Treasury & Asset Management
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Operational Performance
Funding
Treasury continued to be active in supporting the Group’s capital and funding requirements in 2006, arranging four capital issues on behalf of HBOS plc during the year; a €500m floating rate lower Tier 2 subordinated debt issue; a €750m Tier 1 perpetual preferred security issue; a £350m Tier 1 perpetual preference share issue and a US$750m floating rate lower Tier 2 subordinated debt issue.
Approximately £21bn of funds were raised from existing programmes in the securitisation and covered bond markets during the year. This comprised approximately £6.5bn from covered bonds and approximately £14.5bn from securitisations. These transactions included a securitisation of Australian residential mortgages originated by BankWest and the first US Dollar mortgage backed covered bond issued into the United States.
Sales and Trading
Sales and Trading performance was strong with net trading income increasing by 26% to £249m (2005 £197m). Sales revenues were up 19%, primarily due to increased sales of foreign exchange and interest rate derivatives to our Corporate customers. Trading revenues were up 33%, mainly as a result of increased interest rate derivatives flow and credit trading activities.
Overseas Offices
Overseas Treasury revenues increased by 16% to £29m (2005 £25m). Sydney is our largest overseas office where we are building our capacity to support the Group’s expansion in Australia. The New York branch has also continued to broaden its customer base in the United States.
Asset Management
Total funds managed by Insight and Invista were £107.8bn (2005 £88.7bn). Group assets, managed primarily on behalf of the Insurance & Investment division and invested in equity, fixed income, cash, property, private equity and absolute return funds, totalled £58.3bn (2005 £53.1bn).
Insight’s investment performance was strong in the year with 12 out of 16 asset classes performing ahead of benchmark. Insight’s reputation for fixed income performance was reaffirmed with over 95% of institutional fixed income and cash mandates by value ahead of benchmarks over 1 and 3 years. In equities, Global, North American, European and Japanese products were all ahead of benchmark for the year. UK equity performance in the first half of the year was, however, below benchmark leading to a restructuring of the UK equity platform in the second half of the year designed to improve performance. Following on from its successful first year, the Insight Absolute Return Fund performed ahead of its benchmark in 2006.
On the back of this strong investment performance, Insight delivered its best ever year for new business with gross inflows of £23.7bn (2005 £9.7bn). Included within gross sales were LDI sales of £10.6bn (2005 £0.6bn) including overlay mandates, an LDI product where we manage some of the risks of a pension scheme’s liabilities rather than the underlying portfolio of assets. Net inflows in 2006 were £13.4bn (2005 £2.6bn).
Invista, formed following the IPO of the real estate division of Insight in September 2006, is now the largest UK listed real estate fund manager with assets under management of £9.2bn. Invista manages 16 real estate funds spread across the UK and Continental Europe. This includes five funds managed on behalf of the HBOS Group. During 2006, four real estate funds were launched, including the Invista European Real Estate Trust which was listed on the Official list of the London Stock Exchange on 20 December 2006.
Risks and Uncertainties
Risks and uncertainties faced by Treasury in the execution of the divisional strategy include the risk that the Group does not have sufficient financial resources to meet its obligations when they come due, or will have to do so at excessive cost. To mitigate this, Treasury has diversified its funding channels and increased securitisation capacity.
Risks and uncertainties faced by Asset Management include poor investment performance, and a product set that is not aligned with client needs. Our principal challenge will be to maintain and improve investment performance in our core capabilities of fixed income and LDI and to develop a performance track record in UK equities. We plan to exploit our leading edge LDI and absolute return capabilities by introducing a product into the retail market which will enable us to meet customers’ desire to seek investment returns while also limiting downside risk by managing the fluctuations caused by market movements.
Both businesses face the risk of the loss of key personnel and are dependant on the HBOS Group for a large part of their revenues.
Prospects
Treasury’s primary focus is to deliver a top quality service and performance to the Group and our clients, and we will continue to invest in our capabilities to do so. Access to customers, product innovation and our strong standing in the market underpins our confidence in the profitable growth prospects for Treasury. Our cautious approach to products and services will remain unaltered.
Insight continues to be positioned in order to take advantage of the current trends and shifts in the market, particularly in LDI and fixed income. Reaping the benefits of the restructuring of the UK equity platform will also be a key area of focus in 2007.
Invista has successfully built a platform for growth and is now well positioned to benefit from its presence in the UK commercial and residential property markets. Furthermore, the planned opening of offices in France and Germany will fully complement its expansion into Europe.
