Retail
Focus on service supports sales delivery
Retail
In 2004 we have once again delivered an impressive sales performance together with strong growth in profitability. Our commitment to deliver value, simplicity and transparency to consumers continues to drive bottom line growth with profit before tax and exceptionals 22% higher than 2003 at £2,059m.
Highlights of our operating performance include:
- Net mortgage lending share of 17%
- 1.0m new bank accounts
- 1.2m new credit card accounts
- £8.4bn growth in savings and banking credit balances
- Year on year growth in operating expenses of only 0.5%.
Strong growth in income combined with tight cost control resulted in a further improvement in our cost:income ratio to 44.1% (down from 48.7%).
Asset growth was the key driver behind an 8% increase in net interest income to £3,719m (2003 £3,448m). With non-interest income 24% higher at £1,029m (2003 £827m), total operating income grew by 11% year on year.
Our continued focus on stringent cost control and the successful delivery of merger cost synergy targets resulted in year on year operating expense growth of only 0.5%. The combined impact of strong income growth and effective cost management disciplines drove a reduction in the cost:income ratio, for the third successive year since the merger, to 44.1%.
Financial Performance
Profit and Loss Account
| Year ended 31.12.2004 £m |
Year ended 31.12.2003 £m |
|
 |
||
| Net interest income | 3,719 | 3,448 |
| Non-interest income | 1,029 | 827 |
| 757 | 678 | |
| 318 | 301 | |
| 19 | 19 | |
| 38 | 28 | |
| 209 | 179 | |
| 69 | 64 | |
| Fees and commissions receivable | 1,410 | 1,269 |
| Fees and commissions payable | (434) | (451) |
| Other operating income | 53 | 9 |
| Operating income | 4,748 | 4,275 |
| Operating expenses* | (2,093) | (2,083) |
| (979) | (938) | |
| (12) | (50) | |
| (75) | (66) | |
| (195) | (234) | |
|
|
|
| (64) | (56) | |
| (140) | (130) | |
| (1,465) | (1,474) | |
|
|
|
| (267) | (266) | |
| (250) | (238) | |
| (111) | (105) | |
| Operating profit before provisions* | 2,655 | 2,192 |
| Provisions for bad & doubtful debts: | ||
| (610) | (479) | |
| (43) | (59) | |
| Share of profits of associates and joint ventures | 34 | 33 |
| Profit on sale of fixed assets | 23 | - |
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| Profit before tax and exceptional items | 2,059 | 1,687 |
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| Bad debt charge as a % of average advances** | 0.33% | 0.30% |
| Cost:income ratio* | 44.1% | 48.7% |
* Excluding exceptional items
**Certain loans and advances to customers have been securitised. 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.
The non-performing asset (‘NPA’) profile of our mortgage book has inevitably shifted with the increase in specialist lending business written in recent years. This, coupled with slower balance sheet growth in 2004, has had a marked effect on our key NPA measures, but does not signal an equivalent deterioration in credit quality. Whilst the overall level of NPAs has increased by 31% to £4,519m (2003 £3,442m), the strong coverage provided by the average loan to value (‘LTV’) profile of the mortgage book does not result in a corresponding increase in provisioning levels.
Secured NPAs increased by 34% to £2,758m (2003 £2,056m), representing 1.43% (2003 1.17%) of closing advances. This growth was driven by two key factors:
- Our decision to slow asset growth which has resulted in a net lending share of only 17% in 2004. As expected, this slower asset growth has contributed to an increase in NPAs as a percentage of closing advances.
- Our deliberate policy to continue to source approximately 30% of new business from the specialist lending (i.e. buy-to-let, near prime and self-certified) markets and our confidence that the higher level of expected loss associated with this lending is more than compensated for by higher product margins.
Whilst we expect secured NPAs to increase further in 2005, we remain confident that this will not lead to a significant increase in the provisioning requirement because:
- the loss emergence on specialist lending business remains well within our expectation at this stage of the portfolio life cycle.
- NPAs are very well covered by assets.
- the LTV profile of our mortgage portfolio continues to improve.
Unsecured NPAs were 27% higher at £1,761m (2003 £1,386m). Whilst the vast majority of this increase reflects the maturity profile of the increased volume of business written in the period since the merger, we have continued to experience credit performance issues in specific segments of unsecured lending written in 2002 and 2003. Having taken corrective action by tightening lending criteria across all unsecured products, we are now seeing the benefit in terms of improved early arrears performance and are confident that lending originated in 2004 and 2005 will perform satisfactorily.
Overall, the credit quality of the retail balance sheet remains very strong - NPAs represent only 2.16% (2003 1.81%) of closing advances and 92% (2003 92%) of customer loans and advances are secured on residential property.
| Net Interest Margins and Spreads | ||
| Year ended 31.12.2004 £m |
Year ended 31.12.2003 £m |
|
|
||
| Net Interest Income: | ||
| 11,682 | 9,574 | |
| (8,175) | (6,346) | |
| 212 | 220 | |
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| 3,719 | 3,448 | |
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| Average Balances: | ||
| 22,221 | 10,219 | |
| 181,453 | 169,566 | |
|
||
| 203,674 | 179,785 | |
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||
| 126,286 | 114,965 | |
| 22,221 | 10,219 | |
| 55,167 | 54,601 | |
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| 203,674 | 179,785 | |
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| Average Rates: | % | % |
| 5.73 | 5.33 | |
| (4.01) | (3.53) | |
|
||
| Net Interest Spread | 1.72 | 1.80 |
| 0.11 | 0.12 | |
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| Net Interest Margin | 1.83 | 1.92 |
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Certain loans and advances to customers have been securitised. A “linked presentation” format is used for the statutory balance sheet presentation of these assets and the associated non-returnable finance. In the calculation of net interest margin above average balances are stated before deduction of non-returnable finance.
The net interest margin declined by 9bps for the full year to 183bps (2003 192bps). The key movements were as follows:
| Movement in Margin | Basis Points |
|
|
| Net interest margin for the year ended 31 December 2003 | 192 |
| 1 | |
| 7 | |
| 1 | |
| (4) | |
| (4) | |
|
|
| 1 | |
| (9) | |
| (1) | |
|
|
| Net interest margin for the year ended 31 December 2004 | 183 |
|
|
The increased cost of LIBOR related wholesale funding relative to Base Rate resulted in narrower spreads for each of our asset based businesses, and the launch of our “One card”, with an introductory interest free period, caused further dilution in credit card spreads. These factors were, however, more than offset by improved deposit spreads in our Savings and Banking businesses and, overall, product spreads improved by 1bp when compared to 2003. Our increased requirement for wholesale funding resulted in a 9bps reduction in the margin and the benefit from earnings on capital was 1bp lower at 11bps.
Whilst the margin fell by 9bps over the full year, we delivered a 1bp improvement in the second half year compared to the first half. Improved deposit spreads were the key factor behind an overall 6bps improvement in product spreads, offset by an increased requirement for wholesale funding which reduced the margin by 6bps. The benefit from capital earnings was 1bp higher.
