Chief Executive's Report
Retail
Underlying profit before tax decreased by 13% to £2,049m (2006 £2,364m) predominantly reflecting more subdued growth at lower margins. Underlying net operating income fell by 2% to £5,403m (2006 £5,540m) whilst underlying operating expenses increased by just 1% to £2,147m (2006 £2,127m).
Credit experience unfolded largely as expected. Impairment losses increased by 18% to £1,294m (2006 £1,097m) reflecting growth in the first half in unsecured impairment losses prior to the reduction in provisioning requirements in the second half of the year. The strength of collateral in the secured book and an overall decrease in mortgage arrears ensured that secured impairment losses remained negligible.
The strength of the HBOS savings franchise has been very evident in 2007. Retail’s deposits increased by 9% to £158.3bn (2006 £144.6bn) reinforcing HBOS’s position as the UK’s number one provider of liquid savings.
Retail advances increased by 7% with this growth coming from mortgage lending where, despite our lower share in the first half, our second half improvement in gross lending share and share of principal repaid resulted in an estimated mortgage net lending market share of 15% for the year as a whole.
Bank account sales were strong throughout the year whilst lower sales in unsecured lending reflected our continued cautious approach and appetite for such risk.
Outlook
We will continue to favour profitable growth over market share. Over the last five months we have seen mortgage prices adjust in the light of increased funding costs. Our strong multi-brand savings franchise has been to the fore in 2007 and we expect to see strong deposit growth in 2008, despite an expected increase in competition for retail funds.