Last checked at 29 Jul 2008 07:30
Abbey shows strength in volatile market
London, 29th July 2008
This statement provides a summary of the business and financial trends for the six months to 30 June 2008. Unless otherwise stated, the trading results of Abbey are compared to equivalent results for 2007.
The first half 2008 results of Santander are also released today and can be found on www.santander.com. Abbey's results, on a Group basis, are included within Santander's financial statements.
Highlights
statutory profit before tax and trading profit before tax significantly ahead of the same period in 2007;
trading income in the first half was well ahead of last year, with income growth accelerating since Q1 2008 and growth stronger than consensus for peers. This result was driven by a strong performance across all four business divisions: Retail Banking, Private Banking, Corporate Banking and Global Banking and Markets;
mortgage balances were up 13% compared to the same period in 2007. The growth in net mortgage lending can be attributed to a strong performance in both retention activity and gross lending volumes. In the first half of 2008, Abbey took the opportunity to write lower LTV new business whilst achieving new business margins that were considerably higher than those in the same period in 2007;
Abbey's estimated net lending market share of c.26% in the first half was significantly higher than stock share. This share performance was in part impacted by the withdrawal of other providers from the market, with a lower share expected in the remaining part of the year;
resilient retail balance sheet performance reflecting Abbey's strong retail funding mix (c.60% customer deposit based, c.10% of Retail and Corporate assets are funded by wholesale short term funding). Deposit flows were well ahead of the first half in 2007, up over 50%, and in the second quarter of 2008 were more than double the first quarter. Abbey expects to see this momentum to continue in the second half of the year with a strong range of fixed rate bonds and Instant Access Saver accounts;
trading expenses slightly ahead, impacted by investment in customer facing operations and growth businesses such as Corporate Banking and Private Banking which are contributing to good income growth. Operating jaws at the half year were c.8%;
trading provisions increased in-line with asset growth, with provisions performance continuing to be underpinned by prudent lending criteria with increased secured coverage ratios and overall coverage ratios significantly above UK peers; and
trading cost to income ratio of 46.6% (H1 2007: 50.2%) now in line with the average of the sector, and Abbey continues to move towards the best in class in the sector.
Chief Executive's Update
"Since September 2006, we have been managing the profitability of our mortgage business, carefully maintaining a balance between the margin of new business, prudent lending criteria and our market share aspirations. We held back our market share during the first-half of last year when the market was writing low margin and higher-risk business. Since then the market has reduced and we have taken the opportunity to take higher margin, low-risk business, and at the same time improving our customer retention.
As a consequence, Abbey's net lending has increased significantly against the same period last year driven by strong performances in both retention activity and gross lending volumes. Our profitable lending growth has been balanced with a prudent risk approach targeting lower LTV business and continued reduction of our unsecured portfolio.
We have a high quality risk profile as Abbey's mortgage book is made up of prime-residential lending. The quality of our lending will continue to be based on affordability and robust risk management. In the first-half we have focused on lower loan-to-value business, which was tightened further in Q2 with only 1 per cent of our new mortgage lending written above 90 per cent LTV.
Our lending growth has been largely funded by an increase in deposits with significant inflows from our Retail and Private Banking businesses. In addition, we have taken the opportunity to reduce assets in our Global Banking and Markets operations to fund our Retail growth. This active funding allocation strategy continues to serve Abbey well in a challenging market and has allowed us to maintain stable short-term funding requirements throughout the first half.
Our revenue growth has improved again, with costs only slightly ahead of last year, and we expect our operating jaws to be significantly ahead of our UK peers. Our cost to income ratio is now 46.6% and we will move to below the sector average by the end of this year.
Our improved efficiency means that we can continue to offer customers increasingly competitive products, reflecting their desire for longer-term certainty, in mortgages, structured savings and investment products. This will in-turn improve customer loyalty. In the first six months of the year, we launched innovative, value-for-money products such as our Instant Access Savings Account, our 8% Switcher bank account and Zero-fee credit card.
Abbey continues to benefit from and to leverage the scale, expertise and backing of Santander's global businesses. We've also had significant success expanding our corporate banking business and have started a project to build a full service small and medium-size enterprise (SME) operation that will ultimately enable us to compete for the UK's mid-corporate banking business.
Earlier in July, Santander announced its intention to acquire Alliance & Leicester (A&L). The offer has been recommended by A&L's board and it is anticipated that the deal will complete around October. The deal will increase Santander's branch footprint in the UK by over 250 branches, accelerate commercial banking plans and bring an additional 5 million personal customers to the bank.
Abbey and Santander have a proven and successful business model. We will continue to grow our business in a balanced and prudent way based on a strong relationship with our customers and broad product offering. This month, Euromoney magazine named Abbey as "Best Bank in the UK" over the last year. The award is a clear endorsement of Santander's highly-successful turnaround of Abbey and clearly shows we are well-progressed in our goal of becoming the best commercial bank in the UK."
António Horta-Osório, Chief Executive
Financial results
Trading income:
Net interest income was significantly ahead of the first half in 2007. Retail Banking net interest income was up, despite challenging market conditions, reflecting robust asset and customer deposit growth of 12% and 7% respectively. Deposit related income was particularly strong, in part benefiting from bank account growth and strong margin management over the last 18 months. Performance in mortgage lending in the first half was also strong, taking advantage of favourable pricing conditions, and focusing on high quality prime residential lending at lower LTV.
Non-interest income was slightly ahead compared to the first half in 2007. Despite difficult market conditions, Retail achieved improved cross-sale performance increasing commission from credit cards and investments, with success in these areas offset by continued pressure on mortgage redemption and current account charges. Private Banking was ahead due to improved fee performance in James Hay, and Corporate Banking performance was ahead driven by a prudent lending approach whilst taking advantage of opportunities in the market. Global Banking and Markets was slightly ahead of last year, with steady growth despite a difficult market environment.
Trading expenses:
Trading expenses were slightly ahead, impacted by investment in customer facing operations and growth businesses such as Corporate Banking and Private Banking.
Trading provisions:
The provision charge has increased in line with asset growth, with unsecured performance improving and secured performance showing a slight deterioration as anticipated due to tighter market conditions. These trends are expected to continue into the second half of the year.
The increase in mortgage charge is primarily driven by higher average losses on possessions due to the weaker housing market. The volume of arrears and possessions, however, has been more subdued with default levels remaining relatively stable.
The stock of properties in possession increased slightly to 589 (Q1 08: 625, H1 07: 516) albeit from historically low levels. In terms of 3 month plus arrears, the increase to 8,316 (Q1 08: 8,195, H1 07: 7,053) was anticipated following base rate rises. Abbey remains significantly better than the industry based on the most recent CML figures for both and Abbey's book of prime lending stock is performing well compared to its competitors.
Credit quality remains strong, with the average loan to value (LTV) on new business completions and stock at 67% (H1 2007: 64%) and 50% (H1 2007: 43%) respectively, in line with overall movement in house prices. In the second quarter, only 1% of new business had an LTV of greater than 90% and, on average, the LTV of approvals declined from 67% to 63%.
Reorganisation expenses and other charges:
Restructuring costs and other non-trading items were significantly lower than the same period in 2007 reflecting the mature stage of the restructuring programme.
Business flows
| H1 | H2 | H1 | H2 | H1 | |
| 2006 | 2006 | 2007 | 2007 | 2008 | |
| Gross mortgage lending (£ bn) | 15.9 | 16.7 | 16.8 | 18.8 | 19.5 |
| Capital repayments (£ bn) | 11.7 | 13.1 | 13.3 | 13.6 | 11.2 |
| Net mortgage lending (£ bn) | 4.2 | 3.6 | 3.6 | 5.2 | 8.3 |
| Stock (£ bn) | 98.1 | 101.7 | 105.1 | 110.4 | 118.7 |
| Market share - gross lending | 10.0% | 9.0% | 9.5% | 10.1% | 12.9% |
| Market share - capital repayments | 10.7% | 10.4% | 10.7% | 10.3% | 9.5% |
| Market share - net lending | 8.4% | 6.0% | 6.6% | 9.6% | 25.6% |
| Market share - stock | 9.7% | 9.4% | 9.3% | 9.3% | 9.7% |
| Retail net deposit flows (£ bn) | 0.9 | 0.2 | 1.9 | 1.3 | 2.9 |
| Investment sales - API (£ bn) (excl. intermediary sales) | 0.7 | 0.6 | 0.9 | 0.8 | 1.1 |
| Bank account openings (000s) | 212 | 241 | 217 | 213 | 258 |
| Abbey branded adult bank account openings (000s) | 115 | 122 | 125 | 131 | 177 |
| Abbey branded average current account liability (£ bn) | 4.7 | 5.0 | 5.0 | 5.3 | 5.1 |
| Total gross UPL lending (£ bn) | 1.3 | 1.0 | 0.6 | 0.5 | 0.5 |
| Credit card sales (000s) | 52 | 60 | 97 | 164 | 228 |
Main highlights for the six months to 30 June 2008 (compared to the same period in 2007 unless otherwise stated) include:
·; gross mortgage lending of £19.5 billion, 16% higher, with an estimated market share of 12.9%. This improvement reflects strong pricing and successful campaigns across both direct and intermediary channels, with new business margins well ahead of the same period last year. The remortgage segment remains the strongest area of the market and Abbey has performed particularly well with c. 63% remortgages versus c. 48% last year. Abbey is actively targeting lower LTV new business and has also increased the mix of sales on longer term (3yr plus) business through pricing and targeted channel and customer communications and offers. In Q2 55% of new mortgage business applications was fixed for over three years compared to 11% in the fourth quarter of 2007;
·; capital repayments of £11.2 billion, 16% lower, reflecting a strong performance driven by both excellent retention activity and current market conditions. The focus on longer term business to reduce risk in volatile markets and improve future retention continues to be successful with over 60% of all internal transfer customers taking 3yr plus deals. Abbey’s estimated market share of capital repayments is 9.5% which is 1.2% lower than last year;
• net mortgage lending of £8.3 billion, more than double the same period last year. The growth in net mortgage lending can be attributed to a strong performance in both retention activity and gross lending volumes. The improved net lending share has restored Abbey’s stock position to its historical share of around 10% reflecting the strength of Abbey’s franchise in the current challenging conditions;