Strategy Overview
Growing the UK franchise
Growing our UK businesses is our number one priority. In our Retail business we have around 23 million customers. We operate with several brands which allow us to segment and manage more effectively the risk reward potential of individual customer groupings. We look after our customers with a network of around 1,300 branches and estate agents. We handle over 125 million calls and process around 140 million transactions and queries on the internet each year.
Given our customer base and distribution strength we aim for market shares within a 15%-20% range. Today we have just two products, mortgages and savings, within or ahead of that range and therefore have huge opportunities elsewhere. The potential is illustrated by only 1.2 million customers out of 23 million having three or more products.
In our Corporate business we concentrate on markets where we have real expertise and can generate superior returns. We therefore cover corporate customers from FTSE 250 companies to small and medium sized companies with a turnover in excess of £1m. Additionally, we have growing businesses in asset finance, motor and real estate. Our Integrated Finance business provides ‘one stop shop’ funding solutions all the way from senior debt through mezzanine to equity, with a view to creating long term, value creating partnerships with our customers.
In Insurance & Investment we are uniquely
well placed to benefit from the opportunities that being the largest UK liquid saver provides.
This, together with increasingly supportive demographics and the recognition by individuals that they will require to self-provide for retirement should drive growth in investment sales. In general insurance we intend to benefit from the opportunities that being the UK’s
number one mortgage lender gives us in increasing household insurance sales.
Targeted international growth
Internationally we are growing our businesses by taking the formula that has proven to be successful in the UK to other markets that fit with our growth model. In Australia, where we have been operating for over 10 years, we are expanding on our strong West Coast presence and taking our Commercial and Retail banking capability across to the East Coast. In Ireland, having been active in that economy for well over a decade, we are now expanding into retail banking.
In 2005 we bought around fifty shops from the Irish Electricity Board and will reopen the majority as new style Halifax branches by the end of 2007. In Europe & North America, in Corporate and Retail banking and in European Financial Services we are expanding our interests and seeking to capture the synergies open to us by closer co-operation across geographical boundaries.
Cost leadership
As an ambition, cost leadership amongst the major UK banks takes the clear sense of tight cost control one step further. Being low cost is about ensuring that more of the revenue growth is converted to profit. Cost leadership provides the strategic flexibility to deliver further revenue growth. Our customers want more value, not less, in our products and services. Cost leadership at HBOS is not about avoiding or reducing the investment spend but rather it is ensuring an ability to invest by taking out unproductive cost in today’s operations.
We have a number of opportunities to take out further cost across our businesses. In 2006 we announced a programme that will deliver at least £300m of annual savings, around 12% of our UK processing and support costs, by the end of 2009. Allowing for these savings, the costs of achieving them and planned revenue growth, our cost:income ratio is targeted to fall to the mid 30s by 2010.
Colleague development
Our ability to execute our strategy and to deliver consistently high quality products and services to our customers relies very clearly on the capability, motivation and performance of every one of our 74,000 colleagues.
Our colleague strategy is very clear. We aim to have the best leadership teams in the industry and we have clear and increasingly high expectations of both what our leaders deliver and how they do this. We offer all our colleagues the necessary training and personal development they need to do their job well and we aim to create a positive working environment that reflects colleague diversity. Our reward systems are strongly geared to both individual and team performance and the widest possible share ownership by our colleagues. Through our Colleague Opinion Survey we track our leadership and capability indices as well as employer and product advocacy. In addition, we keep a very close eye on colleague turnover at all levels of the organisation.
Capital discipline
We treat capital as a scarce resource at HBOS. Capital is owned by the shareholders and we accept our task is to deploy it to achieve sustainable returns. With the return on equity just above 20%, we can fund approximately 13% annual asset growth from our internal capital generation. Organic growth is our first priority, but if we are not growing to our full capital capacity we will hand surplus capital back. We believe in strong capital ratios and manage to a target 8% Tier 1 capital level and a Tier 1 leverage of 25% ±2%. Likewise we have strong dividend cover and target a cover level of around 2.5 times with dividends growing in line with earnings.
In 2006, as in 2005, we judged that the right level of asset growth relative to return prospects favoured another £1bn buyback programme. We have achieved our plans to buyback £1bn of shares in each year and have, as a consequence, cancelled 210 million shares with a corresponding uplift in the earnings per share.
Our logic on buybacks continues as before. If we see opportunities for more profitable growth then we will deploy more of the capital we generate in growing the business. For 2007 we do see an opportunity to deploy more capital in support of growth than we did in 2006 and this will therefore see us target an initial buyback programme of up to £500m. As in previous years we will review the growth, buyback balance at the half year stage.
