Sant Uk.10te% Regulatory News (SAN)

25 Oct 2005 07:30

Abbey National PLC25 October 2005 Third quarter trading statement London, 25 October 2005 This statement provides a summary of the business and financial trends for thethree months to 30 September 2005. Unless otherwise stated, the trends refer tothe Personal Financial Services ("PFS") businesses within the Abbey group, andare relative to an average of the first two quarters of 2005 (i.e. the firsthalf 2005 run-rate). The third quarter results of Santander are also released today, and Abbey'sthird quarter performance is included within their financial statements. Highlights Third quarter highlights include: • PFS trading profit before tax well ahead of the first half run-rate, driven by revenue improvements and further cost reductions; • an increase in provisions, but with underlying credit quality remaining strong; • a 38% increase in gross mortgage lending and 26% increase in unsecured lending; and • deposit inflows of £0.8 billion. Comment "We've continued to make good progress in the third quarter. We've doneeverything we said we would and, in some areas, a lot more. However, we stillhave a long way to go before we reach the sales and efficiency targets we setout at the time of the acquisition. Today's update clearly shows we're on track, with revenues beginning to move inthe right direction. We've made good progress in improving our salesproductivity against the measures we set out at our results in February. Sincethen we've increased the number of people holding sales authorisations in thebranches by over 20% and we're introducing more rigorous performance managementacross all channels. Our market share of new business in mortgages, savings andunsecured personal loans all improved in the third quarter. We have great ambitions for the business. We will grow in our core mortgage andsavings markets and attack in areas where we have significant opportunities suchas current accounts, personal loans and small business banking. We want Abbey to be the best retail bank on the high street. Our people haveclear targets and are enthusiastic about our plans. We have a great brand name,competitive products and an experienced management team. Turning Abbey aroundwill take three years but we have made an excellent start." Francisco Gomez-Roldan, CEO Abbey Strategic Update Abbey's plans for the next 3 years are in place, and we have a clear vision tobe the best retail bank in the UK, in terms of service and efficiency. As we laid out earlier this year, our immediate priorities are to: • improve sales productivity through 2005, with stronger revenue growth targeted from 2006 onwards; • deliver efficiency improvements, with around £200 million of cost savings now expected in 2005, compared to the original target of £100 million; and • continue to focus on risk management and compliance. Over the next three years we will transform Abbey from its historical focus onmortgages and savings, to a full retail bank offering. Abbey will become apowerful competitor across the market, and we expect to be able to deliverstrong revenue and profit growth over this period. There are 2 components to Abbey's strategic plan: • moving to a new operating model; and • delivering revenue growth in both existing and new markets. New operating model The new model will significantly improve the efficiency of back-office andmanufacturing operations, change the mix of front / back office staff andimprove front-line sales capability. In the short-term one of our priorities has been cost reduction activity, and atleast 4,000 jobs will have been taken out of the business by the year-end. Abbeywill continue to review headcount against the needs of the business and ourfuture plans, with further job cuts expected, though not of the magnitudeexperienced in 2005. This is in line with Santander's model of continuousefficiency and improvements through leading edge technology. This will becomebusiness-as-usual across Abbey. At the same time, we are improving our sales capability, and are targetingsignificant growth across all channels in 2006. Our current level of sales productivity ranges from 15 - 35% below the averageof our peers, and is significantly lower than the best in the market. We haveintroduced a basic focus on sales management across all channels - looking toincrease and optimise capacity, and manage performance more rigorously. In the medium-term, the implementation of Partenon will further lower themarginal cost of new business - reducing manufacturing and IT costs as apercentage of the total cost base, and allowing greater investment in customerfacing activities. Partenon will not only provide efficiency benefits, but will also improve thespeed to market with new products, and provide better sales tools and processes,including a single view of our relationship with the customer. A detailedimplementation plan is now in place for Partenon. There will be a phased rolloutthrough 2006 and 2007 - with 2008 the first year in which a full benefit will berealised. Revenue growth from new and existing markets In Abbey's core markets of mortgage and savings, we are reversing the trends inrevenues through more aggressive balance sheet growth in a more stable marginenvironment. In both mortgages and savings we are targeting new business levelsabove our current stock share from 2006 - to maintain and then grow ourpositions in these markets. In mortgages, plans to enter higher margin segmentsare in place with progress expected through 2006 and 2007. These segments are alarge and growing part of the market that Abbey has not previously competed in. The bank will grow aggressively in areas where it is under-represented such ascurrent accounts, unsecured loans, investments and pensions. In addition, itwill seek to develop opportunities in consumer finance and business banking.Abbey is a natural competitor to the big four clearing banks and it will attackin the areas where it is has significant opportunities to grow and take marketshare. In some of these initiatives, Abbey can use the strength of Santander. As anexample, in the consumer finance market Abbey entered into a joint venture inAugust to develop the motor finance business in the UK - drawing uponSantander's expertise and product range in this area. Financial targets Abbey is on track to meet the revenue and cost targets set at the time ofacquisition: • revenue synergies of £150 million by 2007; and • cost synergies of £300 million by 2007, with cost savings accelerated in 2005 to around £200 million. It is expected that the £300 million of cost savings will be achieved before thefull impact of Partenon. Therefore, we expect further efficiency benefits in2008, that will provide further scope for increased investment in front officeoperations. In addition, Abbey has today announced further financial targets for 2006 -2008: • revenue growth of 5 - 10% per annum over the next 3 years; • a cost: income ratio of around 45% by 2008; and • a return on equity of c.18% by 2008. These are ambitious, but realistic targets in a competitive and slowing marketenvironment. The confidence in the targets reflects the strength of the Abbeyfranchise - and the potential to improve performance and move into new markets.This is underpinned by the implementation of Partenon, and ability to leveragethe strength of the group. Results Abbey statutory profit before tax was broadly in line with the first halfrun-rate, with PFS trading profit before tax well ahead. On both basis' thethird quarter result exceeded both those of the first and second quarters of2005. PFS trading income: Net interest income for the third quarter was modestly higher than thecomparative period. In the Retail Bank, asset growth, a favourable asset mix,and a stable Banking and Savings spread, has been the main driver of the growth.In addition, there has been a higher contribution from the unsecured personallending business following stronger sales in the third quarter. Non-interest income was broadly in line with the first half run-rate. Net feesand commissions in the Retail Bank were stronger, driven by higher mortgage,banking and unsecured personal loan fees. This has been largely offset by someseasonal weakness in Abbey Financial Markets. In total, trading income was slightly higher than the comparative period, andconsistent with our stated goal of stabilising revenues during 2005. PFS expenses: In the third quarter, trading expenses (excluding reorganisation expenses) wereslightly below the first half run-rate, benefiting from continued cost reductionactivities throughout the business. We are ahead of expectations in terms of cost reduction, and have today raisedthe expected cost saving for 2005 from £150 million to around £200 million. Theoriginal target at time of acquisition was for £100 million of savings in thefirst year. Reorganisation expenses were higher in the third quarter compared to the averageof the first half. PFS provisions: Provisions for loan losses have increased relative to the first half run-rate.Mortgage credit quality remains strong, though the market conditions arebecoming tougher, resulting in slightly higher provisions relative to the firsthalf run-rate. Properties in possession have increased by 23% to 431 since June2005, and 3 month plus arrears now represent 0.68% of the book compared to 0.66%in June, but still well below the industry average. The average LTV on newbusiness was 60.7% compared to 60.6% in June 2005. The growth in provisions ispartly the result of the increased consumer indebtedness and growth in theunsecured lending book (both Abbey-branded and cahoot). However, unsecuredlending remains a small part of our lending portfolio - circa 3% of the totallending book. Portfolio Business Unit: The assets of the Portfolio Business Unit have been reduced by a further 3% to£3.2 billion, with the remainder largely comprising the Porterbrook trainleasing business. Profit before tax for the third quarter was lower than thecomparative period, largely due to one-off disposal gains not repeated. Business flows Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 2004 2004 2004 2004 2005 2005 2005 Gross mortgage lending (£ bn) 6.7 6.3 6.4 5.6 5.0 6.7 8.1Capital repayments (£ bn) 4.6 5.2 6.0 6.1 5.6 6.0 6.6Net mortgage lending (£ bn) 2.1 1.1 0.4 (0.5) (0.6) 0.7 1.5Stock (£ bn) 90.0 91.0 91.4 90.9 90.3 91.0 92.5Market share - gross lending 9.9% 8.2% 8.0% 8.4% 8.8% 9.6% 10.0%Market share - net lending 8.8% 3.8% 1.3% (2.3)% (3.5%) 3.0% 5.9%Market share - stock 11.3% 11.0% 10.7% 10.4% 10.1% 9.9% 9.8%Total net deposit flows (£ bn) (1.0) 0.1 1.2 1.0 0.3 1.0 0.8Bank account openings (000s) 95 89 101 93 95 96 101Gross UPL lending (£ m) 677 431 456 575 504 467 614Credit card openings (000s) 41 48 60 50 62 66 56Investment sales - APE (£ m) 26 32 28 33 26 50 40Protection sales - APE (£ m) 31 25 22 19 19 21 21General Insurance sales (000s) 92 92 95 83 77 80 77 Main highlights include: • mortgage gross lending in the third quarter totalled £8.1 billion, representing a 21% increase compared to the second quarter, and an estimated market share of 10.0%. Capital repayments at £6.6 billion remained high, though consistent with our expectations. This resulted in net mortgage lending of £1.5 billion, representing an estimated 5.9% market share; • the savings performance has remained strong, with £0.8 billion of net deposit inflows in the quarter. Abbey branch based acquisition accounts continued to make a significant contribution; • unsecured personal loan volumes were up 31% relative to the second quarter; and • across the remaining product lines, volumes were stable. Disclaimer Abbey National plc ("Abbey") is a wholly owned subsidiary of Banco SantanderCentral Hispano, S.A. (Santander) (SAN.MC, STD.N). Santander is the 9th largestbank in the world by market capitalization and the largest in the Euro Zone.Founded in 1857, Santander has 63 million customers, 9,970 offices and apresence in over 40 countries. It is the largest financial group in Spain andLatin America, and is a major player elsewhere in Europe, including the UnitedKingdom through Abbey and Portugal, where it is the third largest banking group.Through Santander Consumer it also operates a leading consumer finance franchisein Germany, Italy, Spain and nine other European countries. Banco Santander Central Hispano, S.A. obtained a secondary listing of itsordinary shares on the London Stock Exchange on 1 July 2005 and Abbey has itspreference shares listed on the London Stock Exchange. Nothing in this pressrelease constitutes or should be construed as constituting a profit forecast. Abbey and Banco Santander Central Hispano, S.A cautions that this presentationcontains forward looking statements within the meaning of the US PrivateSecurities Litigation Reform Act of 1995. These forward looking statements arefound in various places throughout this presentation and include, withoutlimitation, statements concerning our future business development and economicperformance. While these forward looking statements represent our judgment andfuture expectations concerning the development of our business, a number ofrisks, uncertainties and other important factors could cause actual developmentsand results to differ materially from our expectations. These factors include,but are not limited to: (1) general market, macro-economic, governmental andregulatory trends; (2) movements in local and international securities markets,currency exchange rates, and interest rates; (3) competitive pressures; (4)technological developments; and (5) changes in the financial position or creditworthiness of our customers, obligors and counterparties. The risk factors andother key factors that we have indicated in our past and future filings andreports, including those with the Securities and Exchange Commission of theUnited States of America, could adversely affect our business and financialperformance. The contents of this release are directed only at persons who: (i) haveprofessional experience in matters relating to investments and fall withinArticle 19(1) of the Financial Services and Markets Act 2000 (FinancialPromotion) Order 2005; or (ii) are persons falling within Article 49 (2) of suchorder or to whom this release may otherwise be lawfully communicated. Thecontents of this presentation should not be relied upon by any other persons. Note: Statements as to historical performance, historical share price orfinancial accretion are not intended to mean that future performance, futureshare price or future earnings (including earnings per share) for any periodwill necessarily match or exceed those of any prior year. Nothing in thispresentation should be construed as a profit forecast. Contacts Thomas Coops (Communications Director) 020 7756 5536Israel Santos (Investor Relations) 020 7756 4181Matthew Young (Media Relations) 020 7756 4232 For more information contact: investor@abbey.com. This information is provided by RNS The company news service from the London Stock Exchange