International

Ireland
Financial Performance

	Year ended 31.12.2004 €m	Year ended 31.12.2003 €m
Net interest income	215	166
Non-interest income	65	51
Fees and commissions receivable	49	51
Fees and commissions payable	(5)	(11)
Operating lease rental income	19	-
Other operating income	2	11
Operating income	280	217
Operating expenses*	(116)	(82)
Staff	(62)	(52)
Accommodation, repairs and maintenance	(8)	(7)
Technology	(2)	(3)
Marketing and communication	(7)	(7)
Depreciation:
Tangible fixed assets	(6)	(6)
Operating lease assets	(17)	-
Other	(14)	(7)
Amounts written off fixed asset investments	3	(8)
Operating profit before provisions*	167	127
Provisions for bad & doubtful debts:
Specific	(17)	(20)
Share of losses of associates and joint ventures	(2)	(2)
Profit before tax and exceptional items	148	105
Net interest margin	1.84%	2.12%
Bad debt charge as a % of average advances	0.17%	0.29%
Cost:income ratio**	37.2%	39.2%

* Excluding exceptional items.

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

	As at 31.12.2004 €bn	As at 31.12.2003 €bn
Loans and advances to customers	12.6	7.9
Bad debt provisions:	€m	€m
Specific	63	57
General	34	34
Total	97	91
Provisions as a % of loans and advances	0.77%	1.16%
Classification of loans and advances*:	%	%
Agriculture, forestry and fishing	1	1
Energy	-	1
Manufacturing industry	7	8
Construction and property	20	26
Hotels, restaurants and wholesale and retail trade	19	28
Transport, storage and communication	2	3
Financial	2	3
Other services etc.	10	13
Individuals:
Home mortgages	24	3
Other personal lending	6	7
Overseas residents	9	7
	100	100
Non-performing assets (‘NPAs’)	€193m	€147m
Interest in suspense	€8m	€10m
NPAs as a % of closing advances	1.53%	1.86%
Provisions including interest in suspense as a % of NPAs	54%	69%
Total risk weighted assets	€11.8bn	€8.3bn
Total customer deposits	€5.6bn	€4.4bn

* Before provisions.

During the year Bank of Scotland (Ireland) (‘BoSI’) continued its trend of significant growth. Income and profits increased substantially against a background of a decreasing cost:income ratio and improving credit quality. Profit before tax and exceptional items of €148m increased 41% (2003 €105m) boosted u8m by the transfer of the €2.1bn residential mortgage book from Retail Division in July.

Operating income grew 29%, with net interest income up 30%. The net interest margin declined to 1.84% (2003 2.12%).

The key movements in margin were as follows:

Movement in Margin	Basis Points
Net interest margin for the year ended 31 December 2003	212
Residential mortgages (including transfer of book from Retail)	(12)
Business banking product spread	(8)
Funding & other movements	(8)
Net interest margin for the year ended 31 December 2004	184

The margin reduction in the year arose through a combination of factors including the move into Retail mortgages from 1 July 2004, a tightening of the Business banking product spread as a result of increased competition which is to be expected with growth in market share and the corresponding change in the mix of liquid assets held.

The increase of 21% in operating expenses (excluding operating lease asset depreciation) is inclusive of investment for Retail initiatives and also reflects the cost of re-engineering the Venture Capital business within the core BoSI franchise. The cost:income ratio improved to 37.2% (2003 39.2%).

Growth in profits and in assets was not achieved at the expense of credit quality. Indeed credit quality improved in the year with NPAs as a percentage of closing advances falling from 1.86% to 1.53% and the total charge for bad debts as a percentage of average customer advances falling from 0.29% to 0.17%.

The main driver for growth in the year was strong customer demand. Loan applications were at record levels reflecting the continued customer focus of the business and the improved product and geographical coverage developed over the past couple of years.

Operational Performance
2004 marked another year of record success for BoSI Business banking activity with strong growth in all areas. Our core business banking proposition continued to deliver on our objective to become the Number One Business Bank in the Irish market with growth in advances of 31% and business volumes up 39%, an acceleration unmatched by our competitors. Customer deposits were also a major focus in the year and at €5.6bn at December 2004 represented annual growth of 27%.

This achievement underlines the success of the BoSI proposition; competitive products combined with superior customer service. Our customer base has given this a resounding affirmation enabling BoSI to win the Sunday Times Deep Insight “Company and Supplier of the Year” awards for 2004 and the IMAF Commercial Broker Award.

During the first half we outlined plans for expansion into Retail markets in Ireland commencing with the transfer of the Irish residential mortgage book from Retail to BoSI in July.

The mortgage portfolio has grown 24% to €2.6bn by December 2004 (July 2004 €2.1bn). This represented excellent progress for the fledgling business, surpassing new business targets and building a healthy pipeline for the New Year. We plan to expand the current range of mortgage products to capture a larger share of what is a growing market in Ireland.

Prospects
The outlook for the Irish economy continues to be strong with most of the economic indicators positive and we look forward to 2005 with optimism.

Growth prospects for Business banking are good with a strong pipeline ensuring that we are well positioned for another record year in 2005. Under the banner of the newly established Specialised Finance Unit we have completed a number of high profile leveraged finance transactions and plan to grow our presence in this corporate market.

In Retail the re-launch of the mortgage proposition under local management has been well received by the market and we are optimistic that the renewed focus on this business combined with the introduction of new mortgage products will see steady growth in new business and market share. The Irish Competition Authority has endorsed the need for change to facilitate customer switching and we will continue to be at the forefront of this initiative. Plans are advanced to launch other retail products in 2005 utilising a number of distribution channels and building on the expertise and experience of HBOS in the UK.

The BoSI brand has carved out a highly regarded niche based on quality of both products and service. Our colleagues remain enthusiastic and motivated and this energy combined with our proposition of simple value-for-money products has created a powerful momentum. The Irish market has proved receptive to our approach in both Business and Retail banking and in 2005 we will continue to build our presence in both.