Sant Uk.10te% Regulatory News (SAN)

28 Oct 2008 07:30



Abbey on track for another year of strong results

London, 28th October 2008

This statement provides a summary of the business and financial trends for the nine months to 30 September 2008. Unless otherwise stated, the trading [1] results of Abbey are compared to equivalent results for 2007, and exclude Alliance & Leicester and Bradford & Bingley. All profit and loss analysis excludes any impact from the recent transactions for Santander to acquire Alliance & Leicester and for Abbey to acquire the deposit base and distribution channels of Bradford & Bingley. These three businesses are hereafter referred to as the combined UK businesses.

The results of Santander for the nine months to 30 September 2008 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 nine months was well ahead of last year, with income growth accelerating since H1 2008;

mortgage balances were up 12% compared to the same period in 2007. The growth in net mortgage lending is largely attributable to improved retention performance and sustained gross lending volumes in a smaller market. Abbey has consolidated its strong first half performance, continuing to write lower loan to value (LTV) new business at higher new business margins, with negligible lending in the "greater than 90% LTV" bracket in the third quarter;

another excellent quarter in attracting retail customer deposits of £1.4bn, with inflows in the first nine months 70% higher than the comparative period in 2007. Abbey has also been very successful in increasing its year to date flows in capital guaranteed retail structured products by 169% to £0.8bn and growing its Corporate Banking business, which attracted deposits of £1.5bn in the third quarter. This performance has helped to support growth in the mortgage book, and is consistent with Abbey's resilient retail balance sheet performance and strong retail funding mix (c.60% customer deposit based, less than 10% of Retail and Corporate assets are funded by short term wholesale funds). 

the Bradford & Bingley transaction will further strengthen the funding position of the combined UK businesses and will offset Alliance & Leicester's deposit / loan gap identified at the time of the acquisition announcement;

trading expenses slightly ahead, albeit at a rate below UK peers, impacted by investment in customer facing operations and growth businesses such as Corporate Banking and Private Banking which are contributing to good income growth. The trading cost to income ratio of 46.5% (Q3 ytd 2007: 49.9%) is now better than the average of the sector, and accelerating Abbey's progress to becoming best in class;

trading provisions increased in line with expectations, largely driven by the secured portfolio reflecting market deterioration. Abbey's book is of high quality prime residential lending, with arrears and NPL ratios well below CML average, and increased secured coverage ratios benchmarking well above UK peers. Abbey's indexed LTV stock remains at 50%. New business continues to be actively managed, with average LTV on new lending in Q3 of 62% compared to 67% in the first half of the year and negligible lending in the "greater than 90% LTV" bracket in the third quarter; and

Abbey remains well capitalised and has capital resources well in excess of current regulatory requirements. The position of the combined UK businesses was further strengthened in October with the injection of £1bn of capital from Santander. The injection fulfils Santander's commitment made on the announcement of the Alliance & Leicester plc acquisition earlier in the year, as well as Santander's commitment to support the UK government's banking support scheme.

Chief Executive's Update

"Abbey has seen another excellent quarter's performance, with good contributions from all areas. Our revenue growth has improved again. This is balanced against controlled costs, which are only up slightly as a result of our continued investment in our Corporate Banking and Private Banking businesses, and means that our cost to income ratio has reduced further to 46.5%, further improving our competitive position versus the sector average.

The recent market turmoil is unprecedented and has profoundly changed the landscape for UK banking. The UK Government's initiative announced in early October, including the provision of liquidity and funding support and facilities to enable banks to raise new capital to strengthen their capital base, was in our view a key step in bringing greater stability to the UK banking sector.

Abbey welcomed these measures, and while we won't utilise the recapitalisation scheme with Government funds, we fully supported the Government scheme. 

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. The quality of our lending continues to be based on affordability and robust risk management and this will not change. As predicted at the half-year, we have seen our net lending market share reduce from its peak in Q2, but remain significantly above the same period last year at 28%.

In addition, we had strong deposit inflows demonstrating that Abbey, backed by the strength of Santander, is regarded as a secure and trusted home for UK savings customers.

Moreover, in recent weeks we have completed the acquisition of Bradford & Bingley's savings business and direct channels as well as the acquisition of Alliance & Leicester by Santander. These acquisitions are part of Santander's UK growth strategy and the combined UK businesses give us approximately 1,300 branches on the high street and make us the third largest deposit taker in the UK.

We will continue to grow our business and remain a challenger in the UK market with attractive offers such as high-interest current accounts, strong savings rates and good mortgage deals. Over time, it is our intention to make the full range of our competitive, value-for-money products available to every one of our 24 million UK customers.

Abbey continues to benefit from the strength of our parent company, Santander, and as part of the Santander Group, is uniquely well-positioned for the challenges ahead."

António Horta-Osório, Chief Executive

Financial results

Trading income: 

Net interest income was significantly ahead of the same period last year. Retail Banking net interest income was the main driver of this improvement, reflecting robust asset and customer deposit growth of 11% and 9% respectively. Deposit related income is benefiting from improved balance sheet growth combined with strong margin management. Mortgage lending has also benefited from better new business margins throughout 2008, taking advantage of favourable pricing conditions, whilst maintaining focus on high quality prime residential lending at lower LTV. In addition, improved retention at attractive margins is driving the accelerated growth in mortgage related income, including an increase in standard variable asset. 

Non-interest income was also ahead compared to the prior year driven by a solid performance across Retail Banking, Corporate Banking and Private Banking. Despite difficult market conditions, Retail Banking continued to broaden its cross-selling activity, with increased commission from credit cards and investments. Success in these areas was offset by continued pressure on mortgage redemption and current account charges and lower unsecured lending. Corporate Banking performance was ahead driven by a continued prudent lending approach whilst taking advantage of opportunities in the market. Private Banking was ahead driven by fees in James Hay and Global Banking & Markets had a robust performance due to a focus on core business.

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, as anticipated, driven by the deterioration in the secured performance, as well as an increase in provisions to strengthen secured coverage as market conditions worsen. Unsecured performance remained stable, and slightly ahead of expectations. 

The increase in mortgage charge is primarily driven by higher average losses on possessions due to the weaker housing market.

The stock of properties in possession increased to 802 (Q2 08: 589, Q3 07: 498) reflecting the sharp drop in housing market activity. In terms of 3 month plus arrears, the increase to 8,916 (Q2 08: 8,316, Q3 07: 7,365) was expected due to worsening economic conditions and affordability constraints. However, Abbey remains significantly better than the industry based on the most recent CML figures for both measures and Abbey's book of prime lending stock is performing well compared to its competitors.

Credit quality remains strong, with the average LTV on new business completions reducing to 62% (Q2 08: 67%) and stock remains at 50% (Q2 08: 50%). 

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

Main highlights for the nine months to 30 September 2008 (compared to the same period in 2007 unless otherwise stated) include:

[2] Credit card openings prior to Q3 2007 were opened through Abbey’s relationship with MBNA. Cards are now issued through Abbey’s relationship with Santander Cards Limited (UK).