Financial Review & Risk Management

Group Net Interest Income
Group net interest income increased by £481m to £5,940m. The growth in net interest income reflects strong asset growth partly offset by a decline in Group net interest margin. This reflects higher wholesale funding costs, predominantly impacting Retail, and movements in product mix.

	Year ended 31.12.2004 £m	Year ended 31.12.2003 £m

Interest receivable	21,635	18,227
Interest payable	(15,695)	(12,768)

Net interest income	5,940	5,459

Average balances*
Interest earning assets
- Loans and advances	289,571	265,390
- Securities and other liquid assets	35,780	31,697

	325,351	297,087
- Securitised assets	23,629	11,810

	348,980	308,897

Group net interest margin	1.70%	1.77%
Divisional net interest margins:
Retail	1.83%	1.92%
Corporate	1.98%	1.96%
International	2.04%	2.28%
Treasury	0.09%	0.13%

* 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, the net interest margin is calculated before deduction of average loans and advances subject to non-returnable finance. Trading assets within treasury operations are excluded from the net interest margin calculation.

Non-interest Income
Non-interest income increased by 23% to £4,287m. Net fees and commissions increased by 7%. Strong performances from both Retail and Corporate were partly offset by a loss of commissions previously received as an introducer of household insurance. Following the commencement of household insurance underwriting, income from this business is now reported within general insurance premium income. Income from long term assurance business was 36% higher than 2003 and includes the impact of positive short term fluctuations in investment returns and changes to economic assumptions of £40m (2003 £26m).

Profit on sale of investment securities increased to £108m reflecting a number of realisations within Corporate. Despite these realised gains, the unrealised profit on our Corporate investment portfolio is higher than last year end.

	Year ended 31.12.2004 £m	Year ended 31.12.2003 £m

Fees and commissions receivable	2,710	2,586
Fees and commissions payable	(855)	(847)
Dealing profits	208	172
General insurance premium income	595	360
Income from long term assurance business	714	525
Other operating income:
Profit on sale of investment securities	108	43
Operating lease rental income	618	541
Other	189	107

Total	4,287	3,487

Operating Expenses
The Group cost:income ratio improved from 41.6% to 37.9%.

	Year ended 31.12.2004 £m	Year ended 31.12.2003 £m

Operating expenses	4,322	4,087
Exceptional items	(178)	(119)

	4,144	3,968
Goodwill amortisation	(108)	(97)
Operating lease depreciation	(408)	(344)

Underlying operating expenses	3,628	3,527

Net operating income	10,227	8,946
Amounts written off fixed asset investments	(21)	(29)
General insurance claims	(215)	(99)
Operating lease depreciation	(408)	(344)

Underlying operating income	9,583	8,474

Cost:income ratio	37.9%	41.6%

Tight cost control, particularly within Retail, restricted growth in underlying operating expenses to 3%.

	Year ended 31.12.2004 £m	Year ended 31.12.2003 £m

Staff	1,875	1,755
Accommodation, repairs and maintenance	356	389
Technology	221	300
Marketing and communication	318	357
Depreciation:
Tangible fixed assets	307	283
Operating lease assets	408	344
Goodwill amortisation	108	97
Other	551	443

Total*	4,144	3,968

* Excluding exceptional items of £178m (2003 £119m).

Operating expenses, excluding exceptional items, increased by £176m to £4,144m. This reflects an increase in operating lease depreciation and an increase in pension costs to £175m (2003 £155m) primarily due to the full year impact of the additional pension charge in respect of the triennial valuation of the Halifax Retirement Fund on 31 March 2003. Following the insourcing of certain IT operations in the second half of 2003, there has been an increase in staff costs which is offset by a decrease in technology costs. The increase in goodwill amortisation is mainly attributable to the full year impact of the acquisition of the BankWest minority interest which completed in September 2003. Other includes the costs of regulatory and other business change programmes.

Group Items
Group Items principally comprise the gross expenses of managing the Group, including technology so far as it is not devolved to divisions, accommodation and other shared services such as cheque clearing, mailing etc. The costs of technology, accommodation and other shared services (other than those borne directly by Group functions) are subsequently recharged to divisions according to their usage and are shown under the operating expense analysis for each division. The net cost of Group Items increased by £17m, including £11m increase in goodwill amortisation and additional costs relating to the implementation of International Financial Reporting Standards and the new Integrated Prudential Sourcebook. The reduction in technology spend reflects the insourcing of certain IT operations. The increase in accommodation costs is due to a change in the management and classification between direct and recharged costs.

	Year ended 31.12.2004 £m	Year ended 31.12.2003 £m
Staff	229	189
Accommodation, repairs and maintenance	315	287
Technology	102	174
Marketing and communication	52	65
Depreciation	199	185
Goodwill amortisation	108	97
Other	131	83

Sub Total	1,136	1,080
Less recharges:
Technology	(335)	(356)
Accommodation	(316)	(280)
Other shared services	(179)	(155)

Total	306	289

Share of Operating Profit/(Loss) of Joint Ventures and Other Associated Undertakings
The share of operating profit/(loss) of joint ventures and other associated undertakings is analysed in the following table. The increased share of profits in the year is largely within Corporate, reflecting an increased contribution from the numerous joint ventures within our integrated product portfolio.

	Year ended 31.12.2004 £m	Year ended 31.12.2003 £m

Retail:
Centrica Personal Finance	17	19
Sainsbury’s Bank	8	9
Other	9	5
Corporate:
Lex Vehicle Leasing*	18	16
Drive Financial Services**	12	10
RFS	8	9
Other	38	4
Insurance & Investment:
esure	4	(11)
First Alternative	(15)	(2)
Other	1	1
International	1

Total	101	60