International

International (1)
In sterling terms the combined results for Australia and Ireland disclosed a strong increase in profit before tax and exceptional items of 21% to £312m (2003 £257m), this despite the unfavourable movement of the Australian Dollar during 2004. The performance of Australia and Ireland in local currency terms is described on pages 32 to 35, to remove the distortions created by fluctuations in exchange rates.

Financial Performance

	Year ended 31.12.2004 £m	Year ended 31.12.2003 £m
Net interest income	450	400
Non-interest income	196	181
Fees and commissions receivable	168	169
Fees and commissions payable	(21)	(22)
Operating lease rental income	20	6
Other operating income	29	28
Operating income	646	581
Operating expenses*	(306)	(274)
Staff	(151)	(148)
Accommodation, repairs and maintenance	(20)	(19)
Technology	(6)	(6)
Marketing and communication	(22)	(19)
Depreciation:
Tangible fixed assets	(16)	(16)
Operating lease assets	(17)	(4)
Other	(74)	(62)
General insurance claims payable	(1)	-
Amounts written off fixed asset investments	2	(6)
Operating profit before provisions*	341	301
Provisions for bad & doubtful debts:
Specific	(30)	(37)
General	-	(7)
Share of profits of associates and joint ventures	1	-
Profit before tax and exceptional items	312	257
Net interest margin**	2.04%	2.28%
Bad debt charge as a % of average advances**	0.14%	0.27%
Cost:income ratio***	45.9%	47.3%

* Excluding exceptional items.

** Certain loans and advances to customers have been securitised. Where a “linked presentation” format is used for the statutory balance sheet presentation of these assets and the associated non-returnable finance, these ratios arecalculated before deduction of average loans and advances subject to non-returnable finance.

*** Cost:income ratio has been calculated excluding exceptional items and after netting operating lease depreciation, amounts written off fixed asset investments and general insurance claims payable against operating income.

(1) The results of our overseas businesses are converted at the spot exchange rate at the end of the respective accounting period.

The closing exchange rates used in the conversion of the results were:

	31.12.2004	31.12.2003
£1: Australian Dollar	2.48007	2.37560
£1: Euro	1.41808	1.41617

	As at 31.12.2004 £bn	As at 31.12.2003 £bn
Loans and advances to customers
Loans and advances to customers	23.5	18.9
Less: non-returnable finance	(0.1)	(0.1)
	23.4	18.8
Bad debt provisions:	£m	£m
Specific	75	67
General	84	87
Total	159	154
Provisions as a % of loans and advances	0.68%	0.81%
Classification of loans and advances*:	%	%
Agriculture, forestry and fishing	2	2
Energy	2	3
Manufacturing industry	5	5
Construction and property	21	22
Hotels, restaurants and wholesale and retail trade	12	14
Transport, storage and communication	2	2
Financial	5	2
Other services etc.	8	11
Individuals:
Home mortgages	32	29
Other personal lending	7	8
Overseas residents	4	2
	100	100
Non-performing assets (‘NPAs’)	£203m	£200m
Interest in suspense	£12m	£16m
NPAs as a % of closing advances	0.86%	1.06%
Provisions including interest in suspense as a % of NPAs	84%	85%
Total risk weighted assets	£20.5bn	£17.7bn
Total customer deposits	£10.0bn	£8.1bn

* Before provisions and after deducting non-returnable finance.

Australia
Financial Performance

	Year ended 31.12.2004 A$m	Year ended 31.12.2003 A$m
Net interest income	740	670
Non-interest income	363	342
Fees and commissions receivable	328	315
Fees and commissions payable	(42)	(35)
Operating lease rental income	16	15
Other operating income	61	47
Operating income	1,103	1,012
Operating expenses*	(557)	(514)
Staff	(267)	(266)
Accommodation, repairs and maintenance	(37)	(33)
Technology	(11)	(9)
Marketing and communication	(41)	(33)
Depreciation:
Tangible fixed assets	(30)	(29)
Operating lease assets	(12)	(10)
Other	(159)	(134)
General insurance claims payable	(2)	-
Operating profit before provisions*	544	498
Provisions for bad & doubtful debts:
Specific	(45)	(53)
General	-	(16)
Share of profits of associates and joint ventures	7	5
Profit before tax and exceptional items	506	434
Net interest margin**	2.12%	2.22%
Bad debt charge as a % of average advances**	0.13%	0.24%
Cost:income ratio***	50.0%	50.3%

* Excluding exceptional items.

** Certain loans and advances to customers have been securitised. Where a “linked presentation” format is used for the statutory balance sheet presentation of these assets and the associated non-returnable finance these ratios are calculated before deduction of average loans and advances subject to non-returnable finance.

*** Cost:income ratio has been calculated excluding exceptional items and after netting operating lease depreciation and general insurance claims payable against operating income.

In a year of consolidation and considerable investment, our Australian operations performed strongly. Profit before tax and exceptional items of A$506m increased by 17% (2003 A$434m).

	As at 31.12.2004 A$bn	As at 31.12.2003 A$bn
Loans and advances to customers
Loans and advances to customers	36.3	31.6
Less: non-returnable finance	(0.2)	(0.3)
	36.1	31.3
Bad debt provisions:	A$m	A$m
Specific	75	64
General	150	150
Total	225	214
Provisions as a % of loans and advances	0.62%	0.68%
Classification of loans and advances*:	%	%
Agriculture, forestry and fishing	3	3
Energy	3	3
Manufacturing industry	3	4
Construction and property	21	21
Hotels, restaurants and wholesale and retail trade	8	8
Transport, storage and communication	2	2
Financial	7	2
Other services etc.	8	10
Individuals:
Home mortgages	37	38
Other personal lending	7	8
Overseas residents	1	1
	100	100
Non-performing assets (‘NPAs’)	A$165m	A$226m
Interest in suspense	A$16m	A$21m
NPAs as a % of closing advances	0.45%	0.72%
Provisions including interest in suspense as a % of NPAs	146%	104%
Total risk weighted assets	A$30.2bn	A$28.1bn
Total customer deposits	A$15.1bn	A$11.8bn

* Before provisions and after deducting non-returnable finance.

Total operating income rose 9%. Net interest income increased 10%, which was the result of 15% growth in advances offset by a fall in net interest margin to 2.12% (2003 2.22%). The margin for 2004 was negatively impacted especially in the first half of the year by the combination of unfavourable wholesale funding rates and lengthening funding maturities.

The key movements in margin were as follows:

Movement in Margin	Basis Points
Net interest margin for the year ended 31 December 2003	222
Lending margin	(1)
Wholesale funding	(9)
Net interest margin for the year ended 31 December 2004	212

Non-interest income increased by 6% reflecting growth in the underlying business particularly in relation to housing and asset finance as well as insurance related underwriting fees.

The continued focus on controlling costs, while also pursuing growth and integration initiatives, restricted expenses growth (excluding operating lease asset depreciation) to 8% with the cost:income ratio improving to 50.0% (2003 50.3%). The main areas of growth in operating expenses were driven by increased business demand from our technology services joint venture, investment in a variety of strategies initiated during the period and as part of a two year programme to improve internal processes, IT infrastructure and regulatory compliance.

Customer deposits grew 28% to A$15.1bn during the year, with significant growth in the fourth quarter largely as a result of a new retail deposits initiative, which includes two high interest direct deposit products under the BankWest brand. While still in the early stages, these products have been well received by the target market and exceeded key targets. For example, launched under the ‘Rebel’ theme in October, the initiative raised over A$1bn of deposits from more than 10,000 customers in 13 weeks. The marketing campaign associated with this strategy improved BankWest’s brand recognition in the East Coast considerably, rising from 1% to 12% in 13 weeks, which will assist future growth initiatives.

In addition to the retail deposit initiative, we successfully grew commercial deposits, which totalled A$3.4bn at December 2004, an increase of 54% on the previous year led by the Specialist Deposit Services unit which was created in the second half of the year. An increase in staff and development of new products will help drive deposit growth in 2005. The overall self-funding ratio now stands at 44%.

Advances growth of 15% was achieved with growth particularly strong in the residential mortgage book, which increased 17% to A$14.7bn. The commercial book increased by 14% to A$20.6bn which has largely been the result of growth in asset finance.

The spread of the HBOS Australia loan portfolio geographically throughout Australia and across the retail, SME and corporate banking markets continues to be a significant strength and the quality of the book is high, evidenced by the reduction in non performing assets to 0.45% of closing advances to customers (2003 0.72%) and a reduced charge for bad debt provisions to 0.13% of average advances to customers (2003 0.24%).

Operational Performance
The formation of HBOS Australia, the new holding company overseeing the integrated operations of HBOS plc’s Australian subsidiaries BankWest, Capital Finance, BOS International (Australia) Limited (‘BOSIAL’) and St Andrew’s Insurance, and business integration was substantially completed during the year. Restructuring of the BankWest Treasury business to ensure integration with other parts of HBOS Treasury is scheduled for 2005 and, from 1 January 2005, the BankWest Treasury profits will be reported through HBOS Treasury.

The process of integrating the businesses of these subsidiaries, which operate in the areas of retail, corporate, commercial and asset finance and insurance and investment, presented a major challenge as the teams sought to maintain normal business activities while developing and implementing strategic and integration initiatives.

During the year the HBOS Australia management team was strengthened with the appointment of David Willis as CEO and the secondment of a number of executives from HBOS UK. The extensive financial sector experience and strong leadership of the HBOS Australia management team will be a key ingredient in driving HBOS Australia to meet its growth objectives through product innovation, focus on customers and adapting the successful strategies used by HBOS in the UK to the Australian market.

In October, BOSIAL and BankWest Structured & Property Finance formally joined forces and are moving forward very positively. HBOS Australia is one of the leading players in this part of the corporate banking market and a number of significant structured underwriting transactions were won during the year.

The Insurance & Investment Division, created in April, successfully acquired a Life Licence and began distributing new life products to build a sound platform for the expansion of wealth management products particularly on the East Coast.

In Asset Finance, the integration of BankWest Asset Finance Division into Capital Finance’s Business Finance Division provides a strong platform for further growth. Asset growth in this business during the year was a notable 30%. Asset Finance is planning a number of new product initiatives for 2005 including invoice discounting. Its range of business introducers and partners is increasing significantly.

Prospects
In Australia the domestic economy remains robust and, with the business integration completed, HBOS Australia is now positioned to achieve significant growth based on a clear strategy to offer differentiated customer focused products and services. A multi-brand approach is backed by flexibility together with direct access to the product creation, resources and balance sheet strength of HBOS plc.

During 2005 HBOS Australia will continue to invest in strategic initiatives aimed at generating strong organic growth in the medium term with particular emphasis on the retail and commercial markets to achieve the demanding growth targets in the future. The cost of these investments will be reflected in the 2005 results.

For HBOS Australia, 2005 will be a year to leverage our growth potential and progress our aim to be recognised as the customer champion in Australian financial services.