer lending, total impaired loans fell to 2.72% (2005 2.97%) of closing advances driven by a fall in secured impairments partly offset by further increases on the unsecured book.
Impairment losses as a percentage of average advances remained broadly stable at 0.48% (2005 0.47%). Total impairment losses increased by 11% to £1,097m (2005 £991m), comprising £108m (2005 £139m) for secured lending and £989m (2005 £852m) for unsecured lending. Closing provisions as a percentage of total closing advances remained broadly stable at 0.89% (2005 0.88%). Total provisions coverage of impaired loans increased to 33% (2005 30%) reflecting the higher proportion of unsecured loans in the impaired portfolio.
Secured impairments
Total impaired secured loans continued to fall during 2006 to £4,047m (2005 £4,452m) representing 1.84% (2005 2.21%) of closing advances. The fall in impairments compares favourably to broadly stable trends in the market, with both the mainstream and specialist portfolios benefiting from the implementation of new scorecards, stricter lending policies and a more efficient collections process. The number of cases in arrears fell to 1.17% (2005 1.30%) of mainstream lending and 1.76% (2005 2.32%) of specialist lending. In total, the value of cases in arrears but not in possession decreased by 11% to £3,728m (2005 £4,203m) or 1.70% (2005 2.11%) of the value of the total portfolio.
