Chairman's Statement

The 2003 Annual Report argued that it would be wrong to pursue our previous pace of growth in all our businesses, at all times. This proved to be a sensible cautionary approach to an environment characterised by a transition from lower interest rates to something approaching stability. Last year we therefore focused on profitability and security ahead of targeting further aggressive increases in market share.

Profits were up 22% to £4,592m with underlying earnings per share reaching a new high of 84.3p. The Board has therefore decided to recommend a final dividend of 22.15p bringing the total dividend per share to 32.95p.

These results continue a strong track record of performance during our first three years, which has seen underlying earnings per share increase by over 76%, the cost:income ratio fall from 49.2% to 37.9% and our return on equity increase from 15.1% to 19.7%. This performance emphasises the scale of the opportunity created by bringing Halifax and Bank of Scotland together.

For the year as a whole, the HBOS share price increased by 17% to finish the year at £8.48 – the second best performing major UK bank over the year although the best performing such bank over the past four years. We are pleased with this performance but strongly believe that our performance and prospects warrant a premium rating, firstly amongst UK banks and then amongst the wider peer group in Europe. In this Annual Report you will find the evidence and the clear intent to make this a reality for shareholders.

In our Retail business, restraint has served us well with a tight control on costs an added impetus to earnings as growth has moderated. As a result profit growth has again been strong despite some disappointments in Retail’s credit performance where we plan to do better this year.

Corporate customers have been active during the year but we have opted to enhance returns by turning away additional activity that would otherwise dissipate margins. It is clear that our long-term relationship driven strategy best serves our shareholders’ interests.

In 2004, we successfully completed the process of establishing our own underwriting capability for household insurance and general insurance is now firmly established as a core HBOS activity producing good growth and returns. As the stock market picked up during the year so too did sales in our Investment businesses. The prospect of further improvements in sales from an HBOS business which has turned itself into a market leader just as it switches from being a net user to a net provider of capital is particularly exciting.

Finally in our International businesses there is a buzz of activity as our teams in both Australia and Ireland strive to take growth away from incumbent providers. Our international aspirations at the start of 2005 are every bit as strong as we hoped they would be.

In 2003, we produced our compliance report one year earlier than required and have again produced in this report a full review of the Group’s performance against the requirements of the new Combined Code on Corporate Governance. We have complied with the Code except in one instance where it was not practical for us to do so.

We have made progress in 2004 in the practical delivery of a Corporate Responsibility Standard that guides how we do business. Our policy embraces the responsibilities and standards you should expect as shareholders, customers, colleagues and suppliers. Regular benchmarking reports are scheduled to show how we are doing against our own demanding criteria.

The regulatory agenda is as demanding as ever. Regulation represents Society’s permission to HBOS to exist and the minimum standards by which we are judged. We seek to work ever more effectively with the Government and our regulator. In particular, we welcome the FSA’s more focused agenda and its commitment to risk based regulation. Weare only too conscious that a number of initiatives emanating from Brussels may run counter to our own, the Government’s and the FSA’s objectives. In the midst of such changeit is important that together we strike a common agenda to best protect the interests of our industry and our customers.

The provision for endowment compensation taken in this year’s results relates to activity many years ago. Even so it serves to highlight an important lesson for us. We must always strive to discharge our responsibilities to customers in ways that will stand the test of time.

In 2004, Philip Yea left to take up the Chief Executive job at 3i. We were enormously fortunate to have Philip’s input as a Non-executive Director since the merger and before that at Halifax. At the forthcoming AGM John Maclean retires having served nine years on the HBOS and Bank of Scotland Boards. John has been a tireless contributor across many parts of the business and I would like to offer my personal thanks and those of the Board to him for the quality of his input to the Boards and committees on which he has served.

Mike Ellis also announced his retirement in 2004 as Finance Director but typically stayed on to welcome and work for a period alongside Mark Tucker as the Group’s new Finance Director. Mike Ellis had served at the Halifax as Treasurer, before joining the Board in 1997. As an Executive Director of first Halifax and then HBOS, Mike contributed hugely to the success of this business and will be sorely missed by the Board and colleagues alike. We welcome Mark Tucker to his new role and the experience he brings of the broader financial services marketplace having spent 17 years with Prudential, latterly as Chief Executive of Prudential Corporation Asia Ltd.

Finally this litany of praise and recognition would not be complete without a huge thank you to the 70,000 plus HBOS colleagues who turn fine words into action and hopes into results.

Last summer, as widely reported, we gave careful consideration to acquiring Abbey National. On the face of it the chance to acquire a major competitor was a unique opportunity to exploit very considerable synergies and create value for our shareholders. That we judged otherwise is testament to our confidence in our own prospects. That confidence was also instrumental in your Board’s decisions on future dividend growth and share buybacks. Both will play their part in ensuring that we succeed in making growth work harder for our shareholders.

Finally on a personal note I am delighted to have been asked by my Board colleagues to stay on as your Chairman for a further three years from July. It is a huge honour for me to be a part of the team at HBOS and I look forward greatly to the next stage of our success together.

Dennis Stevenson
Chairman