Last checked at 1 Aug 2007 07:02
HBOS PLC01 August 2007 INTERNATIONAL Underlying profit before tax in International increased by 12% to £327m (H1 2006£293m), with all three International divisions contributing to this growth. InAustralia, strong volume and income growth supported the significant investmentin our East Coast expansion plans. In Ireland the rollout of our branch basedretail business gained momentum with the launch in May 2007 of the personalcurrent account. In Europe & North America strong profit growth was driven byCorporate USA and European Financial Services. Financial Performance Income Statement Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Net interest income 504 414 468 882Underlying non-interest income 207 187 217 404 Fees and commission income 92 81 74 155 Fees and commission expense (79) (80) (109) (189) Change in value of in-force long term 35 25 79 104 assurance business Net income from long term business 134 137 134 271 Investment earnings on surplus assets 3 2 1 3 attributable to shareholders using long term assumptions Operating lease rental income 8 10 11 21 Other operating income 19 20 33 53 Share of profits/(losses) of associates and 2 1 4 5 jointly controlled entities Operating lease depreciation (7) (8) (9) (17) Impairment on investment securities (1) (1) (2)Underlying net operating income 711 601 685 1,286Underlying operating expenses (334) (265) (308) (573) Staff (183) (144) (157) (301) Accommodation, repairs and maintenance (23) (19) (21) (40) Technology (25) (16) (16) (32) Marketing and communication (24) (20) (23) (43) Depreciation:Property and equipment and intangible assets (20) (16) (16) (32) Other (58) (49) (74) (123) Sub total (333) (264) (307) (571) Recharges:Technology (1) (1) (1)Accommodation (1) (1)Underlying operating profit before provisions 377 336 377 713Impairment losses on loans and advances (50) (43) (53) (96)Underlying profit before tax 327 293 324 617 Net interest margin 1.90% 1.97% 1.98% 1.97%Impairment losses as a % of average advances 0.09% 0.11% 0.12% 0.22%Cost:income ratio 47.0% 44.1% 45.0% 44.6% Note: The presentation of the income statement has been simplified by combininga number of predominantly policyholder related items such as investment andother operating income, the change in investment contract liabilities, netclaims incurred on insurance contract liabilities, and net change in insurancecontract liabilities into a single caption called net income from long termbusiness. Page 37 As at As at As at Balance Sheet and Asset Quality Information 30.06.2007 30.06.2006 31.12.2006 Loans and advances to customers £56.8bn £42.7bn £48.7bn Impairment provisions on advances £281m £217m £246m Impairment provisions as a % of closing advances 0.49% 0.51% 0.51% Classification of advances*: % % % Agriculture, forestry and fishing 2 1 2 Energy 1 1 1 Manufacturing industry 3 3 3 Construction and property 22 21 21 Hotels, restaurants and wholesale and retail trade 8 8 9 Transport, storage and communication 2 2 2 Financial 2 2 2 Other services etc. 6 7 6 Individuals: Home mortgages 30 30 29 Other personal lending 4 5 5 Overseas residents 20 20 20 100 100 100 Impaired loans £662m £503m £581m Impaired loans as a % of closing advances 1.17% 1.18% 1.19% Impairment provisions as a % of impaired loans 42% 43% 42% Risk weighted assets £47.7bn £37.2bn £41.3bn Customer deposits £19.8bn £14.3bn £17.5bn * Before impairment provisions. The results of our International businesses are converted to sterling monthly atthe average exchange rate for the month. The average exchange rates for therespective reporting periods were: Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £1 : Australian dollar 2.44 2.41 2.48 2.45£1 : Euro 1.48 1.46 1.48 1.47£1 : US dollar 1.97 1.79 1.90 1.84 The closing exchange rates used in the conversion of the International balancesheets were: As at As at As at 30.06.2007 30.06.2006 31.12.2006 £1 : Australian dollar 2.36 2.49 2.49£1 : Euro 1.49 1.45 1.49£1 : US dollar 2.01 1.85 1.97 Page 38 Australia Underlying profit before tax increased by 4% to £144m (H1 2006 £139m). In localcurrency, however, underlying profit before tax increased by 16% to A$368m (H12006 A$316m), reflecting the continued success of our growth strategy and theunderlying strength and diversity of our businesses. We continue to investheavily in future growth as outlined by our recently announced East Coastexpansion programme. This level of investment will continue to increase in thesecond half of the year and into 2008. Financial Performance Income Statement Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £mNet interest income 290 237 264 501Underlying non-interest income 78 75 67 142 Fees and commission income 71 64 56 120 Fees and commission expense (7) (3) (10) (13) Net income from long term business 7 6 7 13 Operating lease rental income 3 4 5 9 Other operating income 6 5 13 18 Share of profits/(losses) of associates and 1 2 2jointly controlled entities Operating lease depreciation (3) (3) (4) (7)Underlying net operating income 368 312 331 643Underlying operating expenses (188) (146) (160) (306) Staff (111) (82) (89) (171) Accommodation, repairs and maintenance (13) (10) (11) (21) Technology (18) (10) (14) (24) Marketing and communication (12) (11) (10) (21) Depreciation: Property and equipment and intangible (10) (8) (8) (16)assets Other (24) (25) (28) (53)Underlying operating profit before provisions 180 166 171 337Impairment losses on loans and advances (36) (27) (32) (59)Underlying profit before tax 144 139 139 278 Net interest margin 2.20% 2.36% 2.30% 2.33%Impairment losses as a % of average advances 0.13% 0.13% 0.14% 0.27%Cost:income ratio 51.1% 46.8% 48.3% 47.6% Operating Income and Margins Net interest income increased by 22% to £290m (H1 2006 £237m) reflecting thestrong growth in both assets and deposits. The decline in the net interestmargin primarily reflects the change in portfolio mix associated with thestrategic growth of our Retail and Commercial businesses, combined with a movetowards a lower risk/reward profile within our Corporate and Asset Financebusinesses and an increasingly competitive retail environment. Annualised growthin advances and deposits were 40% and 35% respectively. Underlying non-interestincome rose by 4% to £78m (H1 2006 £75m). Movement in margin Basis points Net interest margin for the half year ended 31 December 2006 230 Portfolio mix (6) Retail competition (3) Other (1)Net interest margin for the half year ended 30 June 2007 220 Page 39 Operating Expenses Underlying operating expenses increased 29% to £188m (H1 2006 £146m). Wecontinue to invest significantly in people, processes, and IT governance andinfrastructure. A significant part of this investment is in preparation for ourEast Coast expansion. Credit Quality and Provisions Impaired loans as a % of closing advances remained stable at 0.99% (end 20061.00%), the most significant part of the impaired loans continuing to reflect asmall number of corporate transactions. Impairment provisions as a % ofimpaired loans were unchanged at 46% (end 2006 46%). Balance Sheet and Asset Quality Information As at As at As at 30.06.2007 30.06.2006 31.12.2006 Loans and advances to customers £29.4bn £21.0bn £24.5bn Impairment provisions on advances £135m £98m £113m Impairment provisions as a % of closing advances 0.46% 0.47% 0.46% Classification of advances*: % % % Agriculture, forestry and fishing 3 3 3 Energy 2 2 3 Manufacturing industry 2 3 3 Construction and property 26 24 24 Hotels, restaurants and wholesale and retail trade 9 8 9 Transport, storage and communication 2 3 2 Financial 3 3 3 Other services etc. 8 9 7 Individuals: Home Mortgages 39 41 38 Other personal lending 4 4 6 Overseas residents 2 2 100 100 100 Impaired loans £292m £205m £245m Impaired loans as a % of closing advances 0.99% 0.98% 1.00% Impairment provisions as a % of impaired loans 46% 48% 46% Risk weighted assets £24.4bn £17.8bn £21.0bn Customer deposits £13.5bn £9.2bn £11.5bn * Before impairment provisions. Operational Performance The significant investment in the business, including our East Coast expansionprogramme, is designed to support future profit growth in each of our Retail,Commercial and Insurance and Investment businesses. At the same time, furthertargeted investments are supporting the growth of our Asset Finance andCorporate businesses in their specialist markets. Lending and Deposit Growth Advances grew by an annualised 40% to £29.4bn (end 2006 £24.5bn) with continuedgrowth in the retail and commercial books. Customer deposits grew by anannualised 35% to £13.5bn (end 2006 £11.5bn) as a result of the continuedsuccess of the retail and commercial deposit initiatives. Page 40 Retail Business Our Retail business, operating under the BankWest brand, continued its push tobuild national market share with its "Betterdeal" strategy and "hero" productofferings. Lending was up an annualised 33% to £10.0bn (end 2006 £8.6bn) anddeposits up an annualised 21% to £5.4bn (end 2006 £4.9bn). Mortgages growth outstripped market growth with a resulting strong gain inmarket share to over 3% based on May APRA statistics. Customer satisfaction hasimproved during the period. Continued development to expand our product rangeled to the launch of a new rewards card, the BankWest 'More' MasterCard, whichtargets general rewards customers to complement our successful Lite MasterCardand Zero MasterCard. Commercial Business Commercial, also under the BankWest brand, performed strongly in the first halfof 2007, with more than double the market growth. Lending grew by an annualised58% to £9.0bn (end 2006 £7.0bn) and deposits on an annualised basis grew by 46%to £8.1bn (end 2006 £6.6bn). Our strategy of developing a team of in-housespecialist bankers with industry-specific knowledge and expertise helped drivegrowth and brand awareness. Business banking, which supports the lower-end SMEsector, more than doubled lending approvals compared to June 2006. The newOnline International Trade platform has been launched as one of a number ofinitiatives in the highly competitive SME market. Corporate Business Our BOS International brand lending grew by an annualised 36% to £6.0bn (end Dec2006 £5.1bn). The first half of 2007 has seen strong growth in numbers and valueof transactions following a strong year in 2006. We have continued to competeas an arranger and underwriter in competitive M&A financing and Project Financemarkets and have increased the number of high-value transactions. Our agency andsyndication business has doubled in size since June 2006, and has successfullyestablished itself as a lead arranger of transactions. We are continuing toleverage our UK experience in the local market. Asset Finance Business Our Asset Finance business under the Capital Finance brand, grew lending by anannualised 32% to £4.4bn (end 2006 £3.8bn). All business units had significantincreases in new business over the corresponding period in 2006. The PersonalFinance - Motor business has performed well despite pressure from ourcompetitors. Business Finance has benefited from strong broker introducedbusiness and the ongoing success of our strategic alliances. The propertybusiness has also continued to grow strongly while maintaining credit quality. Insurance & Investment Business Our financial planning business continued to grow strongly. Excluding theacquisition of Whittaker Macnaught in January 2007, funds under advice grew by18% supported by the recruitment of additional advisors in our existingbusiness. This performance was further supported by a strong performance inWhittaker Macnaught in the period since its acquisition. Sales volumes weredriven by the strong lending growth and the extension of relationships withcorporate distribution partners. Page 41 Prospects The global economic backdrop, including historically high commodity prices,remains conducive to solid growth in Australia's economy into 2008. Growth inmost of Australia's key export markets is expected to continue. Householdconsumption is accelerating and filling the minor void left by the slow down inbusiness investment. Sustained, strong employment growth and a 30-plus year lowin the unemployment rate are the legacies of a prolonged period of stableeconomic conditions and support further consolidation in household consumption.The outlook for the Australian wealth management market remains positive due tothe continued growth in managed funds supported by recent changes in governmentpolicy. The Australian managed funds market is now the fourth largest in theworld. During the first half of 2007 we have continued to invest heavily in our growthstrategy. In July we announced that BankWest will open more than 125 retailstores and 35 business banking centres with the first branches expected to beopened in the final quarter of 2007. This will require further investment in thecurrent year and into 2008 and, as previously noted, is expected to slow profitgrowth in the near term. Western Australia remains an important part of our growth plans and focus willensure we take advantage of our strong market position in Australia's fastestgrowing state. Work has started on BankWest's new headquarters in Perth, due tobe completed in 2009. We will continue to accelerate our national growth by driving competition in theAustralian market. Our focus on market leading products and service has resultedin a significant increase in customer numbers. As we expand our physicalpresence on the East Coast, we are well placed to build on the market share wehave established. Page 42 Ireland Underlying profit before tax increased by 14% to £80m (H1 2006 £70m). Thisgrowth was achieved at a time of continued investment in our franchise as weexpand our retail branch network and business banking distribution. Stronggrowth has been achieved across all portfolios, with annualised lending growthof 23% marking the fourth successive half-year period of growth in excess of20%. Financial PerformanceIncome Statement Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Net interest income 151 123 145 268Underlying non-interest income 12 18 24 42 Fees and commission income 6 7 7 14 Operating lease rental income 5 6 6 12 Other operating income 5 11 12 23 Share of profits/(losses) of associates and 5 5 jointly controlled entities Operating lease depreciation (4) (5) (5) (10) Impairment on investment securities (1) (1) (2)Underlying net operating income 163 141 169 310Underlying operating expenses (73) (59) (74) (133) Staff (37) (37) (36) (73) Accommodation, repairs and maintenance (7) (5) (4) (9) Technology (3) (2) (1) (3) Marketing and communication (8) (4) (11) (15) Depreciation: Property and equipment and intangible assets (4) (4) (2) (6) Other (14) (7) (20) (27)Underlying operating profit before provisions 90 82 95 177Impairment losses on loans and advances (10) (12) (16) (28)Underlying profit before tax 80 70 79 149 Net interest margin 1.67% 1.70% 1.76% 1.73%Impairment losses as a % of average advances 0.06% 0.09% 0.11% 0.20%Cost:income ratio 44.8% 41.8% 43.8% 42.9% Operating Income and Margins Underlying net operating income increased by 16% to £163m (H1 2006 £141m), theheadline growth rate being reduced by the investment disposal that was a featureof the first half of 2006. Net interest income grew by 23% to £151m (H1 2006£123m). The increase reflected strong growth in advances, moderated by a declinein margin resulting from changes to funding costs and the expansion of ourretail product offering. Movement in margin Basis points Net interest margin for the half year ended 31 December 2006 176 Change in funding costs (6) Retail (3)Net interest margin for the half year ended 30 June 2007 167 The Retail business has seen a small decline in mortgage margins reflecting theincreased level of competition in the market place and our positioning as amarket leader in our main products. While competition intensifies, it isaffordability of our products, our longer opening hours and the quality of ourservice that have been identified by our customers as the key points ofdifferentiation. Within Business Banking, margins remain robust. Page 43 Operating Expenses Underlying operating expenses increased by 24% to £73m (H1 2006 £59m). Wecontinue to build infrastructure with a further 7 Retail branches opened in thefirst half of the year, together with the establishment of Business Banking hubsin Kilkenny, Wexford and Drogheda. Credit Quality and Provisions Credit quality remained strong with impaired loans as a % of closing advancescontinuing to trend downwards at 1.82% (end 2006 1.87%). In addition to thefavourable portfolio performance, the impairment charge for the first halfreflects a number of recoveries against the impaired portfolio. Balance Sheet and Asset Quality Information As at As at As at 30.06.2007 30.06.2006 31.12.2006 Loans and advances to customers £17.7bn £13.9bn £15.9bn Impairment provisions on advances £121m £100m £113m Impairment provisions as a % of closing advances 0.68% 0.72% 0.71% Classification of advances*: % % % Agriculture, forestry and fishing 1 1 Energy 1 1 Manufacturing industry 4 5 4 Construction and property 29 26 27 Hotels, restaurants and wholesale and retail trade 12 14 13 Transport, storage and communication 2 2 2 Financial 2 1 2 Other services etc. 6 7 6 Individuals: Home Mortgages 27 27 28 Other personal lending 6 7 6 Overseas residents 10 10 11 100 100 100 Impaired loans £322m £263m £297m Impaired loans as a % of closing advances 1.82% 1.89% 1.87% Impairment provisions as a % of impaired loans 38% 38% 38% Risk weighted assets £16.1bn £12.7bn £14.4bn Customer deposits £6.1bn £4.9bn £5.8bn * Before impairment provisions. Page 44 Operational Performance Lending and Deposit Growth Demand remained buoyant in the first half, with overall lending up 23% on anannualised basis to £17.7bn (end 2006 £15.9bn). Deposits also grew strongly,showing an annualised increase of 10% to £6.1bn (end 2006 £5.8bn). Business Banking Within the banking franchise, the core divisions of Business, Property andRegional Banking all contributed to another excellent performance. Advancesgrowth was strong in the first half, gross lending increased by an annualised23% to £12.6bn (end 2006 £11.3bn) with pipeline showing similar strength, up 15%from December 2006. The recently launched Integrated and Acquisition Financebusiness has been successful in securing a number of large ticket, high profiledeals in the first half of 2007. Retail Our Retail businesses (Retail Network, Intermediary Mortgage and Asset Finance)have enjoyed strong growth in the first half of 2007 against the backdrop of anincreasingly competitive marketplace and a softening residential propertymarket. Advances increased by an annualised 22% to £5.1bn (end 2006 £4.6bn),with the pipeline increasing by 12% from December 2006. We have increased ourshare of gross lending in the mortgage market from 7.4% to 7.7% in the period. On 21 May 2007, BOSI became a full-service bank with the launch of the newHalifax Current Account (HCA). The launch has been very well received by themarket with the first six weeks of trading ahead of expectations. We continuethe roll-out of our branch network, with 32 branches now open for business, andwe are on track to achieve our roll-out target for the remainder of the year. Prospects The underlying economic conditions in Ireland continue to be positive withprojections showing strong growth in GDP for the remainder of 2007 and 2008, lowunemployment and stability in consumer confidence, albeit that there willcontinue to be some softening in the housing market as a result of theincreasing interest rate environment. House price growth has slowed over the period as a result of uncertainties instamp duty reform and continuing interest rate increases. This slowdown ingrowth to more sustainable levels is welcome and there are signs of renewedactivity in the mortgage market now that the stamp duty issue has been resolved.We believe this will build through the second half of the year. Prospects for our core Business Banking businesses are good, with benign marketconditions and a healthy pipeline. The Integrated and Acquisition Financeoffering has attracted considerable early success and we will continue to buildon this momentum through the remainder of the year. In our Retail and Intermediary division, the sales pipeline is strong andtrending upwards as we increase our nationwide footprint. Affordability, on theback of eight consecutive rises in the ECB rate, is in the forefront of customerminds and as the best buy tables demonstrate, our products are ideally placed tomeet this demand. Therefore, in the mortgage market particularly, we expect toincrease our market share for the second year in a row as we continue to growboth our intermediary brand (Bank of Scotland Ireland) and our retail brand(Halifax). With the launch of the new Halifax current account and with 32 branches nowopen, the rollout of the Retail proposition is on target. While it is stillearly days, initial signs for the business are encouraging, and we believe weare well positioned to benefit from the opportunities in the Irish market. Page 45 Europe & North America ('ENA') Underlying profit before tax increased by 23% to £103m (H1 2006 £84m) largelydriven by the targeted expansion of our Corporate USA business and increaseddistribution in our European Financial Services business ('EFS'). Our EuropeanRetail businesses continue to invest in the infrastructure required to supportincreasing distribution capacity with the ongoing expansion of the Banco HalifaxHispania ('BHH') branch retail network in Spain and the expansion ofdistribution channels for our market leading online mortgage product in BoSNetherlands ('BoSNL'). Financial PerformanceIncome Statement Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £mNet interest income 63 54 59 113Underlying non-interest income 117 94 126 220 Fees and commission income 15 10 11 21 Fees and commission expense (72) (77) (99) (176) Change in value of in-force long term 35 25 79 104 assurance business Net income from long term business* 127 131 127 258 Investment earnings on surplus assets 3 2 1 3 attributable to shareholders using long term assumptions Other operating income 8 4 8 12 Share of losses of associates and jointly 1 (1) (1) (2) controlled entitiesUnderlying net operating income 180 148 185 333Underlying operating expenses (73) (60) (74) (134) Staff (35) (25) (32) (57) Accommodation, repairs and maintenance (3) (4) (6) (10) Technology (4) (4) (1) (5) Marketing and communication (4) (5) (2) (7) Depreciation: Property and equipment and intangible (6) (4) (6) (10) assets Other (20) (17) (26) (43) Sub total (72) (59) (73) (132) Recharges: Technology (1) (1) (1) Accommodation (1) (1)Underlying operating profit before provisions 107 88 111 199Impairment losses on loans and advances (4) (4) (5) (9)Underlying profit before tax 103 84 106 190 Net interest margin 1.47% 1.43% 1.48% 1.46%Impairment losses as a % of average advances 0.04% 0.05% 0.06% 0.12%Cost:income ratio 40.6% 40.5% 40.0% 40.2% *Net income from long term business is explained in the note on page 29. Thiseffectively represents the annual management charge on long term assurancebusiness together with premiums, net of claims and changes in liabilities, inrespect of protection business. Operating Income and Margins Net interest income increased by 17% to £63m (H1 2006 £54m) reflecting stronggrowth in customer advances across our banking businesses. The decrease in netinterest margin to 1.47% (H2 2006 1.48%) reflects a slight change in thebusiness mix of our loan book in the US, largely offset by an improvement in ourRetail business, in part due to improved funding rates. Page 46 Movement in margin Basis pointsNet interest margin for the half year ended 31 December 2006 148 Lending margin Corporate (3) Lending margin Retail 2Net interest margin for the half year ended 30 June 2007 147 Underlying non-interest income increased by 24% to £117m (H1 2006 £94m), andreflects business growth in EFS and returns from equity realisations in the US. Operating Expenses Underlying operating expenses increased by 22% to £73m (H1 2006 £60m), andremain broadly in line with the second half of 2006. The increase from the firsthalf of 2006 reflects continued investment to support the phased expansion ofour sales and distribution channels, particularly in the USA, and to meetongoing legislative changes in key markets. In BHH, investment continued in theretail branch network, with the opening of branches in Majorca and Calahonda,taking the number of branches in Spain to 21. Investment by BHH also includedthe establishment of a sales presence in Dublin in 2007 to maximise growthopportunities arising from the buoyant Irish expatriate market for Spanishbanking facilities. The first half of 2007 has also seen us open a new office inToronto. Despite these investments, the cost:income ratio of 40.6% remainsbroadly unchanged (H1 2006 40.5%). Credit Quality and Provisions Credit quality remains strong across the division. Impaired loans as a % ofclosing advances increased to 0.49% (end 2006 0.47%), reflecting moderateincreases across our diversified portfolio. Impairment losses as a % of averageadvances improved marginally to 0.04% (H1 2006 0.05%). Impairment provisions asa % of impaired loans remain broadly in line with 2006 at 52% (end 2006 51%). Page 47 As at As at As at 30.06.2007 30.06.2006 31.12.2006Balance Sheet and Asset Quality Information Loans and advances to customers £9.7bn £7.8bn £8.3bn Impairment provisions on advances £25m £19m £20m Impairment provisions as a % of closing advances 0.26% 0.24% 0.24% Classification of advances*: % % % Hotels, restaurants and wholesale and retail trade 2 3 1 Financial 1 1 Other services 1 Individuals: Home mortgages 6 7 7 Overseas residents: Manufacturing industry 3 1 Construction and property 7 5 6 Hotels, restaurants and wholesale and retail trade 2 2 1 Transport, storage and communication 1 1 1 Financial 3 3 3 Other services 16 16 16 Individuals: Home mortgages 60 62 62 100 100 100 Impaired loans £48m £35m £39m Impaired loans as a % of closing advances 0.49% 0.45% 0.47% Impairment provisions as a % of impaired loans 52% 54% 51% Risk weighted assets £7.2bn £6.7bn £5.9bn Customer deposits £0.2bn £0.2bn £0.2bn * Before impairment provisions. Operational Performance Lending and Deposit Growth ENA experienced robust growth levels in the first half of 2007, with anannualised increase in lending of 34% to £9.7bn (end 2006 £8.3bn). Thisreflects strong annualised growth of 76% in Corporate and 17% in Retail. The particularly strong growth experienced in Corporate USA enhances the spreadof the portfolio both geographically and by business, with 34% of lending inCorporate and 66% in Retail. In Retail, our lending portfolio is almost whollyin the form of residential mortgages while Corporate continues to benefit from adiverse portfolio spread across a range of specialist sectors (e.g. Oil & Gas,Gaming, Real Estate). Page 48 As at As at As at Advances 30.06.2007 30.06.2006 31.12.2006 £bn £bn £bn Corporate 3.3 2.4 2.4 Retail 6.4 5.4 5.9 9.7 7.8 8.3 Corporate Our Corporate USA business, based in eight major economic centres across theUSA, has delivered strong lending growth and profits despite the impact of aweakening US dollar. Lending grew by an annualised 76% to £3.3bn (end 2006£2.4bn), reflecting the momentum generated in our mainstream corporate businessfollowing the disposal of our investment in Drive Financial Services in December2006. The US business has continued to focus on its chosen specialist sectors,while expanding the regional banking partnership initiative which identifies USregional banks with whom we can partner in commercial lending opportunities. InJuly we opened a new corporate office in Miami and have plans to open a furtheroffice before the end of the year. Retail BoSNL, our market leading online mortgage sales business, saw lending grow by anannualised 21% to £5.2bn (end 2006 £4.7bn). The expansion of our intermediarydistribution channels has contributed significantly to this growth. In Spain, ina difficult market, BHH has grown its lending by an annualised 14%, as wecontinue our strategy of rolling out retail branches in key UK and Irishexpatriate destinations across Spain. European Financial Services Our European investment business has performed well despite the continuing slowmarket conditions in our core German market which is undergoing significantlegislative change. While sales levels in the German investment market are down15% compared with the same period last year, our sales have risen by 5% to £41m(H1 2006 £39m). In addition, we continue to enter into new distributionagreements and this, coupled with ongoing product innovation, leaves EFS wellplaced to take advantage of an improvement in market conditions. Funds undermanagement increased by an annualised 8% to £10.0bn (end 2006 £9.6bn). Investment Sales* Half year Half year Half year Half year Half year Half year Half year Half year ended ended ended ended ended ended ended ended 30.06.2007 30.06.2007 30.06.2007 30.06.2007 30.06.2006 30.06.2006 30.06.2006 30.06.2006Total Single Annual Total Total APE Single Annual Total APE £m £m £m £m £m £m £m £m Life: 81 28 109 36 79 25 104 33 With profits 13 5 18 6 33 5 38 9 Unit Linked 68 21 89 28 46 13 59 18 Protection 2 2 2 7 7 6 Individual Pensions 5 5 5 6 6 6Total 81 33 114 41 79 31 110 39 * APE is calculated as annual premiums plus 10% of singlepremiums. Page 49 Profit increased by 44% to £56m (H1 2006 £39m), driven by the value of newbusiness and profits emerging from the in-force business, particularly that ofHeidelberger Leben. The vast majority of investment business in EFS isaccounted for on an EV basis under IFRS. The table below analyses the EV profitcontribution of EFS. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Contribution from existing business: Expected contribution 25 21 23 44 Actual vs expected experience 12 6 13 19 37 27 36 63Contribution from new business 16 10 26 36Investment earnings on net assets using long term 3 2 1 3assumptionsUnderlying profit before tax 56 39 63 102 New business profitability, as measured on the embedded value basis under IFRSwas 39% (H2 2006 41%, H1 2006 26%). Prospects We continue to pursue our strategy of targeted organic growth while exploringopportunities to develop new markets. Moving forward, our plans includeexpanding the depth of our presence in current markets by increasingdistribution channels through the development of new products, new relationshipsand extending our physical presence. Our newly established business based inToronto will initially focus on specialist corporate sectors such as corporatefinance, real estate, infrastructure and natural resources and with a pipelineof business already in place, we are optimistic about our growth prospects. We operate in established, affluent and accessible markets which are forecast tomaintain robust growth and which suit HBOS products and risk appetite. Thecontinued attractiveness of the economic, political and fiscal conditions in ourmarkets will play a major role in the pace of our expansion, as will our abilityto continue to attract high quality, talented colleagues. With our current lowmarket penetrations the scale of the opportunity is substantial. Page 50 TREASURY & ASSET MANAGEMENT Underlying profit before tax increased by 24% to £194m (H1 2006 £156m)reflecting strong revenue growth, offset in part by our investment in thedevelopment of new product capabilities and distribution. Asset quality remainshigh and no credit provisions were required in the period. Financial Performance Income Statement Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Net interest income 93 105 100 205Underlying non-interest income 267 186 229 415 Net trading income 105 106 143 249 Fees and commission income 128 90 96 186 Fees and commission expense (21) (23) (20) (43) Other operating income 55 13 9 22 Share of profits of associates and jointly 1 1 controlled entities Underlying net operating income 360 291 329 620Underlying operating expenses (170) (135) (157) (292) Staff (99) (77) (94) (171) Accommodation, repairs and maintenance (1) (1) (1) Technology (5) (5) (5) (10) Marketing and communication (2) (3) (3) (6) Depreciation: Property and equipment and intangible assets (2) (2) (2) (4) Other (40) (37) (41) (78) Subtotal (149) (124) (146) (270) Recharges: Technology (3) (3) (3) (6) Accommodation (7) (7) (7) (14) Other shared services (11) (1) (1) (2)Underlying operating profit 190 156 172 328 Non-operating income 4 22 22 Underlying profit before tax 194 156 194 350 Net interest margin (bps)* 5 7 6 7 Cost:income ratio 47.2% 46.4% 47.7% 47.1%Insight's funds under management £102.1bn £88.7bn £98.6bn £98.6bn of which, overlay funds under management £8.1bn £5.0bn £5.0bnInvista's funds under management £10.2bn £7.9bn £9.2bn £9.2bnRisk weighted assets £15.4bn £14.5bn £15.0bn £15.0bn * Net interest margin has been calculated as net interest income dividedby average interest earning assets excluding securities classified as tradingassets but including lending to other members of the group. Operating Income and Margins Underlying net operating income increased by 24% to £360m (H1 2006 £291m). Netinterest income decreased by 11% to £93m (H1 2006 £105m), £24m of this reductionbeing due to the use of non-interest bearing investments, where the return isreported through non-interest income rather than net interest income. Underlying non-interest income increased by 44% to £267m (H1 2006 £186m). Thisstrong growth includes the income from the non-interest bearing investmentsreferred to above and the inclusion of the Payment & International Servicesbusiness, previously reported in Corporate, from 1 January 2007, which accountsfor £11m of the increase. Page 51 Operating Expenses Underlying operating expenses increased by 26% to £170m (H1 2006 £135m). Theincrease reflects the ongoing development of the business and the operatingexpenses relating to the Payment & International Services business, whichaccounts for £10m of the increase. Asset Quality and Provision Within our Treasury operations, we maintain a cautious policy to avoidsub-investment grade investments, with 99% of our inter-bank and structuredinvestment portfolios rated A or above. During the period no credit provisionswere required. Non-operating Income Following a strategic review of the non-core Channel Islands business, Insightannounced in May 2007 the sale of its Guernsey based retail business (with£0.5bn of assets under management) to Syndicate Asset Management. Completiontook place at the end of June with a gain on sale of £4m. Operational Performance Funding Treasury continues to be active in supporting the Group's capital and fundingplans, arranging five capital issues on behalf of HBOS plc: two floating ratelower Tier 2 subordinated debt issues (€1,000m and US$1,000m); two fixed/floating rate subordinated debt issues (AUD$600m and CAD$500m); and a US$750mTier 1 perpetual preference share issue. Approximately £11.6bn of funds were raised from existing programmes during thefirst half of the year. This comprised approximately £3.2bn from covered bondsand approximately £8.4bn from securitisations. These transactions included thefirst securitisation of UK residential mortgages originated by BirminghamMidshires through the Pendeford programme and the continued development of thecovered bond market in the United States. HBOS also completed an unfundedsynthetic securitisation. Sales and Trading UK Sales performance was strong with revenues increasing by 38% to £90m (H1 2006£65m), primarily as a result of increased Corporate sales revenues, whichaccounts for £9m of the increase, and the inclusion of the Payment &International Services business. UK Trading revenues are in line with the firsthalf of 2006 at £90m (H1 2006 £91m), resulting from increased structuredtransaction business revenue being offset by widening of credit spreads. Insight The restructure of the UK Equity platform in the middle of last year is havingthe desired result, turning around the below benchmark performance of 2006 todeliver 2007 year to date performance well ahead of benchmark. Global Equityperformance continues to be very strong. With the exception of UK Fixed Income(which had previously experienced 3 years of solid out performance), our cashand fixed income funds delivered above benchmark performance for the first halfof the year. Our Absolute Return funds continue to perform well, ahead of theirbenchmark. Of the other asset classes, performance has generally been good;overall 13 out of the 18 asset classes that Insight manages are ahead ofbenchmark for the half year to June 2007. Insight saw gross inflows of £14.9bn (H1 2006 £10.7bn). Net inflows totalled£6.0bn (H1 2006 £7.4bn) with Institutional Fixed Income and Liability DrivenInvestment ('LDI') mandates again the driving force behind these strong salesfigures. Within the gross inflows, £3.1bn (H1 2006 nil) related to overlaymandates, where we are appointed to manage the risks of pension schemes'liabilities rather than the underlying portfolio of assets. Overall assetsunder management increased to £102.1bn (end 2006 £98.6bn) which incorporates atransfer out of £4.2bn as part of the agreed sale of Equitable Life funds. Insight achieved recognition as one of the market leaders in the Institutionalpension market by recently winning several prestigious industry awards. At theFinancial Times Business Pension and Investment Provider Awards 2007, Insightwas named UK Fixed Income Manager of the Year and LDI Manager of the Year. Atthe Global Pension Awards Insight was crowned LDI Manager of the Year. Page 52 Invista Invista's assets under management increased to £10.2bn (end 2006 £9.2bn).Invista now manages a total of 19 funds, 5 on behalf of the HBOS Group, investedacross the UK and Continental Europe in commercial and residential propertyassets. During the first half of 2007, Invista continued to deliver stronginvestment performance for its clients and saw strong fund flows into its rangeof open-ended client funds. Furthermore it was successfully awarded a mandate tomanage the newly launched St. James's Place Authorised Property Unit Trust inJanuary 2007, and a further mandate to manage £325m of residential property onbehalf of the Wellcome Trust. Invista successfully completed two balance sheet investments, using the proceedsraised at IPO. The first of which was the acquisition of a €348m portfolio ofFrench assets through a 50/50 JV with a long standing joint venture partner. Thesecond was the acquisition of a £127.5m UK residential portfolio with a jointventure partner. The residential portfolio has a long-term lease with theMinistry of Defence and a gross yield of around 6.7%. These acquisitions areconsistent with the strategy that the company set out to investors at the timeof IPO. Prospects Treasury's primary focus is to deliver a top quality service and performance toour other divisions and our clients, and we will continue to invest in ourcapabilities to do so. Access to customers, product innovation and strongstanding in the market underpins our confidence in continued profitable growthprospects. Our cautious approach to risk will, however, remain unaltered. Insight's leading position in the Fixed Income and LDI markets in the UKprovides the ideal platform to expand into Europe. Early signs are verypromising as we have already secured a number of mandates for Absolute Return,Fixed Income and Global Equity. With the continued strong performance ofInsight's Absolute Return funds, we plan to generate additional sales as pensionschemes increasingly look for alternative solutions to run their investmentportfolios. Invista has successfully built a platform for growth and is now well positionedto benefit from its presence in the UK and European commercial and residentialproperty markets. It has successfully begun its programme of balance sheetdeployment which will enable it to set up and launch new and innovative fundsfor its clients. Central to Invista's growth strategy are the areas of UKresidential and Europe, where there are plans to establish a physical presencewhich will begin with the opening of an office in Paris during 2007. Page 53 FINANCIAL REVIEW Group underlying profit before tax increased by 13% to £2,962m (H1 2006£2,612m). Underlying net operating income rose by 11% driven by strong growthin underlying non-interest income. Underlying operating expenses rose by 8% andimpairment losses by 11%. Basic earnings per share increased by 22% to 55.1p (H1 2006 45.3p). Underlyingearnings per share rose 16% to 54.6p (H1 2006 47.0p) and the interim dividendincreased by 23% to 16.6p. The interim dividend will be paid on 8 October 2007to ordinary shareholders on the register at the close of business on 10 August2007. The table below reconciles underlying profit before tax and profit beforetax. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Underlying profit before tax 2,962 2,612 2,925 5,537Adjusted for:Retail banking fee refunds (79)Impact of the 2008 change in corporation tax (18)rate on the value of leasing assetsProfit on sale of Drive 180 180 Mortgage endowment compensation (95) (95) Goodwill impairment (2) (55) (55)Policyholder tax payable 167 134 86 220Short term fluctuations (33) (92) 11 (81)Profit before tax 2,997 2,654 3,052 5,706 The publicity generated by the OFT market study into current account charges hasgenerated an industry wide increase in customer requests for refunds of currentaccount service fees. In the first half of 2007, such refunds, includingamounts agreed in principle but not yet paid, together with the associatedadministration costs, amounted to £79m, reported outside of our underlyingresults as they relate predominantly to fees charged in prior years. As a result of the 2007 Finance Act, the main UK corporation tax rate willreduce from 30% to 28% in April 2008. This change affects the incomerecognition of leases that contain tax variation clauses resulting in anestimated reduction in the underlying lease receivables at June 2007 of £18m(pre-tax). The change in tax rate also reduces the deferred tax net liabilitiesof the Group by £110m at June 2007. The net benefit to profit attributable toordinary shareholders of £97m has been excluded from the underlying results. The table below reconciles underlying profit attributable to ordinaryshareholders to profit attributable to ordinary shareholders. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Underlying profit attributable to ordinary 2,046 1,794 2,022 3,816shareholdersAdjusted for:Retail banking fee refunds (55)Impact of the 2008 change in corporation tax rate on: the value of leasing assets (13) deferred tax net liabilities 110Profit on sale of Drive 180 180 Mortgage endowment compensation (67) (67) Goodwill impairment (2) (55) (55)Short term fluctuations (23) (65) 8 (57)Profit of disposal group classified as held for sale 3 3attributable to ordinary shareholdersProfit attributable to ordinary shareholders 2,063 1,729 2,091 3,820 Page 54 Divisional financial performance can be summarised as follows: Half year ended 30 June 2007 Retail Corporate Insurance International Treasury Group Drive Half year Half year & & Items Investment Asset ended ended Mgmt 30.06.2007 30.06.2006 £m £m £m £m £m £m £m £m £m Underlying net interest income 2,087 992 (50) 504 93 3,626 3,647Underlying non-interest income 630 922 775 207 267 2,801 2,150Underlying net operating 2,717 1,914 725 711 360 6,427 5,797incomeUnderlying operating expenses (1,053) (436) (409) (334) (170) (161) (2,563) (2,369)Impairment losses on loans and (678) (235) (50) (963) (864)advancesUnderlying operating profit 986 1,243 316 327 190 (161) 2,901 2,564Non-operating income 57 4 61 48Underlying profit before tax 1,043 1,243 316 327 194 (161) 2,962 2,612 Half year ended 30 June 2006Underlying profit before tax 1,133 809 287 293 156 (111) 45 2,612Increase/(decrease) in (8)% 54% 10% 12% 24% (45)% 13%underlying profit before tax Taxation As a result of the 2007 Finance Act, the main UK corporation tax rate willreduce from 30% to 28% in April 2008. This has resulted in a reduction to thedeferred tax net liabilities of the Group of £110m at June 2007, which has beenexcluded from our underlying results. The tax charge for the period of £858m (H1 2006 £865m) includes £167m (H1 2006£134m) in respect of the tax charge levied on life companies for policyholdertax and a decrease of £110m in respect of the change in the main UK corporationtax rate. Excluding these items results in an effective rate of 28.3% (H1 200629.0%). The tax charge of £858m includes overseas tax of £80m (H1 2006 £82m). Post Tax Return on Mean Equity Group post tax return on mean equity ('ROE') increased to 21.0% (H1 2006 20.5%).This increase was driven by a 14% increase in the underlying post tax profitattributable to ordinary shareholders compared to just a 12% increase in meanequity, the latter benefiting from the cumulative impact of the share buybackprogramme. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Underlying profit attributable to 2,046 1,794 2,022 3,816 ordinary shareholders Mean Equity 19,665 17,611 19,059 18,375 % % % %Group post tax return on mean equity 21.0 20.5 21.0 20.8 Note: ROE is calculated by dividing underlying profit attributable toordinary shareholders by the monthly average of ordinary shareholders' funds. Page 55 Net Interest Income Underlying net interest income fell by 1% to £3,626m compared to thecorresponding period last year. On a like-for-like basis*, excluding the impactof the disposal of Drive, the acquisition of Lex and non-interest income bearingTreasury investments, underlying net interest income has grown by 4% to £3,682m(H1 2006 £3,531m). The Group net interest margin fell 3bps against H2 2006, 1 bp of which was dueto the impact of non-interest income bearing Treasury investments and theremainder reflecting the reduction in the Retail margin of 3bps and a fall inInternational of 8bps. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Interest receivable 15,561 12,187 14,555 26,742Interest payable (11,935) (8,540) (10,802) (19,342)Underlying net interest income (including Drive) 3,626 3,647 3,753 7,400 Drive (120) (134) (254) Underlying net interest income (excluding Drive) 3,626 3,527 3,619 7,146 Average balances Interest earning assets: - Loans and advances 383,723 366,556 379,216 372,938 - Securities and other liquid assets 50,589 43,457 42,037 42,741 434,312 410,013 421,253 415,679 Drive (1,164) (1,523) (1,345) 434,312 408,849 419,730 414,334 Group net interest margin (excluding Drive) 1.68% 1.74% 1.71% 1.72% Divisional net interest margins: Retail 1.73% 1.80% 1.76% 1.78% Corporate 2.12% 2.37% 2.13% 2.25% International 1.90% 1.97% 1.98% 1.97% Treasury & Asset Management 0.05% 0.07% 0.06% 0.07% * Net interest income on a like-for-like basis is calculated as follows: Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Net interest income (excluding Drive) 3,626 3,527 3,619 7,146 Lex 32 4 33 37 Non-interest bearing Treasury investments 24 Net interest income (like-for-like basis) 3,682 3,531 3,652 7,183 Page 56 Non-interest Income Underlying non-interest income increased by 30% to £2,801m (H1 2006 £2,150m).Net fees and commissions have increased by 9% where growth in Corporate, due tohigher underwriting fees, and in Treasury & Asset Management, have more thanoffset a fall in Retail in respect of lower Credit Card default fees. Profitson the sale of investment securities increased to £316m, mainly reflectingrealisations within the Corporate Fund Investment portfolio. Net operating leaseincome increased by 65% reflecting the full consolidation of Lex which became afully owned subsidiary on 31 May 2006. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Fees and commission income 1,193 1,116 1,059 2,175Fees and commission expense (539) (514) (498) (1,012)Net earned premiums on insurance contracts 3,051 2,976 2,672 5,648Net trading income 141 131 148 279Change in value of in-force long term assurance business 159 142 140 282Other operating income: Profit on sale of investment securities 316 92 215 307 Operating lease rental income 655 389 653 1,042 Net investment income related to insurance and 3,481 1,819 4,487 6,306investment business Other income 178 44 104 148Non-interest income 8,635 6,195 8,980 15,175 Impairment on investment securities (27) (59) (12) (71) Operating lease depreciation (500) (295) (517) (812)Change in investment contract liabilities (2,423) (927) (1,983) (2,910)Net claims incurred on insurance contracts (1,433) (1,263) (1,065) (2,328)Net change in insurance contract liabilities (1,388) (1,202) (2,692) (3,894)Change in unallocated surplus (169) (301) (268) (569) Share of profits of associates and jointly controlled 106 2 124 126entitiesUnderlying non-interest income 2,801 2,150 2,567 4,717 Underlying non-interest income analysed by division: Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Retail 630 682 670 1,352Corporate 922 348 705 1,053Insurance & Investment 775 747 747 1,494International 207 187 217 404Treasury & Asset Management 267 186 229 415Underlying non-interest income (excluding Drive) 2,801 2,150 2,568 4,718Drive (1) (1)Underlying non-interest income (including Drive) 2,801 2,150 2,567 4,717 Page 57 Operating Expenses Underlying operating expenses increased by 8% to £2,563m (H1 2006 £2,369m). Theincrease of £194m over last year includes planned investments in Internationaland Treasury & Asset Management, the implementation costs of our cost efficiencyprogramme and the full consolidation of Lex which became a wholly ownedsubsidiary on 31 May 2006. Staff costs increased by 10% against the corresponding period last year due inpart to increased performance based remuneration in Corporate and thecontinuation of our East Coast expansion in Australia. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Staff 1,404 1,271 1,403 2,674 Accommodation, repairs and maintenance 224 205 216 421Technology 134 115 123 238Marketing and communication 187 180 187 367Depreciation: Property and equipment and intangible assets 210 190 190 380Other 404 408 420 828Underlying operating expenses 2,563 2,369 2,539 4,908 Operating lease depreciation 500 295 517 812Change in investment contract liabilities 2,423 927 1,983 2,910 Net claims incurred on insurance contracts 1,433 1,263 1,065 2,328Net change in insurance contract liabilities 1,388 1,202 2,692 3,894 Change in unallocated surplus 169 301 268 569 Total 8,476 6,357 9,064 15,421 Underlying operating expenses analysed by division: Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Retail 1,053 1,052 1,075 2,127 Corporate 436 366 446 812Insurance & Investment 409 418 402 820International 334 265 308 573Treasury & Asset Management 170 135 157 292Group Items 161 111 130 241Underlying operating expenses (excluding Drive) 2,563 2,347 2,518 4,865 Drive 22 21 43Underlying operating expenses (including Drive) 2,563 2,369 2,539 4,908 Page 58 Cost:income Ratio In the first half of 2007, the Group cost:income ratio improved to 39.9% (H12006 41.3%, restated to exclude Drive). Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Underlying operating expenses 2,563 2,347 2,518 4,865 Underlying net interest income 3,626 3,527 3,619 7,146Underlying non-interest income 2,801 2,150 2,568 4,718Underlying net operating income 6,427 5,677 6,187 11,864 % % % % Group cost:income ratio 39.9 41.3 40.7 41.0 Divisional cost:income ratios are summarised below: Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 % % % % Retail 38.8 38.5 38.2 38.4Corporate 22.8 27.1 26.8 26.9International 47.0 44.1 45.0 44.6Treasury & Asset Management 47.2 46.4 47.7 47.1 Group Items Group Items principally comprise the expenses of managing the Group, includingtechnology so far as it is not devolved to divisions, accommodation and othershared services such as cheque clearing, mailing, etc. The costs of technology,accommodation and other shared services (other than those borne directly byGroup functions) are subsequently recharged to divisions according to theirusage and are shown under the operating expense analysis for each division.Group Items has increased by 45% compared to the corresponding period last yeardue in part to the implementation costs of the cost efficiency programme. Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Staff 160 135 156 291Accommodation, repairs and maintenance 183 167 178 345Technology 52 41 50 91Marketing and communication 35 33 34 67Depreciation: Property and equipment and intangible assets 99 97 95 192Other 116 94 106 200Sub total 645 567 619 1,186 Less Recharges: Technology (182) (180) (185) (365) Accommodation (189) (171) (194) (365) Other shared services (113) (105) (110) (215)Total 161 111 130 241 Page 59 Group Embedded Value Information (IFRS Basis) The sources of profit from all long term assurance business accounted for asinsurance contracts on an embedded value ('EV') basis under IFRS 4 are set outbelow. This table includes that part of our Repayment Insurance businessaccounted for on an EV basis but excludes investment contracts accounted forunder IAS 39. Half year ended Half year ended 30.06.2007 30.06.2006 UK UK UK General UK General Investment Europe Insurance Total Investment* Europe Insurance Total £m £m £m £m £m £m £m £m Expected contribution from existing 76 25 2 103 72 21 11 104businessActual vs expected experience on 34 12 24 70 17 6 23existing business 110 37 26 173 89 27 11 127Contribution from new business 142 16 4 162 105 10 14 129Investment earnings on net assets 54 3 5 62 59 2 3 64using long term assumptionsContribution from insurance 306 56 35 397 253 39 28 320contracts** Half year ended Half year ended 31.12.2006 31.12.2006 UK UK UK General UK General Investment Europe Insurance Total Investment* Europe Insurance Total £m £m £m £m £m £m £m £m Expected contribution from existing 63 23 (6) 80 135 44 5 184businessActual vs expected experience on (1) 13 33 45 16 19 33 68existing business 62 36 27 125 151 63 38 252Contribution from new business 111 26 11 148 216 36 25 277Investment earnings on net assets 54 1 3 58 113 3 6 122using long term assumptionsContribution from insurance 227 63 41 331 480 102 69 651contracts** * As explained on page 32, contribution from insurance contracts has beenrestated to allocate the other income and costs line item previously disclosedseparately. ** On an underlying basis The embedded value of long term assurance business accounted for under IFRS 4,which excludes investment contract business accounted for under IAS 39, is setout below. As at As at 30.06.2007 31.12.2006 UK UK UK General UK General Investment Europe Insurance Total Investment Europe Insurance Total £m £m £m £m £m £m £m £m Shareholder funds 2,322 92 2,414 2,315 69 52 2,436Value of in-force business (net of 1,624 441 193 2,258 1,544 419 162 2,125tax)Total embedded value (net of tax) 3,946 533 193 4,672 3,859 488 214 4,561 Shareholder funds as a % of total 59% 17% 52% 60% 14% 24% 53%EV Page 60 Half year ended 30.06.2007 UK UK General Investment Europe Insurance Total £m £m £m £m Opening embedded value 3,859 488 214 4,561 Contribution from insurance contracts 306 56 35 397Developments costs, associated overheads and financing costs (126) (126)Underlying embedded value profit before tax 180 56 35 271Short term investment fluctuations (39) 6 (33)Underlying tax charge (30) (17) (5) (52)Shareholder tax rate change 54 54Dividends paid (51) (51)Other capital movements (78) (78)Movement in embedded value in the period 87 45 (21) 111 Closing embedded value 3,946 533 193 4,672 The economic assumptions (gross of tax) used in the calculation of the embeddedvalues are unchanged from those used at the end of 2006. These are as follows: As at As at 30.06.2007 31.12.2006 % %Risk discount rate* 8.0 8.0Return on fixed income securities 5.0 - 5.5 5.0 - 5.5Return on equities 7.5 7.5Expense inflation rate 3.0 3.0 * Included in the risk discount rate is an investment risk component which ischosen so as to avoid capitalising any investment risk premiums over the longterm view of the risk free rate of return. Page 61 Balance Sheet Analysis Loans and advances to customers increased by an annualised 10% to £395.2bn (end2006 £376.8bn). The increase was 4% in Retail, 14% in Corporate and 34% inInternational on an annualised basis. Customer deposits increased by an annualised 14% to £227.1bn (end 2006 £211.9bn)and wholesale funding increased by 5% on an annualised basis to £219.0bn (end2006 £214.2bn). Retail Corporate International Treasury & Total Total Asset Mgmt 30.06.2007 31.12.2006 £bn £bn £bn £bn £bn £bn Loans and advances to customers 242.1 95.8 56.8 0.5 395.2 376.8Impairment provisions 2.1 0.7 0.3 3.1 3.1Loans and advances to customers 244.2 96.5 57.1 0.5 398.3 379.9(before provisions) Risk weighted assets 109.6 111.9 47.7 15.4 285.5* 276.0*Customer deposits 151.3 41.9 19.8 14.1 227.1 211.9 * Includes risk weighted assets of £0.9bn (end 2006 £0.8bn) attributable toInsurance & Investment. Classification of advances The mix of the Group's gross lending portfolio at the period end is summarisedin the following table: As at As at As at 30.06.2007 30.06.2006 31.12.2006 % % %Energy 1 1Manufacturing industry 2 2 2Construction and property 11 10 11Hotels, restaurants and wholesale and retail trade 3 3 3Transport, storage and communication 1 1 2Financial 2 3 2Other services 6 6 5Individuals: Residential Mortgages 61 63 61 Other personal lending 5 7 6Overseas residents 8 5 7Total 100 100 100 Page 62 Credit Quality & Provisions The total charge for loan impairment losses against Group profits was £963m (H12006 £864m) representing 0.25% of average advances (H1 2006 0.24%). Total £m At 1 January 2007 3,089Amounts written off during the period (926)New impairment provisions less releases 1,003Exchange movements 8Discount unwind on impaired advances (65) Closing balance at 30 June 2007 3,109 New impairment provisions less releases 1,003 Recoveries of amounts previously written off (40) Net charge to income statement 963 Impairment provisions as a % of closing advances are analysed in the followingtable: As at 30.06.2007 As at 30.06.2006 As at 31.12.2006 As % of As % of £m As % of closing closing closing £m advances £m advances advancesRetail 2,080 0.86 2,105 0.92 2,108 0.89Corporate 748 0.78 702 0.82 735 0.82International 281 0.49 217 0.51 246 0.51Drive 66 5.08Total impairment provisions 3,109 0.79 3,090 0.85 3,089 0.82 Impaired loans as a % of closing advances and impairment provisions as a % ofimpaired loans are analysed by division in the following table: Advances Impaired Impaired loans Impairment Impairment loans as % of closing provisions provisions as % advances of impaired loans £bn £m % £m %As at 30 June 2007Retail: Secured 224.4 4,183 1.86 340 8 Unsecured 17.7 2,277 12.86 1,740 76 Total 242.1 6,460 2.67 2,080 32Corporate 95.8 1,518 1.58 748 49International 56.8 662 1.17 281 42Treasury & Asset Management 0.5Total 395.2 8,640 2.19 3,109 36 As at 31 December 2006Retail: Secured 219.4 4,047 1.84 408 10 Unsecured 18.3 2,411 13.17 1,700 71 Total 237.7 6,458 2.72 2,108 33Corporate 89.6 1,163 1.30 735 63International 48.7 581 1.19 246 42Treasury & Asset Management 0.8Total 376.8 8,202 2.18 3,089 38 Page 63 Capital Structure Tier 1 and Total regulatory capital ratios remain strong at 8.0% (end 2006 8.1%)and 12.0% (end 2006 12.0%) respectively. This position has been achievednotwithstanding a share buyback of £394m (including costs) in the first half of2007. Risk weighted assets increased by an annualised 7% to £285.5bn (end 2006£276.0bn). The RWAs at 30 June 2007 are based on new prudential rules relatingto the consolidation of participations(1). Had the new rules been applied atDecember 2006 the RWAs would have been £5.0bn lower at £271.0bn and thereforethe actual annualised growth in RWAs over the first half of 2007 would have beenaround 11%. RWAs are quoted after capital relief achieved by securitisations.New securitisations during the six months to June 2007 have provided anadditional £7.5bn of capital relief and this has been offset by £3.5bn due tothe redemption of existing loan securitisations. In addition to retained earnings, Tier 1 capital was strengthened by £374m bythe issuance of non-innovative preference shares of US$750m in May 2007. Theseincreases were offset by £394m of ordinary shares bought back in the period.Tier 1 gearing at the half year was 26.0% (end 2006 25.0%) in line with ourbenchmark range of 25% +/- 2%. The change resulting from the new prudential rules on the consolidation ofparticipations(1) has reduced Tier 1 capital by a net £216m. Tier 2 capital was increased during the period by a dated subordinated debtissue of €1bn in March 2007, AUD$600m in May 2007, US$1bn in June 2007 andCAD$500m in June 2007. In sterling equivalent terms at 30 June 2007, this newissuance totalled £1,660m. Supervisory deductions mainly reflect investments in subsidiary undertakingsthat are not within the banking group for regulatory purposes together withdeductions relating to the securitisation of loans. These unconsolidatedinvestments are primarily Clerical Medical, St James's Place, St. Andrew'sGroup, Heidelberger Leben and the Group's investment in Crest Nicholson, ahousebuilder. Total supervisory deductions increased to £6,211m from £5,666m asa result of the investment in Crest Nicholson, increases in the embedded valueof life policies held and increased securitisations outlined above. (1) As part of Prudential Sourcebook for Banks, Building Societies andInvestment Firms (BIPRU), rules on the consolidation of participations have beenimplemented from 1 January 2007. The change principally requires 'proportional'consolidation of jointly controlled entities and associates and results in areduction of risk weighted assets and minority interests and goodwill balancesrelating to these participations. Page 64 Capital Structure As at As at As at 30.06.2007 30.06.2006 31.12.2006 £m £m £mRisk Weighted Assets Banking book - on balance sheet 260,369 246,982 253,839 Banking book - off balance sheet 16,102 13,218 14,272 Trading book 9,016 6,977 7,901 Total Risk Weighted Assets 285,487 267,177 276,012 Tier 1 Ordinary share capital 936 950 941Preference share capital 2,781 2,465 2,422Eligible reserves 18,981 17,307 18,496Minority interests (equity) 124 808 1,058Preferred securities 3,178 3,249 3,189Less: goodwill & other intangible assets (3,034) (3,119) (3,677)Total Tier 1 capital 22,966 21,660 22,429 Tier 2 Available for sale reserve 161 154 168Undated subordinated debt 5,562 5,911 5,598Dated subordinated debt 9,174 8,002 7,914Collectively assessed impairment provisions 2,485 2,502 2,711Total Tier 2 capital 17,382 16,569 16,391 Supervisory deductions: Unconsolidated investments - Life (4,444) (4,182) (4,260) Unconsolidated investments - Other (506) (561) (510) Investments in other banks and other deductions (1,261) (757) (896)Total supervisory deductions (6,211) (5,500) (5,666) Total regulatory capital 34,137 32,729 33,154 Tier 1 capital ratio (%) 8.0 8.1 8.1Total capital ratio (%) 12.0 12.2 12.0 Page 65 FINANCIAL INFORMATION (In accordance with the Listing Rules of the Financial Services Authority) Basis of Preparation The Group is adopting IFRS 7 'Financial Instruments: Disclosures' and the'Capital disclosure amendment' to IAS 1 'Presentation of financial statements'together with the following IFRICs for reporting purposes in its 2007 AnnualReport and Accounts. IFRIC 7 'Applying the Restatement Approach under IAS 29Financial Reporting in Hyperinflationary Economies', IFRIC 8 'Scope of IFRS 2Share-based Payment', IFRIC 9 'Reassessment of Embedded Derivatives' and 'IFRIC10 'Interim Financial Reporting and Impairment' and the standards above havebeen adopted by the European Union and are applicable to the Group for thefinancial year to 31 December 2007. As explained in the 2006 Annual Report and Accounts there is no financial impactfrom the implementation of these standards and interpretations by the Group andthey are primarily concerned with disclosure in the financial statements.Accordingly, there have been no significant changes to the accounting policiesas described in the 2006 Annual Report and Accounts. The financial informationhas been prepared on the basis of the accounting policies adopted in thefinancial statements for the year ended 31 December 2006. Section 240 Statement The comparative figures for the year ended 31 December 2006 do not constitutethe company's statutory accounts for that financial year within the meaning ofsection 240 of the Companies Act 1985 but are derived from the 2006 accounts.Those accounts, which were prepared in accordance with International FinancialReporting Standards as adopted by the European Union, have been reported on bythe company's auditors and their report was unqualified and does not containstatements under Section 237(2) or (3) of the Companies Act 1985. Page 66 Consolidated Income Statement Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Interest receivable 15,549 12,187 14,555 26,742Interest payable (11,935) (8,540) (10,802) (19,342)Net interest income 3,614 3,647 3,753 7,400Fees and commission income 1,193 1,116 1,059 2,175Fees and commission expense (539) (514) (498) (1,012)Net earned premiums on insurance contracts 3,051 2,976 2,672 5,648Net trading income 141 131 148 279Change in value of in-force long term assurance business 159 142 140 282Net investment income related to insurance and investment 3,615 1,861 4,584 6,445businessOther operating income 1,143 525 972 1,497Net operating income (Note 1) 12,377 9,884 12,830 22,714Change in investment contract liabilities (2,423) (927) (1,983) (2,910)Net claims incurred on insurance contracts (1,433) (1,263) (1,065) (2,328)Net change in insurance contract liabilities (1,388) (1,202) (2,692) (3,894)Change in unallocated surplus (169) (301) (268) (569)Administrative expenses (Note 2) (2,432) (2,179) (2,444) (4,623)Depreciation and amortisation: (710) (485) (707) (1,192) Intangible assets other than goodwill (94) (80) (81) (161) Property and equipment (116) (110) (109) (219) Operating lease assets (500) (295) (517) (812)Goodwill impairment (2) (55) (55)Operating expenses (8,557) (6,357) (9,214) (15,571)Impairment losses on loans and advances (963) (864) (878) (1,742)Impairment on investment securities (27) (59) (12) (71)Operating profit 2,830 2,604 2,726 5,330Share of profits of jointly controlled entities 97 (2) 114 112Share of profits of associated undertakings 9 4 10 14Non-operating income (Note 3) 61 48 202 250Profit before taxation 2,997 2,654 3,052 5,706Tax on profit (Note 4) (858) (865) (907) (1,772)Profit after taxation (continuing operations) 2,139 1,789 2,145 3,934Profit of disposal group classified as 4 5 5 held for saleProfit for the year 2,143 1,789 2,150 3,939 Attributable to:Parent company shareholders 2,114 1,759 2,120 3,879Minority interests 29 30 30 60 2,143 1,789 2,150 3,939 Basic earnings per share - continuing operations 55.1p 45.3p 55.2p 100.5pBasic earnings per share - disposal group 0.1p 0.1pBasic earnings per share - total 55.1p 45.3p 55.3p 100.6p Diluted earnings per share - continuing operations 54.6p 44.9p 54.5p 99.4pDiluted earnings per share - disposal group 0.1p 0.1pDiluted earnings per share - total 54.6p 44.9p 54.6p 99.5p Details of dividends are set out in Note 5. Page 67 Consolidated Balance Sheet As at As at As at 30.06.2007 30.06.2006 31.12.2006 £m £m £mAssetsCash and balances at central banks 1,780 1,653 1,966Items in course of collection 1,074 1,074 880Financial assets held for trading 58,250 42,187 49,139Disposal group assets held for sale 1,388Derivative assets 12,205 9,441 8,612Loans and advances to banks 9,001 16,656 11,593Loans and advances to customers 395,210 361,631 376,808Investment securities 120,864 113,271 117,031Interests in jointly controlled entities 652 133 420Interests in associated undertakings 141 181 181Goodwill and other intangible assets 2,739 2,736 2,689Property and equipment 1,506 1,492 1,573Investment properties 5,324 4,626 5,010Operating lease assets 4,707 4,826 4,681Deferred costs 899 632 853Value of in-force long term assurance business 3,267 2,994 3,104Other assets 5,396 5,705 3,887Prepayments and accrued income 1,075 1,195 1,214Total Assets 624,090 570,433 591,029 LiabilitiesDeposits by banks 37,530 33,805 30,557Customer accounts 227,117 208,137 211,857Financial liabilities held for trading 22,346 23,625 22,334Disposal group liabilities held for sale 909Derivative liabilities 15,061 10,064 10,755Notes in circulation 859 841 857Insurance contract liabilities 26,074 22,709 24,977Investment contract liabilities 53,441 48,100 49,486Unallocated surplus 1,712 1,275 1,543Net post retirement benefit liabilities 543 1,905 912Current and deferred tax liabilities 3,115 2,337 2,670Other liabilities 7,249 5,990 6,387Accruals and deferred income 2,782 2,622 3,071Other provisions 190 207 201Debt securities in issue 181,477 169,449 183,650Other borrowed funds 22,713 20,074 19,692Total Liabilities 602,209 551,140 569,858 Shareholders' EquityIssued share capital and share premium (Note 6) 4,059 3,903 3,995Other reserves 1,146 875 1,161Retained earnings 16,316 14,310 15,529Shareholders' Equity (excluding minority interests) 21,521 19,088 20,685Minority interests 360 205 486Shareholders' Equity 21,881 19,293 21,171 Total Liabilities and Shareholders' Equity 624,090 570,433 591,029 Page 68 Consolidated Statement of Recognised Income and Expense Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Net actuarial gains from defined benefit plans (net of 261 163 163tax)Foreign exchange translation 63 (98) 75 (23) Available for sale investments Net change in fair value (net of tax) 87 95 95 190 Net gains transferred to the income (129) (64) (107) (171) statement (net of tax) Cash flow hedges Effective portion of changes in fair value 74 (87) 296 209 taken to equity (net of tax) Net gains/(losses) transferred to the income (118) 203 (117) 86 statement (net of tax)Revaluation of existing net assets upon acquisition of (15) (15)jointly controlled entityNet income recognised directly in equity 238 49 390 439Profit for the year 2,143 1,789 2,150 3,939Total recognised income and expense 2,381 1,838 2,540 4,378 Attributable to:Parent company shareholders 2,352 1,808 2,510 4,318Minority interests 29 30 30 60 2,381 1,838 2,540 4,378 Page 69 Consolidated Cash Flow Statement Half year Half year Year ended ended ended 30.06.2007 30.06.2006 31.12.2006 £m £m £m Profit before taxation 2,997 2,654 5,706 Adjustments for:Impairment losses on loans and advances 963 864 1,742Depreciation and amortisation 710 485 1,192Goodwill impairment 2 55Interest on other borrowed funds 609 578 1,157Pension charge for defined benefit schemes 72 82 164Exchange differences 295 1,618 3,157Movements in derivatives held for trading 659 2,227 4,081Other non-cash items (741) (282) (902)Net change in operating assets (32,937) (26,790) (53,452)Net change in operating liabilities 26,158 28,385 44,743Net cash flows from operating activities before tax (1,213) 9,821 7,643Income taxes paid (449) (426) (991)Cash flows from operating activities (1,662) 9,395 6,652Cash flows from investing activities 186 (7,283) (10,319)Cash flows from financing activities 1,115 (799) (2,106)Net (decrease)/increase in cash and cash equivalents (361) 1,313 (5,773)Opening cash and cash equivalents 8,191 13,964 13,964Closing cash and cash equivalents 7,830 15,277 8,191 Analysis of Cash and Cash Equivalents Half year Half year Year ended ended ended 30.06.2007 30.06.2006 31.12.2006 £m £m £mCash and balances at central banks repayable on demand 457 598 663Loans and advances to banks repayable in less than 3 months 7,373 14,679 7,528Closing cash and cash equivalents 7,830 15,277 8,191 Page 70 Consolidated Cash Flow Statement (continued) Half year Half year Year ended ended ended 30.06.2007 30.06.2006 31.12.2006 £m £m £m Investing ActivitiesSale and maturity of investment securities 16,327 9,397 24,448Purchase of investment securities (15,751) (14,093) (31,260)Sale of other intangible assets 18 14 27Purchase of other intangible assets (142) (98) (194)Sale of property and equipment 108 62 60Purchase of property and equipment (158) (138) (280)Sale of investment properties 57 1 2Purchase of investment properties (6)Sale of operating lease assets 319 294 800Purchase of operating lease assets (881) (2,346) (1,804)Cash contribution to defined benefit pension schemes (75) (95) (860)Investment in subsidiary undertakings (228) (1,241)Disposal of subsidiary undertakings 479 87Investment in jointly controlled entities and associated (219) (97) (202)undertakingsDisposal of jointly controlled entities and associated undertakings 55 16 29Dividends received from jointly controlled entities 43 24 57Dividends received from associated undertakings 6 10 12Cash flows from investing activities 186 (7,283) (10,319) Financing ActivitiesIssue of shares 64 441 548Share capital buyback, including costs (394) (502) (982)Issue of other borrowed funds 3,944 867 1,571Repayments of other borrowed funds (530) (80) (777)Minority interest acquired 287Minority interest disposed (129) (30)Equity dividends paid (1,101) (960) (1,501)Dividends paid to minority shareholders in (25) (16) (22) subsidiary undertakingsInterest on other borrowed funds relating to servicing of finance (686) (541) (1,153)Movement in own shares (28) (8) (47)Cash flows from financing activities 1,115 (799) (2,106) Page 71 Notes to the Accounts Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m 1. Net operating income Net operating income includes: Dividend income on financial investments designated as: Available for sale 14 18 7 25 Loans and receivables 1 (1) Net realised gains on sale of financial instruments designated as: Available for sale 184 92 152 244 Loans and receivables 1 1 2. Administrative expenses Administrative expenses include: Retail banking fee refunds 79 Mortgage endowment compensation 95 95 79 95 95 Administrative expenses also include: Staff costs 1,404 1,271 1,403 2,674 Accommodation, repairs and maintenance 224 205 216 421 Technology 134 115 123 238 Marketing and communication 187 180 187 367 3. Non-operating income Profit on sale and leaseback of certain premises 28 22 22 Profit on the part disposal of Rightmove plc 29 17 17 Profit on the dilution of shareholding in Invista 22 22 Real Estate Investment Management Holdings plc Profit on the sale of Retail Financial Services 9 9 Limited Profit on the sale of Drive Financial Services LP 180 180 Profit on the sale of Insight Investment 4 Management (C.I.) Limited 61 48 202 250 Taxation 4. As a result of the 2007 Finance Act, the main UK corporation tax rate will reduce from 30% to 28% in April 2008. This has resulted in a reduction to deferred tax net liabilities of the Group of £110m at June 2007. The tax charge for the period of £858m (H1 2006 £865m) includes £167m (H1 2006 £134m) in respect of the tax charge levied on life companies for policyholder tax and a decrease of £110m in respect of the change in the corporation tax rate. Excluding these items results in an effective rate of 28.3% (H1 2006 29.0%). The tax charge of £858m includes overseas tax of £80m (H1 2006 £82m). A reconciliation of the actual tax charge to the expected tax charge at the standard rate of corporation tax of 30% is detailed below: Page 72 Half year Half year Half year Year ended ended ended ended 30.06.2007 30.06.2006 31.12.2006 31.12.2006 £m £m £m £m Expected tax charge at 30% 899 796 916 1,712 Expenses not deductible/(income not chargeable) (22) 17 (8) 9 for tax purposes Net effect of differing tax rates overseas (1) (6) 22 16 Book gains covered by capital losses/indexation (35) (13) (96) (109) Policyholder tax/differing tax rates for life 117 96 58 154 assurance business Impairment on investment securities 12 22 1 23 Adjustments in respect of previous periods (4) (48) 41 (7) Reduction in deferred tax from change in (110) UK tax rate Other 2 1 (27) (26) Total income tax on profit 858 865 907 1,772 5. Dividends After the balance sheet date an interim dividend of 16.6 pence per ordinary share issued was proposed by the Directors. This interim dividend has not been provided for but the estimated impact on retained earnings, based on the number of shares in issue at 30 June 2007, is £622m. At 30 June 2007 £51m (H1 2006 £30m) of preference dividends have been charged directly to retained earnings in respect of preference shares classified as equity (as shown in Note 6) along with £1,048m of ordinary dividends. 6. Preference shares Included in issued share capital and share premium is £1,267m of preference shares classified as equity as detailed below: As at As at As at 30.06.2007 30.06.2006 31.12.2006 £m £m £m 6.0884% preference shares issued May 2005 750 750 750 6.475% preference shares issued June 2005 198 198 198 6.3673% preference shares issued June 2006 350 350 350 1,298 1,298 1,298 Less: issue costs (31) (31) (31) 1,267 1,267 1,267 Page 73 7. Capital Funding During the period the Group has reduced its share capital and share premium by £394m through the share buy back programme. On 21 May 2007 HBOS issued 7,500 American Depository Receipts representing US$750m 6.657% Fixed-to-Floating Rate preference shares. These are non-innovative non-equity preference shares that are classified as Tier 1 securities. During the period HBOS has issued four tranches of subordinated debt; on 20 March 2007 €1bn Subordinated Callable Notes 2017, on 27 April 2007 AUD$600m subordinated notes, on 6 June 2007 US$1bn Subordinated Callable Notes 2017 and on 20 June 2007 CAD$500m Callable Fixed to Floating Rate Notes 2017. The Group has also issued debt securities and other funding instruments in support of its ongoing securitisation and funding programmes. 8. Contingent Liabilities On 27 July 2007 it was announced that the Company, along with seven other major UK current account providers, had reached agreement with the Office of Fair Trading to start legal proceedings in the High Court of England and Wales for a declaration (or declarations) to resolve legal uncertainties concerning the level, fairness and lawfulness of unauthorised overdraft charges (the "test case"). It was also announced that the Company and those other providers will seek a stay of all current and potential future Court proceedings which are brought against them in the UK concerning these charges and have obtained the consent of the Financial Services Ombudsman not to proceed with consideration of the merits of any complaints concerning these charges that are referred to him prior to the resolution of the test case. A definitive outcome of the test case is unlikely to be known for at least 12 months. Given the very early stage of these proceedings and the uncertainty as to their outcome, it is not practicable at this time to estimate any potential financial effect. Page 74 Independent review report to HBOS plc Introduction We have been instructed by the company to review the financial information forthe six months ended 30 June 2007 which comprises the financial information setout on pages 66 to 74. We have read the other information contained in theInterim Results 2007 Stock Exchange Announcement ("interim report") andconsidered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures should be consistentwith those applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4: Review of interim financial information issued by the Auditing PracticesBoard for use in the UK. A review consists principally of making enquiries ofgroup management and applying analytical procedures to the financial informationand underlying financial data and, based thereon, assessing whether theaccounting policies and presentation have been consistently applied unlessotherwise disclosed. A review excludes audit procedures such as tests ofcontrols and verification of assets, liabilities and transactions. It issubstantially less in scope than an audit performed in accordance withInternational Standards on Auditing (UK and Ireland) and therefore provides alower level of assurance than an audit. Accordingly, we do not express an auditopinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2007. KPMG Audit Plc Chartered Accountants Edinburgh 31 July 2007 Page 75 SUPPLEMENTARY EMBEDDED VALUE INFORMATION FOR THE UK INVESTMENT BUSINESS Introduction The introduction of IFRS in 2005 resulted in a change to the timing of reportedprofit recognition in respect of Investment Business. Under IFRS, insurancecontracts continue to be accounted for on an Embedded Value ('EV') basis butinvestment contracts are now all accounted for under IAS 39. This has theeffect of delaying the recognition of profit in respect of some investmentcontracts and, in particular, has resulted in the reporting of losses in theyear of their sale. To assist in the understanding of the underlying performance and valuegeneration of our UK Investment Business, the supplementary information set outbelow provides the financial results for our UK Investment Business as if bothinsurance and investment contracts (including mutual funds) were accounted foron an EV basis. We refer to this as the 'Full EV' basis. The Full EV basisuses the same methodology as that which is applied to the calculation of EV oninsurance contract business under IFRS. The economic assumptions used for theFull EV basis are the same as used under the reported IFRS basis set out on page61. Applying the Full EV basis results in the earlier recognition of profit on newinvestment contract business, but subsequently a lower contribution fromexisting business, when compared to the recognition of profits on investmentcontracts under IAS 39. Differences between actual and expected experience onexisting business often have a greater impact on a Full EV basis, as changes inexperience can result in significant adjustments to modelled future cashflows.In contrast, under IAS 39, variations in experience compared to expectations arerecognised in the income statement in the year in which they arise. No additional information has been provided in relation to General Insurance orEuropean Financial Services as the investment business not already accounted foron an EV basis under IFRS on these businesses is immaterial. Key Financial Highlights The key highlights of the Full EV basis are as follows: • Group embedded value on a Full EV basis was £7,407m as at 30June 2007 (end 2006 £7,086m), £2,735m higher than reported under IFRS. • Underlying earnings per share on the Full EV basis increased15% to 57.1p (H1 2006 49.6p), 2.5p (5%) higher than reported under IFRS. • Overall, underlying profit before tax for the UK InvestmentBusiness increased 27% to £345m (H1 2006 £272m), £136m higher than reportedunder IFRS. • Contribution from new business in the UK Investment Businessincreased by 25% to £273m (H1 2006 £219m), £255m higher than reported underIFRS. A comparison of the Group's financial results on a Full EV basis and the IFRSbasis is set out below. Half year ended Half year ended Half year ended Half year ended 30.06.2007 30.06.2007 30.06.2006 30.06.2006 Full EV Basis IFRS Basis Full EV Basis IFRS BasisUnderlying profit before tax £3,098m £2,962m £2,760m £2,612mUnderlying EPS 57.1p 54.6p 49.6p 47.0pPost tax return on mean equity 20.6% 21.0% 20.4% 20.5% As at As at As at As at 30.06.2007 30.06.2007 31.12.2006 31.12.2006 Full EV Basis IFRS Basis Full EV Basis IFRS BasisGroup embedded value (net of tax)* £7,407m £4,672m £7,086m £4,561mNet asset value 580p 541p 561p 516p * Includes Europe of £533m (end 2006 £488m) and UK General Insurance of£193m (end 2006 £214m). Page 76 UK Investment Business Full EV Information Underlying profit before tax for our UK Investment Business on the Full EV basiswas 27% higher in the first half of 2007 at £345m (H1 2006 £272m), primarily dueto a strong increase in the contribution from new business in 2007. The tablebelow analyses this result: Half year ended 30.06.2007 Half year ended 30.06.2006 Life & Life & Mutual Life & Life & Mutual Pensions Pensions Funds Pensions Pensions Funds Insurance Investment Investment Insurance Investment Investment Contracts Contracts Contracts Total Contracts Contracts Contracts Total £m £m £m £m £m £m £m £mContribution fromexisting businessExpected contribution 76 64 31 171 72 50 26 148Actual vs expected 34 (51) (14) (31) 17 (25) (26) (34)experience 110 13 17 140 89 25 114Contribution from new 142 71 60 273 105 60 60 225businessInvestment earnings on 54 4 58 59 3 62net assetsContribution from 306 88 77 471 253 88 60 401Investment BusinessDevelopment expenditure (38) (38) (39) (39)Overheads associated (24) (24) (26) (26)with developmentactivityDebt Financing cost (64) (64) (64) (64)Underlying profit 180* 88 77 345 124 88 60 272before tax * Development costs, overheads and financing costs have been attributed toLife & Pensions Insurance Contracts business for presentational purposes only. The contribution from new business under the Full EV basis increased by 21% inH1 2007 to £273m (H1 2006 £225m), reflecting strong growth in volumes andincreased margins. Increased sales of bonds through the Bancassurance channeland strong sales growth through Wealth Management were the primary drivers. The contribution from existing business increased by 23% to £140m (H1 2006£114m). The expected contribution improved by 16% to £171m (H1 2006 £148m)whilst negative Actual vs Expected experience was broadly stable. Thisreflected the positive impact of changes to non-unit reserving due to the FSAPolicy Statement PS06/14 offset by adverse persistency experience. Page 77 Reconciliation of IFRS to Full EV A reconciliation of underlying profit before tax on the Full EV basis with thereported IFRS basis is set out below. Half year ended 30.06.2007 Half year ended 30.06.2006 Life & Life & Mutual Life & Life & Mutual Pensions Pensions Funds Pensions Pensions Funds Insurance Investment Investment Insurance Investment Investment Contracts Contracts Contracts Total Contracts Contracts Contracts Total £m £m £m £m £m £m £m £m Underlying profit 180 34 (5) 209 124 23 (23) 124before tax (IFRSbasis)Additional 128 127 255 106 133 239contribution fromnew businessLower contribution (78) (45) (123) (44) (50) (94)from existingbusinessAdditional 4 4 3 3investment earningson net assets Increase in 54 82 136 65 83 148underlying profitbefore tax Underlying profit 180* 88 77 345 124 88 60 272before tax (Full EVbasis) * Development costs, overheads and financing costs have been attributed toLife & Pensions Insurance Contracts business for presentational purposes only. Moving to the Full EV basis results in earlier recognition of profits from salesof new investment contracts, offset in part by the subsequent recognition oflower profits on existing investment contracts. The Full EV basis, unlike theIFRS basis, recognises profits on new business at the point of sale with thecontribution from existing business consisting only of subsequent changes in thenet present value of future cashflows and changes in experience compared to thatinitially modelled at the point of sale. The contribution from new investment contracts under the Full EV basis was £255mhigher than under the reported IFRS result, the Full EV contribution being £131mcompared to a loss of £124m under the IFRS basis. Under the Full EV basis, the contribution from existing investment contracts inH1 2007 was £123m lower than under the IFRS basis, the Full EV basiscontribution being £30m compared to £153m under the IFRS basis. The lowercontribution from existing business under the Full EV basis includes £(65)m ofactual versus expected experience on investment contracts, which largelyreflects worse than expected persistency on Intermediary business. Improvingretention performance in the Intermediary channel is a key objective and aspecialised existing business team was formed in late 2006 for this purpose. New Business Profitability New business profitability is reported by reference to the Full EV basis. Newbusiness profitability by channel and product type on the Full EV basis is setout below. New business profitability for the UK Investment Business (including both Life &Pensions and Mutual Funds) calculated by reference to the Full EV basis is setout below. Half year ended 30.06.2007 Half year ended 30.06.2006 New Business New Business New Business New Business New Business New Business Contribution Profitability Contribution Profitability APE* APE* £m %APE £m %APE £m £mBancassurance 524 177 34 455 152 33Intermediary 238 24 10 271 24 9Wealth Management 188 72 38 139 49 35Total 950 273 29 865 225 26 Life & Pensions 731 213 29 609 165 27Mutual Funds 219 60 27 256 60 23Total 950 273 29 865 225 26 * Excluding business (£54m APE in 2007, £39m in 2006) distributed but notmanufactured by the Group. Page 78 New business profitability increased to 29% (H1 2006 26%). Bancassurancemargins remain strong, reflecting the efficiency of our model and theproductivity of our sales forces. In Wealth Management, at the same time thatwe have delivered a significant increase in business volumes, profitability hasincreased to 38%, reflecting reductions in unit costs (particularly on pensionsbusiness). The rise in Intermediary margins to 10% reflects our increasingfocus on profitable products and segments in this channel. Overall Life & Pensions margins increased to 29% (H1 2006 26%) due to strongsales of bonds through the Bancassurance channel and improvements in margins onpensions business, particularly through our Wealth Management channel. Theincrease in Mutual Funds profitability largely reflects efficiencies from largercase sizes and changes in the mix of funds. Balance Sheet Information The total net of tax embedded value of UK Investment Business on the Full EVbasis is as follows: As at 30.06.2007 As at 31.12.2006 Life & Life & Mutual Life & Life & Mutual Pensions Pensions Funds Pensions Pensions Funds Insurance Investment Investment Insurance Investment Investment Contracts Contracts Contracts Total Contracts Contracts Contracts Total £m £m £m £m £m £m £m £m Shareholder funds 2,322 456 246 3,024 2,315 469 230 3,014Value of in-force business 1,624 1,389 44 3,657 1,544 1,249 577 3,370(net of tax)Total embedded value (net of 3,946 1,845 890 6,681 3,859 1,718 807 6,384tax)* * Total embedded value excludes subordinated debt liabilities for the UKInvestment Business of £992m (end 2006 £987m). The table below analyses the movement in embedded value of our UK InvestmentBusiness on the Full EV basis: Half year ended 30.06.2007 Life & Life & Mutual Pensions Pensions Funds Insurance Investment Investment Contracts Contracts Contracts Total £m £m £m £m Opening embedded value 3,859 1,718 807 6,384 Contribution from Investment business 306 88 77 471 Development costs, associated overheads and financing (126) (126)costs * Underlying profit before tax 180 88 77 345 Short term investment fluctuations (39) 34 17 12 Underlying tax charge (30) (40) (31) (101) Shareholder tax rate change 54 44 15 113 Dividends paid (39) (39) Other capital movements (78) 40 5 (33)Movement in embedded value 87 127 83 297Closing embedded value 3,946 1,845 890 6,681 * Development costs, overheads and financing costs have been attributed toLife & Pensions Insurance Contracts business for presentational purposes only. Page 79 DIVIDEND REINVESTMENT PLAN Shareholders who have already completed a Mandate Form to receive theirentitlement to dividends in ordinary shares need take no action as they willautomatically receive ordinary shares in respect of the interim dividend of16.6p per ordinary share for the year ending 31 December 2007. Shareholders whohave not already completed a Mandate Form and also wish to participate in theDividend Reinvestment Plan ('DRIP') in respect of the interim dividend arerequired to complete and return a Mandate Form to our Plan Administrator -Computershare Investor Services PLC, PO Box 1909, The Pavilions, BridgwaterRoad, Bristol BS99 7DS. A Mandate Form and a copy of the Terms and Conditionsof the HBOS plc Dividend Reinvestment Plan can be obtained from our PlanAdministrator on 0870 702 0102 or downloaded from the HBOS plc website. EXPECTED TIMETABLE 1 August 2007 2007 Interim Results Announcement 8 August 2007 Ordinary shares quoted ex-dividend 8 August 2007 6.475% preference shares quoted ex-dividend 10 August 2007 Ordinary shares record date for the interim dividend 2007 10 August 2007 6.475% preference shares record date 10 September 2007 Return date for mandates for the DRIP for the interim dividend 2007 17 September 2007 6.475% preference shares dividend payment 8 October 2007 Ordinary shares interim dividend payment 10 October 2007 6.0884% preference shares quoted ex-dividend 12 October 2007 6.0884% preference shares record date 26 October 2007 Last date by which CREST entitlement statements and new ordinary share certificates will be posted and shareholder accounts credited in respect of the DRIP purchases for interim ordinary dividend 2007 31 October 2007 9.25% & 9.75% preference shares quoted ex-dividend 2 November 2007 9.25% & 9.75% preference shares record date 13 November 2007 6.0884% preference shares dividend payment 30 November 2007 9.25% & 9.75% preference shares dividend payment 27 February 2008 2007 Preliminary Results Announcement Page 80 CONTACTS Investor Relations Charles Wycks Director of Investor Relations (0131) 243 5509 (020) 7905 9600 charleswycks@hbosplc.com John Hope Director, Investor Relations (0131) 243 5508 (020) 7905 9600 johnhope@hbosplc.com Press Office Shane O'Riordain General Manager, Group Communications (020) 7905 9600 07770 544585 (mobile) shaneo'riordain@hbosplc.com Page 81 This information is provided by RNS The company news service from the London Stock Exchange
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Halifax 9.375bd Information
Share Price Information for Halifax 9.375bd (HALP)
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Share Price:
145.00
Bid:
140.00
Ask:
150.00
Change:
0.00 (0.00%)
Spread:
10.00 (7.143%)
Open:
145.00
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145.00
Low:
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