Sant Uk.10te% Regulatory News (SAN)

25 Feb 2005 07:30

Abbey National PLC25 February 2005 Abbey returns to profit despite £564 million of restructuring charges Key highlights: • statutory profit before tax of £273 million (2003: a loss of £(686) million), and a profit attributable to ordinary shareholders of £32 million (2003: a loss of £(759) million); • trading profit before tax (1) for Personal Financial Services (PFS) of £814 million (statutory PFS profit before tax of £250 million compared with £235 million in 2003); • second half trading performance was affected by a further decline in PFS revenues reflecting the expected spread decline, negative life assurance experience variances and an element of business disruption; • trading cost growth below inflation, with a modest increase of 1% to £1,599 million; • credit quality remains excellent, with no significant signs of deterioration on either the secured or unsecured loan portfolios; • non-trading charges of £564 million include £321 million of re-organisation costs incurred through 2004, and a further £243 million of post-acquisition charges; • total customer loans of £94.3 billion, up 4% on last year; • the Portfolio Business Unit (PBU) assets have further reduced by 62% to £4.7 billion, now less than 10% of the original £60 billion, and a statutory profit reported for 2004; • a PFS trading cost: income ratio of 61.5% and return on equity of 12.1%; and • capital ratios remain strong, with an equity tier 1 ratio of 7.0% (1) A detailed definition of 'trading' is included in the glossary at the end ofthis document. The statutory financial statements are contained in Appendices 1to 4, including a profit and loss reconciliation between the 'trading' and 'statutory' definitions. London, 25 February 2005 "2004 marked the year that Abbey returned to profit. This business has hugepotential. We can now realise this using Santander's strength and placing astrong emphasis on execution." Francisco Gomez-Roldan Abbey's results are resilient given a year of change, and the impact of takeoveractivity on the business in the second half. Abbey has returned to profit,despite incurring significant charges and provisions - totalling £564 million. We have started to see signs of revenue stabilisation in recent quarters, butthe outlook on revenues for 2005 remains tough. Against this backdrop we willwork to improve sales productivity while at the same time reducing costs. Abbey's focus, like that of Grupo Santander, is retail banking - working hard atthe basics and aiming to improve sales and revenue performance across all oursales channels. At Board level, we are close to completing a top class team andare confident we will demonstrate good progress throughout 2005. Strategic Outline A new high-level management structure, headed by Chief Executive FranciscoGomez-Roldan, is in place and a new executive team is almost complete, with theexperience and energy to meet the goals for 2005 and beyond: • the new simpler management structure, announced in November 2004, combined IT and Customer Operations under a new division called Manufacturing; • Graeme Hardie, former Head of NatWest Retail Banking, has joined the Board as Sales & Marketing Director, a role combining the customer sales and customer propositions functions; and • recruitment is underway for a head of Insurance and Asset Management division. We have also announced today the alignment of the Abbey corporate identity withthe global identity used by Grupo Santander across 40 countries. The familiarAbbey brand name will continue to be used with Grupo Santander's flame symbol,showing that Abbey is now part of a powerful group. The focus on improving thecustomer experience remains. Priorities for 2005 • improving sales performance and productivity; • stabilising revenue trends in mortgages and savings, and positioning the PFS business for revenue growth in 2006; • significant cost base reductions; and • maintaining a strong focus on risk and compliance. Improving sales performance and productivity Key to unlocking the potential in the Abbey customer franchise is improvingsales performance and productivity across all sales channels - branch,telephone, electronic and intermediary. An immediate priority is to tackleunacceptable levels of employee turnover in Abbey's branches and telephone salessites. In addition, work is underway to: • increase the number and quality of customer-facing employees; • increase the number of dedicated sales staff by more than 30%; • introduce a new incentive scheme more closely linked to performance and quality; • introduce new minimum sales performance standards; • improve local management information, particularly in branches, to increase local accountability; • re-branding and refurbishment of branches from May; and • ensure that all call centres can advise and sell across a wider range of PFS products - with a seamless link with the branches to assist in terms of retention. The intermediary channel remains an important part of Abbey's plans fordelivering growth, with the priority on improving service levels, particularlyfor our main IFA relationships, including enhancing our online capability andtailoring products exclusively for the IFA channel. Revenues In 2005, the aim is to stabilise mortgage and savings income. In the future,Abbey will compete more effectively in its core markets, and in 2005, we'retargeting a significant increase in mortgage sales through all channels. Inaddition, over the next 18 months, we will continue to develop higher marginproducts such as large loans, buy-to-let and new build. In savings, the focus continues to be to rebuild the profitable branch-basedfranchise, in addition to using electronic channels. In both mortgages and savings, retaining existing customers is a key driver ofvalue. Outside mortgages and savings, improvements are expected in 2005 across mostproduct areas. In particular, we expect to make progress in rebuildinginvestment sales with the first step being a new range due for launch in March,focusing on capital guaranteed offers that use our structuring capability inAbbey Financial Markets. We are also developing plans to boost our unsecuredlending, general insurance and SME operations. Tackling the cost base The first phase of work to reduce Abbey's cost base is underway, withsignificant reductions in headcount already made, and restrictions on recruitingnon customer-facing staff in place. In addition: • 3,000 roles will be removed by the end of the year, with good progress already made and 2,000 of the people affected to be told by the end of March. The vast majority of the roles removed to date relate to back-office functions without affecting our risk and compliance capability; • 60% of non-Partenon projects have been cancelled, without damaging revenue prospects; and • a new management team has been introduced specifically to control the cost base. In 2005, the programme of site rationalisation will be accelerated, focusing onreducing the number of call centres in the UK (currently 25), and supported bythe development of a single telephony platform. The other component of the first phase of cost reduction involves a projectspanning 10 workstreams focusing on business and process re-engineering, withbenefits expected to increase from 2006. The second phase of cost reduction involves the rollout, from late in 2006, ofPartenon, Santander's industry-leading IT platform, and detailed plans are nowin place. Measuring Abbey's progress We remain confident of achieving the published revenue and cost synergies: • £150 million of revenue synergies by 2007 with momentum from 2006; and • a run-rate of £200 million gross cost savings by the end of 2006, rising to £300 million by 2007. During the course of 2005 we expect to be able to demonstrate clear evidence of: • increased numbers of customer facing staff; • increased staffing levels dedicated to sell; • reduced new joiner staff turnover; • improved sales performance across all channels; • improved market share trends across the range of PFS products; • successful product launches; • further site closures; and • 3,000 roles removed across the business. In terms of financial performance during 2005, we are targeting to: • stabilise PFS trading revenue trends on an underlying basis; • accelerate cost savings, with a cost reduction in 2005 of £150 million instead of the £100 million originally targeted; and • reduce non-trading re-organisation charges, which will be in line with previous guidance of c.£150 million per year, in addition to which there will be some ongoing spend associated with regulatory change. Results Statutory profit before tax of £273 million, marks a significant improvement on2003. Net attributable profit was £32 million compared with a loss of £759million in 2003. The year-on-year improvement was largely due to significantlosses incurred in 2003, relating to the PBU wind-down, not being repeated in2004. Please refer to Appendix 4, which contains commentary on a statutorybasis. Abbey's results continue to be affected by significant restructuring and, in2004, additional charges and provisions in relation to the acquisition by GrupoSantander. For this reason, both a statutory and trading view of the results isprovided - to assist in the understanding of the underlying trends andperformance of the business. £ m Qtr 1 2004 Qtr 2 2004 Qtr 3 2004 Qtr 4 2004 FY 2004 FY 2003PFS trading profit before tax 206 262 286 60 814 1,021Non-trading charges (59) (69) (54) (382) (564) (786)PFS profit before tax 147 193 232 (322) 250 235PBU profit before tax 5 5 34 (21) 23 (921)Abbey profit before tax 152 198 266 (343) 273 (686) The fall in PFS trading profit before tax in the fourth quarter reflects £48million of negative lapse assumptions and other experience variances in the lifebusinesses (which are only booked half yearly), and a slower quarter for AbbeyFinancial Markets. In addition, the result is also impacted by provisions forother liabilities, largely offset by a write-back of general provisions relatingto the mortgage book. PFS trading income:(£m) Qtr 1 Qtr 2 Qtr 3 Qtr 4Net interest income 380 418 339 333Non-interest income 266 255 383 226PFS trading income 646 673 722 559 Net interest income for the year of £1,470 million was down 14%, with the secondhalf 16% lower than the first, though starting to show signs of stabilisation inthe last quarter. The year has been characterised by modest asset and liabilitygrowth, with a shift in focus to value and sustainable new business in terms ofboth mortgage lending and savings inflows. In addition, the 2004 results includec.£50 million of income in relation to free-reserves, largely a profit relatingto the close out of hedging, that will not recur in 2005. Non-interest income of £1,130 million was up 5%, with the second half strongerthan the first. Banking and Savings has benefited from increased bank accountfee income, and a release of unused mortgage reassurance reserves of £42 millionthat will not repeat in 2005. Abbey Financial Markets contributed £291 million, up 30%, reflecting afavourable trading environment and certain non-recurring risk management tradeslargely completed in the third quarter. Offsetting these positive trends was a lower contribution from the lifebusinesses, largely reflecting a lower embedded value (EV) unwind following areduction in the risk discount rate and the impact of rebasing charges takenlast year. Experience variances and assumption changes were flat year on year,with a second half charge of £(48) million. These adjustments affect all UKbancassurers and result from a six-monthly review of assumptions performed byactuaries, and can be positive or negative. The second half charge was largelydriven by less favourable experience relating to expense overruns, changes toreserving and modelling assumptions, and taxation adjustments. Spread % Half 2 2003 Full Year 2003 Half 1 2004 Half 2 2004 Full Year 2004PFS asset spread 0.85 0.90 0.75 0.65 0.70PFS liability spread 0.84 0.88 0.79 0.77 0.78Total PFS spread 1.69 1.78 1.54 1.42 1.48 Note: The PFS banking spread has been restated to reflect the sale of the assetfinancing businesses in Half 1 2004 and adjustment of reported asset andliability balances. The full year PFS banking spread narrowed to 1.48%. The pressure on assetspreads reflects lower early redemption charges combined with a fall in theabsolute balance of mortgage assets paying standard variable rate (SVR). Thepressure on liability spreads was also driven by the changing liability mix withhigh margin back book attrition being replaced by lower margin, but stillprofitable, new inflows. Through 2005, a modest decline in the spread is expected following a period ofrelative stability in the last two quarters. Incentive period maturities willagain start reverting to SVR, which is expected to end the year higher inabsolute terms than the opening position. While back-book attrition of highmargin savings accounts will continue, the business will be challenged tosubstantially offset this impact on income via profitable new inflows. PFS trading expenses: £m Qtr 1 Qtr 2 Qtr 3 Qtr 4 Trading expenses 396 387 399 417 FTE Dec 03 Mar 04 Jun 04 Sep 04 Dec 04PFS headcount 24,813 25,245 25,346 24,389 24,299 Trading expenses increased by 1%, reflecting inflationary growth and increasedmarketing spend, largely offset by cost savings including the initial benefitsof site rationalisation. Including costs reported in embedded value of £165 million, total tradingexpenses were broadly flat for the year. Headcount in the second half of theyear reduced, driven by site closures. Excluded from the graph above are FTE(not on payroll) transferred to outsourcing arrangements in India. As atDecember these totalled c.567 roles. PFS trading provisions: £m Qtr 1 Qtr 2 Qtr 3 Qtr 4 Trading bad debt provisions 44 23 41 (74) % Dec 02 Dec 03 Dec 04 NPL as a % of asset 1.06 0.77 0.82 Trading provisions for bad and doubtful loans (before the write-back of generalprovisions of £117 million) were £151 million, up 16%. The underlying mortgageprovision charge improved year on year, with the increase in overall chargedriven by strong asset growth in unsecured personal loans combined with fraudwrite-offs in relation to bank accounts. Mortgage credit quality remains excellent, in part reflecting actions takenduring the year including taking a more cautionary stance on highincome-multiple applications. Average LTV on new business in Half 2 was 60%,lower than the same period last year, with an average 45% LTV on stock (December2003: 50%). Three month plus arrears reduced over the year by 2% to 8,000, andproperties in possession reduced by 11% to 288. As reported in the third quarter, there has been a slight increase in mortgagearrears levels since the interims, but from a historically low point.Non-performing mortgage loans as a percentage of mortgage assets are 0.60%,marginally up on last year (0.57%). In the fourth quarter, a £154 million provision for other liabilities, includingpotential mis-selling risk has been raised. Together with a similar provision of£50 million raised in 2003, this should significantly reduce the likelihood offuture charges. Non-trading items: In total, non-trading items were £564 million. In July 2004, a detailed review of the with profits funds was completed, andagreement reached with the FSA, resulting in no further charges to the profitand loss or capital, over and above amounts taken in prior years. For the year,there is a credit for embedded value charges and rebasing of £21 millionresulting from a write-back of some of the charges taken in prior years, partlyoffset by a charge for variances in investment performance against assumptions. Re-organisation costs of £565 million were driven by the re-organisationprogramme initiated early in 2003, expenses relating to mandatory regulatorychanges, costs associated with the sale of Abbey to Grupo Santander, andsubsequent costs and provisions raised post-completion of the transaction. Thepost-acquisition charges amount to £243 million, consisting largely ofredundancy costs and asset write-downs. Portfolio Business Unit: Profit before tax of £23 million (2003: loss of £921 million), including a £30million provision relating to the Dublin life assurance fund and remainingconsumer finance operations. With the exception of Porterbrook, which is aprofitable business, the remaining PBU assets have been written down tomanagement's view of market value. PBU assets£ bn Dec 2003 Mar 2004 Jun 2004 Sep 2004 Dec 2004Debt securities 1.0 0.7 0.5 - -Loan portfolio 2.0 1.7 0.9 0.6 0.4Leasing businesses 4.7 4.3 4.1 3.9 3.4Private equity 0.4 0.1 - - -Other 0.2 0.2 - - -Wholesale Banking 8.3 7.0 5.5 4.5 3.8First National 2.1 1.7 1.3 1.1 0.9European Banking and Other 1.9 1.5 1.5 1.5 -Total PBU assets 12.3 10.2 8.3 7.1 4.7 Progress in exiting the PBU continues to run ahead of plan, with a further 62%reduction in 2004, including the agreement to sell all remaining project financeexposures and the sale of the residual high yield debt securities portfolio. Ofthe decrease, 20%, or £2.4 billion, was achieved in the fourth quarter,including the sale of the remaining European banking business, and good progressin reducing leasing assets including the sale of 14 aircraft, with a further 15remaining, of which 7 are well advanced. Business analysis PFS segmental trading and statutory profit and loss:£ m Qtr 1 Qtr 2 Qtr 3 Qtr 4 FY FY 2004 2004 2004 2004 2004 2003 Banking and Savings 160 193 177 115 645 876Investment and Protection 63 52 56 (6) 165 239General Insurance 16 20 22 12 70 73Abbey Financial Markets 42 33 104 24 203 140Group Infrastructure (75) (36) (73) (85) (269) (307)PFS trading PBT 206 262 286 60 814 1,021Less:- EV charges and rebasing - (24) - 45 21 (443)- Re-organisation expenses (54) (40) (49) (422) (565) (315)- Goodwill charges (5) (5) (5) (5) (20) (28)PFS statutory PBT 147 193 232 (322) 250 235 Banking and Savings trading profit before tax down 26% to £645 million, almostentirely due to reduced net interest income reflecting the 30 basis pointreduction in the spread. The movement in the fourth quarter relates to the netof the provision for contingent liability raised (£154 million) and the releaseof general provisions (£117 million). Investment and Protection trading profit before tax down 31%. Improved marginsin Scottish Provident offset the impact of reduced new business volumes acrossthe investment and protection range. The drop in profits was largely due to areduction in the risk discount rate, and a lower unwind of embedded valuefollowing write-downs of the EV asset in 2003. In addition, the life businesseshave been affected by a higher charge for capital from the centre. The movementin the fourth quarter relates to £48 million of experience variances (which areonly booked half yearly). General Insurance trading profit before tax broadly flat at £70 million withlower fee income reflecting the impact of lower mortgage volumes and an increasein policy lapses as a result of system changes in half 2, offset by costsavings. Abbey Financial Markets trading profit before tax of £203 million was up 45%,reflecting favourable market conditions and a number of positive risk managementtrades which totalled c.£65 million, that will not repeat in 2005. Group Infrastructure trading loss before tax reduced, with an increase in costsoffset by lower provisions for contingent liabilities. Business flows: Qtr 1 Qtr 2 Qtr 3 Qtr 4 FY FY 2004 2004 2004 2004 2004 2003 Gross mortgage lending (£ bn) 6.7 6.3 6.4 5.6 25.0 29.1Capital repayments (£ bn) 4.6 5.2 6.0 6.1 21.9 19.7Net mortgage lending (£ bn) 2.1 1.1 0.4 (0.5) 3.1 9.4Stock (£ bn) 90.0 91.0 91.4 90.9 90.9 87.8 Market share - gross lending 10.1% 8.2% 8.0% 8.4% 8.6% 10.7%Market share - repayments 10.5% 10.7% 11.5% 13.3% 11.5% 11.2%Market share - net lending 9.2% 3.8% 1.3% (2.3)% 3.1% 9.9%Market share - stock 11.3% 11.0% 10.7% 10.4% 10.4% 11.5% Total net deposit flows (£ bn) (1.2) 0.2 1.2 1.2 1.4 1.2 Bank account openings 99,000 92,000 104,000 95,000 390,000 396,000Gross UPL lending (£ m) 676 430 456 536 2,098 1,660Credit card openings 40,000 49,000 60,000 49,000 198,000 251,000 Investment sales - APE (£ m) 26 32 28 33 119 184 Protection sales - APE (£ m) 31 25 22 19 97 125 General Insurance sales 101,000 95,000 98,000 82,000 376,000 452,000 Main highlights include: • gross mortgage lending of £25.0 billion, down on last year and an estimated share of 8.6%. New lending business in 2004 has been affected by the extent of re-organisation across all sales channels. However, share of more profitable segments such as first-time buyer and home mover have been more robust, with the sharpest decline in lending and share in the remortgage segment. Average new business margins were up by 13 basis points year on year; • capital repayments of £21.9 billion were above our natural stock share, and were largely driven by second half maturities of two year incentive lending written in 2002. As a result, net lending was lower than 2003 and equivalent to a 3.1% market share for the year with a weak final quarter. Implementing mortgage regulation (N3) further undermined our approvals performance in Q4 2004, which is likely to result in negative net lending in Q1 2005; • deposit inflows of £1.4 billion for the year, with a strong second half performance of £2.4 billion. The focus on profitable branch-based deposits has delivered positive results in the second half, with inflows into accounts such as Flexible Saver broadly offsetting attrition from back book accounts. cahoot also made a strong contribution to deposit inflows; • bank account openings were broadly flat despite reduced marketing spend, with a significant uplift in youth account openings, and balances of Abbey-branded liability up 4% to £4.5 billion; • a 26% increase in gross unsecured lending new business, with uplifts through both the Abbey and cahoot brands, and overall asset growth of 17%; • credit card openings were down year on year, but with second half openings up 22%; • investment sales were down 35%, continuing to be affected by the exit from with profit products and management actions taken over the last 18 months, albeit delivering a stronger performance in the final quarter; and • protection sales were down by 22%, although the business was able to offset this by increasing margins. General insurance sales were slightly lower during the period, in part reflecting lower mortgage volumes, but largely due to the exit from travel and motor insurance. Impact of International Financial Reporting Standards (IFRS) 2004 impactsStandard P&L impacts Equity impact£ m Statutory Combined stat.& proformaIAS 19 - Pensions 1 1 (1,194)IAS 16 and 17 - Leasing (1) (1) (162)IAS 38 - Software capitalisation (109) (109) -IFRS 2 - Stock option expensing - - (46)IFRS 4 / IAS 39 - Life investment products - 12 (85)IAS 39 - Non-trading derivatives n/a see notes (199)IAS 39 - Credit provisions n/a (136) 3IAS 39 - Investment debt and equity securities n/a see notes 52IAS 39 - Fees and commissions n/a (34) (35)IAS 39 - De-recognition of liabilities n/a (9) (154)IAS 32 - Preference shares n/a (97) 62Other 5 (6) (25)Total pre-tax impact of IFRS (104) (379) (1,783)IAS 12 - Deferred taxation 21 21 (40)Tax effect of above adjustments 28 84 494Total post-tax impact of IFRS on 2004 (55) (274) (1,329) The impacts above are based on the standards currently in issue and management'scurrent interpretations of them. As such, the numbers quoted are indicative andintended only to convey direction and approximate scale. These adjustments areunaudited. In the above analysis the statutory adjustments relate to accounting changesapplicable retrospectively (i.e. involving restatements). The proforma effectsrepresent management's estimate of the effect of applying those standards thatare prospective from 1 January 2005 to the 2004 results. This has not beenpossible with respect to certain aspects of IAS 39, where the business model hasbeen substantially changed to minimise the impact, making a realistic estimateof the effect on 2004 difficult to ascertain. If all new standards were applied to 2004, profit before tax would be reduced by£379 million. However, a significant element of this fall would not be ongoing,and the impact of preference shares is a reclassification, which is attributableprofit neutral. Therefore, the impact on ongoing PFS trading results isestimated to be c.(5)% (excluding the preference share reclassification). Themain standards effecting Abbey are outlined below. IAS 19 - Pensions - The equity charge reflects the actuarial pension deficitbeing recognised on the balance sheet. The profit before tax impact in 2004 isnot material since the increased pension charge after applying a discount rateto liabilities is offset by adding back the release of existing SSAP 24accruals. The increase in ongoing pension costs should be substantially offsetby the forecast level of FTE reductions following the Grupo Santanderacquisition. From a regulatory perspective, the IAS equity impact will be substituted with acharge based on the amount of the pension fund deficit that the company wouldhave to meet by way of additional payments (over-and-above "normal" annualcontributions) over the next five years. IAS 38 - Software capitalisation - The standard requires software costs to becapitalised and amortised rather than expensed immediately. The charge to theprofit and loss reflects the impairment of amounts previously capitalisedfollowing the Grupo Santander acquisition and well documented IT improvementsthat are expected to follow. On an ongoing basis, this impairment should lead toa minimal impact on earnings. IFRS 2 - Stock option expensing - The treatment of share options granted tostaff by subsidiaries in the shares of the parent is still being finalised byIFRIC. The present guidance is that a subsidiary should treat such options as"cash settled" in the subsidiary accounts, whereas in the parent accounts suchoptions should be treated as "equity settled". Abbey became a subsidiary of Grupo Santander in 2004, and at that time a numberof options in the shares of Abbey were rolled over into Grupo Santander shares.The profit and loss treatment of this change is yet to be clarified, but thecumulative effect has been included as an equity adjustment. IFRS 4 and IAS 39 - Life assurance - Under IFRS 4 contracts that are largelyinvestment in nature (i.e. do not contain significant insurance risk) will beaccounted for as financial instruments under IAS 39. Whilst DVFP will no longerbe recognised in respect of products classified as investment contracts,companies may recognise particular deferred acquisition costs (DAC). However,the acquisition costs that are deferrable under IAS are limited, and the DACasset recognised will be significantly lower than DVFP reported. There is no requirement for a statutory restatement of 2004 earnings. Instead, aproforma adjustment has been provided reflecting the positive effect of nolonger recognising prior period's DVFP on investment business, partly offset bythe impact of not recognising DVFP on new investment business. As shown in thetable, the impact is relatively small which reflects our current view that mostof the existing book does contain an element of insurance risk. However,industry consensus is still being finalised on the precise split of productsbetween insurance and investment, and this could alter the adjustment. IAS 39 - Non-trading derivatives -The business model has been substantiallychanged with the aim of minimising the impact of IAS 39. A realistic estimate ofthe affect on 2004 is difficult to ascertain, but in future we expect a modestincrease in earnings volatility. IAS 39 - Credit provisions - Credit provisions under IAS will also be morevolatile since general provisioning is not permitted. The proforma profit andloss charge largely reflects the lower starting position for credit provisionsthat would have existed had IAS been adopted prior to 2005, and does notnecessarily reflect the level of ongoing provisions. In future we expect greatervolatility since portfolio provision levels will be more closely linked tochanges in the economic climate. IAS 39 - Fees and commissions - Reflects the impact of origination feesreceivable on loans (e.g. booking/application fees, high LTV fees, survey fees),early redemption fees receivable, and directly related incremental costs oforiginating loans (e.g. survey fees and introducer commissions on mortgages, andissue costs on FRNs in SPVs) being deferred and recognised in income over theexpected life of the loan on an effective yield basis. The ongoing profit andloss impact based on current projections of future business levels should beslightly lower than the 2004 proforma adjustment, though influenced by multiplefactors including macroeconomic factors, front-end fee levels and channel mix. IAS 39 - De-recognition of liabilities - The standard allows liabilities to bede-recognised only when legally extinguished. The equity adjustment representsthe reinstating of certain liabilities (including unclaimed dividends anddormant account balances) to their original contractual values. This standard isnot expected to have any impact on 2005 earnings relative to 2004. IAS 32 - Preference shares - Preference shares will be classified as debt, andcoupon payments reflected as interest payable rather than dividends. The profitand loss impact represents this adjustment, while the equity adjustmentcomprises the translation of Abbey USD preference shares to local currency basedon the year-end rate, compared to UK GAAP book value of historic rate. Appendix 1: Consolidated profit and loss account£ m Unaudited 2003 Variance 2004Net interest income 1,530 2,062 (532)Dividend income 1 1 -Fees and commissions receivable 639 767 (128)Fees and commissions payable (114) (248) 134Dealing profits 268 217 51Income from long-term assurance business 76 (202) 278Other operating income / (expenses) 244 (165) 409Total operating income - continuing operations 2,626 2,711 (85)Total operating income - discontinued operations 18 (279) 297Total operating income 2,644 2,432 212Administrative expenses (2,053) (2,014) (39)Depreciation of fixed assets (81) (112) 31Depreciation and impairment on operating lease assets (151) (251) 100Amortisation and impairment of goodwill (20) (38) 18Depreciation, amortisation and impairment (252) (401) 149Provisions for bad and doubtful debts 35 (474) 509Provisions for contingent liabilities and commitments (202) (104) (98)Amounts written off fixed asset investments 80 (193) 273Provisions & amounts written off fixed asset investments (87) (771) 684Operating profit / (loss) 252 (754) 1,006Income from associated undertakings 6 12 (6)Profit on disposal of Group undertakings 46 89 (43)Loss on the sale or termination of an operation (31) (33) 2Continuing operations 200 (182) 382Discontinued operations 73 (504) 577Profit / (loss) on ordinary activities before tax 273 (686) 959Tax on profit / (loss) on ordinary activities (1) (144) 42 (186)Profit / (loss) on ordinary activities after tax 129 (644) 773Minority interests - non equity (49) (55) 6Profit / (loss) attributable to shareholders (2) 80 (699) 779Transfer from / (to) non-distributable reserve 47 (200) 247Dividends including preference dividends (2) (631) (424) (207)Retained profit / (loss) for the period (504) (1,323) 819 (1) The effective tax rate of 52.75% differs from the expected 30% due to alarge amount of disallowable expenses incurred in 2004, and depreciation onnon-qualifying assets. (2) The net attributable profit quoted on page 1 of £32 million is calculated bydeducting preference dividends of £48 million from profit / (loss) attributableto shareholders of £80 million. Appendix 2: Consolidated balance sheet£ m Unaudited 2004 2003 VarianceCash and balances at central banks 454 439 15Treasury bills and other eligible bills 1,990 1,631 359Loans and advances to banks 10,148 7,155 2,993Loans and advances to customers not subject to securitisation 79,331 84,488 (5,157)Loans and advances to customers subject to securitisation 28,976 23,833 5,143Less: Non-recourse finance (15,098) (14,482) (616)Loans and advances to customers 93,209 93,839 (630)Net investment in finance leases 1,148 2,573 (1,425)Debt securities 22,683 30,328 (7,645)Equity shares and other similar interests 1,176 1,633 (457)Long-term assurance business 2,968 2,272 696Interests in associated undertakings 25 39 (14)Intangible fixed assets 317 341 (24)Tangible fixed assets excluding operating lease assets 246 268 (22)Operating lease assets 2,341 2,529 (188)Other assets 4,661 4,162 499Prepayments and accrued income 1,195 1,230 (35)Assets of long-term assurance funds 27,180 28,336 (1,156)Total assets 169,741 176,775 (7,034)LiabilitiesDeposits by banks 18,412 22,125 (3,713)Customer accounts 78,850 74,401 4,449Debt securities in issue 21,969 24,834 (2,865)Dividend proposed 43 245 (202)Other liabilities 9,170 11,452 (2,282)Accruals and deferred income 1,729 1,582 147Provisions for liabilities and charges 870 836 34Subordinated liabilities including convertible debt 5,360 6,337 (977)Other long-term capital instruments 722 742 (20)Liabilities of long-term assurance funds 27,180 28,336 (1,156)Minority interests - non-equity 512 554 (42)Called up share capital - ordinary shares 148 146 2Called up share capital - preference shares 325 325 -Share premium account 2,164 2,059 105Reserves 306 274 32Profit and loss account 1,981 2,527 (546)Shareholders' funds including non-equity interest 4,924 5,331 407Total liabilities and shareholders' funds 169,741 176,775 (7,034) Appendix 3: Consolidated cash flow £ m Unaudited 2004 2003 VarianceNet cash (outflow) / inflow from operating activities (2,019) (32,678) 30,659Returns on investments and servicing of finance:Interest paid on subordinated liabilities (277) (262) (15)Preference dividends paid (48) (55) 7Payments to non-equity minority interests (49) (55) 6Net cash outflow from returns on investments and servicing of finance (374) (372) (2)Taxation:UK corporation tax paid (2) (93) 91Overseas tax paid (10) (6) (4)Total taxation paid (12) (99) 87Capital expenditure and financial investment:Purchases of investment securities (1,713) (3,895) 2,182Sales of investment securities 1,796 26,462 (24,666)Redemptions and maturities of investment securities 1,235 3,175 (1,940)Purchases of tangible fixed assets (155) (532) 377Sales of tangible fixed assets 83 194 (111)Transfers (to) / from life assurance funds (712) (215) (497)Net cash inflow / (outflow) from capital expenditure and financial 534 25,189 (24,655)investmentAcquisitions and disposals 3,180 8,803 (5,623)Equity dividends paid (697) (216) (481)Net cash inflow / (outflow) before financing 612 627 (15)Financing:Issue of ordinary share capital 13 2 11Redemption of preference share capital - (124) 124Redemption of preferred securities - (15) 15Repayments of loan capital (813) (56) (757)Net cash (outflow) / inflow from financing (800) (193) (607)Increase / (decrease) in cash (188) 434 (622) Appendix 4: Reconciliation of trading profit and loss to statutory£ m 2004 2003 PFS trading Non-trading PBU Total Abbey Total AbbeyNet interest income 1,470 - 60 1,530 2,062Non-interest income 1,130 (99) 83 1,114 370Total income 2,600 (99) 143 2,644 2,432Administrative expenses (1,599) (445) (90) (2,134) (2,126)Goodwill impairment and amortisation - (20) - (20) (38)Depreciation on operating lease assets - - (151) (151) (251)Provisions for bad and doubtful debts (34) 80 (11) 35 (474)Provisions for contingent liabilities (122) (80) - (202) (104)Amounts written off fixed asset investments - - 80 80 (193)Operating profit / (loss) 845 (564) (29) 252 (754)Income from associated undertakings - - 6 6 12Profit on disposal of Group undertakings - - 46 46 89Loss on sale or termination of an operation (31) - - (31) (33)Profit / (loss) before tax 814 (564) 23 273 (686) Material movements by line include: • net interest income of £1,530 million (2003: £2,062 million) down 26%, reflecting lower early redemption charge income, and a changing business mix with lower margin new business replacing the run-off of higher margin back book in both the mortgages and savings portfolios. The fall also reflects the lower level of interest-earning assets in the PBU; • non-interest income of £1,114 million (2003: £370 million), as a result of the non-recurrence of certain embedded value rebasing charges that affected life assurance earnings in 2003, in addition to lower loss realisations from PBU asset sales in 2004; • administrative expenses of £2,134 million (2003: £2,126 million) were broadly in line with 2003. PFS expenses increased to £2,044 million largely reflecting expenses related to the acquisition of Abbey by Grupo Santander including redundancy and restructuring expenses. PBU expenses fell due to the reduced size of operations; • goodwill amortisation of £20 million relates primarily to Scottish Provident; • depreciation on operating lease assets of £151 million (2003: £251 million), down 39% reflecting the sale of leasing companies in the PBU; • a credit provision in relation to bad and doubtful debts of £35 million (2003: £474 million charge), was driven by a release of general provisions on mortgages, and the non-recurrence of PBU provisions; • provisions for contingent liabilities and commitments increased to £202 million (2003: £104 million) mainly due to increases in the level of other provisions; and • a release of amounts written off fixed asset investments of £80 million (2003: £193 million charge) reflecting the disposal of PBU assets for amounts in excess of their written down value. Appendix 5: PFS trading profit and lossPFS total Half 1 Half 2 Full Year Full Year 2004 2004 2004 2003 £ m £ m £m £ mNet interest income 798 672 1,470 1,709Non-interest income 521 609 1,130 1,080Total income 1,319 1,281 2,600 2,789Operating expenses (783) (816) (1,599) (1,577)Provisions (68) (119) (187) (191)Trading profit before tax 468 346 814 1,021Less:Embedded value charges and rebasing (24) 45 21 (443)Re-organisation expenses (94) (471) (565) (315)Goodwill charges (10) (10) (20) (28)PFS profit before tax 340 (90) 250 235 Banking and Savings Half 1 2004 Half 2 2004 Full Year 2004 Full Year 2003 £ m £ m £m £ mNet interest income 782 728 1,510 1,720Non-interest income 193 245 438 427Total income 975 973 1,948 2,147Operating expenses (554) (560) (1,114) (1,132)Provisions (68) (121) (189) (139)Trading profit before tax 353 292 645 876Less:Re-organisation expenses (26) (157) (183) (169)Profit before tax 327 135 462 707 Investment and Protection Half 1 2004 Half 2 2004 Full Year 2004 Full Year 2003 £ m £ m £m £ mNet interest income 48 29 77 83Non-interest income 104 67 171 214Total income 152 96 248 297Operating expenses (37) (46) (83) (58)Provisions - - - -Trading profit before tax 115 50 165 239Less:Embedded value charges and rebasing (24) 45 21 (443)Re-organisation expenses (38) (19) (57) (16)Profit before tax 53 76 129 (220) General Insurance Half 1 2004 Half 2 2004 Full Year 2004 Full Year 2003 £ m £ m £m £ mNet interest income (1) (3) (4) (5)Non-interest income 57 57 114 126Total income 56 54 110 121Operating expenses (20) (20) (40) (48)Provisions - - - -Trading profit before tax 36 34 70 73Less:Re-organisation expenses (3) (13) (16) (41)Profit before tax 33 21 54 32 Abbey Financial Markets Half 1 2004 Half 2 2004 Full Year 2004 Full Year 2003 £ m £ m £m £ mNet interest income 15 6 21 26Non-interest income 113 178 291 223Total income 128 184 312 249Operating expenses (53) (56) (109) (109)Provisions - - - -Trading profit before tax 75 128 203 140Less:Re-organisation expenses (10) (14) (24) (19)Profit before tax 65 114 179 121 Group Infrastructure Half 1 2004 Half 2 2004 Full Year 2004 Full Year 2003 £ m £ m £m £ mNet interest income (46) (88) (134) (115)Non-interest income 54 62 116 90Total income 8 (26) (18) (25)Operating expenses (119) (134) (253) (230)Provisions - 2 2 (52)Trading profit before tax (111) (158) (269) (307)Less: