Treasury & Asset Management
Strategy
Our strategy in Treasury & Asset Management is to provide treasury and asset management products and services to both customers and to the Group.
The provision of treasury services to support the growth of the Group’s business including:
Funding and liquidity
Managing the Group’s funding and liquidity position to ensure that the Group has sufficient financial resources to meet its obligations as they fall due and to do so without excessive cost to the Group. Treasury’s core objectives in this area include producing the Group’s funding plan which seeks to optimise the funding mix and the relative cost of funds.
Providing financial services to the Group and its customers
Treasury provides financial services to the Group and its customers. Treasury’s principal role is not direct client acquisition but to maximise cross selling opportunities to clients acquired by other divisions. We continue to invest in technology, particularly in relation to internet banking solutions and increased automation between the divisions and Treasury. In addition, Treasury are pursuing several initiatives around improving penetration levels for the sale of treasury products to Group customers. Treasury’s overseas locations support the international growth plans in other divisions.
Trading
The majority of the Group’s market risk trading activity is conducted by Treasury, within the risk appetite set by Group. Treasury’s aim is to continue to grow income on the back of business flows whilst maintaining a limited proprietary trading function, managed within modest risk limits and a cautious approach to investments.
Providing superior investment solutions from Asset Management
Investment performance is at the heart of Asset Management. We will strive to continue to provide superior investment solutions to our customers by focusing on those products where we have a proven record of exceptional performance. We will continue to consolidate our position in the market place by further improvement and innovation and grow our key product lines.
Creating a quality investment brand
With exceptional performance, customer service and offering superior investment returns, we want to be one of the leading investment brands in the asset management market. We are considered a key player in the market and in order to maintain our competitive advantage, we will continue to improve and innovate whilst also investing in front office infrastructure and the recruitment, retention and training of high quality staff.
Profitably grow revenues to create shareholder value
We will continue to grow and develop our sales and trading capability and improve investment performance, continuing to invest when appropriate whilst maintaining a strong cost discipline.
Our performance in 2006
Underlying profit before tax increased by 33% to £350m (2005 £263m). Asset quality remains high and no credit provisions were required in the period.
Financial Performance
| Year ended 31.12.2006 £m |
Year ended 31.12.2005 £m |
|
|---|---|---|
| Net interest income | 205 | 183 |
| Non-interest income | 414 | 326 |
| Net trading income | 249 | 197 |
| Fees and commission income | 186 | 146 |
| Fees and commission expense | (43) | (37) |
| Other operating income | 22 | 20 |
| Net operating income | 619 | 509 |
| Operating expenses | (292) | (247) |
| Staff | (171) | (134) |
| Accommodation, repairs and maintenance | (1) | (1) |
| Technology | (10) | (10) |
| Marketing and communication | (6) | (5) |
| Depreciation: | ||
| Property and equipment and intangible assets | (4) | (4) |
| Other | (78) | (74) |
| Subtotal | (270) | (228) |
| Recharges: | ||
| Technology | (6) | (4) |
| Accommodation | (14) | (13) |
| Other shared services | (2) | (2) |
| Operating profit | 327 | 262 |
| Share of profits of associates and jointly controlled entities | 1 | 1 |
| Non-operating income | 22 | |
| Underlying profit before tax | 350 | 263 |
| Net interest margin (bps)* | 7 | 8 |
| Cost:income ratio | 47.2% | 48.5% |
| Insight’s funds under management | £98.6bn | £81.9bn |
| of which, overlay funds under management | £5.0bn | |
| Invista’s funds under management | £9.2bn | £6.8bn |
| Risk weighted assets | £15.0bn | £13.7bn |
* Net interest margin has been calculated as net interest income divided by average interest earning assets excluding securities classified as trading assets but including lending to other members of the group.
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Operating Income and Margins
Net operating income increased by 22% to £619m (2005 £509m). Net interest income increased by 12% to £205m (2005 £183m). Net interest margin reduced to 7bps (2005 8bps) on a larger portfolio.
Non-interest income increased by 27% to £414m (2005 £326m). In Treasury, there was a strong performance from both the UK Trading and Sales businesses, with revenues up 33% and 19% respectively. In Asset Management, non-interest income benefited from strong sales in the institutional market place of Insight’s flagship products of fixed income and Liability Driven Investment (‘LDI’). This was combined with growth in performance fees received by Invista, our property fund manager, both before and after its initial public offering (‘IPO’) on the London Alternative Investment Market in September 2006.
Operating Expenses
Underlying operating expenses increased by 18% to £292m (2005 £247m) reflecting an increase in personnel to support improvements to our infrastructure, and investment in our overseas Treasury offices and our asset management capabilities. Part of this investment included the successful completion of the project to outsource Insight’s back office operations to Northern Trust.
Asset Quality and Provision
Within our Treasury operations, we continue to maintain a cautious policy to avoid sub-investment grade investments, with 99% of our bank and structured investment portfolios rated A or above. During the year no credit provisions were required.
Non-operating Income
The IPO of Invista in September 2006, which raised almost £100m of balance sheet co-investment capital for the business to expand its sphere of operations, resulted in a one-off gain of £22m. HBOS now owns 55% of the enlarged business.
