Chief Executive's Report
Corporate
Underlying profit before tax increased by 31% to £2,320m (2006 £1,776m). This was primarily driven by a strong performance from our non-interest income revenue streams. Underlying net operating income increased by 26% to £3,807m (2006 £3,017m) benefiting from strong realisations from our investment portfolio. However, despite the significant realisations, the second half saw better opportunities for new investments and consequently, the investment portfolio increased by 54% to £4.0bn (2006 £2.6bn).
The net interest margin fell 19bps to 206bps (2006 225bps) mainly due to competitive pressures in the first half and changes to the asset mix.
Underlying operating expenses increased by 9% to £885m (2006 £812m) which, combined with the higher revenue growth, saw a significant improvement in the cost:income ratio to 23.2% (2006 26.9%).
Credit quality remained sound in 2007 although defaults were running at a higher level than the historically low figures seen in 2006. In this environment, impairment losses were higher at 0.61% of average advances (2006 0.50%).
Growth in Corporate lending increased in the second half reflecting the changing conditions. However, we continued to approach the market selectively, and despite slower secondary markets we continued to sell down to hold levels with which we are comfortable. During 2007, lending growth was 30% before sell downs and 22% after sell downs.
Outlook
In Corporate, we are now moving into a cycle where the strong contribution from our investment portfolio will give way to a more balanced contribution from origination revenues and investments.