Chief Executive's Report
Group performance
Profit growth
Underlying* profit before tax increased by 3% to £5,708m (2006 £5,537m). Underlying earnings per share increased by 6% to 106.2p (2006 100.5p), the higher rate of growth relative to our profit growth reflecting the benefit from our share buyback programme, which in 2007 returned £500m to shareholders.
Dividends and capital
We have proposed a final dividend of 32.3p resulting in a full year dividend up 18% to 48.9p. The regulators require banks to hold a certain amount of capital. As with all banks, we measure our capital using two ratios – Tier 1 ratio and Total capital ratio. At 31 December 2007, our Tier 1 ratio was 7.4% (2006 8.1%) and Total capital ratio was 11.1% (2006 12.0%), reflecting strong asset growth in 2007 and our decision not to issue non-equity capital in the latter part of 2007. However, we hold significantly more capital than the regulatory minimum of a Total capital ratio of 8%. From 1 January 2008, we are operating under new capital rules – known as Basel II. This has changed the calculation of our capital ratios. At 1 January 2008, our Basel II Tier 1 ratio was 7.7%, within our revised target range of 7.5%-8.5%.
Asset growth
Loans and advances to customers increased by 14% to £430.0bn reflecting the growth in Corporate (22%) and International (38%), with lower growth in Retail (7%).
Funding
During the dislocation in financial markets in the latter part of 2007, customer deposit growth has been strong, increasing by 15% to £243.2bn. The supply of wholesale funding to HBOS has also remained strong reflecting our prudent approach to funding, which has, over recent years, diversified the types and sources of funding. Further information regarding our approach to liquidity risk management is set out on pages 95 to 98 in the Risk Management report in the Annual Report and Accounts.
Credit quality
Credit experience remained relatively benign throughout 2007. In common with industry expectations, going forward, we expect some modest deterioration in certain sectors and markets, consistent with the general global economic slowdown. Impairment losses increased by 15% to £2,012m representing 0.50% of average advances (2006 0.48%).
Outlook
We expect financial markets to be difficult in 2008 but our combination of balance sheet strength, diversified business mix and stringent cost control, together with relative margin stability, leaves us well positioned to take opportunities presented in these markets and deliver good growth in shareholder value over the next few years.
* Definition of Underlying
References to underlying incorporate the following adjustments:
- excluding regulatory provisions, the impact of the change in corporation tax rates, the profit on sale of Drive, goodwill impairment, policyholder tax payable, the impact of short term fluctuations and changes to economic assumptions for Long Term Assurance Business accounted for on an embedded value basis;
- netting against income of operating lease depreciation, impairment on investment securities, changes in insurance and investment contract liabilities, change in unallocated surplus and net claims incurred on insurance contracts; and
- including share of profits of associates and jointly controlled entities within underlying non-interest income. «