Sant Uk.10te% Regulatory News (SAN)

27 Jul 2005 07:30

Abbey National PLC27 July 2005 Abbey interim results - on track London, 27 July 2005 This statement provides a summary of the business and financial results for thesix months to 30 June 2005. Unless otherwise stated, the statement refers to theentire Abbey National plc ("Abbey") group (comprising both Personal FinancialServices and Portfolio Business Unit operations). The statement details the 2005 six month results prepared on an InternationalFinancial Reporting Standards (IFRS) accounting basis, compared with a 2004result on a like-for-like basis. To achieve this, the 2004 restated resultincludes proforma (prospective) adjustments (except for the IAS 39 impact onnon-trading derivatives and hedging) as well as statutory (retrospective)impacts. Furthermore, to assist in understanding the underlying trends in thebusiness, a view of trading (1) results is again used, which also disclosesseparately the one-off components of statutory IFRS restatements. Appendix 6provides a summary of the 2004 accounting restatements. The interim results of Grupo Santander are also released today, and Abbey'sconsolidated first half performance is included within its financial statements. Key highlights: • statutory profit before tax of £294 million (Half 1 2004: £293 million, Half 2 2004: £(362) million), with a profit attributable to ordinary shareholders of £207 million (Half 1 2004: £181 million, Half 2 2004: £(394) million); • second quarter results ahead of the first quarter, with an increase in revenues combined with increased savings from the cost reduction programme; • PFS trading profit before tax of £349 million compared to £355 million in the same period last year, and £242 million in the second half of 2004; • first half PFS trading revenues were slightly higher than the second half of 2004, with increased fee income and a modest 1 basis point decline in the PFS banking and savings spread; • the ongoing PFS cost base is £101 million lower than the second half of 2004, a reduction of 12%, with the second quarter showing a further marked step down compared to the first quarter; • a reduction in the PFS trading cost: income ratio of 8.5%, from 72.0% in the second half of 2004 to 63.5%; • credit quality robust, despite a modest increase in mortgage and unsecured arrears; • reorganisation and other charges of £91 million; • total customer loans of £94.0 billion, slightly higher than the same point last year, and retail deposits of £60.7 billion, up 6%; • a PFS trading return on equity of 12.2% (Half 1 2004 12.3%); and • capital ratios remaining strong (2), with a Tier 1 ratio of 9.0% and equity tier 1 ratio of 5.7% compared with 9.6% and 6.3% in December 2004 respectively, with the movement largely due to IFRS adjustments applicable from 1 January 2005. (1) A detailed definition of 'trading' is included in Appendix 5. Statutory disclosures are provided in Appendices 1 to 4, with a reconciliation between the 'trading' and 'statutory' definitions also contained in Appendix 5. (2) These are a preliminary view subject to finalisation of quarterly returns to Financial Services Authority. Overview Revenues are stabilising after successive periods of decline, and salesproductivity across most products has improved in the second quarter. We havestarted to reverse market share trends in mortgages. Sales of bank accounts,credit cards, Abbey-branded unsecured loans and investment sales are all higherthan the same period last year. We have moved quickly to improve sales productivity, with a new sales managementteam and changes to roles in the branch network. Our salespeople in branches andon the telephone have been trained to sell a wider range of products, increasingthe number of fully authorised ales staff in branches by 14%. In theintermediary channel we have cleared the backlog of mortgage applications we hadin Q1, and introduced a 10-day commitment from application to offer. We are ahead of our original plan on costs. Ongoing costs are £101 million lowerthan the second half of 2004 and we now expect to exceed the revised £150million absolute cost reduction target for 2005. We have acted decisively toachieve this. Already 3,000 roles have been removed and this will rise to around4,000 by the end of the year. At the same time we have started the work tore-engineer the IT platforms ahead of the introduction of Partenon. We need to build on the momentum already established, and the early positivesigns of growth in the business. Key to success will be improving servicelevels, reducing staff turnover and offsetting a declining contribution from ourback-book of business. "Eight months on from the acquisition, we are firmly on track. We have madeexcellent progress on costs, and a good start on revenues. But this is only thestart - turning Abbey around will take three years and there are still manythings to fix. We have a great customer base, strong branch network and competitive products.Our people have a real desire to succeed, and I'm convinced we are capable ofachieving our long-term goal of becoming the best bank on the UK high street." Francisco Gomez-RoldanChief Executive Results Abbey statutory profit before tax of £294 million, was broadly in line with thesame period last year. Profit and loss: Proforma Proforma Quarter 1 Quarter 2 6 months 6 months 6 months 30 June 31 Dec 30 June 2005 2005 2005 2004 2004 £ m £ m £ m £ m £ mNet interest income 290 301 591 589 722Non-interest income 294 336 630 628 558Total income 584 637 1,221 1,217 1,280Operating expenses (400) (375) (775) (876) (857)Provisions (41) (56) (97) (99) (68)Trading PFS profit before tax 143 206 349 242 355Adjust for:- EV charges and rebasing - (16) (16) 45 (24)- Other intangibles (1) (1) (2) (10) (10)- Hedging variances 6 4 10 n/a n/aPFS profit before tax before 148 193 341 277 321reorganisation expensesAdjust for:- Reorganisation expenses (25) (58) (83) (471) (94)- One-off statutory IAS adj - - - (266) (18)- Remove proforma IAS adj - - - 94 80Statutory PFS profit before tax 123 135 258 (366) 289Statutory PBU profit before tax 20 16 36 4 4Abbey statutory profit before tax 143 151 294 (362) 293Taxation expense (42) (45) (87) 17 (64)Preference dividends and MI n/a n/a n/a (49) (48)Net attributable profit 101 106 207 (394) 181 Results show an improving trend across most lines relative to the second half of2004, and further improvements in terms of both revenues and costs in the secondquarter of 2005 relative to first quarter. In the second half of 2004, PFS trading revenues were boosted by £59 million ofone-off items (full year £99 million), compared with c.£20 million in the firsthalf of 2005. Underlying revenues have benefited from a stabilisation inspreads, and an improvement in fee income and business growth, consistent withthe target of underlying PFS trading revenues being broadly level for the yearas a whole. The cost reduction programme is having a significant impact onoverall costs, and we expect to exceed the targeted £150 million reduction inPFS trading expenses in 2005.£ m Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 2004 2004 2004 2004 2005 2005PFS net interest income 344 378 305 284 290 301PFS non-interest income 297 261 406 222 294 336 PFS net interest income of £591 million was significantly lower than thecomparative period in 2004 (£722 million). This was largely due to the impact ofthe reduction in the average Banking and Savings spread through the course of2004. As stated, spreads have started to stabilise in the first half of 2005(summarised trends detailed below), with most of the remaining pressure drivenby a slowing decline in back-book savings balances.% Half 1 Half 2 Half 1 2004 2004 2005PFS asset spread 0.78 0.70 0.70PFS liability spread 0.78 0.76 0.75Total PFS spread 1.56 1.46 1.45 In addition, net interest income has been impacted by the sale of asset financebusinesses in 2004, as well as lower earnings on the Group's free reserves,partly due to the payment of the special dividend in December 2004. PFS non-interest income for the first half of 2005 of £630 million was up 13% onthe first half of 2004, primarily due to higher bank account and mortgage feeincome. Some of the improvement in quarter two relative to quarter one reflectsthe timing of one-off gains, as well as changes to fee structures in recentmonths. In total, PFS trading operating income of £1,221 million was slightly ahead ofthe second half 2004.£ m Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 2004 2004 2004 2004 2005 2005PFS trading expenses 426 431 425 451 400 375 FTE December March June 2004 2005 2005PFS headcount 24,299 23,420 21,760 In the first half of 2005, PFS operating expenses, excluding reorganisationcosts, of £775 million were 10% lower than in the same period in 2004. Thisreflects the benefit of the cost reduction programme spread across all businessareas. In total, 3,000 roles have been removed from the business with overall headcountreduced by more than 2,500.£ m Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 2004 2004 2004 2004 2005 2005PFS trading provisions 42 26 38 43 41 56 Note: Trading provisions in the table above exclude the £136 million release ofgeneral provisions and the £154 million provision for other liabilities made inQ4 2004.% December December March June 2003 2004 2005 2005NPLs as % of asset - Abbey mortgages 0.50 0.60 0.62 0.66NPLs as % of asset - Abbey UPLs 2.69 3.26 3.36 3.17 PFS trading provisions of £97 million are up from £68 million in the equivalentperiod of last year. Of the increase, £6 million relates to fees not collectedpreviously netted off non-interest income. The balance largely reflects growthin the unsecured loan asset and the maturing cahoot portfolio (the unsecuredloan portfolio remains only 3% of the total Banking and Savings customer loanbook). In addition, the growth in provisions reflects non-recurrence of mortgagerecoveries, being partly offset by lower fraud losses across PFS. There has been no significant change in arrears between quarter 1 and quarter 2in 2005. Most of the increase in provisions between these periods is due to achange of assumptions following a regular review to take account of markettrends. This has resulted in higher reserves and coverage ratio. Mortgage credit quality remains strong. Average loan-to-value (LTV) on newbusiness in Half 1 was just over 60%, lower than in the same period last year.Three-month-plus arrears have increased as expected, from 7,970 at December to8,419, with properties in possession also up from 288 to 351. Current arrearsrelate to £575 million of lending, or 0.66% of the overall book, which is wellbelow the long-run average. Reorganisation and other charges: Reorganisation and other charges for the period totalled £(91) million comparedwith £(128) million in the equivalent period in 2004. Embedded value charges andrebasing were £(16) million (2004 Half 1: £(24) million), relating largely tothe difference between actual and expected investment returns. Additionally, theimpact of hedge ineffectiveness in our hedging activities (i.e. the impact ofIAS 39) has been a favourable £10 million. Reorganisation expenses of £(83) million largely related to the cost reductionprogramme, ongoing restructuring of the business, and some regulatory changeinvestment. We remain confident of achieving our target of reducingreorganisation expenses (excluding mandatory regulatory change costs) for theyear to c. £150 million. Portfolio Business Unit: Profit before tax for the Portfolio Business Unit (PBU) of £36 million issignificantly higher than the £4 million of the equivalent period in 2004,reflecting the more advanced stage of the exit programme, and certain profits onsale of leasing businesses in the period. Total assets of £3.3 billion were 30% lower than December 2004. Business flows: Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 2004 2004 2004 2004 2005 2005Gross mortgage lending (£ bn) 6.7 6.3 6.4 5.6 5.0 6.7Capital repayments (£ bn) 4.6 5.2 6.0 6.1 5.6 6.0Net mortgage lending (£ bn) 2.1 1.1 0.4 (0.5) (0.6) 0.7Stock (£ bn) 90.0 91.0 91.4 90.9 90.3 91.0Market share - gross lending 9.9% 8.2% 8.0% 8.4% 8.8% 9.6%Market share - net lending 8.8% 3.8% 1.3% (2.3)% (3.5%) 3.0%Market share - stock 11.3% 11.0% 10.7% 10.4% 10.1% 9.9%Total net deposit flows (£ bn) (1) (1.0) 0.1 1.2 1.0 0.3 1.0Bank account openings 95,000 89,000 101,000 93,000 95,000 96,000Gross UPL lending (£ m) 677 431 456 575 504 467Credit card openings 41,000 48,000 60,000 50,000 62,000 66,000Investment sales - APE (£ m) 26 32 28 33 26 50Protection sales - APE (£ m) 31 25 22 19 19 21General Insurance sales 92,000 92,000 95,000 83,000 77,000 80,000 (1) Restated to exclude certain institutional balances in Abbey's offshoreoperations. Main highlights include: • gross mortgage lending of £11.7 billion, representing an improved market share estimated at 9.2% relative to the second half of 2004. Capital repayments of £11.6 billion were above natural share, in part driven by maturities of two-year incentive lending written in 2002 and early 2003. Despite the continuing high level of repayments, the improvements in gross lending have started to reverse the net lending trends, which returned to a positive £0.7 billion in the second quarter. Gross lending in the second quarter was up 34%, compared with the seasonal market uplift of 24%; • deposit inflows of £1.3 billion, with new branch-based acquisition account inflows again offsetting back-book attrition. Overall retail deposit balances (1) of £60.7 billion, up 6% on the same period last year; • total bank account openings were ahead of last year's performance, and credit card openings were up 44%. Abbey-branded gross unsecured lending was up 33% reflecting improved branch-based sales performance; • investment sales were 31% ahead of the same period last year, benefiting from a strong tax year-end and the successful launches of new products in the first half, including the Guaranteed Growth Plan and Guaranteed Income Bond; • protection and general insurance sales continue to be impacted by lower mortgage lending, although market shares in protection are improving, and second quarter sales were up 11% and 4% respectively compared with the first quarter. Appendix 1: Statement on accounting policy changes Abbey in line with all listed entities in the European Union ("EU"), is requiredto adopt International Financial Reporting Standards ("IFRS") in preparing itsconsolidated financial statements for the year ending 31 December 2005. Up to 31 December 2004, the Group prepared its financial statements inaccordance with UK Generally Accepted Accounting Principles ("UK GAAP"). Thenumbers contained in Appendix 2 to 6 have been prepared in accordance withInternational Financial Reporting Standards. In accordance with the transitional arrangements contained within "IFRS 1 Firsttime adoption of IFRS" key standards, IAS 32 "Financial Instruments: Disclosureand Presentation", IAS 39 "Financial Instruments: Recognition and Measurement"and IFRS 4 " Insurance Contracts" are required to be applied prospectively from1 January 2005. All other standards are required to be applied retrospectively,therefore, the profit and loss account for the 6 months to 30 June 2004 and thebalance sheet as at 30 June 2004 and 31 December 2004 have been restated for theeffect of these standards. Available on www.aboutabbey.com/home/inst_inv/inst_inv-fin_res.htm are theprovisional IFRS accounting policies that are being applied by Abbey. Appendix 2: Consolidated profit and loss account£ m 6 months to 6 months to 30 June 2005 30 June 2004Net interest income 570 803Fee and commission income 337 345Fee and commission expense (39) (62)Net fee and commission income 298 283Net trading income - banking 135 134Operating income from life assurance 171 145Other operating income 170 118Total income 1,344 1,483Administration expenses (841) (962)Depreciation & amortisation (97) (175)Total operating expenses (938) (1,137)Impairment losses on loans and advances (110) (58)Impairment recoveries/(losses) on fixed asset investments 1 6Provisions for contingent liabilities and commitments (3) (1)Profit before tax 294 293Taxation expense (87) (64)Profit after tax 207 229Minority Interest - non equity - (24)Preference shares - (24)Attributable profit 207 181 Net interest income fell significantly when compared with the comparativeperiod, down £233 million from £803 million to £570 million. This was largelydue to to the impact of the reduction in interest spread during the course of2004 combined with the reclassification of circa £48 million of interest expenseon preference shares and other financial instruments into net interest income inthe first six months of 2005 in accordance with the provisions of "IAS 32Financial Instruments: Disclosure and Presentation". Net fee and commission income increased to £298 million (June 2004: £283million), reflecting higher bank account and mortgage fee income. This offsetthe impact of deferring certain fees and commissions received in the period inaccordance with the effective interest rate method of recognising income asoutlined by "IAS 39 Financial Instruments : Recognition and measurement" and"IAS 18 Revenue recognition". Other operating income was £79 million higher at £476 million (June 2004:£397million), primarily due to the non-repetition of 2004 PBU losses on sale in2005, one off gains relating to mark to market adjustments and profit sharereceipts in general insurance. Operating expenses have fallen from £1,137 million for the comparable period to£938 million reflecting the benefit of the cost reduction programme. Impairment losses and provisions were up £59 million on June 2004. This reflectsincreases in relation to unsecured lending growth and the maturing cahootportfolio. Amounts paid in respect of minority interests - non equity and preference sharesare inclued in net interest income in 2005. Appendix 3: Consolidated balance sheet£ m As at As at As at 30 June 31 December 2004 30 June 2005 2004Cash and balances at central banks 312 613 499Due from banks 7,221 10,148 4,642Trading securities 15,840 25,113 28,999Derivative financial instruments (1) 13,395 - -Other financial instruments at fair value 25,806 21,464 22,843through P&LPledged assets (1) 10,239 - -Loans and advances to customers 107,923 109,637 114,340Investment securities 49 765 1,025Investments in associated undertakings 23 25 22Intangible assets 179 184 327Value of in force business 1,713 1,848 1,502Property, plant and equipment 255 246 336Operating lease assets 2,150 2,219 2,403Investment property 1,134 1,560 1,240Deferred tax assets 803 358 270Other assets 3,834 10,938 9,865Total assets 190,877 185,118 188,313Due to other banks 20,570 18,633 17,905Derivative financial instruments and othertrading liabilities (1) 12,857 - -Due to customers 73,743 78,852 76,067Debt securities in issue 34,435 37,067 41,345Other borrowed funds 2,134 1,234 1,284Subordinated liabilities 6,779 5,360 5,815Insurance and reinsurance liabilities 23,245 23,599 24,511Other liabilities 9,018 14,016 14,322Investment contract liabilities (1) 2,121 - -Other provisions 222 315 138Current tax liabilities 283 - -Deferred tax liabilities 1,101 828 891Retirement benefit obligations 1,349 1,195 902Total liabilities 187,857 181,099 183,180Share capital 148 473 472Share premium account 1,857 2,164 2,115Retained earnings 1,515 1,621 2,612Other reserves (624) (531) (369)Total shareholders equity 2,896 3,727 4,830Minority interests 124 292 303Total equity 3,020 4,019 5,133Total liabilities and equity 190,877 185,118 188,313 (1) These statutory headings relate to "IAS 39 Financial Instruments:Recognition and measurement" and "IFRS 4 Insurance Contracts" which are appliedprospectively from 1 January 2005 hence no comparatives are presented. Appendix 4: Consolidated cash flow£ m 6 months to 6 months to 30 June 2005 30 June 2004Net cash flow (used in) operating activities (6,144) (8,803)Cash flows from / (used in) investing activities:Disposal of subsidiaries, net of cash disposed 319 1,252Purchase of property and equipment (394) (141)Proceeds from sale of property and equipment 538 52Purchase of securities (164) (476)Proceeds from sale and redemption of securities 250 1,658Net cash inflow from investing activities 549 2,345Cash flows from / (used in) financing activities:Issue of ordinary share capital - 2Issue of loan capital 537 -Repayments of loan capital (69) (415)Dividends paid - (189)Net cash inflow from / (used in) financing activities 468 (602)Net (decrease) in cash and cash equivalents (5,127) (7,060)Cash and cash equivalents at the beginning of the year 24,129 28,926Effects of exchange rate differences 96 27Cash and cash equivalents at 30 June 19,098 21,893 Appendix 5: Reconciliation between statutory and trading PFS trading profit before tax is management's preferred profit measure whenassessing the performance of the PFS businesses. It is calculated by adding backreorganisation and other charges from PFS profit before tax. Reorganisation andother charges comprise embedded value charges and rebasing (including investmentvariances compared to assumptions, hedging variances and specific life-relatednon-recurring adjustments), reorganisation expenses (including cost programmeimplementation, costs associated with meeting regulatory change,post-acquisition expenses and certain asset write-downs), and other intangiblecharges. 6 months to 30 June 2005 6 months to June 2004 PFS trading PBU Non-trading Total Abbey Total Abbey £m £m £m £m £mNet interest income 591 (21) - 570 803Net fee and commission income 302 (4) - 298 283Net trading income 893 (25) - 868 1,086Other operating income 328 153 (6) 475 397Total income 1,221 128 (6) 1,343 1,483Total operating expenses (775) (78) (85) (938) (1,137)Impairment losses on loans & advances (96) (14) - (110) (58)Impairment losses on fixed asset investments 2 - - 2 6Provisions for contingent liabilities and (3) - - (3) (1)commitmentsProfit before tax 349 36 (91) 294 293Taxation expense (106) (14) 33 (87) (64)Profit after tax 243 22 (58) 207 229 Appendix 6: Impact of IFRS In the analysis below the statutory adjustments relate to accounting changesapplicable retrospectively (i.e. involving restatements), whereas proformaimpacts will apply from 1 January 2005 onwards. If all IFRS standards wereapplied to 2004, profit before tax (PBT) would be reduced by £503 million.However, a significant element of this is not ongoing, and the impact onpreference shares and life assurance tax is a reclassification. Therefore, theimpact on ongoing trading results is estimated to be in the region of areduction of 5% Proforma impacts included are limited to components where it was practical andfeasible to calculate the 2004 impact. 6 months to June 2004 12 months to December 2004 One-off Ongoing Total One-off Ongoing Total £ m £ m £ m £ m £ m £ mStatutory adjustments:Pensions - 1 1 - 1 1Leasing (6) - (6) (10) (1) (11)Life Assurance tax adjustment (1) - (33) (33) - (45) (45)Vacant property provision 2 - 2 4 - 4Software capitalisation (20) - (20) (109) - (109)Other intangible assets - - - (133) - (133)Stock option expensing - - - (46) - (46)Total statutory adjust. (24) (32) (56) (294) (45) (339)Proforma adjustments:Life investment products 8 - 8 - 3 3Fees & commissions - (7) (7) (1) (30) (31)Product redemption charges (21) (3) (24) (29) (4) (33)De-recognition of liabilities (6) - (6) (9) - (9)Preference shares (1) - (49) (49) - (97) (97)Total proforma adjust. (19) (59) (78) (39) (128) (167)Other minor adjustments 3 - 3 3 - 3Total pre-tax impact of IFRS (40) (91) (131) (330) (173) (503) (1) These adjustments are neutral at the net attributable profit level. Available on www.aboutabbey.com/home/inst_inv/inst_inv-fin_res.htm are theprovisional IFRS accounting policies that are being applied by Abbey. IAS 19 - Pensions - The equity charge reflects the actuarial pension deficitbeing recognised on the balance sheet as required by IAS 19. The PBT impact in2004 is not material since the increased pension charge after applying adiscount rate to liabilities is offset by adding back the release of existingSSAP 24 accruals. The increase in ongoing pension costs should be substantiallyoffset by the forecast level of full time equivalent (FTE) staff reductions. 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 16 & 17 - Leasing - IAS 17 requires finance lease income to be recognised togive a constant rate of return on the net cash investment based on an actuarialbefore tax method. The 2004 PBT impact relates to the move from the actuarialafter tax method of recognising finance lease income that applied under UK GAAP,resulting in a lower net book value and increase in profit on sale of leasingassets. This adjustment also reflects the depreciation of operating lease assetsbeing recognised on a straight-line basis. IAS 12 Life tax adjustment - The tax gross up of the embedded value results isnow based upon the combined rate of tax applicable to both policyholders andshareholders at individual company level for the period concerned, as opposed tothe fixed shareholder rate of 30% as applied previously. IAS 38 - Software capitalisation - IAS 38 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. IAS 38 - Other intangible write-down - IFRS 3 requires separately identifiableother intangibles to be reclassified as other intangible assets if requirementsunder IAS 38 are met, and amortised over their expected useful lives. Goodwillis no longer amortised but is capitalised and subject to annual impairmenttests. The 2004 impact mainly represents the impairment charge resulting from achange in the mix of Top 20 independent financial advisors. IFRS 2 - Stock option expensing -The treatment of share options granted to staffby subsidiaries in the shares of the parent is still being finalised by theInternational Financial Reporting Interpretations Committee (IFRIC). The presentguidance is that a subsidiary should treat such options as "cash settled" in thesubsidiary accounts, whereas in the parent accounts such options should betreated as "equity settled". Abbey became a subsidiary of Banco Santander Central Hispano, S.A (BSCH) andpart of Grupo Santander in 2004, and at that time a number of options in theshares of Abbey were rolled over into BSCH shares. Such options in line withtheir treatment as "cash settled shares" are fair valued at date of grant andthe cost is spread through the income statement over the vesting period. Inaddition, at each balance sheet date the options are revalued and this movementis also taken to the income statement. IFRS 4 - Life assurance - Under IFRS 4 contracts that are largely investment innature (i.e. do not contain significant insurance risk) will be accounted for asfinancial instruments under IAS 39. Whilst the discounted value of futureprofits (DVFP) will no longer be recognised in respect of products classified asinvestment contracts, companies may recognise particular deferred acquisitioncosts (DAC). However, the acquisition costs that are deferrable under IAS arelimited, and the DAC asset recognised will be significantly lower than DVFPreported. 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 the current view that mostof the existing book does contain an element of insurance risk. IAS 39 - Fees and commissions - Reflects the impact of origination feesreceivable on loans (e.g. booking/application fees, high loan-to-value (LTV)fees, survey fees), early redemption fees receivable, and directly relatedincremental costs of originating loans (e.g. survey fees and introducercommissions on mortgages, and issue costs on floating rate notes (FRNs) inspecial purpose vehicles (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 conditions, front-end fee levels and channelmix. IAS 39 - De-recognition of liabilities - IAS 39 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. IAS 10 - Dividends - Under IFRS 10 dividends declared after the balance sheetdate may not be included as a liability at the balance sheet date. The effect ofthis change is to increase shareholders' equity by the amount of any dividenddeclared after the balance sheet date that relates to the prior period. Reconciliation of shareholders' funds The key impacts on shareholder funds since transition are included in the highlevel explanation detailed above. 1 January 30 June 31 Dec 1 January 2004 2004 2004 2005 £ m £ m £ m £ mOrdinary shareholders' funds - UK GAAP 4,699 4,836 4,292 4,292Retrospective (statutory) IFRS adjustmentsPensions (1,101) (902) (1,195) (1,195)Leasing (151) (157) (162) (162)Software capitalisation 108 87 (1) (1)Intangible assets - - (133) (133)Vacant property provision - 2 4 4Stock Option expensing - - (46) (46)Dividends 242 122 - -Deferred taxation (90) (80) (69) (69)Tax effect of the above adjustments 345 291 404 404Shareholders' funds under IFRS 4,052 4,199 3,094 3,094Prospective (proforma) IFRS adjustmentsLife investment products - - - (114)Non equity share reclassified to debt - - - 62Non trading derivatives - - - (199)Securities - - - 52Revenue recognition - - - (73)De-recognition of liabilities - - - (154)Deferred tax - - - 29Other - - - (52)Tax effect of the above adjustments - - - 123Shareholders' funds under IFRS 4,052 4,199 3,094 2,768 Disclaimer Abbey National plc ("Abbey") is a wholly owned subsidiary of Banco SantanderCentral Hispano, S.A. (Grupo Santander) (SAN.MC, STD.N). Grupo Santander is the9th largest bank in the world by market capitalization and the largest in theEuro Zone. Founded in 1857, Grupo Santander has 63 million customers, 9,970offices and a presence in over 40 countries. It is the largest financial groupin Spain and Latin America, and is a major player elsewhere in Europe, includingthe United Kingdom through Abbey and Portugal, where it is the third largestbanking group. Through Santander Consumer it also operates a leading consumerfinance franchise in 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 asdefined in the rules of the UK Listing Authority. Abbey and Grupo Santander cautions that this presentation contains forwardlooking statements within the meaning of the US Private Securities LitigationReform Act of 1995. These forward looking statements are found in various placesthroughout this presentation and include, without limitation, statementsconcerning our future business development and economic performance. While theseforward looking statements represent our judgment and future expectationsconcerning the development of our business, a number of risks, uncertainties andother important factors could cause actual developments and results to differmaterially from our expectations. These factors include, but are not limited to,(1) general market, macro-economic, governmental and regulatory trends, (2)movements in local and international securities markets, currency exchangerates, and interest rates, (3) competitive pressures, (4) technologicaldevelopments, and (5) changes in the financial position or credit worthiness ofour customers, obligors and counterparties. The risk factors and other keyfactors that we have indicated in our past and future filings and reports,including those with the Securities and Exchange Commission of the United Statesof America, could adversely affect our business and financial performance. Contacts Thomas Coops (Communications Director) 020 7756 5536 Israel Santos (Investor Relations) 020 7756 4181 Christina Mills (Media Relations) 020 7756 4212 For more information contact: investor@abbey.com. This information is provided by RNS The company news service from the London Stock Exchange