Directors' Report

The Directors have pleasure in presenting the Report and Accounts of HBOS plc for the year ended 31 December 2004.

Principal Activities
HBOS plc is the holding company of the HBOS Group. The principal activities of the Group are the provision of banking and other financial services in the UK and overseas. The Group’s existing business and future prospects are reviewed by the Chairman on pages 2 and 3, the Chief Executive on pages 4 to 7 and in the Divisional Reviews on pages 8 to 35. Financial aspects are covered in the Financial Review and Risk Management report on pages 36 to 46. A list of the main subsidiary undertakings, and the nature of each company’s business, is given in Note 53 to the Accounts on page 126.

Results and Dividends
The Group profit attributable to shareholders for the year ended 31 December 2004, as shown in the Consolidated Profit and Loss Account, was £3,057m. An interim dividend of 10.8p per Ordinary Share was paid on 22 October 2004. The Directors propose a final dividend of 22.15p per Ordinary Share to be paid on 13 May 2005 to shareholders on the register on 18 March 2005, subject to approval at the 2005 AGM. As announced in the trading statement of 14 December 2004, an active capital management programme has been instigated which includes:

active management of key balance sheet ratios to explicit targets;
a more efficient capital structure through a realignment of equity and preferred capital;
the progressive release of surplus capital emerging in the investment businesses as a result of the switch away from with profits products;
withdrawal of the scrip alternative to dividends and proposed introduction of a dividend reinvestment plan; and
a commitment to return surplus capital to shareholders, through an annual share buy back programme.

Directors
Details of the present Directors are given on pages 52 and 53. Mike Ellis retired as a Director on 31 December 2004 and Sir Bob Reid and Louis Sherwood retired on 27 April 2004 at the conclusion of the 2004 AGM and Philip Yea resigned with effect from 30 June 2004. Following nine years’ service on the Board of Bank of Scotland and the Company, John Maclean retires at the conclusion of the 2005 AGM and is not seeking re-election. Dennis Stevenson, Colin Matthew, Charles Dunstone and Tony Hobson will retire by rotation and resolutions for their re-election will be proposed at the meeting. The Chairman is pleased to confirm that the performance of Charles Dunstone and Tony Hobson continues to be effective and demonstrates commitment in their respective roles as Non-executive Directors. Mark Tucker was appointed a Director from 30 April 2004 and will retire at the forthcoming 2005 AGM and offer himself for election. Particulars of Directors’ remuneration and interests in shares of the Company are given in the Report of the Board in relation to remuneration policy and practice in relation to remuneration policy and practice on pages 60 to 79.

Going Concern
The Directors are satisfied that the Group has adequate resources to continue in business for the foreseeable future and consequently the going concern basis continues to be appropriate in preparing the accounts.

Employees
The Group encourages applications for employment from disabled people and gives full consideration to such applicants based on their skills and abilities. In the event of an existing employee becoming disabled, the Group provides counselling and training support and seeks to provide a suitable alternative position within the Group if the individual is unable to continue in their previous role. The Group offers training and career development for all disabled staff. The views of colleagues with a disability are sought through disability forums to ensure that the Group’s policies continue to recognise their requirements.

Charitable and Political Donations
During the year the Group made charitable donations in the UK of £5.2m. Additionally £2.6m in total has been made available to charities as a result of their affinity to the Visa Charity credit cards offered by Halifax plc and Bank of Scotland.

It is HBOS policy not to make donations to political parties.

Under the terms of the Political Parties, Elections and Referendums Act 2000 (‘PPERA’) companies are required to obtain shareholder approval before any such political donations can be made, and to disclose any such payments in the Company’s Annual Report and Accounts. PPERA is extremely wide in scope and its precise meaning unclear. Many listed companies, including the Company, have therefore obtained authority from shareholders to make such payments as a precautionary measure, so as to enable legitimate business activities, which would not be regarded as political donations in the ordinary sense, to proceed.

At last year’s AGM, the Board accordingly obtained shareholders’ approval for the Company and HBOS UK plc (the principal employer company of the HBOS Group) to make Donations to EU Political Organisations and/or to incur EU Political Expenditure up to defined limits.

During the last financial year, HBOS UK plc seconded one of its employees part-time to the Cross Party Group on the Scottish Economy (‘CPG’) in the Scottish Parliament. The CPG is not a political party. The PPERA contains a specific exemption to the definition of EU Political Organisation for all party groups composed of members of the Westminster Houses of Parliament. There is no such specific exemption for party groups of the Scottish Parliament. The Company is therefore disclosing that the total amount of the donations made by HBOS UK plc to the CPG during the last financial year was £2,908 in respect of the completion of the initial 9 weeks of the secondment.

Payment Policy
For the forthcoming period the Group’s policy for the payment of suppliers will be as follows:

Payment terms will be agreed at the start of the relationship with the supplier and will only be changed by agreement;
Standard payment terms to suppliers of goods and services will be 30 days from the date of a correct invoice that has been received for satisfactory goods or services which have been ordered and received unless other terms are agreed in a contract;
Payment will be made in accordance with the agreed terms or in accordance with the law if no agreement has been made; and
Suppliers will be advised without delay when an invoice is contested and disputes will be settled as quickly as possible.

HBOS plc complies with the Better Payment Practice Code. Information regarding this Code and its purpose can be obtained from the Better Payment Practice Group’s website at www.payontime.co.uk.

The Company’s main trading subsidiary undertakings, Halifax plc and Bank of Scotland, had trade creditors outstanding at 31 December 2004 representing 15 days of purchases for each company. The Company itself owed no amounts to trade creditors at 31 December 2004.

Share Capital
Full details of the movements in the authorised and issued share capital of the Company during the year are provided in Note 34 to the Accounts on page 112.

The Company has the authority to purchase up to 385,035,595 of its ordinary shares. The authority remains valid until the 2005 AGM or, if earlier, 27 July 2005. A resolution will be put to shareholders to renew the authority at the 2005 AGM.

At the date of this report there is a disclosable interest in the issued share capital notified to the Company in accordance with sections 198 to 208 of the Companies Act 1985, by Barclays PLC, in respect of 151,196,422 ordinary shares being 3.85% of the current issued ordinary share capital and by The Capital Group Companies, Inc and its affiliates in respect of 147,182,021 being 3.75% of the current issued share capital.

Properties
The Directors are of the opinion that the current market value of the Group’s properties is not significantly different from the amount at which they are included in the balance sheet.

Auditors
A resolution to re-appoint KPMG Audit Plc as auditors will be put to shareholders at the 2005 AGM.

On behalf of the Board

H F Baines
Company Secretary
1 March 2005