Retail
continued
Unsecured Personal Loans
We continue to focus on the acquisition of better quality business, maintaining our share of gross lending in 2006 at 10% (2005 10%) with balances reducing by 4% to £6.6bn (2005 £6.9bn). Acquisition costs continue to reduce as we concentrate our marketing effort on existing customers with good credit histories.
Credit Cards
Our Credit Card business continues to benefit from our multi-brand, multi-channel distribution strengths, enabling us to grow business volumes in higher quality segments of the market. In 2006, against the background of lower consumer spending and borrowing, we acquired 743,000 new accounts (961,000 including those acquired through our joint venture partners) resulting in an estimated market share of 11% of new credit card accounts.
Outstanding balances reduced by 4% to £7.0bn (2005 £7.3bn) in line with the market, reflecting less aggressive introductory periods, lower consumer demand and the proactive tightening of credit availability.
The implementation of lower default and late payment fees in August 2006 following the Office of Fair Trading (‘OFT’) ruling resulted in a reduction in fee income of circa £25m in 2006, with an estimated full year impact of £60m in 2007.
Retail Savings
Savings deposits increased by 10% to £124bn in 2006 (2005 £113bn), compared to market growth estimated to be 8% over the same period.
Although competition for deposits from both new and existing players increased during the year, growth was achieved across all brands, demonstrating the strength and diversity offered by our Retail Savings’ franchise and reinforcing our position as the UK’s largest savings provider with an estimated share of the Household Sector Liquid Assets of 16% (2005 16%). Strong inflows, in particular, were achieved by the Bank of Scotland and Birmingham Midshires brands, and by our tax-free range of products where we now have a 21% (2005 20%) share of balances in the cash ISA market.
In addition to net inflows, we continue to grow our customer base and remain committed to encouraging the next generation of savers. Over 2.7m new accounts were opened during the year, of which over 380,000 were children’s accounts. We also attracted over 480,000 new to franchise customers.
Bank Accounts
We acquired 879,000 new Bank Accounts, representing an estimated market share of 19% (2005 16%) contributing to an increased share of stock of 13% (2005 12%). Our current account book increased by 10%, representing 77% of our total bank account sales (2005 74%).
Our sales success in 2006 was driven by further innovative product launches. Our High Interest Current Account and our award winning Student Account resulted in sales in 2006 up by more than 33% on 2005. Online banking registrations grew by 31% and online transaction volumes grew by 40%.
Business Banking
The number of customers switching to Bank of Scotland Business Banking in 2006 increased by 28% to 15,800 (2005 12,300), with both our branch and intermediary sales teams enjoying success as our ‘Promise to Beat’ proposition proved popular amongst SME customers. Successful new business acquisition helped to drive up revenue by 19% in 2006.
Regulatory enquiry into banking charges
In September 2006, the OFT announced a joint ‘fact finding’ exercise with the British Bankers’ Association (‘BBA’) to review the legal basis for banking charges. We have participated fully in this exercise through the BBA. As demonstrated in our response to the review of Credit Card default fees in 2006, we will co-operate fully in any ongoing enquiry. We support competition and, most importantly, we provide choice for our customers, consistent with our growth strategy and the creation of long term shareholder value.
Risks and Uncertainties
Risks and uncertainties faced by Retail revolve predominantly around uncertain economic conditions which, if adverse, could lead to a potential contraction of the housing market and bring further pressure to bear in the unsecured lending markets, both resulting in a downturn in business volumes and an increase in credit related impairment losses.
To mitigate, we are continuing to manage the business in a very proactive way in respect of credit, developing enhancements in our credit decisioning and management tools. Affordability measures, responsible lending practices and effective debt collection and recovery processes will help in this respect. Additionally, our investment in fraud detection and prevention processes and systems will help to mitigate potential increasing losses in this area.
The potential reduction in fee revenues from regulatory intervention is an ongoing headwind and remains a key challenge, as demonstrated by the impact of the OFT’s statement on Credit Card default charges, effective from 1 August 2006. To address this risk, our planning continues to take into account the regulatory pressures that we face and the actions we will take. We will continue to focus on our cost leadership position as a means of mitigating against the risks of lower revenues.
Prospects
We continue to see opportunities for growth across all of our principal business activities. Easy to understand, competitively priced products, and rigorously controlled cost growth and risk management, will enable us to drive both customer advocacy and growth in shareholder value.
In mortgages, we will continue to pursue our five-brand market strategy, which enables us to apply flexibility in how we maintain our leading market position. Important components of our approach remain the retention of existing customers where we intend to build on the initiative launched in July 2006. In 2007, we expect to deliver a full year share of the net mortgage market in the 15%-20% range with the profile of maturing cessations dictating that our second half performance will be stronger than the first half.
Conditions in the unsecured credit market, with high levels of indebtedness and significant affordability stretch, lend themselves to the maintenance of our current strategy of shifting the mix of business towards higher quality, existing customers.
In liquid savings, we will also continue to leverage our multi-brand capability to maintain our market leading position. This will include the launch of further ‘hero’ products on a selective basis, targeting specific customer needs whilst avoiding product duplication and overlap.
In summary, whilst recognising the need to choose the right time for growth in markets such as unsecured lending, in the longer term, we continue to see attractive growth prospects across all of our Retail businesses. Our uniquely strong sales and distribution model gives us the ability to choose our timing, and to achieve our long term goal of profitable shares in the 15%-20% range in all our markets.
