Retail

New account openings and attractive interest rates have contributed to the strong growth in credit balances to £15.5bn (December 2003 £13.8bn). Debit balances were slightly down at £1.0bn (December 2003 £1.1bn). Provisions as a percentage of period end loans and advances have increased to 4.8% from 3.5% at end 2003, and NPAs have increased broadly in line with expectations to 7.4% of period end loans and advances (December 2003 5.3%).

Bank account customers have continued to migrate to lower cost distribution channels. Internet registered users have grown by 34% to 2.9m and the number of online transactions has increased by 57% in the last 12 months.

Credit Cards
The HBOS credit card business continues to benefit from an extensive multi-branded product range coupled with the broadest distribution base of any UK Retail bank (ranging from branches to direct mail and our broad collection of partnership and affinity arrangements). The launch of the “One card” in both the Halifax and Bank of Scotland brands with a nine month 0% introductory period, cashback and a go to APR which incorporates our assessment of customers’ inherent risk, has been particularly successful. We acquired 1.2m new accounts (1.6m including those acquired through our joint venture partners) during 2004, resulting in an estimated HBOS market share of 19% of new credit card accounts (25% including joint ventures). The launch of the “One card” is consistent with our strategy of seeking growth in the higher quality segments of the UK credit card market. There is also strong evidence to suggest that the accounts acquired following the launch of the “One card” will show loss rates significantly lower than the market average.

We constantly monitor forward leading credit indicators, which have shown a modest improvement overall since December 2003,as the following table illustrates:

	As at 31.12.2004 %	As at 31.12.2003 %
Credit utilisation*1	17.8	18.1
Overdrawn limits*2	5.9	5.9
Arrears roll rates*3	45.1	48.4

*1 percentage of total available credit lines which are drawn down
*2 percentage of accounts in excess of credit limit
*3 percentage of credit card balances in arrears which have worsened in the period

HBOS balances have increased by 30% to £6.1bn (December 2003 £4.7bn) and NPAs have increased to 9.9% (December 2003 9.4%) of period end loans and advances.

Personal Lending
HBOS unsecured loan balances have grown by 5% compared to a market growth of 10%. This decline in market share has been driven by strong competition and a cautionary tightening of our lending criteria. We have continued to make substantial gains in customer retention, with the percentage of accounts closing improving by 13% on last year.

Balance sheet provisions as a percentage of period end loans and advances increased to 8.1% (2003 7.5%). NPAs as a share of book debt have increased to 13.6% (2003 11.8%). This has been driven by the performance of certain segments of lending written in 2002 and 2003 being worse than anticipated, plus lower book debt growth. Lending criteria were tightened at the end of 2003 and we are confident that new lending in 2004 and 2005 will perform satisfactorily.

Business Banking
Following the HBOS reorganisation in 2003, Retail is now responsible for servicing the small business banking market (typically businesses with a turnover of less than £1m). We believe the Business Banking market in England and Wales is uncompetitive and presents an excellent opportunity to deliver growth by offering small businesses a fresh alternative to the Big Four. In 2004 we acquired 29,000 new customers, 79% of which were in England and Wales where we continue to gain market share. This enabled us to grow deposit balances by 21% to £3.4bn (2003 £2.8bn).

To exploit this growth opportunity, further enhancements to the service provided through our Halifax branch network in England and Wales are being introduced in 2005. These investments include additional Business Banking Managers in the branch network, the introduction of Bank of Scotland branding to all Halifax branches and the launch of a branch based current account and counter service for small businesses.

Provisions as a percentage of period end loans and advances increased to 4.6% (December 2003 4.0%) whilst NPAs fell to 6.1% (December 2003 6.5%) of period end loans and advances.

Savings
Against a background of low but rising interest rates, we have continued to deliver market share gains without detriment to the Savings margin. During 2004 we have continued to use our multi-brand strategy to once again deliver strong savings inflows of £6.2bn (2003 £5.9bn). Our innovative “Regular Saver” account, which rewards customers for getting back into the habit of saving, resulted in 340,000 new accounts being opened, of which over 94,000 were new-to-franchise customers.

Across all brands, we increased our estimated share of Household Sector Liquid Assets to 15.9% (2003 15.7%). This has been achieved at the same time as our continued focus on growing and supporting our long term savings business. Collectively these actions have continued to reinforce our position as the Nation’s No.1 for retail savings and No.1 bancassurer.

Prospects
Retail’s performance in 2004 continues to confirm that our strategy, based on delivering value and simplicity to customers combined with a disciplined approach to cost management, drives real shareholder value. With income growth at 11% and costs only 0.5% higher we delivered a positive “jaws” of more than 10%, which has resulted in a further reduction in the cost:income ratio to 44.1% down from 48.7% for 2003.

The housing market is slowing but there is still low unemployment, good affordability and a shortage of housing stock. Against this background we have continued to tighten our lending criteria and we will target to achieve between 15% and 20% net lending share in 2005.

In the long term we continue to see attractive growth prospects in all of our main Retail businesses and we believe that our uniquely strong sales and distribution model will allow us to achieve long term market shares above 15% in all markets in which we compete. Whilst we anticipate more difficult markets in both secured and unsecured lending, we remain confident that our consumer led strategy and our credit discipline backed by stringent cost control will enable us to continue to outperform our Retail banking peer group.