UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
FORMForm 20-F| | | |
| (Mark One) | | |
o | | |
o | | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | OR |
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þ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | |
| | For the fiscal year ended December 31, 20042005 |
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| OR |
| |
o | | OR |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | |
| | For the transition period fromto |
| OR |
|
o | | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | | |
| | Commission file number 0-25670Date of event requiring this shell company report to |
Commission file number 0-25670
Abbey National plc
(Exact name of Registrant as specified in its charter)
England
(Jurisdiction of incorporation or organization) Abbey National House, 2 Triton Square, Regent’s Place, London NW1 3AN, England
(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act.
| | | |
Title of each
Each Class | | Name of each exchange
Each Exchange on which registeredWhich Registered |
| | |
| Non-cumulative Dollar-denominated Preference | | New York Stock Exchange* |
| Shares of nominal value $0.01 each, Series B | | New York Stock Exchange* |
| American Depositary Shares, | | New York Stock Exchange |
| each representing one Non-cumulative | | |
| Dollar-denominated Preference Share | | |
| of nominal value $0.01, Series B (ANBPRC) | | New York Stock Exchange |
| 7.25% Perpetual Subordinated Capital Securities | | New York Stock Exchange |
| (SXA) | | New York Stock Exchange |
| 7.375% Perpetual Subordinated Capital Securities | | |
| (SXP) | | New York Stock Exchange |
(SXP) | |
| * | Not for trading, but only in connection with the listing of related American Depositary Shares |
* Not for trading, but only in connection with the listing of related American Depositary Shares
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
| | | | | |
| Ordinary Shares of Nominal Value 10 Pence Each | | None | |
103/8% Non-cumulative Preference Shares of nominal value 10 pencevale £1 each | | | None200,000,000 | |
10 3/8%85/8% Non-cumulative Preference Shares of nominal value £1 each | | | 200,000,000 | |
8 5/8% Non-cumulative Preference Shares of nominal value £1 each | | | 125,000,000 | |
7 3/8%3/8% Non-cumulative Dollar-denominated Preference Shares of nominal value $0.01 each, Series B | | | 18,000,000 | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer þ
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17o Item 18þ
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Contents
1
Business Review and Forward-looking statementsStatements
Chairman’s Statement
This was a
Chief Executive’s Review
Overview
In the first full year
since the acquisition of
unprecedented change for Abbey National plc
(“Abbey”(‘Abbey’)
culminating in the acquisition of Abbey by Banco Santander Central Hispano, S.A.
The offer was recommended by the Boards of both companies, Abbey has made good progress in rebuilding its business and
it became effective on 12 November 2004. 2004 was the second year ofhas posted a three-year turnaround plan involving a significant amount of reorganisation across the whole company - particularly in the first six months. At the same time we - like our peers - have had to prepare for and implement significant regulatory changes including rules governing mortgage lending. In addition, Abbey and its people also had to cope with the uncertainty and extra demands arising from the takeover activity.
Given these challenges, Abbey produced a resilientstrong set of financial results.
At the start of 2004, I said that2005 we had toset clear targets against which Abbey’s progress would be able to show tangible evidencemeasured:
| | |
stabilise Personal Financial Services (PFS) trading revenues after a
period of decline | | PFS trading revenues were up 1% |
| |
accelerate cost savings, with a cost reduction in 2005 of £150m
instead of the £100m originally targeted | | cost reduction of £224m |
We’ve reduced costs across the business, and there are clear signs of progress - both for our customersimproved sustainable revenue performance.
Our market share of new business in mortgages and savings has improved and our shareholders. For our customersinitiatives to enter areas where we have improvedsignificant opportunities – such as current accounts, unsecured personal loans and investments — are building momentum. In addition, we have announced our intention to set up our own credit card business, drawing upon the qualityexpertise of Santander’s global card operations. More recently we announced the sale of our Life assurance business to Resolution plc (‘Resolution’), and entered into a distribution agreement with Resolution allowing Abbey to provide products and services through our established direct and intermediary channels. Across all product lines we are focusing on our strengths to build profitable businesses, whilst maintaining good credit quality.
Underpinning our progress are operational improvements in terms of sales capacity and productivity. The number of people holding sales authorisations in our branches has increased by 28% from the start of the
year. In addition, the service
and productsissues that
we offer - but accept that we can and must do better. For our shareholders, the value of the Banco Santander Central Hispano, S.A. offer represented a premium of circa 38% compared to the average share price in the three months prior to announcing the deal - and subsequently the strongwere hindering performance in the
Banco Santander Central Hispano, S.A. share price to the date of this report has increased this value further. Abbey returned to profit in 2004 after two successive years of losses even after incurring a further £564m of reorganisation costs and post acquisition charges. The risks within the Portfolio Business Unitintermediary channel have been substantially removed - and we have reached agreement with the Financial Services Authority in relation to the closed with-profits funds.
There have been a number of changes to the management team since the completion of the sale of Abbey. Francisco Gómez-Roldán, formerly Finance Director of Banco Santander Central Hispano, S.A., is Abbey’s new Chief Executive. Francisco has held various senior posts with Banco Santander Central Hispano, S.A., including key roles in turning around the performance of two Spanish banks, Banesto and Argentaria. Since his appointment we have restructured the board - introducing a simpler structure with clearer lines of responsibility with increased prominence to risk and compliance. In February, Graeme Hardie, former Head of NatWest Retail Banking, joined the Board as Executive Director, Sales and Marketing, and in May, Paul Bradshaw joined Abbey as Head of Insurance and Asset Management. Nathan Bostock also joined the Board as Executive Director, Finance and Markets. We also have a new non-executive director team - with Keith Woodley and myself being joined by a number of highly experienced individuals from Banco Santander Central Hispano, S.A., and Andrew Longhurst, former Chairman of Cheltenham & Gloucester.
I expect 2005 to be a good year for Abbey. I continue to be impressed by our people, and their resilience and willingness to rise to the challenge. We have clear priorities for 2005, set around cost reduction and sales productivity, whilst maintaining a strong focus on risk and compliance.
Although there are still challenges ahead, and we will have to make some tough decisions, we are now in a strong position with the support of Grupo Santander to reaffirm Abbey’s position as one of the leading banks in the UK.
Lord Burns, Chairman
2
successfully addressed.
Business Review and Forward-looking Statements
Chief Executive’s Review
Overview
Abbey returned to profit, with resilient results given a year of change, and the impact of takeover activity on the business in the second half. Abbey is now emerging from a period of significant disruption, having tackled and removed serious risks that threatened the company’s prospects and future.
There remains huge potential in Abbey’s core retail banking franchise — with about 18 million customers, the Abbey brand and strong market positions — there is scope for Abbey to reverse the underperformance in recent years and reaffirm its position as a leader in personal financial services in the UK. We need to do more with our existing customers — both in terms of retention and cross-selling more products that meet their needs.
On 12 November 2004, the acquisition of Abbey by Banco Santander Central Hispano, S.A. was completed, making Abbey an important part of one of the largest global banking groups in the world. Abbey’s focus, like that of Grupo Santander is retail banking — working hard at the basics and aiming to improve sales and revenue performance across all our sales channels. At Executive level, we are completing a top class team and are confident we will demonstrate good progress throughout 2005.
Key financial highlights:
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| > | | statutory profit before tax of £273m (2003: a loss of £(686)£596m (2004: £(21)m), andwith a profit attributable to ordinary shareholdersafter tax of £32m (2003: a loss of £(759)£420m (2004: £(54)m); |
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| > | | statutory profit before tax for Personal Financial Services of £250m (2003: £235m)£509m (2004: £(32)m); |
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| > | | Personal Financial Services trading profit before tax of £775m up 34% compared to £579m in 2004, benefiting from an increase in revenues combined with lower costs resulting from the cost reduction programme; |
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| > | | trading profit before tax forincome in Personal Financial Services was slightly ahead of £814m compared with £1,021m2004, and better than originally targeted at the start of 2005. During the year trading income has benefited from increased fee income, partially offset by a modest decline in 2003, with the decline largely attributable to a narrowing of the Personal Financial Services Spread by 30 basis points;spreads; |
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| > | | excluding restructuring charges,Personal Financial Services trading cost growth was restrained to below inflation; |
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> | | credit quality remains excellent, with no significant signsexpenses were £224m lower than 2004, a reduction of deterioration on either13%, well ahead of the secured or unsecured loan portfolios;original targeted savings for 2005 of £100m; |
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| > | | a reduction in the Personal Financial Services trading cost:income ratio of 61.5% and return on equity of 12.1%to 60.6% (2004: 69.9%); |
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| > | | non-tradingprovision charges in relation to Personal Financial Services lending (after adjusting for 2004 write backs) were higher by £54m; |
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| > | | reorganisation and other charges, IFRS embedded value charges and rebasing and hedging variances of £564m include £321m£266m (2004: |
| | £546m), including the cost of reorganisation costs incurred through 2004, and a further £243mcompensation following remediation of post-acquisition charges;£70m relating to endowment misselling; |
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| > | | total retail customer loans of £94.3bn,£99.3bn, up 4% on last year; |
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> | | the Portfolio Business Unit assets have further reduced by 62%, and retail deposits of £62.0bn, also up 4% compared to £4.7bn, now less than 10% of the original £60bn, and a statutory profit reported for 2004; and |
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| > | | capital ratios remain strong, withdecreased due to the impact of IFRS adjustments applicable from 1 January 2005, partly offset by an increase in net attributable profit. The tier 1 ratio decreased to 10.0% and equity tier 1 ratio ofto 6.6%, compared with 10.4% and 7.0%. in 2004 respectively. |
2
New business flows
Business Review and Forward-looking Statements
Chief Executive’s Reviewcontinued
Strategic Outline
At the time of Abbey’s third Quarter trading update, details of Abbey’s strategic plan were announced. We have a clear vision to be the best retail bank in 2004 were mixed, with mortgage new business and investment sales lower than in 2003, but with a turnaround in savings inflows building momentum, and good performancesthe UK, in terms of unsecured lendingservice and efficiency.
Over the next three years we have plans to transform Abbey from its historical focus on mortgages and savings, to a full retail bank
account openings. Duringoffering. Our aim is for Abbey to become a powerful competitor across the latter part of 2004 signs of revenue stabilisation have been apparent, but the outlook on revenues for 2005 remains tough. Against this backdropmarket, and we will work to improve sales productivity while at the same time reducing costs.
Rebranding:
In February, we also announced the alignment of the Abbey corporate identity with the global identity used by Grupo Santander across 40 countries. The familiar Abbey brand name will continueaim to be used with Grupo Santander’s flame symbol, showing that Abbey is now part of aable to deliver strong revenue and dynamic group. The focus on improving the customer experience remains – we wantprofit growth over this period.
There are two components to
make banking an easier and better experience.Strategic Outline
Priorities for 2005:Abbey’s strategic plan:
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| > | | improving sales performance and productivity; |
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> | | stabilising revenue trends in mortgages and savings, and positioning the Personal Financial Services business for revenue growth in 2006; |
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> | | significant cost base reductions;moving to a new operating model; and |
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| > | | maintaining a strong focus on riskdelivering revenue growth in both existing and compliance.new markets. |
3
New operating model
Business ReviewWe believe that the new model will significantly improve the efficiency of back-office and Forward-looking Statements
Chief Executive’s Review
Improvingmanufacturing operations, change the mix of front / back office staff and improve front-line sales performancecapability.
In the short-term one of our priorities has been cost reduction activity, and
productivity:Keyat least 4,000 jobs were taken out of the business in 2005. Abbey will continue to unlockingreview headcount against the potentialneeds of the business and our future plans, with further job cuts expected, though not of the magnitude experienced in 2005. This is in line with Santander’s model of continuous efficiency and improvements through leading edge technology. These types of cost saving efforts will become business-as-usual across Abbey.
At the same time, we are working to improve our sales capability, and are targeting significant growth across all channels in 2006.
Our current level of sales productivity is well below the average of our peers, and is significantly lower than the best in the Abbey customer franchise is improvingmarket. We have introduced a basic focus on sales performance and productivitymanagement across all channels – looking to increase and optimise capacity, and manage performance more rigorously.
In the medium-term, we expect the implementation of Partenon, Santander’s information technology platform, will further lower the marginal cost of new business – reducing manufacturing and IT costs as a percentage of the total cost base, and allowing greater investment in customer facing activities.
We anticipate that Partenon will not only provide efficiency benefits, but will also improve the speed to market with new products, and provide better sales
channels — branch, telephone, electronictools and
intermediary.Workprocesses, including a single view of our relationship with the customer. A detailed implementation plan is underway to:now in place for Partenon, with a phased rollout through 2006 and 2007 – with 2008 the first year in which a full benefit will be realised.
Revenue growth from new and existing markets
In Abbey’s core markets of mortgage and savings, we are aiming to reverse the recent trends in revenues through more aggressive balance sheet growth in a more stable margin environment than in recent years. In mortgages we are targeting new business levels above our current stock share – to maintain and then grow our position in this market. In mortgages, plans to enter higher margin segments are being developed with progress expected through 2006 and 2007. These segments are a large and growing part of the market in which Abbey has not previously competed. In savings we have to defend our strong market position and focus on growing the business profitably.
The bank will grow aggressively in areas where it is under-represented such as current accounts, unsecured loans, investments and pensions. In addition, it will seek to develop opportunities in consumer finance and business banking. Abbey is a natural competitor to the big four clearing banks and its plan is to attack in the areas where it has significant opportunities to grow and take market share.
In some of these initiatives, Abbey can use the strength of Santander. As an example, in the consumer finance market Abbey entered into a joint venture in August to develop the motor finance business in the UK – drawing upon Santander’s expertise and product range in this area. In January we announced the intention to set up our own credit card business. In doing so we will exit the existing arrangement with MBNA, with Abbey’s new operations able to leverage Santander’s global card operation (which currently has 49 million cards in issue) and Partenon.
Financial targets
Abbey is on track to meet the revenue and cost targets set at the time of acquisition:
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| > | | increase the number and qualityrevenue synergies of customer-facing employees; |
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> | | introduce a new incentive scheme more closely linked to performance and quality of service; |
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> | | introduce new minimum sales performance standards; |
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> | | improve local management information, particularly in branches, to increase local accountability; |
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> | | rebrand and refurbish branches, commencing from May;£150m by 2007; and |
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| > | | ensure that all call centres can advise and sell across a wider rangecost synergies of Personal Financial Services products – with a seamless link with the branches to assist in terms of retention.£300m by 2007. |
The intermediary channel remains an important
As part of
Abbey’s plansthe strategic update in October 2005, further financial targets for
delivering growth, with the priority on improving service levels, particularly for our main Independent Financial Adviser relationships, including enhancing our online capability and tailoring products exclusively for the Independent Financial Adviser channel.Revenues:
In 2005, the aim is to stabilise mortgage and savings income, with retaining existing customers a key driver of value. In terms of new business we are targeting an improvement in mortgage sales trends through all channels. In the future, Abbey will compete more effectively in its core markets, and over the next 18 months, we will continue to develop higher margin products such as large loans, buy-to-let and new build.
In savings, the focus continues to be to rebuild the profitable branch-based franchise, in addition to using electronic channels.
Outside mortgages and savings, improvements are expected in 2005 across most product areas. In particular, we expect to make progress in rebuilding investment sales with the first step being a new range launched in March, focusing on capital guaranteed offers that use our structuring capability in Abbey Financial Markets. We are also developing plans to boost our unsecured lending, general insurance and Small and Medium Enterprise operations.
Tackling the cost base:
The first phase of work to reduce Abbey’s cost base is underway,2006 – 2008 were published, including:
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| > | | removing 4,000 roles byrevenue growth of 5 – 10% per annum over the end of the year. The vast majority of the roles removed to date relate to back-office functions without affecting our risk and compliance capability;next 3 years; |
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| > | | cancellationa cost: income ratio of 60% of projects, that do not relate to Partenon, Grupo Santander’s information technology platform. This is without damaging revenue prospects; and |
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> | | introduction of a new management team with specific responsibility to control the cost base. |
In 2005, the programme of site rationalisation will be accelerated, focusing on reducing the number of call centres in the UK (currently 25), and supported by the development of a single telephony platform.
The other component of the first phase of cost reduction involves a project spanning 10 workstreams focusing on business and process re-engineering, with benefits expected to increase from 2006.
The second phase of cost reduction involves the rollout, from late in 2006, of Partenon, and detailed plans are now in place.
Measuring Abbey’s progress:
We remain confident of achieving the published revenue and cost synergies:
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> | | £150m of revenue synergiesaround 45% by 2007 with momentum from 2006;2008; and |
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| > | | a run-ratereturn on regulatory tier 1 equity of £200m gross cost savings18% by the end of 2006, rising to £300m by 2007.2008. |
In addition, £300m of cost savings are expected to be achieved before the full impact of Partenon, with further efficiency benefits in 2008, that will provide further scope for increased investment in front office operations.
After taking account of the sale of the Life businesses, these are ambitious, but realistic targets in a competitive and slowing market environment. The confidence in the targets reflects the strength of the Abbey franchise – and the potential to improve performance and move into new markets. We expect this to be underpinned by the implementation of Partenon, and the ability to leverage the strength of the Group.
3
During
Business Review and Forward-looking Statements
Chief Executive’s Reviewcontinued
At the coursesame time we have been strengthening the management team. Changes include the appointment of Jorge Morán as Chief Operating Officer, who previously held senior roles in Santander and has extensive knowledge of European retail banking operations.
In the first full year since the acquisition by Santander, we believe that Abbey has made excellent progress. We are meeting our challenges and have competitive products and the enthusiasm to succeed at all levels in the organisation. We have set ourselves clear targets, and will build on the momentum we have established in 2005. 2006 has started positively with business performance maintaining the trends reported through 2005, and we expect to be able to demonstrate evidence of:further improvements in customer service and business efficiency in 2006.
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> | | increased numbers of customer facing staff; |
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> | | increased staffing levels dedicated to sell; |
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> | | reduced new joiner staff turnover; |
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> | | improved sales performance across all channels; |
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> | | improved market share trends across the range of Personal Financial Services products; |
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> | | successful product launches; |
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> | | further site closures; and |
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> | | 4,000 roles removed across the business. |
In terms We’ve made a good start towards achieving our three-year turnaround and long-term goal of financial performance during 2005, we are targeting to:becoming the best retail bank in the UK.
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> | | stabilise Personal Financial Services trading revenue trends on an underlying basis; |
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> | | accelerate cost savings, with a cost reduction in 2005 of £150m instead of the £100m originally targeted; and |
Francisco Gómez-RoldánChief Executive4
Business Review and Forward-looking Statements
Chief Executive’s Review
| | |
> | | reduce reorganisation charges, which will be in line with previous guidance of circa £150m per year, in addition to which, there will be some ongoing spend associated with regulatory change. |
2004 marked the year that Abbey returned to profit. This business has huge potential. We can now realise this using Santander’s strength and placing a strong emphasis on execution.
Francisco Gómez-Roldán
Chief Executive
5
Business review and forward-looking statements
Forward-looking statements Abbey National plc (‘Abbey’) may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the US Securities and Exchange Commission, including this Annual Report, reports to shareholders and other communications. The US Private Securities Litigation Reform Act of 1995 contains a safe harbour for forward-looking statements on which Abbey relies in making such disclosures. Examples of such forward-looking statements include, but are not limited to:
| | | |
| > | | projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital structure or other financial items or ratios; |
| | | |
| > | | statements of plans, objectives or goals of Abbey or its management, including those related to products or services; |
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| > | | statements of future economic performance; and |
| | | |
| > | | statements of assumptions underlying such statements. |
Words such as
“believes”‘believes’,
“anticipates”‘anticipates’,
“expects”‘expects’,
“intends”‘intends’,
“aims”‘aims’, and
“plans”‘plans’ and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. Abbey cautions readers that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements made by Abbey or on Abbey’s behalf. These factors include:
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| > | | inflation, interest rate, exchange rate, market and monetary fluctuations; |
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| > | | the effect of, and changes to, regulation and government policy; |
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| > | | the effects of competition in the geographic and business areas in which Abbey conducts operations; |
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| > | | changes in consumer spending, saving and borrowing habits in the United Kingdom and in other countries in which Abbey conducts operations; |
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| > | | the effects of changes in laws, regulations, taxation or accounting standards or practices; |
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| > | | the ability to increase market share and control expenses; |
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| > | | the timely development of and acceptance of new products and services of Abbey and the perceived overall value of these products and services by users; |
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| > | | acquisitions and disposals; |
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| > | | technological changes; |
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| > | | the possibility of foreign exchange controls, expropriation, nationalisation or confiscation of assets in countries in which Abbey conducts operations; and |
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| > | | Abbey’s success at managing the risks of the foregoing. |
Abbey cautions that the foregoing list of important factors is not exhaustive. When relying on forward-looking statements to make decisions with respect to Abbey, investors and others should carefully consider the foregoing factors and other uncertainties and events. Such forward-looking statements speak only as of the date on which they are made, and Abbey does not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.
65
OperatingBusiness and Financial Review
This section contains forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in such forward-looking statements. See “Forward-looking statements” on page
6.5.
Abbey National plc
(“Abbey”(‘Abbey’) and its subsidiaries
(together, the ‘Group’) operate primarily in the UK,
under UK Law and
from 12 November 2004 formRegulation and are part of
Grupo Santander.the Santander group of companies. Abbey is a significant financial services provider in the UK, being the second largest residential mortgage lender
and the third largest savings
brand, andbrand. It operates across the full range of personal financial services serving
circaapproximately 18 million customers.
GrupoFounded in 1857, Santander
has over 60 million customers, approximately 10,000 offices and a presence in over 40 countries. It is
Europe’sthe largest
bankingfinancial services group
with 5,900 branches in
15 countriesSpain and
is one of the world’s 10 largest banks by market capitalisation.Latin America.
The principal executive office and the registered office of Abbey
National plc and Abbey National Treasury Services plc is Abbey
National House, 2 Triton Square, Regent’s Place, London NW1 3AN. The telephone number of Abbey is
+44-+44 (0)870-607-6000. The designated agent for service of process on Abbey
National plc in the United States is CT Corporation System, with offices at 111 Eighth Avenue, New York, NY 10011. Please see
“Operating“Business and Financial review – Tangible fixed assets” for further information regarding Abbey’s properties.
Summary history of Abbey National plc The Abbey National Building Society
(the Society)(‘the Society’) was formed in 1944 with the merger of two long-standing building societies. In 1988, Abbey National plc was incorporated as a bank and in 1989 the Society transferred business to Abbey National plc as part of the conversion and listing on the London Stock Exchange. In 2003, the brand name was shortened to Abbey and this is the name
we useused in this Annual Report and Accounts.
DuringA list of Abbey’s principal subsidiaries and their country of incorporation can be found at page 129. On 12 November 2004, Abbey was acquired by Banco Santander Central Hispano, S.A.
The transaction was recommended by the Board of Abbey, and via a scheme of arrangement became effective on 12 November 2004.Corporate purpose and strategy Abbey’s
ultimate purpose and goal is to maximise value for
the shareholders of Banco Santander Central Hispano, S.A.,its shareholder, focusing on the provision of
personal financial servicesPersonal Financial Services in the UK.
Over the last two years, Abbey has made good progress in restructuring
theits business — exiting the large majority of £60bn of assets and businesses that were deemed non-core and investing in the ongoing Personal Financial Services operations.
As partOne year since the completion of
Grupo Santander, this programme will be accelerated.the acquisition, excellent progress has been made against the stated 2005 targets: revenues have been stabilised, sales productivity has improved and significant cost savings achieved. Priorities for
20052006 are
delivering material further cost savings, improving sales productivity in Abbey’s sales channels, and positioning the bank for a return to
position Abbey to deliver revenue
growth. From a Banco Santander Central Hispano, S.A. perspective, the acquisitiongrowth of Abbey reflects its confidence in being ablebetween 5-10% subject to accelerate Abbey’s turnaround,market conditions, as well as providing a platform for growth in the UK and improving its global diversification and balance.
further cost savings.
Following the completion of the acquisition
of Abbey by Banco Santander Central Hispano, S.A.
, in November 2004, a new organisational structure
is beingwas implemented with a revised set of executive responsibilities.
The new
Abbey’s management structure
announced in November 2004, is headed by Francisco Gómez-Roldán,
(Chief Executive). Francisco was previously Finance DirectorChief Executive, supported by Jorge Morán, Chief Operating Officer and consists of
Banco Santander Central Hispano, S.A., before which he held a variety of other senior positions in Banco Santander Central Hispano, S.A.three business divisions and three support divisions.
The new structure has the following divisions:business divisions consist of:
| | | |
| > | | Sales and MarketingRetail Banking- responsible for all direct sales (branches, telephone, internet banking) and intermediary channels. Also responsible for marketing, including product design, and pricing, branding and advertising. This role combines the previous Customer Sales and Customer Propositions functions. Graeme Hardie, former head of Natwest retail customer sales, joined Abbey and was appointed to the Board in February 2005 to head this division. |
| | | |
| > | | Insurance and Asset Management- responsible for the long-term savings and general insurance business together with the asset management activities of the Group. This is a new division reflecting the importance of these markets to Abbey and is headed by Paul BradshawJavier Maldonado, who joined Abbey in May 2005. |
| | |
> | | Manufacturing- responsible for all information technology and operations activity (including service centres). This is a new division that combines the previous Customer Operations and Information Technology divisions, and is headed by Tony Wyatt.was appointed on 9 February 2006. |
| | | |
| > | | Finance and Markets- this is a new division that comprises Abbey Financial Markets, Finance and the Portfolio Business Unit, and is headed by Nathan Bostock. Abbey Financial Markets provides treasury services to the Group, including managing the Group’s funding, liquidity and capital; providing risk management services; as well as manufacturing retail structured products. |
|
| The support divisions consist of: |
| | | |
| > | | Human Resources- responsible for all human resources strategy and personnel support. This division is headed by Priscilla Vacassin.Paul Lomas. |
| | |
| > | | Manufacturing- responsible for all information technology and operations activity (including service centres). This division is headed by Juan Olaizola. |
| | | |
| > | | Risk- responsible for ensuring that the Board and senior management team of Abbey are provided with an appropriate risk policy and control framework, and to report any material risk issues to the Risk Committee and the Board. This division is headed by Ian Jenkins. |
These divisions
There are supported by four centralthree further units — Compliance, Communications,that report directly to the Chief Executive – Strategy and Planning; Legal, Secretariat, and Tax and StrategyRegulatory Affairs; and Planning.Communications.
76
Operating
Business and Financial Review Business Overviewcontinued
Competitive environment and future trends Abbey’s main competitors are established UK banks, building societies and insurance companies and other
financial services providers such as supermarket chains and large retailers.
In recent years, customer access, choice and mobility have all increased, as has the extent of regulation. The market is competitive, driven largely by market incumbents.
Management is confident of Abbey’s strength and potential
to improve business performance despite a slower rate of growth in
some of its core personal financial services
markets, and the potential to improve business performance.markets.
Personal Financial Services The overview of Personal Financial Services set out below reflects the reporting structure in place during
2004 on2005 in accordance with which the segmental information
in the “Business Operating Review – Personal Financial Services” section has been presented.
Retail Banking and Savings Abbey is the second largest provider of residential mortgages in the UK, providing mortgage loans for house purchases as well as home improvement loans to new and existing mortgage customers. Mortgage loans are offered in two payment types. Repayment mortgages require both principal and interest to be repaid in monthly
installmentsinstalments over the life of the mortgage. Interest-only mortgages require monthly interest payments and the repayment of principal at the end of the mortgage term (which can be arranged via a number of investment products including Individual Savings Accounts and pension policies, or by the sale of the property).
Abbey’s mortgage loans are usually secured by a first mortgage over property and are typically arranged for a 25-year term, with no minimum term. Historically, interest on mortgage loans has been charged at
floatingvariable rates determined at the discretion of Abbey by reference to the general level of market interest rates and competitive forces in the UK mortgage market. Fixed rate products offer a predetermined interest rate, generally
fixed for between two and five years, after which they bear interest at
floatingstandard variable rates.
In common with the market, an increasing proportion of new
mortgage business in recent years has been through trackers that track the Bank of England base
rate. More recently, a proportion of new loans arerate normally with an incentive period for the first 2 to 5 years, and flexible mortgages, allowing the customer to vary their monthly payments, or take payment holidays, within predetermined criteria.
More recently the UK market has seen an increase in the proportion of fixed rate lending. In line with the rest of the UK market, the majority of mortgages are prepaid at the end of the fixed or incentive period.
Abbey provides a wide range of retail savings accounts, including on-demand accounts, notice accounts, investment accounts and Individual Savings Accounts. Interest rates on savings in the UK are primarily set with reference to the general level of market interest rates and the level of competition for such funds.
Banking and Consumer Credit Abbey offers a range of personal banking services including current accounts, credit cards and unsecured loans. Credit scoring is used for initial lending decisions on these products and behavioural scoring is used for certain products for further lending.
Abbey’s principal credit card offering is delivered through its strategic alliance with MBNA Europe Bank Limited, who are responsible for taking the credit risk and
currently managing the credit card
base on an ongoing basis.base. In February 2006, Abbey announced its intention to commence issuing credit cards directly rather than through MBNA Europe Bank Limited from 2007.
Abbey National OffshoreInternational
Abbey National International Limited, the principal offshore company, uses the Abbey
OffshoreInternational brand.
Abbey National International Limited’sIts head office is in Jersey,
and it has an operational centre in the Isle of Man. Abbey National International Limited’swith a focus
is on attracting deposits by offering a range of savings accounts denominated in sterling, US dollars and euro.
Cater Allen Limited offers banking services under the trading name Cater Allen Private
Bank and aims to provide a personal banking service to high net worth individuals and small corporate clients.Bank. The
bankbusiness attracts clients by marketing to introducers, including Independent Financial Advisers.
James Hay
James Hay provides and offers administration services for self-invested personal pension schemes and small self-administered pension schemes. Its services are provided to end customers mainly via Independent Financial Advisers and branded financial service providers.
cahoot is Abbey’s separately branded, e-commerce retail banking and financial services provider. cahoot targets customers who wish to access banking services eitherpredominantly through the internet.
General Insurance
The range of non-life insurance products sold by Abbey includes property (buildings and contents) and payment protection. Residential home insurance remains the primary type of policy sold and is offered to customers through the branch network, internet or telephone.and over the telephone, as well as being sold by mortgage intermediaries, often at the same time that a mortgage is being taken out.
The business model currently uses Norwich Union to underwrite most property and payment protection insurances. In addition, Capita Insurance Services and Cap Gemini are responsible for the management and development of systems to support
87
Operating
Business and Financial Review Business Overviewcontinued
Investment
the business whilst the servicing of most policies is outsourced to Capita Insurance Services and
Protectionsome claims administration to Aviva plc.
Insurance and Asset Management
The UK life insurance industry consists of three principal segments: protection, investment and savings, and pensions.
| | | |
| > | | Protection. The traditional form of protection policy, known as term insurance, provides a lump sum benefit payable on death within a specified term. Policies are also available to provide protection against critical illness and disability. |
| | | |
| > | | Investment and savings. Investment bonds, with-profit bonds, structured products, unit trusts, Individual Savings Accounts and endowment life insurance policies are included in this category. |
| | | |
| > | | Pensions. In the UK pensions are a tax-efficient way of saving to provide benefits on retirement. This is a result of the tax deductibility of contributions made and the generally tax-free growth granted to pension funds. |
The polarised regime for investment sales is being removed in 2005. Abbey is in the process of making the mandatory changes to comply with the new regime but will continue to sell only its own products for the time being while continuing to review the opportunities that depolarisation presents, for example, gap filling.
Abbey National Life
plc, and its related subsidiary companies distribute via the marketing associate route, whereby the associate is required to recommend the most suitable products from the product range of the companies for which it acts as
associate as well as via the Independent Financial Adviser route in the UK. Independent Financial Advisers must provide suitable advice on the complete product range that exists in the market place.associate.
Abbey National Life
plc provides a wide range of products including pension, protection and investment products.
The subsidiaries of Abbey National Life areplc include Abbey National Unit Trust Managers Limited which manages a range of Unit Trusts and Abbey National Personal Equity PlansPEP and Individual Savings AccountsISA Managers Limited which manages the Personal Equity Plans and Individual Savings Accounts businesses of Abbey. The trustees of the unit trusts changed during the last quarter of 2004 from Citicorp and HSBC to Royal Bank of Scotland Trustee and Depository Services Limited and the investment manager up to January 2004 was Abbey National Asset Managers. On 22 January 2004 Abbey announced that it was transferring certain of its fund management activities to a number of external fund managers.
Scottish Mutual Assurance plc
distributesand Scottish Provident Limited distribute principally via the Independent Financial Adviser route in the UK.
Independent Financial Advisers provide suitable advice on the product range that exists in the market place. Scottish Mutual Assurance plc and its predecessors have been in the insurance business since 1883.
Scottish MutualIt provides a broad range of products including personal pensions, single premium products such as investment bonds annuities and products to cover death, critical illness and disability.
Since the acquisition of Scottish Provident in 2001, its operations have been combined with Abbey’s other life assurance operations, realising cost synergies. New conventional protection business sold under the Scottish Provident brand in the UK is written into Scottish Mutual Assurance plc.
General
Sale of Life InsuranceThe range Businesses
Abbey announced on 7 June 2006 that it has entered into an agreement to sell its entire life insurance business to Resolution plc (“Resolution”) for cash consideration of non-life insurance products sold by Abbey includes property (buildings and contents) and payment protection. Residential home insurance remainsapproximately £3,600m.
Completion of the primary typetransaction is expected during the third quarter of policy sold2006 and is offeredconditional upon, among other things, approval from the Financial Services Authority and relevant overseas regulators and the approval of Resolution’s shareholders. The life businesses being sold are Scottish Mutual Assurance plc, Scottish Provident Limited and Abbey National Life plc, as well as the two offshore life companies, Scottish Mutual International plc and Scottish Provident International Life Assurance Limited. Abbey will retain all of its branch-based investment and asset management business, James Hay, its market-leading self-invested personal pension company, and its Wrap business.
Separately, in order to
provide continuity of product supply and service to its customers,
Abbey has entered into a retail bank distribution agreement and intermediary distribution agreement with Resolution. Under the retail bank distribution agreement Abbey will distribute through
its retail network Abbey-branded protection, life bonds and stakeholder pension products provided by Resolution. Under the
branch network and overintermediary distribution agreement Abbey will continue to be the
telephone, often at the same time that a mortgage is being taken out.exclusive distributor of Scottish Provident protection products to intermediaries. The business model currently uses a panel of competing insurers to offer a wider choice ofdistribution agreement covers Scottish Provident Self Assurance protection products, Scottish Mutual Pegasus protection products and more competitive retail pricing.offshore bonds issued by Scottish Provident International Life Assurance Limited. Resolution will use Abbey’s intermediary sales force to distribute Scottish Provident products to intermediaries and will reimburse Abbey’s costs, on a variable basis, in respect of this sales force. The distribution agreements have a term of ten years, subject to a review after five years. In addition, Capita EastgateAbbey has secured exclusive access to provide retail banking products to Resolution’s estimated five million policyholders.
James Hay
James Hay provides and
Cap Geminioffers administration services for self-invested personal pension schemes and small self-administered pension schemes. Its services are
responsible for the managementprovided to end customers mainly via Independent Financial Advisers and
development of new systems to support the general insurance business whilst the servicing of policies was outsourced to Capita Eastgate and some claims administration to Aviva plc. The process of fully implementing these arrangements and new systems is nearing completion. During 2004, Abbey ceased offering motor and travel insurance.
branded financial service providers.
Abbey Financial Markets (formerly Treasury Services) Abbey Financial Markets is
now structured into the following three business areas:
Asset and Liability Management Asset and Liability Management is responsible for managing the Group’s structural liquidity of the bank.liquidity. This includes Abbey’s capital management activities and medium and long-term funding, including Abbey’s structured covered bond and securitisation programme.programmes. It manages Abbey’s product and structural exposure to interest rates and, in that role, is a link between the retail and wholesale bankingother Abbey Financial Markets areas. Asset and Liability Management helps set and implement Board, Asset and Liability Committee and Risk Committee policies for all aspects of balance sheet management – formulating guidance for, and monitoring, the overall balance sheet shape, including maturity profile. In carrying out its financing role, it maintains many relationships in the financial world which are utilised by other parts of the organisation, including the Personal Financialother Retail Banking Services businesses and the two customer-facing Abbey Financial Markets businesses.
Abbey first registered with the Securities and Exchange Commission in October 1994. Abbey National plc, Abbey National Treasury Services plc and Abbey National First Capital B.V. have registered various shelf facilities with the Securities and Exchange Commission, the most recent being in February 2001, permitting preference shares and debt securities, including medium-term notes and other subordinated securities, to be issued from the date of registration in an aggregate principal amount of approximately $7.0bn.
Under the shelf facility registered with the Securities and Exchange Commission, Abbey National Treasury Services plc may issue senior debt securities, and Abbey National plc and Abbey National First Capital B.V. may issue subordinated debt securities. Abbey acts as guarantor on a senior basis of the debt securities issued by Abbey National Treasury Services plc, and as guarantor on a subordinated basis of the debt securities issued by Abbey National First Capital B.V. Various other entities within the Group may issue other subordinated securities under the shelf facility.
At 31 December 2005, the aggregate amount of outstanding claims of creditors senior to the holders of subordinated debt of the following entities (and in the case of Abbey, senior to the holders of subordinated debt guaranteed by Abbey) was as follows:
| | | | |
|
| Abbey and its subsidiaries | | £ | 196,094m | |
| Abbey National plc | | £ | 131,182m | |
|
At 31 December 2005, the aggregate amount of outstanding claims of creditors of Abbey that will rankpari passuwith the subordinated debt issued by Abbey (and with the subordinated debt guaranteed by Abbey) was as follows:
| | | | |
|
| Abbey National plc | | £ | 7,310m | |
|
8
Business and Financial Review
Business Overviewcontinued
In December 2005 there was a further issue under Abbey’s UK Residential Mortgage Backed Securitisation programme, Holmes Financing Master Trust, bringing the total issuance under the programme to £23.9bn, (of which £15.6bn is outstanding). The terms and conditions of the underlying mortgages remain unaffected by the securitisation process.
See also “Liquidity sources”.
Derivatives and Structured Products Derivatives and Structured Products cover equity, fixed income,
residential property and credit derivative activities including the manufacture of structured products sold to retail customers by Abbey and other financial services organisations.
Short-Term Markets is responsible for managing
theAbbey’s operating
liquidity of the bank.liquidity. It runs Abbey’s short-term funding and liquidity management activities and the securities lending/borrowing and repo businesses. Short-Term Markets focuses on managing Abbey’s liquidity, within the overall balance sheet management framework set by Asset and Liability Management, which also creates trading opportunities. Additionally, Short-Term Markets operates in several international non-cash markets, in particular the stock borrowing and lending repo markets. It has retained a US office, to facilitate Abbey’s short-term multi-currency fund raising.
9
Operating and Financial Review
Business Overviewcontinued
Financing
Abbey Financial Markets continued to raise funding during the year, across the maturity spectrum and in a diverse range of currencies and instruments, but raised no new capital in 2004.
Major debt issuance programs managed by Abbey Financial Markets(1):
| | | | |
Programme | | Outstanding at 31 December 2004 | | Comments |
|
$15bn medium-term notes | | $10.5bn | | Issued in European markets |
$7bn U.S. medium-term notes | | $1.6bn | | Issued in the United States |
$4bn commercial paper | | $0.7bn | | Issued in European markets |
$20bn U.S. commercial paper(2)
| | $2.5bn | | Issued in the United States |
|
(1) | | Securities issued by Abbey National Treasury Services plc unless otherwise stated. |
|
(2) | | Managed for Abbey National North America LLC, a guaranteed subsidiary of Abbey. |
Abbey first registered with the Securities and Exchange Commission in October 1994. Abbey National plc, Abbey National Treasury Services plc and Abbey National First Capital B.V. have registered various shelf facilities with the Securities and Exchange Commission, the most recent being in February 2001, permitting preference shares and debt securities, including medium-term notes and other subordinated securities, to be issued from the date of registration in an aggregate principal amount of approximately $7bn.
Under the shelf facility registered with the SEC, Abbey National Treasury Services plc may issue senior debt securities, and Abbey National plc and Abbey National First Capital B.V. may issue subordinated debt securities. Abbey acts as guarantor on a senior basis of the debt securities issued by Abbey National Treasury Services plc, and as guarantor on a subordinated basis of the debt securities issued by Abbey National First Capital B.V. Various other entities within the Abbey group of companies may issue other subordinated securities under the shelf facility.
At 31 December 2004, the aggregate amount of outstanding claims of creditors senior to the holders of subordinated debt of the following entities (and in the case of Abbey, senior to the holders of subordinated debt guaranteed by Abbey) was as follows:
| | | | |
|
Abbey and its subsidiaries | | £ | 158,223m | |
|
Abbey National plc | | £ | 87,401m | |
|
At 31 December 2004, the aggregate amount of outstanding claims of creditors of the following entities that will rankpari passuwith the subordinated debt issued by those entities (and, in the case of Abbey, with the subordinated debt guaranteed by Abbey) was as follows:
| | | | |
|
Abbey National plc | | £ | 6,395m | |
|
In March 2004 there was a further issue through a new issue under Abbey’s UK Residential Mortgage Backed Securitisation programme, Holmes Financing Master Trust, bringing the total issuance under the programme to £20.6bn, (of which £15.1bn is outstanding). The terms and conditions of the underlying mortgages remain unaffected by the securitisation process.
See also “Liquidity sources”.
Group Infrastructure
Group Infrastructure comprises Central Services, Financial Holdings (which contains the earnings on
the difference between Abbey’s statutory capital and the target regulatory capital allocated to segments)any surplus capital), and the results of certain small
non-core businesses.
The Portfolio Business Unit originally comprised a number of businesses, assets and portfolios that were deemed inconsistent with the new strategy focusing on personal financial services in the UK. Of the £60bn£60.0bn of assets that existed at the start of the programme, now only £4.7bn£2.5bn remains, including finance leases, operating leases (principally Porterbrook),consisting mainly of Porterbrook, and the Motor Finance and Litigation Funding.Funding business. Due to the significantly reduced size of the Portfolio Business Unit the remaining assets including Porterbrook will be reported as part of Abbey Financial Markets in 2006.
109
OperatingBusiness and Financial Review
Operating
Business Review –— Summary The results discussed below are not necessarily indicative of Abbey’s results in future periods. The following information contains certain forward-looking statements.
For a discussion of certain cautionary statements relating to forward-looking statements, seeSee “Forward-looking Statements” on page
6.5.
The following discussion is based on and should be read in conjunction with the Consolidated Financial Statements included elsewhere in this
document.Annual Report and Accounts. The Consolidated Financial Statements are prepared in accordance with
UK GAAP,International Financial Reporting Standards (‘IFRS’), which
variesvary in certain significant respects from US GAAP. A discussion of such differences can be found in the “Other Material Items” section of the
OperatingBusiness and Financial Review and a reconciliation of certain
UK GAAPIFRS amounts to US GAAP is included in note
6158 of the Consolidated Financial Statements.
Abbey has prepared this OperatingBusiness and Financial Review in a manner consistent with the way management views Abbey’s business as a whole. As a result, Abbey presents the following key sections to the OperatingBusiness and Financial Review:
| | | |
| > | | OperatingBusiness review summary- this contains an explanation of the basis of Abbey’s results and any potential changes to that basis in the future, a summary Consolidated Statutory Profit and Lossincome statement with commentary, a summary Consolidated Statutory Profit and Lossincome statement analysed between Personal Financial Services and the Portfolio Business Unit, and a summary of the nature of adjustments between our statutory basis of accounting and Abbey’s management basis of accounting (known as the “trading” basis); |
| | | |
| > | | Personal Financial Services- this contains a summary of the results, and commentary thereon, by profit and lossincome statement line item on a trading basis for each segment. Additional detailed information is provided for certain segments such as the Retail Banking and SavingsInsurance and Investment and ProtectionAsset Management segments due to the significance of their impact on Abbey’s results; |
| | | |
| > | | Portfolio Business Unit- this contains a summary of the results and commentary thereon on a management basis for each segment.basis. Additional detailed information is provided on the assets (andand relevant provisions) of the Portfolio Business Unit due to these businesses being managed for exit;provisions; |
| | | |
| > | | Other Material Items- this contains detailed information about the statutory to trading basis adjustments. It also contains details of the differences between UK GAAPIFRS and US GAAP and the movements therein; and |
| | | |
| > | | Balance Sheet Review- this contains an analysis of Abbey’s balance sheet as a whole, including: |
| | | | | |
| | > | | Capital disclosures- this contains an analysis of Abbey’s capital needs and availability; |
| | | | | |
| | | > | | Off-Balance Sheet disclosures- this contains a summary of Abbey’s off-balance sheet arrangements, their business purpose, and importance to Abbey; and |
| | | | | |
| | > | | Liquidity disclosures- this contains an analysis of Abbey’s sources and uses of liquidity and recent cashflows. |
Basis of results presentationResults
In 2005, the reorganisation of Abbey following its acquisition by Banco Santander Central Hispano, S.A. resulted in a change in the way our business is managed and reported. The discussions in this Annual Report and Accounts reflect our new segments, which are:
| | |
| > | | Retail Banking; |
| | |
| > | | Insurance and Asset Management; |
| | |
| > | | Abbey Financial Markets; |
| | |
| > | | Group Infrastructure; and |
| | |
| > | | Portfolio Business Unit |
In this report, the Retail Banking, Insurance and Asset Management, Abbey Financial Markets and Group Infrastructure segments are disclosedreferred to reflectas the segmentalPersonal Financial Services businesses. The analysis of our results for 2004 has also been presented on this basis. Previously, our segment reporting structure of the group and which is as follows:was:
| | | |
| > | | Banking and Savings; |
| | | |
| > | | Investment and Protection; |
| | | |
| > | | Abbey Financial Markets; |
| | | |
| > | | General Insurance; |
| | | |
| > | | Group Infrastructure; |
| | | |
| > | | Wholesale Banking; |
| | | |
| > | | Motor Finance and& Litigation Funding, (formerly First National);Funding; and |
| | | |
| > | | Other. |
This report reflects
In summary, our General Insurance business has been transferred into the
split of Abbey between the ongoing Personal Financial Services businesses, and those being managed for exit in the Portfolio Business Unit. The Banking and Savings segment, which has been renamed Retail Banking. In addition, Scottish Mutual International Limited, which was reported in the Other segment has been transferred into the Investment & Protection segment in 2005, which has been renamed Insurance and Protection, General Insurance, Abbey Financial Markets and Group Infrastructure segments representAsset Management. Finally, the Personal Financial Services businesses. The Wholesale Banking businesses (which now consist principally of the Porterbrook leasing business), the Motor Finance and Litigation Funding businesses and the remaining businesses in the Other segments representsegment are now reported as the Portfolio Business Unit.
Unit segment.
Critical factors affecting results Critical accounting policies and areas of significant management judgement The preparation of Abbey’s financial statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of income and expenses during the reporting period.
10
Business and Financial Review
Business Review — Summarycontinued
Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The following estimates and judgements are considered important to the portrayal of Abbey’s financial condition.
(a) Provisions for badloans and doubtful debtsadvances
Abbey estimates provisions for
badloans and
doubtful debtsadvances with the objective of maintaining
reserve levelsbalance sheet provisions at the level believed by management to be sufficient to absorb
current estimated probableactual losses
(“observed provisions”) and inherent losses (“incurred but not yet observed provisions”) in Abbey’s loan portfolio from homogeneous portfolios of assets and individually identified loans in connection with loans and advances to banks and loans and advances to customers. The calculation of
specific provisions on impaired loans and advances is based on the likelihood of the asset being written off (or repossessed in the case of mortgage loans) and the estimated loss on such a write-off. These assessments are made using statistical techniques based on historic experience.
General provisions are11
Operating and Financial Review
Operating Review - Summarycontinued
determined based on historic experience, general credit and lending quality, and current or near-future economic prospects. These determinations are supplemented by various formulaic calculations and the application of management judgement.
Abbey considers accounting estimates related to provisions for
badloans and
doubtful debtsadvances “critical accounting estimates” because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between Abbey’s estimated losses (as reflected in the
specific and general provisions) and actual losses will require Abbey to take provisions which, if significantly different, could have a material impact on its future
Profit and Loss Accountincome statement and its
Balance Sheet.balance sheet. Abbey’s assumptions about estimated losses are based on past performance, past customer behaviour, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.
Provisions for
badloans and
doubtful debts,advances, less amounts released and recoveries of amounts written off in previous years, are charged to the line item
“Provisions for bad“Impairment losses on loans and
doubtful debts”advances” in the
Profit and Loss Account.income statement. The
specific and general provisions are deducted from the “Loans and advances to banks” and the “Loans and advances to customers” line items on the balance sheet. If Abbey believes that additions to the
allowanceprovisions for such credit losses are required, then Abbey records additional provisions for credit losses, which would be treated as a charge in the line item
“Provisions for bad“Impairment losses on loans and
doubtful debts”advances” in the
Profit and Loss Account. For US GAAP reporting purposes, allowances for lending losses related to loans within the scope of SFAS 114 “Accounting by Creditors for Impairment of a Loan,” are determined based on the present value of expected future cash flows discounted at the loan’s effective rate, or at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. Credit exposures that are deemed to be uncollectable and credit losses, net of recoveries of previously written off amounts, are first allocated against the cumulative Provisions for bad and doubtful debts, with any difference charged or credited to the line item “Provisions for bad and doubtful debts” within the Profit and Loss Account. Abbey could have chosen, in the current period, estimates that would have had a materially different impact on its financial presentation. For example, theincome statement.
The financial statements for the year ended 31 December
20042005 include a provision charge for
badloans and
doubtful debtsadvances in the
Retail Banking
and Savings segment for an amount equal to
£35m.£208m. This provision
was reducedincreased (in
20032004 it was
£130m)£20m), reflecting
both favourable economic conditions through 2004 resultinghigher default rates in
lower defaultsthe unsecured portfolios, and
write-offs, and improvements to the overall qualitya reduction of
the lending portfolio as a resultgeneral provisions of
effective risk management and debt management operations.£136m. In calculating the general provisions within the Retail Banking and Savings segment, a range of outcomes was calculated based principally on management’s conclusions regarding the current economic outlook.outlook relative to historic experience. Had management used different assumptions regarding the current economic outlook, a larger or smaller provision for badloans and doubtful debtsadvances would have resulted in the Retail Banking and Savings segment that could have had a material impact on Abbey’s reported operating profit in 2004.2005. Specifically, if management’s conclusions as to the current economic outlook were different, but within the range of what management deemed to be reasonably possible economic outlooks, the provision charge for badloans and doubtful debtsadvances in the Retail Banking and Savings segment could have decreased in 20042005 from an actual provision charge of £35m (2003: £130m)£208m (2004: £20m) by as much as £15m (2003: £124m)£32m (2004: £15m), with a potential corresponding increase in Abbey’s operating profit in 20042005 of up to 6% (2003: 19%5% (2004: 71%), or increased by £87m (2003: £20m)£45m (2004: £87m), with a potential corresponding decrease in Abbey’s operating profit in 20042005 of up to 32% (2003: 3%8% (2004: 414%). The actual provision charge of £35m (2003: £130m)£208m (2004: £20m) in 2004,2005 was based on what management estimated to be the most probable economic outlook within the range of reasonably possible economic outlooks.
(b) Trading securitiesValuation of financial instruments
Financial instruments that are classified at fair value through profit and
derivativesSecurities which are notloss (including those held for the purpose of investment,trading purposes) or available for sale, and the associated funding andall derivatives, classified as trading, are stated at fair value. The fair value of such financial instruments is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted market price is available for an instrument, the fair value is calculated based on the market price.
Where quoted market prices
When valuation parameters are not
available,observable in the market or cannot be derived from observable market prices, as is the case with certain over-the-counter derivatives,
the fair value is
determined usingderived through analysis of other observable market data appropriate for each product and pricing models which use a mathematical methodology based on accepted financial theories. Depending on the product type and its components, the fair value of over-the-counter derivatives is modelled using one or a combination of pricing models that are widely accepted in the financial services industry.
Pricing models take into account the contract terms of the securities as well as market-based valuation parameters, such as interest rates, volatility, exchange rates and the credit rating of the counterparty. Valuation adjustments are an integral component of the fair value estimation process and are taken on individual positions where either the absolute size of the trade or other specific features of the trade or the particular market (such as counterparty credit risk, concentration or market liquidity) require more than the simple application of pricing models.
WhenWhere market-based valuation parameters are not directly observable, in the market or cannot be derived frommanagement will make a judgement as to its best estimate of that parameter. In exercising this judgement, a variety of tools are used including proxy observable market prices, as is the case with certain over-the-counter derivatives, the fair value is derived either throughdata, historical analysis of other observable market data, (such as spot prices) or through an estimation of a valuation adjustment appropriate for each product. Typically, historical benchmarks are combined with management judgement in this process.
and extrapolation techniques.
Abbey considers that the accounting estimate related to valuation of trading securities and derivatives where quoted market prices are not available is a “critical accounting estimate” because: (i) it is highly susceptible to change from period to period because it requires management to make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and specific features of the transactions and (ii) the impact that recognising a change in the valuations would have on the assets reported on its
Balance Sheetbalance sheet as well as its net profit/(loss) could be material.
Changes in the valuation of trading securities and derivatives where quoted market prices are not available are accounted for in the line item
“Dealing profits”“Net trading income” in the
Profit and Loss Accountincome statement and the
“Other“Trading assets”
or “Trading Liabilities” and
“Other liabilities”“Derivative Financial Instruments” line items in Abbey’s balance sheet.
12
Operating and Financial Review
Operating Review - Summarycontinued
Abbey could have chosen, in the current period, estimates that would have had a materially different impact on its financial presentation. Had management used different assumptions regarding the interest rates, volatility, exchange rates, the credit rating of the counterparty, and valuation adjustments, a larger or smaller change in the valuation of trading securities and derivatives where quoted market prices are not available would have resulted that could have had a material impact on Abbey’s reported
11
Business and Financial Review
Business Review — Summarycontinued
operating profit in
2004. For details2005. Due to the individual nature of our US GAAP accounting policy referthese contracts, Abbey does not believe it is appropriate to Note 58 of the financial statements.
apply a global adjustment to management’s estimates, as it would not give a meaningful sensitivity.
The table below summarises Abbey’s trading portfolios and other assets and liabilities held at fair value by valuation methodology at 31 December 2005:
| | | | | | | | | |
| | | Assets | | Liabilities |
| | | % | | % |
| |
| Fair value based on: | | | | | | | | |
| Quoted market prices | | | 58 | | | | 36 | |
| Internal models based on market prices | | | 42 | | | | 64 | |
| Internal models based on information other than market data | | | — | | | | — | |
| |
| Total | | | 100 | | | | 100 | |
| |
(c) Long-term assurance business Abbey accounts for the value of the shareholders’ interest in theits long-term assurance business using the embedded value basis of accounting in accordance with UK GAAP forused by banking groups, modified, as necessary, to comply with the requirements of IFRS (“IFRS embedded value”), including a consolidation on a line by line basis of the long-term assurance business into Abbey’s consolidated financial statements.
The long-term assurance business issues insurance contracts and investment contracts. Insurance contracts are contracts which transfer significant insurance risk. As a general guideline, the Group defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event. Investment contracts are those contracts which carry no significant insurance risk. A number of insurance and investment contracts contain a discretionary participation feature which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses that own lifeare likely to be a significant portion of the total contractual benefits and whose amount or timing is contractually at the discretion of the Group and based on the performance of specified assets. Contracts containing a discretionary participation feature are referred to as participating or with-profits contracts.
The critical accounting policies set out below relate to the valuation of insurance contract liabilities and the estimated future surplus emerging. In addition, results are affected by the movement in the value of financial assets within the long-term assurance operations. Thebusiness which are recorded at fair value through income. Management do not consider the valuation of investment contract liabilities as a critical accounting policy, as the impact of market changes is borne by the policyholder.
Insurance contracts and participating contracts
Abbey accounts for insurance contracts and participating investment contracts using the IFRS embedded value
is comprisedbasis of
the net tangible assets of the life assurance subsidiaries andaccounting which recognises the present value of
the in-force
business, which(“PVIF”) business. The PVIF is calculated by projecting future surpluses
(excluding future investment margins) and other net cash flows attributable to the shareholders arising from business written
byat the balance sheet date and discounting the result at a rate which reflects the shareholders’ overall risk premium.
Liabilities relating to insurance contracts, which are not unit linked, are recorded when the premium is recognised as due. The liability is calculated by estimating the future cash flows over the duration of the in-force policies and discounting them back to the valuation date allowing for probabilities of occurrence. The liability will vary with movements in interest rates and with the cost of life assurance and annuity benefits where future mortality is uncertain. Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs. For conventional life and pensions business, the gross premium valuation method has been used.
Liabilities for life insurance contracts, which are unit linked, are recorded when premiums are allocated. These liabilities are increased or reduced by the change in the unit prices and are reduced by policy administration fees, mortality and surrender charges and any withdrawals and include any amounts necessary to compensate the Group for services to be performed over future periods. The mortality charges deducted in each period from the policyholders as a group are considered adequate to cover the expected total death benefits claims in excess of the contract account balances in each period and hence no additional liability is established for these claims in excess of the contract balances. Revenue consists of fees deducted for mortality, policy administration and surrender charges. Interest or changes in the unit prices credited to the account balances and excess benefit claims in excess of the account balances incurred in the period are charged as expenses in the income statement.
Liabilities of the Group’s with-profits life funds, including guarantees and options embedded within products written by that fund, are stated at their realistic values in accordance with the Financial Services Authority’s realistic capital regime. The measurement of insurance liabilities is calculated using stochastic methods and therefore reflects both the intrinsic and time value of guarantees and options embedded within products. Economic assumptions are calibrated to observed current market prices.
Future surpluses
used to calculate the value of in-force business will depend on lapse rates, mortality, persistency,
investment returns for various categories of investments and levels of
expenses (both salary and non-salary).expenses. Surpluses are estimated by management through assumptions about future experience, having regard to both actual experience and current economic trends. Surpluses expected to emerge in the future are discounted at risk-adjusted discount rates after provision has been made for taxation. There is an acceptable range into which these assumptions can validly fall, and the use of different assumptions or changes to these assumptions may cause the present value of future surpluses to differ from those assumed at the balance sheet date. This could significantly affect the income recognised, and the value attributed to the in-force business, in the accounts.
The value of the in-force business could also be affected by changes in the amounts and timing of other net cash flows, principally annual management charges and other fees levied upon the policy holders, which are reflected in the Profit and Loss Accountincome statement using unsmoothed fund values. In addition, to the extent that actual experience is different from that assumed, the effect will be recognised in the Profit and Loss Accountincome statement for the period. Demographic assumptions are set individually by product. It is therefore not appropriate
12
Business and Financial Review
Business Review — Summarycontinued
Sensitivities to
apply a global adjustment to these percentageskey assumption changes such as
it would not give a meaningful sensitivity as different products will react differently or even contrarily to changes in economic conditions.interest rates and lapses rates which impact the value of assets and liabilities are shown on page 71.
(d) Impairment of goodwill The carrying value of goodwill is stated at cost less
accumulated amortisation.impairment. The carrying value of goodwill is written down by the amount of any impairment, and the loss is recognised in the
Profit and Loss Accountincome statement in the period in which this occurs. Should an external event reverse the effects of a previous impairment, the carrying value of the goodwill may be written up to a value no higher than the original amortised cost. Impairments are calculated with reference to the discounted cash flows of the entity or income-generating unit. Assumptions about expected future cash flows require management to make assumptions about interest rates, the health of the economy and operating costs. This involves significant judgement because such factors have fluctuated in the past and are expected to continue to do so.
Abbey considers that the accounting estimate related to impairment of goodwill is a “critical accounting estimate” because: (i) it is highly susceptible to change from period to period because it requires management to make assumptions about future cash flows, interest rates, the health of the economy and operating costs, and (ii) the impact that recognising a goodwill impairment charge would have on the assets reported on its
Balance Sheetbalance sheet as well as on its net profit/(loss) could be material.
Goodwill impairment charges are accounted for in the line item “Impairment
of goodwill”recoveries/(losses) on fixed asset investments” in the
Profit and Loss Accountincome statement and the “Intangible
fixed assets” line item in the
Balance Sheet. Abbey could have chosen, inbalance sheet.
The financial statements for the year ended 31 December 2005 do not include any impairment charges for goodwill under IFRS (2004: £nil). In determining whether or not the goodwill balances within the Retail Banking, Insurance and Asset Management and Portfolio Business Unit segments were impaired and, if so, by how much, a range of outcomes was calculated based principally on management’s conclusions regarding the current
period, estimates that would have had a materially different impact on its financial presentation.economic outlook. Had management used different assumptions regarding the
future cash flows, interest rates, the health of the economy and operating costs, acurrent economic outlook, larger impairment charges for goodwill
impairment charge would have resulted
in the Retail Banking, Insurance and Asset Management and Portfolio Business Unit segments that could have had a material impact on Abbey’s reported operating profit in
2004.2005. Specifically, if management’s conclusions as to the current economic outlook were different, but within the range of what management deemed to be reasonable possible economic outlooks, the impairment charges under IFRS for goodwill in the Retail Banking and Insurance and Asset Management segments could have increased by £136m (2004: £136m), with a potential corresponding decrease in Abbey’s operating profit in 2005 of up to 23% (2004: 647%). The actual impairment charge for goodwill of £nil (2004: £nil) in 2005, was based on what management estimated to be the most probable economic outlook within the range of reasonably possible economic outlooks.
For details of the impairment charge under US GAAP in 2005 in the Insurance and Asset Management segment refer to Note 59 of the Consolidated Financial Statements.
(e) Provisions for misselling Abbey estimates provisions for misselling with the objective of maintaining reserve levels believed by management to be sufficient to absorb current estimated probable losses in connection with compensation and costs relating to the handling of complaints from customers who claim misselling of endowment policies and other products. The calculation of provisions for misselling is based on the estimated number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. These assessments are based on management’s estimate for each of these three factors.
Abbey considers accounting estimates related to misselling provisions “critical accounting estimates” because: (i) they are highly susceptible to change from period to period in the three factors above, and (ii) any significant difference between Abbey’s estimated losses as reflected in the
specific provisions and actual losses will require Abbey to take provisions which, if significantly different, could have a material impact on its future
Profit and Loss Accountincome statement and its
Balance Sheet.balance sheet. Abbey’s assumptions about estimated losses are based on past claims uphold rates, past customer behaviour, and past average settlements, which are not necessarily an indication of future losses.
Provisions for misselling are charged to the line item “Provisions for
contingentother liabilities and
commitments”charges” in the
Profit and Loss Account.income statement. The provision is included in the
“Provisions for liabilities and charges”“Other Provisions” line item on the balance sheet. If Abbey believes that additions to the misselling provision are required, then Abbey records additional provisions, which would be treated as a charge in the line item “Provisions for
contingentother liabilities and
commitments”charges” in the
Profit and Loss Account.income statement.
The financial statements for the year ended 31 December
20042005 include a provision charge for misselling in the
Retail Banking
and Savings segment for an amount equal to
£153m. This£10m. In addition, claims settled of £70m have been charged to administrative expenses. The balance sheet provision
was increased
(in 2003 it was £61m),from £153m to £189m reflecting
both increased claims and claims upheld.13
Operating and Financial Review
Operating Review - Summarycontinued
the £10m additional provision together with the inclusion of £44m previously classified within liabilities of the long-term assurance funds. In calculating the misselling provision withinwith the Retail Banking and Savings segment,Insurance and Asset Management segments, management’s best estimate of the provision was calculated based on conclusions regarding the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. Had management used different assumptions regarding these factors, a larger or smaller provision for misselling would have resulted in the Retail Banking and Savings segmentAsset and Insurance Management segments that could have had a material impact on Abbey’s reported operating profit in 2004.2005. Specifically, if management’s conclusions as to the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case were different, but within the range of what management deemed to be reasonably possible, the provision charge for misselling in the Retail Banking and Insurance and Asset Management segments could have decreased in 2005 from an actual total charge of £80m by as much as £21m, with a potential corresponding increase in Abbey’s operating profit in 2005 of up to 4%, or increased by £65m, with a potential corresponding decrease in Abbey’s operating profit in 2005 of up to 11%. The actual charge of £80m in 2005 was based on what management estimated to be the most probable number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case within the range of reasonably possible outcomes.
13
Business and Financial Review
Business Review — Summarycontinued
(f) Pensions
Abbey operates a number of defined benefit pension schemes as described in Note 43 to the Consolidated Financial Statements. The assets of the schemes are measured at their fair values at the balance sheet date. The liabilities of the schemes are estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, discounted to present value using the interest rate applicable to high-quality corporate bonds of the same currency and term as the scheme liabilities. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the scheme. In determining the value of scheme liabilities, assumptions are made by management as to price inflation, discount rates, pensions increases, earnings growth and mortality.
Abbey considers accounting estimates related to pension provisions “critical accounting estimates” because: (i) they are highly susceptible to change from period to period, and (ii) any significant difference between Abbey’s estimates of the scheme liabilities and actual liabilities could significantly alter the amount of the surplus or deficit recognised in the balance sheet and the pension cost charged to the income statement. Abbey’s assumptions about price inflation, discount rates, pensions increases, earnings growth and mortality are based on past experience and current economic trends, which are not however, ablenecessarily an indication of future experience.
Pension costs are charged to quantify reliablythe line item “Administration expenses” in the income statement. The provision is included in the “Retirement benefit obligations” line item in the balance sheet. If Abbey believes that increases to the pensions cost are required, then Abbey records additional costs that would be treated as a meaningful sensitivity orcharge in the line item “Administration expenses” in the income statement.
The financial statements for the year ended 31 December 2005 include current year service costs for an amount equal to £102m. This cost was reduced (in 2004 it was £121m), reflecting reductions in scheme membership, salary reviews and changes in discount rates. In calculating the current year service cost, a range of
possible outcomes. Specifically, due to the non-homogenous nature of the population, any of the factors could change inoutcomes was calculated based principally on management’s estimates regarding price inflation, discount rates, pensions increases, earnings growth and mortality. Had management used different assumptions regarding price inflation, discount rate, pensions increases, earnings growth and mortality, a
waylarger or smaller charge for pension costs would have resulted that could
either offset or amplify the effect ofhave had a
change in another factor.Change in accounting presentation
From 1 January 2004, within Abbey Financial Markets there has been a presentational change such that interest on mark-to-market securities and money market instruments is now classified within dealing profits (in non-interest income) rather than in net interest income. This has nomaterial impact on profit. InAbbey’s reported operating profit in 2005. Specifically, if management’s conclusions as to price inflation, discount rates, pensions increases, earnings growth and mortality were different, but within the 12 monthsrange of what management deemed to 31 December 2003 this change resultedbe reasonably possible conclusions, the charge for pension costs could have decreased in reclassification2005 from an actual pension charge of £86m (2002: £105m) from net interest income£102m (2004: £121m) by as much as £5m (2004: £5m), with a potential corresponding increase in Abbey’s operating profit in 2005 of up to 0.8% (2004: 23.8%), or increased by £23m (2004: £29m), with a potential corresponding decrease in Abbey’s operating profit in 2005 of up to 3.9% (2004: 138%). The actual current year service pension charge of £101m (2004: £121m) in 2005 was based on what management estimated to be the most probable price inflation, discount rates, pensions increases, earnings growth and mortality within the comparatives for that period have been amended to reflect this change.
range of reasonably possible price inflation, discount rates, pensions increases, earnings growth and mortality.
Profit on disposal of Group undertakings Profits of
£46m£62m were made in the year ended 31 December
20042005 on the disposal of Group undertakings.
Significant acquisitions and disposals The results for the year ended 31 December
20042005 have not been materially impacted by
the disposals. There were no significant acquisitions
induring the year.
Current and future accounting developmentsAbbey, along with all listed companies
Details of current and future developments can be found in the European Union, will be requiredaccounting policies and notes 56 and 57 to prepare its financial statements underthe Consolidated Financial Statements.
Transitional exemptions permitted by IFRS 1
The Consolidated Financial Statements have, for the first time, been prepared in accordance with IFRS as approved by the International Accounting Standards Board (“IASB”), and interpretations issued by the International Financial Reporting Standards (sometimes referredInterpretations Committee of the IASB that, under European Regulations, are effective or available for early adoption at the Group’s first reporting date under IFRS. The date of transition to as International Accounting Standards) fromIFRS for the Group and the date of its opening IFRS balance sheet was 1 January 2005. These standards represent a significant change2004. On initial adoption of IFRS, the Group applied the following exemptions from UK GAAP.the requirements of IFRS and from their retrospective application as permitted by IFRS 1 “First-time Adoption of International Financial Reporting Standards”.
| a) | | Business Combinations – the Group has applied IFRS 3 “Business Combinations” to business combinations that occurred on or after 1 January 2004. Business combinations before that date have not been restated. Under previous GAAP (“UK GAAP”), goodwill arising on acquisitions after 1 October 1998 was capitalised and amortised over its estimated useful economic life. Goodwill arising on acquisitions before 1 October 1998 was deducted from equity. Had this exemption not been taken, the main effects would have been to recognise additional deferred tax on fair value adjustments made at the date of acquisition and to recognise additional intangible assets, with resulting adjustments to the carrying value of goodwill and retained earnings at 1 January 2004. |
|
| b) | | Cumulative foreign currency difference – The Group has brought forward a nil opening balance on the cumulative foreign currency translation adjustment arising from the retranslation of foreign operations, which is shown as a separate item in shareholders’ equity at the date of transition in accordance with IAS 21 “The Effects of changes in Foreign Exchange Rates”. Had this exemption not been taken, the resulting retrospective application of IAS 21 would |
14
Operating
Business and Financial Review OperatingBusiness Review -— Summarycontinued
Impact of International Financial Reporting Standards (IFRS)
The impacts below are based on the standards currently in issue and management’s current interpretations of them. As such, the impacts discussed are indicative and intended only to convey direction and approximate scale. These impacts are unaudited. The main standards affecting Abbey are outlined below.
| | have resulted in a reallocation between retained earnings and other reserves at 1 January 2004 but would have had no impact on total equity. |
|
| c) | | Implementation of IAS 32, IAS 39 and IFRS 4 (incorporating the adoption of FRS 27 “Life Assurance”) – As allowed by IFRS 1, the Group has not restated its 2004 consolidated income statements and balance sheets to comply with IAS 32, IAS 39 and IFRS 4. |
|
| d) | | The Group has decided to early adopt IFRS 7 “Financial Instruments: Disclosures” and has taken advantage of the exemption therein from presenting certain comparative information. |
|
| e) | | The Group has also decided to early adopt the amendment to IAS 19 “Employee Benefits- Actuarial Gains and Losses Group Plans and Disclosures” and has, therefore, recognised in equity at 1 January 2004 all cumulative actuarial gains and losses on post-employment benefit plans. Recognising certain actuarial gains and losses under the alternative ‘corridor approach’ would have reduced liabilities and increased retained earnings at 1 January 2004. Abbey has not elected to adopt a corridor approach going forward under IAS 19 ‘Employee Benefits’. |
|
| f) | | The Group has adopted IFRS 5 “Non current assets held for sale and Discontinued Operations” prospectively from 1 January 2005 and has elected not to restate comparatives. Had this exemption not been taken, the retrospective application of IFRS 5 would have resulted in disclosures of an allocation of the profit for the year ended 31 December 2004 between continuing operations and discontinued operations. |
IAS 19 - Pensions- An equity charge will reflect the actuarial pension deficit being recognised on the balance sheet. The profit before tax impact in 2004 is not material since the increased pension charge after applying a discount rate to liabilities is offset by adding back the release of existing SSAP 24 accruals. The increase in ongoing pension costs should be substantially offset by the forecast level of full-time employee reductions following the Banco Santander Central Hispano, S.A. acquisition. From a regulatory perspective, the IAS equity impact will be substituted with a charge based on the amount of the pension fund deficit that the company would have to meet by way of additional payments (over-and-above “normal” annual contributions) over the next five years.
IAS 16 and 17 - Leasing- These standards require leased assets to be depreciated on a straight-line basis over the estimated useful life. Abbey currently uses an actuarial after tax method for the majority of the leased assets. The straight-line method generally leads to higher depreciation over the early part of the asset’s life and consequently leads to reduction in opening equity. The effect of this higher depreciation on the 2004 profit and loss is largely offset by the increased profit on sale of leasing companies during the year.
IAS 38 - Software capitalisation- The standard requires software costs to be capitalised and amortised rather than expensed immediately. The amounts previously capitalised have been impaired following the Banco Santander Central Hispano, S.A. acquisition and well documented information technology improvements that are expected to follow. On an ongoing basis, this impairment should lead to a minimal impact on earnings.
IFRS 2 - Stock option expensing- The treatment of share options granted to staff by subsidiaries in the shares of the parent is still being finalised by International Financial Reporting Interpretation Committee (IFRIC). The present guidance is that a subsidiary should treat such options as “cash settled” in the subsidiary accounts, whereas in the parent accounts such options should be treated as “equity settled”.
Abbey became a subsidiary of Banco Santander Central Hispano, S.A. in 2004, and at that time a number of options in the shares of Abbey were rolled over into Banco Santander Central Hispano, S.A. shares. The profit and loss treatment of this change is yet to be clarified, but the cumulative effect will be included as an equity adjustment.
IFRS 4 and IAS 39 - Life assurance- Under IFRS 4 contracts that are largely investment in nature (do not contain significant insurance risk) will be accounted for as financial instruments under IAS 39. Whilst discounted value of future profits will no longer be recognised in respect of products classified as investment contracts, companies may recognise particular deferred acquisition cost. However, the acquisition costs that are deferrable under IAS are limited, and the deferred acquisition cost asset recognised will be significantly lower than discounted value of future profits reported.
There is no requirement for a statutory restatement of 2004 earnings. Going forward, there will be the positive effect of no longer recognising prior period’s discounted value of future profits on investment business, partly offset by the impact of not recognising discounted value of future profits on new investment business. The impact is currently anticipated to be relatively small which reflects Abbey’s current view that most of the existing book does contain an element of insurance risk. However, industry consensus is still being finalised on the precise split of products between insurance and investment, and this could alter the adjustment.
IAS 39 - Non-trading derivatives- Abbey’s hedging business model has been substantially changed with the aim of minimising the impact of IAS 39. In future Abbey expects a modest increase in earnings volatility arising in this respect.
IAS 39 - Fees and commissions- This represents the impact of origination fees receivable on loans (booking/application fees, high loan-to-value fees, survey fees), early redemption fees receivable, and directly related incremental costs of originating loans (survey fees and introducer commissions on mortgages, and issue costs on floating rate notes in special purpose vehicles) being deferred and recognised in income over the expected life of the loan on an effective yield basis.
IAS 39 - Derecognition of liabilities- The standard allows liabilities to be derecognised only when legally extinguished. An equity adjustment will represent the reinstating of certain liabilities to their original contractual values. This standard is not expected to have any impact on 2005 earnings relative to 2004.
IAS 32 - Preference shares- Preference shares will be classified as debt, and coupon payments reflected as interest payable rather than dividends.
15
Operating and Financial Review
Operating Review - Summarycontinued
Group summary
Summarised consolidated statutory Profit and Loss Accountincome statement and selected ratios
| | | | | | | | | | | | | |
| | | | | | | 31 December 2003 | | | 31 December 2002 | |
| | | 31 December 2004 | | | (restated) | | | (restated) | |
| | | £m | | | £m | | | £m | |
| |
Net interest income(1) | | | 1,530 | | | | 2,062 | | | | 2,584 | |
Non-interest income (1) | | | 1,114 | | | | 370 | | | | 916 | |
| |
Total operating income | | | 2,644 | | | | 2,432 | | | | 3,500 | |
| Administrative expenses and depreciation on fixed assets | | | (2,134 | ) | | | (2,126 | ) | | | (1,955 | ) |
| Goodwill impairment and amortisation | | | (20 | ) | | | (38 | ) | | | (1,202 | ) |
| Depreciation and impairment on operating lease assets | | | (151 | ) | | | (251 | ) | | | (280 | ) |
| Provision for bad and doubtful debts | | | 35 | | | | (474 | ) | | | (514 | ) |
| Provisions for contingent liabilities and commitments | | | (202 | ) | | | (104 | ) | | | (50 | ) |
| Amounts written off fixed asset investments | | | 80 | | | | (193 | ) | | | (511 | ) |
| |
Operating profit/(loss) | | | 252 | | | | (754 | ) | | | (1,012 | ) |
| Income from associated undertakings | | | 6 | | | | 12 | | | | 17 | |
| Profit on disposal of Group undertakings | | | 46 | | | | 89 | | | | 48 | |
| (Loss) on the sale or termination of an operation | | | (31 | ) | | | (33 | ) | | | – | |
| |
Profit/(loss) on ordinary activities before tax | | | 273 | | | | (686 | ) | | | (947 | ) |
| |
| Tax on profit/(loss) on ordinary activities | | | (144 | ) | | | 42 | | | | (152 | ) |
| |
Profit/(loss) on ordinary activities after tax | | | 129 | | | | (644 | ) | | | (1,099 | ) |
| |
| Earnings/(loss) per ordinary share | | | 2.2p | | | | (52.4 | )p | | | (84.8 | )p |
| |
| Dividend per ordinary share | | | 39.3p | | | | 25.0p | | | | 25.0p | |
| Equity Shareholders’ funds | | | 4,292 | | | | 4,699 | | | | 5,602 | |
| Net asset value per ordinary share | | | 288p | | | | 321p | | | | 384p | |
| Tier 1 capital ratio | | | 10.4 | % | | | 10.1 | % | | | 9.2 | % |
| Equity Tier 1 capital ratio | | | 7.0 | % | | | 6.9 | % | | | 6.4 | % |
| Banking Equity Tier 1 capital ratio | | | 4.4 | % | | | 4.7 | % | | | 4.6 | % |
| Closing risk weighted assets (£bn) | | | 54.2 | | | | 61.2 | | | | 78.7 | |
| |
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Net interest income | | | 1,207 | | | | 1,463 | |
Non-interest income | | | 1,533 | | | | 1,382 | |
| |
Total operating income | | | 2,740 | | | | 2,845 | |
| Administrative expenses | | | (1,724 | ) | | | (2,221 | ) |
| Depreciation and amortisation | | | (199 | ) | | | (547 | ) |
| Provision for bad and doubtful debts | | | (218 | ) | | | 55 | |
| Provisions for other liabilities and charges | | | (3 | ) | | | (233 | ) |
| Amounts written off fixed asset investments | | | — | | | | 80 | |
| |
Profit/(loss) on ordinary activities before tax | | | 596 | | | | (21 | ) |
| |
| Tax on profit/(loss) on ordinary activities | | | (176 | ) | | | (33 | ) |
| |
Profit/(loss) on ordinary activities after tax | | | 420 | | | | (54 | ) |
| |
| | | | | | | | | |
| Tier 1 capital ratio | | | 10.0 | % | | | 10.4 | % |
| Equity Tier 1 capital ratio | | | 6.6 | % | | | 7.0 | % |
| Closing risk weighted assets (£m) | | | 55,972 | | | | 56,171 | |
| |
(1) | | Note, from the first half of 2004, within Abbey Financial Markets there has been a presentational change such that interest on mark-to-market securities and market instruments is now classified within dealing profits (in non-interest income) rather than in net interest income. This has no impact on profit. In the 12 months to December 2003 this change resulted in reclassification of £86m (2002: £105m) from net interest income to non-interest income and the comparatives for that period have been amended to reflect this change. Under the previous presentation net interest income in 2003 was £2,148m (2002: £2,689m) and non-interest income was £284m (2002: £811m). |
2004
2005 compared to 20032004
Total profit before tax of £273m£596m compared to a loss of £686m£21m in 2003.2004 marks a significant improvement on 2004. Material movements by line included:include:
| | | |
| > | | net interest income of £1,530m (2003: £2,062m) down 26%,£1,207m (2004: £1,463m) fell due to a reduction of £99m in Portfolio Business Unit reflecting lower product 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 in net interest income also reflects the lower level of interest earning assetsasset, the non-recurrence of £50m of gains relating to the close-out of hedges, and a 6 basis point fall in the Portfolio Business Unit;retail banking spread. |
| | | |
| > | | non-interest income of £1,114m (2003: £370m)£1,533m (2004: £1,382m), up 201%11% as a result of the non-recurrenceimproved fee performance in relation to mortgages, banking and unsecured personal lending. In addition, reduced losses on disposal of certain embedded value rebasing charges that impacted life assurance earnings in 2003, in addition to lower loss realisations from Portfolio Business Unit asset sales in 2004;loans and securities contributed positively. |
| | | |
| > | | administrative expenses of £2,134m (2003: £2,126m)£1,724m (2004: £2,221m) were broadly in line with 2003.down 22%. Personal Financial Services expenses rose £202mfell £439m to £2,044m£1,686m largely reflecting expenses related to the acquisitionbenefits of the cost reduction programme and higher costs in 2004 associated with the sale of Abbey byNational plc to Banco Santander Central Hispano, S.A. and resulting redundancy and restructuring provisions.including costs realised post acquisition. Portfolio Business Unit expenses fell due to the reduced size of operations;operations. |
| | | |
| > | | goodwill of £20m relates primarily toDepreciation and amortisation of the remaining£199m (2004: £547m) was down 64%. 2004 included a charge of £147m in connection with an impairment of goodwill in relation to Scottish Provident goodwill; |
| | |
> | | Limited distribution channels and depreciation on operating lease assets of £151m (2003: £251m)£123m (2004: £184m), down 40%33% reflecting the sale of leasing companies in the Portfolio Business Unit;Unit through the year. |
| | | |
| > | | a credit provision releasecharge in relation to bad and doubtful debts of £35m (2003: £474m charge), was mainly driven by£218m (2004: £55m release). The 2004 release included a reduction in the levelrelease of general provisions on mortgages,of £136m together with the release of provisions relating to the£60m of Scottish Provident Limited contingent loan andloans not repeated in 2005. Other movements in the non-recurrencecredit provision charge include an increase in mortgage provisions of Portfolio Business Unit provisions;£12m. The remaining increase relates to unsecured lending, reflecting some modest credit quality deterioration together with seasoning of the asset. |
| | | |
| > | | provisions for contingentother liabilities and commitments increasedcharges decreased to £202m (2003: £104m) mainly due£3m (2004: £233m). 2004 included a charge of £154m related to increasesendowment misselling. Remediation costs relating to misselling of £70m in the level of misselling provisions; and2005 were also charged to administrative expenses. |
| | | |
| > | | a release of amounts written off fixed asset investments ofwere nil in 2005 (2004: £80m (2003: £193m charge) reflectingrelease). The release reflected the disposal of Portfolio Business Unit assets for amounts in excess of their written down value, reflecting the improvement in economic conditions relating to these assets.value. |
1615
Operating
Business and Financial Review OperatingBusiness Review -— Summarycontinued
2003 compared to 2002
Loss on ordinary activities before tax of £686m compared to £947m in 2002. Material movements by line included:
| | |
> | | net interest income of £2,062m (2002: £2,584m), down 20%, with lower average asset balances reflecting accelerated Portfolio Business Unit disposals; |
| | |
> | | non-interest income of £370m (2002: £916m), down 60% as a result of increased loss realisations driven from Portfolio Business Unit asset sales; |
| | |
> | | administrative expenses and depreciation on fixed assets of £2,126m (2002: £1,955m), up 9%, driven by reorganisation expenses including asset write-downs, partly offset by savings from the cost programme; |
| | |
> | | goodwill impairment and amortisation of £38m which relates primarily to amortisation of remaining Scottish Provident goodwill, and is significantly lower than the charge in 2002 that was driven by goodwill impairments of £1,138m; |
| | |
> | | provisions for bad and doubtful debts of £474m (2002: £514m), down 8% benefiting from lower Portfolio Business Unit related provisions given reduced asset balances; |
| | |
> | | provisions for contingent liabilities and commitments up to £104m (2002: £50m) following a £50m provision for product misselling exposures; and |
| | |
> | | lower amounts written off fixed-asset investments of £193m (2002: £511m) reflecting provisioning raised in 2002 arising from specific counterparty deterioration in the Portfolio Business Unit, and consistent with the significant reduction in asset balances during 2003. |
Summarised consolidated statutory profit and loss accountincome statement analysed between Personal Financial Services and the Portfolio Business Unit
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | 31 December 2003 (restated) | | 31 December 2002 (restated) | | | 31 December 2005 | | 31 December 2004 | |
| | | PFS | | PBU | | Total | | PFS | | PBU | | Total | | PFS | | PBU | | Total | | | PFS | | PBU | | Total | | PFS | | PBU | | Total | |
| | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | | £m | | £m | |
| | Net interest income | | 1,470 | | 60 | | 1,530 | | 1,709 | | 353 | | 2,062 | | 1,738 | | 846 | | 2,584 | | | 1,243 | | | (36 | ) | | 1,207 | | 1,400 | | 63 | | 1,463 | |
| Non-interest income | | 1,031 | | 83 | | 1,114 | | 701 | | | (331 | ) | | 370 | | 722 | | 194 | | 916 | | | 1,247 | | 286 | | 1,533 | | 1,224 | | 158 | | 1,382 | |
| Total operating income | | 2,501 | | 143 | | 2,644 | | 2,410 | | 22 | | 2,432 | | 2,460 | | 1,040 | | 3,500 | | | 2,490 | | 250 | | 2,740 | | 2,624 | | 221 | | 2,845 | |
| Administrative expenses | | | (2,044 | ) | | | (90 | ) | | | (2,134 | ) | | | (1,842 | ) | | | (284 | ) | | | (2,126 | ) | | | (1,611 | ) | | | (344 | ) | | | (1,955 | ) | | | (1,686 | ) | | | (38 | ) | | | (1,724 | ) | | | (2,125 | ) | | | (96 | ) | | | (2,221 | ) |
| Goodwill impairment and amortisation | | | (20 | ) | | – | | | (20 | ) | | | (28 | ) | | | (10 | ) | | | (38 | ) | | | (811 | ) | | | (391 | ) | | | (1,202 | ) | |
| Depreciation of operating lease assets | | – | | | (151 | ) | | | (151 | ) | | – | | | (251 | ) | | | (251 | ) | | | (23 | ) | | | (257 | ) | | | (280 | ) | |
| Depreciation and amortisation | | | | (76 | ) | | | (123 | ) | | | (199 | ) | | | (363 | ) | | | (184 | ) | | | (547 | ) |
| Provision for bad and doubtful debts | | 46 | | 11 | | 35 | | | (210 | ) | | | (264 | ) | | | (474 | ) | | | (150 | ) | | | (364 | ) | | | (514 | ) | | | (208 | ) | | | (10 | ) | | | (218 | ) | | 65 | | | (10 | ) | | 55 | |
| Provisions for contingent liabilities and commitments | | | (202 | ) | | – | | | (202 | ) | | | (85 | ) | | | (19 | ) | | | (104 | ) | | | (46 | ) | | | (4 | ) | | | (50 | ) | |
| Provisions for other liabilities and charges | | | | (11 | ) | | 8 | | | (3 | ) | | | (233 | ) | | — | | | (233 | ) |
| Amounts written off fixed asset investments | | – | | 80 | | 80 | | | (10 | ) | | | (183 | ) | | | (193 | ) | | 2 | | | (513 | ) | | | (511 | ) | | — | | — | | — | | — | | 80 | | 80 | |
| | |
Operating profit/(loss) | | 281 | | | (29 | ) | | 252 | | 235 | | | (989 | ) | | | (754 | ) | | | (179 | ) | | | (833 | ) | | | (1,012 | ) | |
| Income from associated undertakings | | – | | 6 | | 6 | | – | | 12 | | 12 | | – | | 17 | | 17 | | |
| Profit on disposal of Group undertakings | | – | | 46 | | 46 | | – | | 89 | | 89 | | – | | 48 | | 48 | | |
| (Loss) on the sale or termination of an operation | | | (31 | ) | | – | | | (31 | ) | | – | | | (33 | ) | | | (33 | ) | | – | | – | | – | | |
| Profit/(loss) on ordinary activities before tax | | 250 | | 23 | | 273 | | 235 | | | (921 | ) | | | (686 | ) | | | (179 | ) | | | (768 | ) | | | (947 | ) | | 509 | | 87 | | 596 | | | (32 | ) | | 11 | | | (21 | ) |
|
17
Operating and Financial Review
Operating Review - Summarycontinued
Adjustments between the statutory basis and the trading basis
Abbey’s
managementBoard reviews discrete financial information for each of its segments that includes measures of operating results and assets. However, due to the differing natures of its ongoing Personal Financial Services group of reportable segments and its Portfolio Business Unit
group of reportable segments,segment, which is being managed for
exit, the Personal Financial Services group of reportable segments and Portfolio Business Unit group of reportable segmentsvalue, these are managed differently. The Personal Financial Services group of reportable segments
areis managed primarily on the basis of its results, which are measured on a trading basis. The Portfolio Business Unit
group of reportable segmentssegment is managed both on the basis of its results, which
isare measured on a management basis, and on the basis of its net asset value. On a consolidated level, the trading results of the Personal Financial Services group of reportable segments
isare aggregated with the management results of the Portfolio Business Unit
group of reportable segmentssegment to give the summarised trading
Profit and Loss Account.income statement. The trading basis for Abbey’s Personal Financial Services group of reportable segments and the management basis for its Portfolio Business Unit
group of reportable segmentssegment are collectively known as the “trading” basis, as presented below.
Management considers that the trading basis provides the most appropriate way of reviewing the performance of the business. The main adjustments are:
| | | |
| > | | EmbeddedIFRS embedded value charges and rebasing - these– These are unpredictable as they depend on both equity and debt market movements which do not affect the underlying performance of what is a very long-term business. The short-term market movements remain a very important factor in the management of the business but these are managed separately with a more risk-based focus. |
| | | |
| > | | Reorganisation and other costs– Comprise implementation costs - in 2002, Abbey initiated a far-reachingrelation to the strategic change and cost reduction programme and embarked on a period of significant organisational investment and change.process. Management needs to understand the underlying drivers of the cost base that will remain after the exercise is complete, and does not want this view to be clouded by the costs of the exercise, which are managed independently. More recently, Abbey was acquired by Banco Santander Central Hispano, S.A., which increased the charge in 2004 and will give rise to further restructuring expenditure. |
| | | |
| > | | GoodwillIntangible asset charges - these– These charges can vary significantly year on year, and hence can materially affect the profit or loss for that year. As a result, Abbey reviews these charges separately to avoid clouding the presentation of underlying results. |
| | | |
| > | | DepreciationHedging variances– As a consequence of operating lease assets - The operating lease businessesthe introduction of IFRS, the balance sheet and income statement are managedsubject to volatility particularly from the accounting for elements of derivatives deemed under IFRS rules to be ineffective as financing businesses and therefore management needs to see the margin earned on the businesses. Residual value riskhedges. Where appropriate, such volatility is separately managed.identified to enable management to view the underlying performance of the business. |
| | |
| > | | Proforma IFRS adjustments– Due to certain IFRS standards only being applicable from 1 January 2005, the 2004 statutory results only include the impact of IFRS which are required to be applied retrospectively in the preparation of the 2005 results. As a result, management reviews the depreciation is netted against2004 results on a proforma basis, incorporating the related income.impact of those prospective IFRS where it can be determined what the impact would have been if the accounting changes had been effective in 2004. The impact includes the treatment of interest income and fees and the reclassification of preference shares from shareholders equity to debt, but excludes the effect of accounting for derivatives under IAS 39 as no estimate of their effect can be made. |
| | | |
| > | | IncomeOne-off statutory IFRS adjustments– The conversion to IFRS resulted in the recognition of certain one off items including impairment charges. These items have been deducted from associated undertakings is included within trading income because it is a regular sourcethe results to allow management to understand the underlying performance of income to Abbey’s operations. Therefore management believes its inclusion at this level reflects the aggregate income from Abbey’s activities. |
| | |
> | | Profit on disposal of Group undertakings is included within trading income for reasons similar to those noted above relating to income from associated undertakings.business. |
16
Business and Financial Review
Business Review — Summarycontinued
For a detailed explanation of these items, please refer to the “Other material items” section of the OperatingBusiness and Financial Review.
The adjustments applied to the Personal Financial Services group of reportable segments’ adjustments are the deduction of:segments are:
| | | |
| > | | IFRS embedded value charges and rebasing;rebasing, |
| | | |
| > | | reorganisationReorganisation costs, (including post-acquisition expenses and provisions); |
| | |
| > | | Intangible asset charges, |
| | |
| > | | Hedging variances, |
| | |
| > | | Proforma IFRS adjustments, and |
| | | |
| > | | goodwill charges. |
| | |
> | | There is also a single reclassification adjustment where depreciation on operating lease assets is netted within trading income as opposed to being recorded as a part of operating expenses.One-off statutory IFRS adjustments. |
The
adjustment applied to the Portfolio Business Unit
group of reportable segments’ adjustments are: | | |
> | | depreciation on operating lease assets is netted within trading income as opposed to being recorded as a part of operating expenses; |
| | |
> | | income from associated undertakings is reported as part of non-interest income as opposed to being reported below the operating loss or profit line; and |
| | |
> | | profit on disposal of group undertakings is also reported as part of non-interest income as opposed to being reported below the operating loss or profit line. |
The movement of each of these adjustmentssegment is discussed in more detail in the “Other Material Items” section.
Proforma IFRS adjustments.1817
OperatingBusiness and Financial Review
Operating
Business Review –— Personal Financial Services Personal Financial Services profit before tax by segment| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Investment | | | Abbey | | | | | | | | | | |
| | | Banking and | | | and | | | Financial | | | General | | | Group Infra- | | | | |
| | | Savings | | | Protection | | | Markets | | | Insurance | | | structure | | | Total | |
| 31 December 2004 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Net interest income | | | 1,510 | | | | 77 | | | | 21 | | | | (4 | ) | | | (134 | ) | | | 1,470 | |
| Non-interest income | | | 438 | | | | 171 | | | | 291 | | | | 114 | | | | 116 | | | | 1,130 | |
| Depreciation of operating lease assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| |
Total trading income | | | 1,948 | | | | 248 | | | | 312 | | | | 110 | | | | (18 | ) | | | 2,600 | |
| Total trading expenses | | | (1,114 | ) | | | (83 | ) | | | (109 | ) | | | (40 | ) | | | (253 | ) | | | (1,599 | ) |
| Provision for bad and doubtful debts | | | (34 | ) | | | – | | | | – | | | | – | | | | – | | | | (34 | ) |
| Provisions for contingent liabilities and commitments | | | (155 | ) | | | – | | | | – | | | | – | | | | 2 | | | | (153 | ) |
| Amounts written off fixed asset investments | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| |
Trading profit before tax | | | 645 | | | | 165 | | | | 203 | | | | 70 | | | | (269 | ) | | | 814 | |
| Adjust for: | | | | | | | | | | | | | | | | | | | | | | | | |
| - Embedded value charges and rebasing | | | – | | | | 21 | | | | – | | | | – | | | | – | | | | 21 | |
| - Reorganisation expenses | | | (183 | ) | | | (57 | ) | | | (24 | ) | | | (16 | ) | | | (285 | ) | | | (565 | ) |
| - Goodwill charges | | | – | | | | – | | | | – | | | | – | | | | (20 | ) | | | (20 | ) |
| |
Operating profit/(loss) | | | 462 | | | | 129 | | | | 179 | | | | 54 | | | | (574 | ) | | | 250 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Investment | | Abbey | | | | | | | | | Insurance | | Abbey | | | | | |
| | | Banking and | | and | | Financial | | General | | Group | | | | | Retail | | and Asset | | Financial | | Group | | | |
| | | Savings | | Protection | | Markets | | Insurance | | Infrastructure | | Total | | | Banking | | Management | | Markets | | Infrastructure | | Total | |
| 31 December 2003 | | £m | | £m | | £m | | £m | | £m | | £m | | |
| 31 December 2005 | | | £m | | £m | | £m | | £m | | £m | |
| | Net interest income | | 1,720 | | 83 | | 26 | | | (5 | ) | | | (115 | ) | | 1,709 | | | 1,400 | | 55 | | 1 | | | (213 | ) | | 1,243 | |
| Non-interest income | | 427 | | 214 | | 223 | | 126 | | 90 | | 1,080 | | | 561 | | 267 | | 252 | | 197 | | 1,277 | |
| Depreciation of operating lease assets | | – | | – | | – | | – | | – | | – | | | — | | — | | — | | — | | — | |
| Total trading income | | 2,147 | | 297 | | 249 | | 121 | | | (25 | ) | | 2,789 | | | 1,961 | | 322 | | 253 | | | (16 | ) | | 2,520 | |
| Total trading expenses | | | (1,132 | ) | | | (58 | ) | | | (109 | ) | | | (48 | ) | | | (230 | ) | | | (1,577 | ) | | | (1,050 | ) | | | (193 | ) | | | (105 | ) | | | (178 | ) | | | (1,526 | ) |
| Provision for bad and doubtful debts | | | (130 | ) | | – | | – | | – | | – | | | (130 | ) | | | (208 | ) | | — | | — | | — | | | (208 | ) |
| Provisions for contingent liabilities and commitments | | | (9 | ) | | – | | – | | – | | | (52 | ) | | | (61 | ) | |
| Provisions for other liabilities and charges | | | | (10 | ) | | | (1 | ) | | — | | — | | | (11 | ) |
| Amounts written off fixed asset investments | | – | | – | | – | | – | | – | | – | | | — | | — | | — | | — | | — | |
| Trading profit before tax | | 876 | | 239 | | 140 | | 73 | | | (307 | ) | | 1,021 | | | 693 | | 128 | | 148 | | | (194 | ) | | 775 | |
| Adjust for: | | |
| - Embedded value charges and rebasing | | – | | | (443 | ) | | – | | – | | – | | | (443 | ) | |
| - IFRS embedded value charges and rebasing | | | — | | | (12 | ) | | — | | — | | | (12 | ) |
| - Reorganisation expenses | | | (169 | ) | | | (16 | ) | | | (19 | ) | | | (41 | ) | | | (70 | ) | | | (315 | ) | | | (197 | ) | | | (17 | ) | | | (14 | ) | | | (5 | ) | | | (233 | ) |
| - Goodwill charges | | – | | – | | – | | – | | | (28 | ) | | | (28 | ) | |
| - Intangible asset charges | | | — | | | (3 | ) | | — | | — | | | (3 | ) |
| - Hedging Variances | | | 3 | | — | | — | | | (21 | ) | | | (18 | ) |
| Adjust for: | | |
| - One-off statutory IAS adjustments | | | — | | — | | — | | — | | — | |
| - Eliminating IAS proforma adjustments | | | — | | — | | — | | — | | — | |
| Operating profit/(loss) | | 707 | | | (220 | ) | | 121 | | 32 | | | (405 | ) | | 235 | | |
Profit/(loss) before tax | | | 499 | | 96 | | 134 | | | (220 | ) | | 509 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Investment | | Abbey | | | | | | | | | Insurance | | Abbey | | | | | |
| | | Banking and | | and | | Financial | | General | | Group | | | | | Retail | | and Asset | | Financial | | Group | | | |
| | | Savings | | Protection | | Markets | | Insurance | | Infrastructure | | Total | | | Banking | | Management | | Markets | | Infrastructure | | Total | |
| 31 December 2002 | | £m | | £m | | £m | | £m | | £m | | £m | | |
| 31 December 2004 | | | £m | | £m | | £m | | £m | | £m | |
| | Net interest income | | 1,799 | | 90 | | 27 | | | (3 | ) | | | (175 | ) | | 1,738 | | | 1,432 | | 72 | | | (2 | ) | | | (198 | ) | | 1,304 | |
| Non-interest income | | 454 | | 335 | | 231 | | 149 | | 106 | | 1,275 | | | 477 | | 279 | | 291 | | 151 | | 1,198 | |
| Depreciation of operating lease assets | | | (23 | ) | | – | | – | | – | | – | | | (23 | ) | | — | | — | | — | | — | | — | |
| Total trading income | | 2,230 | | 425 | | 258 | | 146 | | | (69 | ) | | 2,990 | | | 1,909 | | 351 | | 289 | | | (47 | ) | | 2,502 | |
| Total trading expenses | | | (1,108 | ) | | | (53 | ) | | | (110 | ) | | | (54 | ) | | | (252 | ) | | | (1,577 | ) | | | (1,153 | ) | | | (262 | ) | | | (109 | ) | | | (226 | ) | | | (1,750 | ) |
| Provision for bad and doubtful debts | | | (151 | ) | | – | | – | | – | | 1 | | | (150 | ) | | | (20 | ) | | — | | — | | — | | | (20 | ) |
| Provisions for contingent liabilities and commitments | | | (11 | ) | | – | | – | | – | | | (35 | ) | | | (46 | ) | |
| Provisions for other liabilities and charges | | | | (155 | ) | | — | | — | | 2 | | | (153 | ) |
| Amounts written off fixed asset investments | | 2 | | – | | – | | – | | – | | 2 | | | — | | — | | — | | — | | — | |
| Trading profit before tax | | 962 | | 372 | | 148 | | 92 | | | (355 | ) | | 1,219 | | | 581 | | 89 | | 180 | | | (271 | ) | | 579 | |
| Adjust for: | | |
| - Embedded value charges and rebasing | | – | | | (553 | ) | | – | | – | | – | | | (553 | ) | |
| - IFRS embedded value charges and rebasing | | | — | | 21 | | — | | — | | 21 | |
| - Reorganisation expenses | | | (23 | ) | | – | | – | | – | | | (11 | ) | | | (34 | ) | | | (199 | ) | | | (57 | ) | | | (24 | ) | | | (267 | ) | | | (547 | ) |
| - Goodwill charges | | – | | – | | – | | – | | | (811 | ) | | | (811 | ) | |
| - Intangible asset charges | | | — | | — | | — | | | (20 | ) | | | (20 | ) |
| - Hedging Variances | | | — | | — | | — | | — | | — | |
| Adjust for: | | |
| - One-off statutory IAS adjustments | | | | (62 | ) | | | (32 | ) | | | (11 | ) | | | (134 | ) | | | (239 | ) |
| - Eliminating IAS proforma adjustments | | | 80 | | | (3 | ) | | — | | 97 | | 174 | |
| Operating profit/(loss) | | 939 | | | (181 | ) | | 148 | | 92 | | | (1,177 | ) | | | (179 | ) | |
Profit/(loss) before tax | | | 400 | | 18 | | 145 | | | (595 | ) | | | (32 | ) |
|
19
Operating and Financial Review
Operating Review – Personal Financial Servicescontinued
2004 compared to 2003
| | | |
| 2005 compared to 2004 |
| |
| > | | Personal Financial Services trading profit before tax of £814m£775m was down 20%up 34% on 2003 (2003: £1,021m)2004 (2004: £579m), largely due to a fall in net interest income reflecting a 30 basis pointincreased revenues combined with savings from the cost reduction in spread.programme. |
| | | |
| > | | Retail Banking and Savings trading profit before tax decreasedincreased by 26%19% to £645m (2003: £876m)£693m (2004: £581m). ThisIncluded in the 2004 results were £92m of non-recurring revenue benefits. After adjusting for these items, the improvement was largely attributable todriven by increased fee income and the reduction in the Personal Financial Services Banking spread, with a £153m provision for contingent liabilities including misselling risks, largely offset by a £117m releasebenefit of general provisions.significant cost savings. |
| | | |
| > | | InvestmentInsurance and ProtectionAsset Management trading profit before tax decreasedincreased to £165m (2003: £239m)£128m (2004: £89m). The main reason for the movement is the large decrease in costs, a result of the cost reduction in the discount rate and the increase in the internal value based management charge due to a change in the assumed mix of gearing in the business. |
| | |
> | | General Insurance trading profit before tax of £70m was £3m lower than 2003 largely due to falls in new business volumes and lower retention levels,programme, partially offset by decreases in expenses.the impact of continued lapses. |
| | | |
| > | | Abbey Financial Markets trading profit before tax of £203m£148m was up 45%down 18%, reflectinglargely due to £65m of non-recurring revenue items in 2004, being partially offset by favourable market conditions and a numberstrong trading volumes, particularly in the second half of positive risk management trades which totalled circa £65m, that will not repeat in 2005.the year; |
| | | |
| > | | Group Infrastructure trading loss before tax of £269m£194m decreased by £38m (2003:£77m (2004: loss of £307m)£271m) due partlylargely to the allocation of more net interest cost to the businesses, to reflect current gearingreduction in the businesses, combined with a lower provision for contingent liabilities. |
| | |
2003 compared to 2002 |
| | |
> | | Personal Financial Services’ trading profit before tax of £1,021m (2002: £1,219m) was down 16%, largely reflecting reduced earningscosts resulting from the life assurance businesses and a fall in net interest income in Banking and Savings. |
| | |
> | | Banking and Savings’ trading profit before tax decreased by 9% to £876m (2002: £962m). This is largely attributable to a fall in the interest spread. |
| | |
> | | Investment and Protection’s trading profit before tax decreased to £239m (2002: £372m) largely due to a £142m adverse swing in experience and assumption changes. This was partially offset by a £44m improvement in expected return. Despite relatively stable margins, contributions from new business were also down 15%, reflecting the drop in investment business volumes. |
| | |
> | | Abbey Financial Markets’ trading profit before tax was down 5% to £140m (2002: £148m), with a weaker second half performance reflecting less favourable markets. |
| | |
> | | General Insurance’s trading profit before tax of £73m was £19m lower than 2002, primarily due to acost reduction in retail margin following an increase in the risk premiums payable to the principal underwriter. |
| | |
> | | Group Infrastructure’s trading loss before tax improved by £48m to £(307)m (2002: £(355)m) due to increased earnings on centrally held capital and lower expenses. This was partly offset by a provision of £50m relating to potential product misselling.programme. |
2018
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
Business flows relating to the Personal Financial Services businesses are set out below. These flows are used by management to assess the sales performance of Abbey, both absolutely and relative to its peers, and to inform management of product trends in the Personal Financial Services market.
These flows can also enable the reader to compare Abbey with other Personal Financial Services organisations.Personal Financial Services business flows| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| |
Banking and Savings | | | | | | | | | | | | |
Mortgages:(1) | | | | | | | | | | | | |
| Gross mortgage lending | | | £25.0 | bn | | | £29.1 | bn | | | £22.1 | bn |
| Capital repayments | | | £21.9 | bn | | | £19.7 | bn | | | £15.4 | bn |
| Net mortgage lending | | | £3.1 | bn | | | £9.4 | bn | | | £6.7 | bn |
| Mortgage stock | | | £90.9 | bn | | | £87.8 | bn | | | £78.4 | bn |
| Of which: | | | | | | | | | | | | |
| – Abbey retail | | | £87.5 | bn | | | £84.7 | bn | | | £75.7 | bn |
| – Housing Association | | | £3.4 | bn | | | £3.1 | bn | | | £2.7 | bn |
| Market share – gross mortgage lending | | | 8.6 | % | | | 10.7 | % | | | 10.1 | % |
| Market share – capital repayments | | | 11.5 | % | | | 11.2 | % | | | 11.0 | % |
| Market share – net mortgage lending | | | 3.1 | % | | | 9.9 | % | | | 8.6 | % |
| Market share – mortgage stock | | | 10.4 | % | | | 11.5 | % | | | 11.7 | % |
Retail deposits:(2) | | | | | | | | | | | | |
| Total net deposit flows | | | £1.4 | bn | | | £1.2 | bn | | | £1.9 | bn |
| Of which: | | | | | | | | | | | | |
| – Abbey retail | | | £0.3 | bn | | | £0.4 | bn | | | £1.0 | bn |
| – Other | | | £1.1 | bn | | | £0.8 | bn | | | £0.9 | bn |
| Deposit stock | | | £61.9 | bn | | | £60.5 | bn | | | £59.3 | bn |
| Of which: | | | | | | | | | | | | |
| – Abbey retail | | | £49.7 | bn | | | £49.4 | bn | | | £48.8 | bn |
| – Other | | | £12.2 | bn | | | £11.1 | bn | | | £10.5 | bn |
| Market share – total household deposit flows | | | 2.3 | % | | | 1.6 | % | | | 2.2 | % |
| Market share – outstanding household deposits | | | 6.8 | % | | | 7.1 | % | | | 7.6 | % |
Banking: | | | | | | | | | | | | |
| Bank account openings: | | | | | | | | | | | | |
| – Abbey retail | | | 334,950 | | | | 344,000 | | | | 354,000 | |
| – Other | | | 54,776 | | | | 52,000 | | | | 90,000 | |
| |
| | | | 389,726 | | | | 396,000 | | | | 444,000 | |
| | | | | | | | | | | | | |
| Bank account stock: | | | | | | | | | | | | |
| – Abbey retail | | | 3,522,525 | | | | 3,335,000 | | | | 3,138,000 | |
| – Other | | | 460,696 | | | | 443,000 | | | | 447,000 | |
| |
| | | | 3,983,221 | | | | 3,778,000 | | | | 3,585,000 | |
| | | | | | | | | | | | | |
| Bank account liability: | | | | | | | | | | | | |
| – Abbey retail | | | £4.5 | bn | | | £4.3 | bn | | | £3.5 | bn |
| – Other | | | £3.1 | bn | | | £3.4 | bn | | | £3.9 | bn |
| |
| | | | £7.6 | bn | | | £7.7 | bn | | | £7.4 | bn |
| | | | | | | | | | | | | |
| Credit card openings: | | | | | | | | | | | | |
| – Abbey retail | | | 185,000 | | | | 215,000 | | | | 216,000 | |
| – Other | | | 13,040 | | | | 36,000 | | | | 48,000 | |
| |
| | | | 198,040 | | | | 251,000 | | | | 264,000 | |
| | | | | | | | | | | | | |
| Credit card stock: | | | | | | | | | | | | |
| – Abbey retail | | | 1,048,000 | | | | 904,000 | | | | 748,000 | |
| – Other | | | 139,634 | | | | 141,000 | | | | 114,000 | |
| |
| | | | 1,187,634 | | | | 1,045,000 | | | | 862,000 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | 31 December | | 31 December | |
| | | | 2005 | | 2004 | |
Retail Banking | | |
Mortgages: | | |
| Gross mortgage lending | | | £27.6bn | | £25.0bn | |
| Capital repayments | | | £24.6bn | | £21.9bn | |
| Net mortgage lending | | | £3.0bn | | £3.1bn | |
| Mortgage stock | | | £93.9bn | | £90.9bn | |
| Of which: | | |
| – Abbey retail | | | £89.9bn | | £87.5bn | |
| – Housing Association | | | £4.0bn | | £3.4bn | |
| Market share – gross mortgage lending | | | | 9.6 | % | | | 8.6 | % |
| Market share – capital repayments | | | | 12.5 | % | | | 11.5 | % |
| Market share – net mortgage lending | | | | 3.3 | % | | | 3.1 | % |
| Market share – mortgage stock | | | | 9.7 | % | | | 10.4 | % |
Retail deposits: | | |
| Total net deposit flows | | | £2.6bn | | £1.3bn | |
| Of which: | | |
| – Abbey retail | | | £1.6bn | | £0.3bn | |
| – Other | | | £1.0bn | | £1.0bn | |
| Deposit stock | | | £62.0bn | | £59.4bn | |
| Of which: | | |
| – Abbey retail | | | £51.3bn | | £49.7bn | |
| – Other | | | £10.7bn | | £9.7bn | |
Banking: | | |
| Bank account openings: | | |
| – Abbey retail | | | 358,931 | | 334,950 | |
| – Other | | | 26,949 | | 42,630 | |
| | | |
| | | | 385,880 | | 377,580 | |
| Bank account liability: | | |
| – Abbey retail | | | £4.8bn | | £4.5bn | |
| – Other | | | £3.2bn | | £3.2bn | |
| | | |
| | | | £8.0bn | | £7.7bn | |
| Credit card openings: | | |
| – Abbey retail | | | 210,912 | | 185,481 | |
| – Other | | | 6,115 | | 13,247 | |
| | | |
| | | | 217,027 | | 198,728 | |
| Credit card stock: | | |
| – Abbey retail | | | 1,178,205 | | 1,048,718 | |
| – Other | | | 134,824 | | 139,634 | |
| | | 31 December | | 31 December | | 31 December | | |
| | | 2004 | | 2003 | | 2002 | | | 1,313,029 | | 1,188,352 | |
| | Gross unsecured personal loan lending: | | |
| – Abbey retail | | | £1.1 | bn | | | £1.0 | bn | | | £1.0 | bn | | £1.3bn | | £1.1bn | |
| – Other | | | £1.0 | bn | | | £0.7 | bn | | | £0.5 | bn | | £0.8bn | | £1.1bn | |
| | | | | £2.1 | bn | | | £1.7 | bn | | | £1.5 | bn | | £2.1bn | | £2.2bn | |
| | | |
Unsecured lending asset:(3) | | |
| – Abbey retail | | | £2.0 | bn | | | £1.9 | bn | | | £2.0 | bn | |
| Unsecured lending asset – Abbey retail | | | £2.3bn | | £2.0bn | |
| – Other | | | £1.4 | bn | | | £1.0 | bn | | | £0.6 | bn | | £1.5bn | | £1.4bn | |
| | | | | £3.4 | bn | | | £2.9 | bn | | | £2.6 | bn | | £3.8bn | | £3.4bn | |
| | | |
| *SME account openings (net) | | 29,245 | | 38,000 | | 36,000 | | |
| *SME account openings (gross) | | | 36,918 | | 30,949 | |
| *SME account stock | | 158,027 | | 129,000 | | 91,000 | | | 195,579 | | 159,752 | |
| *SME account liability | | | £3.7 | bn | | | £3.2 | bn | | | £2.9 | bn | | £4.0bn | | £3.7bn | |
|
2119
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
| | | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| Investment and Protection | | |
Investment: | | |
Insurance and Asset Management Investment: | | |
| New business premiums: Investments | | | £476m | | | £917m | | | £866m | | | | £1,010m | | | £479m |
| New business premiums: Pensions | | | £292m | | | £464m | | | £1,342m | | | | £250m | | | £292m |
| With-profits — closed | | – | | | £2m | | | £197m | | |
| Prudence Bonds — closed | | | £3m | | | £54m | | | £11m | | |
| Total life assurance new business premiums | | | £771m | | | £1,437m | | | £2,416m | | | | £1,260m | | | £771m |
| Inscape and James Hay | | | £250m | | | £256m | | | £296m | | |
| Inscape | | | | £324m | | | £250m |
| | Total investment new business premiums | | | £1,021m | | | £1,693m | | | £2,712m | | | | £1,584m | | | £1,021m |
| | |
| Annualised equivalent (excluding with-profit bonds) | | | £119m | | | £184m | | | £302m | | |
| Annualised equivalent – with-profit bonds | | – | | – | | | £20m | | |
| | |
Total life assurance annualised equivalent | | | £119m | | | £184m | | | £322m | | |
| | Branch and Direct – annualised equivalent | | | £70m | | | £100m | | | £170m | | | | £94m | | | £70m |
| Intermediary – annualised equivalent | | | £49m | | | £84m | | | £152m | | | | £64m | | | £49m |
| Total life assurance annualised equivalent | | | £119m | | | £184m | | | £322m | | | | £158m | | | £119m |
| James Hay | | |
New business cases: (by number)(4) | | 6,099 | | 7,098 | | 8,452 | | |
Protection: | | |
| Annualised equivalent | | | £97m | | | £125m | | | £112m | | |
| | Branch and Direct – annualised equivalent | | | £19m | | | £28m | | | £27m | | |
| Intermediary – annualised equivalent | | | £78m | | | £97m | | | £85m | | |
| Branch and Direct | | | | £18m | | | £19m |
| Intermediary | | | | £64m | | | £78m |
| Total protection annualised equivalent | | | £97m | | | £125m | | | £112m | | | | £82m | | | £97m |
| | Funds under management – life assurance | | | £25bn | | | £26bn | | | £26bn | | | | £27bn | | | £26bn |
| General Insurance | | |
| New policy sales | | | 314,821 | | 377,523 |
Policies in force | | | 1,472,954 | | 1,672,606 |
| | | |
| * | | Small and Medium Enterprise. |
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| |
General Insurance | | | | | | | | | | | | |
New policy sales: | | | | | | | | | | | | |
| Building and Contents | | | 198,453 | | | | 218,298 | | | | 267,000 | |
| Motor | | | 8,701 | | | | 25,013 | | | | 35,000 | |
| Creditor | | | 116,236 | | | | 129,719 | | | | 144,000 | |
| Travel | | | 6,361 | | | | 33,295 | | | | 26,000 | |
| Other | | | 46,030 | | | | 46,048 | | | | 35,000 | |
| |
| | | | 375,781 | | | | 452,373 | | | | 507,000 | |
| | | | | | | | | | | | | |
Policies in force: | | | | | | | | | | | | |
| Building and Contents | | | 1,151,187 | | | | 1,262,000 | | | | 1,321,000 | |
| Motor | | | 48,884 | | | | 68,000 | | | | 107,000 | |
| Creditor | | | 298,407 | | | | 295,000 | | | | 296,000 | |
| Travel | | | 1,915 | | | | 8,000 | | | | 7,000 | |
| Other | | | 189,419 | | | | 174,000 | | | | 135,000 | |
| |
| | | | 1,689,812 | | | | 1,807,000 | | | | 1,866,000 | |
| |
(1) | | Mortgage data has been adjusted for all periods to remove the impact of the disposed First National business. |
|
(2) | | Deposit inflows and stock have been defined to include all (both retail household and non-household) deposits made through the branch network and remote channels in our retail-orientated businesses, which are predominantly UK-based. For market share purposes only, personal deposits have been used to calculate the share of ‘Outstanding Household Deposits’, in terms of both stock and flow, using a market size estimated from the Office of National Statistics data. |
|
(3) | | Unsecured lending asset comprises the sum of unsecured personal loans, credit cards (cahoot only) and overdrafts. |
|
(4) | | Adjusted to exclude James Hay inflows now replaced by new business cases (by number). New business cases represent the number of individual SIPP’s, SASS’s & WRAP’s sold. Fixed fees are generated from these sales including Establishment fees, annual Administration fees and Transaction fees which are not affected by the size of the investment flow into the SIPP, SASS & WRAP. |
20042005 compared to 2003
2004
Retail Banking and Savings Gross mortgage lending of
£25bn£27.6bn (2004: £25.0bn) was
lower than last year (2003: £29.1bn),10% ahead of 2004 with an uplift in all channels and
representedan improved average new business margin. This compared to a
reduced1% decline in the size of the market, resulting in a market share
ofestimated at 9.6% (2004: 8.6%
(2003: 10.7%).
This reflected the extent of reorganisation across all of our sales channels, but also less aggressive targeting of the lower profitability remortgage market. During the second half of the year, lending capability was temporarily restricted due to the implementation of new processes and procedures required to comply with Financial Services Authority mortgage regulation. Capital repayments
increased to £21.9bn (2003: £19.7bn) driven by the significant increase in asset reaching the end of
its£24.6bn were above natural share, as expected, reflecting high levels of incentive period
and market share increased slightly to 11.5% (2003: 11.2%).maturities. Net lending of £3.1bn£3.0bn, was 67% lower than 2003, equatingslightly ahead of 2004 and corresponds to a 3.3% market share of 3.1%. This significant drop was driven by a combination of increased capital repayments and lower gross lending, and was particularly evident in the second half of the year. Of the £6.3bn reduction in net lending, 65% (£4.1bn) was due to lower gross lending and 35% (£2.2bn) was due to higher capital repayments.
22
share.
Operating and Financial Review
Operating Review – Personal Financial Servicescontinued
Retail Deposits
Deposit inflows of
£1.4bn for£2.6bn were double the
year, with a strong second half performance2004 performance. Profitable new branch-based acquisition account inflows more than offset back-book attrition and helped to stabilise liability spreads. Overall, retail deposits balances of
£2.4bn. The focus£62.0bn were up 4% 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.2004.
In total, bank account openings were ahead of last year’s performance, with a stronger uplift in terms of adult Abbey bank accounts openings, up 14%. This was boosted by the “Bank and Save” campaign in the fourth quarter, which also contributed to an increase of switchers joining Abbey to 34,000.
In total, gross unsecured lending was broadly
flat compared to 2003in line with
stock volume continuing to grow, up 5% on 2003.2004, although balances grew by 12%. Abbey branded
in-credit liability increasedgross lending was up 18%, largely driven by
5%, but other bank account liability decreased largely due to cahoot rates remaining unchanged, despite base rate rises. New creditimproved systems capability in the branch channel.
Credit card openings were
lower than 2003 performance for the first half of the year, however this position was significantly improved in theup 9% compared to 2004, albeit with a weaker second half
where a 22% increase on the first half was achieved following competitive pricing, new product development, and an increased focus on credit cards in the branch network. Despite the slow start, stock of cards grew by 14%. A 26% increase was achieved in unsecured personal loan gross lending compared to 2003 (£2,098m versus £1,660m) and this resulted in a 17% growth in asset. This was achieved while maintaining rates at a broadly constant level in an increasingly competitive marketplace. Only in the final quarter of 2004, was a more aggressive pricing position adopted.
Openings of small and medium enterprise accounts were down on last year but total account numbers increased by 22% and account balances by 16%.
Investment and Protection
Investment
In the direct channels — Individual Savings Accounts and Unit Trusts sales were lower compared to 2003, reflecting market trends.
Via intermediary channels — sale of investments products were significantly down on last year, largely due to lower Flexible Investment Bond sales following the withdrawal of the special offer on the Cash Fund. Investment sales continue to be adversely impacted by Abbey’s withdrawal from with-profits products. Pension sales are also down on last year, although sales picked up in the latter half of 2004.
Protection
Protection sales are down, in part due to lower mortgage sales, but also due to increased competition in the market. Scottish Provident remains one of the leading players in this sector.
performance.
General Insurance policy sales of 375,781314,821 were down 17% on 2003. The2004. This decline was primarily the result of a decline in household sales, has been due to lower mortgage volumes reducing cross-selling opportunities, coupled with increased lapses due to a switch to new systems. Lower business volumesbut were offsetalso affected by higher household sales margins. Abbey exitedAbbey’s exit from both the travel and motor markets in 2004.
Insurance and Asset Management
Investment
Investment sales were 33% ahead of 2004,
reducing new policybenefiting from significant growth in sales
by 27,000of the Select Offshore Bond, a strong tax year-end and
16,000 respectively.2003the successful launch of Guaranteed Growth Plan and Guaranteed Income Bond through direct channels in the first half of the year. In total, investment sales (including Inscape) through direct channels were up 50%.
Pension sales are down on last year due to sales efforts being targeted on development activity to capture increased sales following Pensions A-Day in April 2006.
Protection
Sales of protection sales fell relative to 2004, albeit set against a declining market. Second half protection sales were up 5% compared
to 2002Banking and Savings
Mortgages
Full-year gross mortgage lending of £29.1bn (2002: £22.1bn) was up 32%, and represented a market share of 10.7%. With remortgage activity remaining significant throughout the year, capital repayments increased to £19.7bn (2002: £15.4bn), but were still slightly below natural stock share.
Net lending of £9.4bn was 40% higher than 2002 (£6.7bn), equating to a market share of 9.9%.
Retail deposits
Total retail deposit inflows of £1.2bn were lower than the £1.9bn in 2002, with the estimated market share of total household deposit flows also deteriorating to 1.6% from 2.2%. Inflows into Abbey-branded accounts were £0.4bn (2002: £1.0bn), reflecting positive inflows into the personal and business bank account ranges. Cash Individual Savings Account sales were £1.3bn (2002: £1.3bn), in line with last year. The remainder of the inflows relate to Abbey National Offshore and cahoot.
first half. Banking
Bank account openings totalled 396,000 (2002: 444,000), with a total stock of accounts nearing 3.8m. Abbey retail in-credit balances were up 23% to £4.3bn (2002: £3.5bn). Openings in cahoot and other businesses were 42% lower at 52,000 (2002: 90,000) largely due to an increased number of customers opening the cahoot savings account rather than the current account.
Unsecured lending balances, which incorporate credit cards (cahoot only), unsecured personal loans and overdrafts, increased by 12% to £2.9bn (2002: £2.6bn) driven in particular by growth in cahoot unsecured personal loans. Gross unsecured personal loan new business of £1.7bn was up 13% on 2002.
Openings of Small and Medium Enterprise accounts exceeded 38,000, up 6% on 2002 levels, with balances now in excess of £3bn. Credit card openings of 251,000 were down 5% on 2002.
2320
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
Investment and Protection
Total life assurance new business premiums were £1.4bn (2002: £2.4bn), reflecting a general decline in demand due to investor nervousness about stock market conditions relating to with-profits funds. The impact on our new business flows was more marked as a result of our previous dependence on with-profits, and subsequent withdrawal from this market and declaration of a zero bonus for with-profit policyholders in 2003.
By product, the main movements include a significant fall in sales of single premium pension products in Scottish Mutual and Scottish Provident (£(0.4)bn), falls in single premium structured Individual Savings Account and investment bond sales in Abbey National Life (£(0.4)bn), and the withdrawal from the with-profits bond market (£(0.2)bn).
Sales of protection products were up 12% to £125m (2002: £112m).
General Insurance
General Insurance policy sales of 452,373 were down 11% on 2002, with a fall in household policy sales, only partially offset by increased sales of personal accident and accidental death policies.
The decline in household policy sales in part reflects the high proportion of mortgage lending through the intermediaries resulting in lower cross sales.
Personal Financial Services trading income
Personal Financial Services trading income by segment by business
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Abbey retail | | | 1,810 | | | | 2,009 | | | | 2,082 | |
| cahoot | | | 69 | | | | 57 | | | | 30 | |
| Cater Allen and Offshore | | | 69 | | | | 81 | | | | 118 | |
| |
Banking and Savings | | | 1,948 | | | | 2,147 | | | | 2,230 | |
| Scottish Mutual | | | 84 | | | | 59 | | | | 129 | |
| Scottish Provident | | | 36 | | | | 114 | | | | 49 | |
| Abbey National Life | | | 85 | | | | 89 | | | | 216 | |
| Other | | | 43 | | | | 35 | | | | 31 | |
| |
Investment and Protection | | | 248 | | | | 297 | | | | 425 | |
General Insurance | | | 110 | | | | 121 | | | | 146 | |
Abbey Financial Markets | | | 312 | | | | 249 | | | | 258 | |
Group Infrastructure | | | (18 | ) | | | (25 | ) | | | (69 | ) |
| |
Total trading income | | | 2,600 | | | | 2,789 | | | | 2,990 | |
| |
| Adjust for: | | | | | | | | | | | | |
- Embedded value charges and rebasing(1) | | | (27 | ) | | | (363 | ) | | | (553 | ) |
| - Reorganisation expenses - life assurance | | | (72 | ) | | | (16 | ) | | | — | |
| - Depreciation on operating lease assets | | | — | | | | — | | | | 23 | |
| |
PFS total operating income | | | 2,501 | | | | 2,410 | | | | 2,460 | |
| |
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Retail Banking | | | 1,961 | | | | 1,909 | |
| Insurance and Asset Management | | | 322 | | | | 351 | |
| Abbey Financial Markets | | | 253 | | | | 289 | |
| Group Infrastructure | | | (16 | ) | | | (47 | ) |
| |
Total trading income | | | 2,520 | | | | 2,502 | |
| |
| Adjust for: | | | | | | | | |
| – IFRS embedded value charges and rebasing | | | (12 | ) | | | (27 | ) |
| – Reorganisation expenses – life assurance | | | — | | | | (20 | ) |
| – Hedging variances | | | (18 | ) | | | — | |
| – Eliminating IAS proforma adjustments | | | — | | | | 169 | |
| |
PFS total operating income | | | 2,490 | | | | 2,624 | |
| |
(1) | The £363m embedded value charges and rebasing in 2003 does not include £80m relating to the tax law changes on the Scottish Provident acquisition structure, which are reported as provisions for bad and doubtful debts for statutory purposes. |
2004
2005 compared to 20032004
Retail Banking
and Savings trading income was
£199m lower£52m higher than the previous period at
£1,948m (2003: £2,147m),£1,961m (2004: £1,909m). 2004 included non-recurring items of £92m, excluding which the increase was £144m. The improvement is largely attributable to
the reductiongrowth in
the Personal Financial Services Bankingretail banking fee income, with balance sheet growth offsetting a modest spread
by 30 basis points. This was partially offset bydecline to deliver a
release of unused reassurance reserves of £42m that are not expected to recur in 2005. Investmentstable net interest income result.
Insurance and
ProtectionAsset Management trading income of
£248m£322m was
£49m£29m lower than the previous period
(2003: £297m)(2004: £351m), largely due to lower
expected return from embedded valueprotection new business volumes, lower earnings
on the in-force policies due to the lowering of the discount rate assumption and higher internal value based management charges following a change in the assumed mix of capital support. The
20042005 result includes
£(59)m£118m of experience variances and assumption
charges.changes compared to £83m in 2004. (These are discussed in more detail in the
“life assurance profit before tax”‘Insurance and Asset Management Income’ section).
In General Insurance trading income fell £11m to £110m (2003: £121m) caused mainly by reduced new policy sales and lower renewals business.
Abbey Financial Markets trading income of
£312m£253m was
£63m higher£36m lower than the previous period
(2003: £249m)(2004: £289m), largely due to
a number of risk management opportunities and a favourable interest rate environment. In total, the 2004 results include circa £65m of
one-offnon-recurring specific revenue items
that are not expected to repeat in
2005.2004.
Group Infrastructure trading income of
£(18)£(16)m
(2003: £(25)(2004: £(47)m) was
broadly in line with£31m higher than last
year, but benefiting from the allocation of more interest cost to the business areas. In addition, 2004 results include circa £50m of income in relation to pre-tax earnings on the Group’s capital, that will not recur in 2005 as a result of the closeout of hedging in 2004.
2003 compared to 2002
Banking and Savings trading income was £83m lower at £2,147m (2002: £2,230m). A fall in net interest income was largely due to high levels of mortgage redemptions being replaced by lower margin new business. This also contributed to a lower overall standard variable rate asset, and more than offset the strong volume growth.
24
year.
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
Investment and Protection trading income of £297m was 30% lower than 2002 at £425m. The main contributor to this decrease was the impact of experience variances and assumption changes on the life assurance businesses, which have moved from £84m favourable in 2002 to £58m unfavourable in 2003.
In General Insurance, trading income fell to £121m (2002: £146m), reflecting primarily an increase in the risk premiums payable to the principal underwriter, combined with a fall in policies-in-force.
Abbey Financial Markets trading income fell by £9m to £249m (2002: £258m), largely due to the impact of reduced business opportunities resulting from the narrower Personal Financial Services mandate following the Portfolio Business Unit disposal process.
Group Infrastructure trading income of £(25)m (2002: £(69)m) improved by £44m, with net interest income benefiting from earnings on surplus capital arising from the continued Portfolio Business Unit disposal process. Trading non-interest income was negatively impacted by the non-recurrence of some disposal gains in 2002.
Personal Financial Services net interest income and spread
Personal Financial Services net interest income by segment
| | | | | | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 31 December | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | 2004(1) | | (restated) | | (restated) | | | £m | | £m | |
| | | £m | | £m | | £m | | |
| | |
| Banking and Savings | | 1,510 | | 1,720 | | 1,799 | | |
| Investment and Protection | | 77 | | 83 | | 90 | | |
| General Insurance | | | (4 | ) | | | (5 | ) | | | (3 | ) | |
| Retail Banking | | | 1,400 | | 1,432 | |
| Insurance and Asset Management | | | 55 | | 72 | |
| Abbey Financial Markets | | 21 | | 26 | | 27 | | | 1 | | | (2 | ) |
| Group Infrastructure | | | (134 | ) | | | (115 | ) | | | (175 | ) | | | (213 | ) | | | (198 | ) |
| Net interest income | | 1,470 | | 1,709 | | 1,738 | | | 1,243 | | 1,304 | |
|
(1) | For details of restated presentation of interest and dealing profits see page 14. |
2004
2005 compared to 20032004
Excluding
Retail Banking
and Savings (analysed below), net interest income decreased by
£29m.2003 compared to 2002
Excluding Banking and Savings, net interest income decreased by £50m.
£(29)m.
Personal Financial Services Banking spread
| | | | | | | | | | |
| | | 31 December | | | | | | | | | |
| | | 31 December | | 2003 | | | 31 December | | 31 December | |
| | | 2004 | | (restated) | | | 2005 | | 2004 | |
| | Net interest income (£m) | | 1,510 | | 1,720 | | | 1,400 | | 1,432 | |
| PFS Banking spread | | | 1.48 | % | | | 1.78 | % | | | 1.45 | % | | | 1.51 | % |
| PFS Average asset spread | | | 0.70 | % | | | 0.90 | % | | | 0.71 | % | | | 0.74 | % |
| PFS Average liability spread | | | 0.78 | % | | | 0.88 | % | | | 0.74 | % | | | 0.77 | % |
| PFS Banking margin | | | 1.60 | % | | | 1.98 | % | |
|
|
| (1) | | Retail Banking and Savings net interest income includes income associated with the Housing Association asset, however the Personal Financial Services Banking spread excludes Social Housing. |
|
| (2) | | Average spread is defined as interest received (mortgage, unsecured personal loans and overdraft interest less suspended interest) over average interest earning assets, less interest payable (savings, in-credit bank accounts) over interest bearing liabilities (including an element of wholesale funding). The 2003 spread, has been restated to reflect the sale of asset financing businesses in June 2004, and also adjustment of certain reported asset and liability balances. |
|
| (3) | | Asset and liability spreads are calculated using the third party interest payments (such as mortgage interest receivable or savings interest payable) net of relevant hedging compared to an internal transfer price of average base rate plus 15 bps. |
(4) | Average margin is defined as net interest income (less suspended interest but including a recapitalisation adjustment that equates to earnings on regulatory capital) divided by the average interest earning assets. |
|
(5) | Information relating to Personal Financial Services Banking Spread is not available for 2002. |
Net interest income in the Retail Bank fell from £1,432m to £1,400m. 2004 included £50m of non-recurring benefit, relating to the close out of the free-reserves hedges. The Personal Financial Services Bankingother movement reflects a strong banking performance offset by a lower mortgage contribution and continuing pressure from the decline in back book savings balances. Whilst the overall spread was 1.48%declined year-on-year by 6bps to 1.45% (2004: 1.51%), 30 basis points lowerover the last 18 months the spread has remained stable, with the second half 2005 asset spread 2 bps better than the same period ofpoint last year, with pressure on the asset spread mainly being responsible for the decline. The reduction in the free-to-goreflecting increased standard variable rate asset contributed circa 8bps of the fall, lower product redemption charges a further circa 11bps. The liability spread reduced to 0.78% (2003: 0.88%), benefiting in the first half from a rising rate environment, but with underlying pressure-reflecting attrition from high margin back-book accounts.balances.
Through 2005, a modest decline in the spread is expected following a period of relative stability in the last two quarters.
2004 compared to 2003
Banking and Savings net interest income of £1,510m was down 12.2% (2003: £1,720m), in part reflecting a sharp reduction in product redemption charges to £114m (2003: £194m), with a higher proportion of redemptions being penalty free, as well as a further reduction in average penalties per customer.
The absolute fall in the level of standard variable rate asset has also had an adverse impact of circa £40m in net interest income in 2004 compared with 2003.
2521
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
Earnings from deposits were down by circa £35m, with benefits from rising interest rates and spread widening (particularly in bank accounts) being more than offset by attrition from high margin back-book accounts.
2003 compared to 2002
Banking and Savings net interest income of £1,720m was down 4% (2002: £1,799m), primarily reflecting a fall in the average mortgage book margin, with high levels of redemptions and incentive maturities being replaced by lower margin new lending.
| | | | | | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| Mortgage asset mix(1) | | £bn | | £bn | | £bn | | | £bn | | £bn | |
| Incentive period | | |
| Standard variable rate linked | | 14 | | 18 | | 19 | | |
| Base-rate linked | | 28 | | 26 | | 19 | | |
| Incentive standard variable rate linked | | | 12 | | 14 | |
| Incentive base rate linked | | | 23 | | 27 | |
| Fixed | | 18 | | 17 | | 14 | | | 24 | | 19 | |
| Tied in | | — | | 1 | | 2 | | | — | | — | |
| | | | 60 | | 62 | | 54 | | | 59 | | 60 | |
| Free-to-go | | |
| Standard variable rate linked | | 12 | | 15 | | 17 | | | 14 | | 13 | |
| Base-rate linked | | 7 | | 2 | | 1 | | | 7 | | 6 | |
| Fixed | | 6 | | 5 | | 3 | | |
| Tied in | | 1 | | 1 | | 1 | | |
| Flexible | | | 9 | | 6 | |
| Other | | | 1 | | 2 | |
| | | | 26 | | 23 | | 22 | | | 31 | | 27 | |
| Total mortgage asset | | 86 | | 85 | | 76 | | | 90 | | 87 | |
|
| (1) | | Quoted mortgage asset excludes £3.1bn (2003: £3.1bn; 2001: £2.2bn)£4.0bn (2004: £3.4bn) of Housing Association lending, consistent with the methodology used to calculate the Abbey retail spread. In addition, the split of the asset has been restated in prior periods to correct misclassifications, increasing the amount of fixed rate asset, offset by reducing the standard variable rate linked and Base rate linked incentive period values. |
2004
2005 compared to 20032004
In overall terms,
mortgage assets of £90bn were over 3% higher than 2004. In 2005, the
amount of assets in incentive periods reduced during 2004 reflecting lower gross lending but also high levels of assets reaching the end of their incentive period and reverting to base rate linked (free-to-go). Of the remaining incentive period asset, thefree-to-go balances on standard variable rate
linked incentive period business mainly constitutes higher margin variable internal transfer business which all trackshave stabilised, with growth in flexible products and
reverts to standard variable rate. Basefixed rate
linked business contains most of the front book business and is linked to base rates in the incentive period.offers.
The free-to-go standard variable rate asset
has fallen over the past few years due partly to the increaseof £14bn is higher than 2004, though in
remortgage business and also the selling of Classic and Lifestyle products which revert topercentage terms, broadly in line as a
base rate tracker after the incentive period. Through 2005, incentive period maturities will again start reverting to standard variable rate, and therefore a more stable profile in the high margin standard variable rate asset is expected.
2003 compared to 2002
At year end, free-to-go standard variable rate was £15bn, reducing through 2003, but in particular from September 2003, as an increased proportion of incentive-based customer loans started to mature onto base rate linked reversion products. This latter segment is broadly restricted to lending undertaken between April 2001 and August 2002.the book as a whole.
| | | | | | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| Liability mix | | £bn | | £bn | | £bn | | | £bn | | £bn | |
| | Banking | | 4.5 | | 4.3 | | 3.5 | | |
| Remote | | 11.0 | | 12.2 | | 13.2 | | |
| Fixed term and tax free savings | | 15.1 | | 14.5 | | 14.7 | | |
| Bank accounts | | | 4.8 | | 4.5 | |
| Remote access | | | 11.2 | | 11.0 | |
| Tax and bonds | | | 15.0 | | 15.1 | |
| Branch-based deposits | | 15.3 | | 15.3 | | 15.4 | | | 16.1 | | 15.3 | |
| Total Abbey branded household liability(1) | | 45.9 | | 46.3 | | 46.8 | | | 47.1 | | 45.9 | |
Other brands(1) | | 16.0 | | 14.2 | | 12.5 | | |
Other subsidiaries(1) | | | 14.9 | | 13.5 | |
| Total PFS liability | | 61.9 | | 60.5 | | 59.3 | | | 62.0 | | 59.4 | |
|
| (1) | | The split is different to that in the “Personal Financial Services business flows” section due to the treatment of Abbey Business. |
2004
2005 compared to 2003Overall, branch-based2004
Branch-based deposits have
remained stableincreased by £0.8bn at
£15.3bn. Changes in£16.1bn (December 2004: £15.3bn). The mix
reflecthas changed reflecting attrition from older branch-based accounts,
partlymore than offset by positive flows into new
lower but still positive margin, branch-based offerings, such as Flexible Saver and Branch Saver.
Remote savings balances, including internet and postal, have
reducedincreased to
£11.0bn£11.2bn (December
2003: £12.2bn)2004: £11.0bn).
Fixed termTax and
tax-freebonds savings balances increased, with Individual Savings Account (ISA) inflows offsetting bond
and Tax Exempt Special Savings Account maturities.
Growth in balances outside Abbey retail relate primarily to cahoot.
2622
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
2003 compared to 2002
Overall, branch-based deposits remained broadly stable at £15.3bn. Current account growth contributed positively to the stability of branch-based balances.
Remote savings balances, including internet and postal, have reduced to £12.2bn (2002: £13.2bn). Fixed term and tax-free savings balances fell modestly, with Individual Savings Account inflows partially offsetting bond and Tax Exempt Specialist Savings Account (TESSA) maturities.
Growth in balances outside Abbey retail relate primarily to cahoot and Abbey National Offshore.
Trading non-interest income
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December 2003 | | | 31 December 2002 | |
| | | 2004 | | | (restated) | | | (restated) | |
| | | £m | | | £m | | | £m | |
| |
Mortgages: | | | | | | | | | | | | |
| Administration, survey and legal fees | | | 66 | | | | 73 | | | | 65 | |
| Application and booking fees | | | 40 | | | | 43 | | | | 13 | |
| Fee income on high loan-to-value loans | | | 88 | | | | 55 | | | | 87 | |
| Introducer fees payable | | | (31 | ) | | | (20 | ) | | | (17 | ) |
| Other | | | 17 | | | | 12 | | | | 3 | |
| |
| | | | 180 | | | | 163 | | | | 151 | |
Savings | | | 28 | | | | 47 | | | | 67 | |
Banking: | | | | | | | | | | | | |
| Fees and commissions receivable | | | 278 | | | | 246 | | | | 235 | |
| Fees and commissions payable | | | (40 | ) | | | (38 | ) | | | (31 | ) |
| Other | | | (8 | ) | | | 9 | | | | 9 | |
| |
| | | | 230 | | | | 217 | | | | 213 | |
| |
Banking and Savings | | | 438 | | | | 427 | | | | 431 | |
| |
Investment and Protection | | | 171 | | | | 214 | | | | 335 | |
| |
| Building and contents | | | 91 | | | | 94 | | | | 118 | |
| Motor | | | — | | | | 6 | | | | 6 | |
| Creditor | | | 21 | | | | 24 | | | | 22 | |
| Other | | | 2 | | | | 2 | | | | 3 | |
| |
General Insurance | | | 114 | | | | 126 | | | | 149 | |
| |
Abbey Financial Markets (1) | | | 291 | | | | 223 | | | | 231 | |
| |
Group Infrastructure | | | 116 | | | | 90 | | | | 106 | |
| |
PFS trading non-interest income | | | 1,130 | | | | 1,080 | | | | 1,252 | |
| |
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
Mortgages: | | | | | | | | |
| Administration, survey and legal fees | | | 68 | | | | 50 | |
| Other | | | 8 | | | | 39 | |
| |
| | | | 76 | | | | 89 | |
Savings: | | | 38 | | | | 31 | |
Banking credit card and UPL fees: | | | | | | | | |
| Banking fees | | | 263 | | | | 192 | |
| Credit card fees | | | 18 | | | | 17 | |
| Unsecured Personal Lending (‘UPL’) fees | | | 52 | | | | 34 | |
| |
| | | | 333 | | | | 243 | |
General Insurance: | | | | | | | | |
| Building and contents | | | 85 | | | | 91 | |
| Motor | | | 3 | | | | 6 | |
| Creditor | | | 25 | | | | 21 | |
| Other | | | 1 | | | | (4 | ) |
| |
| | | | 114 | | | | 114 | |
| |
Retail Banking | | | 561 | | | | 477 | |
| |
Insurance and Asset Management | | | 267 | | | | 279 | |
| |
Abbey Financial Markets | | | 252 | | | | 291 | |
| |
Group Infrastructure | | | 197 | | | | 151 | |
| |
PFS trading non-interest income | | | 1,277 | | | | 1,198 | |
| |
(1) | For details of restated presentation of interest and dealing profits see page 14. |
2004
2005 compared to 20032004
Total mortgage non-interest income has
increased by £17mfallen to
£180m (2003: £163m), predominantly due£76m (2004: £89m). 2004 included £42m of specific benefits relating to
athe release of unused reassurance reserves
relating tofrom high loan-to-value mortgages
offset by increased introducer fees (due(included on Other above). Apart from this, mortgage non-interest income was higher, reflecting volume growth and changes to
revised amortisation of fees introduced from 2002), and a fall in administration, survey and legal fees, as a result of reduced mortgage completions in 2004.new business fees.
Savings non-interest income of
£28m£38m is
down £19mup £7m on last year
(2003: £47m)(2004: £31m), largely due to
a fallan increase in
commissions driven by the level of
both protection and investment
sales.sales made through the branch network.
Banking related non-interest income increased by £13m£90m to £230m (2003: £217m)£333m (2004: £243m) driven by a new penalty charging structure, offset by the outsourcing costsvolume related increases, particularly in UPL and Abbey-branded credit cards, in addition to changes to specific fee structures.
General insurance non-interest income of cash processing£114m (2004: £114m) was unchanged on last year.
Insurance and
reduced automatic teller machine income following the loss of key sites at supermarkets. Investment and ProtectionAsset Management trading non-interest income is analysed in the life assurance income section.
General insurance non-interest income of £114m (2003: £126m) was slightly lower than the equivalent period in 2003, with lower new business volumes and a reduction in renewals, in part offset by improved margins.
section that follows.
Abbey Financial Markets non-interest income
increased 30%decreased 13% to
£291m (2003: £223m), largely due to£252m (2004: £291m). The 2004 result included a number of
specific risk management trades
(totalling circa £65m that are not expected to repeat in 2005) andwhich generated income of £65m. Other income was stronger reflecting increased trading volumes resulting from a favourable
interest ratemarket environment.
In Group Infrastructure, non-interest income of
£116m (2003: £90m)£197m (2004: £151m) increased by
£26m,£46m, reflecting higher capital charges allocated to the life assurance
companies in line with the group’s gearing ratio.2003 compared to 2002
Total mortgage non-interest income has increased by £12m to £163m (2002: £151m), largely due to increased new business levels. These improvements have been offset by reduced fee income on high loan-to-value lending, due primarily to lower levels of new business with loan-to-value greater than 90%.
Savings non-interest income of £47m (2002: £67m) was down 30%, resulting from a fall in commissions earned on lower sales of life assurance policies.
Banking related trading non-interest income was £4m higher at £217m.
Investmentcompanies.
Insurance and Protection trading non-interest income is analysed in the “Life assurance income” section.Asset Management Income
| | | | | | | | | | | | | |
| | 31 December 2005 | |
| | | Retail Life | | | Intermediary | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| New business contribution | | | 12 | | | | 26 | | | | 38 | |
| Contribution from existing business: | | | | | | | | | | | | |
| – expected return | | | 34 | | | | 166 | | | | 200 | |
| – experience variances, changes in assumptions and expense loadings | | | 46 | | | | 72 | | | | 118 | |
| |
Increase in value of long-term assurance businesses | | | 92 | | | | 264 | | | | 356 | |
| Non-embedded value earnings: | | | | | | | | | | | | |
ANUTM and ANPIM contribution(1) | | | 43 | | | | — | | | | 43 | |
| Other income (including interest income) | | | 22 | | | | 82 | | | | 104 | |
| Capital charge | | | (28 | ) | | | (153 | ) | | | (181 | ) |
| |
Trading income | | | 129 | | | | 193 | | | | 322 | |
| Operating expenses | | | (39 | ) | | | (155 | ) | | | (194 | ) |
| |
Trading profit before tax(3) | | | 90 | | | | 38 | | | | 128 | |
| Adjust for: | | | | | | | | | | | | |
| - IFRS embedded value charges and rebasing | | | (7 | ) | | | (5 | ) | | | (12 | ) |
| - Reorganisation expenses and others | | | (3 | ) | | | (17 | ) | | | (20 | ) |
| |
Profit/(loss) before tax | | | 80 | | | | 16 | | | | 96 | |
| |
New business margin (%)(2) | | | 26 | % | | | 22 | % | | | 23 | % |
| |
2723
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
General Insurance income has fallen to £126m (2002: £149m). Buildings and contents income has been impacted by an increase in the costs payable to the principal insurer of £18m not passed on to customers. Reduced new business and lower renewals have also contributed to the overall reduction in income.
Abbey Financial Markets non-interest income decreased 3% to £223m (2002: £231m).
In Group Infrastructure, non-interest income of £90m (2002: £106m) fell by £16m, reflecting the non-recurrence of one-off gains in 2002.
Life assurance income
| | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | |
| | | | | | | Scottish | | | Scottish | | | | |
| | | AN Life | | | Mutual | | | Provident | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| New business contribution to embedded value | | | 14 | | | | (1 | ) | | | 32 | | | | 45 | |
| Contribution from existing business to embedded value: | | | | | | | | | | | | | | | | |
| - expected return | | | 37 | | | | 109 | | | | 60 | | | | 206 | |
| - experience variances and changes in assumptions | | | 3 | | | | (4 | ) | | | (58 | ) | | | (59 | ) |
| |
Increase in value of long-term assurance businesses | | | 54 | | | | 104 | | | | 34 | | | | 192 | |
| Non-embedded value earnings: | | | | | | | | | | | | | | | | |
ANUTM and ANPIM Contribution(1) | | | 38 | | | | — | | | | — | | | | 38 | |
| Other income and operating expenses | | | (22 | ) | | | (31 | ) | | | 2 | | | | (51 | ) |
| |
Trading profit before tax(3) | | | 70 | | | | 73 | | | | 36 | | | | 179 | |
| Less: embedded value charges and rebasing | | | (5 | ) | | | (79 | ) | | | 105 | | | | 21 | |
| Less: reorganisation expenses | | | (7 | ) | | | (18 | ) | | | (30 | ) | | | (55 | ) |
| |
Profit/(loss) before tax | | | 58 | | | | (24 | ) | | | 111 | | | | 145 | |
| |
New business margin (%)(2) | | | 40 | % | | | (2 | )% | | | 45 | % | | | 28 | % |
| |
| | | | | | | | | | | | | | | | | |
| | | 31 December 2003 | |
| | | | | | | Scottish | | | Scottish | | | | |
| | | AN Life | | | Mutual | | | Provident | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| New business contribution to embedded value | | | 21 | | | | 6 | | | | 18 | | | | 45 | |
| Contribution from existing business to embedded value: | | | | | | | | | | | | | | | | |
| - expected return | | | 43 | | | | 128 | | | | 44 | | | | 215 | |
| - experience variances and changes in assumptions | | | (14 | ) | | | (69 | ) | | | 25 | | | | (58 | ) |
| |
Increase in value of long-term assurance businesses | | | 50 | | | | 65 | | | | 87 | | | | 202 | |
| Non-embedded value earnings: | | | | | | | | | | | | | | | | |
ANUTM and ANPIM Contribution(1) | | | 43 | | | | — | | | | — | | | | 43 | |
| Other income and operating expenses | | | (14 | ) | | | (15 | ) | | | 26 | | | | (3 | ) |
| |
Trading profit before tax(3) | | | 79 | | | | 50 | | | | 113 | | | | 242 | |
| Less: embedded value charges and rebasing | | | 26 | | | | (207 | ) | | | (262 | ) | | | (443 | ) |
| Less: reorganisation expenses | | | — | | | | (8 | ) | | | (8 | ) | | | (16 | ) |
| |
Profit/(loss) before tax | | | 105 | | | | (165 | ) | | | (157 | ) | | | (217 | ) |
| |
New business margin (%)(2) | | | 46 | % | | | 7 | % | | | 22 | % | | | 21 | % |
| |
| | | | | | | | | | | | | |
| | | 31 December 2004 | |
| | | Retail Life | | | Intermediary | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| New business contribution | | | 14 | | | | 31 | | | | 45 | |
| Contribution from existing business: | | | | | | | | | | | | |
| – expected return | | | 37 | | | | 169 | | | | 206 | |
| – experience variances, changes in assumptions and expense loadings | | | 20 | | | | 63 | | | | 83 | |
| |
Increase in value of long-term assurance businesses | | | 71 | | | | 263 | | | | 334 | |
| Other: | | | | | | | | | | | | |
ANUTM and ANPIM Contribution(1) | | | 38 | | | | — | | | | 38 | |
| Other income (including interest income) | | | 15 | | | | 99 | | | | 114 | |
| Capital Charge | | | (21 | ) | | | (114 | ) | | | (135 | ) |
| |
Trading income | | | 103 | | | | 248 | | | | 351 | |
| Operating expenses | | | (43 | ) | | | (219 | ) | | | (262 | ) |
| |
Trading earnings from PFS life assurance businesses(3) | | | 60 | | | | 29 | | | | 89 | |
| Adjust for: | | | | | | | | | | | | |
| - IFRS embedded value charges and rebasing | | | (5 | ) | | | 26 | | | | 21 | |
| - Reorganisation expenses | | | (7 | ) | | | (50 | ) | | | (57 | ) |
| - One-off statutory IAS adjustments | | | — | | | | (32 | ) | | | (32 | ) |
| - Eliminating IAS proforma adjustments | | | (1 | ) | | | (2 | ) | | | (3 | ) |
| |
Profit/(loss) before tax | | | 47 | | | | (29 | ) | | | 18 | |
| |
New business margin (%)(2) | | | 40 | % | | | 25 | % | | | 28 | % |
| |
| | | | | | | | | | | | | | | | | |
| | | 31 December 2002 | |
| | | | | | | Scottish | | | Scottish | | | | |
| | | AN Life | | | Mutual | | | Provident | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| New business contribution to embedded value | | | 31 | | | | 7 | | | | 15 | | | | 53 | |
| Contribution from existing business to embedded value: | | | | | | | | | | | | | | | | |
| - expected return | | | 50 | | | | 98 | | | | 23 | | | | 171 | |
| - experience variances and changes in assumptions | | | 50 | | | | 47 | | | | (13 | ) | | | 84 | |
| |
Increase in value of long-term assurance businesses | | | 131 | | | | 152 | | | | 25 | | | | 308 | |
| Non-embedded value earnings: | | | | | | | | | | | | | | | | |
ANUTM and ANPIM Contribution(1) | | | 63 | | | | — | | | | — | | | | 63 | |
| Other income and operating expenses | | | 11 | | | | (26 | ) | | | 23 | | | | 8 | |
| |
Trading profit before tax(3) | | | 205 | | | | 126 | | | | 48 | | | | 379 | |
| Less: embedded value charges and rebasing | | | (32 | ) | | | (481 | ) | | | (40 | ) | | | (553 | ) |
| |
Profit/(loss) before tax | | | 173 | | | | (355 | ) | | | 8 | | | | (174 | ) |
| |
New business margin (%)(2) | | | 41 | % | | | 5 | % | | | 22 | % | | | 19 | % |
| |
| | |
| (1) | | ANUTM representsstands for Abbey National Unit Trust Managers whileLimited and ANPIM represents Abbey National PEP and ISA Managers.Managers Limited. |
|
| (2) | | New business margin is calculated as new business contribution, to embedded value, divided by related annualised equivalent premiums for Life contracts. |
|
| (3) | | The difference between trading profit before tax for the life assurance business and the Investment and Protection segment of £(14)m (2003: £(3)m and 2002: £(7)m) consists of the profit before tax for theabove tables include James Hay and Inscape (i.e. represents Insurance and City Deal Businesses.Asset Management Income rather than just Life Assurance). |
28
OperatingThe above analysis is shown on a traditional embedded value for ease of comparison however with an adjustment within experience variances and Financial Review
changes in assumptions included to account for the impact of moving to an IFRS embedded value basis. The key impacts have been the change in the method of the tax gross up the impact of product classification and the elimination of future investment margin in determining the discounted value of future profits. The tax gross up of the embedded value results is now based upon the combined rate of tax applicable to both policyholders and shareholders, as opposed to the shareholder rate of 30% as applied previously. In accordance with IAS 12 Income Taxes, this has been applied retrospectively and comparatives have been adjusted accordingly. In addition, embedded value accounting is not permitted for certain products classified as investment contracts where they do not contain significant insurance risk, whereby the associated income and costs are now accounted for on a deferral and matching basis. The elimination of future investment margin as required under FRS 27 has been applied retrospectively, with comparatives being adjusted accordingly.
Operating Review — Personal Financial Servicescontinued20042005 compared to 2003
2004
New business contribution
New business contribution
to embedded valueNew business contribution to embedded value earnings remaineddecreased from 2004. The reductions in line with 2003. Reductions in Abbey NationalRetail Life and Scottish Mutual Assurance were offset by increases in Scottish Provident. The Abbey National Life reductions were mainly attributable to decreasesa 7% decrease in protection volumes although there was also a drop in investment product volumes.and decreased contribution from ‘future category’ sales despite increased sales volumes due to decreased profitability. The reductions in Scottish Mutual Assurance were attributable to lower flexible investment bond sales and a reduction in Pegasus product sales and profitability. Despite volume decreases Scottish ProvidentIntermediary new business contribution increasedis mainly due to higher profitabilitya 22% fall in protection sales.
Protection sales (particularly Scottish Provident Self Assurance volumes) in a competitive market.
Expected return represents the unwind of the discount on the discounted value of future profits, together with the return on shareholders’ funds held in the long-term business fund. Overall, the expected return of
£206m (2003: £215m)£200m (2004: £206m) was down
£9m.£6m. The overall decline was due to the
reductionfall in
interest rates, which impacts the risk discount
rate.rate and earnings on surplus capital. In addition, earnings have reduced due to capital repatriated to and dividends paid to Abbey. This fall was partly offset by earnings on
former contingent loan balances
in place in 2004 being recognised as part of
IFRS embedded value rather than in net interest income.
Abbey National Unit Trust Managers and Abbey National PEP and ISA managers’ contributionANUTM and ANPIM non-interest income of £38m was slightly below last year (2003: £43m) due to lower sales volumes.
Other Income and Operating Expenses
Other income and operating expenses of £(51)m was down £48m in 2003. This is due to a fall in net interest income of £17m largely due to the unwind of the Scottish Provident and Scottish Mutual Assurance contingent loan arrangements in July 2004, and an increase in the internal management charge for debt capital in line with group gearing.
2003 compared to 2002
New business contribution to embedded value
The decrease in Abbey National Life new business contribution is due to reduced sales of investment products, particularly with-profits bonds together with reduced profitability from protection business resulting from increased reassurance charges. Reduced sales of investment products also lead to a reduction in new business contribution from Scottish Mutual though this is largely offset by reductions in low margin pension business. The increase from Scottish Provident is due to the increase in protection volumes partly offset by reduced profitability in the first half of the year due to increased reassurance rates.
Expected return
Overall, the expected return of £215m (2002: £171m) was up £44m.
The impact of lower balances on the unwind of the discount in 2003 was around £70m negative, compared to £30m negative in 2002. This negative impact in 2003 was broadly offset by new business written in 2002 increasing the opening discounted value of future profits.
The balance of the year-on-year increase largely relates to increased earnings on capital injections made into the long-term business fund, totalling £825m made in Scottish Mutual in the latter half of 2002 and in early 2003, £220m was injected into Scottish Provident.
Abbey National Unit Trust ManagersLimited (‘ANUTM’) and Abbey National PEP and ISA Managers Limited’s (‘ANPIM’) contribution
The reduction in Abbey National Unit Trust Managers’
ANUTM and Abbey National PEP and ISA Managers’ contributions isANPIM non-interest income of £43m was marginally above last year (2004: £38m) due to lowerhigher sales volumes, withmainly the Guaranteed Growth Plan and Safety Plus Growth Plan.
Other Income (including interest income)
Other income (including interest income) of £104m was adverse to 2004. This is mainly due to lost earnings on capital repatriated to, and dividends paid to Abbey from the shareholder fund.
Capital charge
The capital charge of £181m has increased on 2004 reflecting a lower margin sales mix.change in methodology.
Operating expenses
Operating expenses of £194m are down on 2004 following the successful implementation of Group wide cost reduction initiatives.
2924
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
Experience variances, and changes in assumptions and expense loadings
Experience variances, and assumption changes and expense loadings of £(59)m (2003: £(58)m)£118m (2004: £83m) have deterioratedimproved as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 2004 | | December 2003 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Scottish | | Scottish | | Scottish | | Scottish | | | | | 31 December 2005 | | 31 December 2004 | |
| | | AN Life | | Mutual | | Provident | | Total | | AN Life | | Mutual | | Provident | | Total | | | Retail Life | | Intermediary | | Total | | Retail Life | | Intermediary | | Total | |
| | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | | £m | | £m | |
| | Mortality and morbidity experience | | 3 | | 8 | | 5 | | 16 | | 8 | | | (21 | ) | | 23 | | 10 | | | 1 | | 7 | | 8 | | 3 | | 13 | | 16 | |
| Lapse experience | | | (1 | ) | | | (22 | ) | | | (14 | ) | | | (37 | ) | | | (8 | ) | | | (23 | ) | | | (16 | ) | | | (47 | ) | | — | | | (49 | ) | | | (49 | ) | | | (1 | ) | | | (37 | ) | | | (38 | ) |
| Expenses (over)/under run | | | (2 | ) | | | (11 | ) | | 5 | | | (8 | ) | | | (1 | ) | | | (16 | ) | | 21 | | 4 | | |
| Taxation adjustment | | | (6 | ) | | 20 | | | (1 | ) | | 13 | | | (10 | ) | | | (16 | ) | | 7 | | | (19 | ) | |
| Expense loadings | | | 23 | | 127 | | 150 | | 21 | | 141 | | 162 | |
| Changes to reserving and modelling methodology | | 14 | | 7 | | | (50 | ) | | | (29 | ) | | 3 | | 6 | | | (11 | ) | | | (2 | ) | | 22 | | | (13 | ) | | 9 | | | (3 | ) | | | (54 | ) | | | (57 | ) |
| Other | | | (6 | ) | | | (5 | ) | | | (3 | ) | | | (14 | ) | | | (6 | ) | | 1 | | 1 | | | (4 | ) | |
| Total experience and assumption changes variance | | 2 | | | (3 | ) | | | (58 | ) | | | (59 | ) | | | (14 | ) | | | (69 | ) | | 25 | | | (58 | ) | | 46 | | 72 | | 118 | | 20 | | 63 | | 83 | |
|
Experience variances relate to the current year and changes in assumptions capture the effect both in current year, and on the discounted value of future profits, of the difference between the actual experience and the assumptions built in the models for calculating the new business contribution and the expected return. However, investment variances and other one-off items are excluded.
Taxation adjustments affect profit before tax as profit is calculated on a post-tax basis and grossed up at the rate applicable to the company and type of business in question. Mortality and morbidity experience variances have been favourable following the assumption changes made in
all three value centresthe Life Companies at the end of
2003. Lapse experience of £(37)m improved £10m on the prior year. The2004.
Adverse lapse experience was still negativecontinues mainly reflecting general market trends as customers continue to seek alternative investment products to with-profit products. In addition, Protection lapses have been higher than expected due to increased competition throughout the poor lapse experienceyear.
Expense loadings reflect the amount of premium income received that is allocated to cover costs of writing new business and servicing the in-force book of business. The decrease year on year is a direct result of reduced new business and higher than expected lapses. This has been offset by reduced actual expenses following the implementation of Group wide cost reduction initiatives (included in
relation to with-profit products. Expense (over)/‘operating expenses’ line). The expense over/under run, which is a measure of the efficiency of cost management within the funds, and is impacted by sales volumes, sales mix and actual versus assumed costs. Overall, theimproved from an expense variance across all funds declined to a negative experienceoverrun of £(8)m£8m in 2004, fromto an expense under run of £19m in 2005, mainly as a positive varianceresult of £4m in 2003. This is due partly to Scottish Provident including a one-off capitalised benefit for lower investment expenses in 2003.
Taxation experience is up £32mdecreased costs following the recognitionimplementation of a deferred tax asset in Scottish Mutual Assurance in 2004.group wide cost reduction strategies.
Changes to modelling and reserving assumptions
total £29mand other includes the benefit from the revision of expenses and revised mortality assumptions partially offset by a change in lapse assumptions and other modelling changes including
an adjustment to allow for the impact of
mid-year annuity reassurance arrangementsIFRS. Excluding the impact of IFRS and expense loadings, experience variances and changes in
Irish tax assumptions
in Scottish Provident.Embeddedwere £22m (2004: £(55)m)
IFRS embedded value charges and rebasingEmbedded
IFRS embedded value charges and rebasing were
£21m (2003: £(443)m)£(12)m (2004: £21m).
The
IFRS embedded value charges and rebasing are disclosed in the “Other Material Items” section. The investment assumptions and
variances totalvariance totals has two main drivers. Firstly, the impact of investment markets over the period differing from expectations. This includes actual less expected interest on surpluses retained in the funds and the difference between actual and expected management charges on unit funds over the period. Secondly, the impact of closing market levels being different than expected on the discounted value of future profits. This includes items such as changes
to the active economic basis, changes in asset mix and the impact of higher or lower unit values on the stream of future management charges. Other one-off adjustments included
herein 2004 reflect changes in provisioning and the impacts of stabilising the with-profits funds.
Life assurance new business premiums(1)
| | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | | | | | | | | | | | | |
| | | Scottish | | Scottish | | | | | 31 December 2005 | |
| | | AN Life | | Mutual | | Provident | | Total | | | Retail Life | | Intermediary | | Total | |
| | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | |
| Single | | |
| Pension | | 17 | | 222 | | 21 | | 260 | | | 24 | | 204 | | 228 | |
| Life and investments: | | |
| - ISA and unit trusts | | 409 | | — | | — | | 409 | | |
| - Life and other bonds | | 4 | | 17 | | 31 | | 52 | | |
- With-profits(1) | | — | | — | | — | | — | | |
| – ISA and unit trusts | | | 536 | | — | | 536 | |
| – Life and other bonds | | | 151 | | 309 | | 460 | |
| | | | 430 | | 239 | | 52 | | 721 | | | 711 | | 513 | | 1,224 | |
| Annual | | |
| Pension | | 13 | | 18 | | 1 | | 32 | | | 10 | | 12 | | 22 | |
| Life and investments: | | |
| - ISA and unit trusts | | 13 | | — | | — | | 13 | | |
| - Life and other bonds | | — | | — | | 1 | | 1 | | |
| - Term assurance and other protection | | 19 | | 11 | | 68 | | 98 | | |
| – ISA and unit trusts | | | 13 | | — | | 13 | |
| – Life and other bonds | | | — | | 1 | | 1 | |
| – Term assurance and other protection | | | 18 | | 64 | | 82 | |
| | | | 45 | | 29 | | 70 | | 144 | | | 41 | | 77 | | 118 | |
| Total new business premiums | | 475 | | 268 | | 122 | | 865 | | | 752 | | 590 | | 1,342 | |
| | |
Annualised equivalent(2) | | 89 | | 53 | | 75 | | 217 | | | 94 | | 64 | | 158 | |
New business margin(3) | | | 40 | % | | | (2 | )% | | | 45 | % | | | 28 | % | | | 26 | % | | | 22 | % | | | 23 | % |
|
| | |
| (1) | | Excludes sales of Prudential Bonds where only commissions are earned, which totalled £3m.through James Hay and Inscape. |
| |
| (2) | | Calculated as 10% of single premium new business premiums, plus annual new business premiums. |
| |
| (3) | | New business margin is calculated as new business contribution to IFRS embedded value, divided by related annualised premiums for life contracts. |
3025
Operating
Business and Financial Review OperatingBusiness Review — Personal Financial Servicescontinued
| | | | | | | | | | | | | | | | | | |
| | | 31 December 2003 | | | | | | | | | | | | | |
| | | Scottish | | Scottish | | | | | 31 December 2004 | |
| | | AN Life | | Mutual | | Provident | | Total | | | Retail Life | | Intermediary | | Total | |
| | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | |
| Single | | |
| Pension | | 30 | | 280 | | 113 | | 423 | | | 17 | | 243 | | 260 | |
| Life and investments: | | |
| - ISA and unit trusts | | 714 | | 3 | | — | | 717 | | |
| - Life and other bonds | | 20 | | 170 | | — | | 190 | | |
- With-profits(1) | | — | | 2 | | — | | 2 | | |
| – ISA and unit trusts | | | 409 | | — | | 409 | |
| – Life and other bonds | | | 4 | | 48 | | 52 | |
| | | | 430 | | 291 | | 721 | |
| | | 764 | | 455 | | 113 | | 1,332 | | |
Annual | | |
| Pension | | 15 | | 24 | | 2 | | 41 | | | 13 | | 19 | | 32 | |
| Life and investments: | | |
| - ISA and unit trusts | | 9 | | — | | — | | 9 | | |
| - Life and other bonds | | 1 | | — | | — | | 1 | | |
| - Term assurance and other protection | | 28 | | 15 | | 82 | | 125 | | |
| – ISA and unit trusts | | | 14 | | — | | 14 | |
| – Life and other bonds | | | — | | 1 | | 1 | |
| – Term assurance and other protection | | | 19 | | 78 | | 97 | |
| | | | 53 | | 39 | | 84 | | 176 | | | 46 | | 98 | | 144 | |
| Total new business premiums | | 817 | | 494 | | 197 | | 1,508 | | | 476 | | 389 | | 865 | |
| | |
Annualised equivalent(2) | | 129 | | 85 | | 95 | | 309 | | | 69 | | 49 | | 119 | |
New business margin(3) | | | 46 | % | | | 7 | % | | | 22 | % | | | 21 | % | | | 40 | % | | | 25 | % | | | 28 | % |
|
| | |
| (1) | | Excludes sales of Prudential Bonds where only commissions are earned, which totalled £54m.through James Hay and Inscape. |
| |
| (2) | | Calculated as 10% of single premium new business premiums, plus annual new business premiums. |
| |
| (3) | | New business margin is calculated as new business contribution to IFRS embedded value, divided by related annualised equivalent premiums for life contracts. |
| | | | | | | | | | | | | | | | | |
| | | 31 December 2002 | |
| | | | | | | Scottish | | | Scottish | | | | |
| | | AN Life | | | Mutual | | | Provident | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Single | | | | | | | | | | | | | | | | |
| Pension | | | 29 | | | | 623 | | | | 150 | | | | 802 | |
| Life and investments: | | | | | | | | | | | | | | | | |
| - ISA and unit trusts | | | 1,031 | | | | 50 | | | | — | | | | 1,081 | |
| - Life and other bonds | | | 111 | | | | 124 | | | | — | | | | 235 | |
- With-profits(1) | | | 101 | | | | 96 | | | | — | | | | 197 | |
| |
| | | | 1,272 | | | | 893 | | | | 150 | | | | 2,315 | |
Annual | | | | | | | | | | | | | | | | |
| Pension | | | 18 | | | | 42 | | | | 4 | | | | 64 | |
| Life and investments: | | | | | | | | | | | | | | | | |
| - ISA and unit trusts | | | 19 | | | | — | | | | — | | | | 19 | |
| - Life and other bonds | | | 5 | | | | 2 | | | | — | | | | 7 | |
| - Term assurance and other protection | | | 27 | | | | 15 | | | | 70 | | | | 112 | |
| |
| | | | 69 | | | | 59 | | | | 74 | | | | 202 | |
| |
Total new business premiums | | | 1,341 | | | | 952 | | | | 224 | | | | 2,517 | |
| |
Annualised equivalent(2) | | | 196 | | | | 149 | | | | 89 | | | | 434 | |
New business margin(3) | | | 41 | % | | | 5 | % | | | 22 | % | | | 19 | % |
| |
(1) | Excludes sales of Prudential Bonds where only commissions are earned, which totalled £11m. |
|
(2) | Calculated as 10% of single premium new business premiums, plus annual new business premiums. |
|
(3) | New business margin is calculated as new business contribution to embedded value, divided by related annualised equivalent premiums for Life contracts. |
20042005 compared to 2003
2004
Total Personal Financial Services life assurance new business premiums of
£865m£1,342m were
43% lower55% higher than
20032004 (£
1,508m)865m), mainly reflecting the general
declineimprovement in the Individual Savings Account market.
A more detailed analysis of the movement includes:
| | |
| > | | Abbey NationalRetail Life new business totalled £475m (2003: £817m)£752m (2004: £476m), down 42%, impacted by a large fall in life and investment products.up 58%. This was driven by fallsincreases in single premium structured Individual Savings Account sales and investment bonds. |
| | | |
| > | | New business premiums in Scottish MutualIntermediary of £268m£590m were 46% lower51% higher than 2003,2004, predominantly due to reducedincreased sales of single premium pensionSPILA Flexible Select and investment products. Single premium life sales suffered from the withdrawal of the special offer on the cash fund in relation to the Flexible Investment bond. |
| | |
> | | Scottish Provident new business fell 38% to £122m (2003: £197m), largely due to reduced sales of single premium pension products, and lower protection volumes partly offset by sales of the Scottish Provident International offshore bond.Choice plan. |
31
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
2003 compared to 2002
Total Personal Financial Services life assurance new business premiums of £1.5bn were 40% lower than 2002 (£2.5bn), reflecting the withdrawal from the with-profit bond market and a general decline in demand due to investor nervousness about stock market conditions.
The impact on our new business flows has been more marked as a result of our previous dependence on with-profits.
Assets under management
The table below shows the Abbey National Asset Managers’ funds under management by company (including related Portfolio Business Unit entities), and by type of business.
| | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | | | | | | | | | | | | |
| | | Scottish | | Scottish | | | | | 31 December 2005 | |
| | | AN Life | | Mutual(2) | | Provident | | Total | | | Retail Life | | Intermediary(1) | | Total | |
| | | £bn | | £bn | | £bn | | £bn | | | £bn | | £bn | | £bn | |
| | Closed with-profit funds | | — | | 7.5 | | 4.3 | | 11.8 | | | — | | 12.2 | | 12.2 | |
| Ongoing businesses | | 4.7 | | 7.7 | | 2.1 | | 14.5 | | | 3.4 | | 11.3 | | 14.7 | |
| Total(1) | | 4.7 | | 15.2 | | 6.4 | | 26.3 | | |
| Total | | | 3.4 | | 23.5 | | 26.9 | |
|
(1) | Total funds under management are split £25bn in Personal Financial Services, | |
| (1) | | Intermediary includes Scottish Mutual Assurance plc, Scottish Provident Ltd, Scottish Provident International Ltd and £1.3bn within the Portfolio Business Unit.Scottish Mutual International plc. |
| |
| (2) | Scottish Mutual includes Scottish Mutual International. | The above excludes James Hay and Inscape. |
| | | | | | | | | | | | | |
| | | 31 December 2004 | |
| | | Retail Life | | | Intermediary(1) | | | Total | |
| | | £bn | | | £bn | | | £bn | |
| |
| Closed with-profits fund | | | — | | | | 13.2 | | | | 13.2 | |
| Ongoing businesses | | | 4.7 | | | | 8.3 | | | | 13.0 | |
| |
| Total | | | 4.7 | | | | 21.5 | | | | 26.2 | |
| |
| | |
|
| Note: The funds under management disclosed in the table above were largely outsourced in 2004. |
| | | | | | | | | | | | | | | | | |
| | | 31 December 2003 | |
| | | | | | | Scottish | | | Scottish | | | | |
| | | AN Life | | | Mutual(2) | | | Provident | | | Total | |
| | | £bn | | | £bn | | | £bn | | | £bn | |
| |
| With-profits fund | | | — | | | | 9.4 | | | | 4.9 | | | | 14.3 | |
| Non-profit fund | | | 4.8 | | | | 7.5 | | | | 2.5 | | | | 14.8 | |
| |
Total(1) | | | 4.8 | | | | 16.9 | | | | 7.4 | | | | 29.1 | |
| |
26
(1) | Total funds under management is split £25.9bn in Personal Financial Services grouped segments, and £3.2bn in Portfolio Business Unit grouped segments. |
|
(2) | Scottish Mutual includes Scottish Mutual International. |
| | | | | | | | | | | | | | | | | |
| | | 31 December 2002 | |
| | | | | | | Scottish | | | Scottish | | | | |
| | | AN Life | | | Mutual(2) | | | Provident | | | Total | |
| | | £bn | | | £bn | | | £bn | | | £bn | |
| |
| With-profits fund | | | — | | | | 9.3 | | | | 5.1 | | | | 14.4 | |
| Non-profit fund | | | 4.9 | | | | 7.6 | | | | 2.4 | | | | 14.9 | |
| |
Total(1) | | | 4.9 | | | | 16.9 | | | | 7.5 | | | | 29.3 | |
| |
(1) | Total funds under management is split £26.3bn in Personal Financial Services grouped segments, and £3.0bn in Portfolio Business Unit grouped segments. |
|
(2) | Scottish Mutual includes Scottish Mutual International. |
Business and Financial Review
Business Review — Personal Financial Servicescontinued
Personal Financial Services trading expenses
Personal Financial Services trading expenses by segment by business
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Abbey retail | | | 1,037 | | | | 1,041 | | | | 1,002 | |
| cahoot | | | 41 | | | | 43 | | | | 43 | |
| Cater Allen and Offshore | | | 36 | | | | 48 | | | | 63 | |
| |
Banking and Savings | | | 1,114 | | | | 1,132 | | | | 1,108 | |
Scottish Mutual(1) | | | 11 | | | | 9 | | | | 3 | |
Scottish Provident (1) | | | — | | | | 1 | | | | 1 | |
Abbey National Life (1) | | | 15 | | | | 10 | | | | 11 | |
| Other | | | 57 | | | | 38 | | | | 38 | |
| |
Investment and Protection | | | 83 | | | | 58 | | | | 53 | |
General Insurance | | | 40 | | | | 48 | | | | 54 | |
Abbey Financial Markets | | | 109 | | | | 109 | | | | 110 | |
Group Infrastructure | | | 253 | | | | 230 | | | | 252 | |
| |
Total trading expenses | | | 1,599 | | | | 1,577 | | | | 1,577 | |
| Adjust for: | | | | | | | | | | | | |
| - Reorganisation expenses | | | 445 | | | | 265 | | | | 34 | |
| - Goodwill charges | | | 20 | | | | 28 | | | | 811 | |
| |
PFS expenses | | | 2,064 | | | | 1,870 | | | | 2,422 | |
| |
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Retail Banking | | | 1,050 | | | | 1,153 | |
| Insurance and Asset Management | | | 193 | | | | 262 | |
| Abbey Financial Markets | | | 105 | | | | 109 | |
| Group Infrastructure | | | 178 | | | | 226 | |
| |
Total trading expenses | | | 1,526 | | | | 1,750 | |
| Adjust for: | | | | | | | | |
| – Reorganisation expenses | | | 233 | | | | 479 | |
| – Intangible asset charges | | | 3 | | | | 20 | |
| – IAS statutory and proforma adjustments | | | — | | | | 239 | |
| |
PFS expenses | | | 1,762 | | | | 2,488 | |
| |
(1) | The quoted operating expenses for the Life Assurance businesses exclude operating expenses that are accounted for as part of embedded value and reported as non-interest income. These totalled £165m (2003: £179m). |
32
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
20042005 compared to 2003
Banking and Savings2004
At the time of the acquisition of Abbey by Santander, £300m of trading
expenses were down £18m to £1,114m (2003: £1,132m). This was mainly due to lower salary costs and reduced property expenses reflecting site closures, more than offsetting increased marketing promotion. Investment and Protection expenses (excluding those within embedded value) were up £25m to £83m (2003: £58m). The majority of this increase relates to system development spend in James Hay.
General Insurance expenses of £40m (2003: £48m) were down £8m reflecting cost reductions following systems integration.
Abbey Financial Markets costs remained flat year on year with salary expense decreases due to headcount reductions being offset by an increase in bonus payments consistent with revenue performance.
In Group Infrastructure, trading expenses were up 10% to £253m (2003: £230m) largely due to wage inflation, pension contribution increases and a rise in outsourced service costs, previously capitalised.
2003 compared to 2002
Banking and Savings trading expenses were up £24m to £1,132m (2002: £1,108m). Increased employment costs reflected wage inflation, increased customer-facing headcount, and increased national insurance and pension costs. This, combined with increased marketing spend, has more than offset the cost savings by 2007 were identified as potential synergies. Of these, £100m were earmarked to be achieved in Abbey retail.
Investment and Protection expenses2005.
Operating expense of £1,526m in 2005 were
up £5m to £58m (2002: £53m), reflecting the costs of rolling out multi-manager in Scottish Mutual, and some additional spend to support the expansion of James Hay. General Insurance expenses of £48m (2002: £54m) were down £6m, largely due to a significant reduction in headcount as part of the cost reduction programme.
Trading expenses in the Abbey Financial Markets business of £109m were stable.
In Group Infrastructure trading expenses were down 9% to £230m (2002: £252m), largely as a result of benefits associated with the13% lower than 2004. The cost reduction programme has reduced costs by £224m, with savings across all business units and the non-recurrence of project spend incurred in the second half of 2002.
A breakdownis well ahead of the non-trading items is provided inoriginal target.
In total, over 4,000 roles have been removed from the
“Other Material Items” section.business during the year. Other cost savings have come from a detailed procurement review and other activities.
Personal Financial Services trading expenses by type
| | | | | | | | | | | | | | |
| | | 31 December | | | | | | | | | | | |
| | | 31 December | | 2003 | | 31 December 2002 | | | 31 December | | 31 December | |
| | | 2004 | | (restated) | | (restated) | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| | Salaries and other compensation payments | | 640 | | 639 | | 638 | | | 693 | | 718 | |
| Social security costs | | 60 | | 55 | | 51 | | | 58 | | 64 | |
Pension costs (1) | | 120 | | 121 | | 81 | | |
Pension costs | | | 91 | | 84 | |
| Salaries and other staff costs | | 820 | | 815 | | 770 | | | 842 | | 866 | |
| Bank, legal and professional expenses | | 145 | | 123 | | 109 | | | 49 | | 76 | |
| Advertising and marketing | | 109 | | 91 | | 90 | | | 65 | | 109 | |
| Bank, legal, marketing and professional expenses | | 254 | | 214 | | 199 | | | 114 | | 185 | |
| Software, computer and administration expenses | | 268 | | 270 | | 333 | | | 320 | | 421 | |
| Premises and equipment depreciation | | 81 | | 90 | | 92 | | | 67 | | 92 | |
| Other property and equipment expenses | | 176 | | 188 | | 183 | | | 183 | | 186 | |
| PFS trading expenses | | 1,599 | | 1,577 | | 1,577 | | | 1,526 | | 1,750 | |
|
(1) | Pension costs relate to Personal Financial Services only, and do not include £12m (2003: £12m, 2002: £12m) relating to the life businesses accounted for on an embedded value basis. |
2004
2005 compared to 20032004
Total employment costs were higherlower at £820m (2003: £815m)£842m (2004: £866m) comprising:
| | |
| > | | Salaries and other compensation benefits broadly flat with reductions in headcount offset by higher bonus payments; |
| | |
> | | Social security costs have increasedare down on 2004 due to staff movements outa reduction of 4000 roles throughout the State Earnings Related Pension Scheme, where a rebate was previously available to Abbey; and |
| | |
> | | Pensionyear. A corresponding reduction in Social Security costs have remained flat. |
Bank, legal, and professional expenses of £145m were up 18% on 2003, largely due to information technology outsourcing costs and outsourcing in the General Insurance Division. Advertising and marketing spend was £18m higher (2003: £91m) representing a variety of new marketing campaigns.
Software, computer and administration expenses of £268m (2003: £270m) were broadly flat.
Premises and equipment depreciation expenses of £81m decreased by 10% (2003: £90m), due to asset write-offs and run-off more than offsetting increased capital investment.
Other property and equipment expenses fell 6% to £176m (2003: £188m), a result of a reduction in property running costs due to site closures and rationalisation.
33
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
2003 compared to 2002
| | |
Total salaries and other staff costs were up 6% to £815m (2002: £770m) comprising:has been driven by these lower staffing levels; |
| |
| > | | salariesBank, legal, and other compensation payments remained broadly flat, with normal salary inflation, being offset by head count savings from theprofessional expenses of £49m were down 35% on 2004, this is due to tighter cost programme;control on discretionary spend and greater reductions through Procurement negotiations; |
| |
| > | | social securityAdvertising and marketing spend was £44m lower (2004: £109m) due to a significant reduction in advertising spend, greater procurement activity and increased costs up 6% in total, reflecting the increase in employer’s contribution rate effective from April 2002; and2004 due to rebranding; |
| |
| > | | an increase in pension costsComputer and administration expenses of £40m to £121m (2002: £81m), largely£320m (2004: £421m) were lower due to aggressive renegotiation or cancellation of contracts, along with a reduction in software purchases and descoping software maintenance contracts; |
|
| > | | Premises and equipment depreciation expenses of £67m decreased by 27% (2004: £92m), due to asset write-offs and run-off more than offsetting increased capital investment; |
|
| > | | Other property and equipment expenses fell 2% to £183m (2004: £186m), a result of a reduction in property running costs due to site closures and rationalisation, offset by increased utilities charges resulting from the pension fund deficit. A detailed analysis of the pension fund deficit is included in the “Other material items” section.due to market rate increases; |
27
Bank, legal, marketing
Business and professional expenses of £214m were up 8% on last year. Advertising and marketing spend was broadly stable, with a reduction in non-Abbey branded spend being offset by increased Abbey advertising. Software, computer and administration expenses of £270m (2002: £333m) were down 19%, largely reflecting the benefits of the cost reduction programme.
Premises and equipment depreciation expenses of £90m decreased by 2%, due to increased information technology costs in relation to upgrading our telecommunications network, customer relationship management software and upgrades to the branch information technology infrastructure.
Other property and equipment expenses were broadly unchanged at £188m (2002: £183m).
Financial Review
Business Review — Personal Financial Servicescontinued
Personal Financial Services trading provisions
Personal Financial Services trading provisions by type
| | | | | | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| | Mortgages | | | (119 | ) | | 8 | | 17 | | | 8 | | | (139 | ) |
| Unsecured personal loans | | 78 | | 61 | | 47 | | | 116 | | 73 | |
| Credit cards | | 8 | | 10 | | 4 | | | 9 | | 7 | |
| Banking | | 62 | | 39 | | 68 | | | 64 | | 66 | |
| Other | | 5 | | 12 | | 14 | | | 11 | | 13 | |
| PFS provisions for bad and doubtful debts | | 34 | | 130 | | 150 | | | 208 | | 20 | |
| Provisions for contingent liabilities | | 153 | | 61 | | 46 | | |
| Provisions for other liabilities and charges | | | 11 | | 153 | |
| Amounts written off fixed-asset investments | | – | | – | | | (2 | ) | | — | | — | |
| Total PFS trading provisions | | 187 | | 191 | | 194 | | | 219 | | 173 | |
Add: embedded value charges and rebasing (1) | | | (48 | ) | | 80 | | – | | |
Add: reorganisation expenses (2) | | 48 | | 34 | | – | | |
| Adjust for: | | |
| - IFRS embedded value charges and rebasing | | | — | | 48 | |
- Reorganisation expenses (1) | | | — | | | (48 | ) |
| - Eliminating IAS proforma adjustments | | | — | | | (5 | ) |
| PFS provisions | | 187 | | 305 | | 194 | | | 219 | | 168 | |
|
(1) | | Charge in 2003 relates to the impact of tax law changes on the structure of the Scottish Provident acquisition. |
|
(2)(1) | | Includes empty premises provisions arising from the review of site locations and certain asset write-downs. |
2004
2005 compared to 2003In total, Personal Financial Services2004
Total trading provisions
of £219m were
lower at £187m (2003: £191m). There wasup from £173m in 2004. To understand the underlying trends, 2004 included firstly, a release of mortgagesignificant reduction in general provisions of £119m (2003: £8m charge) reflecting favourable arrears,£(136)m due to improvements in economic conditions, and lower propertiessecondly a charge for other liabilities relating to misselling of £153m.
After these items the underlying trend in
possession andlending provisions is an increased charge of £52m. Of this increase, £12m related
losses incurred. Offsetting this are higher provisions on unsecured lending arising from increased fraud write-offs in Banking, and increased reserving on unsecured personal loans reflecting growth.to mortgages, equivalent to approximately 1 basis point.
Most of the
higher charge under provisions for contingent liabilities and commitments relate to increased reserving for misselling contributions.2003 compared to 2002
In total, Personal Financial Services trading provisions fell by 2% to £191m (2002: £194m).
Personal Financial Services provisions for bad and doubtful debts of £130m fell 13% (2002: £150m).
The mortgage provisions charge of £8m (2002: £17m) benefited from an improvement in arrears, while provisions relating to unsecured personal loans grew by £14m to £61m due to continued asset growth, particularly in cahoot. Banking provisions decreased to £39m (2002: £68m).
Provisions for contingent liabilities and commitments of £61m (2002: £46m) include a provision of £50mremaining increase related to uncertainty about the regulatory environment for product misselling.
unsecured book, with some modest credit quality deterioration in line with industry experience, but also attributable to growth and seasoning of the asset over the last two years.
Total Personal Financial Services non-performing loans
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Loans provided for | | | 216 | | | | 167 | | | | 174 | |
| Arrears greater than 90 days not provided | | | 428 | | | | 414 | | | | 528 | |
| |
Total non-performing loans | | | 644 | | | | 581 | | | | 702 | |
| |
Total loans and advances to customers (1) | | | 78,314 | | | | 75,114 | | | | 66,072 | |
| Total provisions | | | 207 | | | | 315 | | | | 292 | |
| |
NPLs as a % of loans and advances | | | 0.82 | % | | | 0.77 | % | | | 1.06 | % |
| |
Provisions as a % of NPLs | | | 32.14 | % | | | 54.22 | % | | | 41.60 | % |
| |
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
Total non-performing loans (“NPLs”) | | | 746 | | | | 604 | |
| |
| Total loans and advances to customers | | | 99,226 | | | | 95,751 | |
| Total provisions | | | 269 | | | | 243 | |
NPLs as a % of loans and advances | | | 0.75 | % | | | 0.63 | % |
| |
Provisions as a % of NPLs | | | 36.06 | % | | | 40.23 | % |
| |
(1) | | The quoted loans and advances to customers are net of securitisations.
|
34
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
20042005 compared to 2003
2004
The value of non-performing loans increased to
£644m (2003: £581m)£746m (2004: £604m), driven by
several interest rate rises duringsome deterioration in market conditions for unsecured lending and a modest slow down in the
year but mitigated by a good credit quality of business written.housing market for mortgages.
As a percentage of loans and advances, non-performing loans have increased to 0.82% (2003: 0.77%0.75% (2004: 0.63%), with provision coverage of 32.14% (2003: 54.22%36.06% (2004: 40.23%) - an appropriate coverage ratio given level. The balance sheet remains strong with secured lending constituting 96% of asset growthall customer loans.
28
Business and quality despite the release of mortgage provisions during the year.2003 compared to 2002
The total value of non-performing loans decreased to £581m (2002: £702m), benefiting from favourable market conditions, good credit control, and strong credit quality of new business written.
As a percentage of loans and advances, non-performing loans decreased to 0.77% (2002: 1.06%), with provision coverage of 54.22% (2002: 41.60%).
Financial Review
Business Review — Personal Financial Servicescontinued
Personal Financial Services mortgage arrears, properties in possession and lending mixMortgage arrears| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | | 31 December 2003 |
| | | | | | | CML(1) | | | | | | | CML(1) | |
| | | Number of | | | | | | | Industry | | | Number of | | | | | | | Industry | |
| Cases | | cases (000) | | | % of total | | | average % | | | cases (000) | | | % of total | | | average % | |
| |
| 1 – 2 months arrears | | | 24.6 | | | | 1.88 | | | | n/a | | | | 20.2 | | | | 1.47 | | | | n/a | |
| 3 – 5 months arrears | | | 5.9 | | | | 0.45 | | | | 0.47 | | | | 5.5 | | | | 0.40 | | | | 0.49 | |
| 6 – 11 months arrears | | | 1.8 | | | | 0.14 | | | | 0.23 | | | | 2.2 | | | | 0.16 | | | | 0.27 | |
| 12 months + arrears | | | 0.3 | | | | 0.02 | | | | 0.10 | | | | 0.5 | | | | 0.03 | | | | 0.12 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | 31 December 2003 | | 31 December 2005 | | 31 December 2004 | |
| Value of arrears | | £m | | % of total | | £m | | % of total | | |
| | | | CML(1) | | CML(1) | |
| 1 – 2 months arrears | | 16.1 | | 0.02 | | 11.2 | | 0.01 | | |
| 3 – 5 months arrears | | 9.6 | | 0.01 | | 7.5 | | 0.01 | | |
| 6 – 11 months arrears | | 5.2 | | 0.01 | | 5.3 | | 0.01 | | |
| | | | Number of | | % of total | | Industry | | Number of | | % of total | | Industry | |
| Cases | | | cases (000) | | mortgages | | average % | | cases (000) | | mortgages | | average % | |
| | | |
| 1 — 2 months arrears | | | 22.5 | | 1.85 | | 1.48 | | 24.6 | | 1.88 | | n/a | |
| 3 — 5 months arrears | | | 5.5 | | 0.45 | | 0.52 | | 5.9 | | 0.45 | | 0.47 | |
| 6 — 11 months arrears | | | 2.4 | | 0.20 | | 0.28 | | 1.8 | | 0.14 | | 0.23 | |
| 12 months + arrears | | | 0.4 | | 0.03 | | 0.12 | | 0.3 | | 0.02 | | 0.10 | |
| | | |
| | |
| | | | 31 December 2005 | | 31 December 2004 | |
| | | | % of total | | % of total | |
| Value of arrears(2) | | | | | £m | | mortgages | | | | £m | | mortgages | |
| | | |
| 1 — 2 months arrears | | | | | 16.4 | | 0.02 | | | | 16.1 | | 0.02 | |
| 3 — 5 months arrears | | | 10.4 | | 0.01 | | 9.6 | | 0.01 | |
| 6 — 11 months arrears | | | 8.3 | | 0.01 | | 5.2 | | 0.01 | |
| 12 months + arrears | | 2.7 | | — | | 3.2 | | — | | | 2.8 | | — | | 2.7 | | — | |
| Total arrears | | 33.6 | | 0.04 | | 27.2 | | 0.03 | | | 37.9 | | 0.04 | | 33.6 | | 0.04 | |
| | Balance sheet provisions | | 76.8 | | 19.01 | | | 58.1 | | 53.1 | |
Coverage (times) | | 2.3 | | 7.0 | | | 1.5 | | 1.6 | |
|
Mortgage properties in possession
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | 31 December 2003 | | 31 December 2005 | | 31 December 2004 | |
| | | CML(1) | | CML(1) | | | CML(1) | | CML(1) | |
| | | Industry | | Number of | | Industry | | | Number of | | Industry | | Number of | | Industry | |
| Cases | | Number of cases | | % of total | | average % | | cases | | % of total | | average % | | | cases (000) | | % of total | | average % | | cases | | % of total | | average % | |
| | No. of repossessions | | 987 | | 0.08 | | 0.05 | | 1,642 | | 0.06 | | 0.03 | | | 1,214 | | 0.10 | | 0.09 | | 987 | | 0.08 | | 0.05 | |
| No. of sales | | 1,024 | | 0.08 | | 0.05 | | 1,736 | | 0.06 | | 0.04 | | | 1,055 | | 0.09 | | 0.07 | | 1,024 | | 0.08 | | 0.05 | |
| Stock | | 288 | | 0.02 | | 0.02 | | 325 | | 0.02 | | 0.02 | | | 447 | | 0.04 | | 0.04 | | 288 | | 0.02 | | 0.02 | |
|
| | |
| (1) | | The abbreviation CML stands for Council of Mortgage Lenders. |
|
| (2) | | This represents the amount of payments outstanding rather than the total amount of loans in arrears |
2004
2005 compared to 20032004
Mortgage 3-month-plus arrears cases have experienced a slight
reductionincrease to
8,0008,300 compared to
8,2008,000 at 31 December
2003.2004. This amounts to
0.61%0.68% of the total, compared to
0.59%0.61% at 31 December
20032004, and
0.80%remains significantly below 0.92% for the industry as a whole (per Council of Mortgage Lenders).
By value, 3-month-plus arrears totalled
£17.5m£21.5m (December
2003: £16.0m)2004: £17.5m), with provisions in place of
£76.8m£58.1m (December
2003: £190.1m)2004: £53.1m).
The stock of properties in possession
fellrose by
11%55% to
288447 (December
2003: 325)2004: 288), with the number of property repossessions also
fallingincreasing by
655227 to
9871,214 (December
2003: 1,642)2004: 987).
Given slightly higher interest rates, a modest deteriorationThe increases in
credit quality in 2005 is expected.2003 compared to 2002
3-month-plus3 months arrears cases of 8,200 was 39% lower than December 2002, and was 0.59% of the mortgage book, compared to 0.88% for the Council of Mortgage Lenders industry average.
By value, the 3-month-plus arrears category totalled £16m (2002: £27m), with provisions in place of £190m (2002: £181m).
The number of repossessions fell significantly by 38% to 1,642 (2002: 2,628), resulting in the stock of properties in possession falling to 325 (2002: 419).
35
are modest given that 2004 was the lowest experienced in a number of years.
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
Mortgage new business credit quality
| | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| Loan-to-value analysis: | | |
| New business | | |
| > 90% | | | 6 | % | | | 7 | % | | | 4 | % | | | 6 | % |
| 75% - 90% | | | 32 | % | | | 30 | % | |
| 75% — 90% | | | | 29 | % | | | 32 | % |
| < 75% | | | 62 | % | | | 63 | % | | | 67 | % | | | 62 | % |
| Average (at inception) | | | 61 | % | | | 62 | % | | | 60 | % | | | 61 | % |
| Average loan-to-value of stock (indexed) | | | 45 | % | | | 50 | % | | | 45 | % | | | 45 | % |
New business profile: | | |
| First-time buyers | | | 18 | % | | | 17 | % | | | 14 | % | | | 19 | % |
| Home movers | | | 39 | % | | | 33 | % | | | 37 | % | | | 41 | % |
| Remortgagers | | | 43 | % | | | 50 | % | | | 49 | % | | | 40 | % |
| Average earnings multiple | | 2.7 | | 2.5 | | | 2.9 | | 2.7 | |
|
There has been no significant deterioration of quality over the period, with most credit quality indicators remaining similar to or better than those reported in 2003.2004. In particular:
| | |
| > | | The average loan-to-value of new business has remained broadly constant in 20042005 at 61%60%, despite remortgage business reducing as a proportion of Abbey’s new business. |
| |
| > | | The proportion of new business written with a high loan-to-value (greater than 90%) has decreased slightly in 2004. |
|
> | | There has been a tightening of policy rules around income verification with a fast-track mortgage introduced for loan-to-value mortgages less than 60%2005 to only 4%. |
| |
| > | | Income multiples have increased in line with the market, given the continued increase in house prices. A review of income multiples has resulted in tighter guidelines for riskier segments of business and more relaxed policy for more valued and low risk customers.business. |
| |
| > | | For niche markets such as Buy-to-Let, Abbey is under-represented and has not significantly increased its exposure. These niche markets are still under review for a wider rollout. |
| |
| > | | The proportion of remortgage business taking further equity release has remained unchanged for the last 18 months. |
29
Business and Financial Review
Business Review — Personal Financial Servicescontinued
Personal Financial Services Bankingbanking and unsecured personal loan arrears
| | | | | | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| Total banking and unsecured personal loan arrears (1,2) | | 183 | | 146 | | 126 | | | 126 | | 121 | |
| Total banking and unsecured personal loan asset | | 3,393 | | 3,019 | | 2,779 | | | 3,749 | | 3,288 | |
Banking and unsecured personal loan arrearsas a % of asset | | | 5.4 | % | | | 4.8 | % | | | 4.5 | % | | | 3.4 | % | | | 3.7 | % |
|
| | |
| (1) | | Banking arrears are defined as customers whose borrowings exceed their overdraft by over £100. |
| |
| (2) | | Unsecured personal loan arrears are defined as the balances of accounts that are twothree or more monthly instalments in arrears. |
2004
2005 compared to 2003Banking2004
The reduction in arrears
have increased to £183m (2003: £146m)as a percentage of assets reflects faster write offs in
line with asset growth, whereas unsecured personal loan arrears have increased above the rate of asset growth, mainly in cahoot and is2005 due to
a maturing book.2003 compared to 2002
Arrears levels have increased 16% to £146m (2002: £126m) driven by increases in asset levels and the growing maturity of the cahoot unsecured lending book. Abbey-branded arrears have fallen 15%.
processing efficiency.
Personal Financial Services provisions for doubtful debts analysis –— balance sheet
| | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | 31 December 2003 | | | | | | | | | | | | | | | | | |
| | | Provisions | | Balance | | Provisions | | Balance | | | 31 December 2005 | | 31 December 2004 | |
| | | balance | | as % of | | balance | | as % of | | | Provisions balance | | Balance as % of | | Provisions balance | | Balance as % of | |
| | | £m | | loan asset | | £m | | loan asset | | | £m | | loan asset | | £m | | loan asset | |
| | Mortgages | | 73 | | 0.1 | | 190 | | 0.2 | | | 58 | | 0.1 | | 53 | | 0.1 | |
| Personal banking | | 44 | | 13.1 | | 42 | | 8.2 | | | 45 | | 12.1 | | 39 | | 11.5 | |
| Unsecured personal loans | | 58 | | 3.0 | | 43 | | 2.7 | | | 89 | | 4.5 | | 73 | | 4.4 | |
| Abbey Business | | 5 | | 0.5 | | 18 | | 1.2 | | | 4 | | 0.3 | | 2 | | 0.2 | |
| cahoot | | 35 | | 2.5 | | 30 | | 2.3 | | | 73 | | 5.3 | | 74 | | 5.7 | |
| Banking and Savings | | 215 | | 0.3 | | 323 | | 0.4 | | |
| Scottish Provident | | — | | — | | 80 | | 6.3 | | |
Retail Banking | | | 269 | | 0.3 | | 241 | | 0.3 | |
| Insurance and Asset Management | | | — | | — | | — | | — | |
| Group Infrastructure | | — | | — | | — | | — | | | — | | — | | — | | — | |
| Total PFS | | 215 | | 0.3 | | 403 | | 0.5 | | | 269 | | 0.3 | | 241 | | 0.3 | |
|
Secured
Mortgage provisions have
fallenincreased in
2004 dueline with the modest rise in arrears and the ratio to
asset reflects a stable performance on the
general provision reduction. The increase in personal banking is due to reserves set aside for dormant accounts.
36
portfolio.
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
Abbey Business excludes the business units disposed in 2004, which had higher reserve coverage. On the remaining assets,Abbey branded unsecured lending, the coveragecurrent experience of deteriorating performance on unsecured personal loans and managements view of worsening near term economic conditions affecting unsecured lending has reduced slightly.
The increase in cahoot’s reserves was driven by a maturing book profile, which resultsresulted in higher non-performing loans and consequently, higher specific provision.
provision balances on unsecured lending.
Personal Financial Services provisions for doubtful debts analysis –— balance sheet reconciliation| | | | | | | | | | | | | | | | | |
| | | Mortgages | | | Unsecured | | | Other | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
At 1 January 2004 | | | | | | | | | | | | | | | | |
| General | | | 183 | | | | 27 | | | | 88 | | | | 298 | |
| Specific | | | 7 | | | | 90 | | | | 8 | | | | 105 | |
| |
| Total | | | 190 | | | | 117 | | | | 96 | | | | 403 | |
| |
| Transfer (to)/from P&L account | | | (120 | ) | | | 151 | | | | 3 | | | | 34 | |
| Recoveries | | | 3 | | | | 25 | | | | — | | | | 28 | |
| Reduction due to sale of leasing business | | | — | | | | — | | | | (92 | ) | | | (92 | ) |
| Irrecoverable amounts written off | | | — | | | | (154 | ) | | | (4 | ) | | | (158 | ) |
| |
At 31 December 2004 | | | 73 | | | | 139 | | | | 3 | | | | 215 | |
| |
| General | | | 64 | | | | 35 | | | | 3 | | | | 102 | |
| Specific | | | 9 | | | | 104 | | | | — | | | | 113 | |
| |
Total | | | 73 | | | | 139 | | | | 3 | | | | 215 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Mortgages | | | Unsecured | | | Other | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
At 1 January 2003 | | | | | | | | | | | | | | | | |
| General | | | 171 | | | | 23 | | | | 9 | | | | 203 | |
| Specific | | | 10 | | | | 73 | | | | 6 | | | | 89 | |
| |
| Total | | | 181 | | | | 96 | | | | 15 | | | | 292 | |
| |
| Transfer (to)/from P&L account | | | 6 | | | | 110 | | | | 94 | | | | 210 | |
| Recoveries | | | 5 | | | | 28 | | | | 1 | | | | 34 | |
| Irrecoverable amounts written off | | | (2 | ) | | | (117 | ) | | | (14 | ) | | | (133 | ) |
| |
At 31 December 2003 | | | 190 | | | | 117 | | | | 96 | | | | 403 | |
| |
| General | | | 183 | | | | 27 | | | | 88 | | | | 298 | |
| Specific | | | 7 | | | | 90 | | | | 8 | | | | 105 | |
| |
Total | | | 190 | | | | 117 | | | | 96 | | | | 403 | |
| |
| | | | | | | | | | | | | |
| | | Mortgages | | | Unsecured | | | Total | |
| | | £m | | | £m | | | £m | |
| |
At 1 January 2005 | | | 53 | | | | 188 | | | | 241 | |
| Transfer (to)/from P&L account | | | 7 | | | | 201 | | | | 208 | |
| Recoveries | | | 2 | | | | 27 | | | | 29 | |
| Income adjustment | | | 1 | | | | 16 | | | | 17 | |
| Irrecoverable amounts written off | | | (5 | ) | | | (221 | ) | | | (226 | ) |
| |
At 31 December 2005 | | | 58 | | | | 211 | | | | 269 | |
| |
3730
OperatingBusiness and Financial Review
Operating
Business Review — Portfolio Business Unit (PBU) Portfolio Business Unit trading profit/(loss)profit on ordinary activities before tax by segment| | | | | | | | | | | | | | | | | |
| | | | | | | Motor Finance | | | | | | | |
| | | Wholesale | | | and Litigation | | | | | | | |
| | | Banking | | | Funding | | | Other | | | Total PBU | |
| 31 December 2004 | | £m | | | £m | | | £m | | | £m | |
| |
| Net interest income | | | (70 | ) | | | 98 | | | | 32 | | | | 60 | |
| Non-interest income | | | 186 | | | | (24 | ) | | | (27 | ) | | | 135 | |
| Depreciation and impairment on operating lease assets | | | (151 | ) | | | — | | | | — | | | | (151 | ) |
| |
Total trading income | | | (35 | ) | | | 74 | | | | 5 | | | | 44 | |
| Total trading expenses | | | (30 | ) | | | (22 | ) | | | (38 | ) | | | (90 | ) |
| Provision for bad and doubtful debts | | | 88 | | | | (89 | ) | | | (10 | ) | | | (11 | ) |
| Amounts written off fixed asset investments | | | 80 | | | | — | | | | — | | | | 80 | |
| |
Trading profit/(loss) on ordinary activities before tax | | | 103 | | | | (37 | ) | | | (43 | ) | | | 23 | |
| Adjust for: | | | | | | | | | | | | | | | | |
| Income from associated undertakings | | | — | | | | (6 | ) | | | — | | | | (6 | ) |
| Profit on disposal of Group undertakings | | | (32 | ) | | | — | | | | (14 | ) | | | (46 | ) |
| |
Operating profit/(loss) | | | 71 | | | | (43 | ) | | | (57 | ) | | | (29 | ) |
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | Motor Finance | | | | | | | |
| | | Wholesale | | | and Litigation | | | | | | | |
| | | Banking | | | Funding | | | Other | | | Total PBU | |
| 31 December 2003 | | £m | | | £m | | | £m | | | £m | |
| |
| Net interest income | | | 22 | | | | 245 | | | | 86 | | | | 353 | |
| Non-interest income | | | (197 | ) | | | (58 | ) | | | 25 | | | | (230 | ) |
| Depreciation and impairment on operating lease assets | | | (250 | ) | | | (1 | ) | | | — | | | | (251 | ) |
| |
Total trading income | | | (425 | ) | | | 186 | | | | 111 | | | | (128 | ) |
| Total trading expenses | | | (107 | ) | | | (137 | ) | | | (83 | ) | | | (327 | ) |
| Provision for bad and doubtful debts | | | (154 | ) | | | (99 | ) | | | (11 | ) | | | (264 | ) |
| Provision for contingent liabilities and commitments | | | (2 | ) | | | — | | | | (17 | ) | | | (19 | ) |
| Amounts written off fixed asset investments | | | (183 | ) | | | — | | | | — | | | | (183 | ) |
| |
Trading profit/(loss) on ordinary activities before tax | | | (871 | ) | | | (50 | ) | | | — | | | | (921 | ) |
| Adjust for: | | | | | | | | | | | | | | | | |
| Income from associated undertakings | | | — | | | | (12 | ) | | | — | | | | (12 | ) |
| Profit on disposal of Group undertakings | | | (50 | ) | | | 1 | | | | (40 | ) | | | (89 | ) |
| Profit/(loss) on the sale or termination of an operation | | | 6 | | | | 27 | | | | — | | | | 33 | |
| |
Operating profit/(loss) | | | (915 | ) | | | (34 | ) | | | (40 | ) | | | (989 | ) |
| |
| | | | | | | | | |
| | | 31 December 2005 | | | 31 December 2004 | |
| | | £m | | | £m | |
| |
| Net interest income | | | (36 | ) | | | 73 | |
| Non-interest income | | | 286 | | | | 158 | |
| |
Total trading income | | | 250 | | | | 231 | |
| Total trading expenses | | | (38 | ) | | | (96 | ) |
| Depreciation and impairment on operating lease assets | | | (123 | ) | | | (184 | ) |
| Provision for bad and doubtful debts | | | (10 | ) | | | (10 | ) |
| Provisions for other liabilities and charges | | | 8 | | | | — | |
| |
| Amounts written off fixed asset investments | | | — | | | | 80 | |
| |
Trading profit on ordinary activities before tax | | | 87 | | | | 21 | |
| - Eliminating IAS proforma adjustments | | | — | | | | (10 | ) |
| |
Profit/(loss) before tax | | | 87 | | | | 11 | |
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | Motor Finance | | | | | | | |
| | | Wholesale | | | and Litigation | | | | | | | |
| | | Banking | | | Funding | | | Other | | | Total PBU | |
| 31 December 2002 | | £m | | | £m | | | £m | | | £m | |
| |
| Net interest income | | | 327 | | | | 464 | | | | 55 | | | | 846 | |
| Non-interest income | | | 378 | | | | (48 | ) | | | (71 | ) | | | 259 | |
| Depreciation and impairment on operating lease assets | | | (252 | ) | | | (5 | ) | | | — | | | | (257 | ) |
| |
Total trading income | | | 453 | | | | 411 | | | | (16 | ) | | | 848 | |
| Total trading expenses | | | (123 | ) | | | (546 | ) | | | (66 | ) | | | (735 | ) |
| Provision for bad and doubtful debts | | | (247 | ) | | | (115 | ) | | | (2 | ) | | | (364 | ) |
| Provision for contingent liabilities and commitments | | | — | | | | (4 | ) | | | — | | | | (4 | ) |
| Amounts written off fixed asset investments | | | (513 | ) | | | — | | | | — | | | | (513 | ) |
| |
Trading profit/(loss) on ordinary activities before tax | | | (430 | ) | | | (254 | ) | | | (84 | ) | | | (768 | ) |
| Adjust for: | | | | | | | | | | | | | | | | |
| Income from associated undertakings | | | — | | | | (17 | ) | | | — | | | | (17 | ) |
| Profit on disposal of Group undertakings | | | (46 | ) | | | (2 | ) | | | — | | | | (48 | ) |
| |
Operating profit/(loss) | | | (476 | ) | | | (273 | ) | | | (84 | ) | | | (833 | ) |
| |
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
Profit on ordinary activities by line of business | | £m | | | £m | | | £m | |
| |
Other: | | | | | | | | | | | | |
| - International life assurance business | | | (39 | ) | | | (26 | ) | | | (92 | ) |
| - European banking and other | | | (4 | ) | | | 26 | | | | 8 | |
| |
| | | | (43 | ) | | | — | | | | (84 | ) |
| |
20042005 compared to 2003
The Portfolio Business Unit trading result improved from a loss of £921m in 2003 to a trading2004
Trading profit
of £23m in 2004, with a profit in the Wholesale Banking Portfolio being offset by continued provisioning and restructuring costs associated with the wind-down of the remaining Motor Finance and Litigation Funding businesses and stabilisation provisions inbefore tax for the Portfolio Business Unit
Life Assurance entity.38
Operatingof £87m was significantly higher than the £21m in 2004, reflecting the more advanced stage of the exit programme, and Financial Review
Operating Review — Portfolio Business Unit (PBU) continued
The Wholesale Banking trading profit before tax was £103m (2003: loss £(871)m). The improved performanceprofits on sale of finance leasing assets in the Wholesale Banking Portfolio reflects the significantly lower absolute level of asset disposals, and the provisioning to market realisable values taken in the course of 2003.period.
| | |
| > | | Net interest income decreased by £92m£109m to £(70)£(36)m (2003: £22m)(2004: £73m) due to lower average asset balances. Net interest income includes interest expense on the funding of operating lease assets, whereas operating lease income is included in non-interest income. As a result of this, and the lower average asset balances, net interest income is negative in 2005. |
|
| > | | Non-interest income increased £383m£128m to £186m (2003: £(197)m)£286m (2004: £158m), reflecting lower absolute levels of asset disposals and related losses. |
|
| > | | Depreciation on operating lease assets fell £99m£61m to £151m (2003: £250m)£123m (2004: £184m), due to continued disposals of operating lease businesses. |
|
| > | | Trading operating expenses fell to £30m (2003: £107m)£38m (2004: £96m) due to reduced size of operations. |
|
| > | | A decrease of £242m to £88m release for provisionProvision for bad and doubtful debts (2003: £154m charge) due to more favourable market conditions relating to the assets disposed of.were in line with 2004. |
|
> | | A credit of £80m to amounts written off fixed asset investments (2003: £183m charge) arose as a result of assets being disposed of for amounts in excess of their existing written down value. |
|
The Motor Finance and Litigation Funding trading loss decreased by £13m to £37m (2003: £(50)m) with 2003 including provisions for redundancy and other costs associated with the wind-down of the business.
| | |
| > | | Net interest income decreased by £147m to £98m (2003: £245m) mainly due to three monthsAmounts written off fixed asset investments were nil with 2004 being a credit of First National Bank net interest income being included£80m, representing disposals of assets in 2003. |
|
> | | Non-interest income increased £34m to £(24)m (2003: £(58)m), reflecting lower levelsexcess of fees being paid to introducers as a result of the run-off of these businesses. |
|
> | | Trading operating expenses fell to £22m (2003: £137m) due to the sale, referred to above. |
|
> | | Provisions for bad and doubtful debts were lower than the prior period at £89m (2003: £99m) due to run-off of the business and provisions made in prior periods. |
written down values. |
The
Other trading loss increased to £43m (2003: £nil) mainly due to provisionsremaining assets in
Scottish Mutual International for fund stabilisation costs and the
profit on the sale of Abbey National Italy in 2003. | | |
> | | Net interest income decreased by £54m to £32m (2003: £86m) mainly due to the sale of Abbey National Italy in 2003 and the sale of Abbey National France in 2004. |
|
> | | Non-interest income decreased £52m to £(27)m (2003: £25m), mainly due to provisions for fund stabilisation costs in Scottish Mutual International and the sale of Abbey National Italy in 2003. |
2003 compared to 2002
The Portfolio Business Unit trading loss before tax increased by £153m to £921m (2002: £768m).
The Wholesale Banking trading loss before tax was £871m (2002: £430m). The loss increase was primarily due to lower losses on assets disposals.
The First National trading loss before tax was £50m (2002: £254m). The loss decrease was primarily due towill be reported as part of Abbey Financial Markets in 2006. Within the non-recurrence£87m of the £357m impairment.
The other trading loss before tax decreased by £84mprofit reported above, approximately £30m relates to nil in 2003, primarily due to rationalisation costs incurred in 2002 which did not recur in 2003. Also results were negatively impacted in 2002 by embedded value charges and rebasing.
these ongoing businesses.
Portfolio Business Unit assets and risk-weighted assets by segment
| | | | | | | | | | | | | | | | | |
| | | At 31 December 2004 | | | At 31 December 2003 | |
| | | Risk-weighted | | | Risk-weighted | |
| | | Assets | | | assets | | | Assets | | | assets | |
| | | £bn | | | £bn | | | £bn | | | £bn | |
| |
| Wholesale Banking | | | 3.8 | | | | 3.1 | | | | 8.3 | | | | 5.4 | |
| Motor Finance and Litigation Funding | | | 0.9 | | | | 0.8 | | | | 2.1 | | | | 2.4 | |
| Other | | | — | | | | — | | | | 1.9 | | | | 1.2 | |
| |
Total PBU | | | 4.7 | | | | 3.9 | | | | 12.3 | | | | 9.0 | |
| |
| | | | | | | | | | | | | | | | | |
| | | At 31 December 2005 | | | At 31 December 2004(1) | |
| | | Assets | | | Risk-weighted assets | | | Assets | | | Risk-weighted assets | |
| | | £bn | | | £bn | | | £bn | | | £bn | |
| |
Total | | | 2.5 | | | | 2.5 | | | | 4.7 | | | | 3.9 | |
| |
| | |
| (1) | | The table excludes the shareholder net assets of the international life assurance businesses of £208m (December 2003: £207m) since they do not have a risk-weighted assetsasset equivalent. |
The following section provides a detailed analysis of the 2004 balance sheet movements, focusing on the outstanding balances in these exit portfolios.
Total Portfolio Business Unit assets of
£4.7bn£2.5bn were
62%47% lower than at December
2003,2004, with a
57%36% reduction in risk-weighted assets to
£3.9bn (2003: £9.0bn)£2.5bn (2004: £3.9bn).
| | |
> | | The outstanding unrealised mark-to-market deficit (net of provisions) on the debt securities portfolio is £nil (2003: £nil), with the equivalent figure on the loan portfolio also £nil (2003: £66m). The mark-to-market positions do not cover portfolios such as leasing (including aircraft and Porterbrook) or private equity, although aircraft leasing has now been provided down to management’s estimate of realisable value and the private equity business was sold in the first half of 2004. |
The remaining balance is largely made up of the Porterbrook business, with some smaller Litigation Funding and Motor Finance balances.3931
Operating
Business and Financial ReviewOperating Review — Portfolio Business Unit (PBU) continued
Wholesale Banking exit portfolios
The total charge for provisions, impairments and disposal losses for 2004 is £nil (December 2003: charge of £1,011m). This reflects the significantly lower level of asset disposals, and the provisioning down to market realisable values in securities and loans taken in 2003.
Balance sheet provisions and coverage
Total balance sheet provisions reduced to £124m during 2004 as a result of sales of debt securities and loans. The difference between the profit and loss provision charge and the balance sheet provision movement is a reflection of balance sheet provisions releases following asset sales and exchange rate movements.
| | | | | | | | | | | | | |
| | | Specific | | | General | | | Total | |
| | | provisions | | | provisions | | | provisions | |
| | | £m | | | £m | | | £m | |
| |
| Closing balance at 31 December 2003 | | | 599 | | | | 173 | | | | 772 | |
| Profit and loss charge in 12 months to December 2004 | | | 32 | | | | (156 | ) | | | (124 | ) |
| Release on disposal | | | (501 | ) | | | — | | | | (501 | ) |
| Other (incl. foreign exchange movements) | | | (23 | ) | | | — | | | | (23 | ) |
| |
Closing balance at 31 December 2004 | | | 107 | | | | 17 | | | | 124 | |
| |
Summary portfolio details
Debt securities
| | | | | | | | | | | | | | | | | |
| | | At 31 December 2004 | | | At 31 December 2003 | |
| | | Assets | | | RWAs | | | Assets | | | RWAs | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Corporates | | | — | | | | 2 | | | | 53 | | | | 100 | |
| Asset-Backed Securities (excluding CDOs) | | | 43 | | | | 31 | | | | 189 | | | | 214 | |
| CDOs | | | — | | | | — | | | | 34 | | | | 31 | |
High yield(1) | | | — | | | | — | | | | 712 | | | | 100 | |
Total debt securities | | | 43 | | | | 33 | | | | 988 | | | | 445 | |
| |
(1) | | See the “Wholesale Banking exit portfolios – credit exposure analysis” section for further details. |
Fair value of debt securities, equity shares and other similar interests
The following table provides an analysis of the fair value of Abbey’s investment securities by investment category at 31 December 2004. All amounts relate to securities held by Personal Financial Services businesses.
| | | | | | | | | | | | | | | | | |
| | | | | | | Gross | | | Gross | | | | |
| | | Amortised | | | unrealised | | | unrealised | | | | |
| | | cost | | | gains | | | losses | | | Fair value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Equity securities | | | 30 | | | | — | | | | — | | | | 30 | |
| Asset backed and corporate debt securities | | | 282 | | | | 51 | | | | (2 | ) | | | 331 | |
| Mortgage backed securities other than those issued or backed by US government agencies | | | 38 | | | | 3 | | | | — | | | | 41 | | |
| Other debt securities | | | 322 | | | | — | | | | — | | | | 322 | |
| |
| | | | 672 | | | | 54 | | | | (2 | ) | | | 724 | |
| |
Loan portfolio
| | | | | | | | | | | | | | | | | |
| | | At 31 December 2004 | | | At 31 December 2003 | |
| | | Assets | | | RWAs | | | Assets | | | RWAs | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Infrastructure | | | 0.2 | | | | 0.2 | | | | 0.6 | | | | 0.4 | |
| Project finance: | | | | | | | | | | | | | | | | |
| – real estate | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.1 | |
| – other | | | 0.1 | | | | 0.1 | | | | 0.9 | | | | 1.0 | |
| Acquisition finance | | | — | | | | — | | | | — | | | | — | |
| Structured finance lending | | | — | | | | — | | | | 0.4 | | | | 0.2 | |
| |
| | | | 0.4 | | | | 0.4 | | | | 2.0 | | | | 1.7 | |
| |
The change in the loan portfolio reflected sales across all portfolios.
Leasing
| | | | | | | | | | | | | | | | | |
| | | At 31 December 2004 | | | At 31 December 2003 | |
| | | Assets | | | RWAs | | | Assets | | | RWAs | |
| | | £bn | | | £bn | | | £bn | | | £bn | |
| |
| Finance leases | | | 1.1 | | | | 0.4 | | | | 2.2 | | | | 0.6 | |
| Operating leases | | | 2.3 | | | | 2.3 | | | | 2.5 | | | | 2.4 | |
| |
| | | | 3.4 | | | | 2.7 | | | | 4.7 | | | | 3.0 | |
| |
40
Operating and Financial Review
Operating Review – Portfolio Business Unit (PBU)continued
The finance leasing portfolio is predominantly high quality with over 70% of exposure being to counterparties rated AA or better. The operating lease portfolio principally represents assets held in Porterbrook (£2.2bn) and aircraft leasing (£0.1bn) portfolios. The value of the aircraft leasing business has been written down to net asset value based on current market conditions.
The decrease in operating leases in the 12 months to 31 December 2004 was due to sales of aircraft leasing.
Private equity
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Opening balance of draw-downs (net of provisions) | | | 373 | | | | 797 | |
| Draw-downs in the current period | | | — | | | | 159 | |
| Disposals | | | (378 | ) | | | (445 | ) |
| Provision write-backs/(offs) | | | 6 | | | | (138 | ) |
| |
Closing balance of draw-downs | | | 1 | | | | 373 | |
| |
Undrawn commitments | | | — | | | | 239 | |
| |
Wholesale Banking exit portfolios – credit exposure analysis
Certain tables presented in prior periods have been omitted as the date is no longer meaningful due to the significant reduction in exposure.
Credit exposures by credit rating
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At 31 December 2004 | | | At 31 December 2003 | |
| | | | | | | Average of | | | | | | | | | | | Average of | | | | |
| | | Average | | | top five | | | Total | | | Average | | | top five | | | Total | |
| | | exposure | | | exposures(2) | | | exposure | | | exposure | | | exposures(2) | | | exposure | |
| | | £m | | | £m | | | £bn | | | £m | | | £m | | | £bn | |
| |
| AAA | | | 25.7 | | | | 50.2 | | | | 0.2 | | | | 25.7 | | | | 87.9 | | | | 0.5 | |
| AA | | | 22.3 | | | | 145.9 | | | | 1.0 | | | | 40.0 | | | | 175.1 | | | | 1.6 | |
| A | | | 17.0 | | | | 76.4 | | | | 0.4 | | | | 20.2 | | | | 107.9 | | | | 0.9 | |
| BBB | | | 35.8 | | | | 125.1 | | | | 0.9 | | | | 23.7 | | | | 141.4 | | | | 1.3 | |
Total investment grade | | | | | | | | | | | 2.5 | | | | | | | | | | | | 4.3 | |
| BB | | | 17.0 | | | | 38.2 | | | | 0.2 | | | | 17.2 | | | | 49.4 | | | | 0.5 | |
| B | | | 7.4 | | | | 10.2 | | | | 0.1 | | | | 15.1 | | | | 41.3 | | | | 0.4 | |
| CCC | | | 7.4 | | | | 10.3 | | | | 0.1 | | | | 14.5 | | | | 42.1 | | | | 0.4 | |
Total sub-investment grade | | | | | | | | | | | 0.4 | | | | | | | | | | | | 1.3 | |
| Equity | | | n/a | | | | n/a | | | | — | | | | n/a | | | | n/a | | | | 0.5 | |
| |
Total exposure(1) | | | | | | | | | | | 2.9 | | | | | | | | | | | | 6.1 | |
| |
(1) | Total exposure of £2.9bn is £0.9bn lower than total assets of £3.8bn. This results mainly from the exposure amounts including amounts due from leasing counterparties rather than the asset value of leasing businesses. |
(2) | In some instances there are now less than five individual counterparties. In these cases a true average is reported, which results in an apparent disconnect between the average of the top five and the total exposure. |
Additional sector analysis
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2004 | | | 2003 | |
| Aircraft | | £m | | | £m | |
| |
| IEM Airfinance BV | | | 39 | | | | 174 | |
| Asset-backed securities | | | — | | | | 183 | |
| Other (including operating leases) | | | 75 | | | | 82 | |
| |
| | | | 114 | | | | 439 | |
| |
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2004 | | | 2003 | |
| US and UK power lending | | £m | | | £m | |
| |
UK | | | 6 | | | | 221 | |
US | | | 39 | | | | 350 | |
| |
| | | | 45 | | | | 571 | |
| |
Of which: | | | | | | | | |
| Power projects lending on credit watch | | | 37 | | | | 360 | |
| |
Credit exposures by region
| | | | | | | | | | | | | |
| | | Investment | | | Sub-investment | | | | |
| | | grade | | | grade | | | Total | |
| At 31 December 2004 | | £bn | | | £bn | | | £bn | |
| |
| Europe | | | 2.1 | | | | 0.3 | | | | 2.4 | |
| North America | | | 0.4 | | | | 0.1 | | | | 0.5 | |
| |
Total exposure | | | 2.5 | | | | 0.4 | | | | 2.9 | |
| |
41
Operating and Financial Review
Operating Review – Portfolio Business Unit (PBU)continued
| | | | | | | | | | | | | |
| | | Investment | | | Sub-investment | | | | |
| | | grade | | | grade | | | Total | |
| At 31 December 2003 | | £bn | | | £bn | | | £bn | |
| |
| Europe | | | 3.4 | | | | 1.0 | | | | 4.4 | |
| North America | | | 0.8 | | | | 0.6 | | | | 1.4 | |
| Asia-pacific | | | 0.1 | | | | 0.1 | | | | 0.2 | |
| Latin America | | | — | | | | 0.1 | | | | 0.1 | |
| |
Total exposure | | | 4.3 | | | | 1.8 | | | | 6.1 | |
| |
Sub-investment grade credit exposure
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At 31 December 2004 | | | At 31 December 2003 | |
| | | | | | | Average of | | | | | | | | | | | Average of | | | | |
| | | Specific | | | top five | | | Total | | | Specific | | | top five | | | Total | |
| | | provisions | | | exposures(1) | | | exposure | | | provisions | | | exposures | | | exposure | |
| | | £m | | | £m | | | £bn | | | £m | | | £m | | | £bn | |
| |
| Corporates | | | — | | | | 16.8 | | | | 0.1 | | | | — | | | | 37.0 | | | | 0.2 | |
| Asset Finance | | | 96.0 | | | | 38.6 | | | | 0.3 | | | | 180.0 | | | | 49.0 | | | | 0.9 | |
| ABS / MBS | | | 10.0 | | | | — | | | | — | | | | 88.0 | | | | 40.5 | | | | 0.2 | |
| |
Credit exposure | | | 106.0 | | | | | | | | 0.4 | | | | 268.0 | | | | | | | | 1.3 | |
| High yield | | | — | | | | | | | | — | | | | 69.0 | | | | — | | | | 0.1 | |
| Private equity (excluding undrawns) | | | 1.0 | | | | | | | | — | | | | 262.0 | | | | | | | | 0.4 | |
| |
Total exposure | | | 107.0 | | | | | | | | 0.4 | | | | 599.0 | | | | | | | | 1.8 | |
| |
(1) | In some instances there are now less than five individual counterparties. In these cases a true average is reported, which results in an apparent disconnect between the average of the top five and the total exposure. |
Motor Finance and Litigation Funding
| | | | | | | | | | | | | | | | | |
| | | At 31 December 2004 | | | At 31 December 2003 | |
| | | | | | | Risk-weighted | | | | | | | Risk-weighted | |
| | | Assets | | | assets | | | Assets | | | assets (1) | |
| | | £bn | | | £bn | | | £bn | | | £bn | |
| |
| | | | 0.9 | | | | 0.8 | | | | 2.1 | | | | 2.4 | |
| |
(1) | In 2003 Motor Finance and Litigation Funding risk-weighted assets exceeded the value of assets due to the regulatory treatment of the joint venture with Peugeot, whereby 100% of assets are included for regulatory purposes. |
Other
International life assurance businesses
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Loss before tax | | | (39 | ) | | | (26 | ) |
| Embedded value asset | | | 88 | | | | 192 | |
| New business premiums | | | 2 | | | | 226 | |
| |
On 1 January 2004, Scottish Provident International was transferred into the ongoing Personal Financial Services business following the decision to retain the business as an integral part of the offering. The 2003 results have not been restated for the transfer, though the business accounted for £8m of loss, £71m of the embedded value asset and £57m of the new business reflected above. The Dublin based international life businesses which are reported in the Portfolio Business Unit in 2004, have now been transferred back into Personal Financial Services from 1 January 2005, with a loss before tax of £(39)m (2003: loss £(18)m), deteriorating due to additional provisioning in respect of fund stabilisation costs in Scottish Mutual International.
European operations and other
Total assets at 31 December 2003 of £1.9bn consisted largely of Abbey National France which was disposed of in 2004.
42
Operating and Financial Review
Impact of IFRS embedded value charges and rebasing
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 31 December | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 31 December 2004 | | 31 December 2003 | | 2002 | | | 31 December 2005 | | 31 December 2004 | |
| | | AN | | Scottish | | Scottish | | AN | | Scottish | | Scottish | | | | | | | Retail | | Retail | | | | | |
| | | Life | | Mutual | | Provident | | Total | | Life | | Mutual | | Provident | | Total | | Total | | | Life | | Intermediary | | Total | | Life | | Intermediary | | Total | |
| | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | | £m | | £m | |
| | Investment assumptions and variances | | | (5 | ) | | | (19 | ) | | 7 | | | (17 | ) | | 26 | | | (122 | ) | | | (22 | ) | | | (118 | ) | | | (668 | ) | | | (7 | ) | | | (5 | ) | | | (12 | ) | | | (5 | ) | | | (12 | ) | | | (17 | ) |
| Other one-off adjustments | | — | | | (60 | ) | | 98 | | 38 | | — | | | (85 | ) | | | (240 | ) | | | (325 | ) | | 115 | | | — | | — | | — | | — | | 38 | | 38 | |
| | Total embedded value charges and rebasing | | | (5 | ) | | | (79 | ) | | 105 | | 21 | | 26 | | | (207 | ) | | | (262 | ) | | | (443 | ) | | | (553 | ) | |
| Total IFRS embedded value charges and rebasing | | | | (7 | ) | | | (5 | ) | | | (12 | ) | | | (5 | ) | | 26 | | 21 | |
|
Investment assumptions and variances This variance represents the adjustment to allow for differences between actual market performance and our assumptions set out at the beginning of the year. Overall, investment assumptions and variances have improved by
£101m. The improvement shows that during 2004 investment performance and market£5m with no significant movements
were in closer alignment with assumptions. In Scottish Mutual, the cost of £19m principally reflects realised losses and an adjustment to the assumed value of future profits following changes in asset mix during the period. The positive £7m Scottish Provident investment variance is largely driven by a change in asset mix in the
non-profit sub-fund out of cash and into bonds.period.
Other one-off adjustmentsThe 2003 results included provisions in relation to the realistic balance sheet position of the funds.
The 2004 results
includerepresents a release of the provisions in respect of the Scottish Provident contingent loan in the long-term fund and shareholders’
fund.fund not repeated in 2005.
Reorganisation expensesand other
| | | | | | | | | | | | | | | | | | | | | |
| | | 31 December | | 31 December | | 31 December | | | 31 December | | 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| | Cost reduction programme | | | (459 | ) | | | (174 | ) | | | (34 | ) | | | (158 | ) | | | (441 | ) |
| Asset write-downs | | | (106 | ) | | | (141 | ) | | — | | | | (5 | ) | | | (106 | ) |
| Misselling remediation cost | | | | (70 | ) | | — | |
| | | | | (565 | ) | | | (315 | ) | | | (34 | ) | | | (233 | ) | | | (547 | ) |
|
Reorganisation
Total reorganisation expenses of
£565m were a combination of expenses in relation to£233m are significantly lower than 2004, reflecting the
reorganisationcost reduction programme
initiated early in 2003, costs associated with the sale of Abbey to Banco Santander Central Hispano, S.A., and
costs and provisions raised post-completionongoing restructuring of the
transaction. The post-acquisition charges amountbusiness being at a more advanced stage and a lower proportion of regulatory change investment. During 2005, Abbey has undergone a detailed review of endowment policies in remediation. As a result, remediation costs of £70m with respect to
£243m in the last quarter, consisting largely of redundancy costs and asset write-downs.Goodwill charges
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Goodwill amortisation | | | (20 | ) | | | (18 | ) | | | (64 | ) |
| Goodwill impairment | | | — | | | | (10 | ) | | | (747 | ) |
| |
| Total goodwill charges | | | (20 | ) | | | (28 | ) | | | (811 | ) |
| |
Goodwill charges of £20m comprise mainly the ongoing amortisation charge in relation to Scottish Provident and Fleming Premier Banking.
Pension fund
| | | | | | | | | | | | | |
| | | 31 December | | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Regular cost | | | 66 | | | | 75 | | | | 85 | |
| Amortisation of surpluses arising on pension schemes | | | — | | | | — | | | | (3 | ) |
| Amortisation of deficits arising on pension schemes | | | 50 | | | | 45 | | | | 16 | |
| Amortisation of surplus arising from fair value adjustment on acquisition of National and Provincial | | | 2 | | | | 2 | | | | 2 | |
| |
P&L charge in respect of defined benefit schemes | | | 118 | | | | 122 | | | | 100 | |
Add: P&L charge in respect of other schemes(1) | | | 4 | | | | 6 | | | | 1 | |
| |
Total pension charges(2) | | | 122 | | | | 128 | | | | 101 | |
| Less: Portfolio Business Unit charges | | | (2 | ) | | | (7 | ) | | | (20 | ) |
| |
| PFS charges | | | 120 | | | | 121 | | | | 81 | |
| |
(1) | | Comprises defined contribution pension schemes. |
|
(2) | | Excludes £10m of pension charges relating to the life assurance businesses reported in non-interest income under embedded value accounting (2003: £7m; 2002: £11m). |
43
Operating and Financial Review
Other Material Itemscontinued
The following comments refer to the pension cost for the combined Personal Financial Services and Portfolio Business Unit businesses.
The Abbey defined benefit pension schemesendowment misselling were closed to new members in March 2002 being replaced withincurred.
Hedging variances
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Hedging variances | | | (18 | ) | | | — | |
| |
As a
defined contribution scheme. The decrease in the regular cost to £66m (2003: £75m) is due to membersconsequence of the
defined benefit schemes leaving employment during 2004, partially offset by salary inflation. The annual reviewintroduction of Abbey’s pension schemes in March 2004 indicated a pre-tax deficit of £563m compared to £604m in 2003.
FRS 17 disclosure
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Total market value of assets | | | 2,493 | | | | 2,205 | |
| Present value of scheme liabilities | | | (3,689 | ) | | | (3,306 | ) |
| |
| FRS 17 scheme deficit | | | (1,196 | ) | | | (1,101 | ) |
| Related deferred tax asset | | | 359 | | | | 330 | |
| |
Net FRS 17 scheme deficit | | | (837 | ) | | | (771 | ) |
| |
The table above and the following comments reflect the position of Abbey’s defined benefit schemes in totality.
At 31 December 2004, taking assets at market value and discounting future liabilities at an AA Corporate Bond Rate of return the scheme deficit under FRS 17 was £837m post tax compared to £771m in December 2003. Asset growth of £288m was primarily driven by £243m investment returns, along with contributions to the fund being greater than benefits paid out and transfers out.
Valuations under FRS 17 are dependent upon market conditions atIAS 39 prospectively from 1 January 2005, the balance sheet date, potentially leading to volatility in results between reporting dates. Based on an asset value of £2,493m at December 2004 and asset allocation targets of 50% equities, 30% Bonds, and 20% Gilts and assuming average market returns, the estimated sensitivityincome statement are subject to a 10% market movement is £125mcertain amount of volatility particularly from the accounting for equities, £75m for Bonds and £50m for Gilts.
Liabilities are determined by projecting forwardhedges deemed under IFRS rules to be ineffective. In 2005, the growth in current accrued pension benefits to reflect inflation and salary growth to the dateimpact of pension payment, discounted to present value. These increased by £383m to £3,689m (2003: £3,306m). The principal movements in the liabilities were the inclusion of a further 12 months’ service cost for current scheme members £120m, the unwind of the discount £183m, a decrease in the discount rate from 5.5% to 5.4% £76m, based on a long-term AA Corporate Bond return and an increase in the inflation rate from 2.7% to 2.8% £78m, offset in part by benefits paid of £88m.
Under FRS 17, the profit and loss charge for 2004 would be £183m, determined by the assumptions below and the actual service accrued by scheme members. This principally comprises a £139m investment return offset by £120m service cost, £24m past service cost and a £183m financing cost, equating to the unwind of the discount on liabilities.this volatility was £(18)m.
| | | | | | | | | |
| | | 31 December 2004 | | | 31 December 2003 | |
| | | % | | | % | |
| |
| Discount rate for scheme liabilities | | | 5.40 | | | | 5.50 | |
| Pension and deferred pension increases | | | 2.80 | | | | 2.70 | |
| General salary increase | | | 4.30 | | | | 4.20 | |
| General price inflation | | | 2.80 | | | | 2.70 | |
| Expected rate of return on equities | | | 8.00 | | | | 7.25 | |
| Expected rate of return on bonds | | | 5.00 | | | | 5.50 | |
| |
UK GAAPIFRS to US GAAP reconciliation
Profit/(loss) attributable to the shareholders of Abbey National plcafter tax under UK GAAPIFRS in each of the years ended 31 December 2005 and 2004 2003was £420m and 2002 was £80m, £(699)m and £(1,161)£(54)m, respectively. Under US GAAP, the corresponding amounts were £(68)m, £(128)m (restated)£253m and £(1,407)m (restated), respectively.£(20)m. A detailed description of the principal differences between IFRS and US GAAP is included in Note 55 to the Consolidated Financial Statements. Reconciliations between the UK GAAPIFRS and US GAAP amounts, together with detailed explanations of the accounting differences,financial statements disclosures required by US GAAP, are included in Notes 58-6558 to 61 to the Consolidated Financial Statements. As part of the preparation of Abbey’s
2005 compared to 2004 Consolidated Financial Statements, certain US GAAP differences for 2003 and 2002 have been restated to reflect the correction of errors in the accounting treatment for securitisations, loan origination fees and costs, goodwill, the deferred acquisition costs in the life assurance businesses, derecognition of liabilities and operating leases. The effects of the restatements are set out on page 186. As a result of management’s review and restatement of previous US GAAP financial results, management has concluded that there was a material weakness in Abbey’s internal control over financial reporting as of December 31, 2004, regarding Abbey and certain of its subsidiaries having insufficient personnel in the corporate accounting department with sufficient knowledge and experience in US GAAP and the SEC requirements. As part of Abbey’s strengthening of internal controls in the context of these findings, Abbey has undertaken a number of remediation procedures in order to address the internal control deficiencies that contributed to these errors. These remediation efforts will continue during 2005 and include hiring additional accounting personnel knowledgeable in US GAAP; training current accounting staff on the application of US GAAP accounting pronouncements; reinforcing existing US GAAP reporting controls over the reporting process of subsidiaries, including levels of review; and improving standardized reconciliation templates to assist in the reconciliation process between UK GAAP and US GAAP.
44
Operating and Financial Review
Other Material Itemscontinued
The principal differences between UK and US GAAP, which affected net income, were as follows:
The treatment of shareholders’ interest in the long-term assurance business.Under UK GAAP applicable to banking groups, the net present value of future profits inherent in the long-term assurance business are recognised in the current reporting period. Under US GAAP revenue is recognised when premiums fall due from the policyholders and costs of claims are recognised in the period that such an assured event occurs, resulting in a more even recognition of profit over the life of the related policies.
In addition, under UK GAAP the shareholder profit and loss account only ever gets credit for the with-profit result at the time of bonus allocation. Under US GAAP the shareholder gets 10% of the with-profit result for a period as the result arises.
The methods of accounting for goodwill and intangible assets.For UK GAAP, FRS 10 continues to require goodwill to be recorded at the income-generating unit and to be amortised over a reputable period of 20 years. Since June 2002, US GAAP requires goodwill to be capitalised at a reporting unit level and all goodwill balances are subject to an annual impairment test. Such goodwill is written off to the extent that it is judged to be impaired.
Under US GAAP, intangible assets representing the value of customer relationships distribution channels and brands associated with acquisitions are established separately. Under UK GAAP, expenses incurred on the purchase or development of computer software are charged to the Profit and Loss account as incurred. Under US GAAP, certain of such costs are capitalised and amortised over the expected useful life of the software. In addition, capitalised costs are tested for impairment.
The treatment of non-trading financial instruments and the derivatives that hedge these financial instruments.The majority of Abbey’s hedging contracts are transacted with an in-house risk management and trading operation, in order to manage financial risks with external markets efficiently. Abbey transfers substantially all of the risk into the external markets on a portfolio basis, in order to benefit from economies of scale. Under UK GAAP, derivatives held as non-trading instruments are accounted for on an accrual basis. Under US GAAP these derivatives are treated as trading, with the unrealised mark-to-market gains and losses taken to the Profit and Loss Account as they arise. As Abbey will continue to hold a significant number of derivatives which are hedge accounted under UK GAAP, net income and shareholders equityNet income/(loss) under US GAAP will be subject to increased volatility.
Loan origination fees and costs.Under UK GAAP, loan origination fees and costs are taken to the Profit and Loss Account when services are provided, unless the origination fees and costs arewas £253m in the nature of interest or income, in which case they are taken to the Profit and Loss Account over the expected life of the transaction to which they relate or over the period of time that Abbey has the right to recover the incentives in the event of early redemption. For US GAAP, SFAS 91 requires all loan origination fees not offset by directly related costs to be deferred and amortised over the life of the related loan.
Securities.Under UK GAAP, securities held for investment purposes are stated at cost and adjusted for any amortisation of premium or discount, with a provision also being made for any impairment. Securities not held for investment are stated at their market values, with any gains or losses taken to the Profit and Loss Account. Under US GAAP, investments in equity securities with readily determinable market values and all investments in debt securities are classified as trading, available for sale or held to maturity securities, in accordance with SFAS 115. Trading securities are accounted for in the same manner as investments not held for investment purposes under UK GAAP. Available for sale Securities are reported at market value, with any unhedged, unrealised gains and losses taken directly to shareholders funds. Securities covered by fair value hedges will have the unrealised portion of the security and the underlying fair value of the derivative taken to the profit and loss account. Held to maturity securities are treated in the same manner as securities held for investment purposes under UK GAAP.
The treatment of dividends declared or proposed after the year-end by the Board of Directors.For UK GAAP, dividends are recorded in the period to which they relate, while under US GAAP dividends are recorded in the period that they are actually declared.
The tax-effect of the above adjustments is made in accordance with the provisions for accounting for deferred income tax.
2004 compared to 2003
Net loss available to ordinary shareholders under US GAAP is £68m in 2004, £110m2005, £167m lower than the equivalent amount available under UK GAAP.IFRS profit for the year of £420m. In 20032004, the US GAAP net loss available to ordinary shareholders was £128m (restated), £631m higher£(20)m, lower than the UK GAAP equivalent.
IFRS loss for the year of £(54)m. The UKIFRS to US GAAP adjustments decreased £741mincreased £201m from additional income of £631m£34m in 20032004 to a £110madditional expenses of £167m in 2004. Material2005. The principal movements includein the following.IFRS to US GAAP adjustments affecting net income/(loss) are as follows:
| > | | In 2005, a charge was recognised in the income statement under US GAAP reflecting impairment in the value of goodwill in the Insurance and Asset Management segment. This impairment was recognised due to expected lower future profitability given higher lapse rates in 2005, coupled with projected lower volumes of new business being written at lower margins in a competitive market. No impairment was recognised for IFRS purposes due to the lower level of goodwill held under IFRS. |
| |
| > | | DuringIn 2005, profits representing movements in the fair values of securities that are classified as fair value through profit and loss under IFRS were reversed for US GAAP purposes. Under US GAAP, these securities are classified as available for sale, with movements in their fair values accounted for in other comprehensive income. Prior to 1 January 2005, under IFRS these securities were accounted for at cost, subject to impairment, so there is no equivalent income statement adjustment in 2004, measuresthe relevant IFRS being prospective from 1 January 2005. |
32
Business and Financial Review
Other Material Items continued
| > | | In 2005, investment properties held at market value under IFRS, and amortised cost under US GAAP, were implemented to reducesold. The sales proceeds significantly exceeded the shareholders’ exposure to losses within the with-profit funds.amortised cost. As a result, provisions madethe 2005 income statement adjustment reflects the increased profit recognised under US GAAP, which was effectively recognised as market value movements in previous years against the prospect of such losses,prior periods under IFRS. Predominantly, this gain flows to the extent not utilised, were reduced. This contributed to the £109mpolicyholder bonus fund, resulting in a corresponding increase in 2004 in shareholders’ interest in long-term assurance business.policy liabilities. |
| | |
| > | | A charge relatedIn 2005, there was no significant income statement adjustment relating to software impairmentsderivatives because under US GAAP, and disposal losses followingIFRS from 1 January 2005, all derivatives are marked to market through the Banco Santander Central Hispano, S.A. acquisition and well documented technology improvementsincome statement. In 2004, the adjustment primarily reflects the marking to market of non-trading derivatives for US GAAP purposes that are expected to follow.were accrual accounted under IFRS, the relevant IFRS being prospective from 1 January 2005. |
| | |
| > | | An impairment charge related toIn 2005, the debt securities in issue income statement adjustment for US GAAP reflects the reversal of movements in the fair value of distribution channels duedebt securities in issue that qualify for the fair value option under IFRS, but do not qualify under the US GAAP fair value option. Prior to reduced profitability1 January 2005, a fair value option did not exist under either IFRS or US GAAP, so there is no equivalent income statement adjustment for this in a competitive UK protection market through2004. In addition, the independent adviser channelsUS GAAP adjustment in place at2005 reflects the dateabsence of Scottish Provident’s acquisition.claiming hedge accounting under US GAAP and the consequent reversal of the hedge accounting claimed under IFRS, as well as the reversal of the IFRS transition adjustment under IFRS 1 for items that qualified as hedges prior to 1 January 2005 but which did not meet the requirements of IAS 39 applicable from 1 January 2005. |
| | |
| > | | 2003In 2005, a credit was affected byrecognised in the closeout of derivatives which hedged Portfolio Business Unit assets, a process that was largely complete by the end of that year. 2004 reflects the remaining reduced level of UK non-trading derivatives for which hedge accounting is not obtained compared to earlier years. |
45
Operating and Financial Review
Other Material Items continued
2003 compared to 2002
Net loss available to ordinary shareholders under US GAAP is £128m in 2003, £631m lower than the equivalent amount available under UK GAAP. In 2002 the US GAAP loss available to ordinary shareholders was £1,407m (restated), £246m higher than the UK GAAP equivalent.
The UK to US GAAP adjustments increased £824m from expense of £193m in 2002 to a £631m income in 2003. Material movements include the following.
| | |
> | | An increase in shareholders’ interests in long-term assurance business (from expense of £673m in 2002 to income of £270m in 2003), primarily due to recognitionstatement under US GAAP reflecting the removal of the deficitspreference share dividends which are accounted for as interest expense in the policyholder with-profits funds whereas,income statement under UK GAAP, only that amountIFRS, the relevant IFRS being prospective from 1 January 2005, but which are excluded from the income statement and accounted for whichas an appropriation of profit in reserves under US GAAP. In addition, the shareholder is responsible is recognised. The deficitsgains and losses recognised under IFRS on the retranslation of foreign currency denominated preference shares were due to the sharp fall in equity markets in 2002 which have partially recovered in 2003, reducing the overall deficit on areversed because under US GAAP basis. The difference was reduced in 2003 followingthose preference shares are not retranslated. In 2004, under IFRS, the provisionpreference share dividends were accounted for realistic balance sheet liabilities inas an appropriation of profit and the UK GAAP result. The improvement was also due to lower levels of new business in 2003foreign currency denominated preference shares were not retranslated. These treatments were consistent with UK GAAP recognising more of the profit up-front while US GAAP, spreads the profit over the life of the contract andso there is therefore a greater benefit from the in-force book.was no adjustment in 2004. |
| | |
> | | An increase in derivatives and hedged underlying transactions of £441m primarily due to the close-out of derivative instruments which hedged Portfolio Business Unit assets as part of the disposal process. |
| | |
> | | A decrease of £692m in goodwill (from £714m in 2002 to £22m in 2003) primarily due to a £660m difference on impairments recognised under UK and US GAAP in 2002 and reversal of amortisation recorded under UK GAAP. |
Legal proceedings
Abbey and its subsidiaries are party to various legal proceedings in the ordinary course of business, the ultimate resolution of which is not expected to have material adverse effect on the financial position or the results of operations of Abbey.
Abbey and its subsidiaries are party to various contracts in the ordinary course of
business save as referred to in note 24 of the Financial Statements.business. For the two years ended 31 December
2004,2005, there have been no material contracts being contracts entered into outside the ordinary course of business.
As described in Note 59(p) to the Consolidated Financial Statements, on 7 June 2006 Abbey entered into a Sale and Purchase Agreement with Resolution plc and Resolution Life Limited pursuant to which Abbey has agreed to sell its entire life assurance business to Resolution plc.
Please refer to Note 89 of the Consolidated Financial Statements.
4633
OperatingBusiness and Financial Review
Balance Sheet OperatingBusiness Review Throughout this section, reference to UK and non-UK refer to the location of the office where the transaction is recorded.
The following tables set forth the average balances of deposits for each of the three years ended 31 December.
| | | | | | | | | | | | | | | | | | | | | |
| | | Average: year ended 31 December | | | Average: year ended 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| Deposits by banks | | |
| UK | | 7,340 | | 7,144 | | 8,159 | | | 26,084 | | 30,036 | |
| Non-UK | | 697 | | 1,761 | | 3,758 | | | 677 | | 688 | |
| | Total | | 8,037 | | 8,905 | | 11,917 | | | 26,761 | | 30,724 | |
| Customers’ accounts (all interest bearing) | | |
| UK | | 59,405 | | 63,154 | | 63,326 | | | 63,999 | | 58,404 | |
| Non-UK | | 5,301 | | 5,501 | | 5,200 | | | 6,080 | | 5,301 | |
| | Total | | 64,706 | | 68,655 | | 68,526 | | | 70,079 | | 63,705 | |
|
Customers’ accounts — by type
| | | | | | | | | | | | | | | | | | | | | |
| | | Average: year ended 31 December | | | Average: year ended 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| UK | | |
| Retail demand deposits | | 41,761 | | 42,477 | | 38,727 | | | 52,083 | | 40,760 | |
| Retail time deposits | | 12,177 | | 12,620 | | 14,396 | | | 9,076 | | 12,177 | |
| Wholesale deposits | | 5,467 | | 8,057 | | 10,203 | | | 2,840 | | 5,467 | |
| | | | 59,405 | | 63,154 | | 63,326 | | | 63,999 | | 58,404 | |
| Non-UK | | |
| Retail demand deposits | | 1,152 | | 1,260 | | 1,320 | | | 1,092 | | 1,152 | |
| Retail time deposits | | 4,149 | | 4,083 | | 3,417 | | | 4,875 | | 4,149 | |
| Wholesale deposits | | — | | 158 | | 463 | | | 113 | | — | |
| | | | 5,301 | | 5,501 | | 5,200 | | | 6,080 | | �� | | 5,301 | |
| Total | | 64,706 | | 68,655 | | 68,526 | | | 70,079 | | 63,705 | |
|
The tables below for 2003 contain information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | |
| | Average: year | |
| | ended 31 | |
| | December | |
| | 2003 | |
| | £m | |
|
Deposits by banks | | | | |
| UK | | | 7,144 | |
| Non-UK | | | 1,761 | |
|
| Total | | | 8,905 | |
|
Customers’ accounts (all interest bearing) | | | | |
| UK | | | 63,154 | |
| Non-UK | | | 5,501 | |
|
| Total | | | 68,655 | |
|
Customers’ accounts — by type
| | | | |
| | Average: year | |
| | ended 31 | |
| | December | |
| | 2003 | |
| | £m | |
|
UK | | | | |
| Retail demand deposits | | | 42,477 | |
| Retail time deposits | | | 12,620 | |
| Wholesale deposits | | | 8,057 | |
|
| | | 63,154 | |
|
Non-UK | | | | |
| Retail demand deposits | | | 1,260 | |
| Retail time deposits | | | 4,083 | |
| Wholesale deposits | | | 158 | |
|
| | | 5,501 | |
|
Total | | | 68,655 | |
|
Substantially all retail demand and time deposits are obtained either through the branch network, cahoot or remotely (such as postal accounts) and administered by the branch network, or cahoot, Abbey’s separately branded internet banking proposition.
34
Business and Financial Review
Balance Sheet Business Reviewcontinued
Retail demand and time deposits are also obtained outside the UK, principally through Abbey National
Offshore.Offshore Holdings Limited. They are all interest bearing and interest rates are varied from time to time in response to competitive conditions.
Demand deposits largely consist of
passbook-based and interest accounts whose balances,
which are available on demand. The category also includes Individual Savings Accounts, current accounts, instant saver savings accounts, remote access accounts, such as those serviced by post, and a number of other accounts
which are passbook- or interest-based but which allow the customer a limited number of notice-free withdrawals per year depending on the balance remaining in the account. These accounts are treated as demand deposits because the entire account balance may be withdrawn on demand without penalty as one of the notice-free withdrawals.
The main constituents of time deposits are notice accounts, which require customers to give notice of an intention to make a withdrawal, and bond accounts, which have a minimum deposit requirement. In each of these accounts, early withdrawal incurs an interest penalty.
Wholesale deposits are those, which either are obtained through the money markets or for which interest rates are quoted on request rather than being publicly advertised. These deposits are of fixed maturity and bear interest rates, which reflect the inter-bank money market rates.
The following tables set forth certain information regarding short-term borrowings (composed of deposits by banks, commercial paper and negotiable certificates of deposit) for each of the three years ended 31 December. While deposits by banks are reported in the “deposits” section above, they are also shown under “Short-term borrowings” because of their importance as a source of funding to Abbey.
47
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Deposits by banks
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended 31 December | | | Year ended 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| Year-end balance(1) | | 8,578 | | 1,178 | | 11,481 | | | 27,478 | | 18,412 | |
Average balance(2) | | 8,037 | | 8,905 | | 11,917 | | | 26,761 | | 30,724 | |
| Maximum balance | | 12,575 | | 10,979 | | 19,101 | | | 35,872 | | 25,530 | |
| | | | |
| | | % | | % | | % | | | % | | % | |
| Average interest rate during year | | 3.15 | | 2.78 | | 2.75 | | | — | | — | |
Year-end interest rate(3)(2) | | 5.43 | | 2.83 | | 2.80 | | | — | | — | |
|
| | |
| (1) | | The year-end deposits by banks balance include non-interest bearing items in the course of transmission of £248m (2004: £161m). |
|
| (2) | | Abbey policy is to mark to market the majority of its deposits by banks balances including interest and is recorded in net trading income banking rather than net interest income, therefore it has not been possible to calculate either the average interest rate during the year or year end interest rate. |
At 31 December 2004,2005, deposits by foreign banks amounted to £9,538m (2003: £5,881m, 2002: £10,364m)£9,281m (2004: £9,538m).
The table below for 2003 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | |
| | Year ended 31 | |
| | December | |
| | 2003 | |
| | £m | |
|
Year-end balance(1) | | | 1,178 | |
| Average balance | | | 8,905 | |
| Maximum balance | | | 10,979 | |
|
| | | | |
| | | % | |
|
| Average interest rate during year | | | 2.78 | |
Year-end interest rate(2) | | | 2.83 | |
|
| | |
| (1) | | The year-end deposits by banks balance includes non-interest bearing items in the course of transmission of £204m. |
|
| (2) | | Year-end interest rates are calculated on the basis of the interest earned in the year relative to the year-end balance, and are therefore not representative of actual interest rates. |
At 31 December 2003, deposits by foreign banks amounted to £5,881m.
35
Business and Financial Review
Balance Sheet Business Reviewcontinued
Commercial paperPaper
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended 31 December | | | Year ended 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| | Year-end balance | | 1,056 | | 1,298 | | 8,439 | | | 6,009 | | 1,656 | |
Average balance(2) | | 2,086 | | 4,199 | | 12,958 | | | 2,891 | | 2,086 | |
| Maximum balance | | 3,367 | | 7,300 | | 15,813 | | | 6,009 | | 3,367 | |
| | | | |
| | | % | | % | | % | | | % | | % | |
Average interest rate during year(1) | | | — | | — | |
Year-end interest rate (1) | | | — | | — | |
| | Average interest rate during year | | 0.57 | | 1.60 | | 3.42 | | |
Year-end interest rate (3) | | 0.22 | | 5.16 | | 1.46 | | |
| | |
| | |
| (1) | | Abbey policy is to mark to market its commercial paper balances including interest paid on commercial paper and is recorded in net trading income banking rather than net interest income, therefore it has not been possible to calculate either the Average interest rate during the year or the year-end interest rate. |
The table below for 2003 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | |
| | Year ended 31 | |
| | December | |
| | 2003 | |
| | £m | |
|
| Year-end balance | | | 1,298 | |
| Average balance | | | 4,199 | |
| Maximum balance | | | 7,300 | |
|
| | | | |
| | | % | |
|
| Average interest rate during year | | | 1.60 | |
Year-end interest rate (1) | | | 5.16 | |
|
| | |
| (1) | | Interest rates are calculated on the basis of the interest earned in the year relative to the year-end balance and are therefore not representative of actual interest rates. |
Commercial paper is issued by Abbey generally in denominations of not less than $50,000, with maturities of up to 365 days. Commercial paper is issued by Abbey National Treasury Services plc and Abbey National North America Corporation, a subsidiary of Abbey National Treasury Services plc.
Included in the above year-end balance for 2002 is £3.6bn in respect of commercial paper issued by Moriarty Limited and Moriarty LLC. Moriarty was a bankruptcy-remote asset-backed commercial paper programme sponsored by Abbey National Treasury Services plc.
Negotiable certificates of deposit
| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended 31 December | | | Year ended 31 December | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| | Year-end balance | | 7,073 | | 8,211 | | 21,744 | | | 5,282 | | 7,073 | |
Average balance(2)(1) | | 8,446 | | 13,996 | | 26,917 | | | 5,727 | | 8,496 | |
| Maximum balance | | 9,901 | | 22,429 | | 30,468 | | | 6,670 | | 9,901 | |
| | | | |
| | | % | | % | | % | | | % | | % | |
| Average interest rate during year | | 3.04 | | 2.17 | | 2.70 | | | — | | — | |
Year-end interest rate (3)(2) | | 3.65 | | 3.70 | | 2.75 | | | — | | — | |
|
(1) | | The year-end deposits by banks balance includes non-interest bearing items in the course of transmission of £161m (2003: £204m, 2002: £221m). |
|
(2)(1) | | Average balances for 2004, 2003,2005 and 20022004 are based upon daily data for Abbey National Treasury Services plc and its subsidiaries and monthly data for all other operations. |
| |
(3)(2) | | Abbey policy is to mark to market its negotiable balances including interest paid on negotiable certificate of deposits and is recorded in net trading income banking rather than net interest income, therefore it has not been possible to calculate either the Average interest rate during the year or the year-end interest rate. |
The table below for 2003 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | |
| | Year ended 31 | |
| | December | |
| | 2003 | |
| | £m | |
|
| Year-end balance | | | 8,211 | |
Average balance(1) | | | 13,996 | |
| Maximum balance | | | 22,429 | |
|
| | | | |
| | | % | |
|
| Average interest rate during year | | | 2.17 | |
Year-end interest rate (2) | | | 3.70 | |
|
| | |
| (1) | | Average balances for 2003 are based upon daily data for Abbey National Treasury Services plc and its subsidiaries and monthly data for all other operations. |
|
| (2) | | Year-end interest rates are calculated on the basis of the interest earned in the year relative to the year-end balance and are therefore not representative of actual interest rates. |
36
Business and Financial Review
Balance Sheet Business Reviewcontinued
Certificates of depositdeposits and certain time deposits The following table sets forth the maturities of Abbey’s certificates of deposit and other large wholesale time deposits from non-bank counterparties in excess of £50,000 (or the non-sterling equivalent of £50,000) at 31 December
2004.2005. A proportion of Abbey’s retail time deposits also exceeds £50,000 at any given date; however, the ease of access and other terms of these accounts means that they may not have been in excess of £50,000 throughout
2004.2005. Furthermore, the customers may withdraw their funds on demand upon payment of an interest penalty. For these reasons, no maturity analysis is presented for such deposits. See “Short-term borrowings” above for information on amounts and maturities of claims under issues of commercial paper.
48
Operating and Financial Review
Balance Sheet Operating Reviewcontinued| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | In more than | | | | | | | | | | |
| | | | | | | three months | | | In more than | | | | | | | |
| | | | | | | but not more | | | six months but | | | | | | | |
| | | Not more than | | | than six | | | not more than | | | In more than a | | | | |
| | | three months | | | months | | | one year | | | year | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Certificates of deposit: | | | | | | | | | | | | | | | | | | | | |
| UK | | | 1,485 | | | | 397 | | | | 1,346 | | | | 202 | | | | 3,430 | |
| Non-UK | | | 1,690 | | | | 104 | | | | 29 | | | | 29 | | | | 1,852 | |
| Wholesale time deposits: | | | | | | | | | | | | | | | | | | | | |
| UK | | | 2,406 | | | | 203 | | | | 112 | | | | 1,103 | | | | 3,824 | |
| Non-UK | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Total | | | 5,581 | | | | 704 | | | | 1,487 | | | | 1,334 | | | | 9,106 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | In more than | | | | | | | | | | |
| | | | | | | three months | | | In more than | | | | | | | |
| | | | | | | but not more | | | six months but | | | | | | | |
| | | Not more than | | | than six | | | not more than | | | In more than a | | | | |
| | | three months | | | months | | | one year | | | year | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Certificates of deposit: | | | | | | | | | | | | | | | | | | | | |
| UK | | | 2,417 | | | | 1,349 | | | | 948 | | | | 80 | | | | 4,794 | |
| Non-UK | | | 1,444 | | | | 550 | | | | 233 | | | | 52 | | | | 2,279 | |
| Wholesale time deposits: | | | | | | | | | | | | | | | | | | | | |
| UK | | | 3,082 | | | | 410 | | | | 325 | | | | 2,635 | | | | 6,452 | |
| Non-UK | | | 279 | | | | — | | | | — | | | | — | | | | 279 | |
| |
| Total | | | 7,222 | | | | 2,309 | | | | 1,506 | | | | 2,767 | | | | 13,804 | |
| |
At 31 December 2004,2005, there were an additional £2,390m£1,355m of wholesale deposits which were repayable on demand. All wholesale time deposits exceeded £50,000 at 31 December 2004.
2005.
The following table sets out the book and market values of securities at 31 December for each of the three years indicated. For further information, see the notes to the Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | Net asset | | | Market | | | Net asset | | | Market | | | Net asset | | | Market | |
| | | value | | | Value(1) | | | value | | | Value(1) | | | value | | | Value(1) | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Investment securities | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| UK government | | | — | | | | — | | | | 125 | | | | 125 | | | | 133 | | | | 133 | |
| US treasury and other US government agencies and corporations | | | — | | | | — | | | | — | | | | — | | | | 778 | | | | 779 | |
| Other public sector securities | | | 28 | | | | 28 | | | | 28 | | | | 29 | | | | 1,512 | | | | 1,699 | |
| Bank and building society certificates of deposit | | | 317 | | | | 317 | | | | 204 | | | | 203 | | | | 1,011 | | | | 1,022 | |
Other issuers: (2) | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate notes | | | 32 | | | | 27 | | | | 330 | | | | 381 | | | | 3,138 | | | | 3,130 | |
| Mortgage-backed securities | | | 38 | | | | 42 | | | | 36 | | | | 37 | | | | 4,022 | | | | 4,014 | |
Other asset-backed securities(3) | | | 257 | | | | 325 | | | | 535 | | | | 483 | | | | 13,392 | | | | 13,061 | |
| Other | | | — | | | | — | | | | 495 | | | | 583 | | | | 8,989 | | | | 9,255 | |
| Ordinary shares and similar securities | | | 30 | | | | 30 | | | | 394 | | | | 394 | | | | 893 | | | | 901 | |
| |
| Sub Total | | | 702 | | | | 769 | | | | 2,147 | | | | 2,235 | | | | 33,868 | | | | 34,004 | |
| |
Other securities(3) | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| UK government | | | 491 | | | | 491 | | | | 547 | | | | 547 | | | | 1,169 | | | | 1,169 | |
| Other public sector securities | | | 2,869 | | | | 2,868 | | | | 3,798 | | | | 3,798 | | | | 4,706 | | | | 4,706 | |
| Bank and building society certificates of deposit | | | 11,170 | | | | 11,170 | | | | 15,811 | | | | 15,811 | | | | 14,322 | | | | 14,322 | |
Other issuers: (2) | | | | | | | | | | | | | | | | | | | | | | | | |
| Floating rate notes | | | 224 | | | | 224 | | | | 244 | | | | 244 | | | | 43 | | | | 43 | |
| Mortgage-backed securities | | | 240 | | | | 240 | | | | 608 | | | | 608 | | | | 159 | | | | 159 | |
Other asset-backed securities(3) | | | 495 | | | | 495 | | | | 614 | | | | 614 | | | | 260 | | | | 260 | |
| Other | | | 6,522 | | | | 6,522 | | | | 6,953 | | | | 6,953 | | | | 6,173 | | | | 6,173 | |
| Ordinary shares and similar securities | | | 1,146 | | | | 1,146 | | | | 1,239 | | | | 1,239 | | | | 70 | | | | 70 | |
| |
| Sub Total | | | 23,157 | | | | 23,156 | | | | 29,814 | | | | 29,814 | | | | 26,902 | | | | 26,902 | |
| |
Total | | | 23,859 | | | | 23,925 | | | | 31,961 | | | | 32,049 | | | | 60,770 | | | | 60,906 | |
| |
37
Business and Financial Review
Balance Sheet Business Reviewcontinued
| | | | | | | | | | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | Net asset | | | Market | | | Net asset | | | Market | |
| | | value | | | value | | | value | | | value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Trading portfolio | | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | |
| UK government | | | 2,700 | | | | 2,700 | | | | 7,492 | | | | 7,492 | |
| US treasury and other US government agencies and corporations | | | 22 | | | | 22 | | | | — | | | | — | |
| Other public sector securities | | | 350 | | | | 350 | | | | 2,887 | | | | 2,886 | |
| Bank and building society certificates of deposit | | | 18,647 | | | | 18,647 | | | | 12,683 | | | | 12,683 | |
Other issuers: | | | | | | | | | | | | | | | | |
| Floating rate notes | | | 463 | | | | 463 | | | | 224 | | | | 224 | |
| Mortgage-backed securities | | | 350 | | | | 350 | | | | 240 | | | | 240 | |
| Other asset-backed securities | | | 4,626 | | | | 4,626 | | | | 495 | | | | 495 | |
| Other | | | 4,396 | | | | 4,396 | | | | 12,317 | | | | 12,317 | |
| Ordinary shares and similar securities | | | 1,539 | | | | 1,539 | | | | 10,762 | | | | 10,762 | |
| |
| Sub Total | | | 33,093 | | | | 33,093 | | | | 47,100 | | | | 47,099 | |
| |
Investment securities | | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | |
| UK government | | | — | | | | — | | | | — | | | | — | |
| US treasury and other US government agencies and corporations | | | — | | | | — | | | | — | | | | — | |
| Other public sector securities | | | — | | | | — | | | | 28 | | | | 28 | |
| Bank and building society certificates of deposit | | | — | | | | — | | | | 317 | | | | 317 | |
Other issuers: | | | | | | | | | | | | | | | | |
| Floating rate notes | | | — | | | | — | | | | 32 | | | | 27 | |
| Mortgage-backed securities | | | — | | | | — | | | | 38 | | | | 42 | |
| Other asset-backed securities | | | — | | | | — | | | | 257 | | | | 310 | |
| Other | | | — | | | | — | | | | — | | | | — | |
| Ordinary shares and similar securities | | | 13 | | | | 13 | | | | 30 | | | | 32 | |
| |
| Sub Total | | | 13 | | | | 13 | | | | 702 | | | | 756 | |
| |
Fair value through profit and loss | | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | |
| UK government | | | 2,794 | | | | 2,794 | | | | — | | | | — | |
| US treasury and other US government agencies and corporations | | | 100 | | | | 100 | | | | — | | | | — | |
| Other public sector securities | | | 417 | | | | 417 | | | | — | | | | — | |
| Bank and building society certificates of deposit | | | 841 | | | | 841 | | | | — | | | | — | |
Other issuers: | | | | | | | | | | | | | | | | |
| Floating rate notes | | | — | | | | — | | | | — | | | | — | |
| Mortgage-backed securities | | | — | | | | — | | | | — | | | | — | |
| Other asset-backed securities | | | 343 | | | | 343 | | | | — | | | | — | |
| Other | | | 8,387 | | | | 8,387 | | | | — | | | | — | |
| Ordinary shares and similar securities | | | 11,670 | | | | 11,670 | | | | — | | | | — | |
| |
| Sub Total | | | 24,552 | | | | 24,552 | | | | — | | | | — | |
| |
Total | | | 57,658 | | | | 57,658 | | | | 47,802 | | | | 47,855 | |
| |
38
Business and Financial Review
Balance Sheet Business Reviewcontinued
The table below for 2003 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | |
| | | 2003 | |
| | | Net asset | | | Market | |
| | | value | | | value(1) | |
| | | £m | | | £m | |
| |
Investment securities | | | | | | | | |
Debt securities: | | | | | | | | |
| UK government | | | 125 | | | | 125 | |
| US treasury and other US government agencies and corporations | | | — | | | | — | |
| Other public sector securities | | | 28 | | | | 28 | |
| Bank and building society certificates of deposit | | | 204 | | | | 204 | |
Other issuers: | | | | | | | | |
| Floating rate notes | | | 330 | | | | 381 | |
| Mortgage-backed securities | | | 36 | | | | 37 | |
| Other asset-backed securities | | | 535 | | | | 483 | |
| Other | | | 495 | | | | 583 | |
| Ordinary shares and similar securities | | | 394 | | | | 394 | |
| |
| Sub Total | | | 2,147 | | | | 2,235 | |
| |
Other securities | | | | | | | | |
Debt securities: | | | | | | | | |
| UK government | | | 547 | | | | 547 | |
| Other public sector securities | | | 3,827 | | | | 3,827 | |
| Bank and building society certificates of deposit | | | 15,811 | | | | 15,811 | |
Other issuers: | | | | | | | | |
| Floating rate notes | | | 244 | | | | 244 | |
| Mortgage-backed securities | | | 608 | | | | 608 | |
| Other asset-backed securities | | | 614 | | | | 614 | |
| Other | | | 6,924 | | | | 6,924 | |
| Ordinary shares and similar securities | | | 1,239 | | | | 1,239 | |
| |
| Sub Total | | | 29,814 | | | | 29,814 | |
| |
Total | | | 31,961 | | | | 32,049 | |
| |
| | |
| (1) | | There are hedges in place in respect of certain securities where the rise or fall in their market value will be offset by a substantially equivalent reduction or increase in the value of the hedges. |
|
(2) | | Other securities comprise securities held for trading purposes and securities used for the stock borrowing and lending business. These securities are carried at market value. |
|
(3) | | In 2002 this included a portfolio of asset-backed securities managed by Abbey National Treasury Services plc on behalf of Moriarty and its associated companies. See “Short-term borrowings — Commercial paper” included elsewhere in this Annual Report. |
A description of the characteristics of the securities held under each of the subcategories of securities in the table above is provided below.
The holdings of UK government securities (gilts) are primarily at fixed rates. Abbey’s assets and liabilities are predominantly floating rate (as described under
“Risk‘Risk management — market
risk”risk’ included elsewhere in this Annual
Report)Report and Accounts) which is used as the benchmark for risk management. Fixed-rate securities (including gilts) are generally hedged into floating-rate, on either an individual or an aggregate basis within the overall management of the appropriate book.
49
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
US treasury and other US government agencies and corporations
This category comprises US treasury securities, mortgage-backed securities issued or guaranteed by the US Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation (collectively,
“Agency‘Agency Mortgage Backed
Securities”Securities’).
Other public sector securities This category comprises issues by governments other than the US and UK governments, issues by supranationals and issues by UK public sector bodies. These are a mixture of fixed-rate and floating-rate securities.
Bank and building society certificates of deposit Bank and building society certificates of deposit are fixed-rate securities with relatively short maturities. These are managed within the overall position for the relevant book.
Other issuers: floating-rate notes Floating-rate notes have simple risk profiles and are either managed within the overall position for the relevant book, or are hedged into one of the main currencies.
Other issuers: mortgage-backed securities This category comprises US mortgage-backed securities (other than Agency mortgage-backed securities) and European mortgage-backed securities. The non-agency mortgage-backed securities have similar characteristics to the agency mortgage-backed securities discussed above and are managed along with the agency mortgage-backed securities for market risk purposes. European mortgage-backed securities have prepayment risks but few have cap features.
Other Issuers: other asset-backed securities This category comprises a range of mostly floating-rate asset-backed securities including home equity loans, commercial mortgages, car dealer, lease and credit card debtors and student loans. A number of the credit card debtors incorporate cap features.
39
Business and Financial Review
Balance Sheet Business Reviewcontinued
Other issuers: other securities This category comprised mainly synthetic floating-rate notes (which are fixed-rate bonds packaged into floating-rate by means of swaps tailored to provide a match to the characteristics of the underlying bond), along with a number of structured transactions which were hedged, as appropriate, either on an individual basis or as part of the overall management of the books. The synthetic floating-rate notes comprised bonds issued by banks, financial institutions and corporations, the latter being largely guaranteed by banks and financial institutions.
The following table sets out the maturities and weighted average yields of investment securities at 31 December 2004.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Maturing after five | | | | | | | |
| | | Maturing within one | | | Maturing after one but | | | years but within ten | | | Maturing after ten | | | | |
| | | year: | | | within five years: | | | years: | | | years: | | | Total: | |
| | | Amount | | | Yield(1) | | | Amount | | | Yield(1) | | | Amount | | | Yield(1) | | | Amount | | | Yield(1) | | | Amount | | | Yield(1) | |
| | | £m | | | % | | | £m | | | % | | | £m | | | % | | | £m | | | % | | | £m | | | % | |
| |
| Public sector securities | | | 28 | | | | 3.25 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 28 | | | | 3.25 | |
| Bank and building society certificates of deposit | | | 310 | | | | 4.89 | | | | 7 | | | | 4.82 | | | | — | | | | — | | | | — | | | | — | | | | 317 | | | | 4.89 | |
| Other issuers | | | 20 | | | | 0.64 | | | | 8 | | | | 1.09 | | | | 49 | | | | 1.27 | | | | 284 | | | | 9.13 | | | | 361 | | | | 7.42 | |
| |
| Sub total | | | 358 | | | | | | | | 15 | | | | | | | | 49 | | | | | | | | 284 | | | | | | | | 706 | | | | | |
Ordinary shares(2) | | | 30 | | | | | | | | — | | | | | | | | — | | | | | | | | — | | | | | | | | 30 | | | | | |
| |
| Total net asset value before provisions | | | 388 | | | | | | | | 15 | | | | | | | | 49 | | | | | | | | 284 | | | | | | | | 736 | | | | | |
| |
| Provisions | | | — | | | | | | | | — | | | | | | | | — | | | | | | | | (34 | ) | | | | | | | (34 | ) | | | | |
| Total net asset value | | | 388 | | | | | | | | 15 | | | | | | | | 49 | | | | | | | | 250 | | | | | | | | 702 | | | | | |
| |
| Total market value | | | 382 | | | | | | | | 9 | | | | | | | | 42 | | | | | | | | 336 | | | | | | | | 769 | | | | | |
| |
(1) | | The weighted average yield for each range of maturities is calculated by dividing the annualised interest income prevailing at 31 December 2004 by the net asset value of securities held at that date, and is not necessarily representative when there are only a small number of securities in the portfolio. |
|
(2) | | Ordinary shares by their nature do not permit the calculation of yields which are meaningful in the same way as yields on debt securities; accordingly, these are omitted. |
The following table sets forth the book and market values of investment and other securities of individual counterparties where the aggregate amount of those securities exceeded 10% of Abbey’s shareholders’ funds at 31 December 2004.
50
2005.
Operating and Financial Review
Balance Sheet Operating Reviewcontinued| | | | | | | | | |
| | | Book value | | | Market value | |
| | | £m | | | £m | |
| |
| Royal Bank of Scotland Group plc | | | 3,230 | | | | 3,233 | |
| HBOS plc | | | 3,121 | | | | 3,132 | |
| Lloyds TSB Group plc | | | 2,707 | | | | 2,717 | |
| Barclays Bank plc | | | 1,847 | | | | 1,848 | |
| Nordea Bank AB | | | 1,000 | | | | 1,000 | |
| Unicredito Italiano SPA | | | 863 | | | | 865 | |
| Government of Germany | | | 823 | | | | 885 | |
| Nationwide Building Society | | | 617 | | | | 617 | |
| Societe Generale | | | 611 | | | | 613 | |
| Banco Bilbao Vizcaya Argentaria | | | 602 | | | | 602 | |
| Republic of Italy | | | 503 | | | | 510 | |
| Bank of Ireland | | | 500 | | | | 501 | |
| HSBC Holdings plc | | | 486 | | | | 486 | |
| Kingdom of Spain | | | 431 | | | | 442 | |
| Credit Suisse Group | | | 429 | | | | 430 | |
| Republic of Austria | | | 425 | | | | 441 | |
| BNP Paribas | | | 407 | | | | 409 | |
| UK Government | | | 403 | | | | 457 | |
| |
| | | | | | | | | |
| | | Book value | | | Market value | |
| | | £m | | | £m | |
| |
| HBOS plc | | | 3,249 | | | | 3,262 | |
| Royal Bank of Scotland Group plc | | | 3,163 | | | | 3,170 | |
| UK government | | | 1,690 | | | | 1,758 | |
| Republic of Italy | | | 1,300 | | | | 1,316 | |
| Barclays Bank plc | | | 907 | | | | 908 | |
| Nationwide Building Society | | | 901 | | | | 901 | |
| Credit Suisse Group | | | 776 | | | | 776 | |
| Government of Germany | | | 598 | | | | 623 | |
| |
For the purposes of determining the above, shareholders’ funds amounted to £4,924m£3,110m at 31 December 2004.
2005.
Loans and advances to banks Loans and advances to banks includes loans to banks and building societies and balances with central banks (excluding those balances which can be withdrawn on demand).
The geographical analysis of loans and advances presented in the following table are based on the location of the office from which the loans and advances are made.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended 31 December | | | Year ended 31 December | |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | |
| | UK | | 9,478 | | 6,219 | | 6,465 | | 9,288 | | 12,031 | | | 8,060 | | 11,081 | |
| Non-UK | | 670 | | 936 | | 135 | | 586 | | 137 | | | 1,036 | | 670 | |
| | Total | | 10,148 | | 7,155 | | 6,600 | | 9,874 | | 12,168 | | | 9,096 | | 11,751 | |
|
The table below for 2003, 2002 and 2001 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | | | | | |
| | | Year ended 31 December | |
| | | 2003 | | | 2002 | | | 2001 | |
| | | £m | | | £m | | | £m | |
| |
| UK | | | 6,219 | | | | 6,465 | | | | 9,288 | |
| Non-UK | | | 936 | | | | 135 | | | | 586 | |
| |
| Total | | | 7,155 | | | | 6,600 | | | | 9,874 | |
| |
The following tables set forth loans and advances to banks by maturity and interest rate sensitivity at 31 December
2004.| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | In more than | | | In more than | | | | | | | |
| | | | | | | | | | | three months | | | one year but | | | | | | | |
| | | | | | | In not more | | | but not more | | | not more | | | | | | | |
| | | On | | | than three | | | than one | | | than five | | | In more than | | | | |
| | | demand | | | months | | | year | | | years | | | five years | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| UK | | | 2,879 | | | | 6,535 | | | | 63 | | | | 1 | | | | — | | | | 9,478 | |
| Non-UK | | | 8 | | | | 662 | | | | — | | | | — | | | | — | | | | 670 | |
| |
| Total | | | 2,887 | | | | 7,197 | | | | 63 | | | | 1 | | | | — | | | | 10,148 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fixed rate | | Variable rate | | Total | | | In more than | | In more than | | | | | |
| | | £m | | £m | | £m | | | | | three months | | one year but | | | | | |
| | | | In not more | | but not more | | not more | | | | | |
| Interest-bearing loans and advances to banks: | | |
| UK | | 7,851 | | 1,520 | | 9,371 | | |
| Non-UK | | 3 | | 667 | | 670 | | |
| | | | on | | than three | | than one | | than five | | In more than | | | |
| | | 7,854 | | 2,187 | | 10,041 | | | demand | | months | | year | | years | | five years | | Total | |
| Items in the course of collection (non-interest bearing) | | |
| | | | £m | | £m | | £m | | £m | | £m | | £m | |
| | | |
| UK | | n/a | | n/a | | 107 | | | | 2,072 | | | | 3,930 | | | | 2,057 | | | | 1 | | | | — | | | | 8,060 | |
| Non-UK | | — | | — | | — | | | | 47 | | | | 752 | | | | 236 | | | | 1 | | | | — | | | | 1,036 | |
| | Total | | 7,854 | | 2,187 | | 10,148 | | | | 2,119 | | | | 4,682 | | | | 2,293 | | | | 2 | | | | — | | | | 9,096 | |
|
40
Business and Financial Review
Balance Sheet Business Reviewcontinued
| | | | | | | | | | | | | |
| | | Fixed rate | | | Variable rate | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| Interest-bearing loans and advances to banks: | | | | | | | | | | | | |
| UK | | | 3,755 | | | | 4,113 | | | | 7,868 | |
| Non-UK | | | 78 | | | | 958 | | | | 1,036 | |
| |
| | | | 3,833 | | | | 5,071 | | | | 8,904 | |
| Items in the course of collection (non-interest bearing): | | | | | | | | | | | | |
| UK | | | n/a | | | | n/a | | | | 192 | |
| Non-UK | | | n/a | | | | n/a | | | | — | |
| |
| Total | | | 3,833 | | | | 5,071 | | | | 9,096 | |
| |
Loans and Advances to Customers Abbey provides lending facilities primarily to personal customers in the form of mortgages secured on residential properties,
and also provides finance lease facilities and a limited number of lending facilities to corporate
customers.customers and also provides finance lease facilities. Purchase and resale agreements represent sale and repurchase activity with professional non-bank customers by Abbey Financial Markets short-term markets business.
The geographical analysis of loans and advances presented in the following table are based on the location of the office from which the loans and advances are made.
51
Operating| | | | | | | | | |
| | | Year ended 31 December |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| UK | | | | | | | | |
| Advances secured on residential properties | | | 94,330 | | | | 91,164 | |
| Purchase and resale agreements | | | 4,789 | | | | 4,520 | |
| Other secured advances | | | 1,882 | | | | 1,793 | |
| Corporate advances | | | 334 | | | | 1,030 | |
| Unsecured personal advances | | | 3,845 | | | | 3,517 | |
| Finance lease debtors | | | 3 | | | | 1,108 | |
| |
| | | | 105,183 | | | | 103,132 | |
| |
| Non-UK | | | | | | | | |
| Advances secured on residential properties | | | 26 | | | | 14 | |
| Purchase and resale agreements | | | 13,152 | | | | 6,737 | |
| Other secured advances | | | — | | | | — | |
| Unsecured personal advances | | | 31 | | | | — | |
| Finance lease debtors | | | — | | | | — | |
| |
| | | | 13,209 | | | | 6,751 | |
| |
| Total | | | 118,392 | | | | 109,883 | |
| |
The table below for 2003, 2002 and
Financial ReviewBalance Sheet Operating Reviewcontinued2001 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year ended 31 December | | | | Year ended 31 December |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | | 2003 | | 2002 | | 2001 | |
| | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | |
| | UK | | |
| Advances secured on residential properties | | 76,065 | | 73,481 | | 65,777 | | 60,738 | | 64,053 | | | 73,481 | | 65,777 | | 60,738 | |
| Purchase and resale agreements | | 4,520 | | 2,958 | | 742 | | 2,704 | | 6,875 | | | 2,958 | | 742 | | 2,704 | |
| Other secured advances | | 1,793 | | 2,938 | | 4,645 | | 3,920 | | 2,367 | | | 2,938 | | 4,645 | | 3,920 | |
| Corporate advances | | 1,030 | | 3,762 | | 9,071 | | 9,119 | | 5,534 | | | 3,762 | | 9,071 | | 9,119 | |
| Unsecured personal advances | | 3,516 | | 3,228 | | 5,162 | | 4,833 | | 4,901 | | | 3,228 | | 5,162 | | 4,833 | |
| Finance lease debtors | | 1,148 | | 2,558 | | 3,429 | | 4,671 | | 5,174 | | | 2,558 | | 3,429 | | 4,671 | |
| | | | 88,072 | | 88,925 | | 88,826 | | 85,985 | | 88,904 | | | 88,925 | | 88,826 | | 85,985 | |
| | Non-UK | | |
| Advances secured on residential properties | | 14 | | 1,745 | | 3,186 | | 2,091 | | 1,635 | | | 1,745 | | 3,186 | | 2,091 | |
| Purchase and resale agreements | | 6,737 | | 6,414 | | 2,358 | | 1,507 | | — | | | 6,414 | | 2,358 | | 1,507 | |
| Other secured advances | | — | | 33 | | 106 | | 48 | | 104 | | | 33 | | 106 | | 48 | |
| Unsecured personal advances | | — | | 145 | | 123 | | 119 | | 108 | | | 145 | | 123 | | 119 | |
| Finance lease debtors | | — | | 15 | | 18 | | 67 | | 18 | | | 15 | | 18 | | 67 | |
| | | | 6,751 | | 8,352 | | 5,791 | | 3,832 | | 1,865 | | | 8,352 | | 5,791 | | 3,832 | |
| | Total | | 94,823 | | 97,277 | | 94,617 | | 89,817 | | 90,769 | | | 97,277 | | 94,617 | | 89,817 | |
|
No single concentration of loans and advances, with the exception of advances secured on residential properties and corporate advances in the UK, as disclosed above, accounts for more than 10% of total loans and advances and no individual country, other than the UK and US, accounts for more than 5% of total loans and advances.
The following tables set forth loans and advances to customers by maturity and interest rate sensitivity at 31 December
2004.2005. In the maturity analysis, overdrafts are included in the “on-demand” category. Advances secured by residential properties are included in the maturity analysis at their stated maturity; however, such advances may be repaid early. Abbey’s mortgage loans currently have an average life of six years depending on, among other factors, housing market conditions.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | In more than | | | In more than | | | | | | | |
| | | | | | | | | | | three months | | | one year but | | | | | | | |
| | | On | | | In more than | | | but not more | | | not more than | | | In more than | | | | |
| | | demand | | | three months | | | than one year | | | five years | | | five years | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| UK | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties | | | 823 | | | | 1,688 | | | | 1,554 | | | | 9,308 | | | | 62,692 | | | | 76,065 | |
| Purchase and resale agreements | | | 2,036 | | | | 2,484 | | | | — | | | | — | | | | — | | | | 4,520 | |
| Other secured advances | | | 29 | | | | 116 | | | | 325 | | | | 263 | | | | 1,060 | | | | 1,793 | |
| Corporate advances | | | 259 | | | | 204 | | | | 43 | | | | 186 | | | | 338 | | | | 1,030 | |
| Unsecured personal advances | | | 1,041 | | | | 214 | | | | 559 | | | | 1,587 | | | | 115 | | | | 3,516 | |
| Finance lease debtors | | | — | | | | 25 | | | | 12 | | | | 84 | | | | 1,027 | | | | 1,148 | |
| |
| Total UK | | | 4,188 | | | | 4,731 | | | | 2,493 | | | | 11,428 | | | | 65,232 | | | | 88,072 | |
| |
| Non-UK | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties | | | — | | | | — | | | | — | | | | 2 | | | | 12 | | | | 14 | |
| Purchase and resale agreements | | | 5,203 | | | | 1,534 | | | | — | | | | — | | | | — | | | | 6,737 | |
| Other secured advances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Corporate advances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Unsecured advances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Finance lease debtors | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Total non-UK | | | 5,203 | | | | 1,534 | | | | — | | | | 2 | | | | 12 | | | | 6,751 | |
| |
| Total | | | 9,391 | | | | 6,265 | | | | 2,493 | | | | 11,430 | | | | 65,244 | | | | 94,823 | |
| |
| | | | | | | | | | | | | |
| | | Fixed rate | | | Variable rate | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| UK | | | 25,857 | | | | 62,215 | | | | 88,072 | |
| Non-UK | | | 6,737 | | | | 14 | | | | 6,751 | |
| |
| | | | 32,594 | | | | 62,229 | | | | 94,823 | |
| |
41
Business and Financial Review
Balance Sheet Business Reviewcontinued
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | In more than | | | In more than | | | | | | | |
| | | | | | | In not more | | | three months | | | one year but | | | | | | | |
| | | On | | | than three | | | but not more | | | not more than | | | In more than | | | | |
| | | demand | | | months | | | than one year | | | five years | | | five years | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| UK | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties | | | 1,199 | | | | 1,362 | | | | 1,968 | | | | 10,730 | | | | 79,071 | | | | 94,330 | |
| Purchase and resale agreements | | | — | | | | 4,789 | | | | — | | | | — | | | | — | | | | 4,789 | |
| Other secured advances | | | 229 | | | | 2 | | | | 2 | | | | 15 | | | | 1,634 | | | | 1,882 | |
| Corporate advances | | | — | | | | 67 | | | | 8 | | | | 169 | | | | 90 | | | | 334 | |
| Unsecured personal advances | | | 974 | | | | 165 | | | | 633 | | | | 1,802 | | | | 271 | | | | 3,845 | |
| Finance lease debtors | | | — | | | | — | | | | — | | | | 1 | | | | 2 | | | | 3 | |
| |
| Total UK | | | 2,402 | | | | 6,385 | | | | 2,611 | | | | 12,717 | | | | 81,068 | | | | 105,183 | |
| |
| Non-UK | | | | | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties | | | — | | | | — | | | | — | | | | 2 | | | | 24 | | | | 26 | |
| Purchase and resale agreements | | | 12,655 | | | | 497 | | | | — | | | | — | | | | — | | | | 13,152 | |
| Other secured advances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Corporate advances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Unsecured advances | | | — | | | | 31 | | | | — | | | | — | | | | — | | | | 31 | |
| Finance lease debtors | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| Total non-UK | | | 12,655 | | | | 528 | | | | — | | | | 2 | | | | 24 | | | | 13,209 | |
| |
| Total | | | 15,057 | | | | 6,913 | | | | 2,611 | | | | 12,719 | | | | 81,092 | | | | 118,392 | |
| |
The interest rate sensitivity table below analyses loans between fixed rate and variable rate.
| | | | | | | | | | | | | |
| | | Fixed rate | | | Variable rate | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| UK | | | 33,420 | | | | 71,763 | | | | 105,183 | |
| Non-UK | | | — | | | | 13,209 | | | | 13,209 | |
| |
| | | | 33,420 | | | | 84,972 | | | | 118,392 | |
| |
Abbey’s policy is to hedge all fixed-rate loans and advances to customers using derivative instruments, or by matching with other on-balance sheet interest rate
exposures.52
exposures .
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Provisions on loans and advances to customers
Abbey’s provisioning policy is in accordance with
UK industry practice as expressedInternational Financial Reporting Standards. The charge for provisions on loans and advances to customers adjusts the balance sheet provisions to the level that management deems adequate to absorb actual and inherent losses in
the British Bankers’ Association StatementAbbey’s loan portfolio from homogeneous portfolios of
Recommended Practice on Advances.assets and individually identified loans. A proportion of Abbey’s provisions on loans and advances to customers relate to loans and advances secured either by a first charge on residential property in the UK, or by other appropriate security depending on the nature of the loan.
Abbey’s provisioning policy is as follows:
| > | | Abbey’s provisioning policy is as follows: |
|
> | Suspended interest— interest continues to be debited to all impaired loans. On advances secured by a charge on residential property payment is deemed to be impaired or non-performing when they are 90 days overdue. The homogeneous nature of the loans, together with the size of the loan portfolio, permits a reasonably accurate estimate to be made of the amount of this interest for which eventual recovery is doubtful. This amount is no longer credited to the Profit and Loss Account and is placed in suspense. Interest is no longer accrued when it is determined that there is no realistic prospect of recovery, the exception to this being certain small specialist portfolios where it is local market practice to place loans on a non-accrual basis where there is no realistic prospect of recovery. |
|
> | SpecificObserved provision— a specific– an observed provision is established for all impairedpast due loans after a specified period of repayment default where it is likely that some of the capital will not be repaid or recovered through enforcement of any applicable security. The length of the default period depends on the nature of the advance and is generally no more than three months. Once a loan is considered to be impairedmisses a payment (breach of contractual terms) an assessment of the likelihood of collecting the principal of this loanand overdue payments is made. This assessment is generally made using statistical techniques developed on previous experience and on management judgement of economic conditions. These techniques estimate the propensity of loans to result in losses net of any recovery where applicable.go to write off and as a separate exercise, the loss incurred on written off debt is monitored. For advances secured on residential property the propensity of loans to becomereach repossession is determined, with repossessed is also calculated.properties assessed on an individual basis through the use of external valuation, anticipated disposal costs and the current exposure. |
| |
| > | | GeneralIncurred but not yet observed provision— a general– an incurred but not yet observed provision is establishedmade against loans, which have not missed a payment but are known from past experience to cover losses which are, from experience, knownhave deteriorated since the initial decision to existlend was made. Based on historical evidence, the number of accounts likely to default in the future as a result of events present at the balance sheet date butare identified through use of statistical techniques. From 1 January 2005, these statistical techniques were expanded and enhanced. In particular, further detailed examination is now performed on the losses that emerge over a defined period of time after the reporting date called the emergence period. This period is determined to ensure that only those accounts which have not yet been identified.a credit deterioration at the reporting date are captured and excludes accounts which will suffer credit deterioration after the reporting period. The generalemergence period is three months for unsecured lending and twelve months for secured lending. The provision methodology outlined for observed provisions is determined using management judgment given past loss experience, lending quality and economic prospects, and is supplemented by statistical calculations which corroboratethen applied to accounts identified as impaired in the conclusions reached.performing portfolio’s. |
| |
| > | | Amounts written off— losses– Unsecured loans are written off when it becomes certain how muchall internal avenues of collecting the debt have failed and the debt is not going to be recovered from repayment, from realising any attached security,passed onto external collection agencies. On secured loans, the write off takes place on ultimate |
42
Business and Financial Review
Balance Sheet Business Reviewcontinued
| | realisation of collateral value, or from claiming on any mortgage indemnity guarantee or other insurance. This write-off is determinedAll write offs are on a case-by-case basis. Incase by case basis, taking account of the caseexposure at the date of secured loans it is made whenwrite off, after accounting for the security has been realised and, sincevalue from any collateral or insurance held against the values can then be calculated with some certainty, the instances of further write-offs or recoveries are minimal. In the case of unsecured loans, the circumstances surrounding the asset will be considered before deciding to write-off completely.loan. The write-off policy is regularly reviewed to assist in determining the adequacy of provisions. |
Security is realised in accordance with Abbey’s internal debt management programme. Contact is made with customers at an early stage of arrears with counselling made available to achieve a realistic and sustainable repayment arrangement. Litigation and/or enforcement of security is usually carried out only when the steps described above have been undertaken without success.
As a result of the write-off policy, the provisions
maywill be made a significant time in advance of the related
write-off. Thiswrite-off on all products. The exception to this rule is
particularly the
case fordiscovery of fraud, where the
loans secured on commercial properties included within the other secured advances category. Legal proceedings to repossess and realise the value of the security are complex and lengthy processes. This means that, although the likely lossesexposure is written off once full investigations have been
identifiedcompleted and
appropriate provisions made onthe probability of recovery is minimal. The time span between the discovery and write off will be a
case-by-case basis, fewer cases have been determined preciselyshort period and
written off, net of recoveries, compared to other classes of lending.53
may not result in a provision being raised.
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Analysis of end-of-year provisions on loans and advances to customers
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Specific | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties — UK | | | 9 | | | | 8 | | | | 24 | | | | 46 | | | | 50 | |
| Other secured advances — UK | | | 148 | | | | 36 | | | | 42 | | | | 45 | | | | 57 | |
| Unsecured personal advances — UK | | | 133 | | | | 171 | | | | 124 | | | | 152 | | | | 170 | |
| Corporate advances — UK | | | 67 | | | | 161 | | | | 204 | | | | — | | | | — | |
| Advances secured on residential properties — non-UK | | | — | | | | 17 | | | | 26 | | | | 16 | | | | 11 | |
| Other secured advances — non-UK | | | — | | | | 26 | | | | 34 | | | | 27 | | | | 41 | |
| Unsecured personal advances — non-UK | | | — | | | | 4 | | | | 4 | | | | 4 | | | | 4 | |
| |
| Total specific provisions | | | 357 | | | | 423 | | | | 458 | | | | 290 | | | | 333 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
General | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties — UK | | | 58 | | | | 165 | | | | 165 | | | | 145 | | | | 139 | |
| Other secured advances — UK | | | 3 | | | | 58 | | | | 19 | | | | 18 | | | | 15 | |
| Unsecured personal advances — UK | | | 35 | | | | 32 | | | | 32 | | | | 35 | | | | 31 | |
| Corporate advances — UK | | | 14 | | | | 173 | | | | 56 | | | | — | | | | — | |
| Advances secured on residential properties — non-UK | | | — | | | | 12 | | | | 9 | | | | 5 | | | | 3 | |
| Other secured advances — non-UK | | | — | | | | 2 | | | | 4 | | | | 4 | | | | 5 | |
| Unsecured personal advances — non-UK | | | — | | | | — | | | | 3 | | | | 1 | | | | 1 | |
| |
| Total general provisions | | | 110 | | | | 442 | | | | 288 | | | | 208 | | | | 194 | |
| |
Total provisions | | | 467 | | | | 865 | | | | 746 | | | | 498 | | | | 527 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
Ratios | | | % | | | | % | | | | % | | | | % | | | | % | |
| |
| Provisions at the year end as a percentage of year-end loans and advances to customers | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties — UK | | | 0.09 | | | | 0.24 | | | | 0.29 | | | | 0.31 | | | | 0.30 | |
| Other secured advances — UK | | | 8.44 | | | | 3.28 | | | | 1.30 | | | | 1.61 | | | | 3.03 | |
| Unsecured personal advances — UK | | | 4.65 | | | | 6.20 | | | | 3.02 | | | | 3.87 | | | | 4.09 | |
| Corporate advances — UK | | | 9.43 | | | | 13.83 | | | | 2.97 | | | | | | | | | |
| Advances secured on residential properties — non-UK | | | 0.73 | | | | 1.70 | | | | 1.10 | | | | 1.00 | | | | 0.87 | |
| Other secured advances — non-UK | | | — | | | | 68.29 | | | | 80.85 | | | | 64.58 | | | | 44.23 | |
| Unsecured personal advances — non-UK | | | 11.53 | | | | 2.76 | | | | 5.69 | | | | 4.20 | | | | 4.39 | |
| Total loans and advances to customers | | | 0.49 | | | | 0.93 | | | | 0.82 | | | | 0.59 | | | | 0.62 | |
Amounts written off (net of recoveries)(1) | | | 0.35 | | | | 0.40 | | | | 0.33 | | | | 0.37 | | | | 0.35 | |
| Percent of loans in each category to total loans | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties — UK | | | 80.29 | | | | 76.62 | | | | 69.76 | | | | 67.62 | | | | 70.57 | |
| Purchase and resale agreements — UK | | | 4.77 | | | | 3.08 | | | | 0.79 | | | | 3.01 | | | | 7.57 | |
| Other secured advances — UK | | | 1.89 | | | | 3.05 | | | | 4.99 | | | | 4.36 | | | | 2.61 | |
| Corporate advances — UK | | | 0.91 | | | | 2.51 | | | | 9.27 | | | | 10.15 | | | | 6.10 | |
| Unsecured personal advances — UK | | | 3.81 | | | | 3.40 | | | | 5.47 | | | | 5.38 | | | | 5.40 | |
| Finance lease debtors — UK | | | 1.21 | | | | 2.67 | | | | 3.64 | | | | 5.20 | | | | 5.70 | |
| Advances secured on residential properties — non-UK | | | 0.02 | | | | 1.78 | | | | 3.38 | | | | 2.33 | | | | 1.80 | |
| Purchase and resale agreements — non-UK | | | 7.10 | | | | 6.68 | | | | 2.50 | | | | 1.70 | | | | — | |
| Other secured advances — non-UK | | | — | | | | 0.04 | | | | 0.05 | | | | 0.05 | | | | 0.11 | |
| Unsecured advances — non-UK | | | — | | | | 0.15 | | | | 0.13 | | | | 0.13 | | | | 0.12 | |
| Finance lease debtors — non-UK | | | — | | | | 0.02 | | | | 0.02 | | | | 0.07 | | | | 0.02 | |
| |
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
Observed provision | | | | | | | | |
| Advances secured on residential properties – UK | | | 21 | | | | 9 | |
| Other secured advances – UK | | | 126 | | | | 148 | |
| Unsecured personal advances – UK | | | 158 | | | | 133 | |
| Corporate advances – UK | | | — | | | | 67 | |
| |
| Total observed provisions | | | 305 | | | | 357 | |
| |
| | | | | | | | | |
Incurred but not yet observed provision | | | | | | | | |
| Advances secured on residential properties – UK | | | 35 | | | | 58 | |
| Other secured advances – UK | | | — | | | | 3 | |
| Unsecured personal advances – UK | | | 54 | | | | 35 | |
| Corporate advances – UK | | | — | | | | 14 | |
| |
| Total incurred but not yet observed provisions | | | 89 | | | | 110 | |
| |
Total provisions | | | 394 | | | | 467 | |
| |
| | | | | | | | | |
Ratios | | | | | | | | |
| |
Provisions at the year end as a percentage of year-end loans and advances to customers: | | | % | | | | % | |
| Advances secured on residential properties – UK | | | 0.06 | | | | 0.07 | |
| Other secured advances – UK | | | 6.69 | | | | 5.22 | |
| Unsecured personal advances – UK | | | 5.46 | | | | 4.57 | |
| Corporate advances – UK | | | — | | | | 9.22 | |
| Advances secured on residential properties – non-UK | | | — | | | | 0.75 | |
| Total loans and advances to customers | | | 0.41 | | | | 0.43 | |
Amounts written off (net of recoveries)(1) | | | 0.31 | | | | 0.35 | |
| | | | | | | | | |
Percent of loans in each category to total loans: | | | | | | | | |
| Advances secured on residential properties – UK | | | 93.96 | | | | 82.97 | |
| Purchase and resale agreements – UK | | | — | | | | 4.11 | |
| Other secured advances – UK | | | 1.97 | | | | 2.64 | |
| Corporate advances – UK | | | — | | | | 0.80 | |
| Unsecured personal advances – UK | | | 4.04 | | | | 3.34 | |
| Advances secured on residential properties – non-UK | | | 0.03 | | | | 0.01 | |
| Purchase and resale agreements – non-UK | | | — | | | | 6.13 | |
| |
| | |
| (1) | | Amounts written off (net of recoveries) ratio as a percentage of average loans and advances to customers excluding finance leases. |
5443
Operating
Business and Financial Review Balance Sheet OperatingBusiness Reviewcontinued
The table below for 2003, 2002 and 2001 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | | | | | |
| | | 2003 | | | 2002 | | | 2001 | |
| | | £m | | | £m | | | £m | |
| |
Specific | | | | | | | | | | | | |
| Advances secured on residential properties – UK | | | 8 | | | | 24 | | | | 46 | |
| Other secured advances – UK | | | 36 | | | | 42 | | | | 45 | |
| Unsecured personal advances – UK | | | 171 | | | | 124 | | | | 152 | |
| Corporate advances – UK | | | 161 | | | | 204 | | | | — | |
| Advances secured on residential properties – non-UK | | | 17 | | | | 26 | | | | 16 | |
| Other secured advances – non-UK | | | 26 | | | | 34 | | | | 27 | |
| Unsecured personal advances – non-UK | | | 4 | | | | 4 | | | | 4 | |
| |
| Total specific provisions | | | 423 | | | | 458 | | | | 290 | |
| |
| | | | | | | | | | | | | |
General | | | | | | | | | | | | |
| Advances secured on residential properties – UK | | | 165 | | | | 165 | | | | 145 | |
| Other secured advances – UK | | | 58 | | | | 19 | | | | 18 | |
| Unsecured personal advances – UK | | | 32 | | | | 32 | | | | 35 | |
| Corporate advances – UK | | | 173 | | | | 56 | | | | — | |
| Advances secured on residential properties – non-UK | | | 12 | | | | 9 | | | | 5 | |
| Other secured advances – non-UK | | | 2 | | | | 4 | | | | 4 | |
| Unsecured personal advances – non-UK | | | — | | | | 3 | | | | 1 | |
| |
| Total general provisions | | | 442 | | | | 288 | | | | 208 | |
| |
Total provisions | | | 865 | | | | 746 | | | | 498 | |
| |
| | | | | | | | | | | | | |
Ratios | | | % | | | | % | | | | % | |
| |
Provisions at the year end as a percentage of year-end loans and advances to customers | | | | | | | | | | | | |
| Advances secured on residential properties – UK | | | 0.24 | | | | 0.29 | | | | 0.31 | |
| Other secured advances – UK | | | 3.28 | | | | 1.30 | | | | 1.61 | |
| Unsecured personal advances – UK | | | 6.20 | | | | 3.02 | | | | 3.87 | |
| Corporate advances – UK | | | 13.83 | | | | 2.97 | | | | — | |
| Advances secured on residential properties – non-UK | | | 1.70 | | | | 1.10 | | | | 1.00 | |
| Other secured advances – non-UK | | | 68.29 | | | | 80.85 | | | | 64.58 | |
| Unsecured personal advances – non-UK | | | 2.76 | | | | 5.69 | | | | 4.20 | |
| Total loans and advances to customers | | | 0.93 | | | | 0.82 | | | | 0.59 | |
Amounts written off (net of recoveries)(1) | | | 0.40 | | | | 0.33 | | | | 0.37 | |
Percent of loans in each category to total loans | | | | | | | | | | | | |
| Advances secured on residential properties – UK | | | 76.62 | | | | 69.76 | | | | 67.62 | |
| Purchase and resale agreements – UK | | | 3.08 | | | | 0.79 | | | | 3.01 | |
| Other secured advances – UK | | | 3.05 | | | | 4.99 | | | | 4.36 | |
| Corporate advances – UK | | | 2.51 | | | | 9.27 | | | | 10.15 | |
| Unsecured personal advances – UK | | | 3.40 | | | | 5.47 | | | | 5.38 | |
| Finance lease debtors – UK | | | 2.67 | | | | 3.64 | | | | 5.20 | |
| Advances secured on residential properties – non-UK | | | 1.78 | | | | 3.38 | | | | 2.33 | |
| Purchase and resale agreements – non-UK | | | 6.68 | | | | 2.50 | | | | 1.70 | |
| Other secured advances – non-UK | | | 0.04 | | | | 0.05 | | | | 0.05 | |
| Unsecured advances – non-UK | | | 0.15 | | | | 0.13 | | | | 0.13 | |
| Finance lease debtors – non-UK | | | 0.02 | | | | 0.02 | | | | 0.07 | |
| |
44
Business and Financial Review
Balance Sheet Business Reviewcontinued
Movements in provisions for bad and doubtful debts
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Provisions at the beginning of the year | | | 865 | | | | 746 | | | | 498 | | | | 527 | | | | 529 | |
| Acquisition of subsidiary undertakings | | | — | | | | — | | | | 8 | | | | — | | | | — | |
| Disposal of subsidiary undertakings | | | (70 | ) | | | (94 | ) | | | (1 | ) | | | — | | | | — | |
| |
| | | | 795 | | | | 652 | | | | 505 | | | | 527 | | | | 529 | |
Amounts written off | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties — UK | | | (2 | ) | | | (16 | ) | | | (27 | ) | | | (41 | ) | | | (39 | ) |
| Other secured advances — UK | | | (39 | ) | | | (45 | ) | | | (33 | ) | | | (49 | ) | | | (41 | ) |
| Unsecured personal advances — UK | | | (136 | ) | | | (148 | ) | | | (335 | ) | | | (296 | ) | | | (234 | ) |
| Corporate advances — UK | | | (164 | ) | | | (80 | ) | | | — | | | | — | | | | — | |
| |
| | | | (341 | ) | | | (289 | ) | | | (395 | ) | | | (386 | ) | | | (314 | ) |
| Advances secured on residential properties — non-UK | | | (2 | ) | | | (10 | ) | | | — | | | | (1 | ) | | | (2 | ) |
| Other secured advances — non-UK | | | (2 | ) | | | (10 | ) | | | — | | | | (5 | ) | | | (7 | ) |
| Unsecured personal advances — non-UK | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | |
| |
| Total amounts written off | | | (345 | ) | | | (309 | ) | | | (396 | ) | | | (393 | ) | | | (323 | ) |
| |
Recoveries | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties — UK | | | 16 | | | | 4 | | | | 4 | | | | 9 | | | | 3 | |
| Other secured advances — UK | | | 8 | | | | — | | | | 3 | | | | 8 | | | | 12 | |
| Unsecured personal advances — UK | | | 28 | | | | 38 | | | | 89 | | | | 85 | | | | 33 | |
| |
| | | | 52 | | | | 42 | | | | 96 | | | | 102 | | | | 48 | |
| |
| Advances secured on residential properties — non-UK | | | — | | | | — | | | | 5 | | | | — | | | | — | |
| Other secured advances — non-UK | | | — | | | | — | | | | 6 | | | | — | | | | — | |
| |
| Total amount recovered | | | 52 | | | | 42 | | | | 107 | | | | 102 | | | | 48 | |
| |
Specific provisions charged against profit | | | | | | | | | | | | | | | | | | | | |
| Advances secured on residential properties — UK | | | (13 | ) | | | 5 | | | | 1 | | | | 27 | | | | 24 | |
| Other secured advances — UK | | | 147 | | | | 52 | | | | 25 | | | | 29 | | | | 52 | |
| Unsecured personal advances — UK | | | 70 | | | | 205 | | | | 219 | | | | 193 | | | | 213 | |
| Corporate advances — UK | | | 71 | | | | 36 | | | | 207 | | | | — | | | | — | |
| |
| | | | 275 | | | | 298 | | | | 452 | | | | 249 | | | | 289 | |
| |
| Advances secured on residential properties — non-UK | | | (1 | ) | | | 4 | | | | 2 | | | | 6 | | | | 1 | |
| Other secured advances — non-UK | | | — | | | | — | | | | (1 | ) | | | (8 | ) | | | — | |
| Unsecured personal advances — non-UK | | | 1 | | | | — | | | | 1 | | | | 1 | | | | 1 | |
| |
| Total specific provisions charged against profit | | | 275 | | | | 302 | | | | 454 | | | | 248 | | | | 291 | |
| |
| General provisions charged against profit | | | (310 | ) | | | 172 | | | | 60 | | | | 15 | | | | (18 | ) |
| |
| Exchange and other adjustments | | | — | | | | 6 | | | | 16 | | | | (1 | ) | | | — | |
| |
| Provisions at the end of the year | | | 467 | | | | 865 | | | | 746 | | | | 498 | | | | 527 | |
| |
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Provisions at 31 December | | | 467 | | | | — | |
| IFRS reclassifications | | | (40 | ) | | | — | |
| Provisions at the 1 January | | | 427 | | | | 865 | |
| Disposal of subsidiary undertakings | | | — | | | | (70 | ) |
| |
| | | | 427 | | | | 795 | |
Amounts written off | | | | | | | | |
| Advances secured on residential properties – UK | | | (8 | ) | | | (2 | ) |
| Other secured advances – UK | | | (42 | ) | | | (39 | ) |
| Unsecured personal advances – UK | | | (275 | ) | | | (136 | ) |
| Corporate advances – UK | | | — | | | | (164 | ) |
| |
| | | | (325 | ) | | | (341 | ) |
| Advances secured on residential properties – non-UK | | | — | | | | (2 | ) |
| Other secured advances – non-UK | | | — | | | | (2 | ) |
| |
| Total amounts written off | | | (325 | ) | | | (345 | ) |
| |
Recoveries | | | | | | | | |
| Advances secured on residential properties – UK | | | 3 | | | | 16 | |
| Other secured advances – UK | | | 7 | | | | 8 | |
| Unsecured personal advances – UK | | | 27 | | | | 28 | |
| |
| | | | 37 | | | | 52 | |
| Advances secured on residential properties – non-UK | | | — | | | | — | |
| Other secured advances – non-UK | | | — | | | | — | |
| |
| Total amount recovered | | | 37 | | | | 52 | |
| |
Observed provisions charged against profit | | | | | | | | |
| Advances secured on residential properties – UK | | | 12 | | | | (13 | ) |
| Other secured advances – UK | | | 11 | | | | 147 | |
| Unsecured personal advances – UK | | | 221 | | | | 70 | |
| Corporate advances – UK | | | — | | | | 71 | |
| |
| | | | 244 | | | | 275 | |
| |
| Advances secured on residential properties – non-UK | | | (3 | ) | | | (1 | ) |
| Other secured advances – non-UK | | | — | | | | — | |
| Unsecured personal advances – non-UK | | | — | | | | 1 | |
| |
| Total observed provisions charged against profit | | | 241 | | | | 275 | |
| |
| Incurred but not yet observed provisions charged against profit | | | 14 | | | | (310 | ) |
| |
| Exchange and other adjustments | | | — | | | | — | |
| |
| Provisions at the end of the year | | | 394 | | | | 467 | |
| |
IFRS reclassifications relate primarily to reclassification of provisions relating to certain corporate loans in the portfolio business unit segment.
45
Interest in suspense
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Interest in suspense at the beginning of the year | | | 50 | | | | 76 | | | | 96 | | | | 100 | | | | 114 | |
| Acquisition of subsidiary undertakings | | | — | | | | — | | | | 3 | | | | — | | | | — | |
| Net interest suspended during the year | | | 7 | | | | 9 | | | | 10 | | | | 23 | | | | 32 | |
| Disposal of subsidiary undertaking | | | (42 | ) | | | (15 | ) | | | — | | | | — | | | | — | |
| Interest written off | | | (8 | ) | | | (24 | ) | | | (38 | ) | | | (26 | ) | | | (46 | ) |
| Exchange and other adjustments | | | — | | | | 4 | | | | 5 | | | | (1 | ) | | | — | |
| |
| Interest in suspense at the end of the year | | | 7 | | | | 50 | | | | 76 | | | | 96 | | | | 100 | |
| |
Business and Financial Review
Balance Sheet Business Reviewcontinued
The table below for 2003, 2002 and 2001 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | | | | | |
| | | 2003 | | | 2002 | | | 2001 | |
| | | £m | | | £m | | | £m | |
| |
| Provisions at the beginning of the year | | | 746 | | | | 498 | | | | 527 | |
| Acquisition of subsidiary undertakings | | | — | | | | 8 | | | | — | |
| Disposal of subsidiary undertakings | | | (94 | ) | | | (1 | ) | | | — | |
| |
| | | | 652 | | | | 505 | | | | 527 | |
Amounts written off | | | | | | | | | | | | |
| Advances secured on residential properties – UK | | | (16 | ) | | | (27 | ) | | | (41 | ) |
| Other secured advances – UK | | | (45 | ) | | | (33 | ) | | | (49 | ) |
| Unsecured personal advances – UK | | | (148 | ) | | | (335 | ) | | | (296 | ) |
| Corporate advances – UK | | | (80 | ) | | | — | | | | — | |
| |
| | | | (289 | ) | | | (395 | ) | | | (386 | ) |
| Advances secured on residential properties – non-UK | | | (10 | ) | | | — | | | | (1 | ) |
| Other secured advances – non-UK | | | (10 | ) | | | — | | | | (5 | ) |
| Unsecured personal advances – non-UK | | | — | | | | (1 | ) | | | (1 | ) |
| |
| Total amounts written off | | | (309 | ) | | | (396 | ) | | | (393 | ) |
| |
Recoveries | | | | | | | | | | | | |
| Advances secured on residential properties – UK | | | 4 | | | | 4 | | | | 9 | |
| Other secured advances – UK | | | — | | | | 3 | | | | 8 | |
| Unsecured personal advances – UK | | | 38 | | | | 89 | | | | 85 | |
| |
| | | | 42 | | | | 96 | | | | 102 | |
| |
| Advances secured on residential properties – non-UK | | | — | | | | 5 | | | | — | |
| Other secured advances – non-UK | | | — | | | | 6 | | | | — | |
| |
| Total amount recovered | | | 42 | | | | 107 | | | | 102 | |
| |
Specific provisions charged against profit | | | | | | | | | | | | |
| Advances secured on residential properties – UK | | | 5 | | | | 1 | | | | 27 | |
| Other secured advances – UK | | | 52 | | | | 25 | | | | 29 | |
| Unsecured personal advances – UK | | | 205 | | | | 219 | | | | 193 | |
| Corporate advances – UK | | | 36 | | | | 207 | | | | — | |
| |
| | | | 298 | | | | 452 | | | | 249 | |
| |
| Advances secured on residential properties – non-UK | | | 4 | | | | 2 | | | | 6 | |
| Other secured advances – non-UK | | | — | | | | (1 | ) | | | (8 | ) |
| Unsecured personal advances – non-UK | | | — | | | | 1 | | | | 1 | |
| |
| Total specific provisions charged against profit | | | 302 | | | | 454 | | | | 248 | |
| |
| General provisions charged against profit | | | 172 | | | | 60 | | | | 15 | |
| |
| Exchange and other adjustments | | | 6 | | | | 16 | | | | (1 | ) |
| |
| Provisions at the end of the year | | | 865 | | | | 746 | | | | 498 | |
| |
Potential credit risk elements in loans and advancesUS banks typically stop accruing interest when loans become overdue by 90 days or more, or when recovery is doubtful. In accordance with the British Bankers’ Association Statement of Recommended Practice on Advances, Abbey continues to charge interest for collection purposes, where appropriate, to accounts whose recovery is in doubt, but the interest is suspended as it accrues and is excluded from interest income in the Profit and Loss Account. This suspension of interest continues until such time as its recovery is considered to be unlikely at which time the advance is written off. While such practice does not affect net income in comparison with the practice followed in the US, it has the effect of increasing the reported level of potential credit risk elements in loans and advances. The amount of this difference at 31 December 2004 was £7m. Other than for the net interest suspended during the year, interest income in the Profit and Loss Account is the same as would have been credited if all loans had been current in accordance with their original terms.
The following table presents the potential credit risk elements in Abbey loans and advances. Additional categories of disclosure are included, however, to record loans and advances where
Under IFRS, interest continues to be accrued
and where either interest is being suspended or specific provisions have been made. Normal US banking practice would be to place suchon all loans and
advances on non-accrual status. However, at 31 December 2004, 2003 and 2002 there was a small amountthe element of
loan assets placed on non-accrual status within Abbey, where such treatmentinterest that is
viewed as more appropriate givennot anticipated to be recovered is derecognised through the
natureuse of an income adjustment, which effectively is the unwind of the
business anddiscounting applied for calculating the
particular circumstances of the loans. The amounts are stated before deductions of the value of security held and specific provision or interest suspended.55
provisions.
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Group non-performing loans and advances
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | |
| | Accruing loans and advances on which a proportion of interest has been suspended and/or on which specific provision has been made: | | |
| Accruing loans and advances on which specific provision made | | |
| UK | | 422 | | 1,531 | | 515 | | 717 | | 777 | | | 314 | | 297 | |
| Non-UK | | — | | 101 | | 154 | | 131 | | 138 | | | — | | — | |
| | | | 422 | | 1,632 | | 669 | | 848 | | 915 | | | 314 | | 297 | |
| | Accruing loans and advances 90 days overdue on which no interest has been suspended and on which no specific provision has been made: | | |
| UK | | 801 | | 1,110 | | 1,364 | | 898 | | 871 | | |
| Non-UK | | — | | 4 | | 22 | | 19 | | 14 | | |
| | |
| | | 801 | | 1,114 | | 1,386 | | 917 | | 885 | | |
| | |
| Non-accruing loans and advances: | | |
| Accruing loans and advances 90 days overdue on which no specific provision made | | |
| UK | | 1 | | — | | — | | 1 | | 125 | | | 568 | | 844 | |
| Non-UK | | — | | 30 | | 22 | | 27 | | 35 | | | — | | — | |
| | | | 1 | | 30 | | 22 | | 28 | | 160 | | | 568 | | 844 | |
| | Total non-performing loans and advances: | | |
| UK | | 1,223 | | 2,641 | | 1,879 | | 1,616 | | 1,773 | | | 882 | | 1,141 | |
| Non-UK | | — | | 135 | | 198 | | 177 | | 187 | | | — | | — | |
| | | | 1,223 | | 2,776 | | 2,077 | | 1,793 | | 1,960 | | | 882 | | 1,141 | |
| | | | |
| | | % | | % | | % | | % | | % | | |
| | |
| Non-performing loans and advances as a percentage of loans and advances to customers excluding finance leases | | 1.48 | | 3.25 | | 2.36 | | 2.22 | | 2.60 | | | | 0.75 | % | | | 1.04 | % |
| Provision as a percentage of total non-performing loans and advances | | 38.18 | | 31.15 | | 35.92 | | 27.77 | | 26.89 | | | | 44.67 | % | | | 40.93 | % |
|
Overall, non-performing loans and advances as a percentage of loans and advances to customers excluding finance leases have decreased from 3.25%1.04% to 1.48%,0.92%. This is due to the unwindsale of the contingent loans made bymajority of AFM’s wholesale lending book and to the long-term business fundsrun down of Scottish Providentthe Motor and Scottish Mutual to Abbey National Scottish Mutual Assurance Holdings in the course of 2004. These loans had provisions against them in 2003.Litigation businesses. Provisions as a percentage of total non-performing loans and advances have increased
46
Business and Financial Review
Balance Sheet Business Reviewcontinued
from
31.15%40.93% to
38.18%44.67% in
2004.2005. This movement is attributable to the
sale of the majority of AFM’s wholesale lending book. In 2004 AFM had only provided £81m against non-performing lending for AFM of £372m. This year AFM’s provision
raised in the Motor Finance and
Litigation Funding businesses.non-performing lending balances are nil.
The table below for 2003, 2002 and 2001 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | | | | | |
| | | 2003 | | | 2002 | | | 2001 | |
| | | £m | | | £m | | | £m | |
| |
| Accruing loans and advances on which a proportion of interest has been suspended and/or on which specific provision has been made: | | | | | | | | | | | | |
| UK | | | 1,531 | | | | 515 | | | | 717 | |
| Non-UK | | | 101 | | | | 154 | | | | 131 | |
| |
| | | | 1,632 | | | | 669 | | | | 848 | |
| |
| Accruing loans and advances 90 days overdue on which no interest has been suspended and on which no specific provision has been made: | | | | | | | | | | | | |
| UK | | | 1,110 | | | | 1,364 | | | | 898 | |
| Non-UK | | | 4 | | | | 22 | | | | 19 | |
| |
| | | | 1,114 | | | | 1,386 | | | | 917 | |
| |
| Non-accruing loans and advances: | | | | | | | | | | | | |
| UK | | | — | | | | — | | | | 1 | |
| Non-UK | | | 30 | | | | 22 | | | | 27 | |
| |
| | | | 30 | | | | 22 | | | | 28 | |
| |
| Total non-performing loans and advances: | | | | | | | | | | | | |
| UK | | | 2,641 | | | | 1,879 | | | | 1,616 | |
| Non-UK | | | 135 | | | | 198 | | | | 177 | |
| |
| | | | 2,776 | | | | 2,077 | | | | 1,793 | |
| |
| | | | | | | | | | | | | |
| | | | % | | | | % | | | | % | |
| |
| Non-performing loans and advances as a percentage of loans and advances to customers excluding finance leases | | | 3.25 | | | | 2.36 | | | | 2.22 | |
| Provision as a percentage of total non-performing loans and advances | | | 31.15 | | | | 35.92 | | | | 27.77 | |
| |
Potential problem loans and advances In retail banking, due to the homogenous nature of the loans, the impairment assessment is undertaken on a collective basis through the use of statistical techniques. The
large numbercollective assessment takes due consideration of
relatively homogeneousthe time in arrears, with higher times in arrears indicating a higher probability of the loans to go to possession. Individual assessments are only undertaken when the collateral on a secured residential
mortgageloan is repossessed or on commercial loans,
has enabled Abbey to develop statistical techniques to estimate capital and interest losses with reasonable accuracy.where the loan is overdue.
These techniques are
equally used to establish the amount of provisions for bad and doubtful
debts and interest suspensions.debts. In addition, Abbey’s policy of initiating prompt contact with customers in arrears, together with the nature of the security held, which in the case of advances secured on residential property
there has
been a substantial increasesubstantially increased in
security valuesvalue over the life of the
loan. Thisloans means that a significant proportion of non-performing loans will not result in a loss.
The categories of non-performing loans and advances, which are statistically most likely to result in losses are cases from 6 months to 12 months in arrears and 12 months or more in arrears. Losses on cases for which the property securing the loan has been taken into possession are evaluated individually with the amounts expected to be lost on realisation of the security being established with a high degree of certainty. The following table sets forth the values for each of these categories included in the non-performing loans and advances table above for each of the last five years.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | 2001 | | 2000 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | |
| | 6 months to 12 months in arrears | | 58 | | 62 | | 101 | | 114 | | 341 | | | 172 | | 105 | |
| 12 months or more in arrears | | 5 | | 44 | | 131 | | 111 | | 192 | | | 26 | | 15 | |
| Properties in possession | | 10 | | 7 | | 9 | | 14 | | 57 | | | 44 | | 18 | |
|
The approximate anticipated bad debt write-offstable below for 2003, 2002 and recoveries in respect of 2005 are as follows:2001 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | |
| | Group | |
Amounts written off | | £m | |
|
Advances secured on residential properties — UK | | | 4 | |
Unsecured personal advances — UK | | | 153 | |
Corporate advances — UK | | | 90 | |
Other secured advances — UK | | | 104 | |
Advances secured on residential properties — non-UK | | | — | |
Other secured advances — non-UK | | | — | |
Unsecured personal advances — non-UK | | | — | |
|
| | | 351 | |
|
| | | | | | | | | | | | | |
| | | 2003 | | | 2002 | | | 2001 | |
| | | £m | | | £m | | | £m | |
| |
| 6 months to 12 months in arrears | | | 62 | | | | 101 | | | | 114 | |
| 12 months or more in arrears | | | 44 | | | | 131 | | | | 111 | |
| Properties in possession | | | 7 | | | | 9 | | | | 14 | |
| |
56
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
| | | | |
| | Group | |
Recoveries | | £m | |
|
Advances secured on residential properties — UK | | | 1 | |
Other secured advances — UK | | | 6 | |
Unsecured personal advances — UK | | | 22 | |
Advances secured on residential properties — non-UK | | | — | |
Other secured advances — non-UK | | | — | |
Unsecured personal advances — non-UK | | | — | |
|
| | | 29 | |
|
Country risk exposure
Abbey has
minimalno exposure to countries currently experiencing liquidity problems.
Cross border outstandings The operations of Abbey involve operations in non-local currencies. These cross border outstandings are controlled through a well-developed system of country limits, which are reviewed to avoid concentrations of transfer, economic or political risks.
47
Business and Financial Review
Balance Sheet Business Reviewcontinued
Cross border outstandings, which exclude finance provided within
Abbey National plc and its subsidiaries,the Group, are based on the country of domicile of the borrower or guarantor of ultimate risk and comprise loans and advances to customers and banks, finance lease debtors, interest-bearing investments and other monetary assets denominated in currencies other than the borrower’s local
currency, but exclude balances arising from off-balance sheet financial instruments. At 31 December 2004, the countries where cross border outstandings exceeded 1% of adjusted assets (as defined below) was the US and consisted substantially of balances with banks and other financial institutions, governments and official institutions and commercial, industrial and other private sector entities. In this context, adjusted assets are total assets, as presented in the Consolidated Balance Sheet, excluding long-term assurance fund assets and balances arising from off-balance sheet financial instruments. On this basis, adjusted assets amounted to £140.2bn at 31 December 2004 compared to £146.6bn at 31 December 2003 and £174.4bn at 31 December 2002.
currency.
Cross border outstandings exceeding 1% of adjustedtotal assets
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Commercial, | |
| | | | | | | | | | | Banks and other | | | | | | | industrial and | |
| | | As % of adjusted | | | | | | | financial | | | Governments and | | | other private | |
| | | assets | | | Total | | | institutions | | | official institutions | | | sector entities | |
| | | % | | | £m | | | £m | | | £m | | | £m | |
| |
At 31 December 2004: | | | | | | | | | | | | | | | | | | | | |
| United States | | | 5.31 | | | | 7,448 | | | | 7,412 | | | | — | | | | 36 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2003: | | | | | | | | | | | | | | | | | | | | |
| United States | | | 3.09 | | | | 4,533 | | | | 2,693 | | | | 25 | | | | 1,815 | |
| Italy | | | 1.25 | | | | 1,836 | | | | 376 | | | | 1,395 | | | | 65 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2002: | | | | | | | | | | | | | | | | | | | | |
| United States | | | 1.65 | | | | 2,884 | | | | 1,112 | | | | 19 | | | | 1,753 | |
| Germany | | | 1.25 | | | | 2,176 | | | | 1,914 | | | | — | | | | 262 | |
| Canada | | | 1.19 | | | | 2,068 | | | | 1,536 | | | | 53 | | | | 479 | |
| Netherlands | | | 1.14 | | | | 1,993 | | | | 1,262 | | | | — | | | | 731 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Commercial, | |
| | | | | | | | | | | Banks and other | | | | | | | industrial and | |
| | | As % of total | | | | | | | financial | | | Governments and | | | other private | |
| | | assets | | | Total | | | institutions | | | official institutions | | | sector entities | |
| | | % | | | £m | | | £m | | | £m | | | £m | |
| |
At 31 December 2005: | | | | | | | | | | | | | | | | | | | | |
| United States | | | 1.55 | | | | 3,200 | | | | 3,200 | | | | — | | | | — | |
| |
| At 31 December 2004: | | | | | | | | | | | | | | | | | | | | |
| United States | | | 5.31 | (1) | | | 7,448 | | | | 7,412 | | | | — | | | | 36 | |
| |
| | |
| (1) | | Total assets are total assets, as presented in the Consolidated Balance Sheet, excluding long-term assurance fund assets and balances arising from off-balance sheet financial instruments. On this basis, total assets amounted to £140.2bn at 31 December 2004. |
The table below for 2003 contains information prepared under UK GAAP, Abbey’s previous GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Commercial, | |
| | | | | | | | | | | Banks and other | | | | | | | industrial and | |
| | | As % of total | | | | | | | financial | | | Governments and | | | other private | |
| | | assets | | | Total | | | institutions | | | official institutions | | | sector entities | |
| | | % | | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2003: | | | | | | | | | | | | | | | | | | | | |
| United States | | | 3.09 | (2) | | | 4,533 | | | | 2,693 | | | | 25 | | | | 1,815 | |
| Italy | | | 1.25 | (2) | | | 1,836 | | | | 376 | | | | 1,395 | | | | 65 | |
| |
| | |
| (2) | | Total assets are total assets, as presented in the Consolidated Balance Sheet, excluding long-term assurance fund assets and balances arising from off-balance sheet financial instruments. On this basis, total assets amounted to £146.6bn at 31 December 2003. |
Cross border outstandings between 0.75% and 1% of adjustedtotal assets At
31 December 2005 and 31 December 2004, Abbey had no
aggregate cross border outstandings between 0.75% and 1% of
adjustedtotal assets.
The 2003 information is prepared under UK GAAP, Abbey’s previous GAAP, which is not comparable to information prepared under IFRS. At 31 December 2003, Abbey had aggregate cross border outstandings with France of 0.96% of
adjustedtotal assets with aggregate outstandings of £1,408m.
At 31 December 2002, Abbey had no aggregate cross border outstandings between 0.75% and 1% of adjusted assets.
Tangible fixed assets
| | | | | | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Capital expenditure | | | 90 | | | | 49 | | | | 165 | |
| |
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Capital expenditure | | | 190 | | | | 115 | |
| |
Capital expenditure to 31 December 2005 amounted to £190m. The majority of this amount was incurred by Retail Banking and mostly related to computer infrastructure, computer software and furniture and fittings for branches. Capital expenditure to 31 December 2004 amounted to
£90m.£115m. The majority of this
amount, was incurred by
BankingsRetail Banking and
Savings mostly related to computer infrastructure. Capital expenditure to 31 December 2003 amounted to £49m. The majority of this, £46m, was incurred by Bankings and Savings mostly related to computer infrastructure.
Capital expenditure to 31 December 2002 amounted to £165m. Expenditure of £139m within Bankings and Savings mostly related to computer infrastructure, telecommunications,computer software and automatic teller machine investment. In Investmentfurniture and Protection and Abbey Financial Markets, £16m and £10m, respectively were spent.
fittings for branches.
Abbey had
971915 unique property interests at 31 December
20042005 consisting of
124 freehold leases
100 leasehold interests, and
859911 operating lease interests, occupying a total floor space of
527,557404,108 square meters.
Abbey’s leasehold57
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
property interests are subject to leases ranging from 1 to 999 years in maturity with the majority being 9 years in average duration and subject to annual contracted rental increases.
The number of unique property interests owned by Abbey is more than the number of individual properties as Abbey has more than one interest in some properties.
The majority of Abbey’s property interests are retail branches. Included in the above total are
24 branches36 properties that were not occupied by Abbey as at 31 December
2004.2005. Of Abbey’s individual properties,
852809 are located in the UK,
1513 in Europe, and
53 in the rest of the world. There are no material environmental issues associated with the use of the above properties.
Abbey has four principal sites at Triton Square, London, Nelson Street, Bradford, St. Vincent Street, Glasgow, and Grafton Gate East, Milton Keynes. The main computer centre is Shenley Wood House in Milton Keynes. These properties are held under operating leases. The registered office of Abbey is located at Abbey National House, 2 Triton Square, Regent’s Place, London NW1 3AN.
Management believes its existing properties and those under construction, in conjunction with the operating lease arrangements in place with Mapeley Columbus Limited, are adequate and suitable for its business as presently conducted or to meet future business needs. All properties are adequately maintained.
48
Business and Financial Review
Balance Sheet Business Reviewcontinued
Capital management and resources Capital management and capital allocation Capital adequacy and capital resources are monitored by Abbey on the basis of techniques developed by the Basel Committee on Banking Supervision (the ‘Basel Committee’) and subsequently implemented in the UK by the UK regulator, the Financial Services Authority (FSA). With Abbey and its subsidiaries being part of Santander, Abbey has both a local ‘host’ regulator (FSA) and a lead ‘home’ regulator, which for both Santander and Abbey is the Banco de España. Abbey is rated, and its capital is managed, on a stand-alone basis, however Abbey does take account of the requirements of both the host and home regulators in its capital management decision-making.
The supervision of capital adequacy for banks in the European Union is governed by European Union Directives, and specifically the Banking Consolidation Directive and the Capital Adequacy Directives.
After continuing consultation, the Basel Committee has developed a new framework to replace the 1988 Capital Accord, which the European Union has adapted and issued as Capital Adequacy Directive three. It is currently expected that the New Capital Accord will be implemented by Abbey from 1 January 2008, which is consistent with Santander group companies. Although the Basel Committee intends to deliver a more risk-sensitive methodology, including a new operational risk capital charge, its goal is that on average, the new approach should not raise nor lower regulatory capital for the banking sector. The international minimum risk asset ratio of 8% will be unchanged.
On the basis of the developing proposals, management does not expect any material adverse change to the business of Abbey to arise from the new capital adequacy framework.
Capital adequacy requirements
Abbey adopts a centralised capital management approach, based on an assessment of both regulatory requirements and the economic capital impacts of our businesses. The various regulatory minimum capital criteria are augmented by internally assigned buffers. These ratios, buffers and restrictions, together with the relevant costs of differing capital instruments and a consideration of the various other capital management techniques are used to shape the most cost-effective structure to fulfil Abbey’s capital requirement.
The most obvious capital management techniques considered are the issue of equity, preference and subordinated capital instruments. Other levers available include tools involving equity and retained earnings. Another obvious measure is control of the amount of assets and risk on the balance sheet and, finally, the use of asset mitigation tools designed to reduce the capital required to back certain classes of asset by disposing of part of the risk associated with them.
Abbey’s capital allocation control process has two main determinants: the capital volumes approved to business units within the planning process, and the need to have access to a capital buffer which is sufficient to cover the capital impact of major contingent events or “capital shocks”. Capital allocation decisions will be influenced by comparison of returns earned on regulatory equity, conducted as part of planning reviews under which capital levels for operating divisions are approved or when additional capital requests are received.
Capital adequacy requirements
Capital adequacy and capital resources are monitored by Abbey on the basis of techniques developed by the Basel Committee on Banking Supervision (the “Basel Committee”) and subsequently implemented in the UK by the UK regulator, the Financial Services Authority.
The supervision of capital adequacy for banks in the European Union is governed by European Union Directives, and specifically the Banking Consolidation Directive and the Capital Adequacy Directives.
After continuing consultation, the Basel Committee has developed a new framework to replace the 1988 Capital Accord, which the European Union has adapted and issued as Capital Adequacy Directive three. It is currently expected that the New Capital Accord will be implemented during 2007 and 2008, although implementation in the European Union will be dependent on the adoption of a directive amending the Banking Consolidation Directive and the Capital Adequacy Directives. Although the Basel Committee intends to deliver a more risk-sensitive methodology, including a new operational risk capital charge, its goal is that on average, the new approach should not raise nor lower regulatory capital for the banking sector. The international minimum risk asset ratio of 8% will be unchanged.
On the basis of the developing proposals, management does not expect any material adverse change to the business of Abbey to arise from the new capital adequacy framework.
The following capital ratios, which exceed both the Basel Committee minimum risk asset ratio of 8% and the Financial Services Authority’s specific recommendation for Abbey, are calculated for Abbey as supervised by the Financial Services Authority. Abbey recognises the additional security inherent in Tier 1 capital, and hence also presents a Tier 1 to risk-weighted assets ratio. An equity Tier 1 ratio (Tier 1 excluding preference shares) is also presented.
5849
Operating
Business and Financial Review Balance Sheet OperatingBusiness Reviewcontinued
Group capital
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| Balance sheet: | | |
| Distributable reserves and shareholders’ funds | | 4,697 | | 4,961 | | 6,196 | | | 3,853 | | 5,004 | |
| Life assurance reserves — non-distributable | | 307 | | 353 | | 153 | | |
Less: goodwill recognised(1) | | | (1,069 | ) | | | (1,068 | ) | | | (1,277 | ) | |
| Less: goodwill recognised | | | | (171 | ) | | | (1,069 | ) |
| | Core equity Tier 1 | | 3,935 | | 4,246 | | 5,072 | | | 3,682 | | 3,935 | |
| Tier 1 capital instruments | | 1,893 | | 1,957 | | 2,174 | | | 1,932 | | 1,893 | |
| Total Tier 1 capital | | 5,828 | | 6,203 | | 7,246 | | | 5,614 | | 5,828 | |
| | Undated subordinated debt | | 2,604 | | 2,976 | | 3,065 | | | 2,641 | | 2,604 | |
| Dated subordinated debt | | 2,204 | | 2,513 | | 2,745 | | | 2,620 | | 2,204 | |
| General provisions and other | | 177 | | 531 | | 394 | | |
| Incurred but not observed provisions and other | | | 85 | | 177 | |
| Total Tier 2 capital | | 4,985 | | 6,020 | | 6,204 | | | 5,346 | | 4,985 | |
| | Less: | | |
| PFS: investments in life assurance businesses | | | (3,789 | ) | | | (3,521 | ) | | | (3,384 | ) | | | (3,682 | ) | | | (3,789 | ) |
| PFS: investment in non-life assurance businesses | | | (68 | ) | | | (93 | ) | | | (166 | ) | | | (296 | ) | | | (68 | ) |
| Portfolio Business Unit | | | (225 | ) | | | (476 | ) | | | (807 | ) | | — | | | (225 | ) |
| Total supervisory deductions | | | (4,082 | ) | | | (4,090 | ) | | | (4,357 | ) | | | (3,978 | ) | | | (4,082 | ) |
| Total regulatory capital | | 6,731 | | 8,133 | | 9,093 | | | 6,982 | | 6,731 | |
| Risk-weighted assets: | | |
| Personal Financial Services | | 52,198 | | 52,158 | | 46,019 | | | 53,434 | | 52,198 | |
| Portfolio Business Unit | | 3,973 | | 8,997 | | 32,686 | | | 2,538 | | 3,973 | |
| Total Abbey risk-weighted assets | | 56,171 | | 61,155 | | 78,705 | | | 55,972 | | 56,171 | |
| | |
| Banking book | | 50,416 | | 55,873 | | 72,900 | | | 50,108 | | 50,416 | |
| Trading book | | 5,755 | | 5,282 | | 5,805 | | | 5,864 | | 5,755 | |
| Total Abbey risk-weighted assets | | 56,171 | | 61,155 | | 78,705 | | | 55,972 | | 56,171 | |
| | | |
Capital ratios: | | |
| | | |
| Risk asset ratio (%) | | 12.0 | | 13.3 | | 11.6 | | | | 12.5 | % | | | 12.0 | % |
| Tier 1 ratio (%) | | 10.4 | | 10.1 | | 9.2 | | | | 10.0 | % | | | 10.4 | % |
| Equity Tier 1 ratio (%) | | 7.0 | | 6.9 | | 6.4 | | | | 6.6 | % | | | 7.0 | % |
| Banking Equity Tier 1 ratio (%) | | 4.4 | | 4.7 | | 4.6 | | |
|
(1) | | Goodwill recognised in the table above of £1,069m differs to that quoted on a statutory basis of £317m, largely as it is deducted from Tier 1 in full on acquisition, whilst the statutory treatment is to amortise the charge over a number of years, together with impairment tests being applied. The significant impairments to goodwill that have been taken in prior years are the principal cause of this difference. |
As at 31 December
2004,2005, the Equity Tier 1 ratio and the risk asset ratio were
7.0%6.6% and
12.0%12.5% respectively.
The increase in the Equity Tier 1 ratio was primarily due to the reduction in Portfolio Business Unit risk-weighted assets. Tier 1 capital decreased by
£375m£214m to
£5,828m,£5,614m, largely driven by the level of profit attributable to shareholders of
£80m and payment of ordinary dividends (£583m), including a special dividend£420m partly offset by IAS adjustments to
Abbey shareholders subsequent to the completion of the takeover by Banco Santander Central Hispano, S.A. Tier 1 capital includes a £307m non-distributable reserve, representing income from long-term assurance businesses recognised in the Profit and Loss Account, but not distributed by the long-term assurance funds.reserves.
The
decreaseincrease in Tier 2 capital of
£1,035m£361m was principally due to
fourtwo subordinated debt issues
being retired, together with amortizationin April (of which £554m was outstanding at 31 December 2005) offset by amortisation of subordinated capital and a reduction in general provisions.
Supervisory deductions primarily represent capital invested in non-banking businesses — mainly the equity investment and retained earnings in life assurance and insurance companies. The movement in the year largely reflects the life assurance profit after tax and the unwind of special purpose vehicles in the Portfolio Business Unit.
The 2004 figures have not been restated for the change to IFRS as the change to IFRS was only implemented for UK capital adequacy reporting from the second quarter of 2005.
Risk-weighted assets (RWAs) Personal Financial Services risk-weighted assets
were at the same level as at the end of December 2003.increased by £1.2bn. This was
principally the result of
an increase in Retail Personal Financial Services risk-weighted assets of £2.1bn after securitisation, offset by reductions of £1.7bn in Abbey Financial Markets Personal Financial Services activitiessecured and
a £0.4bn decrease relating to the sale of the Abbey Business asset and leasing companies.unsecured loan growth.
Risk-weighted assets in the Portfolio Business Unit have decreased by
£5.0bn£1.4bn reflecting the continued asset disposals process.
59
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Reconciliation of Equity Tier 1
| | | | | | | | | |
| | | £m | | | % | |
| |
| Equity Tier 1 at 1 January 2004 | | | | | | | 6.9 | |
| Equity impacts: | | | | | | | | |
- Profit after tax(1) | | | 381 | | | | 0.6 | |
- Dividends and other(2) | | | (692 | ) | | | (1.1 | ) |
| |
| | | | (311 | ) | | | (0.5 | ) |
| Risk-weighted asset impacts: | | | | | | | | |
| - Personal Financial Services growth (excl. securitisations) | | | 2,144 | | | | (0.2 | ) |
| - Securitisations (net of roll-offs) | | | (266 | ) | | | — | |
| - PFS business sales | | | (1,838 | ) | | | 0.2 | |
| - PBU business and asset sales | | | (5,024 | ) | | | 0.6 | |
| |
| | | | (4,984 | ) | | | 0.6 | |
| |
Equity Tier 1 at 31 December 2004 | | | | | | | 7.0 | |
| |
(1) | | Loss after tax for regulatory capital purposes excludes goodwill amortisation, as goodwill is deducted from Tier 1 in full on acquisition. Additionally, the regulatory group structure excludes certain non-banking entities, resulting in a slightly different tax charge to that for the statutory group. |
|
(2) | | “Dividends and other” includes the net impact of ordinary dividends, preference dividends, scrip dividends and movements in minority interests (including joint ventures). |
Analysis of life assurance capital
| | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| Value of long-term assurance business | | £m | | £m | | | £m | | £m | |
| | Discounted value of future profits | | 1,540 | | 1,171 | | |
| Discounted value of future profits (net of tax) | | | 1,421 | | 1,540 | |
| Net assets held by long-term assurance funds | | 1,428 | | 1,101 | | | 1,414 | | 1,428 | |
| | Embedded value of the long-term assurance business | | 2,968 | | 2,272 | | |
| Contingent loan to Scottish Provident’s with-profits sub fund | | — | | 618 | | |
| IFRS embedded value of the long-term assurance business | | | 2,835 | | 2,968 | |
| Opening 2005 IFRS adjustment | | | — | | | (166 | ) |
| | Total value of long-term assurance business | | 2,968 | | 2,890 | | | 2,835 | | 2,802 | |
| Contingent loan to Scottish Mutual | | — | | 575 | | |
| Other net assets of shareholder funds | | 997 | | 427 | | | 847 | | 805 | |
| Subordinated debt | | | — | | 200 | |
| | Total value of long-term assurance business | | 3,965 | | 3,892 | | | 3,682 | | 3,807 | |
|
The capital structure of the life companies changed significantly in July 2004 following the completion of Abbey’s review of the with-profits funds in Scottish Mutual and Scottish Provident and its subsequent agreement with the Financial Services Authority. Both contingent loans were repaid with no incremental capital or adverse profit impact over and above that already reported. A significant contribution was made to the Scottish Mutual with-profits fund, which was covered by provisions set up in prior years. In addition, the hedging programme was extended and moved into the with-profits funds to allow them to stand independently, reducing policyholder and shareholder risk.
The discounted value of future profits represents the present value of the surplus expected to emerge in the future from the business in-force. The increasedecrease in discounted value of future profits since December 20032004 of £369m£119m to £1,540m£1,421m was mainly driven by the impact of IFRS 4 resulting in the removal of the future profits on investment contracts, the impact of continued
50
Business and Financial Review
Balance Sheet Business Reviewcontinued
lapses on with profits and protection business in addition to the unwind of the
contingent loans although growth inexisting discounted value of profits. This was partially offset by an increase from new business
saleswritten in
Scottish Provident also contributed. These increases were partly offset by policy maturities2005 and
stronger levels of surrenders in with-profits business.improved mortality experiences.
Net assets of the shareholders interest in the long-term business fund of
£1,428m£1,414m were
£327m above£14m below the December
20032004 level, as a result of the
reallocationrecognition of the pension deficit and repayment of capital
and dividends to
Abbey partially offset by earnings in 2005 on the
long-term fund from the shareholders fund following the unwind of the contingent loan arrangement.existing assets.
Other net assets of the
shareholdersshareholders’ funds have increased by
£570m£42m from December
20032004 representing capital retained within the
shareholders funds following the unwind of the contingent loan arrangement.shareholders’ funds.
A reconciliation between the opening and closing
IFRS embedded value of the long-term assurance business is as follows:
Movements in IFRS embedded value of the long-term assurance business
| | | | | |
| | | £m | |
| |
Opening value as at 1 January 20042005 | | | 2,2722,802 | |
| Transfers (to)/from shareholders’ funds | | | 731— | |
| Increase in value of the long-term assurance business before tax | | | 76194 | |
| Tax on increase in value of the long-term assurance business | | | (9254 | ) |
| Dividends paid to Abbey | | | (1940 | ) |
| Capital repatriated to Abbey | | | (67 | ) |
| |
Closing value at 31 December 20042005 | | | 2,9682,835 | |
| |
Before the consideration of market movements and other embedded value charges and rebasing adjustments, the increase in the value of long-term business is £108m pre-tax (£78m after tax) and is achieved through ongoing management of the existing business and writing new business. (The Personal Financial Services portion of this is £141m pre-tax and £106m after tax). The long-term fund total investment variances and other adjustments of £(32)m pre-tax, (£94)m after tax relate to the adjustments to period-end market values, and guaranteed liabilities/market value adjustments but exclude restructuring costs.
60
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Injections into the long-term funds included £546m to Scottish Provident and £197m to Scottish Mutual in July 2004, primarily driven by the unwind of the contingent loan arrangement. Abbey National Life repaid £31m from the long-term fund in March 2004 with £19m of this being paid as dividend to Abbey.
Life assurance cashflows
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Capital injections made from Group | | | 5 | | | | 343 | |
| Dividends and interest paid to Group | | | (21 | ) | | | (181 | ) |
| |
| Net cashflows (to)/from Group | | | (16 | ) | | | 162 | |
| |
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| Capital injections made from Abbey | | | — | | | | 5 | |
| Dividends and interest paid to Abbey | | | (51 | ) | | | (21 | ) |
| Capital repaid to Abbey | | | (267 | ) | | | — | |
| |
| Net cashflows (to)/from Abbey | | | (318 | ) | | | (16 | ) |
| |
Intercompany flows to and from Group incurred during the general course of business, such as interest, centrally based IT services and sales commissions for branch-based products, are excluded from the table above.
Realistic liabilities
The following shows the aggregate realistic assets and liabilities of the two UK with-profit funds managed by Scottish Mutual Assurance plc and Scottish Provident Limited, at 31 December 2004.
| | | | | | | | | | | | | |
| | | SMA | | | SPL | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| Asset shares | | | 7,704 | | | | 4,049 | | | | 11,753 | |
| Cost of guarantees | | | 621 | | | | 175 | | | | 796 | |
| Cost of financial options | | | 106 | | | | 149 | | | | 255 | |
| Other liabilities | | | 65 | | | | 410 | | | | 475 | |
| |
Total realistic liabilities | | | 8,496 | | | | 4,783 | | | | 13,279 | |
| |
| Regulatory value of asset | | | 8,562 | | | | 4,900 | | | | 13,462 | |
| Realistic adjustments | | | 9 | | | | 2 | | | | 11 | |
| |
Total realistic assets | | | 8,571 | | | | 4,902 | | | | 13,473 | |
| |
Excess realistic assets | | | 75 | | | | 119 | | | | 194 | |
| |
Asset shares are calculated retrospectively on the basis of the actual experience of the fund. The cost of guarantees and financial options are calculated using a stochastic simulation methodology, with the model calibrated to the relevant financial markets at 31 December 2004.
The base value of guarantees is calculated using a stochastic asset-liability model. The guarantee cost is derived for each guarantee bearing policy by calculating the excess of the guaranteed policyholder payout over the value of the asset share backing the policy on the guarantee exercise date and discounting back.
Options are assumed to be taken up at a dynamic rate that depends on how far in or out of the money the option is under each economic scenario. Once the option is exercised it is valued as a guarantee.
Options and guarantees
The guarantees within the with-profit funds fall into three main categories; cash guarantees, guaranteed annuity options, and guaranteed cash options.
Guaranteed annuity options and guaranteed cash options represent the right to convert contractual benefits denominated in terms of cash into annuities and vice versa, at conversion rates guaranteed in advance, usually at inception of the policy.
For conventional with-profit business, cash guarantees constitute the minimum amount payable at maturity (or other specified date), for example, in terms of guaranteed sums assured and vested bonuses declared at the valuation date, excluding discretionary terminal bonus.
For unitised with-profit business, cash guarantees constitute the minimum amount payable at specified future dates in terms of the value of units allocated to the policy as at the valuation date. Such units usually have a guaranteed minimum rate of future accumulation (which may be zero, but can be higher for some older classes of business), along with a guarantee that no negative market value adjustment will be applied either on maturity, or, in the case of certain unitised with-profit bonds, at a specified future date or range of dates exercisable at the policyholder’s discretion. Any such guarantees applicable to future contractual premiums are also included within the calculation.
Outside the UK with-profit funds the extent of guarantees and options included in the terms of in force business will not, in aggregate, have a material effect on the amount, timing or uncertainty of the company’s future cashflows.
61
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Assumptions
The assumptions that have the greatest effect on the measurement of liabilities, including options and guarantees are:
> | economic assumptions; | |
|
> | persistency rates; |
|
> | expenses; |
|
> | mortality;Intercompany flows to and |
|
> | take-up rates from Abbey incurred during the general course of guaranteesbusiness, such as interest, centrally based IT services and options. |
Economic assumptions
For the purposes of the determination of realistic assets and liabilities, a proprietary Economic Scenario Generator package that has been calibrated to market prices is used. For non-realistic (“regulatory basis”) liabilities, economic assumptions are based on the prevailing market rates and current asset mix of each fund and include margins for prudence.
Persistency rates
The magnitude of policy lapses has a significant impact on the cost of providing guarantees, particularly of unitised with-profit bond products. Lapses are also important in the case of business with guaranteed annuity and cash options where policyholders may choose to transfer the policy away from the company before the guarantee crystallises.
These rates are calculated using standard actuarial methodology, on the basis of experienced rates, with adjustments as appropriate where past experience does not capture the policy features now in force, or the prevalent economic conditions.
Expenses
Expenses are based on future budgeted levels allowing for inflation in future years.
Mortality
As with persistency rates these assumptions are calculated in line with standard actuarial methodology, on the basis of past experience adjusted for a best estimate of how the various factors affecting the parameters may change in future — for example mortality improvements for annuity business. Mortality assumptions, which are based on standard industry published tables, are more stable than the persistency rates.
Take-up rates
The rate of take-up of future guarantees and options affects the quantum and timing of guaranteed payments identifiedsales commissions for branch-based products, are excluded from the table above. The assumptions are determined by considering past experience and taking into account how far the options are in and out of the money, on the basis that the further the option is in the money the greater the propensity for it to be exercised by policyholders.
Analysis of available capital
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | SMA | | | SMPL | | | ANL | | | SPL | | | SMI | | | SPILA | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Total shareholders funds (excl fund for future appropriations) | | | 1,371 | | | | 94 | | | | 360 | | | | 1,342 | | | | 117 | | | | 33 | | | | 3,317 | |
Fund for future appropriations(1) | | | 67 | | | | — | | | | — | | | | 793 | | | | 19 | | | | — | | | | 879 | |
Regulatory adjustments(2) | | | (268 | ) | | | (23 | ) | | | (50 | ) | | | (635 | ) | | | — | | | | — | | | | (976 | ) |
Other capital(3) | | | 325 | | | | — | | | | — | | | | 124 | | | | — | | | | — | | | | 449 | |
| Total available regulatory capital | | | 1,495 | | | | 71 | | | | 310 | | | | 1,624 | | | | 136 | | | | 33 | | | | 3,669 | |
| |
(1) | | The fund for future appropriations represents the excess assets over liabilities in the with-profit funds calculated on a statutory basis. |
|
(2) | | Regulatory adjustments include deferred acquisition costs and the removal of negative sterling reserves and acquired discounted value of future profits. |
|
(3) | | Other capital includes subordinated debt and implicit items. |
The total shareholder funds shown are on a draft Modified Statutory Solvency Basis (MSSB). Reconciliation to the Balance Sheet amount is given in the following table.
| | | | |
| | £m | |
|
Total value of long-term assurance business | | | 3,965 | |
Less: non-acquired value of future profits | | | (1,158 | ) |
Plus: deferred acquisition costs | | | 293 | |
Plus: goodwill | | | 227 | |
Other (including deferred tax) | | | (10 | ) |
|
Total shareholders’ funds (MSSB) | | | 3,317 | |
|
62
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Regulatory Capital Requirements
Under the Financial Services Authority Integrated Prudential Sourcebook, the capital requirements for life funds are determined from the minimum of the Pillar 1 assessment (based upon specific Financial Services Authority valuation rules) and the Pillar 2 risk based capital assessment (based upon the firm’s individual assessment of risk and controls). The Pillar 1 assessment also introduces a “twin peaks” approach for with-profit funds, which requires a comparison of the minimum solvency and resilience requirements, determined in accordance with Financial Services Authority valuation rules, with the capital position calculated reflecting a realistic value of the liabilities coupled with a risk capital margin. The determination of the risk capital margin depends on various actuarial and other assumptions about potential changes in market prices, and the actions management would take in the event of various adverse changes in market conditions. In addition, this assessment is open to challenge by the Financial Services Authority who may issue individual capital guidance following any review, and thereby require an increase in the level of capital needed under Pillar 2.
The offshore companies Scottish Provident International Life Assurance Limited and Scottish Mutual International Plc are subject to regulations in the Isle of Man and Ireland respectively, which are similar to the Financial Services Authority statutory solvency requirements.
At 31 December 2004 the estimated solvency coverage for each of the life companies was as follows:
| | | | |
| | % | |
|
Scottish Mutual Assurance | | | 260 | |
Scottish Mutual Pensions Limited | | | 1,150 | |
AN Life | | | 309 | |
Scottish Provident | | | 183 | |
Scottish Mutual International | | | 163 | |
Scottish Provident International | | | 1,127 | |
|
These reflect the new regulatory regime introduced in 2004 and are not directly comparable to last year’s solvency ratios. However, actions taken during 2004 have in general strengthened the solvency positions of the life companies.
Amounts have been earmarked in the Scottish Provident Non-Profit fund (£125m) and Scottish Mutual Non-Profit fund (£250m) in respect of risks arising in the respective with-profit funds as Risk Based Capital (RBC). These RBC amounts will only be utilised after taking into account any management actions deemed appropriate and are not expected to be utilised on a realistic basis.
Capital sensitivity
The sensitivities of assets and liabilities to changes in market conditions, key assumptions and other variables have been carried out in the Peak 1 and Peak 2 capital assessment. There has been shown to be sufficient capital under the stochastic modelling exercise. For the Individual Capital Assessment (ICA) the capital availability for each major life entity was investigated. A range of scenario and stress tests were carried out which when combined would constitute a 99.5% over one year default test. Incorporating management actions there is sufficient capital to withstand adverse scenarios.
Capital management policies
At 31 December 2004 there is sufficient available capital to cover the Financial Services Authority’s capital requirement. Most of the shareholder capital in Abbey’s life businesses is located in the shareholders funds, which are mainly held in cash and high-grade short-term debt securities. Shareholders capital in the non-profit business is invested in the same asset instruments as the assets backing the liabilities. With respect to the with-profit funds, management can take actions to prevent deterioration of capital position should such circumstance arise, in accordance with the disclosures made in the respective Principles and Practices of Financial Management (PPFM) documents.
In 2004, Abbey entered into significant hedging arrangements to manage exposure to the cost of options and guarantees in the with-profit funds.
Capital independence
All life insurance legal entities within Abbey have sufficient capital on a stand-alone basis, and therefore no capital injections are expected to be needed in the future. As the companies operate as separate legal entities any transfer of capital out of any life companies would require the continued satisfaction of various regulatory capital requirements.
Intra-group capital arrangements
Prior to the stabilisation project concluded in July 2004, Scottish Mutual and Scottish Provident had contingent loan arrangements within the Abbey National Group. Post the stabilisation project there are no intra-group capital arrangements apart from internal reinsurance arrangements in relation to the reinsurance of a large portion of the Scottish Mutual International with-profit business and all of the with-profit business of Abbey National Life and Scottish Mutual Pensions Ltd into the Scottish Mutual with-profit fund.
63
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Off-Balance Sheet Arrangements
In the ordinary course of business, Abbey issues guarantees on behalf of customers. The significant types of guarantees are as follows:
| > | | It is normal in the UK to issue cheque guarantee cards to current account customers holding chequebooks, as retailers do not generally accept cheques without such form of guarantee. The guarantee is not automatic but depends on the retailer having sight of the cheque guarantee card at the time the purchase is made. The bank is liable to honour these cheques even where the customer doesn’t have sufficient funds in his account. The bank’s guarantee liability is in theory the number of cheques in issue multiplied by the amount guaranteed per cheque, which can be between £50 and £250.£100. In practice most customers will only write cheques when they have funds in their account to meet the cheque, and cheques are frequently presented without the benefit of the cheque guarantee. On this basis management have assessed the risk with respect to this guarantee as highly remote and consider the risk of loss as part of the provisioning requirement on bank accounts. |
| |
| > | | Standby letters of credit also represent the taking on of credit on behalf of customers when actual funding is not required, normally because a third party is not prepared to accept the credit risk of Abbey’s customer. These are also included in the normal credit provisioning assessment alongside other forms of credit exposure. |
| |
| > | | Abbey, as is normal in such activity, gives representations, indemnities and warranties on the sale of subsidiaries. The maximum potential amount of any claims made against these is usually significantly higher than actual settlements. Appropriate provision is made with respect to management’s best estimate of the likely outcome, either at the time of sale, or subsequently if additional information becomes available. |
See
notes 46, 47 and 48Note 44 to the Consolidated Financial Statements for additional information regarding Abbey’s guarantees as well as its commitments and contingencies.
In the ordinary course of business, Abbey also enters into securitisation
transactions.transactions as described in Note 21 to the Consolidated Financial Statements. The Holmes securitisation vehicles are consolidated under
UK GAAP, though a linked presentation is used whereby the non-recourse securities liabilities of the vehicles are netted off on the face of the balance sheet against the related mortgage assets.IFRS. The mortgage assets continue to be administered by Abbey. The Holmes securitisation vehicles provide Abbey with an important source of stable long-term funding and also a regulatory capital benefit.
The assets are therefore treated as on-balance sheet. Under US GAAP the vehicles are deconsolidated in accordance with SFAS 140 and an interest-only strip calculated. This is a US GAAP adjustment only and does not affect the way the vehicles or underlying assets are managed.
Liquidity risk is the potential that, although remaining solvent, Abbey does not have sufficient
liquid financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost.
These obligations include the repayment of deposits on demand or at their contractual maturity; the repayment of loan capital and other borrowings as they mature; the payment of insurance policy benefits, claims and surrenders; the payment of lease obligations as they become due; the payment of operating expenses and taxation; the payment of dividends to shareholders; the ability to fund new and existing loan commitments; and the ability to take advantage of new business opportunities. Abbey’s board
The Board is responsible for defining the liquidity management and control framework at Abbey and has approved a Liquidity Risk Policy to cover major liquidity risks and define key liquidity limits.limits in setting Abbey’s liquidity risk appetite. Along with its internal Liquidity Risk PolicyManual, which sets out the liquidity risk control framework and policy, Abbey abides by the “Sound Practices for Managing Liquidity in Banking Organisations” set out
51
Business and Financial Review
Balance Sheet Business Reviewcontinued
by the Basel Committee as its standard for liquidity risk management and control. Abbey also complies with the Financial Services Authority’s liquidity requirements, and has appropriate liquidity
policiescontrols in place.
Analysis of cash flow movementsCash flow forecasts at the consolidated and subsidiary levels are provided on a monthly basis, and we use trend and variance analyses to project future cash needs, making adjustments to the forecasts when needed. The table below shows our recent net cash flows:
| | | | | | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Net cash (outflow)/inflow from operating activities | | | (2,019 | ) | | | (32,678 | ) | | | (10,952 | ) |
| Net cash (outflow) from returns on investments and servicing of finance | | | (374 | ) | | | (372 | ) | | | (462 | ) |
| Taxation paid (outflow) | | | (12 | ) | | | (99 | ) | | | (496 | ) |
| Net cash inflow/(outflow) from capital expenditure and financial investment | | | 534 | | | | 25,189 | | | | 9,555 | |
| Acquisitions and disposals | | | 3,180 | | | | 8,803 | | | | (536 | ) |
| Equity dividends paid | | | (697 | ) | | | (216 | ) | | | (648 | ) |
| Net cash (outflow)/inflow from financing | | | (800 | ) | | | (193 | ) | | | 687 | |
| |
| Increase/(decrease) in cash | | | (188 | ) | | | 434 | | | | (2,852 | ) |
| |
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Net cash (outflow)/inflow from operating activities | | | (5,230 | ) | | | (4,831 | ) |
| Net cash (outflow) from investing activities | | | 2,036 | | | | 4,131 | |
| Net cash inflow/(outflow) from financing activities | | | 96 | | | | (1,497 | ) |
| |
| Increase/(decrease) in cash and cash equivalents | | | (3,098 | ) | | | (2,197 | ) |
| |
64
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
20042005 compared to 2003
2004
Net cash movements decreased by
£622m£901m to a net
cash outflow of
£(188)m£3,098m in
20042005 as compared with a net cash
inflowoutflow of
£434m 2003. | £2,197m in 2004. The decrease was primarily due to: |
|
> | a decrease in the net outflow from operating activities due to lower debt issue redemptions compared to 2003 when a significant amount of debt was redeemed as a result of the Portfolio Business Unit disposal programme. |
|
> | offsetting this was a lower net inflow arising from the significant sales of Portfolio Business Unit investment securities, lower inflows from sales of subsidiaries, increased outflows from equity dividends paid and increased cash outflows from financing due to the redemption of subordinated debt. |
2003 compared to 2002
Net cash movements increased by £3,286m to a net inflowdecrease in cash equivalents of £434m£3,555m, driven by an increase in 2003 as comparedtrading deposits at banks with a net outflowmaturity of £2,852mless than three months, partly offset by an increase in 2002.
| The increase was primarily due to: |
|
> | an increase in the net outflow from operating activities due to a lower level of debt issuance consistent with the lower funding requirement arising from the run down of the Portfolio Business Unit; and |
|
> | offsetting this was the net inflow arising from the significant sales of Portfolio Business Unit investment securities and subsidiaries. |
debt securities with a maturity of less than three months. The movements are due to an increase in Cater Allen International Limited (CAIL) trading activity, which was constrained in 2004 because of Abbeys strategic decision to focus on the Personal Financial Services business and to reduce the operations of the Portfolio Business Unit business.
Abbey has both wholesale and retail sources of funding and attracts them through a variety of entities. The retail sources primarily originate from the Retail savings business, which forms part of the core Personal Financial Services activity. Although primarily callable, these funds provide a stable and predictable core of liquidity due to the nature of the retail accounts and the breadth of personal customer relationships.
Abbey’s wholesale funding sources are diversified across funding types and geography. Through the wholesale markets, Abbey has active relationships with over 500 counterparts across a range of sectors, including banks, central banks, other financial institutions, corporates and investment funds. Other sources of funding include collateralised borrowings,
mortgage securitisations
(primarily mortgages) and long-term debt issuance. While there is no certainty regarding money market lines of credit extended to Abbey, they are actively managed as part of the ongoing business. Currently, no guaranteed lines of credit have been purchased, as they are not common in European banking practice.
The ability to sell assets quickly is also an important source of liquidity for Abbey. Abbey holds marketable investment securities, such as central bank, eligible government and other debt securities, which could be disposed of, either by entering into sale and repurchase agreements, or by being sold to provide additional funding should the need arise. Abbey also makes use of asset securitisation arrangements to provide alternative funding sources.
Under Abbey’s Liquidity Risk Policy, in the calculation of liquidity ratios, Abbey only relies on 95% of retail deposits with an allowance for up to 5% of such deposits being withdrawn at any time. With respect to wholesale deposits, for a period up to and including a month, there is no reliance on external wholesale deposits being renewed. These approaches are more conservative than would be expected based on historical experience with respect to these types of deposits.
Short-term funding is accessed through money market instruments, including time deposits, certificates of deposit and commercial paper. Medium-Medium to long-term funding is accessed primarily through the stand-alone bond markets. In addition Abbey utilises its euro and, separately, Securities and Exchange Commission-registered medium-term note programmes. The major debt issuance programmes managed by Abbey National Treasury Services on its own behalf, except for the US commercial paper programme which is managed for Abbey National North America LLC, a guaranteed subsidiary of Abbey, are set forth below:
| | | | | | | | | |
| Programme | | Outstanding at 31 December 2004 | 2005 | | Markets issued in: | |
| |
| $15bn medium-term notes | | $10.5bn9.5bn
| | European
|
| $7bn medium-term notes | | $ 1.6bn3.6bn
| | United States
|
| $4bn commercial paper | | $ 0.7bn0.3bn
| | European
|
| $20bn commercial paper | | $ 2.5bn9.5bn
| | United States
|
| |
The principal uses of liquidity for Abbey are the funding of
Retail Banking
and Savings lending and investment securities, payment of interest expense, dividends paid to shareholders, and the repayment of debt. Our ability to pay dividends depends on a number of factors, including our regulatory capital requirements, distributable reserves and financial performance.
| | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period | |
| | | | | | | Less than | | | 1-3 | | | 3-5 | | | More than 5 | |
| | | Total | | | 1 year | | | years | | | years | | | years | |
| Contractual obligations | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Liabilities of long-term assurance funds | | | 27,180 | | | | 3,262 | | | | 3,533 | | | | 3,533 | | | | 16,852 | |
| Debt securities in issue | | | 21,969 | | | | 11,360 | | | | 6,103 | | | | 3,012 | | | | 1,494 | |
| Subordinated liabilities including convertible debt | | | 5,360 | | | | 388 | | | | 100 | | | | 360 | | | | 4,512 | |
| Capital leases obligations | | | 1,488 | | | | 120 | | | | 232 | | | | 196 | | | | 940 | |
| Purchase obligations | | | 338 | | | | 125 | | | | 149 | | | | 64 | | | | — | |
| Other long-term capital instruments | | | 722 | | | | — | | | | — | | | | — | | | | 722 | |
| |
| Total | | | 57,057 | | | | 15,255 | | | | 10,117 | | | | 7,165 | | | | 24,520 | |
| |
6552
Operating
Business and Financial Review Balance Sheet OperatingBusiness Reviewcontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Payments due by period | |
| | | | | | | Less than | | | 1-3 | | | 3-5 | | | More than 5 | |
| | | Total | | | 1 year | | | years | | | years | | | years | |
| Contractual obligations | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities in issue | | | 42,807 | | | | 17,157 | | | | 7,432 | | | | 4,674 | | | | 13,544 | |
| Other borrowed funds | | | 2,244 | | | | 16 | | | | 303 | | | | — | | | | 1,925 | |
| Subordinated liabilities | | | 6,205 | | | | 105 | | | | 204 | | | | 309 | | | | 5,587 | |
| Insurance and reinsurance liabilities | | | 21,501 | | | | 2,943 | | | | 2,144 | | | | 3,981 | | | | 12,433 | |
| Investment contract liabilities | | | 3,306 | | | | 777 | | | | 377 | | | | 701 | | | | 1,451 | |
| Retirement benefit obligations | | | 1,380 | | | | 34 | | | | 70 | | | | 74 | | | | 1,202 | |
| Operating lease obligations | | | 1,426 | | | | 122 | | | | 236 | | | | 208 | | | | 860 | |
| Purchase obligations | | | 115 | | | | 55 | | | | 58 | | | | 2 | | | | — | |
| |
| Total | | | 78,984 | | | | 21,209 | | | | 10,824 | | | | 9,949 | | | | 37,002 | |
| |
The amounts and maturities of Abbey’s contractual obligations in connection with
customer accounts, deposits by banks,
customer accounts, and guarantees are described in
notes 31,Notes 32,
4633 and
6244 to the consolidated financial statements.
The repayment terms of the debt securities may be accelerated in line with the covenants contained within the individual loan agreements. Details of deposits by banks and customer accounts can be found in notes 31Notes 32 and 3233 of the Consolidated Financial Statements.consolidated financial statements. Based on previous experience, it is Abbey’s expectation that the undated subordinated liabilities will continue to be outstanding for the foreseeable future. Abbey has entered into significant outsourcing contracts where, in some circumstances, there is no minimum specified spending requirement. In these cases, anticipated spending volumes have been included within purchase obligations.
Based upon the levels of resources within the business and the ability of Abbey to access the wholesale money markets or issue debt securities should the need arise, Abbey believes that its overall liquidity is sufficient to meet current obligations to customers, policy holders and debt holders, to support expectations for future changes in asset and liability levels, and to carry on normal operations.
6653
Operating
Business and Financial Review Balance Sheet OperatingBusiness Reviewcontinued
Average balance sheet(4, 5)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | Average | | Interest | | Average | | Average | | Interest | | Average | | Average | | Interest | | Average | | | Average | | Average | | Average | | | | Average | |
| | | balance | | (1) | | rate | | balance | | (1) | | rate | | balance | | (1) | | rate | | | balance | | Interest(1) | | rate | | balance | | Interest (1) | | rate | |
| | | £m | | £m | | % | | £m | | £m | | % | | £m | | £m | | % | | | £m | | £m | | % | | £m | | £m | | % | |
| Assets | | |
| Loans and advances to banks | | |
| UK | | 5,175 | | 243 | | 4.70 | | 3,685 | | 155 | | 4.21 | | 3,872 | | 120 | | 3.10 | | | 3,694 | | 170 | | | 4.60 | % | | 5,175 | | 243 | | | 4.70 | % |
| Non-UK | | — | | — | | — | | 289 | | 7 | | 2.42 | | 638 | | 41 | | 6.43 | | | 76 | | 4 | | | 5.25 | % | | — | | — | | — | |
Loans and advances to customers(2) | | |
| UK | | 82,056 | | 4,439 | | 5.41 | | 83,692 | | 4,373 | | 5.23 | | 83,457 | | 4,868 | | 5.83 | | | 97,251 | | 5,282 | | | 5.43 | % | | 97,459 | | 5,246 | | | 5.38 | % |
| Non-UK | | 1,398 | | 59 | | 4.24 | | 4,197 | | 174 | | 4.28 | | 2,879 | | 150 | | 5.20 | | | 49 | | 2 | | | 4.06 | % | | 1,398 | | 59 | | | 4.24 | % |
| Lease debtors | | |
| UK | | 1,762 | | 95 | | 5.37 | | 3,098 | | 140 | | 4.52 | | 3,382 | | 202 | | 5.96 | | |
| Non-UK | | — | | — | | — | | 59 | | 2 | | 3.39 | | 68 | | 2 | | 2.94 | | |
| Debt securities | | | | | | | | | | | | | | | | | | | | |
| UK | | 3,255 | | 87 | | 2.66 | | 9,284 | | 324 | | 3.49 | | 26,208 | | 941 | | 3.59 | | | — | | — | | — | | 3,255 | | 87 | | | 2.66 | % |
| Non-UK | | — | | — | | — | | 2,518 | | 69 | | 2.74 | | 15,828 | | 444 | | 2.81 | | | — | | — | | — | | — | | — | | — | |
| | Total average interest-earning assets and interest income - - banking business | | 93,646 | | 4,923 | | 5.26 | | 106,822 | | 5,244 | | 4.91 | | 136,332 | | 6,768 | | 4.96 | | |
| Total average interest-earning assets and interest income – banking business | | | 101,070 | | 5,458 | | | 5.40 | % | | 107,287 | | 5,635 | | | 5.25 | % |
| | Provision for loan losses | | | (792 | ) | | — | | — | | | (773 | ) | | — | | — | | | (652 | ) | | — | | — | | | | (410 | ) | | — | | — | | | (792 | ) | | — | | — | |
| Trading business | | 56,787 | | — | | — | | 40,883 | | 978 | | — | | 42,696 | | — | | — | | | 53,154 | | — | | — | | 56,788 | | — | | — | |
| Liabilities designated at fair value through profit and loss | | | 27,612 | | — | | — | | — | | — | | — | |
| Non-interest-earning assets: | | |
| Long-term assurance fund assets | | 27,461 | | — | | — | | 29,757 | | — | | — | | 26,939 | | — | | — | | | — | | — | | — | | 27,307 | | — | | — | |
| Other | | 13,586 | | — | | — | | 17,429 | | — | | — | | 12,592 | | — | | — | | | 19,146 | | — | | — | | 16,010 | | — | | — | |
| | Total average assets and interest income | | 190,689 | | — | | — | | 194,119 | | — | | — | | 217,907 | | 6,768 | | 3.11 | | |
| Total average assets | | | 200,572 | | 206,600 | |
| | Non-UK assets as a percentage of total | | | 0.73 | % | | — | | — | | | 9.70 | % | | — | | — | | | 8.91 | % | | — | | — | | | | 0.06 | % | | | 0.68 | % | |
| Liabilities | | |
| | Deposits by banks | | |
| UK | | | (7,340 | ) | | | (243 | ) | | 3.32 | | | (7,144 | ) | | | (244 | ) | | 3.42 | | | (8,159 | ) | | 262 | | | (3.21 | ) | | | (1,070 | ) | | | (42 | ) | | | 3.93 | % | | | (7,340 | ) | | | (243 | ) | | | 3.32 | % |
| Non-UK | | | (697 | ) | | | (10 | ) | | 1.48 | | | (1,761 | ) | | | (24 | ) | | 1.36 | | | (3,758 | ) | | 65 | | | (1.73 | ) | | — | | — | | — | | | (697 | ) | | | (10 | ) | | | 1.48 | % |
Customer accounts — retail demand deposits(3) | | |
Customer accounts – retail demand deposits(3) | | |
| UK | | | (41,761 | ) | | | (1,346 | ) | | 3.28 | | | (42,477 | ) | | | (1,061 | ) | | 2.50 | | | (38,727 | ) | | 1,090 | | | (2.82 | ) | | | (52,083 | ) | | | (1,816 | ) | | | 3.49 | % | | | (40,761 | ) | | | (1,371 | ) | | | 3.36 | % |
| Non-UK | | | (1,152 | ) | | | (27 | ) | | 2.37 | | | (1,260 | ) | | | (28 | ) | | 2.22 | | | (1,320 | ) | | 33 | | | (2.52 | ) | | | (1,092 | ) | | | (25 | ) | | | 2.29 | % | | | (1,152 | ) | | | (27 | ) | | | 2.37 | % |
Customer accounts — retail time deposits (3) | | |
Customer accounts – retail time deposits (3) | | |
| UK | | | (12,177 | ) | | | (481 | ) | | 3.75 | | | (12,620 | ) | | | (409 | ) | | 3.25 | | | (14,396 | ) | | 467 | | | (3.24 | ) | | | (9,076 | ) | | | (355 | ) | | | 3.91 | % | | | (12,177 | ) | | | (456 | ) | | | 3.75 | % |
| Non-UK | | | (4,149 | ) | | | (183 | ) | | 4.40 | | | (4,083 | ) | | | (150 | ) | | 3.67 | | | (3,417 | ) | | 107 | | 3.13 | | | | (4,875 | ) | | | (210 | ) | | | 4.31 | % | | | (4,149 | ) | | | (183 | ) | | | 4.40 | % |
Customer accounts — wholesale deposits(3) | | |
Customer accounts – wholesale deposits(3) | | |
| UK | | | (5,467 | ) | | | (183 | ) | | 3.35 | | | (8,057 | ) | | | (280 | ) | | 3.48 | | | (10,203 | ) | | 335 | | | (3,29 | ) | | | (2,840 | ) | | | (125 | ) | | | 4.40 | % | | | (5,467 | ) | | | (183 | ) | | | 3.35 | % |
| Non-UK | | — | | — | | — | | | (158 | ) | | | (2 | ) | | 1.27 | | | (463 | ) | | 7 | | 1.42 | | | | (113 | ) | | — | | — | | — | | — | | — | |
| Bonds and medium-term notes | | |
| UK | | | (12,524 | ) | | | (357 | ) | | 2.85 | | | (14,002 | ) | | | (333 | ) | | 2.38 | | | (17,546 | ) | | 484 | | | (2.76 | ) | | | (23,847 | ) | | | (1,167 | ) | | | 4.89 | % | | | (24,165 | ) | | | (1,136 | ) | | | 4.70 | % |
| Non-UK | | — | | — | | — | | | (395 | ) | | | (6 | ) | | 1.52 | | | (761 | ) | | 15 | | | (1.92 | ) | | — | | — | | — | | — | | — | | — | |
| Other debt securities in issue | | |
| UK | | | (5,676 | ) | | | (148 | ) | | 2.61 | | | (6,551 | ) | | | (146 | ) | | 2.23 | | | (12,107 | ) | | 411 | | | (3.39 | ) | | — | | — | | — | | | (5,676 | ) | | | (148 | ) | | | 2.61 | % |
| Non-UK | | | (5,302 | ) | | | (101 | ) | | 1.91 | | | (11,963 | ) | | | (180 | ) | | 1.50 | | | (25,234 | ) | | 541 | | | (2.15 | ) | | — | | — | | — | | | (5,302 | ) | | | (101 | ) | | | 1.91 | % |
| Dated and undated loan capital and other subordinated liabilities | | |
| UK | | | (6,544 | ) | | | (314 | ) | | 4.79 | | | (6,875 | ) | | | (311 | ) | | 4.52 | | 6,526 | | 324 | | | (4.96 | ) | | | (8,868 | ) | | | (501 | ) | | | 5.65 | % | | | (6,544 | ) | | | (314 | ) | | | 4.79 | % |
| Non-UK | | — | | — | | — | | | (421 | ) | | | (7 | ) | | 1.66 | | | (586 | ) | | 41 | | | (7.00 | ) | | | (563 | ) | | | (35 | ) | | | 6.21 | % | | — | | — | | — | |
| Other interest-bearing liabilities | | |
| UK | | | (16 | ) | | | (1 | ) | | 5.87 | | | (19 | ) | | | (1 | ) | | 5.26 | | | (47 | ) | | 1 | | | (2.13 | ) | | — | | — | | — | | | (16 | ) | | | (1 | ) | | | 5.87 | % |
| Non-UK | | — | | — | | — | | | (2 | ) | | — | | 3.25 | | | (49 | ) | | 1 | | | (2.04 | ) | | — | | — | | — | | — | | — | | — | |
| | | |
| Total average interest-bearing liabilities and interest expense | | |
| – banking | | | | (104,427 | ) | | | (4,276 | ) | | | 4.09 | % | | | (113,446 | ) | | | (4,173 | ) | | | 3.68 | % |
| | | |
6754
Operating
Business and Financial Review Balance Sheet OperatingBusiness Reviewcontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | Average | | Interest | | Average | | Average | | Interest | | Average | | Average | | Interest | | Average | | | Average | | | | Average | | Average | | | | Average | |
| | | balance | | (1) | | | rate | | balance | | (1) | | | rate | | balance | | (1) | | rate | | | balance | | Interest(1) | | rate | | balance | | Interest(1) | | rate | |
| | | £m | | £m | | % | | £m | | £m | | % | | £m | | £m | | % | | | £m | | £m | | % | | £m | | £m | | % | |
| | Total average interest-bearing liabilities and interest expense - - banking | | | (102,805 | ) | | | (3,394 | ) | | 3.30 | | | (117,789 | ) | | | (3,182 | ) | | 2.70 | | | (143,299 | ) | | 4,184 | | | (2.92 | ) | |
| | |
| Trading business | | | (44,129 | ) | | — | | — | | | (24,269 | ) | | | (27,174 | ) | | | | (43,775 | ) | | — | | — | | | (44,129 | ) | | — | | — | |
| Non-interest-bearing liabilities | | | (10,783 | ) | | — | | — | | | (13,999 | ) | | — | | — | | | (13,635 | ) | | — | | — | | |
| Long-term assurance fund liabilities | | | (27,461 | ) | | — | | — | | | (31,763 | ) | | — | | — | | | (26,939 | ) | | — | | — | | |
| Liabilities designated at fair value through profit and loss | | | | (8,153 | ) | | — | | — | | — | | — | | — | |
| Non-interest-bearing liabilities Long-term assurance fund liabilities | | | — | | — | | — | | | (27,307 | ) | | — | | — | |
| Other | | | | | | | | | | (42,070 | ) | | — | | — | | | (17,117 | ) | | — | | — | |
| Shareholders’ funds | | | (5,510 | ) | | — | | — | | | (6,300 | ) | | — | | — | | | (6,860 | ) | | — | | — | | | | (2,147 | ) | | — | | — | | | (4,601 | ) | | — | | — | |
| | Total average liabilities, shareholders’ funds and interest expense | | | (190,688 | ) | | — | | — | | | (194,114 | ) | | — | | — | | | (217,907 | ) | | — | | — | | |
| Total average liabilities, shareholders’ funds | | | | (200,572 | ) | | | (206,600 | ) | | — | | — | |
| | Non-UK liabilities as a percentage of total | | 5.93 | | | 14.94 | % | | | 16.33 | % | | | | 3.31 | % | | | 5.47 | % | |
| Interest income as a percentage of average interest-earning assets | | 5.26 | | 4.87 | | 4.96 | | | | 5.40 | % | | | 5.25 | % |
| Interest expense as a percentage of average interest-bearing liabilities | | 3.30 | | 2.79 | | 2.92 | | | | 4.09 | % | | | 3.68 | % |
| Interest spread | | 1.96 | | 2.21 | | 2.04 | | | | 1.31 | % | | | 1.57 | % |
| Net interest margin | | 1.63 | | 1.93 | | 1.90 | | | | 1.17 | % | | | 1.36 | % |
|
| | |
| (1) | | For the purpose of the average balance sheet, interest income and interest expense have been stated after allocation of interest on instruments entered into for hedging purposes. |
|
| (2) | | Loans and advances to customers includes non-performing loans. See “analysis of end-of-year provisions on loans and advances to customers” and “potential credit risk elements in loans and advances” above. |
|
| (3) | | Demand deposits, time deposits and wholesale deposits are defined under “Deposits” above. |
|
| (4) | | Abbey National Treasury Services plc prepares averages using average daily balances, whereas the remainder of Abbey uses month end averages. These averages are representative of the operations of Abbey. |
|
| (5) | | The ratio of average interest-earning assets to interest-bearing liabilities for the year ended 31 December 2005 was 96.78% (2004: 94.57%). |
55
Interest-earning
Business and Financial Review
Balance Sheet Business Reviewcontinued
The table below for 2003 contains information prepared under UK GAAP, Abbey’s previous primary GAAP, which is not comparable to information prepared under IFRS.
| | | | | | | | | | | | | |
| | | 2003 | |
| | | | Average | | | | | | Average | |
| | | balance | | | Interest(1) | | | rate | |
| | | £m | | | £m | | | % | |
| |
Assets | | | | | | | | | | | | |
| Loans and advances to banks | | | | | | | | | | | | |
| UK | | | 3,685 | | | | 155 | | | | 4.21 | |
| Non-UK | | | 289 | | | | 7 | | | | 2.42 | |
Loans and advances to customers(2) | | | | | | | | | | | | |
| UK | | | 83,692 | | | | 4,373 | | | | 5.23 | |
| Non-UK | | | 4,197 | | | | 174 | | | | 4.28 | |
| Lease debtors | | | | | | | | | | | | |
| UK | | | 3,098 | | | | 140 | | | | 4.52 | |
| Non-UK | | | 59 | | | | 2 | | | | 3.39 | |
| Debt securities | | | | | | | | | | | | |
| UK | | | 9,284 | | | | 324 | | | | 3.49 | |
| Non-UK | | | 2,518 | | | | 69 | | | | 2.74 | |
| |
| Total average interest-earning assets and interest income – banking business | | | 106,822 | | | | 5,244 | | | | 4.91 | |
| |
| Provision for loan losses | | | (773 | ) | | | — | | | | — | |
| Trading business | | | 40,883 | | | | 978 | | | | — | |
| Non-interest-earning assets: | | | | | | | | | | | | |
| Long-term assurance fund assets | | | 29,757 | | | | — | | | | — | |
| Other | | | 17,430 | | | | — | | | | — | |
| |
| Total average assets and interest income | | | 194,119 | | | | — | | | | — | |
| |
| Non-UK assets as a percentage of total | | | 9.70 | % | | | — | | | | — | |
| |
Liabilities | | | | | | | | | | | | |
| |
| Deposits by banks | | | | | | | | | | | | |
| UK | | | (7,144 | ) | | | (244 | ) | | | 3.42 | |
| Non-UK | | | (1,761 | ) | | | (24 | ) | | | 1.36 | |
Customer accounts – retail demand deposits(3) | | | | | | | | | | | | |
| UK | | | (42,477 | ) | | | (1,061 | ) | | | 2.50 | |
| Non-UK | | | (1,260 | ) | | | (28 | ) | | | 2.22 | |
Customer accounts – retail time deposits (3) | | | | | | | | | | | | |
| UK | | | (12,620 | ) | | | (409 | ) | | | 3.25 | |
| Non-UK | | | (4,083 | ) | | | (150 | ) | | | 3.67 | |
Customer accounts – wholesale deposits(3) | | | | | | | | | | | | |
| UK | | | (8,057 | ) | | | (280 | ) | | | 3.48 | |
| Non-UK | | | (158 | ) | | | (2 | ) | | | 1.27 | |
| Bonds and medium-term notes | | | | | | | | | | | | |
| UK | | | (14,002 | ) | | | (333 | ) | | | 2.38 | |
| Non-UK | | | (395 | ) | | | (6 | ) | | | 1.52 | |
| Other debt securities in issue | | | | | | | | | | | | |
| UK | | | (6,551 | ) | | | (146 | ) | | | 2.23 | |
| Non-UK | | | (11,963 | ) | | | (180 | ) | | | 1.50 | |
| Dated and undated loan capital and other subordinated liabilities | | | | | | | | | | | | |
| UK | | | (6,875 | ) | | | (311 | ) | | | 4.52 | |
| Non-UK | | | (421 | ) | | | (7 | ) | | | 1.66 | |
| Other interest-bearing liabilities | | | | | | | | | | | | |
| UK | | | (19 | ) | | | (1 | ) | | | 5.26 | |
| Non-UK | | | (2 | ) | | | — | | | | 3.25 | |
| |
| Total average interest-bearing liabilities and interest expense – banking | | | (117,788 | ) | | | (3,182 | ) | | | 2.70 | |
| |
| Trading business | | | (24,269 | ) | | | — | | | | — | |
| Non-interest-bearing liabilities | | | (13,999 | ) | | | — | | | | — | |
| Long-term assurance fund liabilities | | | (31,763 | ) | | | — | | | | — | |
| Other Shareholders’ funds | | | (6,300 | ) | | | — | | | | — | |
| |
| Total average liabilities, shareholders’ funds and interest expense | | | (194,119 | ) | | | — | | | | — | |
| |
| Non-UK liabilities as a percentage of total | | | 10.33 | % | | | | | | | | |
| Interest income as a percentage of average interest-earning assets | | | | | | | | | | | 4.87 | |
| Interest expense as a percentage of average interest-bearing liabilities | | | | | | | | | | | 2.79 | |
| Interest spread | | | | | | | | | | | 2.21 | |
| Net interest margin | | | | | | | | | | | 1.93 | |
| |
56
Business and Financial Review
Balance Sheet Business Reviewcontinued
In 2003, interest-earning assets, interest-bearing liabilities and the associated interest reflect a “linked presentation” treatment for certain securitised assets (see notes to the Consolidated Financial Statements).under UK GAAP. If a linked presentation was not adopted, the interest spread and net interest margin would be as follows:
| | | | | | | | | | | | | |
| |
| Interest spread | | | 1.67 | | | | 1.94 | | | | 1.87 | |
| Net interest margin | | | 1.40 | | | | 1.69 | | | | 1.73 | |
| |
| | | | |
| | 2003 |
|
| Interest spread | | | 1.94 | |
| Net interest margin | | | 1.69 | |
|
| | |
| (1) | | For the purpose of the average balance sheet, interest income and interest expense have been stated after allocation of interest on instruments entered into for hedging purposes. |
| |
| (2) | | Loans and advances to customers includes non-performing loans. See “analysis of end-of-year provisions on loans and advances to customers” and “potential credit risk elements in loans and advances” above. |
| |
| (3) | | Demand deposits, time deposits and wholesale deposits are defined under “Deposits” above. |
| |
| (4) | | Abbey National Treasury Services prepares averages using average daily balances, whereas the remainder of Abbey uses month end averages. These averages are representative of the operations of Abbey. |
| |
| (5) | | The ratio of average interest-earning assets to interest-bearing liabilities for the year ended 31 December 20042003 was 91.0% (2003: 90.68%, 2002: 95.14%). |
Interest rate sensitivity Interest rate sensitivity refers to the relationship between interest rates and net interest income resulting from the periodic repricing of assets and liabilities. The largest single administered rate items in the Abbey balance sheet are residential mortgages and retail deposits, the majority of which bear interest at variable rates.
The contractual maturity of mortgage loansAbbey is
generally more than five years, but the maturity of the majority of retail deposits is primarily within three months. This apparent mismatch gives rise to issues which are addressed by Abbey in its liquidity management. However, their effect on interest rate management is less significant. Abbey has the ability to reprice both its retail variable rate liabilities and variable rate mortgage assets, subject to the constraints imposed by the competitive situation in the market place. Management believes this ability enables Abbeyable to mitigate the impact of interest rate movements on net interest income in
UKRetail Banking
by repricing separately the variable rate mortgages and
Savings.variable rate retail deposits, subject to competitive pressures.
Abbey also offers fixed-rate mortgages and savings products on which the interest rate paid by or to the customer is fixed for an agreed period of time at the start of the contract. Abbey manages the margin on fixed-rate products by the use of derivatives matching the fixed-rate
maturity profiles. The risk of prepayment is reduced by imposing penalty charges if the customers terminate their contracts early.
Wherever possible,
Abbey seeks to
minimisemanage the risks associated with movements in
market prices such as interest rates
or exchange rates. However, givenas part of its management of the
nature of financial activities, a level of market riskoverall non-trading position. This is
inevitable. Abbey has developed and implemented structures and systems to manage this market risk exposure. For additional information, seedone within limits as described in the “Risk management” section elsewhere in this Annual Report.
68
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Changes in net interest income —– volume and rate analysis
The following table allocates changes in interest income, interest expense and net interest income between changes in volume and changes in rate for the years ended 31 December
20042005 and
2003.2004. Volume and rate variances have been calculated on the movement in the average balances and the change in the interest rates on average interest-earning assets and average interest-bearing liabilities. The variance caused by changes in both volume and rate has been allocated to rate changes.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004/2003 | | | 2003/2002 | |
| | | Total | | | Changes due to | | | Total | | | Changes due to | |
| | | change | | | increase/(decrease): | | | change | | | increase/(decrease): | |
| | | | | | | Volume | | | Rate | | | | | | | Volume | | | Rate | |
| Interest income | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Loans and advances to banks | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 132 | | | | 46 | | | | 86 | | | | 35 | | | | (9 | ) | | | 44 | |
| Non-UK | | | (7 | ) | | | (19 | ) | | | 12 | | | | (34 | ) | | | (17 | ) | | | (17 | ) |
| Loans and advances to customers | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 22 | | | | (95 | ) | | | 117 | | | | (495 | ) | | | 16 | | | | (511 | ) |
| Non-UK | | | (115 | ) | | | (146 | ) | | | 31 | | | | 24 | | | | 79 | | | | (55 | ) |
| Lease debtors | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | (45 | ) | | | (80 | ) | | | 35 | | | | (62 | ) | | | (20 | ) | | | (42 | ) |
| Non-UK | | | (2 | ) | | | (2 | ) | | | — | | | | — | | | | — | | | | — | |
| Debt securities | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | (237 | ) | | | (216 | ) | | | (21 | ) | | | (617 | ) | | | (850 | ) | | | 233 | |
| Non-UK | | | (69 | ) | | | (71 | ) | | | 2 | | | | (375 | ) | | | (604 | ) | | | 229 | |
| Trading assets | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Non-UK | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total interest income | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | (128 | ) | | | (345 | ) | | | 217 | | | | (1,060 | ) | | | (862 | ) | | | (198 | ) |
| Non-UK | | | (193 | ) | | | (237 | ) | | | 44 | | | | (385 | ) | | | (542 | ) | | | 157 | |
| |
| | | | (321 | ) | | | (582 | ) | | | 261 | | | | (1,445 | ) | | | (1,404 | ) | | | (41 | ) |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | (1 | ) | | | 7 | | | | (8 | ) | | | (18 | ) | | | (33 | ) | | | 15 | |
| Non-UK | | | (14 | ) | | | (15 | ) | | | 1 | | | | (41 | ) | | | (35 | ) | | | (6 | ) |
| Customer accounts — retail demand deposits | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 285 | | | | (18 | ) | | | 303 | | | | (29 | ) | | | 106 | | | | (135 | ) |
| Non-UK | | | (1 | ) | | | (2 | ) | | | 1 | | | | (5 | ) | | | (2 | ) | | | (4 | ) |
| Customer accounts — retail time deposits | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 72 | | | | (14 | ) | | | 86 | | | | (58 | ) | | | (58 | ) | | | — | |
| Non-UK | | | 33 | | | | 2 | | | | 31 | | | | 43 | | | | 21 | | | | 22 | |
| Customer accounts — wholesale deposits | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | (97 | ) | | | (95 | ) | | | (2 | ) | | | (55 | ) | | | (70 | ) | | | 15 | |
| Non-UK | | | (2 | ) | | | — | | | | (2 | ) | | | (5 | ) | | | (5 | ) | | | — | |
| Bonds and medium-term notes | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 24 | | | | (35 | ) | | | 59 | | | | (151 | ) | | | (98 | ) | | | (53 | ) |
| Non-UK | | | (6 | ) | | | (6 | ) | | | — | | | | (9 | ) | | | (7 | ) | | | (2 | ) |
| Other debt securities in issue | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 2 | | | | (20 | ) | | | 22 | | | | (265 | ) | | | (189 | ) | | | (76 | ) |
| Non-UK | | | (79 | ) | | | (100 | ) | | | 21 | | | | (361 | ) | | | (285 | ) | | | (76 | ) |
| Dated and undated loan capital and other subordinated liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 3 | | | | (15 | ) | | | 18 | | | | (13 | ) | | | 17 | | | | (30 | ) |
| Non-UK | | | (7 | ) | | | (7 | ) | | | — | | | | (34 | ) | | | (12 | ) | | | (22 | ) |
| Other interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | — | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | |
| Non-UK | | | — | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | — | |
| Trading liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Non-UK | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Total interest expense | | | | | | | | | | | | | | | | | | | | | | | | |
| UK | | | 288 | | | | (191 | ) | | | 479 | | | | (590 | ) | | | (325 | ) | | | (265 | ) |
| Non-UK | | | (76 | ) | | | (128 | ) | | | 52 | | | | (412 | ) | | | (323 | ) | | | (89 | ) |
| |
| | | | 212 | | | | (318 | ) | | | 530 | | | | (1,001 | ) | | | (648 | ) | | | (353 | ) |
| |
Net interest income | | | (533 | ) | | | (264 | ) | | | (269 | ) | | | (444 | ) | | | (615 | ) | | | 171 | |
| |
6957
OperatingBusiness and Financial Review
Balance Sheet Business Reviewcontinued
| | | | | | | | | | | | | |
| | | | | | | | | | | 2005/2004 | |
| | | Total change | | | Changes due to increase/(decrease): | |
| | | | | | | Volume | | | Rate | |
| Interest income | | £m | | | £m | | | £m | |
| |
| Loans and advances to banks | | | | | | | | | | | | |
| UK | | | (73 | ) | | | (46 | ) | | | (27 | ) |
| Non-UK | | | 4 | | | | 5 | | | | (1 | ) |
| Loans and advances to customers | | | | | | | | | | | | |
| UK | | | 36 | | | | (12 | ) | | | 48 | |
| Non-UK | | | (57 | ) | | | (70 | ) | | | 13 | |
| Lease debtors | | | | | | | | | | | | |
| UK | | | — | | | | — | | | | — | |
| Non-UK | | | — | | | | — | | | | — | |
| Debt securities | | | | | | | | | | | | |
| UK | | | (87 | ) | | | (117 | ) | | | 30 | |
| Non-UK | | | — | | | | — | | | | — | |
| Trading assets | | | | | | | | | | | | |
| UK | | | — | | | | — | | | | — | |
| Non-UK | | | — | | | | — | | | | — | |
| Total interest income | | | | | | | | | | | | |
| UK | | | (124 | ) | | | (175 | ) | | | 51 | |
| Non-UK | | | (53 | ) | | | (65 | ) | | | 12 | |
| |
| | | | (177 | ) | | | (240 | ) | | | 63 | |
Interest expense | | | | | | | | | | | | |
| Deposits by banks | | | | | | | | | | | | |
| UK | | | (201 | ) | | | (208 | ) | | | 7 | |
| Non-UK | | | (10 | ) | | | (10 | ) | | | — | |
| Customer accounts – retail demand deposits | | | | | | | | | | | | |
| UK | | | 445 | | | | 381 | | | | 64 | |
| Non-UK | | | (2 | ) | | | (1 | ) | | | (1 | ) |
| Customer accounts – retail time deposits | | | | | | | | | | | | |
| UK | | | (101 | ) | | | (116 | ) | | | 15 | |
| Non-UK | | | 27 | | | | 32 | | | | (5 | ) |
| Customer accounts – wholesale deposits | | | | | | | | | | | | |
| UK | | | (58 | ) | | | (88 | ) | | | 30 | |
| Non-UK | | | — | | | | — | | | | — | |
| Bonds and medium-term notes | | | | | | | | | | | | |
| UK | | | 31 | | | | (15 | ) | | | 46 | |
| Non-UK | | | — | | | | — | | | | — | |
| Other debt securities in issue | | | | | | | | | | | | |
| UK | | | (148 | ) | | | (148 | ) | | | — | |
| Non-UK | | | (101 | ) | | | (101 | ) | | | — | |
| Dated and undated loan capital and other subordinated liabilities | | | | | | | | | | | | |
| UK | | | 187 | | | | 111 | | | | 76 | |
| Non-UK | | | 35 | | | | — | | | | 35 | |
| Other interest-bearing liabilities | | | | | | | | | | | | |
| UK | | | (1 | ) | | | (1 | ) | | | — | |
| Non-UK | | | — | | | | — | | | | — | |
| Trading liabilities | | | | | | | | | | | | |
| UK | | | — | | | | — | | | | — | |
| Non-UK | | | — | | | | — | | | | — | |
| Total interest expense | | | | | | | | | | | | |
| UK | | | 154 | | | | (84 | ) | | | 238 | |
| Non-UK | | | (51 | ) | | | (80 | ) | | | 29 | |
| |
| | | | 103 | | | | (164 | ) | | | 267 | |
| |
Net interest income | | | (280 | ) | | | (76 | ) | | | (204 | ) |
| |
58
Business and Financial Review
The Risk Management report contains audited financial information except where noted.
Abbey’s risk management focuses on the major areas of credit risk, market risk, liquidity risk, insurance risk, operational risk,
financial crime and residual value risk. Authority flows from the Abbey National plc Board of Directors to the Chief Executive Officer and from him to
his direct reports. Delegation of authority is tospecific individuals. Formal standing committees are maintained for effective management or oversight. Their authority is derived from the person they are intended to assist.
The diagram above shows the structure in operation in respect of risk management and oversight.
The main elements of risk governance are as follows:
Board:this is the primary governing body. Its role is largely determined by legal and regulatory responsibilities and requirements. Its risk-control responsibilities include setting risk appetite, approving the risk framework and reviewing risk profile.
Audit and Risk Committee:this is a key Board committee. Its risk-control responsibilities include reviewing the effectiveness of risk controls and procedures including the identification, assessment and reporting of risks and the risk-governance structure and compliance with risk-control policies and procedures. It is the duty of the committee to review the effectiveness of the control mechanisms for the management of risk. It is not the responsibility of the committee to form a judgement about the acceptability or appropriateness of these risks. This remains the responsibility of the Board, and will be discharged through the Chief Executive Officer.
Asset and Liability Management Committee:this is established under the authority of the
Chief Executive
Director, Finance and Markets and comprisesOfficer, comprising selected senior executives and
supported by relevant experts. This committee is responsible for
advising the Executive Director, Finance and Markets on all matters relating to the balance sheet of the Company, specifically
for cross divisional asset and liability management,structural balance sheet risks, capital structure, funding and liquidity.
Risk Committee:this is a management committee established under the Chief
ExecutivesExecutive Officer’s authority and comprises senior executives and the Chief Risk Officer. The
Committeecommittee will consult with the Chief Risk Officer and make recommendations to ensure that the Company’s risk matters are suitably managed and understood. The
Committeecommittee will provide any information requested by the Executive Committee that it might require
to enableenabling it to
release appropriately
discharge its responsibilities. The Risk Committee also receives information from, and is notified of, key decisions made by
the Risk Oversight Fora for
the Retail Banking,
Abbey Financial Markets and Insurance and Asset Management businesses.
Chief Risk Officer:The Chief Risk Officer operates under authority delegated by the Chief Executive Officer. The Chief Risk Officer is responsible for establishing and maintaining comprehensive, accurate and effective risk reporting, and clear systems of risks limits. He is also responsible for highlighting to management all matters relevant to understanding risks being taken and to setting risk appetite.
7059
Operating
Business and Financial Review Financial Instruments
By its nature the Group’s activities are principally related to the use of financial instruments including derivatives. The Group aim to lend monies predominately to retail borrowers at higher interest rates than accepting deposits from customers at both fixed and floating rates and for various periods.
The Group also trades in financial instruments where it takes positions in traded and over the counter instruments, including derivatives, to take advantage of short-term market movements in the equity and bond markets and in currency and interest rates.
Risk Management
The financial risks affecting the Group have been addressed individually in the sections below. The risk exposure, measurement information and management policies are presented through the Group’s main operating segments being, Retail Banking (including Group Infrastructure), Abbey Financial Markets and Insurance and Asset Management.
The risk exposure and management information relating to Retail Banking segment represents the holding company, Abbey National Plc. The other operating segments present the rest of the Abbey subsidiaries. In total the operating segments present the risk exposure and management policies of Abbey as a Group.
Risk Management in Personal Financial ServicesRetail Banking
Credit risk is the risk that counterparties will not meet their financial obligations and may result in Abbey losing the principal amount lent, the interest accrued and any unrealised gains (less any security held). Credit risk occurs mainly in Abbey’s loan and investment assets, and in derivative contracts.
Managing credit risk in Banking and Savings This includes secured lending,
bank accounts, unsecured personal loansbanking and
consumer credit and cahoot.
Secured lending.Abbey lends on many types of property but only after a credit risk assessment of the borrower and an assessment of the property is undertaken. The systems used to manage and monitor the quality of the mortgage asset are reviewed regularly to ensure they perform as expected.
The majority of residential lending is subject to national lending policy and national lending authority levels, which are used to structure lending decisions to the same high standard across the retail network, a process further improved by mortgage credit scoring, underwriter accreditation and regular compliance reviews. Details concerning the prospective borrower and the mortgage are subject to a criteria-based decision-making process. Criteria for assessment include credit references, loan-to-value ratio, borrower status and the mortgage credit score.
A responsible approach to lending is taken to ensure borrowers do not borrow more than they can afford. For low-risk applicants this may include the use of self-certification of income.
The majority of loans provided by Abbey are secured on UK properties. All properties must be permanent in construction; mobile homes are not generally acceptable. Abbey can provide a mortgage for the purchase of properties outside the UK where the property is a second home and the loan is secured on the main property located in the UK.
Prior to granting any first mortgage loan on a property, Abbey has the property valued by an approved and qualified surveyor, who is often an Abbey employee. The valuation is based on set Abbey guidelines. Normally, in the case of additional lending, when the total loan remains below 85% loan-to-value, the original property value is subject to indexation and no further survey is carried out. If the loan exceeds 85% loan-to-value, a revaluation is carried out by a qualified surveyor.
The maximum loan-to-value ratio is usually no more than 95% where the maximum loan is £250,000. Abbey typically charges a fee to customers where the loan-to-value ratio is 90% or higher.
Mortgage credit quality
| | | | | | | | | |
| | | 31 December | | | 31 December | |
| | | 2005 | | | 2004 | |
| |
Loan-to-value analysis: | | | | | | | | |
| New business | | | | | | | | |
| > 90% | | | 4 | % | | | 6 | % |
| 75% - 90% | | | 29 | % | | | 32 | % |
| < 75% | | | 67 | % | | | 62 | % |
| Average (at inception) | | | 60 | % | | | 61 | % |
| Average loan-to-value of stock (indexed) | | | 45 | % | | | 45 | % |
New business profile: | | | | | | | | |
| First-time buyers | | | 14 | % | | | 19 | % |
| Home movers | | | 37 | % | | | 41 | % |
| Remortgagers | | | 49 | % | | | 40 | % |
| | | | | | | | | |
| Average earnings multiple | | | 2.9 | | | | 2.7 | |
| |
There has been no significant deterioration of quality over the period, with most credit quality indicators remaining similar to or better than those reported in 2004. In particular:
| > | | The average loan-to-value of new business has remained broadly constant in 2005 at 60%. Remortgage business is increasing as a proportion of Abbey’s new business in line with the overall market. |
60
Business and Financial Review
Risk Managementcontinued
|
| > | | The proportion of new business written with a high loan-to-value (greater than 90%) has decreased slightly in 2005. |
|
| > | | Income multiples have increased in line with the market, given the continued increase in house prices. |
Mortgage indemnity guarantee insurance and high loan-to-value fee. Mortgage indemnity guarantee insurance is an agreement between a lender and an insurance company to underwrite the amount of every mortgage advance that generally exceeds 75% loan-to-value.
The mortgage indemnity guarantee insurance arrangements for loans originated prior to 31 December 2001 for Abbey are as follows:
| | |
| > | | For loans originated prior to 1993, the credit risk on the amount of every mortgage advance over 75% of the valuation at origination is fully insured with third party insurance companies. The expected insurance recovery is factored into the provision for lending losses. |
| | | |
| > | | For loans originated between 1993 and 2001, Abbey has obtained almost all of its mortgage indemnity guarantee insurance from its insurance subsidiary Carfax Insurance Limited (“Carfax”(‘Carfax’). Carfax in turn reinsures a portion of the credit risk where commercially appropriate. Such reinsurance covers a layer of risk above a level of losses that Carfax believes it can prudently bear. Carfax’s reinsurance is the only insurance purchased and accordingly the provision for lending losses includes a provision for losses insured by Carfax.Cover on all such policies was commuted effective from 14 October 2005. |
In the Consolidated Financial Statements, fees charged to the customer to compensate for the additional risk of mortgage advances are deferred and taken to
“Other operating income”“Net Interest Income” in the
Profit and Loss AccountIncome Statement using the Effective Interest rate (“EIR”) method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the
average anticipatedexpected life of the
loan.instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset and includes all amounts paid or received by the Group that are an integral part of the overall return.
From 1 January 2002, Abbey ceased purchasing mortgage indemnity guarantee insurance from Carfax for the
Retail Banking
and Savings mortgage book.
Existing cover remains in force. Abbey continues to charge
to customers high loan-to-value fees, which are credited to the
Profit and Loss AccountIncome Statement over the anticipated life of the loans. Mortgage indemnity guarantee insurance contracts between Carfax and the rest of Abbey
arewere accounted for as intra-Abbey transactions and
arewere eliminated on consolidation.
Mortgage arrears and repossessions.Debt Management Operations is responsible for all debt management initiatives on the secured portfolio for
Banking and Savings.Retail Banking. Debt management strategies, which include powerdialling, negotiating repayment arrangements and concessions and debt counselling, can start as early as the day after a repayment is
missedpast due and will continue until legal action. Different collection strategies are applied to different segments of the portfolio subject to the perceived levels of risk for example, loan-to-value, collections score and account characteristics.
If the agreed repayment arrangement is not maintained, legal proceedings may be taken and may result in the property being taken into possession. Abbey sells the repossessed property at market price and uses the sale proceeds, net of costs, to pay off the outstanding value of the mortgage. The stock of repossessed properties held by Abbey varies according to the number of new possessions and the buoyancy of the housing market.
The following table sets forth information on UK residential mortgage arrears and properties in possession at 31 December
2004, 20032005 and
20022004 for Abbey compared to the industry average as provided by the Council of Mortgage Lenders.
71
Operating and Financial Review
Risk Managementcontinued| | | | | | | | | |
| | | Abbey | | | CML | |
| | | (percentage of total mortgage loans by number) | |
| |
6 months to 11 months in arrears | | | | | | | | |
| 31 December 2004 | | | 0.14 | | | | 0.23 | |
| |
31 December 2005 | | | 0.20 | | | | 0.28 | |
| |
12 months or more in arrears | | | | | | | | |
| 31 December 2004 | | | 0.02 | | | | 0.10 | |
| |
31 December 2005 | | | 0.03 | | | | 0.12 | |
| |
Properties in possession | | | | | | | | |
| 31 December 2004 | | | 0.02 | | | | 0.02 | |
31 December 2005 | | | 0.04 | | | | 0.04 | |
| |
| | | | | | | | | |
| | | Abbey | | | CML |
| | | (percentage of total mortgage loans by number) | |
| |
6 months to 11 months in arrears | | | | | | | | |
| 31 December 2002 | | | 0.27 | | | | 0.30 | |
| 31 December 2003 | | | 0.16 | | | | 0.25 | |
| |
31 December 2004 | | | 0.14 | | | | 0.23 | |
| |
12 months or more in arrears | | | | | | | | |
| 31 December 2002 | | | 0.07 | | | | 0.15 | |
| 31 December 2003 | | | 0.03 | | | | 0.11 | |
| |
31 December 2004 | | | 0.02 | | | | 0.10 | |
| |
Properties in possession | | | | | | | | |
| 31 December 2002 | | | 0.03 | | | | 0.02 | |
| 31 December 2003 | | | 0.02 | | | | 0.02 | |
31 December 2004 | | | 0.02 | | | | 0.02 | |
| |
Banking and Consumer Credit.Abbey uses many systems and processes to manage the risks involved in providing unsecured personal loans and overdraft lending or in granting bank account facilities. These include the use of application and behavioural scoring systems to assist in the granting of credit facilities as well as regular monitoring of scorecard performance and the quality of the unsecured lending portfolios.
Behavioural scoring examines the lending relationships that a customer has with Abbey and how the customer uses their bank account. This information generates a score that is used to assist in deciding the level of risk (in terms of overdraft facility amount, card facilities granted and preferred unsecured personal loan value) for each customer that Abbey is willing to accept. Individual customer scores are normally updated on a monthly basis.
Abbey has successfully extended the use of behavioural scoring into other areas of the business, including the refinement of debt management strategies and bank account transaction processing.
cahoot.The processes used to manage credit risks are similar to those in the rest of BankingRetail Banking.
61
Business and Savings.Managing credit riskFinancial Review
Risk Managementcontinued
Personal Financial Services banking and unsecured personal loan arrears
| | | | | | | | | |
| | | 31 December 2005 | | | 31 December 2004 | |
| | | £m | | | £m | |
| |
Total banking and unsecured personal loan arrears (1,2) | | | 126 | | | | 121 | |
| Total banking and unsecured personal loan asset | | | 3,749 | | | | 3,288 | |
Banking and unsecured personal loan arrearsas a % of asset | | | 3.4 | % | | | 3.7 | % |
| |
| | |
| (1) | | Banking arrears are defined as customers whose borrowings exceed their overdraft by over £100. |
|
| (2) | | Unsecured personal loan and credit card arrears are defined as the balances of accounts that are three or more months in arrears (> 4 installments). |
Business Banking provides a limited range of products to assist with the finance requirements of businesses including overdrafts. Risk management policies are specific to and reflect the risks inherent in each product set. Approval processes for credit risk include the use of judgement, assisted by the use of probability of default and loss given default data, and the use of credit scoring. Business Banking operates within policies and authority levels approved by the Chief Risk Officer. Business Banking has a dedicated risk team, reflecting the desire for risk control to be close to the business needs and risks.
Property Finance provides mortgages to borrowers on a wide variety of mainly non-residential property. Agreed credit assessment criteria includes, loan-to-value ratios, quality of tenants, rental income coverage for repayments with stress testing against interest rate movements. Concentration limits per borrower and business sector are also employed to ensure a balanced loan portfolio. The management of defaulting accounts and the repossession and sale of properties is handled by a dedicated function within the business.
Managing
Retail Banking estimated exposure
The following table present the amount that best represents Retail Banking’s estimated maximum exposure to credit risk
in Abbey Financial MarketsThe Risk Committee has established a setat the reporting date without taking account of risk appetite limits to coverany collateral held or other credit enhancements:
| | | | |
| | Year ended | |
| 31 December |
| | 2005 | |
| | £m | |
|
| Loans and Advances to customers | | | 95,230 | |
| Financial assets designated at fair value | | | 790 | |
| Other | | | 517 | |
|
Third party exposures | | | 96,537 | |
|
In managing the portfolio mix within Financial Markets. Within these limits,gross exposures, Retail Banking uses the Chief Risk Officer has approved credit mandatespolicies, procedures and policies to cover detailed industry/sector limitstypes of collateral described above.
For further information on non-performing loans and
asset quality. All transactions falling within these mandates and policies are scrutinised by the appropriate credit approval authority. Specific approval by the Risk Committee is required for any transaction that falls outside the risk appetite. Analysis of credit exposures and credit risk trends are provided for the Financial Markets Risk Oversight Forum each month, and key issues escalatedrepossessions refer to the
Risk Committee as required. Large exposures (as defined byrelevant sections in the
Financial Services Authority) are reported quarterly to the Risk Committee and the Financial Services Authority. Credit risk on derivative instruments is assessed using scenario analysis to determine the potential future mark-to-market exposurerest of the instruments at a 95% statistical confidence levelbusiness and adding this value to the current mark-to-market value. The resulting “loan equivalent” credit risk is then included against credit limits, along with other non-derivative exposures.
In addition, there is a policy framework to enable the collateralisation of certain derivative instruments (including, in particular, swaps). If collateral is deemed necessary to reduce credit risk, then the amountfinancial review, mainly pages 42 and nature of the collateral to be obtained is based on management’s credit evaluation of the customer.
47.
Market risk is the potential for loss of income or decrease in the value of
net assets caused by movements in the levels and prices of financial instruments.
A major portion of the market risk arises from exposures to changes in the levels of interest rates, equity markets and credit spreads. Interest rate exposure is generated from providing fixed-rate loans and savings products, funding and trading activities in Financial Markets, and management of Abbey’s overall asset and liability structure. Changes in interest rates affect the value of funds managed for the benefit of customers, as well as on specific shareholders’ funds of the life assurance business. The life assurance business is also exposed to changes in the level of equity markets. Other exposure to equity markets is generated by the creation and risk management of structured products by Financial Markets for the
72
Operating and Financial Review
Risk Managementcontinued
Personal Financial Services market and trading activities. Credit spread exposure arises from credit risk management and trading activities within Financial Markets.
Abbey accepts that market risk arises from the full range of activities undertaken as a provider of Personal Financial Services. Abbey actively manages and controls market risk by limiting the adverse impact of market movements whilst seeking to enhance earnings within clearly defined parameters. The Market Risk Manual, which is reviewed and approved by the Chief ExecutiveRisk Officer on an annual basis, sets the framework under which market risks are managed and controlled. Business area policies, risks limits and mandates are established within the context of the Market Risk Manual. The business areas are responsible for ensuring that they have sufficient expertise to manage the risks associated with their operations. The independent Risk function, under the direction of the Chief Risk Officer, ensures that risk takingrisk-taking and risk control occur within the framework prescribed by the Manual. The Risk function also provides oversight of all risk-taking activities through a rigorous process of regular reviews.
Abbey ensures that exposure to market risks is measured and reported on an accurate and timely basis to senior management. In addition to the regular reporting for the purposes of active risk management, the
boardBoard also receives
consolidated reporting of all market risk exposures on a monthly basis where actual exposure levels are measured against limits.
Senior management recognise that different risk measures are required to best reflect the risks faced in different types of business activities. In measuring exposure to market risk, Abbey uses a range of complementary measures, covering both value and income as appropriate. TheTo facilitate understanding and communication of different risks, risk categories have been defined. Exposure to all market risk disclosures shown below for trading instruments are calculated using Value at Risk (using a historical simulation approach) whilst disclosures for non-trading instruments are based upon a combinationfactors should be assigned to one of Value at Risk and sensitivity analysis. At both aggregated and business area levels such analysis is complemented by stress testing.
To achieve consistency in measurement across business areas, we have adopted a series of market risk measurement standards to which business areas are required to adhere.these categories. Abbey report market risks by type of exposure inconsiders two categories:
Short-term market riskcovers activities where exposures are subject to frequent change and could be closed out over a short-time horizon. Most of the exposure is generated by
Abbey Financial Markets.
Structural market riskincludes exposures arising as a result of the structure of portfolios of assets and liabilities, or where the liquidity of the market is such that the exposure could not be closed out over a short time horizon. The risk exposure is generated by features inherent in either a product or portfolio and normally presentpresented over the life of the portfolio or product. Such exposures are a result of the decision to undertake specific business activities, can take a number of different forms, and are generally managed over a longer time horizon. Examples of structural market risk include the exposures arising out of the uncertainty of business volumes from the launch of fixed-rate and structured loans and savingsretail products, or from the provision of hedging
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against such risks. Although most long-termrisks, structural balance sheet exposures managed by the Asset and Liability Management Committee (“ALCO”) and unexpected customer prepayment of mortgage.
Non-trading market risks
In the Retail Banking business (including Group Infrastructure), market risk arise through the provision of retail and other banking products and services, as well as structural exposures arising in Abbey’s balance sheet. These risks impact Abbey’s current earnings and economic value. The most significant market risk in the Retail Banking business is yield curve risk, which arises from the timing mismatch in the repricing of fixed and variable rate assets, liabilities and off-balance sheet positions, are hedged,as well as the investment of non-interest-bearing liabilities in interest-bearing assets. Abbey remainsis also exposed to variancesrisks arising from features in retail products which give customers the right to alter the expected cashflows of a financial contract. This creates product launch risk, for example where the customers may not take up the expected volume of new fixed rate mortgages or other loans, and prepayment risk, for example where customers may prepay loans before their contractual maturity.
Abbey is able to mitigate yield curve risk by repricing separately administered variable rate mortgages and variable rate retail deposits, subject to competitive pressures. However, to the extent that the volume of administered variable rate assets and liabilities are not precisely matched, the balance sheet is exposed to changes in the relationship between administered rates and market rates. In addition, the structure of customer behaviour (often caused bydeposit rates puts pressure on margins in a sustained low interest rate environment.
Other non-trading market
rate movements) impacting new business take-uprisks arise in Cater Allen Premier Bank, First National Motor Finance and
early redemptionthe Abbey National International Group, as well as in Social Housing activities on the Abbey National Plc and
causing unfavourable mismatches to arise.Trading Activities
Trading activities are undertaken by Financial Markets only. TheyAbbey National Treasury Services plc (“ANTS”) balance sheets. These risks are managed within specific mandates to ensure the risks remain immaterial. Within the ANTS Group, market risks also arise in Porterbrook Leasing Company Ltd and from capital markets funding activities.
Managing non-trading risks
Most non-trading market risks are transferred from the originating business to Abbey Financial Markets. Risks not transferred are managed within a series of market risk mandates, which set limits on the extent of market risk that may be retained. These limits are defined in terms of nominal amounts, sensitivity, earnings-at-risk or value-at-risk.
ALCO is responsible for managing Abbey’s overall non-trading position. Natural offsets are used as far as possible to mitigate yield curve exposures but the overall balance sheet position is generally managed using interest rate swaps that are transacted through Financial Markets. The Treasurer is responsible for managing risks in accordance with ALCO’s direction. Risks are managed within limits approved either by the Chief Risk Officer or Grupo Santander’s Board Risk Committee. The key risk limits relate to yield curve risk. They are:
| > | | Net Interest Margin (NIM) sensitivity: the sensitivity of annual net interest margin to an instantaneous and unexpected adverse 100 basis point parallel shock to the yield curve. |
|
| > | | Market Value of Equity (MVE) sensitivity: the potential change in net present value of interest rate sensitive positions from an instantaneous and unexpected adverse 100 basis point parallel shock to the yield curve. |
These two measures provide complementary views of potential losses from interest rate movements. Market Value of Equity sensitivity provides a
continuous basis, and are marked to marketlong-term view covering the present value of all future cashflows, whereas Net Interest Margin sensitivity considers only the impact on
a daily basis.net interest income over the next year
The following table shows the
value at risk-based consolidated exposures for the major risk classesresults of these measures as at 31 December
2004, together with the highest, lowest and average exposures for the year. Exposures within each risk class reflect a range of exposures associated with movements in that financial market. For example, interest rate risks include the impact of absolute rate movements, movements between interest rate bases and movements in implied volatility on interest rate options. The range of possible statistical modelling techniques and assumptions mean these measures are not precise indicators of expected future losses, but are estimates of the potential change in the value of the portfolio over a specified time horizon and within a given confidence interval. From time to time, losses may exceed the amounts stated where the movements in market rates fall outside the statistical confidence interval used in the calculation of the value at risk analysis. The 95% confidence interval, used as a standard across Abbey, means that the theoretical loss at a risk factor level is likely to be exceeded in one period in twenty. We address this risk by monitoring stress-testing measures across the different business areas. For trading instruments the actual, average, highest and lowest value at risk exposures shown below are all calculated to a 95% level of confidence using a simulation of actual one day market movements over a one year period. The effect of historic correlations between risk factors is additionally shown below. The use of a one-day time horizon for all risks associated with trading instruments reflects the horizon over which market movements will affect the measured profit and loss of these activities.
The numbers below represent the potential change in market values of trading instruments. Since trading instruments are recorded at market value, these numbers also represent the potential effect on income. Trading instruments are held only in Financial Markets.
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2005:
Operating and Financial Review
Risk Managementcontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Exposure at 31 December | | | Exposure for the year ended 31 December |
| | | Actual exposure | | | Average exposure | | | Highest exposure | | | Lowest exposure |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Group trading instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate risks(1) | | | 4.8 | | | | 3.7 | | | | 4.3 | | | | 4.3 | | | | 7.1 | | | | 7.5 | | | | 2.8 | | | | 2.8 | |
| Equity risks | | | 5.0 | | | | 1.6 | | | | 3.3 | | | | 2.3 | | | | 5.6 | | | | 5.2 | | | | 1.3 | | | | 1.4 | |
| Spread risk | | | 1.5 | | | | 1.1 | | | | 1.8 | | | | 2.0 | | | | 2.4 | | | | 2.5 | | | | 1.1 | | | | 1.1 | |
Other risks(2) | | | 0.3 | | | | 0.1 | | | | 0.2 | | | | 0.1 | | | | 0.4 | | | | 0.2 | | | | 0.0 | | | | 0.0 | |
| |
Correlation offsets(3) | | | (2.2 | ) | | | (1.2 | ) | | | (1.8 | ) | | | (2.6 | ) | | | | | | | | | | | | | | | | |
| |
| Total correlated one-day Value at Risk | | | 9.4 | | | | 5.3 | | | | 7.8 | | | | 6.1 | | | | 10.5 | | | | 8.4 | | | | 4.8 | | | | 4.5 | |
| |
(1) | | Interest rate risks include property index risk |
|
(2) | | Other risks include foreign exchange risk. |
|
(3) | | The highest and lowest exposure figures reported for each risk type did not necessarily occur on the same day as the highest and lowest Total correlated one-day Value at Risk. |
| | | |
| | | A corresponding correlation offset effect cannot be calculated and is therefore omitted from the above table.31 December | |
| | 2005 | |
| | £m | |
|
| Net interest margin sensitivity (100bps adverse parallel shock) | | | (63 | ) |
| Market value of equity sensitivity (100bps adverse parallel shock) | | | (298 | ) |
|
Non-trading activities
An
NIM and MVE sensitivity measures were introduced as primary risk metrics during 2005. For comparative purposes, NIM sensitivity to an adverse 100bps parallel yield curve shock at 31 December 2004 was £54m.
Within the ANTS Group, non-trading interest rate risk arises in Porterbrook. This exposure is managed by ALCO as part of the overall non-trading interest rate risk position. However, on a stand-alone basis its contribution to overall NIM sensitivity (to 100bps adverse yield curve shock) at 31 December 2005 was £1.5m.
For illustrative purposes, a year-on-year analysis of
exposures on non-trading
financial instrumentsmarket risks is shown below.
This analysis uses risk measures employed by management prior to adopting NIM and MVE sensitivities as the primary risk measures during 2005. These numbers represent the potential change in theoretical market values of
suchnon-trading instruments, and do not represent the potential effects on income for a given time period.
Separate income at risk measures are used to supplement these analyses for appropriate portfolios. Non-trading instruments are
generally held for collection in the form of cash over time, and are accounted for at amortised cost, with earnings accrued over the relevant life of the instruments.
Abbey’s risk measures, however, focus on potential risks over the life of the non-trading instruments wherever appropriate, and are therefore based on valuation measures, using estimated discounted cash flows where reliable market values are not available. For Abbey’s non-trading instruments the
The actual, average, highest and lowest exposures shown below are all calculated to a 95% level of confidence and are based upon one-day market movements for short-term market risks, and market movements of between one day and three months (as appropriate to the management of each portfolio) for structural market risk positions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Exposure at 31 December | | | Exposure for the year ended 31 December | |
| | | Actual exposure | | | Average exposure | | | Highest exposure | | | Lowest exposure |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Group non-trading instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term market risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate risks | | | 0.6 | | | | 1.0 | | | | 0.6 | | | | 1.4 | | | | 1.6 | | | | 2.7 | | | | 0.0 | | | | 0.5 | |
| Equity risks | | | 0.0 | | | | 0.2 | | | | 0.1 | | | | 0.3 | | | | 0.2 | | | | 0.6 | | | | 0.0 | | | | 0.0 | |
| Foreign exchange risks | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.2 | | | | 0.2 | | | | 0.1 | | | | 0.1 | |
Structural market risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate risks | | | 8.5 | | | | 14.7 | | | | 12.9 | | | | 33.4 | | | | 16.0 | | | | 53.3 | | | | 8.5 | | | | 14.7 | |
| Equity risks | | | 0.4 | | | | 1.7 | | | | 0.6 | | | | 3.6 | | | | 1.2 | | | | 5.7 | | | | 0.3 | | | | 1.7 | |
| Foreign exchange risks | | | 2.9 | | | | 2.9 | | | | 3.1 | | | | 2.9 | | | | 3.7 | | | | 3.9 | | | | 2.6 | | | | 2.5 | |
| |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Exposure at 31 | | | | | | | | | | | Exposure for the year ended 31 December | |
| | | December | | | | | | | | | | | | | | |
| | | Actual exposure | | | Average exposure | | | Highest exposure | | | Lowest exposure | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Group non-trading instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Short-term market risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate risks | | | 0.2 | | | | 0.6 | | | | 0.4 | | | | 0.6 | | | | 0.6 | | | | 1.6 | | | | 0.2 | | | | — | |
| Equity risks | | | — | | | | — | | | | — | | | | 0.1 | | | | — | | | | 0.2 | | | | — | | | | — | |
| Foreign exchange risks | | | — | | | | 0.1 | | | | — | | | | 0.1 | | | | — | | | | 0.2 | | | | — | | | | 0.1 | |
Structural market risk | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate risks | | | 73.8 | | | | 8.5 | | | | 48.3 | | | | 12.9 | | | | 79.1 | | | | 16.0 | | | | 15.6 | | | | 8.5 | |
| Equity risks | | | 0.3 | | | | 0.4 | | | | 0.4 | | | | 0.6 | | | | 0.6 | | | | 1.2 | | | | 0.2 | | | | 0.3 | |
| Foreign exchange risks | | | 1.4 | | | | 2.9 | | | | 1.9 | | | | 3.1 | | | | 2.4 | | | | 3.7 | | | | 1.4 | | | | 2.6 | |
| |
The above sensitivity exposures should not be aggregated, as no account has been taken of the correlation between risk classes.
The 2003 Structural market risk results have been restated to reflect enhanced risk measurement techniques used in the calculation of 2004 exposures.
Managing market risk in Banking and Savings Business
The primary risks within the Banking and Savings business are interest rate related. Abbey is able to mitigate the consequences of interest rate movements on net interest income from Banking and Savings by repricing separately the administered variable rate mortgages and variable rate retail deposits, subject to competitive pressures. The absolute levels of interest rate risk are managed via a portfolio of fixed interest rate instruments including interest rate swaps. However, to the extent that variable rate assets and liabilities are not precisely matched, the balance sheet is exposed to changes in the relationship between administered rates and market rates.
In addition to administered variable rate products, Abbey also has a significant volume of fixed-rate and structured mortgage and savings products. The market risk exposures from these products are generally hedged with interest rate swaps which are transacted through Financial Markets. However, during the period of product launches the hedging of actual volume can only be estimated, so triggers on the maximum exposure are maintained during that period. The business also remains exposed to variances from the expected redemption level of fixed-rate and structured products by customers in advance of the contractual maturity, with measures and triggers in place to control the exposure.
Managing market risk in Financial Markets
The primary risk exposures for Financial Markets are interest rate, equity, credit spread and residual exposure to property indices. Equity risks are managed via equity stock, futures and structured equity derivatives. Credit-spread risks are managed via credit derivatives (credit default swaps, total return swaps). Property Index risk is managed via insurance contracts and property derivatives.
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Operating and Financial Review
Risk ManagementDerivativescontinued
Financial Markets operates within a market risk framework designed to ensure that it has the capability to manage risk in a well-controlled manner. A comprehensive set of policies, procedures and processes have been developed and implemented to identify, measure, report, monitor and control risk across Financial Markets.
The standardised risk measure adopted is Value at Risk calculated at a 95% confidence level over a one day time horizon. On a daily basis, market risk factor sensitivities, Value at Risk measures and stress tests are produced, reported and monitored against limits for each major activity and at the aggregate Financial Markets level. These limits are used to align risk appetite with the business’s risk-taking activities and are reviewed on a regular basis. Early identification and measurement of risks are important elements of the risk management processes. Measurement of risks can involve the use of complex quantitative methods and mathematical principles to model and predict the changes in instruments and portfolio valuation. These methods are essential tools to understand the risk exposures.
Managing market risk in Investment and Protection
Abbey faces two main sources of market risk within the Personal Financial Services Life Companies:
Firstly, there are exposures that arise directly from funds held for the account of Abbey in the shareholder funds of the Life Companies. Abbey directly bears these risks and they are consolidated with other corporate-wide market risk exposures.
Secondly, there are indirect interest rate and equity risk exposures arising where there are insufficient surpluses in the policyholder funds to fully mitigate the market risks associated with the effects of adverse market movements on the funds. The sources of indirect market risks include Market Value Adjustment free guarantees and Guaranteed Annuity Option exposures where any shortfall on the with-profit business would be borne by Abbey. These exposures are risk managed using a combination of equity index options and forward starting interest rate swaps.
Market risk affects solvency, embedded and realistic balance sheet valuations, and the risks under these different measures are managed simultaneously against their respective limits and controls. The Life Companies Market Risk Function ensures that all risk positions are understood by management and that key issues are escalated.
Managing market risk in Group Infrastructure
Risk exposure arises from the pool of interest earning assets funded by non-interest bearing liabilities, for example share capital, retained profit as well as from other capital issuance and investments in subsidiaries. Resulting exposures are managed by Financial Markets, operating within the same market risk framework approved by the Chief Executive Officer in the Market Risk Manual.
Market risk exposures are managed using a combination of earnings volatility and Value at Risk measures. An appropriate set of limits are established and control processes are in place to ensure that risk management activities operate within the established framework.
Effect of repricing risks on Abbey
The interest rate repricing gap information is shown in the notes to the Consolidated Financial Statements.
Hedging activity
A significant part of Abbey’s exposures are hedged internally, offset against other categories of exposure in the balance sheet, or by using derivatives as part of an integrated approach to risk management. For further details on the use of derivatives, see the section ‘Derivatives’ below and notes to the consolidated financial statements.
Any unhedged residual risks are retained in Abbey businesses and are monitored, reported and managed under the overall market risk framework.
Liquidity risk
Liquidity risk is the potential that, although remaining solvent, Abbey does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. Liquidity risk is a key risk faced by financial services organisations.
�� The Board is responsible for the liquidity management and control framework at Abbey and has approved key liquidity limits in setting Abbey’s liquidity risk appetite. Along with its internal Liquidity Risk Manual, which sets out the liquidity risk control framework and policy, Abbey abides by the “Sound Practices for Managing Liquidity in Banking Organisations” set out by the Basel Committee as its standard for liquidity risk management and control.
Managing Liquidity risk in Abbey
Management of liquidity at Abbey, including the management of cash flows, raising funding, and managing liquid asset holdings, is the responsibility of the Executive Director, Finance and Markets. The active management of liquidity is undertaken by Financial Markets within the framework of the Liquidity Risk Manual. The Asset and Liability Management Committee and the Risk Committee monitor Abbey’s liquidity position on a monthly basis. The Board also receives a monthly update on key liquidity issues and Abbey’s liquidity position is reported to the Financial Services Authority on a monthly basis.
Abbey views the essential elements of liquidity management as controlling potential cash outflows, maintaining prudent levels of highly liquid assets and ensuring that access to funding is available from a diversity of sources. A comprehensive management and monitoring process, and a series of liquidity limits within which liquidity is managed, underpin these elements. For example, as excessive concentration in either liquid assets or contractual liabilities contributes
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Risk Managementcontinued
to potential liquidity risk, appropriate limits have been defined under the Liquidity Risk Appetite. Management also monitors Abbey’s compliance with the Sterling Stock Liquidity limits set by the Financial Services Authority, which focus on ensuring that sterling cash liabilities due five days in advance can be met by realising liquid assets, with any excesses being reported to the Risk Committee and the Board. In addition to such limits, liquidity ratios also have trigger-review levels that require the Treasurer, Head of Asset and Liability Management, and Chief Risk Officer to initiate appropriate reviews of current exposure when such levels are exceeded.
The Liquidity Risk Manual has been designed to reduce the likelihood and impact of either firm specific or system-wide liquidity problems. Abbey intends to maintain sufficient liquid assets and marketable assets to meet the expected cash flow requirements of all its businesses, to ensure customer and counterparty confidence, and to be in a position to withstand liquidity pressures resulting from unexpected or exceptional circumstances.
While Abbey’s liquidity risk is consolidated and primarily controlled at the Abbey company level, liquidity risk is also measured, monitored and controlled within the specific business area or the subsidiary where it arises. Management recognises that while the liquidity approach developed pursuant to the Liquidity Risk Manual is designed to reduce the likelihood of significant liquidity issues arising, the possibility of such events cannot be eliminated. Consequently, Abbey also operates a Liquidity Contingency Plan to manage and co-ordinate any actions that are required in order to mitigate the effects of a liquidity shortfall. The Liquidity Contingency Plan defines the circumstances under which the plan is activated, the management framework and notification procedures, and the key roles and responsibilities during the operation of the plan.
The Liquidity Contingency Plan becomes operational when the demand for cash, whether from demands for repayment, from wholesale funding or from retail deposits, exceeds the limits for liquidity management defined under the Liquidity Risk Appetite. The circumstances that cause this to happen will tend to be sudden, unexpected events that trigger demands for cash that cannot be managed within the procedures, limits and controls defined in the Liquidity Risk Manual.
To be effective, the management of liquidity in a crisis must be timely, proactive and flexible enough to respond to a variety of different circumstances. The management structure for the Liquidity Contingency Plan, which is structured around a small team of individuals with the authority to agree, co-ordinate and implement actions that will control a volatile, dynamic situation, has two key elements:
| | |
> | | the Treasurer, Head of Asset and Liability Management, is responsible for the rapid assessment of the implications of a sudden, unexpected event on the day-to-day liquidity of Abbey, and for the decision to activate the Liquidity Contingency Plan; and |
| | |
> | | the liquidity crisis management team, under the chairmanship of the Treasurer, Head of Asset and Liability Management, is the decision-making authority in the event of a liquidity crisis, and is responsible for implementing the Liquidity Contingency Plan. |
The Liquidity Contingency Plan defines a framework for the decision-making process under exceptional circumstances, and it details the tools available to mitigate any such event. These tools include procedures for realising marketable assets, for entering into repo transactions with central banks, and for securing retail deposits and managing wholesale funds. Even though the Liquidity Contingency Plan focuses predominantly on realising marketable assets to meet liabilities, in certain situations additional funding — as well as certificates of deposit, commercial paper and medium term funding — may be sought, depending on the nature of the crisis. The Liquidity Contingency Plan is reviewed and revised on at least an annual basis.
Potentially, if Abbey’s usual funding sources become unavailable for an extended period of time, the issuance of a retail savings bond may also be considered.
Liquidity risk measurement
Abbey uses net cash flows as a key measure of liquidity risk as they take into account contracted liabilities and contracted assets that have a defined maturity date. Such current cash outflows as well as expected future cash outflows measured over key benchmark time periods and unexpected cash outflows arising from unexpected but plausible events, such as the withdrawal of a percentage of retail deposits at any point in time and the limited ability to renew wholesale deposits, are met through new borrowing, additional sales in the repo market and additional asset sales.
Liquid assets are normally measured at current market values, discounted to reflect transaction costs. Liquid assets may take time to liquidate, due to marketability issues and large position sizes, and may decrease in market value in times of adverse market movement. This expected liquidation time is measured over key benchmark time periods under prudent assumptions in relation to market conditions. The risk related to uncertain assumptions about the behavioural characteristics of assets and liabilities is also considered when measuring liquidity risk.
The ratio of discounted liquid assets that will be available to meet the cumulative liabilities falling due at key benchmark time periods is the principal liquidity measure. The liquidity ratio is subject to periodic stress testing based upon a range of assumptions.
Securitisation of Abbey assets
Abbey, through various special purpose vehicles, provide a wide range of securitised mortgage products to a diverse investor base. There is little liquidity risk related to asset securitisations as the repayment of the securitised notes issued is financed by the expected maturity or repayment of the underlying securitised asset which is recognised in the Liquidity Risk Manual. Abbey does not expect securitisations to represent a greater proportion of its overall funding in the future than at present. However, in times of significant market disruption, residential mortgage backed securitisation, which typically remains a very liquid and deep market, might be accessed, and in such circumstances could provide a higher proportion of funding than is presently expected.
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Investment and Protection
Insurance risk relates to the inherent uncertainty as to the occurrence, amount and timing of insurance liabilities arising from death, continuity of life, disablement or sickness or when the customer terminates his contract early. The exposure to insurance risk arises in the life assurance companies.
The Appointed Actuary (UK) was responsible throughout 2004 for the independent review of the management of insurance risk.
During 2004, the Appointed Actuary (UK) chaired the Insurance Risk Committee which based on the principle established under the insurance risk policy provided the control framework within which insurance risk was managed. The Appointed Actuary role was discontinued from the end of 2004 with management of insurance risk now falling under the responsibility of the With-Profit Actuary in respect of with-profit business and the Head of Actuarial Function for all other business.
The essential elements of insurance risk management and mitigation include underwriting (from the policy proposal document through to assessment of individual claims), pricing (taking into account the level of underwriting, market experience, external studies and reassurance data), reinsurance (for assistance in pricing of some risks and for spreading of risks) and reserving (holding sufficient funds to meet expected claims).
Operational risk
Managing operational risk in Abbey
Operational risk is the risk of loss to Abbey, resulting from inadequate or failed internal processes, people and systems, or from external events. Risks are categorised by type, such as fraud, process failure, inadequate Human Resource management and damage to assets. They are assessed, not only in terms of their financial impact, but also in terms of their effect on business objectives, regulatory responsibilities and Abbey’s reputation.
Abbey operates a ‘hub and spokes’ model for the implementation of an operational risk management programme. An independent operational risk ‘hub’ function has responsibility for establishing the framework within which risk is managed and working with the business aligned ‘spoke’ groups to ensure its consistent implementation across Abbey. The framework incorporates industry practice and regulatory requirements, particularly those emanating from the Basel Committee, European Union Directives and the Financial Services Authority. The primary purpose of the framework, which is approved by the Risk Committee, is to define and articulate Abbey-wide policy, processes, roles and responsibilities.
The management of operational risk is the responsibility of business managers, who identify assess and monitor risks, in line with the processes described in the framework. The operational risk function ensures that all key risks are regularly reported to the Risk Committee and Board.
In line with Financial Services Authority’s guidance and industry practice, the company has crisis management and disaster recovery arrangements to ensure that critical business processes are maintained in the event of an unforeseen interruption. Insurance policies are also purchased to provide cover for a range of potential operational risk losses. The implementation of a board-approved environmental policy is managed as part of the operational risk framework.
Risk Management in Portfolio Business Unit
The Portfolio Business Unit consists of businesses being managed for exit. The majority of the risk management processes within these businesses follow the same management, measurement and control guidelines as those in Personal Financial Services, except for credit risk in Motor Finance and Litigation Funding businesses and residual value risk, which arises solely in Portfolio Business Unit.
Credit risk
Managing credit risk in Wholesale Banking
The management of credit risk in the Portfolio Business Unit follows the same management, measurement and control guidelines as that in Financial Markets, except that risk appetite is defined by the reducing portfolio size, and also that Credit personnel for the Portfolio Business Unit form an integral part of the Wholesale Credit Risk function. Regular reviews of credit exposures and counterparties continue to be undertaken and Credit Risk provides advice to the respective business units in the sales process.
Managing credit risk in Motor Finance and Litigation Funding
Motor Finance provided funds via motor dealers acting as introducers to individuals and businesses. A large majority of such arrangements are secured on the vehicles involved. In the course of these operations, advances were also provided to participating dealers. No new business has been accepted in 2004 the emphasis being on managing the repayment of extant loans. This is reflected in the Credit Risk management policies and techniques employed.
Litigation Funding plc provided loans via claims management companies and solicitors acting as introducers to individual claimants for the purchase of “after the event” insurance cover. Such cover provides the claimant with insurance against the costs of unsuccessful litigation. The repayment of such loans is made by the claimants, either from damages and costs recovery, or from the insurance policy. Other than fulfilling contractual requirements no new business has been accepted during 2004 the emphasis being on the managing the repayment of extant loans. This is reflected in the Credit Risk management policies and techniques employed.
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Market risk
Managing market risk in European operations
The French subsidiary prior to its sale during 2004 was exposed to market risks arising from banking and savings activity. These risks were monitored in a manner consistent with the Personal Financial Services Banking and Savings exposures. The French subsidiary also had interest-earning assets funded by non-interest bearing liabilities, similar to the same risk in Group Infrastructure and interest rate risk exposure arising from the litigation funding vehicle. These risks were measured, reviewed and reported by the Personal Financial Services Banking and Savings market risk function.
Managing market risk in Investment and Protection
There is one Life company in the Portfolio Business Unit, Scottish Mutual International. Abbey’s market risk exposures in Portfolio Business Unit-Life are similar to those in Personal Financial Services-Life. All Portfolio Business Unit-Life market risk exposures are measured, managed and reported in a manner consistent with the Personal Financial Services-Life exposures and by the Life companies’ market risk function.
Managing market risk in Wholesale Banking
The majority of Financial Markets Portfolio Business Unit positions were investment assets (bonds, leases and structured loans) fully cash flow matched with interest rate swaps and hedged to minimise interest rate risk exposure. The remaining portfolios are now being managed for exit, and market risk management remains a key consideration in this process. Risk measurement, monitoring and control continue to be applied, with oversight by the market risk function.
Insurance risk
Managing insurance risk
The Appointed Actuary (International) has responsibility for managing the pricing and reserving of insurance risk within the Portfolio Business Unit Life company. A process similar to that employed in the Personal Financial Services companies is used in the Portfolio Business Unit company.
Operational risk
A process similar to that employed in Personal Financial Services is used in the Portfolio Business Unit.
Residual value risk
Residual value risk occurs when the value of a physical asset at the end of certain contracts (e.g. operating leases) potentially may be worth less than that required to achieve the anticipated return from the transaction. Managing residual value risk in Wholesale Banking business Residual value risk exposure in Wholesale Banking relates principally to trains and other rail assets managed by Porterbrook Leasing Company Limited (“Porterbrook”), as well as aircraft managed by IEM Airfinance BV (“IEM”). Periodic revaluations and/or impairment reviews are undertaken.
Tools such as first loss and residual value guarantees where appropriate (aircraft), and appropriate return conditions are employed by Abbey to mitigate the associated risks. The residual value risk management framework includes business area mandates, asset specific policies and delegated authorities agreed by Risk Committee and business area risk oversight fora (e.g. Financial Markets) as appropriate.
Managing residual value risk in Motor Finance and Litigation Funding businesses
Within Motor Finance, exposure arises within portfolios of contract purchase agreements relating to motor vehicles. Revaluations of motor vehicles are undertaken at least annually.
Derivatives
Derivative financial instruments (“derivatives”(‘derivatives’) are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in the contract or agreement.
They include interest rate,
cross currencycross-currency and equity related swaps, forward rate agreements, futures, caps, floors, options and swaptions (see table below). Derivatives are used for trading and
non-tradinghedging purposes. These terms are defined in
(“Accounting“Accounting policies: Derivatives”
).
Non-trading
The main
non-tradinghedging derivatives are interest rate and
cross currencycross-currency swaps, which are used to hedge
certain of Abbey’s exposures,
to interest rates and exchange rates inherent in non-trading assets, liabilities and positions, including fixed-rate lending and structured savings products within the
Retail Banking
and Savings segment and medium-term note issues, capital
issuesissuances and
fixed-rate asset purchases within Financial Markets.other capital markets funding.
Derivative products that are combinations of more basic derivatives (such as swaps with embedded option features), or that have leverage features, may be used in circumstances where the underlying position being hedged contains the same risk features. In such cases the derivative used will be structured to match the risks of the underlying asset or liability. Exposure to market risk on such contracts is therefore
economically hedged.
Derivatives used for non-trading activities were accounted for on an accruals basis consistent with the assets, liabilities or positions being hedged.
The following table summarises
non-trading activities undertaken by Abbey, the related risks associated with such activities and the types of
non-trading derivatives used in managing such risks. Such risks may also be managed using on-balance sheet instruments
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as part of an integrated approach to risk management. Further information is contained in Note 5115 of the Consolidated Financial Statements.
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| | | | | |
| Activity | | Risk | | Type of hedge |
| |
| Management of the return on variable rate assets financed by shareholders’ funds and net non-interest bearing liabilities. | | Reduced profitability due to falls in interest rates. | | Receive fixed interest rate swaps. |
| |
| Fixed rate lending and investments. | | Sensitivity to increases in interest rates. | | Pay fixed interest rate swaps. |
| |
| Fixed rate retail and wholesale funding. | | Sensitivity to falls in interest rates. | | Receive fixed interest rate swaps. |
| |
| Equity-linked retail funding. | | Sensitivity to increases in equity market indices. | | Receive equity swaps. |
| |
| Management of other net interest income on retail activities. | | Sensitivity of returnsincome to changes in interest rates. | | Interest rate swaps and caps/floors according to the type of risk identified. |
| |
| Profits earned in foreign currency. | | Sensitivity to strengthening of sterling against other currencies. | | Forward foreign exchange contracts. |
| |
| Investment in foreign currency assets. | | Sensitivity to strengthening of sterling against other currencies. Foreign currency funding. | | Cross-currency and foreign exchange swaps. |
| |
| Issuance of products with embedded equity options. | | Sensitivity to changes in underlying rateindex and rateindex volatility causing option exercise. | | Interest rate swaps combined with equity options. |
| |
Lending, and investments. | | Sensitivity to weakening credit quality. | | Purchase credit default and total return swaps. |
|
Investment in, and issuance of, products with embedded interest rate options. | | Sensitivity to changes in underlying rate and rate volatility causing option exercise. | | Interest rate swaps plus caps/floors, and other matched options. |
| |
| Investment in, and issuance of, bonds with put/call features. | | Sensitivity to changes in rates causing option exercise. | | Interest rate swaps combined with swaptions(1)and other matched options. |
| |
| Firm commitments (e.g. asset purchases, issues arranged). | | Sensitivity to changes in rates between arranging a transaction and completion. | | Hedges are arranged at the time of commitments if there is exposure to rate movements. |
| |
| | |
| (1) | | A swaption is an option on a swap which gives the holder the right but not the obligation to buy or sell a swap. |
Liquidity risk
Retail Banking’s liquidity risk are managed by Abbey Financial Markets, refer relevant section below.
Operational risk
Managing operational risk
Operational risk is the risk of loss to Abbey, resulting from inadequate or failed internal processes, people and systems, or from external events. Risks are categorised by type, such as fraud, process failure, inadequate human resource management and damage to assets. They are assessed, not only in terms of their financial impact, but also in terms of their effect on business objectives, customers, regulatory responsibilities and Abbey’s reputation.
Abbey operates a ‘hub and spokes’ model for the implementation of an operational risk management programme. An independent operational risk ‘hub’ function has responsibility for establishing the framework within which risk is managed and working with the business aligned ‘spoke’ groups to ensure its consistent implementation across Abbey. The framework incorporates industry practice and regulatory requirements, particularly those emanating from the Basel Committee, European Union Directives and the Financial Services Authority. The primary purpose of the framework, which is approved by the Risk Committee, is to define and articulate the Abbey-wide policy, processes, roles and responsibilities.
The management of operational risk is the responsibility of business managers, who identify, assess and monitor risks, in line with the processes described in the framework. The operational risk function ensures that all key risks are regularly reported to the Risk Committee and Board.
In line with Financial Services Authority’s guidance and industry practice, the company has crisis management and disaster recovery arrangements to ensure that critical business processes are maintained in the event of an unforeseen interruption. Insurance policies are also purchased to provide cover for a range of potential operational risk losses.
Risk Management in Abbey Financial Markets
Credit risk
Credit risk is the risk that counterparties will not meet their financial obligations resulting in Abbey Financial Markets (“AFM”) losing the monies lent or having to close out transactions prematurely, which may incur losses after realising collateral held. Credit risk arises by AFM making loans, investing in debt securities or other financial instruments or entering into financing transactions or derivative contracts.
Managing credit risk
The Risk Committee has established a set of risk appetite limits to cover different types of risk, including credit risk, arising in AFM. Abbey’s credit risk appetite is measured and controlled by a maximum Economic Capital value, which is defined as the maximum level of unexpected loss that Abbey is willing to sustain over a one year period. Within these limits, credit mandates and policies are approved to cover detailed industry, sector and product limits. All transactions falling within these mandates and policies are accommodated under credit limits approved by the appropriate credit authority. Specific approval is required by the Risk Committee for any transaction that falls outside the mandates. Analysis of credit exposures and credit risk trends are provided to the Financial Markets Risk Oversight Forum each month, and key issues escalated to the Risk Committee as required.
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Large Exposures (as defined by the Financial Services Authority) are reported quarterly to the Risk Committee and the Financial Services Authority.
Credit risk on derivative instruments is calculated using the potential future mark-to-market exposure of the instruments at a 95% statistical confidence level and adding this value to the current mark-to-market value. The resulting “loan equivalent” or credit risk is then included against credit limits, along with other non-derivative exposures.
In addition, there is a policy framework to enable the collateralisation of derivative instruments (including, swaps). If collateral is deemed necessary to reduce credit risk, the amount and nature of the collateral is determined by management’s credit evaluation of the counterparty.
Credit Risk Mitigation
(i) Netting arrangements
The Group restricts its credit risk by entering into transactions under industry standard agreements where possible these agreements facilitate netting of transactions with the counterparty. The netting arrangements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis. However, there is scope for the credit risk associated with favourable contracts to be reduced by netting arrangements embodied in the agreements to the extent that if an event of default occurs, all amounts with the counterparty under the specific agreement can be terminated and settled on a net basis. Derivatives, repurchase and reverse repurchase transactions, stock borrowing/ lending transactions and securities financing transactions are governed by industry standard agreements that facilitate netting.
(ii) Collateralisation
The Group also mitigates its credit risk to counterparties with which it transacts significant amounts of derivatives through collateralisation, using industry standard collateral agreements. Under these agreements, net derivative exposures with counterparties are collateralised with cash, securities or equities. Also exposures and collateral are revalued daily and collateral is adjusted accordingly to reflect deficits/ surpluses.
Using credit risk methodologies explained above, exposure stands at £37,899m. The below table breaks down the net exposure down by credit rating of the issuer or counterparty:
| | | | |
| | Year ended | |
| | 31 December | |
| | 2005 | |
| | £m | |
|
| AAA | | | 3,961 | |
| AA | | | 22,568 | |
| A | | | 8,774 | |
| BBB | | | 2,437 | |
| BB | | | 146 | |
| B | | | 13 | |
|
Total | | | 37,899 | |
|
In the securities financing businesses, credit risk arises on both assets and liabilities and on both on and off balance sheet transactions. Consequently, the above credit risk exposure arises not only from the on balance sheet assets, the gross value of which is detailed below, but also from a portfolio of securities financing trades classified as liabilities and off balance sheet assets.
The following table presents the amount that best represents Abbey Financial Markets’ estimated maximum exposure to counterparties at the reporting date without taking account of any collateral held or other credit enhancements:
| | | | |
| | Year ended | |
| | 31 December | |
| | 2005 | |
| | £m | |
|
| Trading assets | | | 34,671 | |
| Purchase and resell agreements | | | 23,578 | |
| Derivatives | | | 12,212 | |
| Other | | | 4,366 | |
|
Third party exposures | | | 74,827 | |
|
Market risk
As discussed above in the Retail Banking section, market risk-taking is performed within the framework established by the Market Risk Manual.
A major portion of the market risk arises from exposures to changes in the levels of interest rates, equity markets and credit spreads. Interest rate exposure is generated from funding and trading activities. Exposure to equity markets is generated by the creation and risk management of structured products by Abbey Financial Markets for the Personal Financial Services market and trading activities. Credit spread exposure arises from credit risk management and trading activities within Abbey Financial Markets.
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Managing market risk
The primary risk exposures for Abbey Financial Markets are interest rate, equity, credit spread and residual exposure to property indices. Equity risks are managed via equity stock, futures and structured equity derivatives. Credit-spread risks are managed via credit derivatives (credit default swaps, total return swaps). Property Index risk is managed via insurance contracts and property derivatives.
Abbey Financial Markets operates within a market risk framework designed to ensure that it has the capability to manage risk in a well-controlled manner. A comprehensive set of policies, procedures and processes have been developed and implemented to identify, measure, report, monitor and control risk across Abbey Financial Markets.
Market Risk from non-trading activities is discussed in the Retail Banking section above.
For Trading activities the standardised risk measure adopted is Value at Risk calculated at a 95% confidence level over a one-day time horizon. On a daily basis, market risk factor sensitivities, Value at Risk measures and stress tests are produced, reported and monitored against limits for each major activity and at the aggregate Abbey Financial Markets level. These limits are used to align risk appetite with the business’s risk-taking activities and are reviewed on a regular basis. Early identification and measurement of risks are important elements of the risk management processes. Measurement of risks can involve the use of complex quantitative methods and mathematical principles to model and predict the changes in instruments and portfolio valuation. These methods are essential tools to understand the risk exposures.
Trading Activities
Trading activities are undertaken by Abbey Financial Markets only. They are managed on a continuous basis, and are marked to market on a daily basis.
Trading risk exposure arises only in the Abbey National Treasury Services group. The majority of trading risk exposure arises in Abbey National Treasury Services plc. Trading risk exposure arises in Cater Allen International Limited and Abbey National Securities Inc, where risk taking is controlled by the provisions in Risk Mandates.
The following table shows the value at risk-based consolidated exposures for the major risk classes as at 31 December 2005, together with the highest, lowest and average exposures for the year. Exposures within each risk class reflect a range of exposures associated with movements in that financial market. For example, interest rate risks include the impact of absolute rate movements, movements between interest rate bases and movements in implied volatility on interest rate options. The range of possible statistical modelling techniques and assumptions mean these measures are not precise indicators of expected future losses, but are estimates of the potential change in the value of the portfolio over a specified time horizon and within a given confidence interval.
From time to time, losses may exceed the amounts stated where the movements in market rates fall outside the statistical confidence interval used in the calculation of the value at risk analysis. The 95% confidence interval, used as a standard across Abbey, means that the theoretical loss at a risk factor level is likely to be exceeded in one period in twenty. Abbey address this risk by monitoring stress-testing measures across the different business areas. For trading instruments the actual, average, highest and lowest value at risk exposures shown below are all calculated to a 95% level of confidence using a simulation of actual one day market movements over a one year period. The effect of historic correlations between risk factors is additionally shown below. The use of a one-day time horizon for all risks associated with trading instruments reflects the horizon over which market movements will affect the measured profit and loss of these activities.
The numbers below represent the potential change in market values of trading instruments. Since trading instruments are recorded at market value, these numbers also represent the potential effect on income. Trading instruments are held only in Abbey Financial Markets.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Exposure at 31 | | | | | | | | | | | Exposure for the year ended 31 | |
| | | December | | | | | | | | | | | | | December | |
| | | Actual exposure | | | Average exposure | | | Highest exposure | | | Lowest exposure | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | | £m | | | £m | |
| |
Group trading instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate risks(1) | | | 3.4 | | | | 4.8 | | | | 4.1 | | | | 4.3 | | | | 5.2 | | | | 7.1 | | | | | 3.4 | | | 2.8 | |
| Equity risks | | | 2.7 | | | | 5.0 | | | | 3.5 | | | | 3.3 | | | | 5.2 | | | | 5.6 | | | | | 2.0 | | | 1.3 | |
| Spread risk | | | 2.1 | | | | 1.5 | | | | 1.7 | | | | 1.8 | | | | 2.1 | | | | 2.4 | | | | | 1.4 | | | 1.1 | |
Other risks(2) | | | 0.1 | | | | 0.3 | | | | 0.1 | | | | 0.2 | | | | 0.4 | | | | 0.4 | | | | | — | | | — | |
| |
Correlation offsets(3) | | | (1.6 | ) | | | (2.2 | ) | | | (1.8 | ) | | | (1.8 | ) | | | | | | | | | | | | | | | | |
| |
| Total correlated one-day Value at Risk | | | 6.7 | | | | 9.4 | | | | 7.6 | | | | 7.8 | | | | 9.9 | | | | 10.5 | | | | | 5.6 | | | 4.8 | |
| |
| | |
| (1) | | Interest rate risks include property index risk.
|
|
| (2) | | Other risks include foreign exchange risk. |
|
| (3) | | The highest and lowest exposure figures reported for each risk type did not necessarily occur on the same day as the highest and lowest total correlated one-day Value-at-Risk. |
| |
| | | Exchange-traded derivatives may additionallyA corresponding correlation offset effect cannot be used as hedgescalculated and is therefore omitted from the above table. |
Liquidity risk
Liquidity risk is the potential that, although remaining solvent, Abbey does not have sufficient liquid financial resources to enable it to meet its obligations as they fall due, or can secure them only at excessive cost. Liquidity risk is a key risk faced by financial services organisations.
The Board is responsible for the liquidity management and control framework at Abbey and has approved key liquidity limits in setting Abbey’s liquidity risk appetite. Along with its internal Liquidity Risk Manual, which sets out the liquidity risk control framework and policy, Abbey abides by the “Sound Practices for Managing Liquidity in Banking Organisations” set out by the Basel Committee as its standard for liquidity risk management and control.
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Managing Liquidity risk
Management of liquidity at Abbey, including the management of cash flows, raising funding, and managing liquid asset holdings, is the responsibility of the Executive Director, Finance and Markets. The active management of liquidity is undertaken by Abbey Financial Markets within the framework of the Liquidity Risk Manual. The Asset and Liability Management Committee and the Risk Committee monitor Abbey’s liquidity position on a monthly basis. The Board also receives a monthly update on key liquidity issues and Abbey’s liquidity position is reported to the Financial Services Authority on a monthly basis.
Abbey views the essential elements of liquidity management as controlling potential cash outflows, maintaining prudent levels of highly liquid assets and ensuring that access to funding is available from a diversity of sources. A comprehensive management and monitoring process, and a series of liquidity limits within which liquidity is managed, underpin these elements. For example, as excessive concentration in either liquid assets or contractual liabilities contributes to potential liquidity risk, appropriate limits have been defined under the Liquidity Risk Appetite. Management also monitors Abbey’s compliance with the Sterling Stock Liquidity limits set by the Financial Services Authority, which focus on ensuring that sterling cash liabilities due five days in advance can be met by realising liquid assets, with any excesses being reported to the Risk Committee and the Board. In addition to such limits, liquidity ratios also have trigger-review levels that require the Treasurer, Head of Asset and Liability Management, and Chief Risk Officer to initiate appropriate reviews of current exposure when such levels are exceeded.
The Liquidity Risk Manual has been designed to reduce the likelihood and impact of either firm specific or system-wide liquidity problems. Abbey intends to maintain sufficient liquid assets and marketable assets to meet the expected cash flow requirements of all its businesses, to ensure customer and counterparty confidence, and to be in a position to withstand liquidity pressures resulting from unexpected or exceptional circumstances.
While Abbey’s liquidity risk is consolidated and primarily controlled at the ANTS company level, liquidity risk is also measured, monitored and controlled within the specific business area or the subsidiary where it arises. Management recognises that while the liquidity approach developed pursuant to the Liquidity Risk Manual is designed to reduce the likelihood of significant liquidity issues arising, the possibility of such events cannot be eliminated. Consequently, Abbey also operates a Liquidity Contingency Plan to manage and co-ordinate any actions that are required in order to mitigate the effects of a liquidity shortfall. The Liquidity Contingency Plan defines the circumstances under which the plan is activated, the management framework and notification procedures, and the key roles and responsibilities during the operation of the plan.
The Liquidity Contingency Plan becomes operational when the demand for cash, whether from demands for repayment, from wholesale funding or from retail deposits, exceeds the limits for liquidity management defined under the Liquidity Risk Appetite. The circumstances that cause this to happen will tend to be sudden, unexpected events that trigger demands for cash that cannot be managed within the procedures, limits and controls defined in the Liquidity Risk Manual.
To be effective, the management of liquidity in a crisis must be timely, proactive and flexible enough to respond to a variety of different circumstances. The management structure for the Liquidity Contingency Plan, which is structured around a small team of individuals with the authority to agree, co-ordinate and implement actions that will control a volatile, dynamic situation, has two key elements:
| > | | the Treasurer, Head of Asset and Liability Management, is responsible for the rapid assessment of the above activitiesimplications of a sudden, unexpected event on the day-to-day liquidity of Abbey, and for the decision to activate the Liquidity Contingency Plan; and |
|
| > | | the liquidity crisis management team, under the chairmanship of the Treasurer, Head of Asset and Liability Management, is the decision-making authority in lieuthe event of interest rate swaps.a liquidity crisis, and is responsible for implementing the Liquidity Contingency Plan. |
The Liquidity Contingency Plan defines a framework for the decision-making process under exceptional circumstances, and it details the tools available to mitigate any such event. These tools include procedures for realising marketable assets, for entering into repo transactions with central banks, and for securing retail deposits and managing wholesale funds. Even though the Liquidity Contingency Plan focuses predominantly on realising marketable assets to meet liabilities, in certain situations additional funding — as well as certificates of deposit, commercial paper and medium term funding — may be sought, depending on the nature of the crisis. The Liquidity Contingency Plan is reviewed and revised on at least an annual basis.
Liquidity risk measurement
Abbey uses net cash flows as a key measure of liquidity risk as they take into account contracted liabilities and contracted assets that have a defined maturity date. Such current cash outflows as well as expected future cash outflows are measured over key benchmark time periods and unexpected cash outflows arising from unexpected but plausible events, such as the withdrawal of a percentage of retail deposits at any point in time and the limited ability to renew wholesale deposits, are met through new borrowing, additional sales in the repo market and additional asset sales.
Liquid assets are normally measured at current market values, discounted to reflect transaction costs. Liquid assets may take time to liquidate, due to marketability issues and large position sizes, and may decrease in market value in times of adverse market movement. This expected liquidation time is measured over key benchmark time periods under prudent assumptions in relation to market conditions. The risk related to uncertain assumptions about the behavioural characteristics of assets and liabilities is also considered when measuring liquidity risk.
The ratio of discounted liquid assets that will be available to meet the cumulative liabilities falling due at key benchmark time periods is the principal liquidity measure. The liquidity ratio is subject to periodic stress testing based upon a range of assumptions.
Securitisation of Abbey assets
Abbey, through various special purpose vehicles, provide a wide range of securitised mortgage products to a diverse investor base. There is little liquidity risk related to asset securitisations as the repayment of the securitised notes issued is financed by the expected maturity or repayment of the underlying securitised asset, which is recognised in the Liquidity Risk Manual. Abbey does
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not expect securitisations to represent a greater proportion of its overall funding in the future than at present. However, in times of significant market disruption, residential mortgage backed securitisation, which typically remains a very liquid and deep market, might be accessed, and in such circumstances could provide a higher proportion of funding than is presently expected.
Maturities of financial liabilities
The table below analyses the financial liabilities of the Group into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date.
Customer Accounts is largely made up of Retail Deposits. In particular the ‘Demand’ grouping consists, for example, of current accounts and other variable rate savings products. The ‘Up to 3 Month’ grouping largely constitutes wholesale funding of wholesale assets of a similar maturity.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | |
| | | | | | | Up to 3 | | | 3-12 | | | 1-5 | | | Over 5 | | | | |
| | | Demand | | | months | | | months | | | years | | | years | | | Total | |
| At 31 December 2005 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Deposits by banks | | | 845 | | | | 4,767 | | | | 3 | | | | — | | | | 2 | | | | 5,617 | |
| Customer accounts | | | 53,326 | | | | 9,205 | | | | 2,464 | | | | 546 | | | | 348 | | | | 65,889 | |
| Derivative financial instruments | | | — | | | | 177 | | | | 650 | | | | 3,804 | | | | 6,633 | | | | 11,264 | |
| Trading liabilities | | | 1,257 | | | | 35,426 | | | | 4,998 | | | | 6,912 | | | | 4,071 | | | | 52,664 | |
| Financial liabilities designated at fair value | | | — | | | | 1,234 | | | | 2,449 | | | | 509 | | | | 3,756 | | | | 7,948 | |
| Debt securities in issue | | | 74 | | | | 1,001 | | | | 2,272 | | | | 6,955 | | | | 10,974 | | | | 21,276 | |
| Other borrowed funds | | | — | | | | 16 | | | | — | | | | 303 | | | | 1,925 | | | | 2,244 | |
| Subordinated liabilities | | | — | | | | — | | | | 105 | | | | 381 | | | | 5,719 | | | | 6,205 | |
| Investment contract liabilities | | | — | | | | — | | | | 186 | | | | 648 | | | | 2,472 | | | | 3,306 | |
| |
Total financial liabilities | | | 55,502 | | | | 51,826 | | | | 13,127 | | | | 20,058 | | | | 35,900 | | | | 176,413 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Company | |
| | | | | | | Up to 3 | | | 3-12 | | | 1-5 | | | Over 5 | | | | |
| | | Demand | | | months | | | months | | | years | | | years | | | Total | |
| At 31 December 2005 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Deposits by banks | | | 19,490 | | | | 3,921 | | | | 182 | | | | 24,672 | | | | 2 | | | | 48,267 | |
| Customer accounts | | | 58,162 | | | | 6,373 | | | | 1,017 | | | | 2,047 | | | | 11,689 | | | | 79,288 | |
| Derivative financial instruments | | | — | | | | — | | | | — | | | | 219 | | | | 404 | | | | 623 | |
| Debt securities in issue | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | 4 | |
| Other borrowed funds | | | — | | | | — | | | | — | | | | 303 | | | | 1,149 | | | | 1,452 | |
| Subordinated liabilities | | | — | | | | — | | | | 105 | | | | 381 | | | | 5,991 | | | | 6,477 | |
| |
Total financial liabilities | | | 77,652 | | | | 10,294 | | | | 1,304 | | | | 27,626 | | | | 19,235 | | | | 136,111 | |
| |
Derivatives held for Trading Purposes
Abbey Financial Markets (“AFM”) is the principal area of the Group actively trading derivative products and is additionally responsible for implementing Group derivative hedging with the external market. For trading activities AFM’s objectives are to gain value by:
| > | | marketing derivatives to end users and hedging the resulting exposures efficiently and |
|
| > | | the management of trading exposure reflected on the Group’s balance sheet. |
Trading derivatives include interest rate, cross currency, equity, residential property and other index related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures and equity index options.
(Unaudited information)
The following table presents the notional amounts of credit derivatives protection bought and sold at 31 December 2004.2005.
| | | | | | | | | | | | | | | | | |
| | | Protection | | | Protection | |
| | | Purchased | | Sold | | | Purchased | | Sold | |
| | | £m | | £m | | | £m | | £m | |
| | Notional amounts: | | |
| Portfolio Business Unit protection | | 15 | | – | | | 3 | | — | |
Trading activity (1) | | 9,409 | | 6,393 | | | 10,780 | | 7,881 | |
| | Total | | 9,424 | | 6,393 | | | 10,783 | | 7,881 | |
|
| | |
| (1) | | This includes £562m£487m (notional) of portfolio credit derivatives. |
The use of derivatives to manage exposures does not reduce the reported levelslevel of assets on the balance sheet or the level of off-balance sheet commitments.
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Portfolio Business Unit protection activity Within the Portfolio Business Unit, credit derivatives have been used as hedging instruments for assets held on the balance sheet. Purchased protection at 31 December
20042005 within the Portfolio Business Unit totalled
£15m. These transactions are accrual accounted.£3m.
The business trades in single-name credit derivatives and
also a limited number of portfolio credit derivative transactions. The credit derivatives’ trading function operates within the same framework as other trading functions. Risk limits are established and closely monitored.
At 31 December 2004,2005, the total notional amounts of protection purchased and sold by the trading business were £9.4bn£10.8bn and £6.4bn,£7.9bn, respectively. The mismatch between notional amounts is largely attributable to Abbey using credit derivative transactions hedged with securities positions. The majority of positions are matched. Consequently, the amount of retained credit risk contributed by the credit derivatives trading activity is small in the context of Abbey’s overall credit exposures.
Risk Management in Insurance and Asset Management
Management of insurance and financial risk
The Insurance and Asset Management (“IAM”) division issues contracts that transfer insurance risk or financial risk or both. This section summarises these risks and the way the IAM manages them.
The IAM Division Risk Manual supports the Abbey Risk Framework and Risk Appetite Statement by defining at a more detailed level the measurement, management and governance for IAM risks. Below this manual are a series of risk policy documents covering individual risk types within IAM. The IAM Risk Oversight Forum meets on a regular basis to ensure that all key risks impacting the IAM division are suitably monitored and managed.
Contracts are written into three sub fund types, the key risks of which are summarised as follows:
(a) With-profits fund
This fund takes controlled investment risk with the aim of enhancing policyholder investment returns. The fund aims to limit that risk, in line with the Risk Manual and the Principles and Practices of Financial Management (“PPFM”), to that supportable by the With-Profit Fund’s assets. The costs of guarantees are spread across the contracts in the fund, but there remains a risk that the shareholder may have to contribute capital to the With-Profit fund in accordance with the terms of a memorandum of agreement to which the shareholder is party. However, derivative backed hedge assets are in place to protect against this risk.
For unitised with-profit contracts, the shareholder receives an annual management charge, typically ranging between 0.5% and 1.5% per annum, so that the earnings risk to the shareholder are similar to unit-linked contracts.
For traditional with-profit contracts, which form the minority of the with-profit fund business, the shareholder receives 1/9th of the cost of bonuses declared to policyholders as long as there is a distributable surplus within the fund.
The Risk Capital Margin, calculated in accordance with the Prudential Sourcebook, quantifies the capital required to cover adverse deviation arising from the effects of market risk, credit risk and persistency risk. As such, it covers the risk associated with the extent and timing of cash flows arising from the assets and liabilities in the With-Profit fund and the extent and duration matching for these contracts. At 31 December 2005, the Risk Capital Margin prior to making any allowance for management actions as set out in the PPFM amounted to £281m in relation to total assets of £15,478m.
(b) Unit linked fund
In relation to unit-linked funds, the policyholders carry all investment risks, with any changes in underlying investments being reflected by an equal and opposite change in the related contract liabilities.
(c) Non-profit fund
The risk within the non-profit fund is directly with the shareholder.
The Resilience Capital Requirement, calculated in accordance with the Prudential Sourcebook, quantifies the capital required to cover adverse deviation arising from the effects of market risk. As such, it covers the risk associated with the extent and timing of cash flows arising from the assets and liabilities in the Non-Profit fund and the extent and duration matching for these contracts. At 31 December 2005, the Resilience Capital Requirement amounted to £68m in relation to total assets of £6,297m.
Further details of the risks relevant to the above sub funds and contract types and how they are controlled is set out below.
Insurance risk
Insurance risk is the possibility under any one insurance contract that the insured event occurs and the uncertainty of the amount of the resulting claim. It refers to the inherent uncertainties in insurance, including:
| > | | the occurrence of any event specifically insured against; |
|
| > | | for long-term insurance business, adverse mortality, morbidity and persistency experience; and |
|
| > | | expense overruns relative to pricing or provisioning assumptions. |
Those terms and conditions of insurance contracts that have a material effect on the Group’s cash flows are as follows:
| > | | fixed and guaranteed benefits for a fixed future premium; |
|
| > | | the option to pay reduced or no future premiums; |
70
79
Business and Financial Review
Risk Managementcontinued
| > | | the option to terminate the contract completely; and |
|
| > | | the option to exercise a guaranteed annuity or cash option. |
The group controls insurance risk through the following:
| > | | the use of actuarial models to calculate premiums and monitor claims patterns. Past experience, as well as statistical methods, are used. |
|
| > | | issued guidelines for concluding insurance contracts and assuming insurance risks. In relation to life insurance, the group concentrates on risks such as mortality, disability, illness and long-term care requirements. |
|
| > | | reinsurance of a large portion of the annuity and protection business. Reassurance is also used to limit the Group’s exposure to large single claims. When selecting a reinsurer, the group only considers those companies that provide high security. In order to assess this, ratings information is used, both from the public domain or gathered through internal investigations. |
|
| > | | close monitoring of the management of assets and liabilities to attempt to match the expected pattern of claim payments with the maturity dates of assets. |
|
| > | | the use of underwriting with premium levels being set to reflect the calculated level of risk. |
|
| > | | stress and scenario testing to monitor insurance risk as part of the Individual Capital Assessment required under the FSA regulatory reporting regime. Each main category of insurance risk is subject to a detailed experience analysis to ensure that all assumptions are reasonable. |
(i) Sensitivity analysis
The nature of the insurance business is such that a number of assumptions have been made in compiling the financial statements. These assumptions are around mortality rates, morbidity rates, persistency rates, investment returns and expenses in connection with in-force policies.
The table below provides a sensitivity analysis in relation to these assumptions.
| | | | | | | | | | | | | | | | | | | |
| | | | | Impact on pre tax | | | Impact on pre tax | | | | | | | |
| | | | | profit pre | | | profit post | | | Impact on equity | | | Impact on equity | |
| | | Assumed | | reinsurance | | | reinsurance | | | pre reinsurance | | | post reinsurance | |
| Assumption | | increase/(reduction) | | £m | | | £m | | | £m | | | £m | |
| |
| Interest rate and assets | | 100 basis points increase in risk discount rate | | | (96.8 | ) | | | (78.1 | ) | | | (82.9 | ) | | | (66.2 | ) |
| Interest rate and assets | | 100 basis point increase in interest rate | | | n/a | | | | 21.6 | | | | n/a | | | | 17.7 | |
| Expenses | | 10% decrease in maintenance expenses | | | 47.5 | | | | 42.7 | | | | 36.3 | | | | 33.2 | |
| Persistency | | 10% proportionate decrease in lapse rates | | | 41.0 | | | | 39.9 | | | | 34.9 | | | | 34.0 | |
| Mortality/morbidity — life assurance | | 5% proportionate decrease in base mortality and morbidity rates | | | 93.4 | | | | 26.3 | | | | 65.8 | | | | 22.9 | |
| Mortality/morbidity — annuity business | | 5% proportionate decrease in base mortality and morbidity rates | | | (27.8 | ) | | | (12.9 | ) | | | (19.1 | ) | | | (8.9 | ) |
| |
IAM’s exposure to movements in equity markets is limited by the use of derivative backed hedges within the with profits funds. For unit-linked contracts invested in equities, the investment risk is borne entirely by the contract holders. Accordingly the IAM’s results are less sensitive to movements in equity markets.
(ii) Concentrations of insurance risk
The table below presents an analysis of insured benefits across products.
| | | | | | | | | |
| | | Liability value | |
| | | Pre reinsurance | | | Post reinsurance | |
| | | £m | | | £m | |
| |
| Property linked | | | 6,422 | | | | 6,402 | |
| Annuity in payment | | | 1,088 | | | | 558 | |
| Structured products | | | 219 | | | | 219 | |
| Traditional life non profit | | | 2,755 | | | | 2,529 | |
| Traditional pension non profit | | | 1,242 | | | | 745 | |
| Unitised with profit | | | 7,664 | | | | 7,664 | |
| Deposit administration | | | 149 | | | | 149 | |
| Traditional life with profit | | | 2,359 | | | | 2,354 | |
| Traditional pension with profit | | | 2,631 | | | | 2,631 | |
| Other | | | 278 | | | | 264 | |
| |
Total | | | 24,807 | | | | 23,515 | |
| |
71
Business and Financial Review
Risk Managementcontinued
Financial Instrument Risk
IAM is exposed to financial risk through its financial assets, financial liabilities (investment contracts and borrowings), reinsurance assets and insurance liabilities.
The key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance and investment contracts as they fall due. The most important components of this financial risk are market risk, credit risk and liquidity risk, as outlined below.
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices and comprises three types of risk: interest rate risk, price risk and currency risk. These risks impact on IAM depends on the nature of the contracts written, as follows:
(a) Participating insurance and investment contracts — written in the With-profits funds
The main market risks inherent in these contracts are dependent upon the asset allocation of the With-Profits Fund. The more the fund is invested in an asset class, the greater the risk attached to movements in the particular asset markets.
The main market risks, reflecting the asset allocation, within the With-Profits funds are due to variations in:
| > | | equity prices; |
|
| > | | interest rates and bond prices; |
|
| > | | corporate bond spreads; |
|
| > | | equity price volatility affecting the value of policy guarantees; and |
|
| > | | bond volatilities affecting the value of guaranteed annuity options and other guarantees. |
(b) Non-linked Insurance contracts — written in the Non-profit funds
For conventional non-participating products, the contract benefits are guaranteed at outset, which implies a guaranteed rate of return (ignoring mortality risk). IAM bears the risk of the assets held failing to meet the value of liabilities.
IAM ’s non-profit funds are invested in a mix of government bonds, corporate bonds and cash. Therefore, the main market risks within these funds are:
| > | | variation in interest rates and bond prices; and |
|
| > | | variation in corporate bond spreads. |
(c) Unit-linked Insurance and non-participating investment contracts — written in the Non-profit funds
For unit-linked policies, the asset values determine the liabilities and the policyholder therefore bears all the market risk.
Fee income to IAM from unit-linked policies is normally taken as a percentage of funds under management, which is determined by cash flows, including the rate of asset growth. Therefore, if markets fall the value of the in-force policies fall as the present value of the charges on the funds under management is reduced.
The level of market risk in IAM is closely monitored and a report on risk levels, including Risk Based Capital levels (both total risk and market risk), is provided monthly to the Abbey Board, the Abbey Risk Committee and to the IAM Risk Oversight Forum.
A system of exposure limits is in place with clearly specified escalation procedures in the event of breaches. Risk positions against limits are included in the monthly reports to senior management. In the Non Profit fund, risk mitigation actions are likely to include adjusting asset profiles to more closely match liabilities. In relation to participating contracts, risk mitigation actions are likely to include switching the asset allocation into less risky assets or using derivatives to hedge positions.
Market risk can be further subdivided into the following components:
(i) Interest rate risk
Interest rate risk is part of market risk and is the risk that the value/future cash flows of a financial instrument will fluctuate because of changes in interest rates.
The IAM interest rate risk policy requires it to manage interest rate risk by maintaining an appropriate mix of fixed and variable rate instruments. The policy also requires it to manage the maturity profile of interest bearing financial assets and interest bearing financial liabilities.
Sensitivities to a 100 basis point change in the risk discount rate are shown in the insurance risk section above.
(ii) Price risk
IAM has entered into over the counter derivative contracts, with AFM, to provide financial protection against a range of embedded policy guarantees within the with profits fund. The majority of the non-profit fund is backed by debt instruments, rather than equity instruments. As a result of this, other price risk is minimised.
(iii) Currency risk
IAM takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial positions and cash flows. The level of exposure in total and by currency is monitored daily and arises primarily with respect to the Euro and the US Dollar.
72
Business and Financial Review
Risk Managementcontinued
IAM’s exposure to foreign currency risk within the investment portfolios supporting IAM’s sterling insurance and investment operations arises where assets are held that are denominated in a foreign currency. These positions are deliberately taken to obtain diversification benefits and exposures are generally low in proportion to total fund size.
The principal foreign currency exposure within the With profit funds is to the Euro, the bulk of which is as a result of Euro-denominated assets held to match the liabilities in Euro-denominated funds. These Euro assets are included as part of the hedging programme. On a net basis, foreign currency mismatch exposure is not significant.
Foreign currency exposure within the non-profit funds is also minimal.
IAM’s foreign operations (taken to be those denominated in non-sterling) generally invest in assets in the same currency denomination as their liabilities, so foreign currency mismatch risk between assets and liabilities is largely mitigated. Consequently, the foreign currency risk from the foreign operations mainly arises when the assets and liabilities denominated in a foreign currency are translated into sterling.
Credit risk
IAM has exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due.
IAM recognises that credit risk in its life insurance business arises from:
| > | | direct holdings of credit debt (principally corporate bonds); |
|
| > | | the impact of credit default on equity holdings; and |
|
| > | | external reinsurance contracts. |
IAM structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty, or groups of counterparties. Such risks are subject to frequent review.
The table below shows the ratings of fair value of assets held by IAM, which are subject to credit risk and presents the amount that best represents IAM’s estimated maximum exposure to counterparties at the reporting date without taking account of any collateral held or other credit enhancements. The table below reflects credit risk on assets where risk is borne by the shareholder, therefore, unit linked assets are excluded.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | AAA | | | AA | | | A+ | | | A | | | A- | | | AA- | | | BBB | | | BB | | | Total | |
| At 31 December 2005 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities | | | 5,930 | | | | 1,498 | | | | 45 | | | | 1,554 | | | | — | | | | 231 | | | | 272 | | | | 2 | | | | 9,532 | |
| Reinsurance asset | | | — | | | | 295 | | | | 17 | | | | 309 | | | | 115 | | | | 557 | | | | — | | | | — | | | | 1,293 | |
| Cash and balances with central banks | | | 58 | | | | 131 | | | | 113 | | | | 1,507 | | | | — | | | | 156 | | | | — | | | | — | | | | 1,965 | |
| |
Credit ratings have not been disclosed in the above table for equities. Whilst IAM is exposed to the impact of credit default on its equity holdings, this risk is not considered significant due to the spread of holdings.
Liquidity risk
IAM manages liquidity risk through a clearly articulated IAM Liquidity Risk Policy, Investment Guidelines and Treasury Management Guidelines. The Liquidity Risk Policy has the objectives of ensuring low probability of loss due to liquidity risk events, documentation of systems and controls for cost-efficient control of liquidity risk.
IAM effect operational control of liquidity risk through clearly documented and frequently monitored treasury guidelines.
Liquidity controls in IAM are monitored on a daily basis and breaches are escalated as provided for in the IAM Liquidity Risk Policy. A report on liquidity risk levels is included in the monthly risk reports submitted to the IAM Risk Oversight Forum and Abbey Risk Committee.
In addition a minimum number of months cash coverage is required in the With-profits funds. This limit is based on a moving average of previous months surrenders. The minimum cash coverage is updated regularly and is detailed in the Abbey Risk Appetite Statement. No such limit is applied to the non-profit funds. As the Group has a mandatory requirement of 4 day settlement for all withdrawals and that over 85% of assets are held in cash and readily marketable instruments, there is a significant time buffer to raise liquidity if redemptions increase unexpectedly in these funds.
73
Report of the Directors
Board of Directors
As at 31 December 20042005 Lord Burns (age
60)62) was appointed Joint Deputy Chairman on 1 December 2001 and Chairman on 1 February 2002. He is also Chairman of Glas Cymru
LtdLimited (Welsh Water)
, Deputy Chairman of Marks and Spencer plc and a Non-Executive Director of Pearson Group plc and
British Land plc.Banco Santander Central Hispano, S.A. His current professional roles include President of the Society of Business Economists, Fellow of the London Business School, Companion of the Institute of Management,
GovernorPresident of the National Institute of Economic and Social Research and Vice President of the Royal Economic Society.
He was formerly Permanent Secretary to the Treasury and chaired the Parliamentary Financial Services and Markets Bill Joint Committee. Until
October 2001,recently, he was a Non-Executive Director of
British Land plc (2000-2005) and Legal & General Group plc
and(1991-2001). He was Chairman of the National Lottery Commission (2000-2001).
Executive directors
Francisco Gómez-Roldán
Francisco Gómez-Roldán (age
51)52) was appointed Chief Executive Officer on 15 November 2004. He joined Abbey from Banco Santander Central Hispano, S.A., where he was the Chief Financial Officer for
the Group,Santander, a position that he held since March 2002. Prior to
thisthat he joined Banesto, a banking subsidiary of Banco Santander Central Hispano, S.A., in 2000 to become Chief Executive and Executive Director.
In 1992, he became Finance Director of the newly formed Grupo Argentaria, which aggregated a number of leading public sector banks and joined the
Group’sgroup’s board as an Executive Director in 1996.
With degrees in aeronautical engineering and economics, he joined Banco Vizcaya in 1978. In 1984 he became Director General of Banca Catalana after its acquisition by Vizcaya and following the merger of Banco Vizcaya and Banco Bilbao in 1988 to form BBV, he played a key role in creating and developing the investment fund and pensions industry in Spain.
He is currently a director of the Spain Fund
and Bolsas y Mercados Españoles S.A.
and AC Hoteles.Tony Wyatt
Jorge Morán
Chief Operating Officer
Jorge Morán (age 41) joined as an Executive Director
ManufacturingTony Wyatton the Board on 20 December 2005. He was appointed as Chief Operating Officer reporting directly to Abbey’s Chief Executive Officer, Francisco Gómez-Roldán. Jorge is currently General Manager of Santander and a member of the group’s management committee. He is head of Santander’s global Asset Management and Insurance division (2002 to present).
Before joining Santander in 2002, Jorge was Vice Chairman and Chief Executive Officer of Morgan Stanley for Spain and Portugal (2000 — 2002), where he was responsible for developing the company’s management strategy. Prior to this, Jorge was also responsible for managing Morgan Stanley’s asset management and distribution network (1992 — 2000). Before joining Morgan Stanley, Jorge was Director of Marketing at National Westminster Bank plc and Head of Product Development at Citibank España.
Graeme Hardie
Executive Director, Retail Banking
Graeme Hardie (age 55)44) was appointed Executive Director, Customer OperationsRetail Banking on 1 September 2003, having previously held positions with Novartas, New Power, AT&T, Guardian Royal Exchange and Midland Bank, including roles as22 February 2005.
He was Managing Director of OperationsNational Westminster Bank plc Retail Banking from April 2002 to December 2004, with responsibility for all aspects of management of the retail branch network.
Prior to this, in March 2000, following the takeover of National Westminster Bank plc by The Royal Bank of Scotland plc, he was appointed Director, National Westminster Bank plc Retail Change Planning.
Before joining National Westminster Bank plc, he was head of Retail Network Services for The Royal Bank of Scotland plc. Appointed in February 1997, he was responsible for sales and Technology, Directorservice, processes, training and development programmes, incentive and management information design.
He joined The Royal Bank of
Group Development,Scotland plc in 1978, initially in a variety of sales, marketing and
Banking Systems Director.Priscilla Vacassin
business development roles.
Nathan Bostock
Executive Director, Human ResourcesPriscilla VacassinFinance and Markets
Nathan Bostock (age
47)45) was appointed Executive Director,
Human ResourcesFinance and Markets on
1 June 2003. She was previously Group Human Resources Director at BAA plc, before which she was Director of Organisational Management22 February 2005. This followed his appointment to Abbey’s Executive Committee in November 2004. His responsibilities include finance, treasury, Abbey Financial Markets and
Development at the same company. She also spent 10 years with the Kingfisher Group (1988 to 1998), before which she worked for United Biscuits.Mark Pain (resigned on 28 January 2005)
Executive Director, Customer Sales
Mark Pain (age 43) was appointed Finance Director on 1 January 1998, Managing Director of Wholesale BankingCorporate Banking.
Nathan joined Abbey in November 2001 as Chief Operating Officer, Abbey National Treasury Services plc, with responsibility for finance, market risk and Executiveoperations. Prior to joining Abbey, Nathan spent nine years (1992-2001) with The Royal Bank of Scotland plc where his roles included Director, Customer Sales in 2003.Group Risk Management and Chief Operating Officer, Treasury and Capital Markets. Prior to joining The Royal Bank of Scotland plc, Nathan was Head of Risk Analysis and Finance, Treasury and Interest Rate Derivatives (Europe) for Chase Manhattan Bank (1988 to 1992). He joined AbbeyChase Manhattan Bank in 1989,1986 having previously held positions with Touche Ross & Coworked for Coopers and TSB Group. His previous appointments at Abbey include Manager of Strategic Planning, Manager of European Operations, Regional Director of Retail, and Group Financial Controller.Lybrand.
Angus Porter
Executive Director, Customer Propositions (resigned on 25 February 2005)
Angus Porter (age 47) was appointed as Executive Director, Customer Propositions on 1 July 2003. He was formerly Managing Director for the Consumer Division of BT plc. Before BT, he spent 14 years at Mars Confectionery in a variety of research and development, sales and marketing roles, including four years as Marketing Director. He is also currently a Non-Executive Director of MyTravel plc.
8074
Juan Inciarte (age
52)53) was appointed Non-Executive Director on 1 December 2004. He joined Banco Santander Central Hispano, S.A. in 1985. After holding different positions of responsibility, he was appointed to the Board of Directors in 1991, holding this office until 1999. He is currently Deputy Chairman of Santander Consumer Finance, S.A. and Executive Vice President of Banco Santander Central Hispano, S.A. In addition, he is a director of Compañía Española de Petróleos, Finanzauto S.A., Banco Banif S.A., Vista Capital de Espansion S.A. and Euroresidencias Gestión.
For several years he has served on the Board of Directors of First Union Corporation (presently Wachovia) in the US and the Board of Directors and Executive Committee of San Paolo - IMI in Italy.
He is a member of the US-Spain Council and Fellow of The Chartered Institute of Bankers in Scotland.
Senior Independent Non-Executive Director Keith Woodley (age
65)66) was appointed Non-Executive Director on 5 August 1996. He was made
Deputy Chairman and Senior Independent Non-Executive Director in April
1999.1999 and was Deputy Chairman from 6 April 1999 until November 2004. He is a former Non-Executive Director of National and Provincial Building Society and a former partner of Deloitte Haskins & Sells. A past President of the Institute of Chartered Accountants in England and Wales, he is currently Complaints Commissioner for the London Stock Exchange and a Council Member and Treasurer of the University of Bath.
José María Fuster (age
46)47) was appointed Non-Executive Director on 1 December 2004. He is currently Executive Vice-President of Operations and Technology of Banesto and Chief Information Officer
(“CIO”) of Grupofor Santander. He joined Banco Español de Crédito in 1998 and was appointed as
CIOChief Information Officer of
GrupoBanco Santander
Central Hispano, S.A. in 2003. He is a director of ISBAN UK Limited. He started his professional career in IBM and Arthur Andersen as a consultant. In the financial services sector, he has worked
at CitiBankfor Citibank and
Natwest Bank.National Westminster Bank plc.
José María Carballo (age
60)62) was appointed Non-Executive Director on 1 December 2004. He is currently Chairman of La Unión Resinera Española, Chairman of Vista Desarrollo, Director of
Star Capital Partners Ltd. (U.K.), Director of SCH Activos Inmobiliarios
and Director of Teleférico del Pico de Teide. He is also Vice President and Honorary Treasurer of the Iberoamerican Benevolent Society (U.K).
Previously, he was Executive Vice President of Banco Santander Central Hispano, S.A. from 1989 to 2001 and
CEOChief Executive Officer of Banco Santander de Negocios from 1989 to 1993. Until 1989 he was Executive Vice President responsible for Europe at Banco Bilbao Vizcaya. He was also Executive Vice President of Banco de Bilbao in New York until 1983.
António Horta-Osório (age
40)42) was appointed Non-Executive Director on 1 December 2004. He is currently Executive Vice President of
GrupoBanco Santander
Central Hispano, S.A. and
a member of its
Management Committeemanagement committee as well as Chief Executive Officer
(“CEO”) of Banco Santander Totta in Portugal. He was previously
CEOChief Executive Officer of Banco Santander Brasil. António Horta-Osório started his career at Citibank Portugal, where he was
Headhead of Capital Markets and at the same time was an assistant professor at the Universidade Católica Portuguesa. He then worked for Goldman Sachs in New York and London, focusing on
Corporate Finance Activitiescorporate finance activities in Portugal and, in 1993, he joined
Grupo Santander as
CEOChief Executive Officer of Banco Santander de Negócios Portugal.
New Appointments post 31 December 2004
Executive Directors
Graeme Hardie
Graeme Hardie (age 43) was appointed Executive Director, Sales and Marketing on 22 February 2005.
He was Managing Director of NatWest Retail Banking from January 2002 to December 2004, with responsibility for all aspects of management of the Retail Branch Network.
Prior to this, in March 2000, following the takeover of NatWest by the Royal Bank of Scotland Group, he was appointed Director, NatWest Retail Change Planning.
Before joining NatWest, he was Head of Retail Network Services for Royal Bank of Scotland (RBSG). Appointed in February 1997, he was responsible for sales and service, processes, training and development programmes, incentive and management information design.
He joined Royal Bank of Scotland in 1978, initially in a variety of sales, marketing and business development roles.
Nathan Bostock
Nathan Bostock (age 44) was appointed Executive Director, Finance and Markets on 22 February 2005. This follows his appointment to Abbey’s Executive Committee in November 2004. His responsibilities include finance, treasury, Abbey Financial Markets and the Portfolio Business Unit.
Nathan joined Abbey in November 2001 as Chief Operating Officer, Abbey National Treasury Services plc, with responsibility for finance, market risk and operations. Prior to joining Abbey, Nathan spent nine years (1992-2001) with The
81
Report of the Directors
Directorscontinued
Royal Bank of Scotland Group (“RBS”) where his roles included Director, Group Risk Management and Chief Operating Officer, Treasury and Capital Markets. Prior to joining RBS, Nathan was Head of Risk Analysis and Finance, Treasury and Interest Rate Derivatives (Europe) for Chase Manhattan Bank (1988 to 1992). He joined Chase Manhattan Bank in 1986 having previously worked for Coopers and Lybrand.
Non-Executive Directors
Andrew Longhurst
Andrew Longhurst (age
65)66) was appointed Non-Executive Director on 28 January 2005.
He was Chief Executive
Officer of
the Cheltenham & Gloucester
building society (1982 to 1995) during the time that itBuilding Society (1982-1997). In 1995 Cheltenham & Gloucester Building Society converted to a public limited company and was
sold toacquired by Lloyds Bank
in 1995. Heplc. Andrew joined the main board of Lloyds
Bank plc and
later of LloydsTSB. He oversaw the extension of Cheltenham & Gloucester’s mortgage operation into Lloyds
Bank plc branches. In 1997 he was appointed Director, Customer Finance of Lloyds TSB Bank plc, having responsibility for the enlarged group’s mortgage, credit card and
TSB branches,personal loan businesses and became Chairman of Cheltenham &
Gloucester (1997-98).Gloucester.
In 1998, Andrew retired from full time executive employment and joined the boards of
theThe United Assurance Group
Limited (Chairman 1998-2000), Thames Water
Limited (1998-2000) and Hermes Focus Asset Management
Limited (1998-present). He was appointed Deputy Chairman of The Royal London Insurance Society
LtdLimited (2000-2002) following its acquisition of United Assurance
(2000-02).Group Limited.
He has also served as Chairman of the Council of Mortgage Lenders (1994) and was a member of the DTI’sDepartment of Trade and Industry’s taskforce on deregulation of financial services (1993).
75
AuditorsReport of the Directors
Directorscontinued
New appointment post 31 December 2005
DeloitteNon-Executive Director
Rosemary Thorne
Rosemary Thorne (age 54) was appointed Non-Executive Director on 13 June 2006, with effect from 1 July 2006.
She is currently Group Finance Director of Ladbrokes plc and a Non-Executive Director of Cadbury Schweppes plc. Previously, Rosemary was Group Financial Controller of Grand Metropolitan Public Limited Company (prior to its merger with Guinness plc to become Diageo plc) and then spent almost eight years as the Group Finance Director of J Sainsbury plc. Rosemary joined the board of Bradford &
Touche LLPStonecutter Court1 Stonecutter StreetLondon EC4A 4TRBingley in 1999 as Group Finance Director, initially working on its demutualisation and flotation, resulting in a place in the FTSE 100 in December 2000. Rosemary remained in this role for a further five years.
Rosemary is a member of the Financial Reporting Council, Financial Reporting Review Panel and The Hundred Group of Finance Directors Main Committee. She also sits on the Council of the University of Warwick.
Registered Office and Principal Office
Abbey National House
2 Triton Square
Regent’s Place
London
Abbey National plc (“Abbey”) is registered in England and Wales No 2294747.
Auditors
Deloitte & Touche LLP
Stonecutter Court
1 Stonecutter Street
London EC4A 4TR
8276
Report of the Directors
Since 12 November 2004,
a Scheme of Arrangement, which hadAbbey has been
approved by the High Court of England and Wales and by the shareholders of Abbey and Banco Santander Central Hispano, S.A. became effective, whereby Abbey became a wholly owned subsidiary of Banco Santander Central Hispano, S.A. and the ordinary shares of Abbey
ceased to beare no longer traded on the London Stock Exchange.
ShareholdersAs a result, there have been no disclosures made to Abbey in
accordance with sections 198 to 208 of the
UK were awarded one new Banco Santander Central Hispano, S.A. share for each share which they held in Abbey and holders of American Depository Shares in the US were awarded two new Banco Santander Central Hispano, S.A. American Depository Shares for each Abbey American Depository Share.Companies Act 1985.
Banco Santander Central Hispano, S.A. is incorporated in Spain and has its registered office at Paseo de Pereda 9-12, Santander, Spain. Note 23 to the Financial Statements provides a list of the principal subsidiaries of Abbey and the nature of each company’s business as well as details of overseas branches.
Abbey is subject to
the listing rules of the UK Listing
Authority, a division of the Financial Services Authority, because it has preference shares listed on the London Stock Exchange. As it does not have listed ordinary shares, Abbey is exempt from the requirement to make certain disclosures
whichthat are normally part of the continuing obligations of listed companies in the UK. This exemption applies, among other things, to corporate governance and directors’ remuneration disclosures.
Principal activities and Business Reviewbusiness review
The principal activity of Abbey and its subsidiaries continues to be the provision of an extensive range of
personal financialretail banking services. Abbey is authorised and regulated by the Financial Services Authority. The
OperatingBusiness and Financial Review for the year, including a review of non-banking activities, is set out on pages
76 to
6958 of this document. Details of important events which have occurred since the end of the financial year and prospects for
20052006 are included in the Business Overview and the
OperatingBusiness and Financial Review sections.
The
profit on ordinary activities before tax forDirectors do not recommend the
year ended 31 December 2004 was £273m (2003: loss £686m). Anpayment of an interim net dividend of 8.33 pence per ordinary share was paid on 6 October 2004 (2003:(2004: 8.33 pence per ordinary share). In addition, nor do they recommend the payment of a special dividend of 25 pence per ordinary share together with 6 pence for dividend differential was paid on 14 December 2004. No final dividend is proposed.
(2004: nil).
The members of the Board at 31 December
20042005 are named on pages
80 to 82 together with appointments made following the year end. Where a74 and 75. For each Director,
was appointed during the year, the date of appointment is shown.
All other Directors served throughout the year. As at 31 December
2004,2005, the Board comprised a Chairman,
fivefour Executive Directors, including the Chief Executive,
Chief Operating Officer and
fivesix Non-Executive Directors. As at the date of publication of this report,
there is now a Chairman, five Executive Directors, including the
Chief Executive, and six Non-Executive Directors.composition of the Board remains unchanged. The roles of Chairman and Chief Executive are separated and clearly defined. The Chairman is primarily responsible for the working of the Board and the Chief Executive for the running of the business and implementation of Board strategy and policy.
There havehas been someone additional changesNon-Executive Director appointed since 31 December 2004. Mark Pain, Executive Director, Customer Sales resigned from the Board with effect from 28 January 2005 and Angus Porter, Executive Director, Customer Propositions resigned on 25 February 2005 from the Board, but stayed with Abbey in a management capacity until 24 March 2005.
Graeme Hardie Rosemary Thorne was appointed to the Board on 22 February 200513 June 2006, with her appointment to take up the post of Executive Director, Sales and Marketing, combining the previous roles of Mark Pain and Angus Porter. Nathan Bostock was also appointed to the Board as Executive Director, Finance and Markets,effect on 22 February 2005.
Andrew Longhurst was appointed to the Board as a Non-Executive Director on 28 January 2005. Details of all three new appointments are included on pages 81 and 82.
1 July 2006.
During 2004,2005, the following directors resigned:
| | | | | |
| Director | | Title | | Date of resignation |
| |
Luqman ArnoldMark Pain | | Chief Executive OfficerDirector, Customer Sales | | 15 November 200428 January 2005 |
Stephen HesterAngus Porter | | Chief Operating OfficerExecutive Director, Customer Propositions | | 12 November 200425 February 2005 |
Yasmin JethaPriscilla Vacassin | | Executive Director, Human Resources | | 30 November 2004September 2005 |
Leon AllenTony Wyatt | | Non-ExecutiveExecutive Director, Manufacturing | | 1 December 2004 |
Geoffrey Cooper | | Non-Executive Director | | 1 December 2004 |
Richard Hayden | | Non-Executive Director | | 1 December 2004 |
Gerard Murphy | | Non-Executive Director | | 1 December 2004 |
Vittorio Radice | | Non-Executive Director | | 1 December 2004 |
Charles Shuttleworth | | Non-Executive Director | | 1 December 200430 June 2005 |
| |
83
Report of the Directors
Directors’ Reportcontinued
Non-Executive Directors arehave been appointed for an indefinite term (other than Keith Woodley and Rosemary Thorne, who have been appointed for a three year term after which their appointmentappointments may be extended upon mutual agreement.agreement). In accordance with the Company’s Articles of Association, one-thirdall of the Board are required todirectors shall retire by rotation each yearfrom office and over a three year period all Directors must have retired from the Board and faced re-election.face re-election at every Annual General meeting. The Company’s Articles of Association also require that a Director must retire at the first Annual General Meeting after their 70th birthday.
Francisco Gómez-Roldá
n, Jorge Morán, Juan Rodríguez Inciarte, Jóse María Fuster,
JóseJosé María Carballo
and António Horta-Osório
Andrew Longhurst, Graeme Hardie and Nathan Bostock, having been appointed to the Board since the last Annual General Meeting, will retire and, being eligible, may offer themselves for election at the forthcoming Annual General Meeting. Keith Woodley, Lord Burns and Priscilla Vacassin will retire by rotation at the forthcoming Annual General Meeting and, all being eligible, may offer themselves for re-election. As described above, there were a number of changes to the Board of Directors, following the acquisition of Abbey by Banco Santander Central Hispano, S.A. All the new directors were selected for the wide knowledge and experience they have of the personal financial services market. In addition, as they all have an existing relationship with Banco Santander Central Hispano, S.A. they areand have therefore able to bringbrought to Abbey their experience and understanding of Bancothe Santander Central Hispano, S.A.’s successful business model.
Group.
The Board maintains three standing committees, all of which operate within written terms of reference. They are the Audit and Risk Committee, the Remuneration Committee and the Policyholder Review Committee.
Membership of the Audit and Risk Committee is restricted to
non-executive directors.Non-Executive Directors.
The Audit and Risk Committee’s primary tasks are to review the scope of external and internal audit, to receive regular reports from the external auditors, (currently Deloitte & Touche)Touche LLP) and the Chief Internal Auditor, and to review the preliminary results, interim information, and annual financial statements and any other significant financial reports before they are presented to the Board, focusing in particular on accounting policies, and compliance and areas of management judgement and estimates. The Committee’s scope was extended during 2003also includes risk management and oversight and the review of the procedures in place for employees to include risk oversight.raise concerns about possible wrongdoing in financial reporting and other matters. For a further discussion of the risk-control responsibilities of the Audit and Risk Committee, see the Risk Management section of the Business and Financial Review on page 59. The Audit and Risk Committee more generally acts as a forum for discussion of internal control issues and contributes to the Board’s review of the effectiveness of the Company’s internal control and risk management systems and processes. The Audit and Risk Committee also conducts a review of the remit and reports of the Abbey and Santander internal audit function, itsfunctions, as well as their effectiveness, authority, resources and scopestanding within Abbey and management’s response to their findings and
77
Report of work.the Directors
Directors’ Report continued
recommendations. Abbey’s relationship with the external auditors
isand the experience and qualifications of the external auditors are monitored by the Audit and Risk Committee and
aexternal auditor’s audit plans and audit findings are reviewed by the Committee. A framework for ensuring auditor independence has been adopted which defines unacceptable
non auditnon-audit assignments, pre-approval of acceptable non-audit assignments and procedures for approval of other non-audit assignments.
The Committee may make any recommendations to the Board as it sees fit and the Chairman of the Committee reports formally to the Board after each meeting.
The Chairman, Keith Woodley, is a chartered accountant and a previous President of the Institute of Chartered Accountants in England and Wales. The Board has determined that Keith Woodley has the necessary qualifications and experience to qualify as an audit committee financial expert as defined for the purposes of the US Sarbanes-Oxley Act of 2002.2002 and the Board considers that he is independent in accordance with S303A.02 of the New York Stock Exchange Corporate Governance Rules.
The other members of the Audit and Risk Committee are Juan
Rodríguez Inciarte and
Jose Fuster.José María Carballo. Following her appointment becoming effective on 1 July 2006, it is anticipated that Rosemary Thorne will also become a member of the Audit and Risk Committee. Pursuant to SEC Rule 10A-3(c)(2), which provides a general exemption from the requirement to have an audit committee for subsidiaries that are listed on a national securities exchange or market where the parent satisfies the requirement of SEC Rule 10A-3, Abbey is exempt from the requirements of SEC Rule 10A-3. According to SEC Rule 10A-3(c)(2), additional listings of an issuer’s securities are exempt from the audit committee requirements if the issuer is already subject to them as a result of listing any class of securities on any market subject to SEC Rule 10A-3. This exemption extends to listings of non-equity securities by a direct or indirect subsidiary that is consolidated or at least 50% beneficially owned by a parent company, if the parent is subject to the requirements as a result of the listing of a class of its equity securities. Consequently, as applied to the current shareholding structure of Abbey, (as the wholly-owned subsidiary of Banco Santander Central Hispano, S.A.), Abbey is exempt from the audit committee requirements of SEC Rule 10A-3 since: (i) Abbey is a wholly-owned subsidiary of Banco Santander Central Hispano, S.A., (ii) Banco Santander Central Hispano, S.A., has equity securities listed on the NYSE and is therefore subject to SEC Rule 10A-3, and (iii) Abbey does not have any equity securities listed on the NYSE or any other US national securities exchange.
Membership of the Remuneration Committee consists of at least three
non-executiveNon-Executive Directors. The Committee is responsible for
oversight of the remuneration
and succession planningof senior management within Abbey
and its aim is to ensure that these
policiesarrangements support the business objectives
determined by the Abbey Board and the interests of
its shareholders. ItAbbey. The Committee is charged with recommendingoversight of the remuneration, performance targets and performance bonus payments for Executive Directors and members of the Executive Committee. All of these are subject to overall approval by the full Board Abbey’s policy on Executive DirectorSantander Appointments and executive management remuneration. The Remuneration Committee determinesfollowing approval and recommendation by the individual remuneration package of each Executive Director and is also responsible for succession planning for the Executive Director and Director Group populations and is responsible for any employee and management share schemes.
Remuneration Committee.
The
chairmanChairman of the Remuneration Committee is
JoseJosé María Carballo and the other members are
Antonio Horta,António Horta-Osório, Juan
Rodríguez Inciarte and Andrew Longhurst.
Compensation for loss of office When they were appointed Priscilla Vacassin, Angus Porter and Tony Wyatt were granted contracts which initially entitled them to 24
monthsmonth’s notice of termination of their employment. The notice required
reducesreduced by one month for each month of service to 12
monthsmonth’s notice after 12
months; this is now themonths. The applicable notice
period.period when each of them left Abbey was 12 months and each of them received pay instead of notice pursuant to their contracts. Graeme Hardie has a similar provision in his contract. Abbey may pay an Executive Director instead of allowing them to work their notice period.
Graeme Hardie has a similar provision in his contract. Mark Pain
and Yasmin Jetha had
contractsa contract that entitled
themhim to additional payments if
they werehe was made redundant.
They haveHe has now left Abbey and the figures for the compensation paid
to him in respect of
20042005 are included in the table of directors’ remuneration below.
When Angus Porter left Abbey he received pay instead of notice pursuant to his contract as set out above.84
Report of the Directors
Directors’ Reportremunerationcontinued
Directors’ remuneration
The aggregate remuneration received by the Directors of Abbey in 20042005 was:
| | | | | |
| | | 20042005 | |
| | | £m | |
| |
| Salaries and fees | | | 5,002,6127,055,710 | |
| Performance-related payments | | | 2,396,1684,509,040 | |
| Other taxable benefits | | | 23,06814,125 | |
| Total remuneration excluding pension contributions | | | 7,421,84811,578,875 | |
| Pension contributions | | | 424,747— | |
| Compensation for loss of office | | | 450,842771,661 | |
| |
These totals exclude emoluments received by Directors in respect of their primary duties as Directors or officersOfficers of Banco Santander Central Hispano, S.A. No, in respect of which no apportionment of this remuneration has been made. Compensation in cash for loss of office was paid to one Director due to theirhis redundancy in 2004.2005.
Medium Term Incentive Plan
For 2005, two Executive Directors were granted conditional awards of shares in Banco Santander Central Hispano, S.A. under the Abbey National plc Medium-Term Incentive Plan for a total aggregate value of £1,222,010.
Under the Medium-Term Incentive Plan granted on 20 October 2005, certain Executive Directors, Other Key Management Personnel (as defined in Note 50 to the Consolidated Financial Statements) and other nominated individuals were granted a conditional award of shares in Banco Santander Central Hispano, S.A. The amount of shares participants will receive at the end of a three-year period depends on the performance of Abbey during this period. The performance conditions are set by the Remuneration Committee and are linked to Abbey’s three-
78
Report of the Directors
Directors’ Report continued
year plan. Performance will be measured in two ways, half of the award depends on Abbey achieving an attributable profit target for the 2007 financial year, and the remainder depends on the achievement of a revenue target for the 2007 financial year.
Remuneration of Highest Paid Director In
2004,2005, the remuneration, excluding pension contributions, of the highest paid Director was
£1,375,418 (2003: £1,688,000)£2,989,603 (2004: £1,375,418) of which
£550,167 (2003: £1,013,000)£1,667,593 (2004: £550,167) was performance related.
Share options were received by the highest paid Director and shares were received under a Long Term Incentive Plan during the year. There was no accrued pension benefit for the highest paid Director
(2003:(2004: £nil)
., other than that accrued by, or treated to be accrued by a Spanish subsidiary of Banco Santander Central Hispano, S.A., the parent company of Abbey.
We provide defined-benefit pension plans to certain of our employees. See
note 53Note 43 to the Financial Statements for a description of the plans and the related costs and obligations.
Share options
During the year, prior to the acquisition of Abbey by Banco Santander Central Hispano, S.A. seven of the Directors exercised share options and received shares Retirement benefits are accruing for two directors under long-term incentive schemes. These options and shares werea defined benefit scheme (2004: two) in respect of Abbey ordinary shares. As part of the acquisition, option holders were invited eithertheir qualifying services to exercise, cash cancel or transfer their Abbey options into an option over Banco Santander Central Hispano, S.A. shares. Where the option price was higher than the purchase price per share of £6.22, these options effectively lapsed. As of 12 November 2004 when the acquisition of Abbey by Banco Santander Central Hispano, S.A. was completed, no further options over Abbey ordinary shares remain. Currently, no new schemes with respect to shares in Abbey are planned. Further details are provided in Note 55 on page 154.
Long-term Performance Share Plan
Under the Performance Share Plan, the Chief Executive could earn shares worth up to 175% of his salary while the other executive Directors’ awards gave them the opportunity to earn shares worth up to 150% of salary. The proportion of shares the Directors would receive at the end of three years following the award depended on the performance of the Company during this period. Performance was measured in two ways: (i) half the award depended on the real growth in the earnings per share of the Personal Financial Services business and (ii) half the award was based on the growth in total shareholder returns over the three year period, compared with a group of 16 other UK financial services companies. This plan ceased to operate after the acquisition.
Abbey.
Fees were paid to Non-Executive Directors in
20042005 totalling
£579,410 (2003: £402,232)£265,438 (2004: £579,410); this amount is included above in the table of directors’ remuneration.
Directors’ interests and Related Party Transactions In
2004, loans were2005 a loan was made
by Abbey to
Directors, Executive Officers and connected persons and,a member of
these loans,Abbey’s Key Management Personnel, with a principal
amountsamount of
£240,000 were£215,000 outstanding at 31 December
2004.2005. See
Note 54Notes 50 and
5651 to the Consolidated Financial Statements included elsewhere in this Annual Report for disclosures of deposits and investments made and insurance policies entered into by the Directors,
Executive OfficersKey Management Personnel and
their connected persons with Abbey at 31 December
2004.2005. Note
5651 to the Consolidated Financial Statements also includes details of
other related party transactions.
In
2004,2005, there were no other transactions, arrangements or agreements with Abbey or its subsidiaries in which Directors or
Executive OfficersKey Management Personnel or persons connected with them had a material
interest, other than options to subscribe for ordinary shares under the share options schemes.interest. No
directorDirector had a material interest in any contract of significance other than a service contract with Abbey, or any of its subsidiaries, at any time during the year.
No Director was interested in the shares of any company within the Group at any time during the year and no Director exercised or was granted any rights to subscribe for shares in any company within the Group. During 2005, two Directors exercised share options over shares in Banco Santander Central Hispano, S.A., the parent company of Abbey.
Abbey seeks exemption under The Companies (Disclosure of Directors’ Interests) (Exceptions) Regulations 1985 (SI 802), not to disclose the Directors’ interests in the shares of Banco Santander Central Hispano, S.A., a company incorporated in Spain and the ultimate parent undertaking of Abbey.
85
ReportThird Party Indemnities
During 2005, Abbey applied the provisions of the
Companies (Audit, Investigations and Community Enterprise) Act 2004 to issue enhanced indemnities to its Directors
and to directors of its associated companies against liabilities and associated costs which they could incur in the course of their duties for Abbey and its associated companies. All of the indemnities remain in force as at the date of this Annual Report and Accounts. A copy of each of the indemnities is kept at the address shown on page 76.
Directors’ ReportcontinuedEmployee share ownership
During 2004, eligible employees were able to become financial stakeholders in Abbey by taking part in the Abbey Sharesave scheme or Partnership Shares scheme that gave staff the opportunity to save money from their pre-tax salary. Through these schemes, and others we have offered over the years, a number of our employees owned shares in Abbey. At the time of the acquisition by Banco Santander Central Hispano, S.A., employees were given the option of exercising, cash cancelling or transferring their interest to Banco Santander Central Hispano, S.A. shares and taking a cash alternative. Those who have chosen to transfer their interest in the Sharesave Scheme can exercise the option on maturity or in certain circumstances when they leave Abbey.
In recognition of the Banco Santander Central Hispano, S.A. acquisition of Abbey, all employees were given 100 free shares in Banco Santander Central Hispano, S.A. on 15 February 2005, which2005. These shares were granted using an Inland Revenue approved Share Incentive Plan (‘SIP’). The free shares will be held in trust on the employees’ behalf for a minimum of three years. Currently, no new all-employee schemes are planned
In January 2006, Abbey introduced a Partnership Shares scheme, which also operates under the SIP umbrella. Employees will be able to
invest up to a maximum of £1,500 of pre-tax salary in Banco Santander Central Hispano, S.A. shares per tax year. These shares will be
launched. Further details can be foundheld in
note 55 totrust on the
consolidated Financial Statements on page 154.employees’ behalf.
The assets of the main pension schemes are held separately from those of Abbey and are under the control of the
Trusteestrustees of each scheme. The four Abbey pension schemes have a common corporate trustee which, at 31 December
2004,2005, had nine
Directors,directors, comprising six
CompanyAbbey appointed
Directors (three of whom are Directors of Abbey) together withdirectors and three member-nominated
Directors.directors.
The National and Provincial Pension Fund has a different corporate trustee, the Board of which at 31 December
20042005 comprised three Company appointed
Directors, two of whom are Directors of Abbey,directors, and three member-elected
Directors.directors.
At 31 December
2004,2005, the Scottish Mutual Assurance plc Staff Pension Scheme had six trustees, of whom four are selected by Scottish Mutual Assurance plc (two of whom are members) and two
are member-elected trustees. In the case of the Scottish Provident Institution Staff Pension Fund, at 31 December
20042005 there were eight trustees, of whom five (at least one of whom is a member) are selected by Scottish Provident Limited, as principal employer of the
Fund:fund: the remaining three trustees are elected by the active members from their number.
Asset management of the schemes is delegated to a number of fund managers and the trustees receive independent professional advice on the performance of the managers. Asset management of the Scottish Mutual Assurance Staff Pension Scheme is through a Trustee Investment Account invested in a range of pooled funds operated by Scottish Mutual Assurance. Assurance plc.
79
Report of the Directors
Directors’ Report continued
Assets (other than petty cash) of the Scottish Provident Institution Staff Pension Fund are invested in a Managed Fund policy held with Scottish Provident Limited.
Legal advice to the trustees of the various schemes is provided by external firms of solicitors. The audits of the pension schemes are separate from that of Abbey. The audits of the Abbey pension schemes and the National and Provincial Pension Fund are undertaken by Grant Thornton UK LLP. The audits of the Scottish Mutual Assurance Staff Pension Scheme and SPI Staff Pension Fund are undertaken by KPMG
Audit Plc.LLP. Further information is provided in
note 53Note 43 to the
consolidatedConsolidated Financial
Statements on page 152.Statements.
Market value of land and buildings On the basis of a periodic review process, the estimated aggregate market value of the
companyCompany and its subsidiaries’ land and buildings was below the fixed asset net book value of
£32m,£34m, as disclosed in
note 26Note 27 to the Financial Statements, by approximately
£13m.£14m. It is considered that, except where specific provisions have been made, the land and buildings have a value in use to the
Abbey Group
of companies whichthat exceeds the estimated market value, and the net book value is not impaired.
Corporate social responsibility Abbey is committed to being a responsible corporate citizen and to treating all those who come into contact with it in a fair and ethical manner. Abbey recognises the need to structure our approach to corporate social responsibility and to report regularly on progress. Abbey does so through its annual
corporate social responsibilityCorporate Social Responsibility report
(CSR Report)(‘CSR Report’), which is approved by the Board and includes information about Abbey’s ethical principles, corporate governance, treatment of employees, community involvement and its environmental policy and performance. Abbey’s previous corporate social responsibility reports can be found on the website www.aboutabbey.com>
corporatesocialresponsibilityCSR and hard copies can be obtained by writing to the corporate social responsibility
Managermanager at the registered office address shown on page
82 of this Annual Report. Going forward Abbey will be working with Banco Santander Central Hispano, S.A. to align its corporate social responsibility management and reporting.Management of Corporate Social Responsibility
76.
The
Executive Director, Human Resources has responsibility for corporate social
responsibility at board level. Abbey’s corporate social responsibility management framework follows the guidelines recommended by Business in the Community and is governed across the four corporate social responsibility areas of Workplace, Marketplace, Environment and Community.responsibility.
Abbey aims to comply with industry standards including the Association of British Insurers disclosure guidelines on social responsibility, the Department of Trade and Industry Company Law Review and the Accounting for People Report recommendations.
Abbey is a member of the FORGE Group, a government-supported consortium of major financial services companies that, in 2002, formalised a structured approach for the management and reporting of corporate social responsibility issues for the financial sector.
Employees
We want to be the best retail bank in the UK, which means the best for our customers to bank with, the best bank to invest in and the best bank to work for. Achieving these goals is dependant on us being able to provide a positive working experience for our employees.
A new Employee Handbook was launched in 2005 setting out the details of key policies and procedures. This helps employees understand what they can expect from Abbey as their employer and what Abbey expects from them in return. We aim, wherever possible, to exceed our minimum statutory obligations.
The total number of UK employees was 20,642 at 31 December 2005 (24,361 at 31 December 2004). Total employee numbers have reduced during 2005 as Abbey works to become more efficient. These reductions have been created by more effective working practices and closing of smaller sites. At all times, Abbey has adhered to its agreement with Abbey National Group Union to protect employees and reduce the anxiety that these reduction programmes can cause in the work force. Around 4,000 job roles were affected during 2005, approximately 60% of the reductions resulted from redundancy, the remainder being achieved through natural wastage and early retirement.
Further details are given in the table below:
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2005 | | | 2004 | |
| |
Total employees* | | | 20,642 | | | | 24,361 | |
| Total female employees | | | 13,102 | | | | 15,623 | |
| Total male employees | | | 7,540 | | | | 8,738 | |
| Total full-time employees | | | 16,884 | | | | 20,599 | |
| Total part-time employees | | | 3,758 | | | | 3,762 | |
| Total ethnic minority employees | | | 1,302 | | | | 1,655 | |
| Employees aged 50 and under | | | 18,729 | | | | 22,195 | |
| Employees aged over 50 | | | 1,913 | | | | 2,166 | |
| Employee turnover (%) | | | 22 | | | | 22 | |
| Average days absent per employee | | | 7 | | | | 8 | |
| Total number of staff grievances (at final stage) | | | 10 | | | | 7 | |
| |
Training | | | | | | | | |
| Total number of training days | | | 154,276 | | | | 180,974 | |
| Average number of training days per employee | | | 7 | | | | 7 | |
| Average £ invested in training per employee | | | 527 | | | | 805 | |
| |
Health and Safety | | | | | | | | |
| Total number of reported accidents | | | 275 | | | | 319 | |
| Total number of accidents reported to enforcing authorities | | | 10 | | | | 20 | |
| Total number of adjustments to workplaces** | | | — | | | | 608 | |
| Workplace adjustments for disabled employees** | | | — | | | | 128 | |
| |
| * | | The total number of UK employees, at 31 December 2005, on a full-time equivalent basis. |
|
| ** | | These figures are no longer recorded centrally. |
8680
Directors’ Reportcontinued
Workplace
Equality and diversity
Abbey
regards all employees as partners inwants to benefit from the
business.full range of knowledge and skills society offers. Abbey recognises, respects and values individual differences, and acknowledges the distinctive contribution that each person makes to the success of the business.
Abbey aims to be the financial services employer of choice in the UK. Abbey’s policy “Valuing people as Individuals” underpins these goals and this document can be found via the website at www.aboutabbey.com>General Information>Our Policies>valuing people as individuals. The total number of employees was 24,361 at December 31 2004, 27,726 at December 31 2003 and 32,364 at December 31 2002.
Further details are given in the table below:
Employees
| | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2004 | | | 2003 | |
| |
Total employees* | | | 24,361 | | | | 27,726 | |
| Total female employees | | | 15,623 | | | | 18,402 | |
| Total male employees | | | 8,738 | | | | 9,324 | |
| Total full-time employees | | | 20,599 | | | | 21,116 | |
| Total part-time employees | | | 3,762 | | | | 6,610 | |
| Total ethnic minority employees | | | 1,655 | | | | 1,936 | |
| Employees aged 50 and under | | | 22,195 | | | | 25,157 | |
| Employees aged over 50 | | | 2,166 | | | | 2,569 | |
| Employee turnover (%) | | | 22 | | | | 14.7 | |
| Average days absent per employee | | | 8 | | | | 10 | |
| Total number of staff grievances (at final stage) | | | 7 | | | | 9 | |
| Total employee satisfaction (%) (with everything measured by the employee opinion survey) | | | 56 | | | | 58 | |
| |
| | | | | | | | | |
Training | | | | | | | | |
| Total number of training days | | | 211,358 | | | | 188,752 | |
| Average number of training days per employee | | | 8 | | | | 7 | |
| Average £ invested in training per employee | | | 805 | | | | 614 | |
| |
| | | | | | | | | |
Health and Safety | | | | | | | | |
| Total number of reported accidents | | | 319 | | | | 296 | |
| Total number of accidents reported to enforcing authorities | | | 20 | | | | 36 | |
| Total number of adjustments to workplaces | | | 608 | | | | 543 | |
| Workplace adjustments for disabled employees | | | 128 | | | | 42 | |
| |
* | | The total number of employees, at 31 December 2004, on a full-time equivalent basis. |
Equality and diversity
Abbey wants to benefit from the full range of knowledge and skills society offers. Abbey’s policy “Valuing People as Individuals” sets out its approach to creating a workforce that reflects that diversity. Everyone at Abbey hasis selected, promoted and treated on the basis of their relevant aptitudes, abilities, and skills. Abbey wants everyone to be able to give their best and be successful. We demonstrate respect in the way we treat one another and we aim to ensure that we all understand and follow our policy relating to diversity.
Abbey is an active member of a number of
employee-led Diversity Action Groups which worknational campaigns that aim to
promoteimprove opportunities for under represented groups. These include Opportunity Now, Race for Opportunity, who awarded Abbey a
more diverse workforceSilver standard benchmark for the first time in
their2005, and Employers’ Forum on Disability. At a local
areas.level, Abbey also hasis involved in a number of Disability Employment Action Teams which focus on setting up a strong frameworkdiversity initiatives, often in partnership with other local employers, for the employment of peopleexample, providing structured work induction programmes for ethnic minority school students and working with disabilities. This aims to make sure that job brokering agencies for disabled people.
Disability
Abbey has
the appropriate processes in place to help recruit, develop and retain employees with disabilities.
Abbey is committed to the Disability Discrimination Act and the Disability Employment Action Teams have been instrumental in ensuring that Abbey has been compliant with the new requirements of the Disability Discrimination Act. Abbey is proud to use the Employment Service “Positive about Disabled People” symbol. Abbey has a partnership agreement with the Employment Service Disability Service to provide access to work for people with disabilities. This aims to make sure that new and existing staff get the necessary aids and equipment to
make their working life easier.Work-life balance
Abbey is committedenable them to supporting individuals in achieving a reasonable balance between their home and working life. Abbey understands that people must be valued and supported through the various stages of their lives. As a result, Abbey offers a wide range of flexible working options, including part-time work job sharing, homeworking, compressed working arrangements and career breaks.
Our employees’ well being is very important to us and we want to support them as much as we can. Abbey’s confidential Employee Advice Line can give information on their employment with Abbey and point them in the right direction if they have a personal problem. Abbey also provides an external counselling service which offers professional counselling on a wide range of work or personal issues, including post trauma counselling.
effectively.
Abbey believes that healthy employees working in a safe environment enhance the business and the achievement of its objectives.
Ensuring thisThis is good business practice and a positive investment
whichthat protects its people, Abbey’s most valuable asset.
87
Report of the Directors
Directors’ Reportcontinued
Abbey’s goal of health and safety excellence is put into practice through Abbey’sa clear statement of our policy statement on health and safety at work. This is overseen bywork and the development of a new Health and Safety Management System for Abbey. The Occupational Health and Safety teamTeam provides specialist support to all employees should they fall ill or have an accident or problem that may affect their ability to work.
Well-being
Abbey believes it is important that employees are supported in taking care of their well-being. The company has developed a range of benefits to help them look after their health, most of which seeksare free. ‘Health Wise’ helps employees to assess their lifestyle risks and develop a plan to improve itstheir health. There is also a programme available designed to improve understanding of how to sustain a healthier lifestyle and roadshows are run in Abbey locations across the country giving practical advice and information. Gymnasiums are available in some Abbey sites and where these are not available we have negotiated discounted rates at gymnasium facilities across the country. Each year, Abbey negotiates discounted rates for employees for private health cover with a healthcare provider.
During 2005, Abbey launched an Employee Assistance Programme (‘EAP’) as a new benefit for all our employees. The EAP is a free, confidential and safety performance. No healthimpartial telephone advice service for all Abbey employees and safety enforcement actions were taken against their immediate families. The telephone service is operated by an expert third party supplier offering support on a wide range of issues.
Work-life balance
Abbey
during 2004.is committed to supporting individuals in achieving a reasonable balance between their home and working life. Abbey respects and understands that people have a wide range of commitments outside of work. As a result, Abbey offers a range of flexible working options, and flexible holiday arrangements which includes time off work for religious observance.
Learning and Developing our people Abbey’s Learning and Development departmentteam supports Abbey’s employees and itsAbbey’s business by providing training and development that is effective, efficient and responsive. The departmentteam works in partnership with each business area to provide learning solutions activities where they will add the most benefit.
In 2005 Abbey conducted training for a number of large organisational projects including training for the restructure of the branch network. Abbey has
also implemented a
best-in-class learning management system to support the delivery of computer-based training ensuring flexible learning opportunities for all employees.
This ensures Abbey
delivers consistent and high-quality training, and that it provides appropriate and cost-effective learning for all employees. Facilities are availablelaunched a series of sales academies designed to
staff out of hours to help them study outside their job roleget new joiners ready for their
own personal development.roles in 2005.
Performance managementdevelopment
Abbey wants to create a high performance culture. This means Abbey is committed to developing its employees’ ability to perform at their best. Abbey continually encourages
thememployees to deliver better service to its customers, support each other by removing obstacles and use their talent to produce improved results.
Abbey
Abbey’s approach to performance development is simple and straightforward. Employees will understand what’s expected of them and get the right development and support to allow them to succeed. And when they’ve done this, they will be recognised and rewarded for their contribution. Employees are responsible for their performance and their manager is responsible for making sure they are clear about what they need to do to perform to their best, and for supporting them to achieve it.
Total Reward
In 2005, Abbey delivered the first phase of a ‘total reward’ strategy to standardise terms and conditions for all employees, to create consistency and fairness regardless of length of service. Work was carried out to classify roles that are operating at a similar level across the company, to give a more up-to-date and consistent way of managing reward, and four new benefits
81
Working in partnership
Report of the Directors
Directors’ Reportcontinued
bands were introduced (Bands A, B, C, and D). Introducing bands will help to bring Abbey into line with other financial services companies, and make things simpler and more consistent. It also means that Abbey can better tailor how it rewards people at different levels within the organisation.
In December 2005, Abbey communicated to employees a new range of generic benefits that included: Abbey Products, Retail Vouchers, Flexi-Holidays, Partnership Shares and Childcare Vouchers. In addition, Abbey’s approach to holiday entitlement and notice periods were standardised to more closely reflect the external market. Each employee was sent a ‘You & Abbey’ pack that contained personalised information about the benefits available to their band.
Communication
Abbey wants to involve and inform employees on matters that affect them.
Abbey believesWe believe this is key to being successful and as such effective communication is vital to everything it does. Abbey publishes a magazine every other month for employees
– “read”,and almost all employees have access to
our intranet – “net” and “talk” sessions where senior management, including the
Chief Executive and the Chairman, answer staff questions face to face.intranet. Abbey also uses more traditional methods of communication, such as team meetings. All these channels are designed to keep employees fully informed of news and developments which may have an impact on them, and also to keep them up to date on financial, economic and other factors which affect the company’s performance.
It’s just as important to listen to the views of employees and Abbey asks for their opinions on a range of issues through regular departmental and company-wide opinion surveys.
These surveys are confidential and employees don’t have to give their names.Working in partnership
Abbey has over 25 years of trade union recognition through a partnership agreement with Abbey National Group Union
(ANGU)(‘ANGU’), the independent trade union that it recognises to speak on behalf of Abbey employees. ANGU is affiliated to the Trade Union Congress and operates from its own offices in Hertfordshire. ANGU is involved in major initiatives, and Abbey consults them on significant proposals within the business. Consultation takes place at both national and local levels. Abbey holds regular relationship management meetings to make sure that communication is open and two-way.
During 2005 Abbey’s relationship with ANGU was further strengthened by the signing of a new Joint Negotiating and Consultative Framework which was developed through a process of joint working. Abbey believes that maintaining successful partnerships with all our stakeholders is critical to Abbey achieving its goals. A key part of this is continuing to develop strong relationships with our trade union colleagues through the building of trust and respect, joint problem solving and creating an environment within which positive employee relations can flourish. The new framework sets out how Abbey’s relationship with ANGU operates through infrastructure that enables consultation on a range of issues. The framework also includes details of Abbey’s collective bargaining arrangements.
During 2005 representatives from ANGU and Abbey’s management team attended the Santander European Works Council in Madrid to discuss pan-European employee issues.
Abbey carries out some operational activities, such as banking enquiries, in India. Abbey is sensitive to concerns from stakeholders about the hosting of jobs outside of the UK operation.
Abbey believes these decisions are absolutely necessary to the health of Abbey’s future and for giving customers better service at a competitive price. MsourcE, its contractor in India, has a proven track record in treating employees fairly and with respect.
Marketplace
Understanding
Customers
Abbey and its parent, Banco Santander Central Hispano, S.A., share a fundamental belief in the importance of understanding customers,
Understanding customers has always been something Abbey has prided itself on, particularly at a local branch level. Abbey’s business will only be successful if we understand customers’ needs and provide the right products and services to meet them. Abbey has developed its business and brand strategy with this recognition at its core.
That is why Abbey devotes considerable time and money asking customers their views and requirements. In
20042005 Abbey carried out research with around
20,00045,000 consumers. Some of
these interviewsthis research resulted in changes to processes and services, others in
tone of voice and how Abbey communicates with customers.
Creating a better banking experience for customers is a key goal, and in so doing abbeyAbbey aims to help everyimprove customer getsatisfaction. Critical to achieving this will be the successful implementation of the Partnenon technology platform, which will provide a more for their money. Partcomplete view of this iseach of our customers.
Abbey has also continued to promote a
continued focus on being straightforward, practical and friendly
rapport with
customers;customers, ensuring Abbey people
takehave a
positive and ‘can do’ attitude
in dealings with them; and
are always
being alert to customers’ needs and changes in the market place. Abbey wants to sell the right products to the right customers – this is the key in making sure Abbey treats customers fairly.
Part of understanding customers is knowing where, when and how Abbey can help them. Abbey has a heritage of offering people from all walks of life the opportunity to
get more frommanage their
money.finances effectively. Abbey
fully supportshas many initiatives that promote financial capability and, through the
Government and the FSA in developing a National Strategy for Financial Capability andAbbey basic bank account, continues to provide services for people who may have difficulty
in accessing mainstream banking
services through theservices. Abbey
basic bank account. Abeyalso helps fund the Consumer Credit Counselling
Service, this is amongst a number of initiatives that gets Abbey’s support.88
Service.
Report of the Directors
Directors’ Reportcontinued
Abbey is also committed to meeting the Disability Discrimination Act’s access to services requirements and has been working with disability groups to upgrade branches and other services to comply with this act. Customer information is also made available in alternative formats including Braille and large print, when requested.
Complaints management
Abbey’s vision for managing complaints is to actively seek and effectively manage feedback. During 2005, Abbey has focused on creating a ‘fit for purpose’, compliant, complaint handling framework that gets the basics right. In May 2005, Abbey was fined
82
Complaints represent a very important area
Report of the business from whichDirectors
Directors’ Reportcontinued
£800,000 by the Financial Services Authority for mishandling mortgage endowment complaints. Abbey
can learn and improve its service. While Abbeyundertook to conduct a review of all mortgage endowment complaints rejected since 1 January 2000. This review is
committed to ensuring that customers get the very highest levels of service, from time to time service does not match the high expectations customers rightly have. Abbey is focused on getting the basics of complaint management right, so Abbey can be clear and responsive with customers who have concerns and can put right what might have gone wrong as quickly as possible.now largely complete.
Abbey’s specialist Social Housing Finance unit delivers long-term finance solutions to Registered Social Landlords to enable them to provide affordable housing for people in need and to undertake wider social inclusion initiatives. Registered Social Landlords (often called Housing Associations) are regulated, non-profit making, community-based organisations. Abbey’s loan commitments
are currently
exceed £5bn.Procurement
around £6.0bn.
Suppliers
Abbey has in place
acost management and procurement
policypolicies that explicitly
promotespromote competitive tendering and dealing with suppliers in a fair and open manner. The
procurement policy requires a record of hospitality received to be maintained by each department and made available for review. Abbey reserves the right to verify the ethical standing of its suppliers as it deems appropriate.
Abbey does not operate a single payment policy in respect of all classes of suppliers.
Each individual operating areaPayment terms vary depending on the supplier and the type of spend and the supplier is
responsible for agreeing terms and conditions under which business is to be transacted and for making the suppliermade aware of these
beforehand.before engagement. It is Abbey’s policy to ensure payments are made in accordance with the terms and conditions agreed, except where the supplier fails to comply with those terms and conditions.
Abbey recognises its responsibility to consider the environmental issues associated with its business. Abbey’s environmental management strategy is to reduce the direct impacts of its activities, for example energy and resource use, and to manage the indirect risks associated with its main business interests.
Abbey’s environmental policy is approved by the Board, and the Chief Risk Officer is accountable for ensuring management acts in accordance with its principles. The policy applies to all business units, covers all significant environmental impacts and risks, and provides the basis for Abbey’s environmental management system. Senior managers are responsible for ensuring compliance with the policy and risk management procedures. The policy can be viewed in full at www.aboutabbey.com>General Information>Our policies>environmental policy statement. Abbey expects its suppliers and the organisations with which it undertakes joint ventures or outsourcing operations to support it.
Environmental risks are identified through the Operational Risk process, overseen by the Chief Risk Officer and
the Risk
Function.Division. Through the risk process, environmental
risks and impacts are identified and assessed, and there is opportunity to report significant environmental impacts to the Board and/or Risk Committee on a monthly basis. Abbey’s
environmental performancerisk management process is subject to internal audit
on a rolling basis and its
environmental disclosures in the Corporate Social Responsibility Report are externally verified.
Abbey is a signatory to, and an active member of, the United Nations Environment Programme Financial Institutions’ Initiative.
Abbey is proud of its involvement in the community and it supports a wide range of charitable projects, primarily through the Abbey Charitable Trust Limited
(the Trust)(‘the Trust’). Abbey has built strong links with local communities, in areas where it has a large presence, through seven Community Partnership Groups. Their main role is to distribute donations from the Trust to meet the needs of their local community.
Charitable priorities
Abbey has revised its charitable priorities in 2004 to reflect the changes to Abbey’s core values.
The Abbey Charitable Trust Limited supports disadvantaged people through:
> | education and training; |
|
> | local regeneration projects which encourage cross community partnerships; and |
|
> | financial advice which helps people manage their money. |
89
Report of> education and training;
> financial advice which helps people manage their money; and
> local regeneration projects which encourage cross community partnerships.
Donations
The Abbey Charitable Trust Limited supports disadvantaged people throughout the
DirectorsDirectors’ Reportcontinued
Donations
UK. In 2004,2005, Abbey made total cash donations of £2,342,087 (2003: £1,711,380)£1,556,947 (2004: £2,342,087) to a wide range of charities. This included £586,793 (2003: £583,868)£569,004 (2004: £586,793) by matching the amount staff raised during the year for local and national charities. The Community Partnership Groups, made up of local staff and charities, helped Abbey continued its partnership with The Prince’s Trust, nowto focus support in its 12th year, with its funding focused on The Trust’s Leaving Care Initiative and Business Start-up Programme.
those areas where Abbey has a significant staff presence.
Abbey believes that providing opportunities for employee volunteering brings benefits to everyone involved, including the company. Abbey co-ordinates its own Abbey schemes including
an “E-mentoring”a ‘Mentoring’ programme that matches Year
108 pupils
studying vocational General Certificates of Secondary Education (GCSEs)(12-13 year olds) with an Abbey employee
who is working in that subject areato explore career opportunities and
find out about the
mentoring support is carried out by exchanging e-mails. “Number Partners”world of work. ‘Number Partners’ uses specially designed board games to help small groups of eight- and nine-year-olds develop their number skills with the help of trained groups of volunteers from Abbey head offices.
“Business Experts”‘Business Experts’ matches employees with specialist business skills with charities in the local area. Abbey matches an employee’s donated time on an hour-for-hour basis, up to a maximum of 35 hours per year.
The total value of support to good causes amounted to £2,515,995£1,778,160 in 2004 (2003: £2,170,036)2005 (2004: £2,515,995). This comprised cash donations and other support given in kind, including the value of the volunteering scheme. In all, 10% of Abbey employees were involved in one of its matching schemes. These figures are collated using the London Benchmarking Group reporting model.
83
Further details on Abbey’s corporate social responsibility programme can be found via
Report of the website at www.aboutabbey.com >corporate social responsibility.Directors
Directors’ Reportcontinued
Abbey’s ethical policies are set out in “How we do business”. This document, which was established in 1999, and reviewed and updated by the
boardBoard in 2003,
confirmsstates that:
> | employees should raise concerns if they become aware that ethical polices and principles are not being followed; |
|
> | Abbey values all employees as individuals and treat them as partners in the business; |
|
> | Abbey treats customers fairly and delivers what it promises; |
|
> | Abbey considers ethical and environmental concerns when investing Abbey assets; |
|
> | Abbey is committed to adopting sound environmental management practices; and |
|
> | Abbey expects suppliers to operate to high ethical standards. |
> employees should raise concerns if they become aware that ethical polices and principles are not being followed;
> Abbey values all employees as individuals and treats them as partners in the business;
> Abbey treats customers fairly and delivers what it promises;
> Abbey considers ethical and environmental concerns when investing Abbey assets;
> Abbey is committed to adopting sound environmental management practices; and
> Abbey expects suppliers to operate to high ethical standards.
Abbey’s ethical policies include ethical investment guidelines which are an integral part of the risk management processes for investment decision making. Procedures are also in place for employees to follow if they feel that there has been a breach of our ethical policies. “How we do business” can be read in full on the website at www.aboutabbey.com> General Information > Our Policies>how we do business.
Abbey also complies with the applicable code of ethics regulations of the United States Securities and Exchange Commission arising from the Sarbanes-Oxley
Act.Act of 2002. Amongst other things, the Sarbanes-Oxley Act aims to protect investors by improving the accuracy and reliability of information that companies disclose. It requires companies to disclose whether they have a code of ethics that applies to the Chief Executive and senior financial officers that promotes honest and ethical conduct; full, fair, accurate, timely and understandable disclosures; compliance with applicable governmental laws, rules and regulations; prompt internal reporting of violations; and accountability for adherence to such a code of ethics. Abbey meets these requirements through “How we do business”, our whistleblowing policy, the Financial Services Authority’s Principles for Businesses, and the Financial Services Authority’s Principles and Code of Practice for Approved Persons (together, the Code of Ethics), with which the Chief Executive and senior financial officers must comply. These include requirements to manage conflicts of interest appropriately and to disclose any information the Financial Services Authority may want to know about. Abbey provides a copy of its code of ethics to anyone, free of charge, on application to the
registered office address
as shown on page
82.76.
No contributions were made for political purposes.
Policy and Practice on Payment of Creditors Abbey’s practice on payment of creditors has been quantified under the terms of the Companies Act 1985 (Directors’ Report) (Statement of Payment Practice) Regulations 1997. Based on the ratio of amounts invoiced by trade creditors during the year to amounts of Abbey trade creditors at 31 December
2004,2005, trade creditor days for Abbey were
25 (2004: 12
(2003: 19 days). The equivalent period calculated for Abbey’s legal entities is
25 days (2004: 12
days (2003: 20 days).
The Directors confirm that they are satisfied that
the Abbey
National and its subsidiaries
hashave adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt a going concern basis in preparing the financial statements.
A resolution to reappoint Deloitte & Touche LLP as auditors will be proposed at the forthcoming Annual General Meeting.
90
Report of the Directors
Directors’ Reportcontinued
Disclosure controls and procedures
(Sarbanes-Oxley Act 2002)
Over
In Abbey’s annual report on Form 20-F for the
past2004 fiscal year, Abbey
has been assessing and strengthening its internal controls over financial reporting in preparation for the application of Section 404 of the Sarbanes-Oxley Act of 2002 and in connection with the implementation of International Financial Reporting Standards during 2005. These procedures have included the documentation, testing and review by senior management of processes previously established to report Abbey’s US GAAP financial information. As a result of these procedures, subsequent to the issuance of the 2003 Financial Statements, and also in connection with the preparation of the 2004 financial statements, management has identified a number of errors in Abbey’s previously issued US GAAP financial information for the fiscal years 2002 and 2003 and it determined that restatement of the 2002 and 2003 figures was necessary, as set out in Note 62(t) to the Consolidated Financial Statements. As a result of management’s review and restatement of previous US GAAP financial results, management has concludedrecognised that there was a material weakness in
Abbey’sits internal control over financial reporting as of
31 December
31, 2004,
regardingas Abbey and certain of its subsidiaries
havinghad insufficient personnel in the corporate accounting department with sufficient knowledge and experience in US GAAP and
the SECSecurities and Exchange Commission requirements.
As part of Abbey’s strengthening of internal controls in the context of these findings, Throughout 2005, Abbey has undertakenundertook a number of remediation procedures in order to address the internal control deficiencies that contributed to these errors.this material weakness. These remediation efforts will continue during 2005 and includeincluded hiring additional accounting personnel knowledgeable in US GAAP; training current accounting staff on the application of US GAAP accounting pronouncements; reinforcing existing US GAAP reporting controls over the reporting process of subsidiaries, including levels of review; and improving standardised reconciliation templates to assist in the reconciliation process between UKprimary GAAP and US GAAP.
As of 31 December 2005, these remediation procedures had not been completed at Abbey’s life assurance subsidiaries. The material weakness was not, therefore, fully remediated as of 31 December 2005 for all of Abbey’s subsidiaries. The remediation efforts continued during 2006. As described in Note 59(p) to the Consolidated Financial Statements, on 7 June 2006, Abbey has carried out an evaluation underagreed to sell its life assurance subsidiaries, including those subsidiaries that had not yet completed the supervision andremediation procedures. Pending consummation of this transaction, the remediation procedures in relation to the life business were put on hold.
Abbey evaluated with the participation of Abbey’s
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness
of the design and operation of Abbey’s disclosure controls and
procedures as of 31 December 2005. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon Abbey’s evaluation,
which considered both the findings and remediation efforts described above, the Chief Executive Officer and the Chief Financial Officer
cannot concludeconcluded that, as of 31 December
2004,2005, for the
reasons stated in the paragraph above, Abbey’s disclosure controls and procedures were
not effective to provide reasonable assurance that information required to be disclosed
by Abbey in the reports that Abbey files and submits under the Exchange Act is recorded, processed, summarised and reported
within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to Abbey’s management, including Abbey’s Chief Executive Officer and Chief Financial Officer, as
and when required.appropriate, to allow timely decisions regarding disclosure. Other than described above, there has been no change in Abbey’s internal control over financial reporting during Abbey’s 20042005 fiscal year that has materially affected, or is reasonably likely to materially affect Abbey’s internal controlcontrols over financial reporting.
84
Statement of directors’ responsibilities The directors of Abbey National plc are required by UK company lawresponsible for preparing their report and financial statements. The directors have chosen to prepare accounts for the company in accordance with International Financial Reporting Standards (‘IFRS’). Company law requires the directors to prepare such financial statements in accordance with International Financial Reporting Standards, the Companies Act 1985 and Article 4 of the International Accounting Standards Regulation.
International Accounting Standard 1 requires that financial statements present fairly for each financial year
which give a truethe company’s financial position, financial performance and
fair viewcash flows. This requires the faithful representation of the
stateeffects of
affairs of Abbey National plctransactions, other events and
its subsidiaries atconditions in accordance with the
end ofdefinitions and recognition criteria for assets, liabilities, income and expenses set out in the
financial year, and of the profit/(loss) for Abbey National plc and its subsidiariesInternational Accounting Standards Board’s ‘Framework for the
year. Theypreparation and Presentation of Financial Statements’. In virtually all circumstances, a fair presentation will be achieved by compliance with all applicable International Financial Reporting Standards. Directors are also
responsible for ensuring that proper and adequate accounting records have been maintained and that reasonable procedures have been followed for safeguarding the assets of Abbey National plc and its subsidiaries and for preventing and detecting fraud and other irregularities.required to:
| > | | In respect of the financial statements the directors are required to:properly select and apply accounting policies; |
| |
| > | ensure that suitable | present information, including accounting policies, which follow generally accepted accounting principles, have been applied consistently;in a manner that provides relevant, reliable, comparable and understandable information; |
| |
| > | ensure that reasonable and prudent judgements and estimates have been used in the preparation of the Consolidated Financial Statements; |
| | provide additional disclosures when compliance with the specific requirements in International Financial Reporting Standards is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and |
| > | | prepare the Consolidated Financial Statementsaccounts on a going concern basis unless, it is inappropriatehaving assessed the ability of the company to presume that Abbey will continue in business; and |
|
> | state whether applicable UK accounting standardsas a going concern, management either intends to liquidate the entity or to cease trading, or have been followed andno realistic alternative but to disclose and explain any material departures from the financial statements.do so. |
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the company, for safeguarding the assets, for taking reasonable steps for the prevention and detection of fraud and other irregularities and for the preparation of a directors’ report which comply with the requirements of the Companies Act 1985.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.
9185
Report of the Directors
Supervision and Regulation European Union directivesDirectives
The framework for supervision of banking and financial services in the UK is largely formed by European Union Directives which are required to be implemented in member states through national legislation. Directives aim to harmonise banking and financial services regulation and supervision throughout the European Union by laying down minimum standards in key areas, and requiring member states to give mutual recognition to each other’s standards of prudential supervision. This has led to the “passport” concept enshrined in the Banking Consolidation Directive and the Investment Services Directive (soon to be replaced by the Markets in Financial Instruments Directive): that is, freedom to establish branches in, and freedom to provide cross-border services into, other European Union member states once a bank or investment firm is authorised in its “home” state.
The framework for supervision of banking and financial services is also formed by European Union Regulation (for example, parts of the Markets in Financial Instruments Directive will be implemented through Regulations). Regulations apply to all Member States and benefit from direct applicability as measures are binding on a Member State as if they were national law. Significant legislative changes
are beinghave been made
throughpursuant to the European Union Financial Services Action
Plan.Plan 1999-2005, which aimed to create a true single European market for financial services. The European Commission has published a white paper on Financial Services 2005-2010 which explains that, going forward, the European Union’s policy will be one of ‘dynamic consolidation’. This means that the legislation already introduced (or in the process of being introduced) under the Financial Services Action Plan will be evaluated in terms of its effectiveness and to what degree it is being implemented by the Member States.
Prudential supervision and capital adequacy The Banking Consolidation Directive sets out minimum conditions for authorisation and the ongoing prudential supervision of banks. Minimum conditions for the authorisation and prudential supervision of investment firms are set out in the Investment Services Directive.
The overall responsibility for prudential supervision falls on the home country regulator of a bank or investment firm. The Banking Consolidation Directive and the Capital Adequacy Directives govern supervision of capital adequacy for both banks and investment firms in the European Union. The Capital Adequacy Directives contain detailed rules for the regulatory capital treatment of risks arising in the trading book, that is broadly, positions and securities that a UK bank or investment firm holds for proprietary trading purposes. For other
(non-trading)(non trading) risks, the Capital Adequacy Directives refer to the Banking Consolidation Directive, which regulates the quality and proportions of different types of capital to be held by an institution, the amount of capital to be held for counterparty exposures arising outside the trading book and restrictions on exposures to an individual counterparty or group of connected counterparties. In addition, the Capital Adequacy Directives and the Banking Consolidation Directive require consolidated supervision of financial groups; these requirements have recently been enhanced by the Financial Group’s Directive.
The Banking Consolidation Directive and the Capital Adequacy Directive will be replaced by the Capital Requirements Directive (the ‘CRD’) from 1 January 2007 onwards. The Council of Ministers have now signed off the final version of the CRD, which should be published in the Official Journal by the end of June 2006. The CRD allows a staggered implementation date from 1 January 2007 for basic and intermediate approaches and from 1 January 2008 for more advanced approaches. The CRD reflects the implementation of the Basel 2 Accord, as published by the Basel Committee on Banking Supervision on 26 June 2004 published the2004.
The Basel 2 Accord which amends the Basel 1 1988 Accord. Basel 2 promotes more risk sensitive approaches to the determination of minimum regulatory capital requirements which would further strengthen the soundness and stability of the international banking system. Banks will be able to choose between three levels of sophistication to calculate regulatory capital for credit and operational risk and this will change the way that many banks evaluate, measure and report capital adequacy. To ensure that the most appropriate approaches are being used, banks are encouragedincentivised to move to the mostmore sophisticated method feasible.methods by a reduction in the regulatory capital charge. All major UK banks are in the process of implementing their solutions and applications, to ensure they comply with the requirements of the Basel Accord. Under
Pursuant to the
current timetable,CRD, supervision on a consolidated basis for the
new AccordSantander group (including Abbey as a subsidiary) will
become fully effective atbe the
endresponsibility of
2007.the home country supervisor of Banco Santander Central Hispano, S.A., Banco de España. The host supervisor (in the case of Abbey, the Financial Services Authority) has responsibility for regulating the host entity but this will require written coordination and cooperation arrangements to be in place between the home and the host regulator. At this stage, the details of the home and host arrangements have not been finalised by the two regulators although Abbey understands that the Financial Services Authority will be responsible for the review of the Basel 2 Capital Accord will be implemented into European Union law through the Capital Requirements Directive which was published in draft on July 15 2004. The Capital Requirements Directive is not a single new directive, but comprises the significant changes proposed to the Banking Consolidation Directive and the Capital Adequacy Directives and will result in a “recast Banking Consolidation Directive” and a “recast Capital Adequacy Directive”. The Capital Requirements Directive is currently being discussed by the Council of Ministers and the European Parliament and a near final version is expected in the third quarter of 2005. The draft Capital Requirements Directive proposes a staggered implementation date from 1 January 2007 for basic and intermediate approaches and from 1 January 2008 for more advanced approaches.
implementation.
In the UK, the Financial Services Authority will implement the Capital Requirements Directive inCRD through the Integrated Prudential Sourcebook which can be different from the Capital Requirements DirectiveFinancial Services Authority Handbook and this will include additional requirements in those areas where national discretions are permitted and where specific national interpretation is required. Abbey’s application to apply Basel 2 models will be submitted to Banco de España and the question of which set of national discretions should apply is yet to be finalised between Banco de España and the Financial Services Authority.
Abbey intends to implement for credit risk the Internal Ratings Based approach for
Core Retail and the Advanced Internal Ratings Based approach for Financial Markets in line with the
home-host responsibilities under the capital requirement directive.Basel 2 implementation within Santander from 1 January 2008. For
operational risk,Operational Risk, Abbey intends to adopt the Standardised Approach, which will be implemented from the end of 2006, moving to the Advanced Measurement Approach when appropriate.
Abbey has established a bank-wide
programme which willprogram to manage the changes required to ensure compliance with the Basel 2 requirements.
The Financial Services Authority is the single statutory regulator responsible for regulating deposit taking, mortgages, insurance and investment business pursuant to the Financial Services and Markets Act 2000. It is a criminal offence for any person to carry
86
Report of the Directors
Supervision and Regulationcontinued
on any of the activities regulated under this Act in the UK by way of business unless that person is authorised by the Financial Services Authority or falls under an exemption.
The Financial Services Authority has authorised Abbey, as well as some of its subsidiaries, to carry on certain regulated activities. The regulated activities they are authorised to engage in, depends upon permissions granted by the Financial Services Authority. The main permitted activities of Abbey and its subsidiaries are listed
below.below:
Lending secured on land
at(at least 40% of which is used as a dwelling by an individual borrower or
relative has beenrelative) is regulated by the Financial Services
Authority since 31 October 2004.Authority. Abbey is authorised to enter into, advise and arrange regulated mortgage contracts.
92
Report of the Directors
Supervision and Regulationcontinued
Banking
Deposit taking is a regulated activity that requires a firm to be authorised and supervised by the Financial Services Authority.
Abbey has permission to carry on deposit taking, as do several of its subsidiaries, including Abbey National Treasury Services plc
Cater Allen Limited and Cater Allen
Premier Banking Limited.
UK banking groups may provide insurance services through other group companies. Insurance business in the UK is divided between two main categories: long-term assurance (whole life, endowments, life insurance investment bonds) and general insurance (building and contents cover, and motor insurance). Under the Financial Services and Markets Act 2000, effecting or carrying out any contract of insurance, whether general or long-term, is a regulated activity requiring authorisation. LifeThis includes life insurance mediation, which has been subject to regulation for many years. Broking
In addition, broking of long-term insurance (for example, critical illness)
became regulated on 31 October 2004. Generaland general insurance mediation
has beenbecame subject to regulation by the Financial Services Authority
since 14more recently (October 2004 and January
2005.2005, respectively).
Abbey has a number of subsidiaries which are authorised by the Financial Services Authority to effect contracts of insurance. Abbey also acts as a broker, receiving commissions for the policies arranged.
Investment business such as dealing in, arranging deals in, managing and giving investment advice in respect of most types of securities and other investments, including options, futures and contracts for differences (which would include interest rate and currency swaps) and long-term assurance contracts are all regulated activities under the Financial Services and Markets Act and require authorisation by the Financial Services Authority.
Abbey and a number of its subsidiaries have permission to engage in a wide range of wholesale and retail investment businesses including selling certain life assurance and pension products, unit trust products and Individual Savings Accounts (tax exempt saving products) and providing certain retail equity products and services.
Financial Services Authority conduct of business rules The Financial Services Authority conduct of business rules
also apply to every authorised
personfirm carrying on regulated activities and regulate the day-to-day conduct of business standards to be observed by authorised
personsfirms in carrying on those activities.
The conduct of business rules prescribe
stringent rules
in a number of areas, including those relating to the circumstances and manner in which authorised
personsfirms may communicate and approve financial promotions, which are communications in the course of business
which arethat constitute invitations or inducements to engage in investment activity.
The Financial Services Compensation Scheme The Financial Services Compensation Scheme covers claims against authorised firms (or any participating European Economic Area firms) where they are unable, or likely to be unable, to pay claims against them. The Financial Services Compensation Scheme covers the following:
Deposits:up to £31,700 per person (100% of the first £2,000 and 90% of the next £33,000). The Scheme is triggered when an authorized deposit taker (such as a bank, building society or credit union) is unable, or likely to be unable, to repay its depositors.
Investments:up to £48,000 per person (100% of the first £30,000 and 90% of the next £20,000). The scheme provides protection if an authorised firm is unable to pay claims against it. Investments covered include stocks and shares, unit trusts, futures and options;
Mortgage advice and arranging:the scheme will pay up to £48,000 (100% of the first £30,000 and 90% of the next £20,000) for claims against authorised mortgage firms that are unable to pay claims against them.
Long-term insurance (pensions and life assurances) firms:unlimited, 100% of the first £2,000 plus 90% of the remainder of the claim. Policyholder protection is triggered if an authorised insurer is unable, or likely to be unable, to meet claims against it, for example if it has been placed in provisional liquidation or administration.
General insurance firms:Compulsory insurance (third party motor): unlimited, 100% of the claim; non-compulsory insurance (home and general): unlimited, 100% of the first £2,000 plus 90% of the remainder of the claim. Policyholder protection is triggered if an authorised insurer is unable, or likely to be unable, to meet claims against it, for example if it has been placed in provisional liquidation or administration.
General insurance advice and arranging*:arranging:unlimited, comprising 100% of the first £2,000 plus 90% of the remainder of the claim. Compulsory insurance is protected in full.
87
*For business conducted on or after 14 January 2005.
Report of the Directors
Supervision and Regulationcontinued
The UK Data Protection Act 1998
limits the ability of a UK company toplaces obligations on those who hold and use personal information
relatingand gives rights to
its customers. The law requiresthe subjects of that
information. Anyone processing information in the UK
companiesmust notify the Information Commissioner of their
processing activities,
concerning theunless their processing
of personal data prior to commencing those activities.is exempt. The Information Commissioner maintains a public register of
data controllers. In addition, companies regulated by the Data Protection Act 1998these notifications, which must be renewed on an annual basis. Anyone processing personal information must comply with the
Data Protection Act’s eight enforceable principles
which lay down good information handling practices. They also give individuals a number of
good conduct,rights including the
“data protection principles” and must submitright to
requests fromfind out what information is held about them, the
individual who is the subject of theright to have incorrect data
concerning matters such as giving access to their dataamended and the right to object to
incorrect data being held or to direct marketing.
93
Report of the Directors
Supervision and Regulationcontinued
Other main relevant legislation
The Consumer Credit Act 1974regulates
certainmost loans up to £25,000 to consumers, both secured (but excluding secured loans regulated by the Financial Services
Authority – see above)Authority) and unsecured and associated credit broking.
The Consumer Credit Act 2006was enacted on 31 March 2006. The Department of Trade and Industry has published an implementation timetable for the various provisions which will come into force at various times in 2007 and 2008. The new Consumer Credit Act removes the £25,000 limit (referred to in the Consumer Credit Act 1974 above) and applies to all loans, with exemptions for certain business loans and loans to high net worth individuals. It also introduces changes relating to the provision of statements for fixed sum credit, new provisions relating to unfair relationships, increased powers for the Office of Fair Trading, a new licensing regime, and various new notices to be provided when the borrower is in arrears.
The Unfair Terms in Consumer Contracts Regulations 1999, apply to certain contracts for goods and services entered into with consumers. The main effect of the Regulations is that a contractual term covered by the Regulations which is “unfair” will not be enforceable against a consumer. The Regulations contain an indicative list of unfair terms. These Regulations applyinter alia, to mortgages, savings accountsall Abbey’s products.
The Office of Fair Trading has recently completed an industry wide investigation into default charges on credit cards and
related products and services. The Financial Services Authority has
issued guidance on how it will use its powerscome to the view that certain of these charges are unfair under the
Regulations.Distance Marketing Directive
This directive dealsRegulations and should be reduced. In line with distance contracts for financial services. It is implemented by the Banking Code, Financial Services Authority Rules, Consumer Credit Act and the Financial Services (Distance Marketing) Regulations 2004. It gives customers a right to cancel a distance contract within 14 days (30 days for some insurance products) and the right to receive certain information and a copy of the terms and conditions before they become bound by the contract. It came into force on 31 October 2004.
other credit card providers, Abbey will be reducing its applicable charges accordingly.
Current and future developments Payment SystemsFollowing the Chancellor’s Pre-Budget Report in November
Since 2003, the Office of Fair Trading has been given an enhanced role in payments systems for a period of four years. TheFollowing this period, the Government will then review competition in the industry and may consider legislation. In March 2004, the Office of Fair Trading Payments Systems Task Force was established to consider issues relating to competition, efficiency and innovation in the UK’s payments systems. The Task Force brings together payments industry, retail, consumer and government representatives with an interest in payments systems. The initial focus is on a faster electronic payments scheme for the UK.UK that is intended to speed up bill payments initiated by telephone and internet channels and standing orders. This scheme should be operational from November 2007.
Other issues to be addressed include cheques, governance and access, industry co-operation, European developments
(including the Directive on Payments Services discussed further below), pricing and transparency.
Pensions A Day
The payments industryrules and regulations covering UK pensions were recently altered on 6 April 2006. From this date, commonly referred to as ‘A Day’, the eight different layers of legislation covering UK pensions were replaced by one new set of guidelines which apply to all registered pension schemes. The main changes affected the rules relating to pension contributions, benefits, the minimum retirement age, retirement and income withdrawal, death benefits and multi scheme membership and scheme registration.
Treating Customers Fairly
Treating Customers Fairly is
also under scrutiny from the Treasury Select Committee who are conducting separate investigations into automatic teller machine charging and transparency of credit card charges. A key objective within the European Union’s Financial Services Action Plan is to create an integrated system for payments in Europe. The European Commission has issued a draft Directive on a New Legal Framework for Payments in Europe which could have wide reaching implications for the UK payments industry.
Future governance of insurance companies
The Financial Services Authority are consulting on many issues which will affect the way insurers carry on business.
Child Trust Funds
In October 2003 the government announced detailed proposals for Child Trust Funds. These are designed to encourage parents and children to develop savings habits andinitiative. The overall aim is to ensure that in future all children have financial assetsfirms meet the requirements of Principle 6 of the Financial Services Authority Principles for Business — to start adult life. They are a tax wrapper (free of personal income and capital gains tax), which can hold a variety of savings and investments. All children born on or after 1 September 2002 qualify for a Child Trust Fund. From January 2005 Child Trust Fund vouchers were sent“pay due regard to the entitled childreninterests of its customers and accounts are now being opened.
Polarisation
The polarisation rules control the way certain savings and investment products can be sold. Advisers on life assurance, personal pension policies, collective investment schemes (unit trusts and OEICS) and investment trust savings schemes have to be either: an Independent Financial Adviser and advise across all products and companies in the market; or tied and represent just one company or group and sell only its products.treat them fairly”.
The Financial Services Authority has issuedsaid that it expects firms, and their senior management, to consider the implications of Treating Customers Fairly for their business and to take steps to tackle any shortfalls, which they identify as a result.
Helping Consumers Achieve a Fair Deal
The Financial Services Authority has proposed new
regulationsproduct disclosure requirements for investment products that are expected to
remove the polarisation restrictions with the aim of increasing the range of products available to customers as well as giving them a clearer picture of what they are paying for advice. The depolarisation rules are being implemented over a 6-month transitional period, beginning on 1 December 2004.Consumer Credit Bill
The bill was reintroducedcome into force in the new Parliamentsecond half of 2006.
The Financial Services Authority hope that increased public understanding and awareness at the point of sale for investment products will deliver more capable and confident consumers who will be better equipped to manage their financial affairs successfully, exercise a greater influence in
May 2005. When enacted, it will introduce changes making it easier for consumersthe retail market and be less susceptible to
challenge unfair practices, changes relating to increased powers for Office of Fair Trading and new requirements relating to the information lenders must give to consumers about their accounts.misselling.
European Union developments There are a number of proposals emanating from the European Union, which will affect the UK financial services industry in due course.
These include proposals for a new Consumer Credit Directive, a directive on Unfair Commercial Practices and implementing measures for the Markets in Financial Instruments Directive. There have also been a number of measures which are aimed at facilitating the provision of financial services across borders by use of e-commerce.
94
Report of the Directors
Supervision and Regulationcontinued
New Banking Code
The Banking Code is issued by the Code Sponsors, the British Bankers’ Association, the Building Societies’ Association and Association of Payment Clearing Services and subscribers (including Abbey) should ensure that they abide by the spirit as well as the letter of the Code. Changes cover the key commitments, basic bank account, interest rates, terms and conditions, cancellation rights, advertising, cards and personal identification numbers and credit cards.
9588
Report of the Directors
Supervision and Regulationcontinued
Markets in Financial Instruments Directive (MiFID)
The Markets in Financial Instruments Directive also known as ‘MiFID’, was formally adopted by the European Council of Ministers on 21 April 2004 with an original implementation date of April 2006. However, in light of the significant changes that MiFID required Member States and industry to make before and during the implementation process, the European Commission proposed to defer the deadline for effective application of MiFID until 1 November 2007.
MiFID applies to all investment firms including securities and futures firms, investment banks and retail banks, brokers, asset managers, hedge funds and securities issuers.
MiFID broadens the scope of the European passport to cover additional activities and financial instruments and is expected to bring about significant changes to the Financial Services Authority Handbook.
Directive on Payments Services
A key objective within the European Union’s Financial Services Action Plan is to create an integrated system for payments in Europe and the Directive on Payments Services was published in December 2005. It is proposed that this will involve creating a new authorisation regime for “payment institutions” as well as imposing regulations as to transparency and execution of payment orders.
Credit Agreements for Consumers Directive
The key aim of the proposed directive is to promote a single market for consumer credit. The proposed directive applies to unsecured credit for amounts up to€50,000 and sets out requirements for pre-contractual and contractual information to be supplied to consumers, a right on the part of consumers to withdraw from a credit agreement within 14 days and a less onerous regime for overdrafts.
Unfair Commercial Practices Directive
This directive aims to harmonise the principles of consumer protection law across the European Union. Companies will be permitted to advertise and market in all European Union countries, provided they comply with the requirements of their country of origin. The Financial Services Authority has indicated that it considers that the Financial Services Authority Handbook already prohibits unfair commercial practices in marketing and advertising, so they intend to make only minimal changes to existing rules in order to comply with this directive.
Transparency Directive
The purpose of the directive is to improve the efficiency, openness and integrity of the European capital markets and thus attracts investors to the European market place. It places increased obligations on securities issuers to disclose financial information to the public, including a half yearly condensed financial report & update to the annual management report. It also introduces requirements in relation to the disclosure of changes to issuers’ shareholding structure.
Third Money Laundering Directive
This directive is designed to strengthen the fight against money laundering and terrorist financing. Provisions include identity checks on customers opening accounts (so that accounts cannot be held anonymously), checks applicable to any transaction over€15,000 and penalties for failure to report suspicious transactions to national financial intelligence units.
89
Financial Statements
Financial Statements
Contents to Financial Statements
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| Financial Statements | | | | |
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9690
Financial Statements
Independent Auditors’ Report to the Member of Abbey National plc
Report of Independent Registered Public Accounting Firm To the Board of directors and shareholdersshareholder of Abbey National plc We have audited the accompanying consolidated balance sheets of Abbey National plc
and its subsidiary undertakings (together “the Abbey National Group”), a wholly owned subsidiary of Banco Santander Central Hispano, S.A.,
and its subsidiary undertakings (together “the Abbey National Group”), as at 31 December
20042005 and
2003,2004 and the related consolidated
profit and loss accounts,income statements, the
consolidated statements of
consolidated total recognised
gainsincome and
lossesexpense and the consolidated cash flow statements for each of the
threetwo years in the period ended 31 December
2004, the statement of accounting policies and the related notes 1 to 65. These financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the part of the directors’ remuneration report that is described in note 54.2005. These financial statements are the responsibility of the Abbey National Group directors. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Abbey National Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Abbey National Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Abbey National Group as at 31 December
20042005 and
2003,2004, and the consolidated results of its operations and its cash flows for each of the
threetwo years in the period ended 31 December
20042005 in conformity with
accounting principles generally acceptedInternational Financial Reporting Standards as adopted for use in the
United Kingdom.Accounting principles generally accepted in the United KingdomEuropean Union (IFRS).
IFRS vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of consolidated net income (loss) for each of the three years in the period ended 31 December 2004 and the determination of the consolidated shareholders’ equity as at 31 December 2004 and 2003,Information relating to the extent summarisednature and effect of such differences is presented in Note 61Notes 55 to 59 to the consolidated financial statements.
The reported net income (loss) for the years ended 31 December 2003 and 2002 and shareholders’ equity at 31 December 2003, as determined in accordance with accounting principles generally accepted in the United States of America, have been restated for the items described in Note 62(t).
Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London, England
826 June 20052006
9791
Financial Statements
Consolidated Profit and Loss AccountIncome Statement
For the years ended 31 December 2004, 20032005 and 20022004
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2003 | | | 2002 | |
| | | | | | | 2004 | | | (restated) | | | (restated) | |
| | | Notes | | | £m | | | £m | | | £m | |
| |
| Interest receivable: | | | | | | | | | | | | | | | | |
| Interest receivable and similar income arising from debt securities | | | | | | | 87 | | | | 393 | | | | 1,386 | |
| Other interest receivable and similar income | | | 3 | | | | 4,838 | | | | 4,851 | | | | 5,382 | |
| Interest payable | | | 4 | | | | (3,395 | ) | | | (3,182 | ) | | | (4,184 | ) |
| |
Net interest income | | | | | | | 1,530 | | | | 2,062 | | | | 2,584 | |
| Dividend income | | | 5 | | | | 1 | | | | 1 | | | | 1 | |
| Fees and commissions receivable | | | | | | | 639 | | | | 767 | | | | 786 | |
| Fees and commissions payable | | | | | | | (114 | ) | | | (248 | ) | | | (275 | ) |
| Dealing profits | | | 6 | | | | 268 | | | | 217 | | | | 205 | |
| Income from long-term assurance business before embedded value charges and rebasing | | | 21 | | | | 108 | | | | 176 | | | | 321 | |
| Embedded value charges and rebasing | | | 21 | | | | (32 | ) | | | (378 | ) | | | (632 | ) |
| Income from long-term assurance business after embedded value charges and rebasing | | | 21 | | | | 76 | | | | (202 | ) | | | (311 | ) |
| Other operating (expense) income | | | 7 | | | | 244 | | | | (165 | ) | | | 510 | |
| |
| Total operating income – continuing operations | | | 2 | | | | 2,626 | | | | 2,711 | | | | 3,141 | |
| Total operating income – discontinued operations | | | 2 | | | | 18 | | | | (279 | ) | | | 359 | |
Total operating income | | | | | | | 2,644 | | | | 2,432 | | | | 3,500 | |
| Administrative expenses | | | 8 | | | | (2,053 | ) | | | (2,014 | ) | | | (1,852 | ) |
| Depreciation of fixed assets excluding operating lease assets | | | 26 | | | | (81 | ) | | | (112 | ) | | | (103 | ) |
| Depreciation and impairment on operating lease assets | | | 27 | | | | (151 | ) | | | (251 | ) | | | (280 | ) |
| Amortisation of goodwill | | | 25 | | | | (20 | ) | | | (20 | ) | | | (64 | ) |
| Impairment of goodwill | | | 25 | | | | — | | | | (18 | ) | | | (1,138 | ) |
| |
| Depreciation, amortisation and impairment | | | | | | | (252 | ) | | | (401 | ) | | | (1,585 | ) |
| Provisions for bad and doubtful debts | | | 9 | | | | 35 | | | | (474 | ) | | | (514 | ) |
| Provisions for contingent liabilities and commitments | | | 38 | | | | (202 | ) | | | (104 | ) | | | (50 | ) |
| Amounts written off fixed asset investments | | | | | | | | | | | | | | | | |
| – debt securities | | | 19 | | | | 67 | | | | (45 | ) | | | (388 | ) |
| – equity shares and similar investments | | | 20 | | | | 13 | | | | (148 | ) | | | (123 | ) |
| |
| Provisions and amounts written off fixed asset investments | | | | | | | (87 | ) | | | (771 | ) | | | (1,075 | ) |
| |
Operating profit/(loss) | | | | | | | 252 | | | | (754 | ) | | | (1,012 | ) |
| Income from associated undertakings | | | | | | | 6 | | | | 12 | | | | 17 | |
| Profit on disposal of Group undertakings | | | | | | | 46 | | | | 89 | | | | 48 | |
| Profit/(loss) on the sale or termination of an operation | | | 57 | | | | (31 | ) | | | (33 | ) | | | — | |
| |
| Continuing operations | | | 2 | | | | 200 | | | | (182 | ) | | | (278 | ) |
| Discontinued operations | | | 2 | | | | 73 | | | | (504 | ) | | | (669 | ) |
| |
Profit/(loss) on ordinary activities before tax | | | | | | | 273 | | | | (686 | ) | | | (947 | ) |
| Tax on profit/(loss) on ordinary activities | | | 10 | | | | (144 | ) | | | 42 | | | | (152 | ) |
| |
Profit/(loss) on ordinary activities after tax | | | | | | | 129 | | | | (644 | ) | | | (1,099 | ) |
| Minority interests – non-equity | | | 41 | | | | (49 | ) | | | (55 | ) | | | (62 | ) |
| |
Profit/(loss) for the financial year attributable to the shareholders of Abbey National plc | | | | | | | 80 | | | | (699 | ) | | | (1,161 | ) |
| Transfer from/(to) non-distributable reserve | | | 43 | | | | 47 | | | | (200 | ) | | | 263 | |
| Dividends including amounts attributable to non-equity interests | | | 12 | | | | (631 | ) | | | (424 | ) | | | (424 | ) |
| |
Retained loss for the financial year | | | | | | | (504 | ) | | | (1,323 | ) | | | (1,322 | ) |
| |
| Profit/(loss) on ordinary activities before tax includes for acquired operations | | | | | | | — | | | | — | | | | 4 | |
| Earnings/(loss) per ordinary share – basic | | | 13 | | | | 2.2p | | | | (52.4p | ) | | | (84.8p | ) |
| Earnings/(loss) per ordinary share – diluted | | | 13 | | | | 2.2p | | | | (52.4p | ) | | | (84.3p | ) |
| |
| | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2004 | |
| | | Notes | | | £m | | | £m | |
| |
| Interest and similar income | | | 2 | | | | 5,457 | | | | 5,637 | |
| Interest expense and similar charges | | | 2 | | | | (4,250 | ) | | | (4,174 | ) |
| |
Net interest income | | | | | | | 1,207 | | | | 1,463 | |
| |
| Fee and commission income | | | 3 | | | | 759 | | | | 653 | |
| Fee and commission expense | | | 3 | | | | (107 | ) | | | (115 | ) |
| |
Net fee and commission income | | | | | | | 652 | | | | 538 | |
| Dividend income | | | 4 | | | | 1 | | | | 1 | |
| Net earned life assurance premiums | | | | | | | 1,224 | | | | 750 | |
| Net trading income | | | 5 | | | | 3,124 | | | | 846 | |
| Other operating income | | | 6 | | | | 215 | | | | 341 | |
| |
Total operating income | | | | | | | 6,423 | | | | 3,939 | |
| |
| Net life assurance claims incurred and movement in policyholder liabilities | | | | | | | (3,683 | ) | | | (1,094 | ) |
| |
Total income net of insurance claims | | | | | | | 2,740 | | | | 2,845 | |
| |
| Administration expenses | | | 7 | | | | (1,724 | ) | | | (2,221 | ) |
| Depreciation and amortisation | | | 8 | | | | (199 | ) | | | (547 | ) |
| |
Total operating expenses | | | | | | | (1,923 | ) | | | (2,768 | ) |
| Impairment (losses)/recoveries on loans and advances | | | 10 | | | | (218 | ) | | | 55 | |
| Impairment recoveries on fixed asset investments | | | | | | | — | | | | 80 | |
| Provisions for other liabilities and charges | | | | | | | (3 | ) | | | (233 | ) |
| |
Operating profit/(loss) | | | | | | | 596 | | | | (21 | ) |
| Share of profit of associates | | | | | | | — | | | | — | |
| |
Profit/(loss) before tax | | | | | | | 596 | | | | (21 | ) |
| Taxation expense | | | 11 | | | | (176 | ) | | | (33 | ) |
| |
Profit/(loss) for the year | | | | | | | 420 | | | | (54 | ) |
| |
| | | | | | | | | | | | | |
Attributable to: | | | | | | | | | | | | |
| Equity holders of the company | | | | | | | 420 | | | | (54 | ) |
| Minority interest | | | | | | | — | | | | — | |
| |
The Group’s results as reportednotes on pages 97 to 194 are on an historical cost basis, except where, as described in Accounting policies, special provisionsintegral part of the Companies Act 1985 or industry standards apply. Accordingly, no note of historical cost profits and losses has been presented.these consolidated financial statements.
The 2003 and 2002 comparatives have been restated to include accrued interest on mark-to-market securities and money market instruments within dealing profits. These amounts were previously included within interest income and interest expense. The impact of the adjustment was to move £978m (2002: £1,301m), from interest income and £892m (2002: £1,258m) from interest expense into dealing profits.
9892
Financial Statements
Consolidated Balance Sheet As at 31 December 2004, 20032005 and 20022004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | 2002 | | | 2002 | |
| | | Notes | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | | | | | | | | | 454 | | | | | | | | 439 | | | | | | | | 396 | |
| Treasury bills and other eligible bills | | | 14 | | | | | | | | 1,990 | | | | | | | | 1,631 | | | | | | | | 1,483 | |
| Loans and advances to banks | | | 15 | | | | | | | | 10,148 | | | | | | | | 7,155 | | | | | | | | 6,601 | |
| Loans and advances to customers not subject to securitisation | | | | | | | 79,331 | | | | | | | | 84,488 | | | | | | | | 81,427 | | | | | |
| Loans and advances to customers subject to securitisation | | | 17 | | | | 28,976 | | | | | | | | 23,833 | | | | | | | | 24,156 | | | | | |
| Less: non-recourse finance | | | | | | | (15,098 | ) | | | | | | | (14,482 | ) | | | | | | | (15,160 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans and advances to customers | | | 16 | | | | | | | | 93,209 | | | | | | | | 93,839 | | | | | | | | 90,423 | |
| Net investment in finance leases | | | 18 | | | | | | | | 1,148 | | | | | | | | 2,573 | | | | | | | | 3,447 | |
| Debt securities | | | 19 | | | | | | | | 22,683 | | | | | | | | 30,328 | | | | | | | | 59,807 | |
| Equity shares and other similar interests | | | 20 | | | | | | | | 1,176 | | | | | | | | 1,633 | | | | | | | | 963 | |
| Long-term assurance business | | | 21 | | | | | | | | 2,968 | | | | | | | | 2,272 | | | | | | | | 2,316 | |
| Interests in associated undertakings | | | 22 | | | | | | | | 25 | | | | | | | | 39 | | | | | | | | 51 | |
| Intangible fixed assets | | | 25 | | | | | | | | 317 | | | | | | | | 341 | | | | | | | | 376 | |
| Tangible fixed assets excluding operating lease assets | | | 26 | | | | 246 | | | | | | | | 268 | | | | | | | | 371 | | | | | |
| Operating lease assets | | | 27 | | | | 2,341 | | | | | | | | 2,529 | | | | | | | | 2,573 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tangible fixed assets | | | | | | | | | | | 2,587 | | | | | | | | 2,797 | | | | | | | | 2,944 | |
| Other assets | | | 28 | | | | | | | | 4,661 | | | | | | | | 4,162 | | | | | | | | 5,085 | |
| Prepayments and accrued income | | | 29 | | | | | | | | 1,195 | | | | | | | | 1,230 | | | | | | | | 1,891 | |
| Assets of long-term assurance funds | | | 21 | | | | | | | | 27,180 | | | | | | | | 28,336 | | | | | | | | 29,411 | |
| |
Total assets | | | | | | | | | | | 169,741 | | | | | | | | 176,775 | | | | | | | | 205,194 | |
| |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 31 | | | | | | | | 18,412 | | | | | | | | 22,125 | | | | | | | | 24,174 | |
| Customer accounts | | | 32 | | | | | | | | 78,850 | | | | | | | | 74,401 | | | | | | | | 76,766 | |
| Debt securities in issue | | | 33 | | | | | | | | 21,969 | | | | | | | | 24,834 | | | | | | | | 48,079 | |
| Dividend payable | | | | | | | | | | | 43 | | | | | | | | 245 | | | | | | | | 113 | |
| Other liabilities | | | 34 | | | | | | | | 9,170 | | | | | | | | 11,452 | | | | | | | | 9,125 | |
| Accruals and deferred income | | | 35 | | | | | | | | 1,729 | | | | | | | | 1,582 | | | | | | | | 2,218 | |
| Provisions for liabilities and charges | | | 36 | | | | | | | | 870 | | | | | | | | 836 | | | | | | | | 1,028 | |
| Subordinated liabilities including convertible debt | | | 39 | | | | | | | | 5,360 | | | | | | | | 6,337 | | | | | | | | 6,532 | |
| Other long-term capital instruments | | | 40 | | | | | | | | 722 | | | | | | | | 742 | | | | | | | | 771 | |
| Liabilities of long-term assurance funds | | | 21 | | | | | | | | 27,180 | | | | | | | | 28,336 | | | | | | | | 29,411 | |
| Minority interests – non-equity | | | 41 | | | | | | | | 512 | | | | | | | | 554 | | | | | | | | 627 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 164,817 | | | | | | | | 171,444 | | | | | | | | 198,844 | |
| Called up share capital | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| – ordinary shares | | | 42 | | | | 148 | | | | | | | | 146 | | | | | | | | 146 | | | | | |
| – preference shares | | | 42 | | | | 325 | | | | | | | | 325 | | | | | | | | 325 | | | | | |
| Share premium account | | | 42 | | | | 2,164 | | | | | | | | 2,059 | | | | | | | | 2,155 | | | | | |
| Reserves | | | 43 | | | | 306 | | | | | | | | 274 | | | | | | | | 74 | | | | | |
| Profit and loss account | | | 43 | | | | 1,981 | | | | | | | | 2,527 | | | | | | | | 3,650 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ funds including non-equity interests | | | 44 | | | | | | | | 4,924 | | | | | | | | 5,331 | | | | | | | | 6,350 | |
| |
Total liabilities | | | | | | | | | | | 169,741 | | | | | | | | 176,775 | | | | | | | | 205,194 | |
| |
| Memorandum items | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contingent liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Guarantees and assets pledged as collateral security | | | 46 | | | | | | | | 1,084 | | | | | | | | 2,148 | | | | | | | | 1,902 | |
| Other contingent liabilities | | | 47 | | | | | | | | 116 | | | | | | | | 159 | | | | | | | | 157 | |
| |
| | | | | | | | | | | | 1,200 | | | | | | | | 2,307 | | | | | | | | 2,059 | |
| |
Commitments | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Obligations under stock borrowing and lending agreements | | | 48 | | | | | | | | 20,508 | | | | | | | | 25,649 | | | | | | | | 19,137 | |
| Other commitments | | | 48 | | | | | | | | 2,849 | | | | | | | | 3,018 | | | | | | | | 4,742 | |
| |
| | | | | | | | | | | | 23,357 | | | | | | | | 28,667 | | | | | | | | 23,879 | |
| |
| | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2004 | |
| | | Notes | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | |
| Cash and balances at central banks | | | 13 | | | | 991 | | | | 454 | |
| Trading assets | | | 14 | | | | 58,231 | | | | — | |
| Derivative financial instruments | | | 15 | | | | 11,855 | | | | 2,377 | |
| Financial assets designated at fair value | | | 16 | | | | 30,597 | | | | — | |
| Loans and advances to banks | | | 17 | | | | 444 | | | | 11,751 | |
| Loans and advances to customers | | | 18 | | | | 95,467 | | | | 109,416 | |
| Debt securities | | | 19 | | | | — | | | | 37,010 | |
| Equity securities and other variable yield securities | | | 20 | | | | — | | | | 10,792 | |
| Available for sale securities | | | 22 | | | | 13 | | | | — | |
| Investment in associated undertakings | | | 24 | | | | 24 | | | | 25 | |
| Intangible assets | | | 25 | | | | 171 | | | | 175 | |
| Value of in force business | | | 26 | | | | 1,721 | | | | 1,844 | |
| Property, plant and equipment | | | 27 | | | | 314 | | | | 262 | |
| Operating lease assets | | | 28 | | | | 2,172 | | | | 2,275 | |
| Investment property | | | 29 | | | | — | | | | 1,228 | |
| Current tax assets | | | | | | | 235 | | | | 242 | |
| Deferred tax assets | | | 30 | | | | 796 | | | | 501 | |
| Other assets | | | 31 | | | | 4,003 | | | | 6,381 | |
| |
Total assets | | | | | | | 207,034 | | | | 184,733 | |
| |
| | | | | | | | | | | | | |
| Deposits by banks | | | 32 | | | | 5,617 | | | | 18,412 | |
| Customer accounts | | | 33 | | | | 65,889 | | | | 78,660 | |
| Derivative financial instruments | | | 15 | | | | 11,264 | | | | 3,665 | |
| Trading liabilities | | | 34 | | | | 52,664 | | | | — | |
| Financial liabilities designated at fair value | | | 35 | | | | 7,948 | | | | — | |
| Debt securities in issue | | | 36 | | | | 21,276 | | | | 37,067 | |
| Other borrowed funds | | | 37 | | | | 2,244 | | | | 722 | |
| Subordinated liabilities | | | 38 | | | | 6,205 | | | | 5,484 | |
| Insurance and reinsurance liabilities | | | 39 | | | | 21,501 | | | | 24,923 | |
| Macro hedge of interest rate risk | | | | | | | 13 | | | | — | |
| Other liabilities | | | 40 | | | | 3,190 | | | | 8,844 | |
| Investment contract liabilities | | | 41 | | | | 3,306 | | | | — | |
| Other provisions | | | 42 | | | | 253 | | | | 302 | |
| Current tax liabilities | | | | | | | 288 | | | | 161 | |
| Deferred tax liabilities | | | 30 | | | | 886 | | | | 1,064 | |
| Retirement benefit obligations | | | 43 | | | | 1,380 | | | | 1,197 | |
| Minority interests – non-equity | | | | | | | — | | | | 512 | |
| |
Total liabilities | | | | | | | 203,924 | | | | 181,013 | |
| |
| | | | | | | | | | | | | |
| Share capital | | | 45 | | | | 148 | | | | 473 | |
| Share premium account | | | 45 | | | | 1,857 | | | | 2,164 | |
| Retained earnings | | | 46 | | | | 1,105 | | | | 1,083 | |
| |
Total shareholders equity | | | | | | | 3,110 | | | | 3,720 | |
| |
Total liabilities and equity | | | | | | | 207,034 | | | | 184,733 | |
| |
The notes on pages 97 to 194 are an integral part of these consolidated financial statements.
9993
Financial Statements
Company Balance Sheet
As at 31 December 2004, 2003 and 2002
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | 2002 | | | 2002 | |
| | | Notes | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | | | | | | | | | 443 | | | | | | | | 417 | | | | | | | | 356 | |
| Loans and advances to banks | | | 15 | | | | | | | | 3,605 | | | | | | | | 4,218 | | | | | | | | 4,716 | |
| Loans and advances to customers not subject to securitisation | | | | | | | 63,829 | | | | | | | | 66,048 | | | | | | | | 59,628 | | | | | |
| Loans and advances to customers subject to securitisation | | | 17 | | | | 28,976 | | | | | | | | 23,835 | | | | | | | | 24,035 | | | | | |
| Less: non-recourse finance | | | | | | | (12,948 | ) | | | | | | | (13,813 | ) | | | | | | | (14,491 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Loans and advances to customers | | | 16 | | | | | | | | 79,857 | | | | | | | | 76,070 | | | | | | | | 69,172 | |
| Net investment in finance leases | | | 18 | | | | | | | | 3 | | | | | | | | 18 | | | | | | | | 13 | |
| Debt securities | | | 19 | | | | | | | | 405 | | | | | | | | 480 | | | | | | | | 1,394 | |
| Equity shares and other similar interests | | | 20 | | | | | | | | 1 | | | | | | | | 2 | | | | | | | | 2 | |
| Shares in Associate undertakings | | | 22 | | | | | | | | 12 | | | | | | | | 32 | | | | | | | | — | |
| Shares in Group undertakings | | | 23 | | | | | | | | 8,250 | | | | | | | | 8,171 | | | | | | | | 7,545 | |
| Tangible fixed assets | | | 26 | | | | | | | | 226 | | | | | | | | 239 | | | | | | | | 304 | |
| Other assets | | | 28 | | | | | | | | 1,293 | | | | | | | | 1,001 | | | | | | | | 794 | |
| Prepayments and accrued income | | | 29 | | | | | | | | 379 | | | | | | | | 501 | | | | | | | | 566 | |
| |
Total assets | | | | | | | | | | | 94,474 | | | | | | | | 91,149 | | | | | | | | 84,862 | |
| |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 31 | | | | | | | | 15,697 | | | | | | | | 18,780 | | | | | | | | 14,307 | |
| Customer accounts | | | 32 | | | | | | | | 65,910 | | | | | | | | 57,900 | | | | | | | | 55,444 | |
| Debt securities in issue | | | 33 | | | | | | | | 4 | | | | | | | | 4 | | | | | | | | 4 | |
| Dividend payable | | | | | | | | | | | 43 | | | | | | | | 245 | | | | | | | | 113 | |
| Other liabilities | | | 34 | | | | | | | | 1,114 | | | | | | | | 1,030 | | | | | | | | 759 | |
| Accruals and deferred income | | | 35 | | | | | | | | 1,008 | | | | | | | | 823 | | | | | | | | 941 | |
| Provisions for liabilities and charges | | | 36 | | | | | | | | 224 | | | | | | | | 100 | | | | | | | | 43 | |
| Subordinated liabilities including convertible debt | | | 39 | | | | | | | | 5,673 | | | | | | | | 6,689 | | | | | | | | 6,959 | |
| Other long-term capital instruments | | | 40 | | | | | | | | 722 | | | | | | | | 742 | | | | | | | | 771 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 90,395 | | | | | | | | 86,313 | | | | | | | | 79,341 | |
| Called up share capital – ordinary shares | | | 42 | | | | 148 | | | | | | | | 146 | | | | | | | | 146 | | | | | |
| - preference shares | | | 42 | | | | 325 | | | | | | | | 325 | | | | | | | | 325 | | | | | |
| Share premium account | | | 42 | | | | 2,164 | | | | | | | | 2,059 | | | | | | | | 2,155 | | | | | |
| Profit and loss account | | | 43 | | | | 1,442 | | | | | | | | 2,306 | | | | | | | | 2,895 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ funds including non-equity interests | | | 44 | | | | | | | | 4,079 | | | | | | | | 4,836 | | | | | | | | 5,521 | |
| |
Total liabilities | | | | | | | | | | | 94,474 | | | | | | | | 91,149 | | | | | | | | 84,862 | |
| |
| Memorandum items | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contingent liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Guarantees and assets pledged as collateral security | | | 46 | | | | | | | | 63,009 | | | | | | | | 69,487 | | | | | | | | 110,882 | |
| Other contingent liabilities | | | 47 | | | | | | | | 8 | | | | | | | | 8 | | | | | | | | 23 | |
| |
| | | | | | | | | | | | 63,017 | | | | | | | | 69,495 | | | | | | | | 110,905 | |
| |
Commitments | | | 48 | | | | | | | | 1,733 | | | | | | | | 1,627 | | | | | | | | 1,303 | |
| |
100
Financial Statements
Consolidated Statement of Total Recognised GainsIncome and Losses
For the year ended 2004, 2003 and 2002Expense
| | | | | | | | | | | | | | | | | |
| | | | | | | 2004 | | | 2003 | | | 2002 | |
| | | Notes | | | £m | | | £m | | | £m | |
| |
| Profit/(loss) attributable to the shareholders of Abbey National plc | | | | | | | 80 | | | | (699 | ) | | | (1,161 | ) |
| Translation differences on foreign currency net investment | | | 43 | | | | (2 | ) | | | (1 | ) | | | (2 | ) |
| |
| Total recognised gains /(losses) relating to the year | | | | | | | 78 | | | | (700 | ) | | | (1,163 | ) |
| |
Total gains recognised since the prior year | | | | | | | 78 | | | | | | | | | |
| |
101
Financial Statements
Consolidated Cash Flow Statement
For the years ended 31 December 2004, 20032005 and 20022004
| | | | | | | | | | | | | | | | | |
| | | | | | 2004 | | | 2003 | | | 2002 | |
| | | Notes | | | £m | | | £m | | | £m | |
| |
| Net cash (outflow)/inflow from operating activities | | | 52a | | | | (2,019 | ) | | | (32,678 | ) | | | (10,952 | ) |
| |
| Returns on investments and servicing of finance: | | | | | | | | | | | | | | | | |
| Interest paid on subordinated liabilities | | | | | | | (277 | ) | | | (262 | ) | | | (337 | ) |
| Preference dividends paid | | | | | | | (48 | ) | | | (55 | ) | | | (63 | ) |
| Payments to non-equity minority interests | | | | | | | (49 | ) | | | (55 | ) | | | (62 | ) |
| |
Net cash outflow from returns on investments and servicing of finance | | | | | | | (374 | ) | | | (372 | ) | | | (462 | ) |
| |
| Taxation: | | | | | | | | | | | | | | | | |
| UK corporation tax paid | | | | | | | (2 | ) | | | (93 | ) | | | (481 | ) |
| Overseas tax paid | | | | | | | (10 | ) | | | (6 | ) | | | (15 | ) |
| |
Total taxation paid | | | | | | | (12 | ) | | | (99 | ) | | | (496 | ) |
| |
| Capital expenditure and financial investment: | | | | | | | | | | | | | | | | |
| Purchases of investment securities | | | | | | | (1,713 | ) | | | (3,895 | ) | | | (16,636 | ) |
| Sales of investment securities | | | | | | | 1,796 | | | | 26,462 | | | | 12,926 | |
| Redemptions and maturities of investment securities | | | | | | | 1,235 | | | | 3,175 | | | | 14,977 | |
| Purchases of tangible fixed assets | | | | | | | (155 | ) | | | (532 | ) | | | (909 | ) |
| Sales of tangible fixed assets | | | | | | | 83 | | | | 194 | | | | 79 | |
| Transfers (to)/from life assurance funds | | | | | | | (712 | ) | | | (215 | ) | | | (882 | ) |
| |
Net cash inflow/(outflow) from capital expenditure and financial investment | | | | | | | 534 | | | | 25,189 | | | | 9,555 | |
| |
| Acquisitions and disposals | | | 52e-g | | | | 3,180 | | | | 8,803 | | | | (536 | ) |
| |
| Equity dividends paid | | | | | | | (697 | ) | | | (216 | ) | | | (648 | ) |
| |
Net cash inflow/(outflow) before financing | | | | | | | 612 | | | | 627 | | | | (3,539 | ) |
| |
| Financing: | | | | | | | | | | | | | | | | |
| Issue of ordinary share capital | | | | | | | 13 | | | | 2 | | | | 17 | |
| Issue of loan capital | | | | | | | — | | | | — | | | | 392 | |
| Issue of other long-term capital instruments | | | | | | | — | | | | — | | | | 485 | |
| Issue of preferred securities and minority interests | | | | | | | — | | | | — | | | | 15 | |
| Redemption of preference share capital | | | | | | | — | | | | (124 | ) | | | — | |
| Redemption of preferred securities | | | | | | | — | | | | (15 | ) | | | — | |
| Repayments of loan capital | | | | | | | (813 | ) | | | (56 | ) | | | (222 | ) |
Net cash (outflow)/inflow from financing | | | 52c | | | | (800 | ) | | | (193 | ) | | | 687 | |
| |
Increase/(decrease) in cash | | | 52b | | | | (188 | ) | | | 434 | | | | (2,852 | ) |
| |
| | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2004 | |
| | | Notes | | | £m | | | £m | |
| |
| Exchange differences on translation of foreign operations | | | | | | | 3 | | | | (2 | ) |
| Actuarial gains and losses on defined benefit pension plans | | | | | | | (154 | ) | | | (70 | ) |
| Tax on items taken directly to equity | | | | | | | 46 | | | | 21 | |
| |
Net loss recognised directly in equity | | | | | | | (105 | ) | | | (51 | ) |
| Profit/ (loss) for the period | | | | | | | 420 | | | | (54 | ) |
| |
Total recognised income and expense for the period | | | | | | | 315 | | | | (105 | ) |
| |
Effect of changes in accounting policy | | | | | | | | | | | | |
| IFRS transition adjustments at 1 January 2005: | | | | | | | | | | | | |
| Retained earnings | | | 54 | | | | (293 | ) | | | — | |
| |
| | | | | | | | 22 | | | | (105 | ) |
| |
| Attributable to: | | | | | | | | | | | | |
| Equity holders of the parent | | | | | | | 22 | | | | (105 | ) |
| Minority interest | | | | | | | — | | | | — | |
| |
| | | | | | | | 22 | | | | (105 | ) |
| |
For the purposes of the
Consolidated Cash Flow Statement cash includes all cash at bank
For the years ended 31 December 2005 and in hand and loans and advances2004
| | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2004 | |
| | | Notes | | | £m | | | £m | |
| |
Net cash flow from/(used in) operating activities | | | | | | | | | | | | |
| Profit before tax | | | | | | | 596 | | | | (21 | ) |
| Adjustments for: | | | | | | | | | | | | |
| Non cash items included in net profit | | | | | | | 92 | | | | (180 | ) |
| Change in operating assets | | | | | | | (10,056 | ) | | | (677 | ) |
| Change in operating liabilities | | | | | | | 4,270 | | | | (3,941 | ) |
| Income taxes paid | | | | | | | (132 | ) | | | (12 | ) |
| |
Net cash flow from/(used in) operating activities | | | 47 | | | | (5,230 | ) | | | (4,831 | ) |
| |
| | | | | | | | | | | | | |
Cash flows from/(used in) investing activities | | | | | | | | | | | | |
| Disposal of subsidiaries, net of cash disposed | | | | | | | 845 | | | | 3,180 | |
| Purchase of tangible and intangible fixed assets | | | | | | | (329 | ) | | | (155 | ) |
| Proceeds from tangible and intangible fixed assets | | | | | | | 190 | | | | 240 | |
| Proceeds from sale of investment properties | | | | | | | 1,332 | | | | 72 | |
| Purchase of non-dealing securities | | | | | | | (2 | ) | | | (2,237 | ) |
| Proceeds from sale and redemption of non-dealing securities | | | | | | | — | | | | 3,031 | |
| |
Net cash flow from/(used in) investing activities | | | | | | | 2,036 | | | | 4,131 | |
| |
| | | | | | | | | | | | | |
Cash flows from/(used in) financing activities | | | | | | | | | | | | |
| Issue of ordinary share capital | | | | | | | — | | | | 13 | |
| Issue of loan capital | | | | | | | 554 | | | | — | |
| Repayment of loan capital | | | | | | | (458 | ) | | | (813 | ) |
| Dividends paid | | | | | | | — | | | | (697 | ) |
| |
Net cash flows from/(used in) financing activities | | | | | | | 96 | | | | (1,497 | ) |
| |
Net increase/(decrease) in cash and cash equivalents | | | | | | | (3,098 | ) | | | (2,197 | ) |
| |
| Cash and cash equivalents at beginning of the period | | | | | | | 11,259 | | | | 14,089 | |
| Effects of exchange rate changes on cash and cash equivalents | | | | | | | 80 | | | | (633 | ) |
| |
Cash and cash equivalents at the end of the period | | | | | | | 8,241 | | | | 11,259 | |
| |
The notes on pages 97 to banks repayable on demand without notice or penalty, including amounts denominated in foreign currencies.194 are an integral part of these consolidated financial statements.
10294
Financial Statements
Company Balance Sheet
As at 31 December 2005 and 2004
| | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2004 | |
| | | Notes | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | |
| Cash and balances at central banks | | | 13 | | | | 370 | | | | 443 | |
| Derivative financial instruments | | | 15 | | | | 1,227 | | | | — | |
| Financial assets designated at fair value | | | 16 | | | | 790 | | | | — | |
| Loans and advances to banks | | | 17 | | | | 33,009 | | | | 23,605 | |
| Loans and advances to customers | | | 18 | | | | 95,230 | | | | 79,860 | |
| Available for sale securities | | | 22 | | | | 272 | | | | — | |
| Debt securities | | | 19 | | | | — | | | | 405 | |
| Equity securities and other variable yield securities | | | 20 | | | | — | | | | 1 | |
| Investment in associated undertakings | | | 24 | | | | 24 | | | | 19 | |
| Investment in subsidiary undertakings | | | 23 | | | | 8,690 | | | | 8,250 | |
| Property, plant and equipment | | | 27 | | | | 298 | | | | 231 | |
| Current tax asset | | | | | | | 235 | | | | 242 | |
| Deferred tax assets | | | 30 | | | | 702 | | | | 494 | |
| Other assets | | | 31 | | | | 553 | | | | 1,505 | |
| |
Total assets | | | | | | | 141,400 | | | | 115,055 | |
| |
| | | | | | | | | | | | | |
| Deposits by banks | | | 32 | | | | 48,267 | | | | 35,697 | |
| Customer accounts | | | 33 | | | | 79,288 | | | | 65,910 | |
| Derivative financial instruments | | | 15 | | | | 623 | | | | — | |
| Debt securities in issue | | | 36 | | | | 4 | | | | 4 | |
| Other borrowed funds | | | 37 | | | | 1,452 | | | | 722 | |
| Subordinated liabilities | | | 38 | | | | 6,477 | | | | 5,674 | |
| Macro hedge of interest rate risk | | | | | | | 13 | | | | — | |
| Other liabilities | | | 40 | | | | 814 | | | | 2,407 | |
| Other provisions | | | 42 | | | | 202 | | | | 237 | |
| Current tax liabilities | | | | | | | 112 | | | | 57 | |
| Retirement benefit obligations | | | 43 | | | | 1,240 | | | | 1,060 | |
| |
Total liabilities | | | | | | | 138,492 | | | | 111,768 | |
| |
| | | | | | | | | | | | | |
| Share capital | | | 45 | | | | 148 | | | | 473 | |
| Share premium account | | | 45 | | | | 1,857 | | | | 2,164 | |
| Retained earnings | | | 46 | | | | 903 | | | | 650 | |
| |
Total shareholders equity | | | | | | | 2,908 | | | | 3,287 | |
| |
Total liabilities and equity | | | | | | | 141,400 | | | | 115,055 | |
| |
The notes on pages 97 to 194 are an integral part of these consolidated financial statements.
95
Financial Statements
Company Statement of Recognised Income and Expense
For the years ended 31 December 2005 and 2004
| | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2004 | |
| | | Notes | | | £m | | | £m | |
| |
| Actuarial gains and losses on defined benefit pension plans | | | | | | | (152 | ) | | | (49 | ) |
| Tax on items taken directly to equity | | | | | | | 46 | | | | 15 | |
| |
Net loss recognised directly in equity | | | | | | | (106 | ) | | | (34 | ) |
| Profit/ (loss) for the period | | | | | | | 691 | | | | (284 | ) |
| |
Total recognised income and expense for the period | | | | | | | 585 | | | | (318 | ) |
Effect of changes in accounting policy | | | | | | | | | | | | |
| IFRS transition adjustments at 1 January 2005: | | | | | | | | | | | | |
| Retained earnings | | | 54 | | | | (332 | ) | | | — | |
| |
| | | | | | | | 253 | | | | (318 | ) |
| |
| Attributable to: | | | | | | | | | | | | |
| Equity holders of the parent | | | | | | | 253 | | | | (318 | ) |
| Minority interest | | | | | | | — | | | | — | |
| |
| | | | | | | | 253 | | | | (318 | ) |
| |
Company Cash Flow Statement
For the years ended 31 December 2005 and 2004
| | | | | | | | | | | | | |
| | | | | | | 2005 | | | 2004 | |
| | | Notes | | | £m | | | £m | |
| |
Net cash flow from/(used in) operating activities | | | | | | | | | | | | |
| Profit before tax | | | | | | | 699 | | | | (490 | ) |
| Adjustments for: | | | | | | | | | | | | |
| Non cash items included in net profit | | | | | | | (121 | ) | | | 34 | |
| Change in operating assets | | | | | | | (7,715 | ) | | | (4,388 | ) |
| Change in operating liabilities | | | | | | | 1,315 | | | | 9,399 | |
| Income taxes paid | | | | | | | (8 | ) | | | 2 | |
| |
Net cash flow from/(used in) operating activities | | | 47 | | | | (5,830 | ) | | | 4,557 | |
| |
| | | | | | | | | | | | | |
Cash flows from/(used in) investing activities | | | | | | | | | | | | |
| Disposal of subsidiaries, net of cash disposed | | | | | | | — | | | | 875 | |
| Purchase of tangible and intangible fixed assets | | | | | | | (185 | ) | | | (83 | ) |
| Proceeds from tangible and intangible fixed assets | | | | | | | 56 | | | | 52 | |
| Purchase of non-dealing securities | | | | | | | (3 | ) | | | — | |
| Proceeds from sale and redemption of non-dealing securities | | | | | | | 178 | | | | 152 | |
| |
Net cash flow from/(used in) investing activities | | | | | | | 46 | | | | 996 | |
| |
| | | | | | | | | | | | | |
Cash flows from/(used in) financing activities | | | | | | | | | | | | |
| Issue of ordinary share capital | | | | | | | — | | | | 8 | |
| Issue of preference share capital | | | | | | | — | | | | 2 | |
| Issue of loan capital | | | | | | | 554 | | | | (571 | ) |
| Repayment of loan capital | | | | | | | (458 | ) | | | (301 | ) |
| Dividends paid | | | | | | | — | | | | (699 | ) |
| |
Net cash flows from/(used in) financing activities | | | | | | | 96 | | | | (1,561 | ) |
| |
Net increase/(decrease) in cash and cash equivalents | | | | | | | (5,688 | ) | | | 3,992 | |
| |
| Cash and cash equivalents at beginning of the period | | | | | | | (9,518 | ) | | | (13,346 | ) |
| Effects of exchange rate changes on cash and cash equivalents | | | | | | | 122 | | | | (164 | ) |
| |
Cash and cash equivalents at the end of the period | | | | | | | (15,084 | ) | | | (9,518 | ) |
| |
The notes on pages 97 to 194 are an integral part of these consolidated financial statements.
96
Financial Statements
Accounting PoliciesBasis of presentation
International Financial Reporting Standards
The Consolidated Financial Statements
arehave, for the first time, been prepared in accordance with
the special provisions of Part VII Schedule 9 of the Companies Act 1985 applicable to banking companies and banking groups.Accounting convention
Abbey prepares its ConsolidatedInternational Financial Statements under the historical cost convention, modifiedReporting Standards (“IFRS”) as approved by the revaluation of certain assets and liabilities. They are prepared in accordance with applicable accounting standards of theInternational Accounting Standards Board and pronouncements of its Urgent Issues Task Force and with the Statements of Recommended Accounting Practice(“IASB”), interpretations issued by the British Bankers’ Association,International Financial Reporting Interpretations Committee of the Irish Bankers’ FederationIASB that, under European Regulations, are effective or available for early adoption at the Group’s first reporting date under IFRS. The Group, in addition to complying with its legal obligation to comply with IFRS as adopted for use in the European Union, has also complied with IFRS as issued by the IASB. The date of transition to IFRS for the Group and the Financedate of its opening IFRS balance sheet was 1 January 2004. On initial adoption of IFRS, the Group applied the following exemptions from the requirements of IFRS and Leasing Association. Accountingfrom their retrospective application as permitted by IFRS 1 “First-time Adoption of International Financial Reporting Standards” (IFRS 1).
| a) | | Business Combinations – the Group has applied IFRS 3 “Business Combinations” to business combinations that occurred on or after 1 January 2004. Business combinations before that date have not been restated. Under previous GAAP (“UK GAAP”), goodwill arising on acquisitions after 1 October 1998 was capitalised and amortised over its estimated useful economic life. Goodwill arising on acquisitions before 1 October 1998 was deducted from equity. |
| b) | | Cumulative foreign currency difference – The Group has brought forward a nil opening balance on the cumulative foreign currency translation adjustment arising from the retranslation of foreign operations, which is shown as a separate item in shareholders’ equity at the date of transition in accordance with IAS 21 “The Effects of changes in Foreign Exchange Rates”. |
| c) | | Implementation of IAS 32, IAS 39 and IFRS 4 (incorporating the adoption of FRS 27 “Life Assurance”) – As allowed by IFRS 1, the Group has not restated its 2004 consolidated income statements and balance sheets from UK GAAP to comply with IAS 32, IAS 39 and IFRS 4. |
| d) | | The Group has decided to early adopt IFRS 7 “Financial Instruments: Disclosures” and the related amendments to IAS 1 “Presentation to Financial Statements” and has taken advantage of the exemption therein from presenting certain comparative information. Disclosures required by IFRS 7 relating to the nature and extent of risks arising from financial instruments may be found in the “Risk Management” section of the Business and Financial Review on pages 59 to 73, which form part of these financial statements. |
| e) | | The Group has also decided to early adopt the amendment to IAS 19 “Employee Benefits- Actuarial Gains and Losses Group Plans and Disclosures” |
| f) | | The Group has adopted IFRS 5 “Non-current assets held for sale and Discontinued Operations” prospectively from 1 January 2005 and has elected not to restate comparatives. |
At the date of authorization of these financial statements, it’s the Directors’ view that none of the Standards and Interpretations in issue, but not yet effective will have any material impact on the financial statements of the group in future.
Consolidation
a) Subsidiaries
Subsidiaries, which are those companies and other entities (including Special Purpose Entities) over which the Group, directly or indirectly, has power to govern the financial and operating policies, are reviewed regularly to ensure theyconsolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the most appropriateGroup controls another entity.
Subsidiaries are consolidated from the date on which control is transferred to the
circumstancesGroup and are no longer consolidated from the date that control ceases. The purchase method of
Abbeyaccounting is used to account for the
purposesacquisition of
giving a true andsubsidiaries. The cost of an acquisition is measured at the fair
view. Consistent with other banking groups, in preparing consolidated financial statements, the long-term assurance business is valued using the embedded value method, with adjustments made for the impact of investment variances to Long-Term Assumptions. Disclosures consistent with the guidance provided by the Association of British Insurers in December 2001 is provided in either the Consolidated Financial Statements or the Operating and Financial Review, wherever practical.
Basis of consolidation
The Group Financial Statements incorporate the Consolidated Financial Statements of the companyassets given up, shares issued or liabilities undertaken at the date of acquisition, plus costs directly attributable to the acquisition. The excess of the cost of acquisition over the fair value of the tangible and all itsintangible assets of the subsidiary undertakings.acquired is recorded as goodwill. Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered.
The accounting reference date of the companyCompany and its subsidiary undertakings is 31 December, with the exception of those leasing, investment, insurance and funding companies which, because of commercial considerations, have various accounting reference dates. The financial statements of these subsidiaries have been consolidated on the basis of interim Financial Statementsfinancial statements for the period to 31 December 2004.December.
b) Associates and joint ventures
Investments in associates and joint ventures are accounted for by the equity method of accounting and are initially recognised at cost. Under this method, the Group’s share of the post-acquisition profits or losses of associates is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the cost of the investment.
Associates are entities in which the Group has between 20% and 50% of the voting rights, or over which the Group has significant influence, but which it does not control. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. The Group’s investment in associates includes goodwill on acquisition. When the Group’s share of losses in an associate equals or exceeds its interest in the associate the Group does not recognise further losses unless the Group has incurred obligations or made payments on behalf of the associates.
Joint ventures are based on contractual arrangements where two or more entities carry out an economic activity that is subject to joint control.
97
Financial Statements
Accounting Policiescontinued
Foreign currency translation
Items included in the financial statements of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (“the functional currency”). The consolidated financial statements are presented in Pounds Sterling, which is the functional currency of the parent.
Income statements and cash flows of foreign entities are translated into the Group’s reporting currency at average exchange rates for the year and their balance sheets are translated at the exchange rates ruling on 31 December. Exchange differences arising from the translation of the net investment in foreign entities are taken to shareholders’ equity. When a foreign entity is sold, such exchange differences are recognised in the income statement as part of the gain or loss on sale.
Foreign currency transactions are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement.
Revenue recognition
(a) Interest Income and Expense
Interest income on financial assets that are classified as loans and receivables or available for sale and interest expense on financial liabilities other than those at fair value through profit and loss is determined using the effective interest method. The effective interest rate is the rate that discounts the estimated future cash payments or receipts over the expected life of the long-term assuranceinstrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the future cash flows are estimated after considering all the contractual terms of the instrument but not future credit losses. The calculation includes all amounts paid or received by the Group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of a financial instrument and all other premiums or discounts.
(b) Fee and commissions income
Fees and commissions, which are not an integral part of the effective interest rate are generally recognised when the service has been provided. For the asset management operations, fee and commission income consists principally of investment management fees, distribution fees from mutual funds, commission revenue from the sale of mutual fund shares and transfer agent fees for shareholder record keeping. Revenue from investment management fees, distribution fees and transfer agent fees is recognised as earned when the service has been provided.
Portfolio and other management advisory and service fees are recognised based on the applicable service contracts. Asset management fees related to investment funds are presented separately from thoserecognised rateably over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time.
(c) Financial assets and liabilities held at fair value
Financial assets and liabilities held for trading and financial assets and financial liabilities designated as fair value through profit or loss, are recorded at fair value. Changes in fair value of assets and liabilities held for trading are recognised in the income statement as net trading income together with dividends and interest receivable and payable. Changes in fair value of assets and liabilities designated as fair value through profit or loss are recognised in the income statement as net trading income together with dividends and interest receivable and payable.
Pensions and other businessespost retirement benefits
Group companies have various pension schemes. The schemes are generally funded through payments to insurance companies or trustee-administered funds as determined by periodic actuarial calculations. A defined benefit plan is a pension plan that defines an amount of pension benefit to be provided, usually as a function of one or more factors such as age, years of service or compensation. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity (a fund) and will have no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees benefits relating to employee service in order to reflect the different naturecurrent and prior periods.
The liability recognised in respect of
defined benefit pension plans, is the
shareholders’ interests therein.Interest in subsidiary undertakings and associated undertakings
The company’s interests in subsidiary undertakings and associated undertakings are stated at cost less any provisions for impairment. The Group’s interests in associated undertakings are stated at Abbey’s share of the bookpresent value of the net assetsdefined benefit obligation at the balance sheet date less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Full actuarial valuations of the associated undertakings.
Goodwill
Goodwill arising on consolidation as a resultGroup’s principal defined benefit schemes are carried out every year. The present value of the acquisitionsdefined benefit obligation is determined by the estimated future cash outflows using interest rates of subsidiary undertakingsgovernment securities, which have terms to maturity approximating the terms of the related liability.
The Group’s income statement includes the current service cost of providing pension benefits, the expected return on schemes’ assets net of expected administration costs, and the purchaseinterest cost on the schemes’ liabilities. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are taken directly to reserves and recognised in the statement of businesses after 1 January 1998 is capitalised underrecognised income and expense. Past-service costs are charged immediately to the heading Intangible fixed assets andincome statement, unless the changes are conditional on the employees remaining in service for a specified period of time, the vesting period. In this case, the past-service costs are amortised on a straight-line basis over the vesting period.
For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Once the contributions have been paid, the Group has no further payment
98
Financial Statements
Accounting Policiescontinued
obligations. The regular contributions constitute net periodic costs for the year in which they are due and as such are included in staff costs.
Share based payments
The Group engages in cash settled share based payment transactions in respect of services received from certain of its
expected useful economic life.employees. Shares of the Group’s parent, Banco Santander Central Hispano, S.A are purchased in the open market to satisfy share options as they vest. Prior to the acquisition of Abbey by Banco Santander Central Hispano, S.A, share options were satisfied by issue of new Abbey shares. These options were accounted for as equity settled share based payments. The
useful economic lifefair value of the services received is
calculated using a valuation model which determinesmeasured by reference to the
periodfair value of
time over which returns are expected to exceed the
shares or share options initially on the date of the grant and then subsequently at each reporting date. The cost of
capital, subject to a maximum period of 20 years. Goodwill arising on consolidation as a resultthe employee services received in respect of the acquisitions of subsidiary undertakings, and the purchase of businesses prior to 1 January 1998, has previously been written off directly to reserves. On disposal of subsidiary undertakings and businesses, such goodwill is charged to the Profit and Loss Account balanced by an equal credit to reserves. Where such goodwill in continuing businesses has suffered an impairment, a similar charge to the Profit and Loss Account and credit to reserves is made.
Impairment of fixed assets and goodwill
Tangible fixed assets, other than investment properties, and goodwill are subject to review for impairment in accordance with FRS 11 Impairment of Fixed Assets and Goodwill. The carrying values of tangible fixed assets and goodwill are written down by the amount of any impairment, and the lossshares or share options granted is recognised in the Profit and Loss Account inincome statement over the period inthat the services are received, which this occurs. Should an event reverseis the effects of a previous impairment, the carryingvesting period. The fair value of the tangible fixedoptions granted is determined using option pricing models, which take into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the Banco Santander Central Hispano, S.A. share price over the life of the option and other relevant factors. Except for those which include terms related to market conditions, vesting conditions included in the terms of the grant are not taken into account in estimating fair value. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of employee service so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market related vesting conditions are met, provided that the non-market vesting conditions are met.
Goodwill and other intangible assets
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on the acquisition of subsidiaries is included in “intangible assets”. Goodwill on acquisitions of associates is included in “investment in associates”. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill mayrelating to the entity sold.
Other intangible assets are recognised if they arise from contracted or other legal rights or if they are capable of being separated or divided from the Group and sold, transferred, licensed, rented or exchanged. The value of such intangible assets is amortised on a straight line basis over the useful economic life of the assets in question which ranges from 12 to 20 years.
Property, plant and equipment
Property, plant and equipment, includes owner-occupied properties, office fixtures and equipment and computer software. Property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Items of property, plant and equipment are reviewed for indications of impairment at each reporting date. Gains and losses on disposal of property, plant and equipment are determined by reference to their carrying amount and are taken into account in determining operating profit reported as other operating expenses. Repairs and renewals are charged to the income statement when the expenditure is incurred.
Software development costs are capitalised when they are associated with identifiable and unique software products that are expected to provide economic benefits and the cost of these products can be
written up to a value no higher thanmeasured reliably. Internally developed software meeting these criteria and externally purchased software are classified in property, plant and equipment on the
original depreciated or amortised cost which would have been recognised had the original impairment not occurred.Depreciation
Tangible fixed assets excluding operating lease assetsbalance sheet. Costs associated with maintaining software programmes are expensed as incurred.
Classes of property, plant and investment propertiesequipment are depreciated on a straight-line basis over their estimated useful lives,life as follows:
| | | |
| |
Freehold buildings: | | 100 years |
Long and short leasehold premises: | | Over the remainder of the lease, with a maximum of 100 years. Acquisition premiums are depreciated over the period to the next rent review. |
Freehold land:Owner-occupied properties | | Not depreciatedexceeding 40 years |
Office fixtures equipment and furniture:equipment | | 53 to 8 years |
Computer equipment:software | | 3 to 5 years |
| |
For
Financial assets
The Group classifies its financial assets in the following categories: financial assets at fair value through profit and loss account; loans and receivables and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.
(a) Financial assets at fair value through the profit and loss
Financial assets are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition. A financial asset is classified as held for trading if it is a descriptionderivative or it is acquired principally for the purpose of depreciation on operating leaseselling in the near term, or forms part of a portfolio of financial instruments that are managed together and for which there is evidence of short-term profit taking.
In certain circumstances financial assets see “Assets leased to customers” below.other than those that are held for trading are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that
10399
Accounting Policiescontinued
Interest receivable
would otherwise arise from measuring assets or recognising the gains or losses on them on a different basis, or where a financial asset contains one or more embedded derivatives which are not closely related to the host contract.
(b) Loans and
payableInterest receivableReceivables
Loans and payablereceivables are non-derivative financial assets with fixed or determinable payments and which are not classified as available for sale. They arise when the Group provides money or services directly to a customer with no intention of trading the loan. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all of the risks and rewards of ownership.
(c) Available for sale
Available for sale investments are non-derivative financial investments that are designated as available for sale and are not categorised into any of the other categories described above. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses arising from changes in fair value are included as a separate component of equity until sale when the cumulative gain or loss is
recognised intransferred to the
Profit and Loss Account as it accrues.income statement. Interest is
suspended where due but not received on loans and advances in arrears where recovery is doubtful. The amounts suspended are excluded fromdetermined using the effective interest
receivable on loans and advances until recovered.Fees, commissions and dividends receivable
Fees and commissions receivable in respect of services provided are taken to the Profit and Loss Account when the related services are performed. Where fees, commissions and dividends are in the nature of interest, these are taken to the Profit and Loss Account on a systematic basis over the expected life of the transaction to which they relate, and are included under the heading interest receivable, except for amounts that related to trading activities.method. Income on investments in equity shares and other similar interests is recognised as and when dividends are declared and interest is accrued. These amounts are recorded in the income statement. Impairment losses and foreign exchange translation differences on monetary items are recognised in the income statement. The investments are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.
Regular way purchases of financial assets classified as loans and receivables are recognised on settlement date; all other regular way purchases are recognised on trade date.
The assets are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.
Offsetting financial assets and liabilities
Financial assets and liabilities including derivatives are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Sale and repurchase agreements (Including stock lending and borrowing)
Securities sold subject to a linked repurchase agreement (‘repos’) are retained in the financial statements as trading securities and the counterparty liability is included in amounts “Deposits by banks” or “Customer accounts” as appropriate. Securities purchased under agreements to resell (‘reverse repos’) are recorded as “Loans and advances to banks” or “Loans and advances to customers” as appropriate. The difference between the sale and repurchase price is treated as trading income in the income statement. Securities lent to counterparties collateralised by cash are also retained in the financial statements.
Securities borrowing and lending transactions collateralised with other securities are not recognised in the balance sheet.
Derivative financial instruments
Transactions are undertaken in derivative financial instruments, (derivatives), which include interest rate swaps, cross-currency and foreign exchange swaps, futures, equity and credit derivatives, options and similar instruments. Under IFRS all derivatives are classified as trading.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and valuation techniques, including discounted cash flow models and option pricing models as appropriate. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative.
Certain derivatives embedded in other financial instruments, such as the conversion option in a convertible bond, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the hybrid contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement.
Hedge accounting
The Group designates certain derivatives as hedging instruments of the fair value of recognised assets or liabilities or firm commitments (fair value hedge) provided certain criteria are met.
At the time a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged items(s). Documentation includes its risk management objectives and its strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Accordingly, the Group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been “highly effective” in offsetting changes in the fair value or cash flows of the hedged items. A hedge is normally regarded as highly effective if, at inception and throughout its life, the Group can expect, and actual results indicate, that changes in the fair value of the hedged items are effectively offset by changes in the fair value or cash flows of the
100
Financial Statements
Accounting Policiescontinued
hedging instrument, and actual results are within dividend income. Fees receiveda range of 80% to 125%. The Group discontinues hedge accounting when it is determined that: a derivative is not, or has ceased to be, highly effective as a hedge; when the derivative expires, or is sold, terminated, or exercised; when the hedged item matures or is sold or repaid.
Hedge ineffectiveness represents the amount by which the changes in the fair value of the hedging derivative differ from changes in the fair value of the hedged item. Such gains and losses are recorded in current period earnings in Other Operating Income. Gains and losses on components of a hedging derivative that are excluded from assessing hedge effectiveness are included in Net Trading Income.
Securitisation transactions
The Group has entered into certain arrangements where undertakings have issued mortgage-backed securities or have entered into funding arrangements with lenders in order to finance specific loans with high loan-to-value ratios areand advances to customers. As the Group has retained substantially all the risks and rewards, all such financial instruments continue to be held on the Group balance sheet, and a liability recognised for the proceeds of the funding transaction.
Transactions undertaken prior to 1 January 2004 that were accounted for on the basis of linked presentation under UK GAAP have been represented by separate recognition of the gross assets and related funding from that date.
Impairment of financial assets
At each balance sheet date the Group assesses whether, as
described undera result of one or more events occurring after initial recognition, there is objective evidence that a financial asset or group of financial assets classified as available for sale or loans and receivables have become impaired. Evidence of impairment may include indications that the
heading “Deferred income”. This accounting policyborrower or group of borrowers have defaulted, are experiencing significant financial difficulty, or the debt has been amendedrestructured to reduce the burden to the borrower.
(a) Financial assets carried at amortised cost
Impairment losses are assessed individually for the financial assets that are individually significant and individually or collectively for assets that are not individually significant.
For individually assessed assets, the Group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of the estimated future cash flows from the asset or group of assets discounted at the original effective interest rate of the asset.
In making collective assessment for impairment, financial assets are assessed for each portfolio segmented by similar risk characteristics. For each risk segment, future cash flows from these portfolios are estimated through the use of historical loss experience. The historical loss experience is adjusted for current observable data, to reflect the
change in accounting policy described ineffects of current conditions not affecting the
dealing profits accounting policy.Lending-related fees and commissions payable and discounts
Under certain schemes, payments and discounts may be made to customers as incentives to take out loans. Itperiod of historical experience, based on observable data. The loss is usually a conditiondiscounted at the effective interest rate, except where portfolios meet the criteria for short-term receivables. The unwind of such schemes that incentive payments are recoverable by way of early redemption penalty charges in the event of redemption within a specified period, “the penalty period”, and itdiscount over time is Abbey’s policy and normal practice to make such charges. Such incentive payments are charged to the Profit and Loss Account over the penalty period where their cost is recoverable from the netreported through interest income earned from the related loans over the penalty period. If the loan is redeemedreceivable within the penalty periodincome statement, with the incentive payments are offset against the penalty charge. When the related loan is redeemed, sold or becomes impaired any amounts previously unamortised are charged to the Profit and Loss Account. The Profit and Loss Account charge for such amounts is included under the heading interest receivable.
Commissions payable to introducers in respect of obtaining certain lending business are charged to the Profit and Loss Account over the anticipated life of the loans. The Profit and Loss Account charge for such commissions is included under the heading Fees and commissions payable.
Dealing profits
Dealing profits include movements in prices on a mark-to-market basis, including interest and dividends, on trading derivatives, trading security positions, trading treasury and other bills and related funding. This is a presentational change in that previously interest on mark-to-market securities and money market instruments was classified within interest receivable and interest payable. This had no impact on profit. In the 12 months to December 2003 this change resulted in reclassification of £86m (2002: £105m) from net interest income to non-interest income.
Deferred income
The arrangement of certain UK loans and advances secured on residential properties with high loan-to-value ratios may result in a fee being charged.
In Abbey’s accounts, such fees are deferred and are included in the Balance Sheet under the heading accruals and deferred income. The deferred income balance is taken to the Profit and Loss Account over the average anticipated life of the loan and is included under the heading Other operating income.
Pensions
Where pensions are provided by means of a funded defined benefits scheme, annual contributions are based on actuarial advice. The expected cost of providing pensions is recognised on a systematic basis over the expected average remaining service lives of members of the scheme.
For defined contribution schemes the amount charged to the Profit and Loss Account in respect of pensions costs and other post retirement benefits is the contributions payable in the year. Differences between contributions payable in the year and contributions actually paid are shown as either accruals or prepaymentsprovision reserves on the Balance Sheet.
Provisions for bad and doubtful debts
A specific provision is established for all impaired loans where it is likely that some of the capital will not be repaid or, where the loan is secured, recovered through enforcement of security. No provision is made where the security is in excess of the secured advance. Default is taken to be likely after a specified period of repayment default.balance sheet increasing.
Loans that are part of a homogeneous pool of similar loans are placed on default status based on the number of months in arrears, which is determined through
historical experience.number of missed payments or number of months in collection. Loans that are not part of a homogeneous pool of similar loans are analysed based on the number of months in arrears on a case-by-case basis and are placed on default status when the probability of default is likely.
Generally, the length of time before
a loanan asset is placed on default status
after afor provisioning is when one payment is missed. However, for assessing the level of non-performing asset repayment default depends on the nature of the collateral that secures the
advance.advances. On advances secured by residential
or commercial property, the default period is three months.
On advances secured by commercial property, the default period is five months, based on historical experience with business customers. For advances secured by consumer goods such as cars or computers, the default period is less than three months, the exact period being dependent on the particular type of loan in this category.
104
Financial Statements
Accounting Policiescontinued
On unsecured advances, such as personal term loans, the default period is often less than three months.generally four missed payments (three months in arrears). Exceptions to the general rule exist with respect to revolving facilities, such as bank overdrafts, which are placed on default upon a breach of the contractual terms governing the applicable account, and on credit card accounts where the default period is three months.
Once a financial asset or a group of financial assets has been written down as a result of an impairment loss, interest income is continued to be recognised on an effective interest rate basis, though on the asset value after provisions have been deducted.
Impairment losses are recognised in the income statement and the carrying amount of the financial asset or group of financial reduced by establishing an allowance for impairment losses. If in a subsequent period the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance.
A write off is made when all collection procedures have been completed and is charged against previously established provisions for impairment.
(b) Available for sale financial assets
The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In assessing whether assets are impaired, a significant or prolonged decline in the fair value of the security below its cost is considered evidence.
101
Wholesale lending
Financial Statements
Accounting Policiescontinued
The cumulative loss is measured as the difference between the acquisition cost and the current fair value, less any impairment loss previously reported in the income statement and is removed from equity and recognised in the income statement.
If in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase is due to an event occurring after the impairment loss was recognised in the income statement (with objective evidence to support this), the impairment loss is reversed through the income statement.
Impairment of non-financial assets
At each balance sheet date, or more frequently when events or changes in circumstances dictate, property plant and equipment and intangible assets are assessed for indicators of impairment. If indications are present, these assets are subject to an impairment review. Goodwill is subject to an impairment review as at the balance sheet date each year. The impairment review comprises a comparison of the carrying amount of the asset with its recoverable amount: the higher of the asset’s or the cash-generating unit’s fair value less costs to sell and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm’s length transaction evidenced by an active market or recent transactions for similar assets. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre tax basis.
The carrying values of fixed assets and goodwill are written down by the amount of any impairment and the loss is recognised in the income statement in the period in which it occurs. A previously recognised impairment loss relating to a fixed asset may be reversed in part or in full when a change in circumstances leads to a change in the estimates used to determine the fixed asset’s recoverable amount. The carrying amount of the fixed asset will only be increased up to the amount that would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. For conducting impairment reviews, cash generating units are the lowest level at which management monitors the return on investment on assets.
Investment property
Property held for long-term rental yields and capital appreciation within the long-term assurance funds is classified as investment property. Investment property is stated at fair value, which is determined annually as the open market value. These valuations are reviewed annually by an independent valuation expert. Changes in fair values are recorded in the income statement.
Leases
The Group as lessor – Assets leased to customers under agreements which transfer substantially all the risks and rewards identical to ownership, are classified as finance leases. Assets held under finance leases are recognised in the Balance Sheet as a receivable amount equal to the net investment in leases. The net investment in leases represents the present value of the minimum lease payments receivable under finance leases together with any unguaranteed residual value accruing to the lessor discounted at the rates of interest implicit in the leases. Income from finance leases is recognised using the constant periodic rate of return before tax to give a constant periodic rate of return on the net investment.
Operating leases are recorded at cost and depreciated over the life of the asset after taking into account anticipated residual values. Operating lease rental income and depreciation is recognised on a straight-line basis over the life of the asset.
The Group as lessee – The Group principally enters into operating leases for the rental of equipment or real estate. Payments made under such leases are charged to the income statement principally on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment to be made to the lessor by way of penalty is recognised as an expense in the period in which termination takes place. If the lease agreement transfers the risk and rewards of the asset, the lease is recorded as a finance lease and the related asset is capitalised. At inception, the asset is recorded at the lower of the present value of the minimum lease payments or fair value and depreciated over the estimated useful life. The corresponding rental obligations are recorded as borrowings.
The aggregate benefit of incentives, if any, is recognised as a reduction of rental expense over the lease term on a straight-line basis.
Insurance
(a) Insurance and investment securitiescontract classification
The Group enters into insurance contracts and investment contracts.
Insurance contracts are placedthose contracts, which transfer significant insurance risk. Investment contracts are those contracts, which carry no significant insurance risk.
A number of insurance and investment contracts contain a Discretionary Participation Feature (“DPF”) which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses that are likely to be a significant portion of the total contractual benefits and whose amount or timing is contractually at the discretion of the Group and based on default status immediately upon defaultthe performance of specified assets. Contracts containing a discretionary participation feature are also referred to as participating or with-profits contracts.
102
For insurance and participating investment contracts, the group continues to use the embedded value basis of accounting used by banking groups, modified, as necessary to comply with the requirements of IFRS (“IFRS embedded value”). Investment contracts that are non-participating are accounted for as financial instruments.
(b) Insurance and participating investment contracts
The majority of the life assurance contracts issued by the Group are long-term life assurance contracts. The Group also issues life assurance contracts to protect customers from the consequence of events (such as death, critical illness or disability) that would effect the ability of the customer or their dependants to maintain their current level of income. Guaranteed benefits paid on occurrence of the specified insurance event are either fixed or linked to the extent of the economic loss suffered by the policyholder.
The significant accounting policies applied in relation to insurance and participating investment contracts are:
Premiums
Premiums received in respect of life insurance and participating investment contracts are recognised as revenue when due and shown before deduction of commission. Reassurance premiums are charged when they become payable.
Claims
Death claims are recognised on receipt of notifications. Maturities and annuity payments are recorded when contractually due. Surrenders are recorded on the earlier of the date paid or date the policy benefit (or part thereof) ceases to be included within the insurance and participating contract liabilities. Claims on participating business include bonuses payable. Claims payable include costs of settlement. Reinsurance recoveries are credited to match the relevant gross amounts.
Insurance and participating investment contract liabilities
Value of in-force life assurance business
The Group recognises as an asset the value of in-force life assurance business in respect of life insurance contracts and participating investment contracts. The asset, which represents the present value of future profits (‘PVFP’) expected to arise from these contracts, is determined by projecting the future surpluses and other net cash flows arising from life insurance contract and participating investment contract business written by the balance sheet date. The PVFP is determined using appropriate economic and actuarial assumptions excluding future investment margins, and is discounted at a rate which reflects the Group’s overall risk premium attributable to this business. The asset in the consolidated balance sheet and movements in the asset in the income statement are determined and shown on a payment due date or following any event specifiedgross of tax basis.
Liabilities are calculated as follows:
Liabilities – non-participating insurance contracts which are not unit linked:
A liability for contractual benefits that are expected to be incurred in the loan documentationfuture is recorded when the premium is recognised. The liabilities of the Group’s non-profit life funds are calculated by estimating the future cash flows over the duration of the in-force policies and discounting them back to the valuation date allowing for probabilities of insured event occurrence. The liability will vary with movements in interest rates and with the cost of life assurance and annuity benefits which reflect changes in mortality rates. Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs. For conventional life and pensions business, the gross premium valuation method has been used.
Liabilities – non-participating insurance contracts which are unit linked:
Allocated premiums in respect of unit linked contacts that are either life insurance contracts or participating investment contracts are recognised as liabilities. These liabilities are increased or reduced by the change in the relevant unit prices over the period and include any amounts necessary to compensate the Group for services to be performed over future periods. They are reduced by policy administration fees, mortality charges, surrender charges and any withdrawals. The mortality charges deducted in each period from the policyholders as a default event. Securitiesgroup are also placedconsidered adequate to cover the total death benefit claims that are expected to occur over the term of the contracts.
Liabilities – participating insurance and investment contracts:
Liabilities of the Group’s with-profits fund, including guarantees and options embedded within products written by that fund, are stated at their realistic values in accordance with the Financial Services Authority’s Realistic Capital regime. The measurement of insurance liabilities is calculated using stochastic methods and therefore reflects both the intrinsic and time value of guarantees and options embedded within products. Economic assumptions are calibrated to observed current market prices.
Unallocated surplus liability
The Group has an obligation to pay policyholders a specified portion of all interest and realisable gains and losses arising from the assets backing participating contracts. Any amounts not yet determined as being due to policyholders are recognised as a liability, which is shown separately from other liabilities.
Liability adequacy test
At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract liabilities. In performing these tests current best estimates of future contractual cash flows and claims
103
Financial Statements
Accounting Policiescontinued
handling and administration expenses, as well as investment income from the assets backing such liabilities are used. Any deficiency is immediately charged to the income statement to establish an appropriate provision against these potential losses.
Embedded derivatives
Embedded derivative features contained within insurance contracts are accounted for at fair value and unrealised gains and losses arising on default statusthe embedded derivatives are reported in income. Where the risks and characteristics of embedded derivatives are not closely related to those of the host contract and the host contract is not carried at fair value the embedded derivatives are accounted for separately.
Reinsurance
The Group cedes reinsurance in the normal course of business. Amounts recoverable from reinsurers are estimated in a manner consistent with the amounts associated with the reinsured policies and in accordance with the reinsurance contract. Premiums ceded and benefits reimbursed are presented on the consolidated balance sheet on a gross basis.
The Group regularly assesses its long-term reinsurance assets for impairment. A reinsurance asset is impaired if there is objective evidence that the Group may not receive all amounts due to it under the terms of the contract and that event has a reliably measurable impact on the amounts that the Group will receive from the reinsurer.
Insurance contracts and business combinations
For Insurance contracts acquired in business combinations and portfolio transfers, intangible assets are recognised and are the capitalised value of the future profits that are expected to emerge for the benefit of the shareholders from the acquired business or portfolio transfer. The capitalised value is the actuarially determined fair value of the business calculated using a risk adjusted discount rate and the appropriate assumptions for mortality, morbidity, persistency, expenses and investment return.
Receivables and payables related to insurance and participating investment contracts
Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance contract holders.
(c) Non-participating investment contracts
All of the Group’s non-participating investment contracts are unit linked. These contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable.
Premiums and Claims
Premiums which are invested on behalf of non-participating investment contract holders and related claims are excluded from the income statement, with all movements in the contract holder liability and related assets recorded in the balance sheet.
Fee Income
Revenue in relation to investment management and other related services provided in respect on non-participating investment contracts is recognised in the accounting period in which the services are rendered. These services comprise an indeterminate number of acts over the life of individual contracts. For practical purposes, the Group recognises these fees on a straight-line basis over the estimated life of the contract.
Deferred Acquisition Cost
Directly incremental commissions that vary with and are related to either securing new or renewing existing non-participating investment contracts are capitalised as an intangible asset. This asset is subsequently amortised over the period of the provision of investment management services and is reviewed for impairment in circumstances where its carrying amount may not be recoverable. If the asset is greater than the recoverable amount it is written down immediately. All other costs are recognised as expenses when incurred.
Income taxes, including deferred income taxes
The tax expense represents the sum of the income tax currently payable and deferred income tax.
Income tax payable on profits, based on the applicable tax law in each jurisdiction is recognised as an expense in the period in which profits arise. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. The tax effects of income tax losses available to carry forward are recognised as an asset when it is probable that future taxable profits will be available against which tax losses can be utilised.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the counterparty goes into voluntarytemporary difference arises from the initial recognition of other assets (other than in a business combination) and liabilities in a transaction that affects neither the tax profit nor the accounting profit.
104
Financial Statements
Accounting Policiescontinued
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or forced administrationthe asset is realised. Deferred tax is charged or liquidationcredited in the income statement, except when it relates to items charged or makes an announcementcredited directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries except where we are able to control reversal of the temporary difference and it is probable that it wouldwill not meet its commitments onreverse.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the
next payment due date. Once a loanextent that it is considered impaired, an assessmentno longer probable that sufficient taxable profits will be available to allow all or part of the likelihoodasset to be recovered.
Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
Cash and cash equivalents
For the purposes of
collecting the
principal is made. This assessment includes, where appropriate,cash flow statement, cash and cash equivalents comprise balances with less than three months’ maturity from the
usedate of
statistical techniques developed based on previous experienceacquisition, including cash and
on management judgment of economic conditions. These techniques estimate the propensity of loans to result in lossesnon-restricted balances with central banks, treasury bills and other eligible bills, net
of any recovery where applicable. A general provision is made against loans and advances to cover badbanks, net securities financing amounts and doubtful debtsshort-term investments in securities
Financial liabilities
Financial liabilities are initially recognised when the Group becomes contractually bound to the transfer of economic benefits in the future.
Financial liabilities are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition. A financial liability is classified as held for trading if it is a derivative or is incurred principally for the purpose of selling or being unwound in the near term, or forms part of a portfolio of financial instruments that are managed together and for which have not been separately identified, butthere is evidence of short-term profit taking.
In certain circumstances financial liabilities other than those that are held for trading are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets and liabilities or recognising the gains or losses on them on a different basis, or where a financial liability contains one or more embedded derivatives which are knownevidently not closely related to the host contract.
These liabilities are initially recognised at fair value and transactions costs are taken directly to the income statement. Gains and losses arising from experiencechanges in fair value are included directly in the income statement.
All other financial liabilities are initially recognised at fair value net of transaction costs incurred. They are subsequently stated at amortised cost and the redemption value recognised in the income statement over the period of the liability using the effective interest method.
Borrowings
Borrowings are recognised initially at fair value, being the proceeds (fair value of consideration received) net of transaction costs incurred. Borrowings are subsequently stated at amortised cost or fair value dependent on designation at initial recognition.
Preference shares, which carry a contractual obligation to be presenttransfer economic benefits, or are redeemable on a specified date or at the option of the shareholder, are classified as other financial liabilities and are presented in portfoliosother borrowed funds. The dividends on these preference shares are recognised in the income statement as interest expense on an amortised cost basis using the effective interest method.
Share capital
Share issue costs
Incremental external costs directly attributable to the issue of
loans and advances. The general provision is determined using management judgment given past loss experience, lending quality and economic conditions, and is supplemented by statistical based calculations. The specific and general provisionsnew shares, other than on a business combination, are deducted from equity net of any related income taxes.
Provisions
Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, and it can be reliably estimated.
When a leasehold property ceases to be used in the business, provision is made where the unavoidable costs of the future obligations relating to the lease are expected to exceed anticipated rental income. The net costs are discounted using market rates of interest to reflect the long-term nature of the cash flows.
Provision is made for the anticipated cost of restructuring, including redundancy costs, when an obligation exists. An obligation exists when the Group has a detailed formal plan for restructuring a business, and has raised valid expectations in those affected by the restructuring and has started to implement the plan or announce its main features.
Contingent liabilities are possible obligations whose existence will be confirmed only by certain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote.
105
Financial Statements
Accounting Policiescontinued
Dividends
Dividends on ordinary shares are recognised in equity in the period in which they are declared.
Critical accounting policies and areas of significant management judgement
The preparation of Abbey’s financial statements requires management to make estimates and judgements that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of income and expenses during the reporting period.
Management evaluates its estimates and judgements on an ongoing basis. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
The following estimates and judgements are considered important to the portrayal of Abbey’s financial condition.
(a) Provisions for loans and advances.advances
Abbey estimates provisions for loans and advances with the objective of maintaining balance sheet provisions at the level believed by management to be sufficient to absorb actual losses (“observed provisions”) and inherent losses (“incurred but not yet observed provisions”) in Abbey’s loan portfolio from homogeneous portfolios of assets and individually identified loans in connection with loans and advances to banks and loans and advances to customers. The calculation of provisions on impaired loans and advances is based on the likelihood of the asset being written off (or repossessed in the case of mortgage loans) and the estimated loss on such a write-off. These assessments are made using statistical techniques based on historic experience. These determinations are supplemented by various formulaic calculations and the application of management judgement.
Abbey considers accounting estimates related to provisions for loans and advances “critical accounting estimates” because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between Abbey’s estimated losses (as reflected in the provisions) and actual losses will require Abbey to take provisions which, if significantly different, could have a material impact on its future income statement and its balance sheet. Abbey’s assumptions about estimated losses are based on past performance, past customer behaviour, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.
Provisions made during the year,for loans and advances, less amounts released and recoveries of amounts written off in previous years, are charged to the Profitline item “Impairment losses on loans and Loss Account. Write offsadvances” in the income statement. The provisions are determineddeducted from the “Loans and advances to banks” and the “Loans and advances to customers” line items on the balance sheet. If Abbey believes that additions to the provisions for such credit losses are required, then Abbey records additional provisions for credit losses, which would be treated as a case-by-case basischarge in the line item “Impairment losses on loans and advances” in the income statement.
Details of the provisions for different productsloans and portfolios,advances are set out in Note 18.
(b) Valuation of financial instruments
Financial instruments that are classified at
times ranging typically from 30 to 365 days.Share-based payments
The costs of share-based instruments are accounted for on a fair value basis, computed by reference to the grant date; such costs are expensed over the performance period to which the award relates. The amount charged to the Profitthrough profit and Loss Account is credited to reserves.
In accordance with UITF 38 Accounting for ESOP Trusts, shares purchased through Employee Share Option Trusts (ESOPs) are held at cost and treated as treasury shares and are taken as a deduction from shareholders’ equity.
Foreign currency translation
Income and expenses arising in foreign currencies are translated into sterling at the average rates of exchange over the accounting period unless they are hedged, in which case the relevant hedge rate is applied. Dividends are translated at the rate prevailing on the date the dividend is receivable. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange current at the balance sheet date. In Abbey’s Consolidated Financial Statements, exchange differences on the translation of the opening net assets of foreign undertakings to the closing rate of exchange are taken to reserves, as areloss (including those differences resulting from the restatement of the profits and losses of foreign undertakings from average to closing rates. Exchange differences arising on the translation of foreign currency borrowings used to hedge investments in overseas undertakings are taken directly to reserves and offset against the corresponding exchange differences arising on the translation of the investments. Other translation differences are dealt with through the Profit and Loss Account.
Securities
Debt securities, equity shares and other similar interests (“securities”) held for investment purposestrading purposes) or available for sale, and all derivatives, are stated at cost, adjusted for any amortisation of premium or discount on an appropriate basis over their estimated remaining lives. Provision is made for any impairment.
In accordance with industry practice, securities which are not held for the purpose of investment and the associated funding of these assets are stated at market value and profits and losses arising from this revaluation are taken directly to the Profit and Loss Account.fair value. The net return on these assets, including interest, appears in dealing profits in the Profit and Loss Account. This net return comprises the revaluation profit and loss referred to above, plus profits and losses on disposal of these assets. The difference between the cost and marketfair value of securities not held for investmentsuch financial instruments is not disclosed as its determination is not practicable.
The market values of securities are primarily derived using publicly quoted prices, direct broker quotes or recognised market models. Where such prices are unavailable, market values for those securities have been derived using in-house pricing models.
Where securities are transferred between portfolios held for investment purposes and portfolios held for other purposes, the securities are transferred at market value. Gains and losses on these transfers are taken directly to the Profit and Loss Account, and are included within other operating income.
Securities are recognised as assets or, in the case of short positions, liabilities, at the dateestimated amount at which the commitment to purchaseinstrument could be exchanged in a current transaction between willing parties, other than in a forced or sellliquidation sale. If a quoted market price is considered to be binding.
Securities sold subject to a sale and repurchase agreements (“repurchase” agreement) are retainedavailable for an instrument, the fair value is calculated based on the Balance Sheet where substantially allmarket price.
When valuation parameters are not observable in the market or cannot be derived from observable market prices, as is the case with certain over-the-counter derivatives, the fair value is derived through analysis of other observable market data appropriate for each product and pricing models which use a mathematical methodology based on accepted financial theories. Depending on the product type and its components, the fair value of over-the-counter derivatives is modelled using one or a combination of pricing models that are widely accepted in the financial services industry. Pricing models take into account the contract terms of the risksecurities as well as market-based valuation parameters, such as interest rates, volatility, exchange rates and rewards of ownership remain within Abbey. Similarly, securities purchased subject to a purchase and resale agreement (“resale” agreement) are treated as collateralised lending transactions where Abbey does not acquire substantially allthe credit rating of the riskscounterparty. Where market-based valuation parameters are not directly observable, management will make a judgement as to its best estimate of that parameter. In exercising this judgement, a variety of tools are used including proxy observable data, historical data, and rewardsextrapolation techniques.
Abbey considers that the accounting estimate related to valuation of
ownership. Thistrading securities and derivatives where quoted market prices are not available is a “critical accounting policy has been amendedestimate” because: (i) it is highly susceptible to reflectchange from period to period because it requires management to make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and specific features of the transactions and (ii) the impact that recognising a change in accounting policy describedthe valuations would have on the assets reported on its balance sheet as well as its net profit/(loss) could be material.
Changes in the
dealing profits accounting policy.105
Financial Statements
Accounting Policiescontinued
Repurchasevaluation of trading securities and resale agreements
Repurchase and resale agreementsderivatives where quoted market prices are included within loans and advances to banks, loans and advances to customers, deposit by banks and customer accounts. The difference between sale and repurchase and purchase and resale prices for such transactions is charged to the Profit and Loss Account over the life of the relevant transaction and reported within dealing profits. Repurchase and resale agreements transacted on standard settlement terms are recognised on the Balance Sheet on a trade date basis while all non-standard settlement terms agreements are recognised on a value date basis.
Outright sale and purchase of securities combined with the total return swaps which remove the risk inherent in those securities are accounted for as effectively repurchase and resale agreements.
Abbey adopts a value date accounting treatment for repurchase and resale agreements which fall outside the standard terms of settlement. It is considered that this policy is more appropriate for Balance Sheet presentation as it better reflects the economic risks and rewards of these instruments.
This accounting policy has been amended to reflect the change in accounting policy described in the dealing profits accounting policy.
Customer accounts/deposits
Contracts involving the receipt of cash on which customers receive an index-linked returnnot available are accounted for in substance as equity index-linked deposits.the line item “Net trading income-banking” in the income statement and the “Trading assets” or “Trading Liabilities” and “Derivative Financial Instruments” line items in Abbey’s balance sheet.
The
current market value of the contract is reported within Customer accounts. Equity index-linked deposits are managed within the equity derivativestable below summarises Abbey’s trading book as an integral part of the equity derivatives portfolio. Equity index-linked deposits are remeasuredportfolios and other assets and liabilities held at fair value by valuation methodology at each reporting date with changes in fair values recognised in the consolidated Profit and Loss Account. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with customers. Such embedded derivatives are not separated from the host instrument and are not separately accounted for as a derivative instrument, as the entire contract embodies both the embedded derivative instrument and the host instrument and is remeasured at fair value at each reporting date.
Stock borrowing and lending agreements
Obligations taken on pursuant to entering into such agreements are reported as commitments. Income earned and expense paid on stock borrowing and lending agreements is reported in dealing profits.
This accounting policy has been amended to reflect the change in accounting policy described in the dealing profits accounting policy.
Deferred taxation
Deferred taxation is provided on all timing differences that have not reversed before the balance sheet date at the rate of tax expected to apply when those timing differences will reverse. Deferred tax assets are recognised to the extent that they are regarded as recoverable.
Subordinated liabilities (including convertible debt) and debt securities in issue
Bonds and notes issued are stated at net issue proceeds adjusted for amortisation. Premiums, discounts and expenses relating to bonds and notes issued are amortised over the life of the underlying transaction. Where premiums, discounts and expenses are matched by swap fees, the respective balances have been netted.
Derivatives
Transactions are undertaken in derivative financial instruments, (derivatives), which include interest rate swaps, cross currency and foreign exchange swaps, futures, equity and credit derivatives, options and similar instruments for both trading and non-trading purposes.
Derivatives classified as trading are held for market-making or portfolio management purposes within Abbey’s trading books. Trading book activity is the buying and selling of financial instruments in order to take advantage of short-term changes in market prices or for market-making purposes in order to facilitate customer requirements. Trading derivatives are carried at fair value in the balance sheet within other assets and other liabilities. Valuation adjustments to cover credit and market liquidity risks and other fair value adjustments are made. Positive and negative market values of trading derivatives are offset where the contracts have been entered into under master netting agreements or other arrangements that represent a legally enforceable right of set off which will survive the liquidation of either party. Gains and losses are taken directly to the Profit and Loss Account and reported within dealing profits.
Derivatives classified as non-trading are those entered into for the purpose of matching or eliminating risk from potential movements in foreign exchange rates, interest rates, and equity prices inherent in Abbey’s non-trading assets, liabilities and positions. Non-trading derivatives are accounted for in a manner consistent with the assets, liabilities, or positions being hedged. Income and expense on non-trading derivatives are recognised as they accrue over the life of the instruments as an adjustment to interest receivable or interest payable. Credit derivatives, designated as non-trading and through which credit risk is taken on, are reported as guarantees which best reflect the economic substance of those transactions.
Where a non-trading derivative no longer represents a hedge because either the underlying non-trading asset, liability or position has been derecognised, or transferred into a trading portfolio, or the effectiveness of the hedge has been undermined, it is restated at fair value and any change in value is taken directly to the Profit and Loss Account and reported
31 December 2005:106
Accounting Policiescontinued
within other operating income. Thereafter
| | | | | | | | | |
| | | Assets | | | Liabilities | |
| | | % | | | % | |
| |
| Fair value based on: | | | | | | | | |
| Quoted market prices | | | 58 | | | | 36 | |
| Internal models based on market prices | | | 42 | | | | 64 | |
| Internal models based on information other than market data | | | — | | | | — | |
| |
| Total | | | 100 | | | | 100 | |
| |
(c) Long-term assurance business
Abbey accounts for its long-term assurance business using the
derivative is classifiedembedded value basis of accounting used by banking groups, modified, as
trading or redesignated asnecessary, to comply with the requirements of IFRS (“IFRS embedded value”), including a
hedge of another non-trading item and accounted for accordingly. In other circumstances where non-trading derivatives are reclassified as trading or where non-trading derivatives are terminated, any resulting gains and losses are amortised over the remaining life of the hedged asset, liability or position. Unamortised gains and losses are reported within prepayments and accrued income and accruals and deferred income on the Balance Sheet. Derivatives hedging anticipatory transactions are accounted forconsolidation on a basis consistent with the relevant type of transaction. Where anticipatory transactions do not actually occur, related derivatives are restated at fair value and changes in value are taken directly to the Profit and Loss Account and reported within other operating income. Where retained, such derivatives are reclassified as trading or redesignated as a hedge of a non-trading item and accounted for accordingly.
Assets leased to customers
Assets leased to customers under agreements which transfer substantially all the risks and rewards associated with ownership, other than legal title, are classified as finance leases. All other assets leased to customers are classified as operating lease assets.
The net investment in finance leases represents total minimum lease payments less gross earnings allocated to future periods. Income from finance leases is credited to the Profit and Loss Account using the actuarial after-tax method to give a constant periodic rate of return on the net cash investment.
Operating lease assets are reported at cost less depreciation. They are shown as a separate class of tangible fixed asset because they are held for a different purpose to tangible fixed assets used in administrative functions. In the Profit and Loss Account, income in respect of operating lease assets is reported within other operating income, and depreciation on operating lease assets is reported within depreciation and amortisation. Provision is made for any impairment in value, any such amount being included in depreciation and amortisation.
Abbey selects the most appropriate method for recognition of income and depreciation according to the nature of the operating lease. This is determinedline by various factors including the length of the lease in proportion to the total economic life of the asset, any terms providing protection against early cancellation, and the amount of income retained in the lease to cover future uncertainties in respect of the realisation of residual values. For a large proportion of Abbey’s operating leases, the most appropriate method of accounting for income and depreciation is the actuarial after-tax method. Other operating leases are accounted for on a straight-line basis.
Leases
Assets held under finance leases and other similar contracts, which confer rights and obligations similar to those attached to owned assets, are capitalised as tangible fixed assets and are depreciated over the shorter of the lease terms and their useful lives. The capital elements of future lease obligations are recorded as liabilities, while the interest elements are charged to the Profit and Loss Account over the period of the leases to produce a constant rate of charge on the balance of capital repayments outstanding. Hire purchase transactions are dealt with similarly except that assets are depreciated over their useful lives.
Rentals under operating leases are charged on a straight-lineline basis over the lease term, even if the payments are not made on such a basis. Benefits received and receivable as an incentive to sign an operating lease are similarly spread on a straight-line basis over the lease term, except where the period to the review date on which the rent is first expected to be adjusted to the prevailing market rate is shorter than the full lease term, in which case the shorter period is used. Property rentals under operating leases are generally subject to annual escalation clauses or regular rent reviews; increased costs are charged from the increase date.
Securitisations
Certain Group undertakings have issued debt securities, or have entered into funding arrangements with lenders, in order to refinance existing assets or to finance the purchase of certain portfolios of loan and investment assets. These obligations are secured on the assets of the undertakings through non-recourse finance arrangements. Where the conditions for linked presentation, as stipulated in FRS 5, are met, the proceeds of the note issues, to the extent that there is no recourse to Abbey, are presented as “non-recourse finance” in Abbey’s balance sheet and shown deducted from the securitised assets, which are presented as “Loans and advances to customers subject to securitisation” in Abbey’s balance sheet.
Long-term assurance business
The value of the long-term assurance business representsinto Abbey’s consolidated financial statements.
The long-term assurance business issues insurance contracts and investment contracts. Insurance contracts are contracts which transfer significant insurance risk. As a general guideline, the Group defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event. Investment contracts are those contracts which carry no significant insurance risk. A number of insurance and investment contracts contain a discretionary participation feature which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses that are likely to be a significant portion of the total contractual benefits and whose amount or timing is contractually at the discretion of the Group and based on the performance of specified assets. Contracts containing a discretionary participation feature are referred to as participating or with profits contracts.
The critical accounting policies set out below relate to the valuation of insurance contract liabilities and the estimated future surplus emerging. In addition, results are affected by the movement in the value of the shareholders’ interest infinancial assets within the long-term assurance funds,business which consistsare recorded at fair value through income. Management do not consider the valuation of investment contract liabilities as a critical accounting policy, as the impact of market changes is borne by the policyholder.
Insurance contracts and participating contracts
Abbey accounts for insurance contracts and participating investment contracts using the IFRS embedded value basis of accounting which recognises the present value of in force (“PVIF”) business. The PVIF is calculated by projecting future surpluses (excluding future investment margins) and other net cash flows attributable to the surplusshareholders arising from business written at the balance sheet date and discounting the result at a rate which reflects the shareholders’ overall risk premium.
Liabilities relating to insurance contracts, which are not unit linked, are recorded when the premium is recognised as due. The liability is calculated by estimating the future cash flows over the duration of the in-force policies and discounting them back to the valuation date allowing for probabilities of occurrence. The liability will vary with movements in interest rates and with the cost of life assurance and annuity benefits where future mortality is uncertain. Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs. For conventional life and pensions business, the gross premium valuation method has been used.
Liabilities for life insurance contracts, which are unit linked, are recorded when premiums are allocated. These liabilities are increased or reduced by the change in the unit prices and are reduced by policy administration fees, mortality and surrender charges and any withdrawals and include any amounts necessary to compensate the Group for services to be performed over future periods. The mortality charges deducted in each period from the policyholders as a group are considered adequate to cover the expected total death benefits claims in excess of the contract account balances in each period and hence no additional liability is established for these claims in excess of the contract balances. Revenue consists of fees deducted for mortality, policy administration and surrender charges. Interest or changes in the unit prices credited to the account balances and excess benefit claims in excess of the account balances incurred in the period are charged as expenses in the income statement.
Liabilities of the Group’s with-profits life funds, including guarantees and options embedded within products written by that fund, are stated at their realistic values in accordance with the Financial Services Authority’s realistic capital regime. The measurement of insurance liabilities is calculated using stochastic methods and therefore reflects both the intrinsic and time value of guarantees and options embedded within products. Economic assumptions are calibrated to observed current market prices.
Future surpluses used to calculate the value of in force business will depend on lapse rates, mortality, persistency, and levels of expenses. Surpluses are estimated by management through assumptions about future experience, having regard to both actual experience and current economic trends. Surpluses expected to emerge in the future
from business currently in force, together with Abbey’s interest in the surplus retained within the long-term assurance funds. In determining this value, assumptions relating to investment returns, future mortality and morbidity, persistency and levels of expenses are based on experience of the business concerned. The surplus expected to emerge in the future is discounted at a risk-adjusted discount raterates after provision has been made for taxation.
To demonstrate There is an acceptable range into which these assumptions can validly fall, and the impactuse of different assumptions or changes to these assumptions may cause the actual investment return comparedpresent value of future surpluses to differ from those assumed at the balance sheet date. This could significantly affect the income recognised, and the value attributed to the expected return over a year, an adjustment is made (shown as embedded value charges and rebasing on long-term assurancein force business, in the Profitaccounts.
The value of the in force business could also be affected by changes in the amounts and Loss Account) identifying separatelytiming of other net cash flows, principally annual management charges and other fees levied upon the policy holders, which are reflected in the income statement using unsmoothed fund values. In addition, to the extent that actual experience is different from that assumed, the effect will be recognised in the income statement for the period. Demographic assumptions are set individually by product.
Details of the value generated from the normal operations of thein-force business, from that relating to market conditions. With the exceptioninsurance and reinsurance liabilities are set out in Notes 26 and 39.
(d) Impairment of products with material explicit investment guarantees, assumptions as to future investment returns (rather than forward market rates) are used to assess the futuregoodwill
The carrying value of both assetsgoodwill is stated at cost less impairment. The carrying value of goodwill is written down by the amount of any impairment, and liabilities,the loss is recognised in allthe income statement in the period in which this occurs. Should an external event
107
Accounting Policiescontinued
cases
reverse the effects of a previous impairment, the carrying value of the goodwill may be written up to a value no higher than the original amortised cost. Impairments are calculated with reference to the discounted cash flows of the entity or income-generating unit. Assumptions about expected future cash flows require management to make assumptions about interest rates, the health of the economy and operating costs. This involves significant judgement because such factors have fluctuated in the past and are expected to continue to do so.
Abbey considers that the accounting estimate related to impairment of goodwill is a “critical accounting estimate” because: (i) it is highly susceptible to change from period to period because it requires management to make assumptions about future cash flows, interest rates, the health of the economy and operating costs, and (ii) the impact that recognising a goodwill impairment charge would have on the assets reported on its balance sheet as well as on its net profit/(loss) could be material.
Goodwill impairment charges are accounted for in the line item “Impairment recoveries / (losses) on fixed asset investments” in the income statement and the “Intangible assets” line item in the balance sheet.
Details of goodwill are set out in Note 25.
(e) Provisions for misselling
Abbey estimates provisions for misselling with the objective of maintaining reserve levels believed by management to be sufficient to absorb current estimated probable losses in connection with compensation and costs relating to the handling of complaints from customers who claim misselling of endowment policies and other products. The calculation of provisions for misselling is based on the estimated number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. These assessments are based on management’s estimate for each of these three factors.
Abbey considers accounting estimates related to misselling provisions “critical accounting estimates” because: (i) they are highly susceptible to change from period to period in the three factors above, and (ii) any significant difference between Abbey’s estimated losses as reflected in the provisions and actual losses will require Abbey to take provisions which, if significantly different, could have a material impact on its future income statement and its balance sheet. Abbey’s assumptions about estimated losses are based on past claims uphold rates, past customer behaviour, and past average settlements, which are not necessarily an indication of future losses.
Provisions for misselling are charged to the line item “Provisions for other liabilities and charges” in the income statement. The provision is included in the “Provisions for liabilities and charges” line item on the balance sheet. If Abbey believes that additions to the misselling provision are required, then Abbey records additional provisions, which would be treated as a charge in the line item “Provisions for other liabilities and charges” in the income statement.
Details of the provisions for misselling are included in Note 42.
(f) Pensions
Abbey operates a number of defined benefit pension schemes as described in Note 43 to the Consolidated Financial Statements. The assets of the schemes are measured at their fair values at the balance sheet date. The liabilities of the schemes are estimated by projecting forward the growth in current accrued pension benefits to reflect inflation and salary growth to the date of pension payment, discounted to present value using the interest rate applicable to high-quality corporate bonds of the same currency and term as the scheme liabilities. Any surplus or deficit of scheme assets over liabilities is recognised in the balance sheet as an asset (surplus) or liability (deficit). An asset is only recognised to the extent that the surplus can be recovered through reduced contributions in the future or through refunds from the current market values. Where material investment guarantees are given, the market forward rate is used to assessscheme. In determining the value of scheme liabilities, assumptions are made by management as to price inflation, discount rates, pensions increases, earnings growth and mortality.
Abbey considers accounting estimates related to pension provisions “critical accounting estimates” because: (i) they are highly susceptible to change from period to period, and (ii) any significant difference between Abbey’s estimates of the
liability. Changesscheme liabilities and actual liabilities could significantly alter the amount of the surplus or deficit recognised in the valuebalance sheet and the pension cost charged to the income statement. Abbey’s assumptions about price inflation, discount rates, pensions increases, earnings growth and mortality are based on past experience and current economic trends, which are not necessarily an indication of long-term assurance business,future experience.
Pension costs are charged to the line item “Administration expenses” in the income statement. The provision is included in the Profit and Loss Account taking account“Retirement benefit obligations” line item in the balance sheet. If Abbey believes that increases to the pensions cost are required, then Abbey records additional costs that would be treated as a charge in the line item “Administration expenses” in the income statement.
Details of the
effective rate of tax where appropriate. The post-tax increasepension obligations are set out in
the value is treated as non-distributable until it emerges as part of the surplus arising during the year. The values of the assets and liabilities of the long-term assurance funds are based on the amounts included in the financial statements of the Life Assurance companies. The values are determined in accordance with the terms of the Companies Act 1985 (Insurance Companies Accounts) Regulations 1993, adjusted for the purposes of inclusion in Abbey Financial Statements in order to be consistent with Abbey’s accounting policies and presentation, where a separate asset is established to account for the value of long-term assurance business.
Reserve capital instruments
Reserve capital instruments, included within other long-term capital instruments, are unsecured securities, subordinated to the claims of unsubordinated and subordinated creditors. Reserve capital instruments are treated as subordinated liabilities. Interest payable on the reserve capital instruments is included within interest payable.
Note 43. 108
Financial Statements
Notes to the Financial Statements
1. Segmental analysis
a) By class of business
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Motor | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Finance | | | | | | | |
| | | Banking | | | Investment | | | Abbey | | | | | | | | Group | | | Whole- | | | & | | | | | | | |
| | | and | | | and | | | Financial | | | General | | | Infra- | | | sale | | | Litigation | | | | | | | |
| | | Savings | | | Protection | | | Markets | | | Insurance | | | structure | | | Banking | | | Funding | | | Other | | | Group | |
| | | (1) | | | (1) | | | (1) | | | (1) | | | (1) | | | (2) | | | (2,3) | | | (2) | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 1,510 | | | | 77 | | | | 21 | | | | (4 | ) | | | (134 | ) | | | (70 | ) | | | 98 | | | | 32 | | | | 1,530 | |
| Other income and charges | | | 438 | | | | 93 | | | | 291 | | | | 114 | | | | 95 | | | | 186 | | | | (24 | ) | | | (27 | ) | | | 1,166 | |
| |
Total operating income/(loss) | | | 1,948 | | | | 170 | | | | 312 | | | | 110 | | | | (39 | ) | | | 116 | | | | 74 | | | | 5 | | | | 2,696 | |
| Operating expenses excluding depreciation on operating lease assets | | | (1,297 | ) | | | (89 | ) | | | (133 | ) | | | (56 | ) | | | (489 | ) | | | (30 | ) | | | (22 | ) | | | (38 | ) | | | (2,154 | ) |
| Depreciation and impairment on operating lease assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | (151 | ) | | | – | | | | – | | | | (151 | ) |
| Provisions for bad and doubtful debts | | | (34 | ) | | | 80 | | | | – | | | | – | | | | – | | | | 88 | | | | (89 | ) | | | (10 | ) | | | 35 | |
| Provisions for contingent liabilities and commitments | | | (155 | ) | | | (32 | ) | | | – | | | | – | | | | (46 | ) | | | – | | | | – | | | | – | | | | (233 | ) |
| Amounts written off fixed asset investments | | | – | | | | – | | | | – | | | | – | | | | – | | | | 80 | | | | – | | | | – | | | | 80 | |
| |
Profit/(loss) before taxation | | | 462 | | | | 129 | | | | 179 | | | | 54 | | | | (574 | ) | | | 103 | | | | (37 | ) | | | (43 | ) | | | 273 | |
| |
Total assets | | | 79,645 | | | | 28,838 | | | | 50,073 | | | | 144 | | | | 812 | | | | 6,956 | | | | 646 | | | | 2,627 | | | | 169,741 | |
| |
Net assets | | | 2,295 | | | | 1,968 | | | | 324 | | | | 8 | | | | 8 | | | | 187 | | | | 40 | | | | 94 | | | | 4,924 | |
| |
| The average number of staff employed by the Group during the year was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
Employees | | | 18,015 | | | | 3,666 | | | | 486 | | | | 94 | | | | 2,038 | | | | 110 | | | | 28 | | | | 216 | | | | 24,653 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
2003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 1,720 | | | | 83 | | | | 26 | | | | (5 | ) | | | (115 | ) | | | 22 | | | | 245 | | | | 86 | | | | 2,062 | |
| Other income and charges | | | 427 | | | | (165 | ) | | | 223 | | | | 126 | | | | 90 | | | | (197 | ) | | | (58 | ) | | | 25 | | | | 385 | |
| |
| Total operating income/(loss) | | | 2,147 | | | | (82 | ) | | | 249 | | | | 121 | | | | (25 | ) | | | (175 | ) | | | 187 | | | | 111 | | | | 2,533 | |
| Operating expenses excluding depreciation on operating lease assets | | | (1,286 | ) | | | (58 | ) | | | (128 | ) | | | (89 | ) | | | (309 | ) | | | (107 | ) | | | (137 | ) | | | (83 | ) | | | (2,197 | ) |
| Depreciation and impairment on operating lease assets | | | – | | | | – | | | | – | | | | – | | | | – | | | | (250 | ) | | | (1 | ) | | | – | | | | (251 | ) |
| Provisions for bad and doubtful debts | | | (130 | ) | | | (80 | ) | | | – | | | | – | | | | – | | | | (154 | ) | | | (99 | ) | | | (11 | ) | | | (474 | ) |
| Provisions for contingent liabilities and commitments | | | (14 | ) | | | – | | | | – | | | | – | | | | (71 | ) | | | (2 | ) | | | – | | | | (17 | ) | | | (104 | ) |
| Amounts written off fixed asset investments | | | (10 | ) | | | – | | | | – | | | | – | | | | – | | | | (183 | ) | | | – | | | | – | | | | (193 | ) |
| |
| Profit/(loss) before taxation | | | 707 | | | | (220 | ) | | | 121 | | | | 32 | | | | (405 | ) | | | (871 | ) | | | (50 | ) | | | – | | | | (686 | ) |
| |
| Total assets | | | 77,183 | | | | 28,790 | | | | 54,459 | | | | 165 | | | | 564 | | | | 7,426 | | | | 2,160 | | | | 6,028 | | | | 176,775 | |
| |
| Net assets | | | 2,325 | | | | 1,846 | | | | 425 | | | | 8 | | | | 8 | | | | 362 | | | | 127 | | | | 230 | | | | 5,331 | |
| |
| The average number of staff employed by the Group during the year was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Employees | | | 16,378 | | | | 3,708 | | | | 511 | | | | 139 | | | | 3,999 | | | | 374 | | | | 1,170 | | | | 759 | | | | 27,038 | |
| |
109
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Motor | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Finance | | | | | | | |
| | | Banking | | | Investment | | | Abbey | | | | | | | | Group | | | Whole- | | | & | | | | | | | |
| | | and | | | and | | | Financial | | | General | | | Infra- | | | sale | | | Litigation | | | | | | | |
| | | Savings | | | Protection | | | Markets | | | Insurance | | | structure | | | Banking | | | Funding | | | Other | | | Group | |
| | | (1) | | | (1) | | | (1) | | | (1) | | | (1) | | | (2) | | | (2,3) | | | (2) | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2002 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 1,799 | | | | 90 | | | | 27 | | | | (3 | ) | | | (175 | ) | | | 327 | | | | 464 | | | | 55 | | | | 2,584 | |
| Other income and charges | | | 454 | | | | (218 | ) | | | 231 | | | | 149 | | | | 106 | | | | 378 | | | | (48 | ) | | | (71 | ) | | | 981 | |
| |
| Total operating income (loss) | | | 2,253 | | | | (128 | ) | | | 258 | | | | 146 | | | | (69 | ) | | | 705 | | | | 416 | | | | (16 | ) | | | 3,565 | |
| Operating expenses excluding depreciation on operating lease assets | | | (1,131 | ) | | | (53 | ) | | | (110 | ) | | | (54 | ) | | | (1,074 | ) | | | (123 | ) | | | (546 | ) | | | (66 | ) | | | (3,157 | ) |
| Depreciation and impairment on operating lease assets | | | (23 | ) | | | – | | | | – | | | | – | | | | – | | | | (252 | ) | | | (5 | ) | | | – | | | | (280 | ) |
| Provisions for bad and doubtful debts | | | (151 | ) | | | – | | | | – | | | | – | | | | 1 | | | | (247 | ) | | | (115 | ) | | | (2 | ) | | | (514 | ) |
| Provisions for contingent liabilities and commitments | | | (11 | ) | | | – | | | | – | | | | – | | | | (35 | ) | | | – | | | | (4 | ) | | | – | | | | (50 | ) |
| Amounts written off fixed asset investments | | | 2 | | | | – | | | | – | | | | – | | | | – | | | | (513 | ) | | | – | | | | – | | | | (511 | ) |
| |
| Profit/(loss) before taxation | | | 939 | | | | (181 | ) | | | 148 | | | | 92 | | | | (1,177 | ) | | | (430 | ) | | | (254 | ) | | | (84 | ) | | | (947 | ) |
| |
| Total assets | | | 67,264 | | | | 30,404 | | | | 43,603 | | | | 199 | | | | 837 | | | | 48,401 | | | | 7,751 | | | | 6,735 | | | | 205,194 | |
| |
| Net assets | | | 2,060 | | | | 1,764 | | | | 386 | | | | 9 | | | | 14 | | | | 1,387 | | | | 393 | | | | 337 | | | | 6,350 | |
| |
| The average number of staff employed by the Group during the year was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Employees | | | 15,882 | | | | 3,486 | | | | 539 | | | | 206 | | | | 4,788 | | | | 495 | | | | 1,503 | | | | 1,284 | | | | 28,183 | |
| |
The
average number of staff employed in the year is calculated on a full-time equivalent basis.Consistent with previous years, when arriving at the segmental analysis, certain adjustments have been made. They include an adjustment to reflect the capital notionally absorbed by each segment, based on the Group’s Financial Services Authority regulatory requirements, and an allocation across the segmentsprincipal activity of the earnings on Group reserves.
(1) Collectivelyis financial services, which is managed using the Personal Financial Services group of reportable segments.
(2) Collectively the Portfolio Business Unit group of reportable segments.
(3) Motor Finance and Litigation Funding were previously known as First National.
b) By geographical region
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Europe | | | | | | | | | | |
| | | | | | | (excluding | | | United | | | Rest of | | | Group | |
| | | UK | | | UK) | | | States | | | World | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 1,505 | | | | 30 | | | | (5 | ) | | | – | | | | 1,530 | |
| Dividend income | | | 1 | | | | – | | | | – | | | | – | | | | 1 | |
| Net fees and commissions receivable | | | 524 | | | | 1 | | | | – | | | | – | | | | 525 | |
| Dealing profits | | | 266 | | | | – | | | | 2 | | | | – | | | | 268 | |
| Other operating income | | | 358 | | | | 14 | | | | – | | | | – | | | | 372 | |
| |
Total operating income | | | 2,654 | | | | 45 | | | | (3 | ) | | | – | | | | 2,696 | |
| Operating expenses excluding depreciation on operating lease assets | | | (2,114 | ) | | | (37 | ) | | | (3 | ) | | | – | | | | (2,154 | ) |
| Depreciation and impairment on operating lease assets | | | (151 | ) | | | – | | | | – | | | | – | | | | (151 | ) |
| Provisions for bad and doubtful debts | | | 36 | | | | (1 | ) | | | – | | | | – | | | | 35 | |
| Provisions for contingent liabilities and commitments | | | (233 | ) | | | – | | | | – | | | | – | | | | (233 | ) |
| Amounts written off fixed asset investments | | | 80 | | | | – | | | | – | | | | – | | | | 80 | |
| |
Profit/(loss) before taxation | | | 272 | | | | 7 | | | | (6 | ) | | | – | | | | 273 | |
| |
Total assets | | | 168,465 | | | | – | | | | 1,276 | | | | – | | | | 169,741 | |
Net assets | | | 4,924 | | | | – | | | | – | | | | – | | | | 4,924 | |
| |
110
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Europe | | | United | | | Rest of | | | Group | |
| | | UK | | | (excluding UK) | | | States | | | World | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2003 | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 1,977 | | | | 76 | | | | 12 | | | | (3 | ) | | | 2,062 | |
| Dividend income | | | 1 | | | | – | | | | – | | | | – | | | | 1 | |
| Net fees and commissions receivable | | | 514 | | | | 5 | | | | – | | | | – | | | | 519 | |
| Dealing profits | | | 215 | | | | – | | | | 2 | | | | – | | | | 217 | |
| Other operating income | | | (308 | ) | | | 42 | | | | – | | | | – | | | | (266 | ) |
| |
| Total operating income | | | 2,399 | | | | 123 | | | | 14 | | | | (3 | ) | | | 2,533 | |
| Operating expenses excluding depreciation on operating lease assets | | | (2,138 | ) | | | (55 | ) | | | (4 | ) | | | – | | | | (2,197 | ) |
| Depreciation and impairment on operating lease assets | | | (251 | ) | | | – | | | | – | | | | – | | | | (251 | ) |
| Provisions for bad and doubtful debts | | | (467 | ) | | | (7 | ) | | | – | | | | – | | | | (474 | ) |
| Provisions for contingent liabilities and commitments | | | (104 | ) | | | – | | | | – | | | | – | | | | (104 | ) |
| Amounts written off fixed asset investments | | | (193 | ) | | | – | | | | – | | | | – | | | | (193 | ) |
| |
| Profit/(loss) before taxation | | | (754 | ) | | | 61 | | | | 10 | | | | (3 | ) | | | (686 | ) |
| |
| Total assets | | | 174,027 | | | | 1,867 | | | | 881 | | | | – | | | | 176,775 | |
| Net assets | | | 5,229 | | | | 102 | | | | – | | | | – | | | | 5,331 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Europe | | | United | | | Rest of | | | Group | |
| | | UK | | | (excluding UK) | | | States | | | World | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2002 | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 2,422 | | | | 109 | | | | 52 | | | | 1 | | | | 2,584 | |
| Dividend income | | | 1 | | | | – | | | | – | | | | – | | | | 1 | |
| Net fees and commissions receivable | | | 508 | | | | 3 | | | | – | | | | – | | | | 511 | |
| Dealing profits | | | 203 | | | | (2 | ) | | | 4 | | | | – | | | | 205 | |
| Other operating income | | | 218 | | | | 46 | | | | — | | | | – | | | | 264 | |
| |
| Total operating income | | | 3,352 | | | | 156 | | | | 56 | | | | 1 | | | | 3,565 | |
| Operating expenses excluding depreciation on operating lease assets | | | (3,013 | ) | | | (135 | ) | | | (8 | ) | | | (1 | ) | | | (3,157 | ) |
| Depreciation and impairment on operating lease assets | | | (280 | ) | | | – | | | | – | | | | – | | | | (280 | ) |
| Provisions for bad and doubtful debts | | | (517 | ) | | | 3 | | | | – | | | | – | | | | (514 | ) |
| Provisions for contingent liabilities and commitments | | | (50 | ) | | | – | | | | – | | | | – | | | | (50 | ) |
| Amounts written off fixed asset investments | | | (513 | ) | | | 2 | | | | – | | | | – | | | | (511 | ) |
| |
| Profit/(loss) before taxation | | | (1,021 | ) | | | 26 | | | | 48 | | | | – | | | | (947 | ) |
| |
| Total assets | | | 188,888 | | | | 8,705 | | | | 7,465 | | | | 136 | | | | 205,194 | |
| Net assets | | | 5,525 | | | | 336 | | | | 478 | | | | 11 | | | | 6,350 | |
| |
The above tables are based on the domicile of the office writing the business.
111
Financial Statements
Notes to the Financial Statementscontinued
2. Discontinued Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Dis- | | | | | | | | | | | Dis- | | | | |
| | | | | | Dis- | | | | | | | Continuing | | | continued | | | | | | | Continuing | | | continued | | | | |
| | | Continuing | | | continued | | | | | | | operations | | | operations | | | Total | | | operations | | | operations | | | Total | |
| | | operations | | | operations | | | Total | | | 2003 | | | 2003 | | | 2003 | | | 2002 | | | 2002 | | | 2002 | |
| | | 2004 | | | 2004 | | | 2004 | | | (restated) | | | (restated) | | | (restated) | | | (restated) | | | (restated) | | | (restated) | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Net interest income | | | 1,501 | | | | 29 | | | | 1,530 | | | | 1,883 | | | | 179 | | | | 2,062 | | | | 2,159 | | | | 530 | | | | 2,689 | |
| Other income and charges | | | 1,125 | | | | (11 | ) | | | 1,114 | | | | 828 | | | | (458 | ) | | | 370 | | | | 982 | | | | (171 | ) | | | 811 | |
| |
Total Income | | | 2,626 | | | | 18 | | | | 2,644 | | | | 2,711 | | | | (279 | ) | | | 2,432 | | | | 3,141 | | | | 359 | | | | 3,500 | |
| |
| Total administrative expenses | | | (2,030 | ) | | | (23 | ) | | | (2,053 | ) | | | (1,927 | ) | | | (87 | ) | | | (2,014 | ) | | | (1,670 | ) | | | (182 | ) | | | (1,852 | ) |
| Depreciation of tangible fixed assets excluding operating lease assets | | | (80 | ) | | | (1 | ) | | | (81 | ) | | | (111 | ) | | | (1 | ) | | | (112 | ) | | | (95 | ) | | | (8 | ) | | | (103 | ) |
| Amortisation – Goodwill | | | (20 | ) | | | – | | | | (20 | ) | | | (20 | ) | | | – | | | | (20 | ) | | | (53 | ) | | | (11 | ) | | | (64 | ) |
| Impairment loss on tangible & intangible fixed assets | | | – | | | | – | | | | – | | | | (18 | ) | | | – | | | | (18 | ) | | | (781 | ) | | | – | | | | (781 | ) |
| |
Operating expenses excluding depreciation on operating lease assets | | | (2,130 | ) | | | (24 | ) | | | (2,154 | ) | | | (2,076 | ) | | | (88 | ) | | | (2,164 | ) | | | (2,599 | ) | | | (201 | ) | | | (2,800 | ) |
| Depreciation and impairment on operating lease assets | | | (151 | ) | | | – | | | | (151 | ) | | | (251 | ) | | | – | | | | (251 | ) | | | (278 | ) | | | (2 | ) | | | (280 | ) |
| Provisions for bad and doubtful debts | | | 36 | | | | (1 | ) | | | 35 | | | | (446 | ) | | | (28 | ) | | | (474 | ) | | | (436 | ) | | | (78 | ) | | | (514 | ) |
| Provisions for contingent liabilities and commitments | | | (202 | ) | | | – | | | | (202 | ) | | | (104 | ) | | | – | | | | (104 | ) | | | (46 | ) | | | (4 | ) | | | (50 | ) |
| Amounts written off fixed assets investments | | | – | | | | 80 | | | | 80 | | | | (118 | ) | | | (75 | ) | | | (193 | ) | | | (123 | ) | | | (388 | ) | | | (511 | ) |
| |
Operating profit/(loss) | | | 179 | | | | 73 | | | | 252 | | | | (284 | ) | | | (470 | ) | | | (754 | ) | | | (341 | ) | | | (314 | ) | | | (655 | ) |
| |
| Income from associated undertakings | | | 6 | | | | – | | | | 6 | | | | 12 | | | | – | | | | 12 | | | | 17 | | | | – | | | | 17 | |
| Profit/loss on sale of subsidiary undertakings | | | 46 | | | | – | | | | 46 | | | | 447 | | | | (358 | ) | | | 89 | | | | 46 | | | | 2 | | | | 48 | |
| Less: 2002 provision | | | – | | | | – | | | | – | | | | (357 | ) | | | 357 | | | | – | | | | – | | | | (357 | ) | | | (357 | ) |
| Profit/(loss) on sale or termination of an operation | | | (31 | ) | | | – | | | | (31 | ) | | | – | | | | (33 | ) | | | (33 | ) | | | – | | | | – | | | | – | |
| |
Profit/(loss) before taxation | | | 200 | | | | 73 | | | | 273 | | | | (182 | ) | | | (504 | ) | | | (686 | ) | | | (278 | ) | | | (669 | ) | | | (947 | ) |
| |
| > | | |
Discontinued activities included:Retail Banking |
| |
| > | | The business which managed Abbey’s debt securities portfolios in itsInsurance and Asset Management and Risk Transfer businesses in the Wholesale Bank segment. |
| |
| > | | European Banking operations discontinued in 2004 following the sale of Abbey National France.Financial Markets |
| |
| > | | TotalGroup Infrastructure |
|
| > | | Portfolio Business Unit |
Abbey’s segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Abbey has five segments. Retail Banking offers a range of personal banking, savings and mortgage products and services. Insurance and Asset Management offers a range of investment products such as pensions, investment bonds, with-profits bonds, structured products, unit trusts, Individual Savings Accounts, Wrap products and endowment life insurance policies, as well as a range of protection products such as term life insurance, critical illness cover and disability cover. Abbey Financial Markets manages Abbey’s liquidity, supports its funding and capital management activities, and provides risk management services to third parties and Abbey’s other businesses. Group Infrastructure comprises Central Services, Financial Holdings (which contains the earnings on the difference between Abbey’s statutory capital and the target regulatory capital allocated to segments) and the results of certain small non-core businesses. The Portfolio Business Unit consists principally of Porterbrook, and Motor Finance and Litigation Funding. Porterbrook is in the train asset leasing business. The Motor Finance and Litigation Funding business offered a comprehensive range of loans and insurance products for the purchase or leasing of motor vehicles, and litigation finance.
Transactions between the business segments are on normal commercial terms and conditions. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Funds are ordinarily reallocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on the Group’s cost of capital.
Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet. Internal charges and transfer pricing adjustments have been reflected in the performance of each business. Revenue sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis.
a) By class of business
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance | | | Abbey | | | Group | | | Portfolio | | | | | | | | | | |
| | | Retail | | | and Asset | | | Financial | | | Infra- | | | Business | | | | | | | | | | |
| | | Banking | | | Management | | | Markets | | | structure | | | Unit | | | Total | | | Intercompany | | | Group Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and similar | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| income | | | 8,718 | | | | 103 | | | | 4,069 | | | | 1,810 | | | | 211 | | | | 14,911 | | | | (9,454 | ) | | | 5,457 | |
| Interest expense and | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| similar charges | | | (7,318 | ) | | | (48 | ) | | | (4,068 | ) | | | (2,023 | ) | | | (247 | ) | | | (13,704 | ) | | | 9,454 | | | | (4,250 | ) |
| |
| Net interest income | | | 1,400 | | | | 55 | | | | 1 | | | | (213 | ) | | | (36 | ) | | | 1,207 | | | | — | | | | 1,207 | |
| Non-interest income | | | 564 | | | | 255 | | | | 252 | | | | 176 | | | | 286 | | | | 1,533 | | | | — | | | | 1,533 | |
| |
Total income net of insurance claims | | | 1,964 | | | | 310 | | | | 253 | | | | (37 | ) | | | 250 | | | | 2,740 | | | | — | | | | 2,740 | |
| |
| Administration expenses | | | (1,180 | ) | | | (208 | ) | | | (115 | ) | | | (183 | ) | | | (38 | ) | | | (1,724 | ) | | | — | | | | (1,724 | ) |
| Depreciation and amortisation | | | (67 | ) | | | (5 | ) | | | (4 | ) | | | — | | | | (123 | ) | | | (199 | ) | | | — | | | | (199 | ) |
| |
Total operating expenses | | | (1,247 | ) | | | (213 | ) | | | (119 | ) | | | (183 | ) | | | (161 | ) | | | (1,923 | ) | | | — | | | | (1,923 | ) |
| |
| Impairment losses on loans and advances | | | (208 | ) | | | — | | | | — | | | | — | | | | (10 | ) | | | (218 | ) | | | — | | | | (218 | ) |
| Provisions for other liabilities and charges | | | (10 | ) | | | (1 | ) | | | — | | | | — | | | | 8 | | | | (3 | ) | | | — | | | | (3 | ) |
| |
Profit/(loss) before tax | | | 499 | | | | 96 | | | | 134 | | | | (220 | ) | | | 87 | | | | 596 | | | | — | | | | 596 | |
| |
Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segmental assets | | | 98,695 | | | | 28,872 | | | | 76,463 | | | | 488 | | | | 2,492 | | | | 207,010 | | | | | | | | | |
| Investments in associates | | | — | | | | — | | | | — | | | | 24 | | | | — | | | | 24 | | | | | | | | | |
| | | | | | | | | |
Consolidated total assets | | | 98,695 | | | | 28,872 | | | | 76,463 | | | | 512 | | | | 2,492 | | | | 207,034 | | | | | | | | | |
| | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment liabilities | | | 84,798 | | | | 27,219 | | | | 83,310 | | | | 7,832 | | | | 765 | | | | 203,924 | | | | | | | | | |
| | | | | | | | | |
Consolidated total liabilities | | | 84,798 | | | | 27,219 | | | | 83,310 | | | | 7,832 | | | | 765 | | | | 203,924 | | | | | | | | | |
| | | | | | | | | |
| The average number of staff employed by the Group during the year was as follows: | | | 16,692 | | | | 2,651 | | | | 519 | | | | 2,285 | | | | 250 | | | | 22,397 | | | | | | | | | |
| | | | | | | | | |
109
Financial Statements
Notes to the Financial Statementscontinued
Included in the 2005 segmental net trading income is an element of intercompany revenue. An analysis showing intercompany revenue and third part revenue by segment is shown below.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance | | | Abbey | | | | | | | | | | |
| | | Retail | | | and Asset | | | Financial | | | Group | | | Portfolio | | | | |
| | | Banking | | | Management | | | Markets | | | Infrastructure | | | Business Unit | | | Total | |
| Intercompany revenue | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2005 | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | (809 | ) | | | 32 | | | | 691 | | | | 105 | | | | (19 | ) | | | — | |
| Non-interest income | | | 18 | | | | (17 | ) | | | — | | | | (1 | ) | | | — | | | | — | |
| |
Total income net of insurance claims | | | (791 | ) | | | 15 | | | | 691 | | | | 104 | | | | (19 | ) | | | — | |
| |
| |
| | | | | | | Insurance | | | Abbey | | | | | | | | | | |
| | | Retail | | | and Asset | | | Financial | | | Group | | | Portfolio | | | | |
| | | Banking | | | Management | | | Markets | | | Infrastructure | | | Business Unit | | | Total | |
| Third party revenue | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2005 | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 2,209 | | | | 23 | | | | (690 | ) | | | (318 | ) | | | (17 | ) | | | 1,207 | |
| Non-interest income | | | 546 | | | | 272 | | | | 252 | | | | 177 | | | | 286 | | | | 1,533 | |
| |
Total income net of insurance claims | | | 2,755 | | | | 295 | | | | (438 | ) | | | (141 | ) | | | 269 | | | | 2,740 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance | | | Abbey | | | Group | | | Portfolio | | | | | | | | | | | |
| | | Retail | | | and Asset | | | Financial | | | Infra- | | | Business | | | | | | | Inter- | | | | |
| | | Banking | | | Management | | | Markets | | | structure | | | Unit | | | Total | | | company | | | Group Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest and similar income | | | 7,038 | | | | 108 | | | | 1,059 | | | | 560 | | | | 814 | | | | 9,579 | | | | (3,942 | ) | | | 5,637 | |
| Interest expense and similar charges | | | (5,607 | ) | | | (36 | ) | | | (1,061 | ) | | | (661 | ) | | | (751 | ) | | | (8,116 | ) | | | 3,942 | | | | (4,174 | ) |
| |
| Net interest income | | | 1,431 | | | | 72 | | | | (2 | ) | | | (101 | ) | | | 63 | | | | 1,463 | | | | — | | | | 1,463 | |
| Non-interest income | | | 553 | | | | 250 | | | | 291 | | | | 130 | | | | 158 | | | | 1,382 | | | | — | | | | 1,382 | |
| |
Total income net of insurance claims | | | 1,984 | | | | 322 | | | | 289 | | | | 29 | | | | 221 | | | | 2,845 | | | | — | | | | 2,845 | |
| |
| Administration expenses | | | (1,276 | ) | | | (307 | ) | | | (130 | ) | | | (412 | ) | | | (96 | ) | | | (2,221 | ) | | | — | | | | (2,221 | ) |
| Depreciation and amortisation | | | (138 | ) | | | (45 | ) | | | (14 | ) | | | (166 | ) | | | (184 | ) | | | (547 | ) | | | — | | | | (547 | ) |
| |
Total operating expenses | | | (1,414 | ) | | | (352 | ) | | | (144 | ) | | | (578 | ) | | | (280 | ) | | | (2,768 | ) | | | — | | | | (2,768 | ) |
| |
| Impairment losses on loans and advances | | | (15 | ) | | | 80 | | | | — | | | | — | | | | (10 | ) | | | 55 | | | | — | | | | 55 | |
| Provisions for other liabilities and charges | | | (155 | ) | | | (32 | ) | | | — | | | | (46 | ) | | | — | | | | (233 | ) | | | — | | | | (233 | ) |
| Impairment recoveries/(losses) on fixed asset investments | | | — | | | | — | | | | — | | | | — | | | | 80 | | | | 80 | | | | — | | | | 80 | |
| |
Profit/( loss) before tax | | | 400 | | | | 18 | | | | 145 | | | | (595 | ) | | | 11 | | | | (21 | ) | | | — | | | | (21 | ) |
| |
Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segmental assets | | | 95,602 | | | | 28,138 | | | | 50,020 | | | | 6,248 | | | | 4,700 | | | | 184,708 | | | | — | | | | 184,708 | |
| Investments in associates | | | — | | | | — | | | | — | | | | 25 | | | | — | | | | 25 | | | | — | | | | 25 | |
| |
Consolidated total assets | | | 95,602 | | | | 28,138 | | | | 50,020 | | | | 6,273 | | | | 4,700 | | | | 184,733 | | | | — | | | | 184,733 | |
| |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment liabilities | | | 94,058 | | | | 26,473 | | | | 49,733 | | | | 6,277 | | | | 4,472 | | | | 181,013 | | | | — | | | | 181,013 | |
| |
Consolidated total liabilities | | | 94,058 | | | | 26,473 | | | | 49,733 | | | | 804 | | | | 4,472 | | | | 181,013 | | | | — | | | | 181,013 | |
| |
| The average number of staff employed by the Group during the year was as follows: | | | 18,156 | | | | 3,984 | | | | 503 | | | | 2,102 | | | | 526 | | | | 25,271 | | | | | | | | | |
| |
Included in the 2004 segmental net trading income is an element of intercompany revenue. An analysis showing intercompany revenue and third part revenue by segment is shown below.
110
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance | | | Abbey | | | | | | | | | | |
| | | Retail | | | and Asset | | | Financial | | | Group | | | Portfolio | | | | |
| | | Banking | | | Management | | | Markets | | | Infrastructure | | | Business Unit | | | Total | |
| Intercompany revenue | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | (646 | ) | | | 23 | | | | (920 | ) | | | 157 | | | | 1,386 | | | | — | |
| Non-interest income | | | 37 | | | | (31 | ) | | | (5 | ) | | | 3 | | | | (4 | ) | | | — | |
| |
Total income net of insurance claims | | | (609 | ) | | | (8 | ) | | | (925 | ) | | | 160 | | | | 1,382 | | | | — | |
| |
| |
| | | | | | | Insurance | | | Abbey | | | | | | | | | | |
| | | | Retail | | | and Asset | | | Financial | | | Group | | | Portfolio | | | | |
| | | Banking | | | Management | | | Markets | | | Infrastructure | | | Business Unit | | | Total | |
| Third party revenue | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 2,133 | | | | 49 | | | | 941 | | | | (334 | ) | | | (1,326 | ) | | | 1,463 | |
| Non-interest income | | | 516 | | | | 314 | | | | 296 | | | | 92 | | | | 164 | | | | 1,382 | |
| |
Total income net of insurance claims | | | 2,649 | | | | 363 | | | | 1,237 | | | | (242 | ) | | | (1,162 | ) | | | 2,845 | |
| |
b) By geographical region
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
Total Income | | | | | | | | |
| United Kingdom | | | 2,706 | | | | 2,803 | |
| Europe | | | 18 | | | | 45 | |
| United States | | | 16 | | | | (3 | ) |
| Other | | | — | | | | — | |
| |
| | | | 2,740 | | | | 2,845 | |
| |
Profit before tax | | | | | | | | |
| United Kingdom | | | 575 | | | | (22 | ) |
| Europe | | | 17 | | | | 7 | |
| United States | | | 4 | | | | (6 | ) |
| Other | | | — | | | | — | |
| |
| | | | 596 | | | | (21 | ) |
| |
Profit after tax | | | | | | | | |
| United Kingdom | | | 405 | | | | (54 | ) |
| Europe | | | 12 | | | | 3 | |
| United States | | | 3 | | | | (3 | ) |
| Other | | | — | | | | — | |
| |
| | | | 420 | | | | (54 | ) |
| |
Carrying amount of segment assets | | | | | | | | |
| United Kingdom | | | 191,970 | | | | 175,113 | |
| Europe | | | 25 | | | | — | |
| United States | | | 15,038 | | | | 9,620 | |
| Other | | | 1 | | | | — | |
| |
| | | | 207,034 | | | | 184,733 | |
| |
c) Other segmental disclosures on a management basis
IAS 14 requires that the amounts to be disclosed in the segmental analysis be presented on a statutory basis. However, IAS 14 permits additional segment disclosures to be presented on the basis used by Abbey’s Board to evaluate performance.
Abbey’s Board reviews discrete financial information for each of its segments that includes measures of operating results and assets. However, due to the differing natures of its ongoing Personal Financial Services group of reportable segments and its Portfolio Business Unit segment, which is being managed for value, these are managed differently. The Personal Financial Services group of reportable segments is managed primarily on the basis of its results, which are measured on a trading basis. The Portfolio Business Unit segment is managed both on the basis of its results, which are measured on a management basis, and on the basis of its net asset value. On a consolidated level, the trading results of the Personal Financial Services group of reportable segments are aggregated with the management results of the Portfolio Business Unit segment to give the summarised trading income statement. The trading basis for Abbey’s Personal Financial Services group of reportable segments and the management basis for its Portfolio Business Unit segment are collectively known as the “trading” basis, as presented below.
Management considers that the trading basis provides the most appropriate way of reviewing the performance of the business. The main adjustments are:
| > | | IFRS embedded value charges and rebasing— These are unpredictable as they depend on both equity and debt market movements which do not affect the underlying performance of what is a very long-term business. The short-term market movements remain a very important factor in the management of the business but these are managed separately with a more risk-based focus. |
|
| > | | Reorganisation and other costs– Comprise implementation costs in relation to the strategic change and cost reduction process. Management needs to understand the underlying drivers of the cost base that will remain after |
111
Financial Statements
Notes to the Financial Statementscontinued
| | the exercise is complete, and does not want this view to be clouded by the costs of the exercise, which are managed independently. |
|
| > | | Intangible asset charges– These charges can vary significantly year on year, and hence can materially affect the profit or loss for that year. As a result Abbey reviews these charges separately to avoid clouding the presentation of underlying results. |
|
| > | | Hedging variances– As a consequence of the introduction of IFRS, the balance sheet and income statement are subject to volatility particularly from the accounting for elements of derivatives deemed under IFRS rules to be ineffective as hedges. Where appropriate, such volatility is separately identified to enable management to view the underlying performance of the business. |
|
| > | | Proforma IFRS adjustments– Due to certain IFRS standards only being applicable from 1 January 2005, the 2004 statutory results only include the impact of IFRS which are required to be applied retrospectively in the preparation of the 2005 results. As a result, management reviews the 2004 results on a proforma basis, incorporating the impact of those prospective IFRS where it can be determined what the impact would have been if the accounting changes had been effective in 2004. The impact includes the treatment of interest income and chargesfees and the reclassification of preference shares from shareholders equity to debt, but excludes the effect of accounting for derivatives under IAS 39 as no estimate of their effect can be made. |
|
| > | | One-off statutory IFRS adjustments– The conversion to IFRS resulted in 2004 consistedthe recognition of £73m (2003: £(470)m loss).certain one off items including impairment charges. These items have been deducted from the results to allow management to understand the underlying performance of the business. |
During 2003, Abbey discontinued
The adjustments applied to the business which managed its debt securities portfolios in its Asset Management and Risk Transfer businesses inPersonal Financial Services group of reportable segments are:
| > | | IFRS embedded value charges and rebasing, |
|
| > | | Reorganisation costs and other, |
|
| > | | Intangible asset charges, |
|
| > | | Hedging variances, |
|
| > | | Proforma IFRS adjustments, and |
|
| > | | One-off statutory IFRS adjustments. |
The adjustment applied to the Wholesale Bank segment. Total charges and operatingPortfolio Business Unit segment is Proforma IFRS adjustments.
Also included within trading interest income in 2003 consisted2005 is £9,454m (2004: £3,942m) of £(470)m loss (2002: £(314)m loss).inter-segment funding offset against interest expense.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance and | | | Abbey | | | Group | | | Portfolio | | | | | | | | | | | |
| | | Retail | | | Asset | | | Financial | | | Infra- | | | Business | | | | | | | | | | | |
| | | Banking | | | Management | | | Markets | | | structure | | | Unit | | | Total | | | Adjustments | | | Group Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 8,718 | | | | 103 | | | | 4,069 | | | | 1,810 | | | | 211 | | | | 14,911 | | | | (9,454 | ) | | | 5,457 | |
| Interest expense | | | (7,318 | ) | | | (48 | ) | | | (4,068 | ) | | | (2,023 | ) | | | (247 | ) | | | (13,704 | ) | | | 9,454 | | | | (4,250 | ) |
| |
| Net interest income | | | 1,400 | | | | 55 | | | | 1 | | | | (213 | ) | | | (36 | ) | | | 1,207 | | | | — | | | | 1,207 | |
| Non-interest income | | | 561 | | | | 267 | | | | 252 | | | | 197 | | | | 286 | | | | 1,563 | | | | (30 | ) | | | 1,533 | |
| |
Total trading income | | | 1,961 | | | | 322 | | | | 253 | | | | (16 | ) | | | 250 | | | | 2,770 | | | | (30 | ) | | | 2,740 | |
| |
| Administrative and other expenses | | | (985 | ) | | | (191 | ) | | | (104 | ) | | | (178 | ) | | | (38 | ) | | | (1,496 | ) | | | (228 | ) | | | (1,724 | ) |
| Impairments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Depreciation | | | (65 | ) | | | (2 | ) | | | (1 | ) | | | — | | | | (123 | ) | | | (191 | ) | | | (8 | ) | | | (199 | ) |
| |
Total trading expenses | | | (1,050 | ) | | | (193 | ) | | | (105 | ) | | | (178 | ) | | | (161 | ) | | | (1,687 | ) | | | (236 | ) | | | (1,923 | ) |
| |
| Provisions for bad and doubtful debts | | | (208 | ) | | | — | | | | — | | | | — | | | | (10 | ) | | | (218 | ) | | | — | | | | (218 | ) |
| Provisions for other liabilities and charges | | | (10 | ) | | | (1 | ) | | | — | | | | — | | | | 8 | | | | (3 | ) | | | — | | | | (3 | ) |
| Amounts written off fixed asset investments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
Trading profit/(loss) before taxation | | | 693 | | | | 128 | | | | 148 | | | | (194 | ) | | | 87 | | | | 862 | | | | (266 | ) | | | 596 | |
| |
| Adjust for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| IFRS embedded value charges and rebasing | | | — | | | | (12 | ) | | | — | | | | — | | | | — | | | | (12 | ) | | | | | | | | |
| Reorganisation expenses | | | (197 | ) | | | (17 | ) | | | (14 | ) | | | (5 | ) | | | — | | | | (233 | ) | | | | | | | | |
| Intangible asset charges | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | (3 | ) | | | | | | | | |
| Hedging variances | | | 3 | | | | — | | | | — | | | | (21 | ) | | | — | | | | (18 | ) | | | | | | | | |
| | | | | | | | | |
Profit/(loss) before taxation | | | 499 | | | | 96 | | | | 134 | | | | (220 | ) | | | 87 | | | | 596 | | | | | | | | | |
| | | | | | | | | |
112
Notes to the Financial Statementscontinued
3. Other interest receivable and similar income
| | | | | | | | | | | | | |
| | | | | | | 2003 | | | 2002 | |
| | | 2004 | | | (restated) | | | (restated) | |
| | | £m | | | £m | | | £m | |
| |
| On secured advances | | | 4,055 | | | | 3,726 | | | | 3,805 | |
| On unsecured advances | | | 350 | | | | 458 | | | | 707 | |
| On wholesale lending | | | 79 | | | | 340 | | | | 490 | |
| On finance leases | | | 95 | | | | 142 | | | | 202 | |
| On other interest earning assets and investments | | | 259 | | | | 185 | | | | 178 | |
| |
| | | | 4,838 | | | | 4,851 | | | | 5,382 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Provision | | | Provision | | | Admininstr- | | | Profit/ | |
| | | Non- | | | | | | | | | | | for bad and | | | for | | | ation and | | | (loss) | |
| | | interest | | | Net interest | | | | | | | doubtful | | | contingent | | | other | | | before | |
| | | income | | | income | | | Depreciation | | | debts | | | liabilities | | | expenses | | | taxation | |
| Adjustments comprise: | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2005 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| IFRS embedded value charges and rebasing | | | (12 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) |
| Reorganisation expenses | | | — | | | | — | | | | (5 | ) | | | — | | | | — | | | | (228 | ) | | | (233 | ) |
| Intangible asset charges | | | — | | | | — | | | | (3 | ) | | | — | | | | — | | | | — | | | | (3 | ) |
| Hedging variances | | | (18 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (18 | ) |
| |
| | | | (30 | ) | | | — | | | | (8 | ) | | | — | | | | — | | | | (228 | ) | | | (266 | ) |
| |
Interest receivable on secured advances is net of £232m (2003: £284m, 2002: £401m) in respect of the charge for lending-related fees and discounts payable, which are charged against interest income over the period of time in which Abbey has the right to recover the incentives in the event of early redemption and it is normal practice to do so. The movements on such incentives are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | Interest rate | | | Cash- | | | | | | | Interest rate | | | Cash- | | | | |
| | | discounts | | | backs | | | Total | | | discounts | | | backs | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 18 | | | | 107 | | | | 125 | | | | 18 | | | | 107 | | | | 125 | |
| Expenditure incurred in the year | | | 147 | | | | 23 | | | | 170 | | | | 147 | | | | 23 | | | | 170 | |
| Transfer to profit and loss account | | | (160 | ) | | | (72 | ) | | | (232 | ) | | | (160 | ) | | | (72 | ) | | | (232 | ) |
| |
| At 31 December 2004 | | | 5 | | | | 58 | | | | 63 | | | | 5 | | | | 58 | | | | 63 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance | | | Abbey | | | | | | | Portfolio | | | | | | | | | | |
| | | Retail | | | and Asset | | | Financial | | | Group Infra- | | | Business | | | | | | | | | | |
| | | Banking | | | Management | | | Markets | | | structure | | | Unit | | | Total | | | Adjustments | | | Group Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 7,039 | | | | 108 | | | | 1,059 | | | | 463 | | | | 824 | | | | 9,493 | | | | (3,856 | ) | | | 5,637 | |
| Interest expense | | | (5,607 | ) | | | (36 | ) | | | (1,061 | ) | | | (661 | ) | | | (751 | ) | | | (8,116 | ) | | | 3,942 | | | | (4,174 | ) |
| |
| Net interest income | | | 1,432 | | | | 72 | | | | (2 | ) | | | (198 | ) | | | 73 | | | | 1,377 | | | | 86 | | | | 1,463 | |
| Non-interest income | | | 477 | | | | 279 | | | | 291 | | | | 151 | | | | 158 | | | | 1,356 | | | | 26 | | | | 1,382 | |
| |
Total trading income | | | 1,909 | | | | 351 | | | | 289 | | | | (47 | ) | | | 231 | | | | 2,733 | | | | 112 | | | | 2,845 | |
| |
| Administrative and other expenses | | | (1,089 | ) | | | (249 | ) | | | (108 | ) | | | (192 | ) | | | (96 | ) | | | (1,734 | ) | | | (487 | ) | | | (2,221 | ) |
| Impairments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Depreciation | | | (64 | ) | | | (13 | ) | | | (1 | ) | | | (34 | ) | | | (184 | ) | | | (296 | ) | | | (251 | ) | | | (547 | ) |
| |
Total trading expenses | | | (1,153 | ) | | | (262 | ) | | | (109 | ) | | | (226 | ) | | | (280 | ) | | | (2,030 | ) | | | (738 | ) | | | (2,768 | ) |
| |
| Provisions for bad and doubtful debts | | | (20 | ) | | | — | | | | — | | | | — | | | | (10 | ) | | | (30 | ) | | | 85 | | | | 55 | |
| Provisions for other liabilities and charges | | | (155 | ) | | | — | | | | — | | | | 2 | | | | — | | | | (153 | ) | | | (80 | ) | | | (233 | ) |
| Amounts written off fixed asset investments | | | — | | | | — | | | | — | | | | — | | | | 80 | | | | 80 | | | | — | | | | 80 | |
| |
Trading profit/(loss) before taxation | | | 581 | | | | 89 | | | | 180 | | | | (271 | ) | | | 21 | | | | 600 | | | | (621 | ) | | | (21 | ) |
| |
| Adjust for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| IFRS embedded value charges and rebasing | | | — | | | | 21 | | | | — | | | | — | | | | — | | | | 21 | | | | | | | | | |
| Reorganisation expenses | | | (199 | ) | | | (57 | ) | | | (24 | ) | | | (267 | ) | | | — | | | | (547 | ) | | | | | | | | |
| Intangible asset charges | | | — | | | | — | | | | — | | | | (20 | ) | | | — | | | | (20 | ) | | | | | | | | |
| Proforma IFRS adjustments | | | 80 | | | | (3 | ) | | | — | | | | 97 | | | | (10 | ) | | | 164 | | | | | | | | | |
| One-off IFRS adjustments | | | (62 | ) | | | (32 | ) | | | (11 | ) | | | (134 | ) | | | — | | | | (239 | ) | | | | | | | | |
| | | | | | | | | |
Profit/(loss) before taxation | | | 400 | | | | 18 | | | | 145 | | | | (595 | ) | | | 11 | | | | (21 | ) | | | | | | | | |
| | | | | | | | | |
Interest due but not received on loans and advances in arrears has not been recognised in interest receivable where collectibility is in doubt, but has been suspended. A table showing the movements on suspended interest is included in note 9.
A presentational change has been made with respect to accrued interest as set out in the accounting policy on dealing profits on page 104.
4. Interest payable
| | | | | | | | | | | | | |
| | | | | | | 2003 | | | 2002 | |
| | | 2004 | | | (restated) | | | (restated) | |
| | | £m | | | £m | | | £m | |
| |
| On retail customer accounts | | | 2,090 | | | | 1,648 | | | | 1,699 | |
| On other deposits and debt securities in issue | | | 992 | | | | 1,216 | | | | 2,120 | |
| On subordinated liabilities including convertible debt | | | 313 | | | | 318 | | | | 365 | |
| |
| | | | 3,395 | | | | 3,182 | | | | 4,184 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Provision for | | | | | | | | | | |
| | | Non- | | | | | | | | | | | bad and | | | Provision for | | | Administrat- | | | Profit/(loss) | |
| | | interest | | | Net Interest | | | | | | | doubtful | | | contingent | | | ion and other | | | before | |
| | | income | | | income | | | Depreciation | | | debts | | | liabilities | | | expenses | | | taxation | |
| Adjustments comprise: | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| IFRS embedded value charges and rebasing | | | (27 | ) | | | — | | | | — | | | | 80 | | | | (32 | ) | | | — | | | | 21 | |
| Reorganisation expenses | | | (20 | ) | | | — | | | | — | | | | — | | | | (48 | ) | | | (479 | ) | | | (547 | ) |
| Intangible asset charges | | | — | | | | — | | | | — | | | | — | | | | — | | | | (20 | ) | | | (20 | ) |
| Proforma IFRS adjustments | | | 73 | | | | 86 | | | | — | | | | 5 | | | | — | | | | — | | | | 164 | |
| One-off IFRS adjustments | | | — | | | | — | | | | (251 | ) | | | — | | | | — | | | | 12 | | | | (239 | ) |
| |
| | | | 26 | | | | 86 | | | | (251 | ) | | | 85 | | | | (80 | ) | | | (487 | ) | | | (621 | ) |
| |
A presentational change has been made with respect to accrued interest as set out in the accounting policy on dealing profits on page 104.
5. Dividend income
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Income from equity shares | | | 1 | | | | 1 | | | | 1 | |
| |
6. Dealing profits
| | | | | | | | | | | | | |
| | | | | | | 2003 | | | 2002 | |
| | | 2004 | | | (restated) | | | (restated) | |
| | | £m | | | £m | | | £m | |
| |
| Securities | | | 83 | | | | 120 | | | | 117 | |
| Interest rate, equity and credit derivatives | | | 185 | | | | 97 | | | | 88 | |
| |
| | | | 268 | | | | 217 | | | | 205 | |
| |
A presentational change has been made with respect to accrued interest as set out in the accounting policy on dealing profits on page 104.
113
Notes to the Financial Statementscontinued
7.2. Net interest income
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
Interest and similar income: | | | | | | | | |
| Loans and advances to banks | | | 109 | | | | 129 | |
| Loans and advances to customers | | | 5,284 | | | | 5,217 | |
| Other interest earning financial assets | | | 64 | | | | 291 | |
| |
Total interest and similar income | | | 5,457 | | | | 5,637 | |
| |
Interest and similar charges: | | | | | | | | |
| Deposits by banks | | | 9 | | | | 47 | |
| Deposits by customers | | | 2,562 | | | | 2,090 | |
| Debt securities in issue and other borrowed funds | | | 1,175 | | | | 1,258 | |
| Other interest bearing financial liabilities | | | 504 | | | | 779 | |
| |
Total interest and similar charges | | | 4,250 | | | | 4,174 | |
| |
Net interest income | | | 1,207 | | | | 1,463 | |
| |
3. Net fee and commission income
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
Fee and commission income: | | | | | | | | |
| Insurance | | | 176 | | | | 156 | |
| Banking fees | | | 465 | | | | 221 | |
| Fund management fees | | | 112 | | | | 89 | |
| Residential property | | | — | | | | 183 | |
| Other fees | | | 6 | | | | 4 | |
| |
Total fee and commission income | | | 759 | | | | 653 | |
| |
Fee and commission expense: | | | | | | | | |
| Introducer fees | | | — | | | | 51 | |
| Other fees paid | | | 107 | | | | 64 | |
| |
Total fee and commission expense | | | 107 | | | | 115 | |
| |
Net fee and commission income | | | 652 | | | | 538 | |
| |
4. Dividend income
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Dividend income | | | 1 | | | | 1 | |
| |
5. Net trading income
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Securities | | | 100 | | | | 83 | |
| Interest rate, equity and credit derivatives | | | 152 | | | | 185 | |
| |
| Net trading income — Banking | | | 252 | | | | 268 | |
| Net trading income — Life Assurance | | | 2,872 | | | | 578 | |
| |
Total net trading income | | | 3,124 | | | | 846 | |
| |
6. Other operating (expenses)/income
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Fee income from high LTV lending (see note 35) | | | 37 | | | | 45 | | | | 85 | |
| Profit/(loss) on disposal of investment securities | | | (168 | ) | | | (474 | ) | | | (88 | ) |
| Profit/(loss) on disposal of equity shares | | | — | | | | (34 | ) | | | 34 | |
| Profit/(loss) on disposal of fixed assets | | | (34 | ) | | | 2 | | | | 3 | |
| Income from operating leases | | | 291 | | | | 325 | | | | 400 | |
| Other | | | 118 | | | | (29 | ) | | | 76 | |
| |
| | | | 244 | | | | (165 | ) | | | 510 | |
| |
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Profit/(loss) on sale of investment securities | | | — | | | | (168 | ) |
| Profit/(loss) on sale of subsidiary undertakings | | | 62 | | | | 46 | |
| Profit/(loss) on sale of fixed assets | | | 4 | | | | (34 | ) |
| Income from operating lease assets | | | 231 | | | | 311 | |
| Net foreign exchange gains/(losses) | | | — | | | | (9 | ) |
| Income on other financial assets and liabilities designated at fair value | | | 109 | | | | — | |
| Loss on derivatives managed in conjunction with financial assets and liabilities designated at fair value | | | (112 | ) | | | — | |
| Other | | | (79 | ) | | | 195 | |
| |
| | | | 215 | | | | 341 | |
| |
114
Financial Statements
Notes to the Financial Statementscontinued
7. Administration expenses
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Staff costs: | | | | | | | | |
| Wages and salaries | | | 648 | | | | 838 | |
| Social security costs | | | 59 | | | | 70 | |
| Pensions costs: | | | | | | | | |
| - defined contribution plans | | | 4 | | | | 4 | |
| - defined benefit plans | | | 99 | | | | 116 | |
| Other personnel costs | | | 98 | | | | (9 | ) |
| |
| | | | 908 | | | | 1,019 | |
| |
| | | | | | | | | |
| Property and equipment expenses | | | 202 | | | | 199 | |
| Information technology expenses | | | 131 | | | | 152 | |
| Other administrative expenses | | | 483 | | | | 851 | |
| |
| | | | 1,724 | | | | 2,221 | |
| |
8. Administrative expensesDepreciation and amortisation
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
Staff costs:(1) | | | | | | | | | | | | |
| Wages and salaries | | | 791 | | | | 782 | | | | 769 | |
| Social security costs | | | 65 | | | | 64 | | | | 62 | |
| Other pension costs | | | 123 | | | | 128 | | | | 101 | |
| |
| | | | 979 | | | | 974 | | | | 932 | |
| |
| Property and equipment expenses: | | | | | | | | | | | | |
| Rents payable | | | 114 | | | | 115 | | | | 121 | |
| Rates payable | | | 10 | | | | 28 | | | | 28 | |
| Hire of equipment | | | 3 | | | | 3 | | | | 4 | |
| Other property and equipment expenses | | | 58 | | | | 75 | | | | 63 | |
| |
| | | | 185 | | | | 221 | | | | 216 | |
| |
| Other administrative expenses | | | 889 | | | | 819 | | | | 704 | |
| |
| | | | 2,053 | | | | 2,014 | | | | 1,852 | |
| |
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Depreciation of property, plant and equipment excluding operating lease assets | | | 72 | | | | 149 | |
| Depreciation on operating lease assets | | | 123 | | | | 160 | |
| Amortisation and impairment of intangible fixed assets | | | 4 | | | | 154 | |
| Impairment of property, plant and equipment | | | — | | | | 62 | |
| Impairment of operating lease assets | | | — | | | | 22 | |
| |
| | | | 199 | | | | 547 | |
| |
(1) | Excludes the following staff costs incurred by the Life Assurance businesses, which are charged to income from long-term assurance business: |
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Staff costs: | | | | | | | | | | | | |
| Wages and salaries | | | 76 | | | | 89 | | | | 82 | |
| Social security costs | | | 5 | | | | 6 | | | | 6 | |
| Other pension costs | | | 11 | | | | 13 | | | | 10 | |
| |
| | | | 92 | | | | 108 | | | | 98 | |
| |
The aggregate remunerationfees for audit and other services payable to the auditorsDeloitte & Touche LLP is analysed below:as follows:
| | | | | | | | | | |
| | | | | | | | | | | Group | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | | £m | | £m | | | £m | | £m | |
| | Audit services | | |
| – statutory audit | | 4.1 | | 4.1 | | |
| – audit related regulatory reporting | | 2.1 | | 0.9 | | |
| - statutory audit | | | 3.8 | | 4.1 | |
| - audit related regulatory reporting | | | 1.9 | | 2.1 | |
| | | | 6.2 | | 5.0 | | | 5.7 | | 6.2 | |
| | Further assurance services | | 1.9 | | 1.3 | | | 0.7 | | 1.9 | |
| Tax services | | |
| – compliance services | | 0.1 | | 0.1 | | |
| – advisory services | | — | | 0.1 | | |
| - compliance services | | | — | | 0.1 | |
| - advisory services | | | — | | — | |
| | | | 2.0 | | 1.5 | | | 0.7 | | 2.0 | |
| | Other services | | |
| – other services | | 1.1 | | 3.5 | | |
| | |
| | | 1.1 | | 3.5 | | |
| - other services | | | | (0.2 | ) | | 1.1 | |
| | | | 9.3 | | 10.0 | | | 6.2 | | 9.3 | |
| | % Non-Audit: Audit Services | | 50 | | 100 | | | 8.8 | | 50.0 | |
|
No internal audit, valuation, litigation or recruitment services were provided by the external auditors during these years.
Further assurance relates primarily to advice on accounting matters and accords with the definition of “audit related fees” per Securities
and Exchange
Commission guidance.
Tax services relate principally to advice on Abbey’s tax affairs.
The other service expenditure
credit of
£1.1m£(0.2)m in
2004 primarily2005 relates to
consulting services, which were subject to pre-approval by the Audit and Risk Committee. The bulk of the expenditure was in connection with services providedfees accrued in respect of the Sarbanes-Oxley readiness
project includingproject. The scope of work performed was less than initially accrued for hence costs were reduced resulting in a
dry run assessment of readiness.credit to fees.
The pre-approval of services provided by the external auditors is explained on page
84.78.
Included within the remuneration for audit services is the audit fee for Abbey National plc of
£0.7m (2003:£0.6m (2004: £0.9m)
. Of the fees payable to the Group’s auditors for audit services, £4m (2003: £3.7m; 2002: £3.8m)£5.0m (2004: £4m) related to the UK.
114115
Notes to the Financial Statementscontinued
9. Provisions10. Impairment losses/(recoveries) on loans and advances
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Loans and advances to customers | | | 218 | | | | (55 | ) |
| |
| | | | 218 | | | | (55 | ) |
| |
11. Taxation expense
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Current tax: | | | | | | | | |
| UK corporation tax on profit of the year | | | 210 | | | | 81 | |
| Adjustments in respect of prior periods | | | (22 | ) | | | 8 | |
| |
| Total current tax | | | 188 | | | | 89 | |
| |
| | | | | | | | | |
| Deferred tax (Note 30) | | | | | | | | |
| Current year | | | (19 | ) | | | (46 | ) |
| Adjustments in respect of prior periods | | | 7 | | | | (10 | ) |
| |
| Total deferred tax | | | (12 | ) | | | (56 | ) |
| |
Tax on profit for the year | | | 176 | | | | 33 | |
| |
Domestic income tax is calculated at 30% (2004: 30%) of the estimated assessable profits for
bad and doubtful debts| | | | | | | | | | | | | | | | | | | | | |
| | | On advances | | | | | | | | | | | | | |
| | | secured on | | | On other | | | On | | | On | | | | |
| | | residential | | | secured | | | unsecured | | | wholesale | | | | |
| | | properties | | | advances | | | advances | | | advances | | | Total | |
| Group | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | | | | | | | | | | | | | | | | | | |
| General | | | 177 | | | | 61 | | | | 32 | | | | 172 | | | | 442 | |
| Specific | | | 25 | | | | 63 | | | | 174 | | | | 161 | | | | 423 | |
| Disposals of subsidiary undertakings | | | (28 | ) | | | (38 | ) | | | (4 | ) | | | — | | | | (70 | ) |
| Exchange adjustments | | | — | | | | — | | | | — | | | | — | | | | — | |
| Transfer from profit and loss account | | | (119 | ) | | | 98 | | | | 74 | | | | (88 | ) | | | (35 | ) |
| Irrecoverable amounts written off | | | (4 | ) | | | (41 | ) | | | (136 | ) | | | (164 | ) | | | (345 | ) |
| Recoveries | | | 16 | | | | 8 | | | | 28 | | | | — | | | | 52 | |
| |
| At 31 December 2004 | | | 67 | | | | 151 | | | | 168 | | | | 81 | | | | 467 | |
| |
| Being for the Group: | | | | | | | | | | | | | | | | | | | | |
| General | | | 58 | | | | 3 | | | | 35 | | | | 14 | | | | 110 | |
| Specific | | | 9 | | | | 148 | | | | 133 | | | | 67 | | | | 357 | |
| |
| At 1 January 2003 | | | | | | | | | | | | | | | | | | | | |
| General | | | 174 | | | | 23 | | | | 35 | | | | 56 | | | | 288 | |
| Specific | | | 50 | | | | 76 | | | | 128 | | | | 204 | | | | 458 | |
| Disposals of subsidiary undertakings | | | (20 | ) | | | (13 | ) | | | (61 | ) | | | — | | | | (94 | ) |
| Exchange adjustments | | | 3 | | | | 3 | | | | — | | | | — | | | | 6 | |
| Transfer from profit and loss account | | | 17 | | | | 90 | | | | 214 | | | | 153 | | | | 474 | |
| Irrecoverable amounts written off | | | (26 | ) | | | (55 | ) | | | (148 | ) | | | (80 | ) | | | (309 | ) |
| Recoveries | | | 4 | | | | — | | | | 38 | | | | — | | | | 42 | |
| |
| At 31 December 2003 | | | 202 | | | | 124 | | | | 206 | | | | 333 | | | | 865 | |
| |
| Being for the Group: | | | | | | | | | | | | | | | | | | | | |
| General | | | 177 | | | | 61 | | | | 32 | | | | 172 | | | | 442 | |
| Specific | | | 25 | | | | 63 | | | | 174 | | | | 161 | | | | 423 | |
| |
| At 1 January 2002 | | | | | | | | | | | | | | | | | | | | |
| General | | | 150 | | | | 22 | | | | 36 | | | | — | | | | 208 | |
| Specific | | | 62 | | | | 72 | | | | 156 | | | | — | | | | 290 | |
| Acquisition of subsidiary undertakings | | | 6 | | | | 1 | | | | 1 | | | | — | | | | 8 | |
| Disposal of subsidiary undertakings | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
| Transfer from investment security provisions | | | — | | | | — | | | | — | | | | 16 | | | | 16 | |
| Exchange adjustments | | | 1 | | | | 2 | | | | — | | | | (3 | ) | | | — | |
| Transfer from profit and loss account | | | 23 | | | | 26 | | | | 218 | | | | 247 | | | | 514 | |
| Irrecoverable amounts written off | | | (27 | ) | | | (33 | ) | | | (336 | ) | | | — | | | | (396 | ) |
| Recoveries | | | 9 | | | | 9 | | | | 89 | | | | — | | | | 107 | |
| |
| At 31 December 2002 | | | 224 | | | | 99 | | | | 163 | | | | 260 | | | | 746 | |
| |
| Being for the Group: | | | | | | | | | | | | | | | | | | | | |
| General | | | 174 | | | | 23 | | | | 35 | | | | 56 | | | | 288 | |
| Specific | | | 50 | | | | 76 | | | | 128 | | | | 204 | | | | 458 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | On advances | | | | | | | | | | | | | |
| | | secured on | | | On | | | | | | | | | | |
| | | residential | | | other secured | | | On unsecured | | | On wholesale | | | | |
| | | properties | | | advances | | | advances | | | advances | | | Total | |
| Company | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2004 | | | | | | | | | | | | | | | | | | | | |
| General | | | 54 | | | | 3 | | | | 35 | | | | — | | | | 92 | |
| Specific | | | 7 | | | | 4 | | | | 130 | | | | — | | | | 141 | |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| General | | | 142 | | | | 3 | | | | 32 | | | | — | | | | 177 | |
| Specific | | | 5 | | | | 8 | | | | 87 | | | | — | | | | 100 | |
| |
| At 31 December 2002 | | | | | | | | | | | | | | | | | | | | |
| General | | | 119 | | | | — | | | | 24 | | | | — | | | | 143 | |
| Specific | | | 11 | | | | 6 | | | | 76 | | | | — | | | | 93 | |
| |
Total Group provisions at: | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2004 | | | | | | | | | | | | | | | | | | | | |
| UK | | | 67 | | | | 151 | | | | 168 | | | | 81 | | | | 467 | |
| Non-UK | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| UK | | | 173 | | | | 96 | | | | 202 | | | | 333 | | | | 804 | |
| Non-UK | | | 29 | | | | 28 | | | | 4 | | | | — | | | | 61 | |
| |
| At 31 December 2002 | | | | | | | | | | | | | | | | | | | | |
| UK | | | 189 | | | | 61 | | | | 156 | | | | 260 | | | | 666 | |
| Non-UK | | | 35 | | | | 38 | | | | 7 | | | | — | | | | 80 | |
| |
115
| | | | | | | | | |
| | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Profit before tax | | | 596 | | | | (21 | ) |
| Tax calculated at a tax rate of 30% (2004: 30%) | | | 179 | | | | (6 | ) |
| Effect of non-allowable provisions and other non-equalised items | | | 89 | | | | 32 | |
| Underlying tax relief on overseas dividends | | | (51 | ) | | | — | |
| Non-taxable dividend income | | | (20 | ) | | | — | |
| Amortisation and impairment of goodwill | | | (1 | ) | | | 4 | |
| Effect of non-UK profits and losses | | | (5 | ) | | | 5 | |
| Adjustment to prior year provisions | | | (15 | ) | | | (2 | ) |
| |
| Income tax expense | | | 176 | | | | 33 | |
| |
Financial Statements
NotesIn addition to the Financial Statementscontinued
Capital provisions asincome tax expense charged to profit or loss a percentagedeferred tax asset of loans and advances to customers:
| | | | | | | | | | | | | | | | | | | | | |
| | | On advances | | | | | | | | | | | | | |
| | | secured on | | | On other | | | | | | | | | | |
| | | residential | | | secured | | | On unsecured | | | On wholesale | | | | |
| | | properties | | | advances | | | advances | | | advances | | | Total | |
| Group | | % | | | % | | | % | | | % | | | % | |
| |
| At 31 December 2004 | | | | | | | | | | | | | | | | | | | | |
| UK | | | 0.1 | | | | 5.1 | | | | 4.4 | | | | 9.4 | | | | 0.7 | |
| Non-UK | | | 0.3 | | | | — | | | | 67.3 | | | | — | | | | 0.4 | |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| UK | | | 0.3 | | | | 3.4 | | | | 4.2 | | | | 13.4 | | | | 1.0 | |
| Non-UK | | | 1.6 | | | | 58.5 | | | | 2.7 | | | | — | | | | 3.1 | |
| |
| At 31 December 2002 | | | | | | | | | | | | | | | | | | | | |
| |
| UK | | | 0.3 | | | | 1.6 | | | | 2.3 | | | | 3.0 | | | | 0.8 | |
| Non-UK | | | 1.1 | | | | 59.9 | | | | 5.9 | | | | — | | | | 2.4 | |
| |
Company | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2004 | | | 0.1 | | | | 0.9 | | | | 4.6 | | | | — | | | | 0.4 | |
| At 31 December 2003 | | | 0.2 | | | | 0.8 | | | | 3.7 | | | | — | | | | 0.4 | |
| At 31 December 2002 | | | 0.2 | | | | 0.6 | | | | 3.5 | | | | — | | | | 0.4 | |
| |
Analysis of movements on suspended interest:
| | | | | | | | | | | | | | | | | |
| | | On advances | | | | | | | | | | |
| | | secured on | | | On other | | | | | | | |
| | | residential | | | secured | | | On unsecured | | | | |
| | | properties | | | advances | | | advances | | | Total | |
| Group | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 14 | | | | 32 | | | | 4 | | | | 50 | |
| Disposal of subsidiary undertakings | | | (12 | ) | | | (29 | ) | | | (1 | ) | | | (42 | ) |
| Exchange adjustments | | | — | | | | — | | | | — | | | | — | |
| Amounts suspended in the period | | | 2 | | | | 1 | | | | 4 | | | | 7 | |
| Irrecoverable amounts written off | | | (2 | ) | | | (2 | ) | | | (4 | ) | | | (8 | ) |
| |
| At 31 December 2004 | | | 2 | | | | 2 | | | | 3 | | | | 7 | |
| |
| At 1 January 2003 | | | 31 | | | | 37 | | | | 8 | | | | 76 | |
| Disposal of subsidiary undertakings | | | (12 | ) | | | — | | | | (3 | ) | | | (15 | ) |
| Exchange adjustments | | | 2 | | | | 2 | | | | — | | | | 4 | |
| Amounts suspended in the period | | | 2 | | | | 2 | | | | 5 | | | | 9 | |
| Irrecoverable amounts written off | | | (9 | ) | | | (9 | ) | | | (6 | ) | | | (24 | ) |
| |
| At 31 December 2003 | | | 14 | | | | 32 | | | | 4 | | | | 50 | |
| |
| At 1 January 2002 | | | 39 | | | | 47 | | | | 10 | | | | 96 | |
| Exchange adjustments | | | 2 | | | | 3 | | | | — | | | | 5 | |
| Acquisitions of subsidiary undertakings | | | 3 | | | | — | | | | — | | | | 3 | |
| Amounts suspended in the period | | | — | | | | 2 | | | | 8 | | | | 10 | |
| Irrecoverable amounts written off | | | (13 | ) | | | (15 | ) | | | (10 | ) | | | (38 | ) |
| |
| At 31 December 2002 | | | 31 | | | | 37 | | | | 8 | | | | 76 | |
| |
| | | | | | | | | | | | | | | | | |
Company | | | | | | | | | | | | | | | | |
| At 31 December 2004 | | | 2 | | | | 2 | | | | 3 | | | | 7 | |
| At 31 December 2003 | | | 1 | | | | 2 | | | | 3 | | | | 6 | |
| At 31 December 2002 | | | 13 | | | | 2 | | | | 4 | | | | 19 | |
| |
116
Financial Statements
Notes to the Financial Statementscontinued
The value of loans and advances on which interest£46m (2004: £21m) has been suspended is as follows:
| | | | | | | | | | | | | | | | | |
| | | On advances | | | | | | | | | | |
| | | secured on | | | | | | | | | | |
| | | residential | | | On other secured | | | On unsecured | | | | |
| | | properties | | | advances | | | advances | | | Total | |
| Group | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2004 | | | | | | | | | | | | | | | | |
| Loans and advances to customers | | | 43 | | | | 30 | | | | 140 | | | | 213 | |
| Provisions on these amounts | | | (7 | ) | | | — | | | | (109 | ) | | | (116 | ) |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | |
| Loans and advances to customers | | | 90 | | | | 117 | | | | 111 | | | | 318 | |
| Provisions on these amounts | | | (21 | ) | | | (27 | ) | | | (72 | ) | | | (120 | ) |
| |
Company | | | | | | | | | | | | | | | | |
| At 31 December 2004 | | | | | | | | | | | | | | | | |
| Loans and advances to customers | | | 47 | | | | 4 | | | | 140 | | | | 191 | |
| Provisions on these amounts | | | (7 | ) | | | (3 | ) | | | (109 | ) | | | (119 | ) |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | |
| Loans and advances to customers | | | 38 | | | | 6 | | | | 95 | | | | 139 | |
| Provisions on these amounts | | | (4 | ) | | | (1 | ) | | | (69 | ) | | | (74 | ) |
| |
Analysis of Group non-performing loans and advances
The following table presents loans and advances which are classified as ‘non-performing’. No interest is suspended or provisions maderecognised in respect of such cases where the Group does not expect to incur losses.
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Loans and advances on which a proportion of interest has been suspended and/or on which specific provision has been made | | | 422 | | | | 1,632 | | | | 669 | |
| Loans and advances 90 days overdue on which no interest has been suspended and on which no specific provision has been made | | | 801 | | | | 1,114 | | | | 1,386 | |
| Non-accruing loans and advances | | | 1 | | | | 30 | | | | 22 | |
| |
| | | | 1,224 | | | | 2,776 | | | | 2,077 | |
| |
| Non-performing loans and advances as a percentage of total loans and advances to customers | | | 1.48 | % | | | 3.25 | % | | | 2.36 | % |
| Provisions as a percentage of total non-performing loans and advances | | | 38.19 | % | | | 31.14 | % | | | 35.95 | % |
| |
10. Tax on profit/(loss) on ordinary activities
The charge or credit for taxation comprises:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| UK Corporation tax: | | | | | | | | | | | | |
| Current year | | | 78 | | | | 57 | | | | 252 | |
| Prior years | | | 8 | | | | (112 | ) | | | (31 | ) |
| Double tax relief | | | — | | | | (7 | ) | | | — | |
| Share of associated undertakings taxation | | | 3 | | | | 5 | | | | 5 | |
| Overseas taxation | | | — | | | | 11 | | | | 8 | |
| |
| Total current tax (credit)/charge | | | 89 | | | | (46 | ) | | | 234 | |
| Deferred tax: | | | | | | | | | | | | |
| Timing differences, origination and reversal | | | 55 | | | | 4 | | | | (82 | ) |
| |
| | | | 144 | | | | (42 | ) | | | 152 | |
| |
Factors affecting the charge for taxation for the year:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Profit/(loss) on ordinary activities before tax | | | 273 | | | | (686 | ) | | | (947 | ) |
| |
| Taxation at UK corporation tax rate of 30% of (2003: 30%, 2002: 30%) | | | 82 | | | | (206 | ) | | | (284 | ) |
| Effect of non-allowable provisions and other non-equalised items | | | 54 | | | | 218 | | | | 38 | |
| Amortisation and impairment of goodwill | | | 4 | | | | 11 | | | | 360 | |
| Capital allowances for the period in excess of depreciation | | | (46 | ) | | | (61 | ) | | | 42 | |
| Provisions and short term timing differences | | | (19 | ) | | | 98 | | | | 74 | |
| Effect of non-UK profits and losses | | | 5 | | | | 6 | | | | 36 | |
| Adjustment to prior year provisions | | | 8 | | | | (112 | ) | | | (31 | ) |
| Effect of loss utilisation | | | — | | | | — | | | | (1 | ) |
| |
| Current tax charge for the year | | | 89 | | | | (46 | ) | | | 234 | |
| |
117
Financial Statements
Notes to the Financial Statementscontinued
Factors that may affect future period’s tax charges:
Future profits in offshore subsidiaries where rates of tax are lower than the standard UK corporation tax rate will continue to reduce the Group tax charges. However any dividends received from these offshore subsidiaries will increase future Group tax charges.
Future profits or losses on the sale of trading subsidiaries should not be subject to taxationequity in the UK under the substantial shareholding exemption and this will have a corresponding impact on the future Group tax charges.
Any future non-allowable provisions and other non-equalised items will increase the future Group tax charges.
11. Loss/profityear (see Note 30).
12. Profit/(loss) on ordinary activities after tax The lossprofit after tax of the Company attributable to the shareholders is £231m (2003:£691m (2004 loss £167m; 2002: loss £497m)£284m). As permitted by Section 230 of the Companies Act 1985, the Company’s Profit and Loss Accountincome statement has not been presented in these Consolidated Financial Statements.
13. Cash and balances with central banks
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Cash in hand | | | 361 | | | | 446 | | | | 362 | | | | 435 | |
| Other money market placements | | | — | | | | — | | | | — | | | | — | |
| Balances with central banks | | | 630 | | | | 8 | | | | 8 | | | | 8 | |
| |
| | | | 991 | | | | 454 | | | | 370 | | | | 443 | |
| |
116
12. Dividends
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | | | | | | | | |
| | | Pence per | | | Pence per | | | Pence per | | | 2004 | | | 2003 | | | 2002 | |
| | | share | | | share | | | share | | | £m | | | £m | | | £m | |
| |
| Ordinary shares (equity): | | | | | | | | | | | | | | | | | | | | | | | | |
| Interim (paid) | | | 8.33 | | | | 8.33 | | | | 17.65 | | | | 122 | | | | 120 | | | | 255 | |
| Final (proposed) | | | — | | | | 16.67 | | | | 7.35 | | | | — | | | | 244 | | | | 107 | |
| |
| Special (paid) | | | 31.00 | | | | — | | | | — | | | | 461 | | | | — | | | | — | |
| |
| | | | 39.33 | | | | 25.00 | | | | 25.00 | | | | 583 | | | | 364 | | | | 362 | |
| Preference shares (non-equity) | | | | | | | | | | | | | | | 48 | | | | 60 | | | | 62 | |
| |
| | | | | | | | | | | | | | | | 631 | | | | 424 | | | | 424 | |
| |
13. Earnings/(loss) per ordinary share
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| |
| Profit/(loss) attributable to the shareholders of Abbey National plc (£m) | | | 80 | | | | (699 | ) | | | (1,161 | ) |
| Preference dividends (£m) | | | (48 | ) | | | (60 | ) | | | (62 | ) |
| |
| Profit/(loss) attributable to the ordinary shareholders of Abbey National plc (£m) | | | 32 | | | | (759 | ) | | | (1,223 | ) |
| |
| Weighted average number of ordinary shares in issue during the year — basic (million) | | | 1,460 | | | | 1,448 | | | | 1,442 | |
| Dilutive effect of share options outstanding (million) | | | 9 | | | | 9 | | | | 8 | |
| |
| Weighted average number of ordinary shares in issue during the year — diluted (million) | | | 1,469 | | | | 1,457 | | | | 1,450 | |
| |
| Basic earnings/(loss) per ordinary share (pence) | | | 2.2 | p | | | (52.4 | p) | | | (84.8 | p) |
| |
| Diluted earnings/(loss) per ordinary share (pence) | | | 2.2 | p | | | (52.4 | p) | | | (84.3 | p) |
| |
In accordance with UITF 13, “Accounting for ESOP Trusts”, shares held in trust in respect of certain incentive schemes have been excluded from
Financial Statements
Notes to the calculation of earnings per ordinary share as the trustees have waived dividend and voting rights.Financial Statementscontinued
14. Treasury billsTrading assets
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Loans and advances to banks | | | 7,013 | | | | — | | | | — | | | | — | |
| Loans and advances to customers | | | 18,125 | | | | — | | | | — | | | | — | |
| Debt securities | | | 31,554 | | | | — | | | | — | | | | — | |
| Equity securities | | | 1,539 | | | | — | | | | — | | | | — | |
| |
| | | | 58,231 | | | | — | | | | — | | | | — | |
| |
Debt securities can be analysed as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Issued by public bodies: | | | | | | | | | | | | | | | | |
| Government securities | | | 2,722 | | | | — | | | | — | | | | — | |
| Other public sector securities | | | 350 | | | | — | | | | — | | | | — | |
| |
| | | | 3,072 | | | | — | | | | — | | | | — | |
| |
| Issued by other issuers: | | | | | | | | | | | | | | | | |
| Bank and building society certificates of deposit | | | 18,647 | | | | — | | | | — | | | | — | |
| |
| | | | 18,647 | | | | — | | | | — | | | | — | |
| |
| Other debt securities | | | 9,835 | | | | — | | | | — | | | | — | |
| |
| | | | 31,554 | | | | — | | | | — | | | | — | |
| |
Debt securities and other eligible billsequity securities can be analysed by listing status as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities: | | | | | | | | | | | | | | | | |
| - Listed UK | | | 1,075 | | | | — | | | | — | | | | — | |
| - Listed elsewhere | | | 7,171 | | | | — | | | | — | | | | — | |
| - Unlisted | | | 23,308 | | | | — | | | | — | | | | — | |
| |
| | | | 31,554 | | | | — | | | | — | | | | — | |
| |
| Equity securities: | | | | | | | | | | | | | | | | |
| - Listed UK | | | 1,093 | | | | — | | | | — | | | | — | |
| - Listed elsewhere | | | 446 | | | | — | | | | — | | | | — | |
| | | | 1,539 | | | | — | | | | — | | | | — | |
| |
15. Derivative financial instruments
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Book | | | Market | | | Book | | | Market | |
| | | value | | | value | | | value | | | value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Treasury bills | | | 1,922 | | | | 1,922 | | | | 1,560 | | | | 1,560 | |
| Other eligible bills | | | 68 | | | | 68 | | | | 71 | | | | 71 | |
| |
| | | | 1,990 | | | | 1,990 | | | | 1,631 | | | | 1,631 | |
| |
Treasury bills and other eligible bills areDerivatives held for trading purposes
Abbey Financial Markets (“AFM”) is the principal area of the Group actively trading derivative products and liquidityis additionally responsible for implementing Group derivative hedging with the external market. For trading activities AFM’s objectives are to gain value by:
> marketing derivatives to end users and hedging the resulting exposures efficiently and
> the management purposes.of trading exposure reflected on the groups balance sheet.
Trading derivatives include interest rate, cross currency, equity, residential property and other index related swaps, forwards, caps, floors, swaptions, as well as credit default and total return swaps, equity index contracts and exchange traded interest rate futures and equity index options.
Hedging Derivatives
The main derivatives are interest rate, cross-currency swaps, and credit default swaps, which are used to hedge the Group’s exposure to interest rates, exchange rates and credit spread movements. These risks are inherent in non-trading assets, liabilities and positions, including fixed-rate lending and structured savings products within the relevant operations throughout the Group, including medium-term note issues, capital issues and fixed-rate asset purchases.
The following table summarises activities undertaken by the Group, the related risks associated with such activities and the types of derivatives used in managing such risks. Such risks may also be managed using natural offsets within other on-balance sheet instruments as part of an integrated approach to risk management.
117
Financial Statements
Notes to the Financial Statementscontinued
| | | | |
| Activity | | Risk | | Types of Hedge |
|
| Management of the return on variable rate assets financed by shareholders’ funds and net non-interest bearing liabilities. | | Reduced profitability due to falls in interest rates. | | Receive fixed interest rate swaps. |
| Fixed rate lending and investments. | | Sensitivity to increases in interest rates. | | Pay fixed interest rate swaps. |
| Fixed rate retail and wholesale funding. | | Sensitivity to falls in interest rates. | | Receive fixed interest rate swaps. |
| Equity-linked retail funding. | | Sensitivity to increases in equity market indices. | | Receive equity swaps. |
| Management of other net interest income on retail activities. | | Sensitivity of income to changes in interest rates. | | Interest rate swaps |
| Profits earned in foreign currency. | | Sensitivity to strengthening of sterling against other currencies. | | Forward foreign exchange contracts. |
| Investment in foreign currency assets. | | Sensitivity to strengthening of sterling against other currencies. | | Cross-currency and foreign exchange swaps. |
| Issuance of products with embedded equity options. | | Sensitivity to changes in underlying index and index volatility causing option exercise. | | Interest rate swaps combined with equity options. |
| Lending, and issuance of, products with embedded interest rate options. | | Sensitivity to changes in underlying rate and rate volatility causing option exercise. | | Interest rate swaps plus caps/floors, and other matched options. |
| Investment in, and issuance of, bonds with put/call features. | | Sensitivity to changes in rates causing option exercise. | | Interest rate swaps combined with swaptions and other matched options. |
| Firm commitments (e.g. asset purchases, issues arranged). | | Sensitivity to changes in rates between arranging a transaction and completion. | | Hedges are arranged at the time of commitments if there is exposure to rate movements. |
| Management of the return on variable rate assets financed by shareholders’ funds and net non-interest bearing liabilities. | | Reduced profitability due to falls in interest rates. | | Receive fixed interest rate swaps. |
|
Derivative products which are combinations of more basic derivatives (such as swaps with embedded option features), or which have leverage features, may be used in circumstances where the underlying position being hedged contains the same risk features. In such cases, the derivative used will be structured to match the risks of the underlying asset or liability. Exposure to market risk on such contracts is therefore hedged.
The fair values of derivative instruments held both for trading and hedging purposes are set out in the following tables.
The tables below show the contract or underlying principal amounts, positive and negative fair values of derivatives analysed by contract. Contract or notional amounts indicate the volume of business outstanding at the balance date and do not represent amounts of risk. The fair values represent the amount at which a contract could be exchanged in an arms length transaction, calculated at market rates at the balance sheet date.
| | | | | | | | | | | | | |
| | | | | | | Group | |
| | | Contract/ notional | | | Fair value | | | Fair value | |
| | | amount | | | assets | | | liabilities | |
| 2005 Derivatives held for trading | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | |
| Cross –currency swaps | | | 14,777 | | | | 119 | | | | 252 | |
| Forward exchange swaps and forwards | | | 1,132 | | | | 5 | | | | 12 | |
| |
| | | | 15,909 | | | | 124 | | | | 264 | |
| |
| Interest rate contracts: | | | | | | | | | | | | |
| Interest rate swaps | | | 400,418 | | | | 9,273 | | | | 9,187 | |
| Caps, floors and swaptions | | | 41,016 | | | | 796 | | | | 755 | |
| Futures (exchange traded) | | | 1,314 | | | | 197 | | | | 1 | |
| Forward rate agreements | | | 511 | | | | — | | | | — | |
| |
| | | | 443,259 | | | | 10,266 | | | | 9,943 | |
| |
| Equity and credit contracts: | | | | | | | | | | | | |
| Equity index and similar products | | | 8,748 | | | | 475 | | | | 786 | |
| Equity index options (exchange traded) | | | 3,937 | | | | 141 | | | | — | |
| Credit default swaps and similar products | | | 21,283 | | | | 108 | | | | 99 | |
| |
| | | | 33,968 | | | | 724 | | | | 885 | |
| |
Sub total derivative assets / liabilities held for trading | | | 493,136 | | | | 11,114 | | | | 11,092 | |
| |
Effect of netting | | | — | | | | — | | | | — | |
| |
Total derivative assets / liabilities held for trading | | | 493,136 | | | | 11,114 | | | | 11,092 | |
| |
118
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | |
| | | | | | | Group | |
| | | Contract/ notional | | | Fair value | | | Fair value | |
| | | amount | | | assets | | | liabilities | |
| 2005 Derivatives held for fair value hedging purposes | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | |
| Cross –currency swaps | | | 12,376 | | | | 528 | | | | 158 | |
| |
| | | | 12,376 | | | | 528 | | | | 158 | |
| |
| Interest rate contracts: | | | | | | | | | | | | |
| Interest rate swaps | | | 9,422 | | | | 213 | | | | 14 | |
| |
| | | | 9,422 | | | | 213 | | | | 14 | |
| |
Sub total derivative assets / (liabilities) held for fair value hedging purposes | | | 21,798 | | | | 741 | | | | 172 | |
| |
Total recognised derivative assets / (liabilities) | | | 514,934 | | | | 11,855 | | | | 11,264 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Company | |
| | | Contract/ notional | | | Fair value | | | Fair value | |
| | | amount | | | assets | | | liabilities | |
| 2005 Derivatives held for trading purposes | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | |
| Cross –currency swaps | | | 522 | | | | 332 | | | | 2 | |
| |
| | | | 522 | | | | 332 | | | | 2 | |
| |
| Interest rate contracts: | | | | | | | | | | | | |
| Interest rate swaps | | | 32,447 | | | | 437 | | | | 454 | |
| Caps, floors and swaptions | | | 523 | | | | 3 | | | | 1 | |
| |
| | | | 32,970 | | | | 440 | | | | 455 | |
| |
| Equity and credit contracts: | | | | | | | | | | | | |
| Equity index and similar products | | | 334 | | | | 71 | | | | 163 | |
| |
| | | | 334 | | | | 71 | | | | 163 | |
| |
Sub total derivative assets / (liabilities) held for fair value hedging purposes | | | 33,826 | | | | 843 | | | | 620 | |
| |
Total recognised derivative assets / (liabilities) | | | 33,826 | | | | 843 | | | | 620 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Company | |
| | | Contract/ notional | | | Fair value | | | Fair value | |
| | | amount | | | assets | | | liabilities | |
| 2005 Derivatives held for fair value hedging purposes | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | |
| Cross –currency swaps | | | 1,658 | | | | 181 | | | | — | |
| |
| | | | 1,658 | | | | 181 | | | | — | |
| |
| Interest rate contracts: | | | | | | | | | | | | |
| Interest rate swaps | | | 7,128 | | | | 203 | | | | 3 | |
| |
| | | | 7,128 | | | | 203 | | | | 3 | |
| |
Sub total derivative assets / (liabilities) held for fair value hedging purposes | | | 8,786 | | | | 384 | | | | 3 | |
| |
Total recognised derivative assets / (liabilities) | | | 42,612 | | | | 1,227 | | | | 623 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Group | |
| | | Contract/ notional | | | Fair value | | | Fair value | |
| | | amount | | | assets | | | liabilities | |
| 2004 Derivatives held for trading | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | |
| Cross –currency swaps | | | 8,817 | | | | 194 | | | | 393 | |
| Forward exchange swaps and forwards | | | 3,533 | | | | 13 | | | | 164 | |
| |
| | | | 12,350 | | | | 207 | | | | 557 | |
| |
| Interest rate contracts: | | | | | | | | | | | | |
| Interest rate swaps | | | 377,931 | | | | 8,855 | | | | 8,694 | |
| Caps, floors and swaptions | | | 54,074 | | | | 824 | | | | 765 | |
| Futures (exchange traded) | | | 1,069 | | | | — | | | | — | |
| Forward rate agreements | | | 2,290 | | | | — | | | | — | |
| |
| | | | 435,364 | | | | 9,679 | | | | 9,459 | |
| |
| Equity and credit contracts: | | | | | | | | | | | | |
| Equity index and similar products | | | 15,696 | | | | 581 | | | | 1,750 | |
| Equity index options (exchange traded) | | | 3,487 | | | | 128 | | | | 127 | |
| Credit default swaps and similar products | | | 17,156 | | | | 90 | | | | 80 | |
| |
| | | | 36,339 | | | | 799 | | | | 1,957 | |
| |
Sub total derivative assets / (liabilities) held for trading | | | 484,053 | | | | 10,685 | | | | 11,973 | |
| |
Effect of netting | | | — | | | | (8,308 | ) | | | (8,308 | ) |
| |
Total derivative assets / (liabilities) held for trading | | | 484,053 | | | | 2,377 | | | | 3,665 | |
| |
119
15.Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | |
| | | | | | | Group | |
| | | Contract/ notional | | | Fair value | | | Fair value | |
| | | amount | | | assets | | | liabilities | |
| 2004 Derivatives held for non-trading purposes | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | |
| Cross –currency swaps | | | 23,311 | | | | 761 | | | | 1,440 | |
| Forward exchange swaps and forwards | | | 1,194 | | | | 7 | | | | — | |
| |
| | | | 24,505 | | | | 768 | | | | 1,440 | |
| |
| Interest rate contracts: | | | | | | | | | | | | |
| Interest rate swaps | | | 49,143 | | | | 1,136 | | | | 376 | |
| Caps, floors and swaptions | | | 1,707 | | | | 6 | | | | 1 | |
| |
| | | | 50,850 | | | | 1,142 | | | | 377 | |
| |
| Equity and credit contracts: | | | | | | | | | | | | |
| Equity index and similar products | | | 256 | | | | — | | | | 140 | |
| Credit default swaps and similar products | | | 418 | | | | 18 | | | | 50 | |
| |
| | | | 674 | | | | 18 | | | | 190 | |
| |
Sub total derivative assets / (liabilities) held for fair value hedging purposes | | | 76,029 | | | | 1,928 | | | | 2,007 | |
| |
Total recognised derivative assets / (liabilities) | | | 560,082 | | | | 4,305 | | | | 5,672 | |
| |
The Company did not have any derivatives held for trading purposes in 2004.
| | | | | | | | | | | | | |
| | | | | | | Company | |
| | | Contract/ notional | | | Fair value | | | Fair value | |
| | | amount | | | assets | | | liabilities | |
| 2004 Derivatives held for non-trading purposes | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | |
| Cross –currency swaps | | | 1,407 | | | | — | | | | 67 | |
| |
| | | | 1,407 | | | | — | | | | 67 | |
| |
| Interest rate contracts: | | | | | | | | | | | | |
| Interest rate swaps | | | 45,675 | | | | 568 | | | | 99 | |
| |
| | | | 45,675 | | | | 568 | | | | 99 | |
| |
| Equity and credit contracts: | | | | | | | | | | | | |
| Equity index and similar products | | | 334 | | | | — | | | | 140 | |
| |
| | | | 334 | | | | — | | | | 140 | |
| |
Sub total derivative assets / (liabilities) held for fair value hedging purposes | | | 47,416 | | | | 568 | | | | 306 | |
| |
Total recognised assets / (liabilities) | | | 47,416 | | | | 568 | | | | 306 | |
| |
Gains or losses arising from fair value hedges
| | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2005 | |
| | | £m | | | £m | |
| |
| Gains/(losses): | | | | | | | | |
| On hedging instruments | | | 20 | | | | 41 | |
| On the hedged items attributable to hedged risk | | | (38 | ) | | | (49 | ) |
| |
| | | | (18 | ) | | | (8 | ) |
| |
The following table analyses over-the-counter (OTC) and other non-exchange traded derivatives held for non-trading purposes by remaining maturity:
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | Contract or | | | | | | | Contract or | | | | |
| | | underlying | | | Replacement | | | underlying | | | Replacement | |
| | | principal | | | cost | | | principal | | | cost | |
| | | 2005 | | | 2005 | | | 2004 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Hedging/ Non-trading derivatives maturing: | | | | | | | | | | | | | | | | |
| In not more than one year | | | 4,702 | | | | 19 | | | | 26,673 | | | | 286 | |
| In more than one year but not more than five years | | | 7,880 | | | | 236 | | | | 38,727 | | | | 912 | |
| In more than five years | | | 9,216 | | | | 486 | | | | 10,629 | | | | 730 | |
| |
| | | | 21,798 | | | | 741 | | | | 76,029 | | | | 1,928 | |
| |
120
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | |
| | | Company | |
| | | Contract or | | | | | | | Contract or | | | | |
| | | underlying | | | Replacement | | | underlying | | | Replacement | |
| | | principal | | | cost | | | principal | | | cost | |
| | | 2005 | | | 2005 | | | 2004 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Hedging/ Non-trading derivatives maturing: | | | | | | | | | | | | | | | | |
| In not more than one year | | | 534 | | | | 19 | | | | 9,204 | | | | — | |
| In more than one year but not more than five years | | | 5,210 | | | | 77 | | | | 18,207 | | | | 568 | |
| In more than five years | | | 3,042 | | | | 288 | | | | 20,005 | | | | — | |
| |
| | | | 8,786 | | | | 384 | | | | 47,416 | | | | 568 | |
| |
The following table analyses replacement cost for over-the-counter and other non-exchange traded derivatives with positive market values held for trading purposes by remaining maturity before netting:
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | Contract or | | | | | | | Contract or | | | | |
| | | underlying | | | Replacement | | | underlying | | | Replacement | |
| | | principal | | | cost | | | principal | | | cost | |
| | | 2005 | | | 2005 | | | 2004 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Trading derivatives maturing (before netting): | | | | | | | | | | | | | | | | |
| In not more than one year | | | 107,679 | | | | 655 | | | | 80,237 | | | | 820 | |
| In more than one year but not more than five years | | | 208,560 | | | | 3,285 | | | | 222,234 | | | | 3,470 | |
| In more than five years | | | 171,646 | | | | 6,836 | | | | 177,026 | | | | 6,267 | |
| |
| | | | 487,885 | | | | 10,776 | | | | 479,497 | | | | 10,557 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Company | |
| | | Contract or | | | | | | | Contract or | | | | |
| | | underlying | | | Replacement | | | underlying | | | Replacement | |
| | | principal | | | cost | | | principal | | | cost | |
| | | 2005 | | | 2005 | | | 2004 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Trading derivatives maturing (before netting): | | | | | | | | | | | | | | | | |
| In not more than one year | | | 306 | | | | 15 | | | | — | | | | — | |
| In more than one year but not more than five years | | | 14,498 | | | | 142 | | | | — | | | | — | |
| In more than five years | | | 19,022 | | | | 686 | | | | — | | | | — | |
| |
| | | | 33,826 | | | | 843 | | | | — | | | | — | |
| |
Unrecognised gains and losses on financial assets and financial liabilities resulting from hedge accounting
Under UK GAAP gains and losses on financial instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised. Unrecognised gains and losses on instruments used for hedging were as follows in 2004. Under IAS 39, applied prospectively from 1 January 2005, all derivative contracts are held at fair value and recorded on the balance sheet, hence in 2005 there were no unrecognised gains and losses on financial assets and financial liabilities resulting from hedge accounting:
| | | | | | | | | | | | | |
| | | Group | |
| | | | | | | | | | | 2004 | |
| | | 2004 | | | 2004 | | | Net gains | |
| | | Gains | | | Losses | | | (losses) | |
| | | £m | | | £m | | | £m | |
| |
| Gains and losses expected to be recognised: | | | | | | | | | | | | |
| In one year or less | | | 209 | | | | (89 | ) | | | 120 | |
| After one year | | | 1,328 | | | | (1,732 | ) | | | (404 | ) |
| |
| | | | 1,537 | | | | (1,821 | ) | | | (284 | ) |
| |
The net gain unrecognised as at the start of the year and recognised in 2004 was £210m.
16. Financial assets designated at fair value
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Loans and advances to banks | | | 1,639 | | | | — | | | | — | | | | — | |
| Loans and advances to customers | | | 4,406 | | | | — | | | | 790 | | | | — | |
| Debt securities | | | 12,882 | | | | — | | | | — | | | | — | |
| Equity securities | | | 11,670 | | | | — | | | | — | | | | — | |
| |
| | | | 30,597 | | | | — | | | | 790 | | | | — | |
| |
121
Financial Statements
Notes to the Financial Statementscontinued
Financial assets are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring the assets or liabilities or recognising gains or losses on them on a different basis. The following assets have been designated at fair value through profit or loss;
| (a) | | Loans and advances to customers, representing loans secured on residential lending to housing associations. These would otherwise have been measured at amortised cost with the associated derivatives used to economically hedge the risk held for trading and measured at fair value through profit or loss. |
| (b) | | Debt and equity securities held by the Life Assurance businesses to back the actuarial liabilities of those businesses. These would otherwise have been classified as available for sale and measured at fair value through equity with the associated liabilities classified as and measured at amortised cost. |
The maximum exposure to credit risk on the loans and advances held at fair value through profit or loss at the balance sheet date was £5,886m for the Group and £760m for the Company. This maximum exposure was mitigated by the Group having a charge over the residential properties in respect of lending to housing associations. Of the movement in the fair value of the loans and advances to banks and an immaterial amount was amount both cumulatively and in the period was due to changes in credit spreads. This is due to the loans and advances to banks being short-term cash deposits and the loans and advances to customers being residential lending to housing associations, which are government guaranteed.
Debt securities can be analysed as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Issued by public bodies: | | | | | | | | | | | | | | | | |
| Government securities | | | 2,894 | | | | — | | | | — | | | | — | |
| Other public sector securities | | | 417 | | | | — | | | | — | | | | — | |
| |
| | | | 3,311 | | | | — | | | | — | | | | — | |
| |
| Issued by other issuers: | | | | | | | | | | | | | | | | |
| Bank and building society certificates of deposit | | | 841 | | | | — | | | | — | | | | — | |
| |
| | | | 841 | | | | — | | | | — | | | | — | |
| |
| Other debt securities | | | 8,730 | | | | — | | | | — | | | | — | |
| |
| | | | 12,882 | | | | — | | | | — | | | | — | |
| |
Debt securities and equity securities can be analysed by listing status as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities: | | | | | | | | | | | | | | | | |
| - Listed UK | | | 9,065 | | | | — | | | | — | | | | — | |
| - Listed elsewhere | | | 2,860 | | | | — | | | | — | | | | — | |
| - Unlisted | | | 957 | | | | — | | | | — | | | | — | |
| |
| | | | 12,882 | | | | — | | | | — | | | | — | |
| |
| Equity securities: | | | | | | | | | | | | | | | | |
| - Listed UK | | | 10,918 | | | | — | | | | — | | | | — | |
| - Listed elsewhere | | | 668 | | | | — | | | | — | | | | — | |
| - Unlisted | | | 84 | | | | — | | | | — | | | | — | |
| |
| | | | 11,670 | | | | — | | | | — | | | | — | |
| |
17. Loans and advances to banks
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Items in the course of collection | | | 94 | | | | 171 | | | | 85 | | | | 164 | |
| Amounts due from subsidiaries | | | — | | | | — | | | | 3,381 | | | | 3,925 | |
| Purchase and resale agreements | | | 6,397 | | | | 5,034 | | | | — | | | | — | |
| Other loans and advances | | | 3,657 | | | | 1,950 | | | | 139 | | | | 129 | |
| |
| | | | 10,148 | | | | 7,155 | | | | 3,605 | | | | 4,218 | |
| |
| Repayable: | | | | | | | | | | | | | | | | |
| On demand | | | 2,887 | | | | 3,089 | | | | 209 | | | | 142 | |
| In not more than 3 months | | | 7,197 | | | | 4,022 | | | | 85 | | | | 232 | |
| In more than 3 months but not more than 1 year | | | 63 | | | | 11 | | | | 322 | | | | 546 | |
| In more than 1 year but not more than 5 years | | | 1 | | | | 33 | | | | 740 | | | | 1,337 | |
| In more than 5 years | | | — | | | | — | | | | 2,249 | | | | 1,961 | |
| |
| | | | 10,148 | | | | 7,155 | | | | 3,605 | | | | 4,218 | |
| |
| Banking business | | | 3,068 | | | | 1,031 | | | | 3,605 | | | | 4,218 | |
| Trading business | | | 7,080 | | | | 6,124 | | | | — | | | | — | |
| |
| | | | 10,148 | | | | 7,155 | | | | 3,605 | | | | 4,218 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Placements with other banks | | | 444 | | | | 5,354 | | | | 293 | | | | 224 | |
| Amounts due from subsidiaries | | | — | | | | — | | | | 32,716 | | | | 23,381 | |
| Purchase and resale agreements | | | — | | | | 6,397 | | | | — | | | | — | |
| |
| Total | | | 444 | | | | 11,751 | | | | 33,009 | | | | 23,605 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Repayable: | | | | | | | | | | | | | | | | |
| On demand | | | 109 | | | | 4,424 | | | | 7,673 | | | | 209 | |
| In not more than 3 months | | | 334 | | | | 7,263 | | | | 284 | | | | 85 | |
| In more than 3 months but not more than 1 year | | | 1 | | | | 63 | | | | — | | | | 322 | |
| In more than 1 year but not more than 5 years | | | — | | | | 1 | | | | 25,000 | | | | 20,740 | |
| In more than 5 years | | | — | | | | — | | | | 52 | | | | 2,249 | |
| |
| | | | 444 | | | | 11,751 | | | | 33,009 | | | | 23,605 | |
| |
122
Financial Statements
Notes to the Financial Statementscontinued
The loans and advances to banks in the above table have the following interest rate structures:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | | Company | | | Group | | Company | |
| | | 2004 | | 2003 | | 2004 | | 2003 | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | |
| | Fixed rate | | 7,854 | | 5,225 | | 136 | | 115 | | | 32 | | 7,854 | | 25,056 | | 20,136 | |
| Variable rate | | 2,187 | | 1,754 | | 3,375 | | 3,939 | | | 220 | | 3,790 | | 7,767 | | 3,375 | |
| Items in the course of collection (non-interest bearing) | | 107 | | 176 | | 94 | | 164 | | |
| Non-interest bearing | | | 192 | | 107 | | 186 | | 94 | |
| | | | 10,148 | | 7,155 | | 3,605 | | 4,218 | | | 444 | | 11,751 | | 33,009 | | 23,605 | |
|
The Group’s policy is to hedge fixed rate loans and advances to banks to floating rates using derivative instruments, or by matching with other on-balance sheet interest rate exposures. See note 51, Derivatives — Non-trading derivatives, for further information.
16.18. Loans and advances to customers
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Advances secured on residential properties | | | 76,012 | | | | 75,014 | | | | 75,114 | | | | 71,208 | |
| Purchase and resale agreements | | | 11,257 | | | | 9,372 | | | | 1,083 | | | | — | |
| Other secured advances | | | 1,642 | | | | 2,849 | | | | 3,226 | | | | 1,300 | |
| Unsecured advances | | | 3,413 | | | | 4,441 | | | | — | | | | 2,797 | |
| Wholesale lending | | | 880 | | | | 2,115 | | | | — | | | | — | |
| Collateralised and guaranteed mortgage loans | | | 5 | | | | 48 | | | | — | | | | — | |
| Amounts due from subsidiaries | | | — | | | | — | | | | 434 | | | | 765 | |
| |
| | | | 93,209 | | | | 93,839 | | | | 79,857 | | | | 76,070 | |
| |
| Repayable: | | | | | | | | | | | | | | | | |
| On demand or at short notice | | | 9,391 | | | | 10,844 | | | | 1,859 | | | | 1,648 | |
| In not more than 3 months | | | 6,240 | | | | 3,971 | | | | 706 | | | | 946 | |
| In more than 3 months but not more than 1 year | | | 2,482 | | | | 4,513 | | | | 1,930 | | | | 2,083 | |
| In more than 1 year but not more than 5 years | | | 11,347 | | | | 12,899 | | | | 10,270 | | | | 10,720 | |
| In more than 5 years | | | 64,216 | | | | 62,477 | | | | 65,325 | | | | 60,950 | |
| Less: provisions (see note 9) | | | (467 | ) | | | (865 | ) | | | (233 | ) | | | (277 | ) |
| |
| | | | 93,209 | | | | 93,839 | | | | 79,857 | | | | 76,070 | |
| |
| Banking business | | | 81,852 | | | | 84,234 | | | | 79,857 | | | | 76,070 | |
| Trading business | | | 11,357 | | | | 9,605 | | | | — | | | | — | |
| |
| | | | 93,209 | | | | 93,839 | | | | 79,857 | | | | 76,070 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Advances secured on residential properties | | | 90,098 | | | | 91,178 | | | | 90,072 | | | | 75,175 | |
| Corporate loans | | | — | | | | 880 | | | | — | | | | — | |
| Purchase and resale agreement | | | — | | | | 11,257 | | | | — | | | | — | |
| Finance leases | | | 3 | | | | 1,108 | | | | 3 | | | | 3 | |
| Other secured advances | | | 1,884 | | | | 1,793 | | | | 1,659 | | | | 1,090 | |
| Other unsecured advances | | | 3,876 | | | | 3,667 | | | | 3,763 | | | | 3,391 | |
| Amounts due from subsidiaries | | | — | | | | — | | | | 186 | | | | 434 | |
| |
Loans and advances to customers | | | 95,861 | | | | 109,883 | | | | 95,683 | | | | 80,093 | |
| |
| Less: loan loss allowances | | | 394 | | | | 467 | | | | 453 | | | | 233 | |
| |
Loans and advances to customers, net of loan loss allowances | | | 95,467 | | | | 109,416 | | | | 95,230 | | | | 79,860 | |
| |
Included within Group unsecured advances in 2003 were two contingent loans owed by the with-profit sub funds of the long-term business funds of Scottish Mutual Assurance plc and Scottish Provident Limited to Abbey National Scottish Mutual Assurance Holdings Limited of £571m and £623m respectively. These loans include accrued interest of £75m and £80m and are subject to provisions of £76m and £4m, respectively. These loans were repaid in the course of 2004. See note 21, long-term assurance business, for further information.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Repayable: | | | | | | | | | | | | | | | | |
| On demand | | | 2,398 | | | | 9,433 | | | | 2,355 | | | | 1,859 | |
| In no more than 3 months | | | 149 | | | | 6,315 | | | | 132 | | | | 706 | |
| In more than 3 months but not more than a year | | | 2,216 | | | | 2,721 | | | | 2,171 | | | | 1,930 | |
| In more than 1 year but not more than 5 years | | | 12,005 | | | | 12,798 | | | | 11,956 | | | | 10,273 | |
| In more than 5 years | | | 79,093 | | | | 78,616 | | | | 79,069 | | | | 65,325 | |
| |
Loans and advances to customers | | | 95,861 | | | | 109,883 | | | | 95,683 | | | | 80,093 | |
| |
Less: loan loss allowances | | | 394 | | | | 467 | | | | 453 | | | | 233 | |
| |
Loans and advances to customers, net of loan loss allowances | | | 95,467 | | | | 109,416 | | | | 95,230 | | | | 79,860 | |
| |
The loans and advances to customers included in the above table have the following interest rate structures:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Fixed rate | | | 26,644 | | | | 35,242 | | | | 26,513 | | | | 18,449 | |
| Variable rate | | | 69,217 | | | | 74,641 | | | | 69,170 | | | | 61,644 | |
| Less: loan loss allowances | | | 394 | | | | 467 | | | | 453 | | | | 233 | |
| |
| | | | 95,467 | | | | 109,416 | | | | 95,230 | | | | 79,860 | |
| |
Interest income recognised on impaired loans amounted to £4m.
Movement in loan loss allowances:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Other | | | Other | | | | |
| | | Loans secured on | | | Corporate | | | Finance | | | secured | | | unsecured | | | | |
| | | residential property | | | loans | | | leases | | | advances | | | advances | | | Total | |
| Group | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| As at 31 December 2004 | | | 67 | | | | 81 | | | | — | | | | 151 | | | | 168 | | | | 467 | |
| IFRS reclassifications | | | (15 | ) | | | (81 | ) | | | 3 | | | | (4 | ) | | | 57 | | | | (40 | ) |
| As at 1 January 2005 | | | 52 | | | | — | | | | 3 | | | | 147 | | | | 225 | | | | 427 | |
| Charge to the income statement for the period | | | 9 | | | | — | | | | (1 | ) | | | 12 | | | | 235 | | | | 255 | |
| Write offs | | | (5 | ) | | | — | | | | 1 | | | | (36 | ) | | | (248 | ) | | | (288 | ) |
| |
| At 31 December 2005 | | | 56 | | | | — | | | | 3 | | | | 123 | | | | 212 | | | | 394 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As at 1 January 2004 | | | 202 | | | | 333 | | | | — | | | | 124 | | | | 206 | | | | 865 | |
| Disposal of subsidiary undertakings | | | (28 | ) | | | — | | | | — | | | | (38 | ) | | | (4 | ) | | | (70 | ) |
| Charge to the income statement for the period | | | (119 | ) | | | (88 | ) | | | — | | | | 98 | | | | 74 | | | | (35 | ) |
| Write offs | | | 12 | | | | (164 | ) | | | — | | | | (33 | ) | | | (108 | ) | | | (293 | ) |
| |
| At 31 December 2004 | | | 67 | | | | 81 | | | | — | | | | 151 | | | | 168 | | | | 467 | |
| |
IFRS reclassifications relate primarily to reclassification of provisions relating to certain corporate loans in the portfolio business unit segment.
119123
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Fixed rate | | | 32,502 | | | | 30,877 | | | | 18,446 | | | | 16,590 | |
| Variable rate | | | 61,174 | | | | 63,827 | | | | 61,644 | | | | 59,757 | |
| Provisions | | | (467 | ) | | | (865 | ) | | | (233 | ) | | | (277 | ) |
| |
| | | | 93,209 | | | | 93,839 | | | | 79,857 | | | | 76,070 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Amounts | | | | | | | Other | | | Other | | | | |
| | | Loans secured on | | | due from | | | Finance | | | secured | | | unsecured | | | | |
| | | residential property | | | subsidiaries | | | leases | | | advances | | | advances | | | Total | |
| Company | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| As at 31 December 2004 | | | 61 | | | | 183 | | | | — | | | | 7 | | | | 165 | | | | 416 | |
| IFRS reclassifications | | | (18 | ) | | | — | | | | 3 | | | | (2 | ) | | | 58 | | | | 41 | |
| As at 1 January 2005 | | | 43 | | | | 183 | | | | 3 | | | | 5 | | | | 223 | | | | 457 | |
| Charge to the income statement for the period | | | 11 | | | | 3 | | | | (1 | ) | | | 2 | | | | 227 | | | | 242 | |
| Write offs | | | (6 | ) | | | — | | | | 1 | | | | (1 | ) | | | (240 | ) | | | (246 | ) |
| |
| At 31 December 2005 | | | 48 | | | | 186 | | | | 3 | | | | 6 | | | | 210 | | | | 453 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As at 1 January 2004 | | | 147 | | | | 88 | | | | — | | | | 11 | | | | 119 | | | | 365 | |
| Disposal of subsidiary undertakings | | | — | | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| Charge to the income statement for the period | | | (102 | ) | | | 97 | | | | — | | | | 7 | | | | 163 | | | | 165 | |
| Write offs | | | 16 | | | | (2 | ) | | | — | | | | (8 | ) | | | (117 | ) | | | (111 | ) |
| |
| At 31 December 2004 | | | 61 | | | | 183 | | | | — | | | | 7 | | | | 165 | | | | 416 | |
| |
The Group’s policy is to hedge fixed rate loans and advances to customers to floating rates using derivative instruments, or by matching with other on-balance sheet interest rate exposures. See note 51, Derivatives – Non-trading derivatives for further information.
17.
Loans and advances to customers subjectinclude finance lease receivables.
| | | | | | | | | | | | | | | | | |
| | | Group | | | | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Gross investment in finance leases, receivable: | | | | | | | | | | | | | | | | |
| No later than 3 months | | | 1 | | | | 64 | | | | 1 | | | | — | |
| Later than 3 months and no later than 1 year | | | 1 | | | | 21 | | | | 1 | | | | — | |
| Later than 1 year and no later than 5 years | | | 1 | | | | 145 | | | | 1 | | | | 3 | |
| Later than 5 years | | | — | | | | 1,753 | | | | — | | | | — | |
| |
| | | | 3 | | | | 1,983 | | | | 3 | | | | 3 | |
| |
| Unearned future finance income on finance leases | | | — | | | | (875 | ) | | | — | | | | — | |
| Less: Provisions allowance for impairment | | | 3 | | | | — | | | | 3 | | | | — | |
| |
| Net investment in finance leases | | | — | | | | 1,108 | | | | — | | | | 3 | |
| |
| |
| The net investment in finance leases may be analysed as follows: | | | | | | | | | | | | | | | | |
| No later than 3 months | | | — | | | | 36 | | | | — | | | | — | |
| Later than 3 months and no later than 1 year | | | — | | | | 11 | | | | — | | | | — | |
| Later than 1 year and no later than 5 years | | | — | | | | 82 | | | | — | | | | 3 | |
| Later than 5 years | | | — | | | | 979 | | | | — | | | | — | |
| |
| | | | — | | | | 1,108 | | | | — | | | | 3 | |
| |
19. Debt securities
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| Investment securities | | £m | | | £m | | | £m | | | £m | |
| |
| Issued by public bodies: | | | | | | | | | | | | | | | | |
| Other public sector securities | | | — | | | | 28 | | | | — | | | | 28 | |
| |
| | | | — | | | | 28 | | | | — | | | | 28 | |
| |
| Issued by other issuers: | | | | | | | | | | | | | | | | |
| Bank and building society certificates of deposit | | | — | | | | 317 | | | | — | | | | — | |
| Other debt securities | | | — | | | | 361 | | | | — | | | | 377 | |
| |
| | | | — | | | | 678 | | | | — | | | | 377 | |
| |
| Less: provisions | | | — | | | | (34 | ) | | | — | | | | — | |
| |
| Sub-total – Non-trading book | | | — | | | | 672 | | | | — | | | | 405 | |
| |
Other securities | | | | | | | | | | | | | | | | |
| Issued by public bodies: | | | | | | | | | | | | | | | | |
| Government securities | | | — | | | | 7,492 | | | | — | | | | — | |
| Other public sector securities | | | — | | | | 2,887 | | | | — | | | | — | |
| |
| | | | — | | | | 10,379 | | | | — | | | | — | |
| |
| Issued by other issuers: | | | | | | | | | | | | | | | | |
| Bank and building society certificates of deposit | | | — | | | | 12,683 | | | | — | | | | — | |
| Other debt securities | | | — | | | | 13,276 | | | | — | | | | — | |
| |
| | | | — | | | | 25,959 | | | | — | | | | — | |
| |
| Sub-total – Trading book | | | — | | | | 36,338 | | | | — | | | | — | |
| |
| Total | | | — | | | | 37,010 | | | | — | | | | 405 | |
| |
The investment securities held by the Company in 2004 include subordinated investments in subsidiaries of £377m and are included within Other debt securities. Investment securities held by the Group in 2004 included £nil of subordinated investments in associates.
124
Financial Statements
Notes to securitisationthe Financial Statementscontinued
Analysed by listing status:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| Investment securities | | £m | | | £m | | | £m | | | £m | |
| |
| Listed in the UK | | | — | | | | 370 | | | | — | | | | — | |
| Listed or registered elsewhere | | | — | | | | 255 | | | | — | | | | — | |
| Unlisted | | | — | | | | 47 | | | | — | | | | 405 | |
| |
| Sub-total – Non-trading book | | | — | | | | 672 | | | | — | | | | 405 | |
| |
Other securities | | | | | | | | | | | | | | | | |
| Listed in the UK | | | — | | | | 14,144 | | | | — | | | | — | |
| Listed or registered elsewhere | | | — | | | | 7,646 | | | | — | | | | — | |
| Unlisted | | | — | | | | 14,548 | | | | — | | | | — | |
| |
| Sub-total – Trading book | | | — | | | | 36,338 | | | | — | | | | — | |
| |
| Total | | | — | | | | 37,010 | | | | — | | | | 405 | |
| |
| |
| Book value of debt securities analysed by maturity: |
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Due within 1 year | | | — | | | | 19,029 | | | | — | | | | 28 | |
| Due in more than 1 year but not more than 5 years | | | — | | | | 6,892 | | | | — | | | | — | |
| Due in more than 5 years but not more than 10 years | | | — | | | | 10,112 | | | | — | | | | — | |
| Due in more than 10 years | | | — | | | | 1,011 | | | | — | | | | 377 | |
| Less: provisions | | | — | | | | (34 | ) | | | — | | | | — | |
| |
| | | | — | | | | 37,010 | | | | — | | | | 405 | |
| |
| |
| The movement on debt securities held for investment purposes was as follows: |
| | | | | | | Group | |
| | | | | | | Cost | | | Provisions | | | Net book value | |
| | | | | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | | | | | 1,931 | | | | (178 | ) | | | 1,753 | |
| Exchange adjustments | | | | | | | (148 | ) | | | — | | | | (148 | ) |
| Additions | | | | | | | 1,476 | | | | — | | | | 1,476 | |
| Disposals | | | | | | | (1,331 | ) | | | 93 | | | | (1,238 | ) |
| Redemptions and maturities | | | | | | | (1,239 | ) | | | — | | | | (1,239 | ) |
| Transfers to other securities (net) | | | | | | | — | | | | (16 | ) | | | (16 | ) |
| Transfer from profit and loss account | | | | | | | — | | | | 67 | | | | 67 | |
| Net of amortisation of discounts (premiums) | | | | | | | 17 | | | | — | | | | 17 | |
| |
| At 31 December 2004 | | | | | | | 706 | | | | (34 | ) | | | 672 | |
| |
| | | | | | | | | | | | | |
| | | Company | |
| | | Cost | | | Provisions | | | Net book value | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 480 | | | | — | | | | 480 | |
| Exchange Adjustments | | | (43 | ) | | | — | | | | (43 | ) |
| Disposals | | | (32 | ) | | | — | | | | (32 | ) |
| |
| At 31 December 2004 | | | 405 | | | | — | | | | 405 | |
| |
The total net book value of debt securities held for investment purposes at 31 December 2004 includes net unamortised premiums/discounts of £34m.
The Group also purchases credit protection by entering into credit derivative transactions such as credit default swaps and total return swaps with highly rated banks.
20. Equity shares and other similar interests
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Listed in the UK | | | — | | | | 8,451 | | | | — | | | | — | |
| Listed elsewhere | | | — | | | | 2,287 | | | | — | | | | — | |
| Unlisted | | | — | | | | 54 | | | | — | | | | 1 | |
| |
| | | | — | | | | 10,792 | | | | — | | | | 1 | |
| |
| Banking business | | | — | | | | 30 | | | | — | | | | 1 | |
| Trading business | | | — | | | | 10,762 | | | | — | | | | — | |
| |
| | | | — | | | | 10,792 | | | | — | | | | 1 | |
| |
There was a small movement on Company equity shares and other similar interests held for investment purposes during the 2004 year. The total amount held in 2004 was £1m. There were no provisions. These amounts exclude investment in subsidiary undertakings.
125
Financial Statements
Notes to the Financial Statementscontinued
21. Securitisation of assets
Loans and advances to customers include portfolios of residential mortgage loans, which are subject to non-recourse finance arrangements. These loans have been purchased by, or assigned to, special purpose securitisation companies
(“(‘Securitisation
Companies”Companies’), and have been funded primarily through the issue of mortgage-backed securities
(“Securities”(‘Securities’). No gain or loss has been recognised as a result of these sales. These Securitisation Companies are consolidated and included in the Group financial statements as
quasi-subsidiaries.subsidiaries.
Abbey National plc and its subsidiaries are under no obligation to support any losses that may be incurred by the Securitisation Companies or holders of the Securities except as described below, and do not intend to provide such further support.
Up to and including 31 December 2001, Abbey required Mortgage Indemnity Guarantee (‘MIG’) policies for all mortgaged properties with a Loan to Original Property Value ratio of more than 75 per cent (with the exception of some flexible loans). These MIG policies were underwritten by Carfax Insurance Limited,
or (‘Carfax’), a wholly owned subsidiary of
Abbey. However, on 14 October 2005, Abbey
National plc, providesexercised its right to cancel all relevant MIG policies, as a result of which none of the mortgage
indemnity guarantee insuranceloans purchased by, or assigned to
Abbey National plc. Abbey National plc has assigned its interest under each mortgage indemnity guarantee policy to the Securitisation Companies
to the extent that it relates to loans comprised in the current portfolio. Since 1 January 2002 Abbey National plc has not taken out mortgage indemnity guarantee insurance in relation to new mortgage loans.is covered by a MIG policy. Holders of the Securities are only entitled to obtain payment of principal and interest to the extent that the resources of the Securitisation Companies are sufficient to support such payments, and the holders of the Securities have agreed in writing not to seek recourse in any other form.
Abbey National plc receives payments from the Securitisation Companies in respect of fees for administering the loans, and payment of deferred consideration for the sale of the loans.
In addition, Abbey National plc has made interest bearing subordinated loans to Holmes Financing (No.1) plc, Holmes Financing (No.2) plc, Holmes Financing (No.3) plc, Holmes Financing (No.4) plc, Holmes Financing (No.5) plc, Holmes Financing (No.6) plc, Holmes Financing (No.7) plc and Holmes Financing (No.8) plc. Abbey National plc does not guarantee the liabilities of the subsidiary which provides mortgage indemnity guarantee insurance. Abbey National plc is contingently liable to pay to the subsidiary any unpaid amounts in respect of share capital. At a Group level, a separate presentation of assets and liabilities is adopted to the extent of the amount of insurance cover provided by the subsidiary. Abbey National Treasury Services plc has entered into an interest rate swap with Holmes Funding Limited. This swap in effect converts a proportion of the fixed and variable interest flows receivable from customers into LIBOR based flows to match the interest payable on the Securities.
Abbey National plc has no right or obligation to repurchase the benefit of any securitised loan, except if certain representations and warranties given by Abbey National plc at the time of transfer are breached.
In
April 2004December 2005 Holmes Funding Limited acquired, at book value, a beneficial interest in the trust property vested in Holmes Trustees Limited. This further beneficial interest of
£4.0bn£3.8bn was acquired through borrowing from Holmes Financing
(No.8)(No.9) plc, which funded its advance to Holmes Funding Limited, principally through the issue of mortgage backed securities. The remaining share of the beneficial interest in residential mortgage loans held by Holmes Trustees Limited belongs to Abbey National plc, and amounts to
£15.8bn£14.0bn at 31 December
2004.2005.
The balances of assets securitised and non-recourse finance at 31 December 20042005 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Gross assets | | Subordinated loans | | | Gross assets | | | |
| | | securitised | | Non- recourse finance | | made by the Group | | | securitised | | Non- recourse finance | |
| Securitisation company | | Date of securitisation | | £m | | £m | | £m | | | Closing date of securitisation | | £m | | £m | |
| | Holmes Financing (No.1) plc | | 19 July 2000 | | * 1,520 | | 1,537 | | 4 | | | 26 July 2000 | | | 904 | | | | 904 | |
| Holmes Financing (No.2) plc | | 29 November 2000 | | * 655 | | 856 | | 4 | | | 29 November 2000 | | | 628 | | | | 753 | |
| Holmes Financing (No.3) plc | | 23 May 2001 | | * 533 | | 1,322 | | 6 | | | 23 May 2001 | | | 546 | | | | 546 | |
| Holmes Financing (No.4) plc | | 5 July 2001 | | * 1,546 | | 1,791 | | 3 | | | 5 July 2001 | | | 1,836 | | | | 1,836 | |
| Holmes Financing (No.5) plc | | 8 November 2001 | | * 901 | | 992 | | 2 | | | 8 November 2001 | | | 955 | | | | 955 | |
| Holmes Financing (No.6) plc | | 7 November 2002 | | * 2,704 | | 2,878 | | 2 | | | 7 November 2002 | | | 2,077 | | | | 2,077 | |
| Holmes Financing (No.7) plc | | 20 March 2003 | | * 1,540 | | 1,836 | | 1 | | | 26 March 2003 | | | 1,079 | | | | 1,882 | |
| Holmes Financing (No. 8) plc | | 1 April 2004 | | 3,769 | | 3,886 | | 12 | | |
| Holmes Financing (No.8) plc | | | 1 April 2004 | | | 2,890 | | | | 2,890 | |
| Holmes Financing (No.9) plc | | | 8 December 2005 | | | 3,797 | | | | 3,797 | |
| Retained interest in Holmes Trustees Limited | | ** 15,808 | | — | | — | | | | | | | | 13,979 | | | | — | |
| | | | 28,976 | | 15,098 | | 34 | | | | | | | | 28,691 | | | | 15,640 | |
|
* | | RepresentsThe gross assets securitised represent the interest in the trust property at book value held by Holmes Funding Limited related to the debt issued by these securitisation companies. |
|
** | | As part of the master structure trust agreement, a certain proportion of funds is required to be retained in the trust. |
120
Financial Statements
Notes to the Financial Statementscontinued
debt issued by the securitisation companies. The retained interest in Holmes Trustees Limited represents the proportion of the funds required to be retained in the trust as part of the master structure trust agreement.
The securitisation vehicles have placed deposits totalling
£2,150m£928m representing cash, which has been accumulated to finance the redemption of a number of securities issued by the securitisation companies. The securitisation companies’ contractual interest in advances secured on residential property is therefore reduced by this amount.
Abbey National plc does not own directly, or indirectly, any of the share capital of any of the above securitisation companies or their parents.
A summarised
profitincome statement and
loss accountcash flow statement for the years ended 31 December
2004, 20032005 and
20022004 and an aggregated balance sheet at 31 December
20042005 and
20032004 for the above companies is set out below:
Profit and loss accountIncome statement for the year ended 31 December
| | | | | | | | | | | | | | | | | | |
| | | | Group | | Company | |
| | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | |
| | Net interest income | | 15 | | 3 | | 7 | | | 22 | | 15 | | — | | — | |
| Other operating income | | | (9 | ) | | | (7 | ) | | | (8 | ) | | | (50 | ) | | | (9 | ) | | — | | — | |
| Administrative expenses | | | (1 | ) | | | (1 | ) | | — | | | | (2 | ) | | | (1 | ) | | — | | — | |
| Provisions | | 19 | | | (6 | ) | | | (7 | ) | |
| Impairment losses on loans and advances | | | | (3 | ) | | 19 | | — | | — | |
| Taxation expense | | | 9 | | | (3 | ) | | — | | — | |
| | Profit/(loss) for the financial period | | 24 | | | (11 | ) | | | (8 | ) | | | (24 | ) | | 21 | | — | | — | |
|
126
Prior years have been restated for a reallocation between administrative expenses and other operating expenses.
Cash flow statement for period ended 31 December
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Net cash outflow from operating activities | | | (2 | ) | | | — | | | | (5 | ) |
| Net cash outflow from returns on investment and servicing of finance | | | — | | | | — | | | | — | |
| Total taxation paid | | | 2 | | | | — | | | | — | |
| Net cash inflow/(outflow) from capital expenditure and financing investment | | | — | | | | — | | | | — | |
| Net cash outflow before financing | | | — | | | | — | | | | — | |
| |
| Net cash inflow from financing | | | — | | | | — | | | | — | |
| |
| Net (decrease)/increase in cash | | | — | | | | — | | | | (5 | ) |
| |
Financial Statements
Notes to the Financial Statementscontinued
Balance sheet as at 31 December
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | | Group | | Company | |
| | | £m | | £m | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | | £m | | £m | | £m | | £m | |
| | | |
| Derivative financial instruments | | | 321 | | — | | — | | — | |
| Loans and advances to banks | | 2,982 | | 1,504 | | | 928 | | 2,986 | | — | | — | |
| Loans and advances to customers | | 13,168 | | 14,053 | | | 15,042 | | 13,241 | | — | | — | |
| Prepayments | | 101 | | 72 | | |
| Other assets | | | 8 | | 24 | | — | | — | |
| | Total assets | | 16,251 | | 15,629 | | | 16,299 | | 16,251 | | — | | — | |
| | Deposits by banks | | 540 | | 547 | | | 206 | | 540 | | — | | — | |
| Derivative financial instruments | | | 158 | | — | | — | | — | |
| Debt securities in issue | | 15,510 | | 14,895 | | | 15,950 | | 15,681 | | — | | — | |
| Accruals and deferred income | | 203 | | 210 | | |
| Other liabilities | | | 2 | | 32 | | — | | — | |
| Profit and loss account | | | (2 | ) | | | (23 | ) | | | (17 | ) | | | (2 | ) | | — | | — | |
| | Total liabilities | | 16,251 | | 15,629 | | | 16,299 | | 16,251 | | — | | — | |
|
18. Net investment
In addition in finance leases2005 £1.9bn was raised from two issues from Abbey’s€12.0bn covered bond programme established in 2005. The covered bonds are secured by a pool of ring-fenced residential mortgages. The covered bond issues are not included in the tables above.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Amounts receivable | | | 1,983 | | | | 4,241 | | | | 3 | | | | 21 | |
| Less: deferred income | | | (835 | ) | | | (1,668 | ) | | | — | | | | (3 | ) |
| |
| | | | 1,148 | | | | 2,573 | | | | 3 | | | | 18 | |
| |
| Repayable: | | | | | | | | | | | | | | | | |
| In not more than 3 months | | �� | 37 | | | | 31 | | | | — | | | | 1 | |
| In more than 3 months but not more than 1 year | | | 12 | | | | 66 | | | | — | | | | 4 | |
| In more than 1 year but not more than 5 years | | | 84 | | | | 537 | | | | 3 | | | | 13 | |
| In more than 5 years | | | 1,015 | | | | 1,939 | | | | — | | | | — | |
| |
| | | | 1,148 | | | | 2,573 | | | | 3 | | | | 18 | |
| |
| Cost of assets acquired for the purpose of letting under finance leases in the year | | | — | | | | 176 | | | | — | | | | 11 | |
| Gross rentals receivable | | | 135 | | | | 611 | | | | — | | | | 21 | |
| Commitments as lessor for the purchase of equipment for use in finance leases | | | 3 | | | | — | | | | — | | | | — | |
| |
Provisions22. Available for impairment relate to small ticket leasing assets.
sale securities| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities | | | — | | | | — | | | | 270 | | | | — | |
| Equity securities | | | 13 | | | | — | | | | 2 | | | | — | |
| |
| | | | 13 | | | | — | | | | 272 | | | | — | |
| |
Maturities of debt securities
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Due in more than 10 years | | | — | | | | — | | | | 270 | | | | — | |
| |
| | | | — | | | | — | | | | 270 | | | | — | |
| |
Debt securities can be analysed as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Other debt securities | | | — | | | | — | | | | 270 | | | | — | |
| |
| | | | — | | | | — | | | | 270 | | | | — | |
| |
Debt securities and equity securities can be analysed by listing status as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities: | | | | | | | | | | | | | | | | |
| - Unlisted | | | — | | | | — | | | | 270 | | | | — | |
| |
| | | | — | | | | — | | | | 270 | | | | — | |
| |
| Equity securities: | | | | | | | | | | | | | | | | |
| - Listed UK | | | 12 | | | | — | | | | 1 | | | | — | |
| - Unlisted | | | 1 | | | | — | | | | 1 | | | | — | |
| |
| | | | 13 | | | | — | | | | 2 | | | | — | |
| |
121127
Notes to the Financial Statementscontinued
19. Debt securities
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Book | | | Market | | | Book | | | Market | |
| | | value | | | value | | | value | | | value | |
| Investment securities | | £m | | | £m | | | £m | | | £m | |
| |
| Issued by public bodies: | | | | | | | | | | | | | | | | |
| Government securities | | | — | | | | — | | | | 125 | | | | 125 | |
| Other public sector securities | | | 28 | | | | 28 | | | | 28 | | | | 28 | |
| |
| | | | 28 | | | | 28 | | | | 153 | | | | 153 | |
| |
| Issued by other issuers: | | | | | | | | | | | | | | | | |
| Bank and building society certificates of deposit | | | 317 | | | | 317 | | | | 204 | | | | 204 | |
| Other debt securities | | | 361 | | | | 379 | | | | 1,574 | | | | 1,484 | |
| |
| | | | 678 | | | | 696 | | | | 1,778 | | | | 1,688 | |
| |
| Less: provisions | | | (34 | ) | | | — | | | | (178 | ) | | | — | |
| |
| Sub-total – Non-trading book | | | 672 | | | | 724 | | | | 1,753 | | | | 1,841 | |
| |
Other securities | | | | | | | | | | | | | | | | |
| Issued by public bodies: | | | | | | | | | | | | | | | | |
| Government securities | | | 3,359 | | | | 3,359 | | | | 4,374 | | | | 4,374 | |
| |
| Issued by other issuers: | | | | | | | | | | | | | | | | |
| Bank and building society certificates of deposit | | | 11,170 | | | | 11,170 | | | | 15,811 | | | | 15,811 | |
| Other debt securities | | | 7,482 | | | | 7,482 | | | | 8,390 | | | | 8,390 | |
| |
| | | | 18,652 | | | | 18,652 | | | | 24,201 | | | | 24,201 | |
| |
| Sub-total – Trading book | | | 22,011 | | | | 22,011 | | | | 28,575 | | | | 28,575 | |
| |
| Total | | | 22,683 | | | | 22,735 | | | | 30,328 | | | | 30,416 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Company | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Book | | | Market | | | Book | | | Market | |
| | | value | | | value | | | value | | | value | |
| Investment securities | | £m | | | £m | | | £m | | | £m | |
| |
| Issued by public bodies: | | | | | | | | | | | | | | | | |
| Other public sector securities | | | 28 | | | | 28 | | | | 28 | | | | 28 | |
| Issued by other issuers: | | | | | | | | | | | | | | | | |
| Other debt securities | | | 377 | | | | 377 | | | | 452 | | | | 452 | |
| |
| | | | 405 | | | | 405 | | | | 480 | | | | 480 | |
| |
The Company held no securities for purposes other than investment. The investment securities held by the Company include subordinated investments in subsidiaries of £377m (2003: £432m) and are included within Other debt securities. Investment securities held by the Group include £nil (2003: £20m) of subordinated investments in associates and are included within Other debt securities.
All of the securities held by the Company are unlisted.
Analysed by listing status:
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Book | | | Market | | | Book | | | Market | |
| | | value | | | value | | | value | | | value | |
| Investment securities | | £m | | | £m | | | £m | | | £m | |
| |
| Listed in the UK | | | 370 | | | | 422 | | | | 701 | | | | 673 | |
| Listed or registered elsewhere | | | 255 | | | | 257 | | | | 161 | | | | 223 | |
| Unlisted | | | 47 | | | | 45 | | | | 891 | | | | 945 | |
| |
| Sub-total – Non-trading book | | | 672 | | | | 724 | | | | 1,753 | | | | 1,841 | |
| |
Other securities | | | | | | | | | | | | | | | | |
| Listed in the UK | | | 1,199 | | | | 1,199 | | | | 2,015 | | | | 2,015 | |
| Listed or registered elsewhere | | | 6,414 | | | | 6,414 | | | | 7,644 | | | | 7,644 | |
| Unlisted | | | 14,398 | | | | 14,398 | | | | 18,916 | | | | 18,916 | |
| |
| Sub-total – Trading book | | | 22,011 | | | | 22,011 | | | | 28,575 | | | | 28,575 | |
| |
| Total | | | 22,683 | | | | 22,735 | | | | 30,328 | | | | 30,416 | |
| |
122
Financial Statements
Notes to the Financial Statementscontinued
Book value of debt securities analysed by maturity:have fixed coupons. Equity securities do not bear interest.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Due within 1 year | | | 12,996 | | | | 20,644 | | | | 28 | | | | 150 | |
| Due in more than 1 year but not more than 5 years | | | 4,790 | | | | 3,712 | | | | — | | | | — | |
| Due in more than 5 years but not more than 10 years | | | 3,920 | | | | 4,427 | | | | — | | | | 32 | |
| Due in more than 10 years | | | 1,011 | | | | 1,723 | | | | 377 | | | | 298 | |
| Less: provisions | | | (34 | ) | | | (178 | ) | | | — | | | | — | |
| |
| | | | 22,683 | | | | 30,328 | | | | 405 | | | | 480 | |
| |
The movement on debtin available for sale securities held for investment purposesmay be summarised as follows:
| | | | | | | | | |
| | | Group | | | Company | |
| | | Total | | | Total | |
| | | £m | | | £m | |
| |
| At 1 January 2005 | | | 11 | | | | 379 | |
| Exchange differences on monetary assets | | | — | | | | (9 | ) |
| Additions | | | 2 | | | | — | |
| Disposals (sale and redemption) | | | — | | | | (100 | ) |
| |
| At 31 December 2005 | | | 13 | | | | 270 | |
| |
23. Investment in subsidiary undertakings
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | Net book value | | | Net book value | |
| | | £m | | | £m | |
| |
| Subsidiary undertakings: | | | | | | | | |
| Banks | | | 2,974 | | | | 2,486 | |
| Others | | | 5,716 | | | | 5,764 | |
| |
| | | | 8,690 | | | | 8,250 | |
| |
The movement in shares in Group undertakings was as follows:
| | | | | | | | | | | | | |
| | | Group | |
| | | Cost | | | Provisions | | | Net book value | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 1,931 | | | | (178 | ) | | | 1,753 | |
| Exchange adjustments | | | (148 | ) | | | — | | | | (148 | ) |
| Additions | | | 1,476 | | | | — | | | | 1,476 | |
| Disposals | | | (1,331 | ) | | | 93 | | | | (1,238 | ) |
| Redemptions and maturities | | | (1,239 | ) | | | — | | | | (1,239 | ) |
| Transfers to other securities (net) | | | — | | | | (16 | ) | | | (16 | ) |
| Transfer from profit and loss account | | | — | | | | 67 | | | | 67 | |
| Net of amortisation of discounts (premiums) | | | 17 | | | | — | | | | 17 | |
| |
| At 31 December 2004 | | | 706 | | | | (34 | ) | | | 672 | |
| |
| | | | | | | | | | | | | |
| | | Company | |
| | | Cost | | | Provisions | | | Net book value | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 480 | | | | — | | | | 480 | |
| Exchange Adjustments | | | (43 | ) | | | — | | | | (43 | ) |
| Disposals | | | (32 | ) | | | — | | | | (32 | ) |
| |
| At 31 December 2004 | | | 405 | | | | — | | | | 405 | |
| |
| | | | | | | | | | | | | |
| | | Cost | | | Impairment | | | Company | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2005 | | | 9,962 | | | | (1,712 | ) | | | 8,250 | |
| Additions | | | 1 | | | | (34 | ) | | | (33 | ) |
| Disposals | | | (68 | ) | | | — | | | | (68 | ) |
| Write-back of impairments | | | — | | | | 541 | | | | 541 | |
| |
| At 31 December 2005 | | | 9,895 | | | | (1,205 | ) | | | 8,690 | |
| |
The total net book value of debt securities held for investment purposes at 31 December 2004 includes net unamortised premiums/discounts of £34m (2003: £39m).
Included within debt securities are £nil (2003: £5m) of subordinated amounts due from third parties, which comprise debt securities issued by financial services companies which qualify as regulatory capital for the issuing company. There are hedges in place in respect of the majority of fixed rate investment securities whereby the rise or fall in their market value, due to interest rate movements, will be offset by a substantially equivalent reduction or increase in the value of the hedges. The Group also purchases credit protection by entering into credit derivative transactions such as credit default swaps and total return swaps with highly rated banks. In 2003 the Group had purchased protection on a £707m portfolio of high yield assets. Protection had been purchased from a third party bank, which has in turn purchased protection from Newark (a synthetic Collateral Debt Obligation) and super senior protection from a super senior Monoline insurer. The Group’s exposure under the structure was £91m. This consisted of a junior note exposure (net of provisions) of £31m to Newark and a potential exposure with respect to credit spread of £60m. This structure was unwound in the course of 2004.
In prior years Investment debt securities included asset backed and mortgage-backed securities sold to various bankruptcy-remote special purpose vehicles.
The special purpose vehicles were owned directly by charitable trusts and therefore were not legal subsidiaries of the Group. However they were consolidated into the Group on the basis that substantially all the rewards inherent in those entities were retained in the Group.
The debt security acquisitions by these special purpose vehicles were funded primarily through the issue of commercial paper to the market. These vehicles were disposed in the course of 2003.
An aggregated summary profit and loss account for the years ended 31 December 2004, 2003 and 2002, and an aggregated balance sheet as at 31 December 2004 and 2003 for these entities are shown below.
Profit and loss account forDuring the year
ended 31 December| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Interest receivable | | | — | | | | 33 | | | | 137 | |
| Interest payable | | | — | | | | (29 | ) | | | (115 | ) |
| |
| Net interest income | | | — | | | | 4 | | | | 22 | |
| Profit on disposal of investment debt securities | | | — | | | | 4 | | | | 2 | |
| |
| Profit for the financial year | | | — | | | | 8 | | | | 24 | |
| Amounts charged to entities of the Group | | | — | | | | (8 | ) | | | (24 | ) |
| |
| Retained profits | | | — | | | | — | | | | — | |
| |
123
Financial Statements
Notes to the Financial Statementscontinued
Balance sheet as at 31 December
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Investment debt securities | | | — | | | | — | |
| Prepayments and accrued income | | | — | | | | — | |
| |
| Total assets | | | — | | | | — | |
| |
| Debt securities in issue | | | — | | | | — | |
| Accruals and deferred income | | | — | | | | — | |
| |
| Total liabilities | | | — | | | | — | |
| |
20. Equity shares and other similar interests
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Book | | | Market | | | Book | | | Market | |
| | | value | | | value | | | value | | | value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Listed in the UK | | | 502 | | | | 503 | | | | 1,164 | | | | 1,164 | |
| Listed elsewhere | | | 663 | | | | 664 | | | | 93 | | | | 93 | |
| Unlisted | | | 11 | | | | 11 | | | | 376 | | | | 376 | |
| |
| | | | 1,176 | | | | 1,178 | | | | 1,633 | | | | 1,633 | |
| |
| Banking business | | | 30 | | | | 32 | | | | 394 | | | | 394 | |
| Trading business | | | 1,146 | | | | 1,146 | | | | 1,239 | | | | 1,239 | |
| |
| | | | 1,176 | | | | 1,178 | | | | 1,633 | | | | 1,633 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Company | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Book | | | Market | | | Book | | | Market | |
| | | value | | | value | | | value | | | value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Unlisted | | | 1 | | | | 1 | | | | 2 | | | | 2 | |
| |
The movement on equity shares and other similar interests held for investment purposesa £67m dividend was as follows:
| | | | | | | | | | | | | |
| | | Group | |
| | | Cost | | | Provisions | | | Net book value | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 655 | | | | (261 | ) | | | 394 | |
| Exchange adjustments | | | (14 | ) | | | 5 | | | | (9 | ) |
| Additions | | | 210 | | | | — | | | | 210 | |
| Disposals | | | (808 | ) | | | 244 | | | | (564 | ) |
| Impairments | | | (1 | ) | | | — | | | | (1 | ) |
| |
| At 31 December 2004 | | | 42 | | | | (12 | ) | | | 30 | |
| |
There was a small movement on Company equity shares and other similar interests held for investment purposes during the year. The total amount held was £1m (2003: £2m). There were no provisions. These amounts exclude investment in subsidiary undertakings.
21. Long-term assurance business
The value of the long-term assurance business is as follows:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
|
| Gross of tax basis: | | | | | | | | | | | | |
| Income from long-term assurance business before embedded value changes and rebasing | | | 108 | | | | 176 | | | | 321 | |
| Embedded value charges and rebasing | | | (32 | ) | | | (378 | ) | | | (632 | ) |
| |
| Income from long-term assurance business after embedded value changes and rebasing | | | 76 | | | | (202 | ) | | | (311 | ) |
| |
Net of tax basis: | | | | | | | | | | | | |
| |
| Income from long-term assurance business before embedded value changes and rebasing | | | 78 | | | | 110 | | | | 252 | |
| Embedded value charges and rebasing | | | (94 | ) | | | (369 | ) | | | (480 | ) |
| |
| Income from long-term assurance business after embedded value changes and rebasing | | | 16 | | | | (259 | ) | | | (228 | ) |
| |
The assets and liabilities of the long-term assurance funds are presented separately from those of other businesses in order to reflect the different nature of the shareholders’ interest in them.
124
Financial Statements
Notes to the Financial Statementscontinued
The value of the long-term assurance business is calculatedpaid by discounting the proportion of surplus which is projected to accrue to shareholders in future years from business currently in force, and adding the shareholders’ interest in the surplus retained within the long-term assurance funds. The basis on which this value is determined is reviewed regularly in the light of the experience of the business and expectations regarding future economic conditions.
The principal long-term economic assumptions used are as follows:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | % | | | % | |
| |
| Risk adjusted discount rate (net of tax) | | | 8.0 | | | | 7.5 | |
| Return on equities (gross of tax — pension business) | | | 7.0 | | | | 7.25 | |
| Return on equities (gross of tax — life business) | | | 7.0 | | | | 7.25 | |
| Return on gilts (gross of tax) | | | 4.5 | | | | 4.75 | |
| Return on corporate bonds (gross of tax) | | | 5.0 | | | | 5.25 | |
| Return on property | | | 6.5 | | | | 6.75 | |
| Inflation (indexation) | | | 2.75 | | | | 2.75 | |
| Inflation (expenses) | | | 3.75 | | | | 3.75 | |
| |
Embedded Value rebasing and other adjustments
The embedded value rebasing is made up of two components:
Investment assumptions and variances
The variance represents the adjustment to allow for differences between actual market performance and our assumptions set out at the beginning of the year. Overall investment assumptions and variances have improved by £101m. The improvement shows that investment performance and market movements were in closer alignment with assumptions. In Scottish Mutual the cost of £19m principally reflects realised losses and an adjustment to the assumed value of future profits following changes in asset mix during the period. The positive £7m Scottish Provident investment variance is largely driven by a change in asset mix in the non-profit sub-fundPensions Limited out of cash and into bonds.
Other one off adjustments
The 2003 results included provisions in relation to the realistic balance sheet position of the funds. The 2004 results include a partial release of provisions no longer required together with a reallocation of provisions between entities in the long-term fund, excluding the shareholders’ fund.
Movement in the embedded value asset is calculated as follows:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| At 1 January | | | 2,272 | | | | 2,316 | |
| Increase in value of long-term business after tax | | | 78 | | | | 110 | |
| Embedded value rebasing and other adjustments | | | (94 | ) | | | (369 | ) |
| Capital injections | | | — | | | | 272 | |
| Surplus transferred to/(from) long-term business funds | | | 712 | | | | (57 | ) |
| |
| At 31 December | | | 2,968 | | | | 2,272 | |
| |
The assets and liabilities of the long-term assurance funds are:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Investments | | | 17,913 | | | | 19,570 | |
| |
| Assets held to cover linked liabilities | | | 6,782 | | | | 7,041 | |
| Debtors and prepayments | | | 2,893 | | | | 3,465 | |
| |
| Other assets | | | 2,656 | | | | 1,564 | |
| |
| Total assets | | | 30,244 | | | | 31,640 | |
| Less: Attributable to shareholders | | | 3,064 | | | | 3,304 | |
| |
| Total assets attributable to policyholders | | | 27,180 | | | | 28,336 | |
| |
| Technical provisions | | | 16,601 | | | | 18,729 | |
| Technical provisions for linked liabilities | | | 6,998 | | | | 7,142 | |
| Fund for future appropriations | | | 898 | | | | (769 | ) |
| Other creditors | | | 2,683 | | | | 3,234 | |
| |
| Total liabilities attributable to policyholders | | | 27,180 | | | | 28,336 | |
| |
These balances are prepared in accordance with applicable UK Accounting Standards under the historical cost accounting rules modified to include revaluation of investments. The accounts have also been prepared in accordance with the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers in November 2003.
The amounts of these assets, which are valued at market value, and liabilities of the long-term assurance funds included in the consolidated balance sheet are based upon the draft life assurance balance sheets prepared in compliance with the special provisions relating to insurance groups of section 255A and Schedule 9A to the Companies Act 1985.
125
Financial Statements
Notes to the Financial Statementscontinued
Included within other creditors in 2003 above are two contingent loans owed by the with-profit sub funds of the long-term business funds of Scottish Mutual Assurance plc and Scottish Provident Limited tocapital. Hence Abbey National Scottish Mutual Assurance Holdings Limited of £500m and £619m, respectively. Accrued interest on these loans amounted to £75m and £80m, respectively.
The capital structure of the Life Companies changed significantly in July 2004 following the completion of Abbey’s review of the with-profits fundsplc’s investment in Scottish Mutual and Scottish Provident and it’s subsequent agreement withPensions Limited has reduced by £67m. Abbey National Independent Financial Consultants Limited was dissolved during 2005 making up the Financialremaining £1m of disposals.
The write-back of impairments of shares in Group undertakings in the year included: Abbey National Treasury Services Authority. Both contingent loans were repaid with no incremental capital or adverse profit impact over and above that already reported. A significant contribution was made to theplc £492m, Cater Tyndall Limited £23m, Scottish Mutual with-profits fund, whichInternational Holdings £18m, and Inscape Investments Limited £4m.
This was
coveredoffset by
provisions set up in prior years. In addition, the hedging programme was extended and moved into the with-profits funds to allow them to stand independently, reducing policyholder and shareholder risk.22. Interests andimpairment of shares in associatedGroup undertakings,
which include the following: Scottish Mutual Pensions Limited £12m, Abbey National Business Equipment Leasing Limited £10m, Key Investments Limited £2m, and Abbey National Business Leasing (Holdings) Limited £2m. These impairments are only in the Abbey National plc accounts and do not affect the consolidated accounts.
Investments in subsidiaries are held at cost subject to impairment.
The
movementfollowing table details group undertakings sold in
interests in associated undertakings for 2004the year and
2003 was as follows:| | | | | | | | | |
| | | Group | | | Company | |
| | | £m | | | £m | |
| |
| At 1 January 2004 | | | 39 | | | | 32 | |
| Additions | | | — | | | | — | |
| Dividend Received | | | — | | | | (20 | ) |
| Share of current year net assets | | | (14 | ) | | | — | |
| |
| At 31 December 2004 | | | 25 | | | | 12 | |
| |
| At 1 January 2003 | | | 51 | | | | — | |
| Additions | | | — | | | | 51 | |
| Dividend Received | | | — | | | | (19 | ) |
| Share of current year net assets | | | (12 | ) | | | — | |
| |
| At 31 December 2003 | | | 39 | | | | 32 | |
| |
The principal associated undertakings at 31 December 2004 are:
| | | | | | | |
| | | | | Group Interest | |
Name and nature of business | | Issued share capital | | % | |
|
EDS Credit Services Ltd, Information technology services | | 5,000 A ordinary shares of £0.01 each and 1,000 B ordinary shares of £0.01 each | | | 25 | |
|
PSA Finance plc, Personal finance | | 40,000,000 £1 ordinary shares | | | 50 | |
|
IF Online Group Limited, Information technology services | | 5,393,191 A ordinary shares of £1 each, 1,000,000 B ordinary shares of £1 each 930,120 Class A ordinary shares of £1 each 38,317 Class C preference shares of £1 each, 1 Founder share of £1 each, and 1 Abbey special share of £1 each | | | | |
|
Abbey National plc acquired PSA Finance plc from First National Bank plc on 1 February 2003.
The UK is the principal area of operation of the principal associated undertakings and all are registered in England and Wales.
All associated undertakings are unlisted. EDS Credit Services Limited and PSA Finance plc have a year end of 31 December. IF Online Group Limited has a year end of 30 November.
23. Shares in Group undertakings
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | Net book value | | | Net book value | |
| | | £m | | | £m | |
| |
| Subsidiary undertakings | | | | | | | | |
| Banks | | | 2,486 | | | | 2,264 | |
| Others | | | 5,764 | | | | 5,907 | |
| |
| | | | 8,250 | | | | 8,171 | |
| |
The movement in shares in Group undertakings was as follows:
| | | | | | | | | | | | | |
| | | Cost | | | Impairment | | | Company | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 10,071 | | | | (1,900 | ) | | | 8,171 | |
| Exchange adjustments | | | — | | | | — | | | | — | |
| Additions | | | 13 | | | | (142 | ) | | | (129 | ) |
| Disposals | | | (122 | ) | | | 45 | | | | (77 | ) |
| |
| Write-back of impairments | | | — | | | | 285 | | | | 285 | |
| |
| At 31 December 2004 | | | 9,962 | | | | (1,712 | ) | | | 8,250 | |
| |
Subscriptions for additional share capital in existing subsidiary undertakings during the year amounted to £13m, including £5m in Abbey National Asset Managers and £5m in Abbey National Independent Consulting Group.
126
Financial Statements
Notes to the Financial Statementscontinued
The write-back of impairments of shares in group undertakings in the year included: Abbey National Treasury Services plc £285m.
This was offset by impairment of shares in group undertakings in the following: Inscape development £71m, Scottish Mutual International Holdings £35m and AN 123 Limited £25m. These impairments are only in the Abbey National plc accounts and do not affect the consolidated accounts.
The following table details group undertakings sold in the year and the consideration received.
| | | | | Consideration | |
| Date | | Company/Business disposed of | | £m | Consideration |
| |
515 Mar 20042005 | | Life Online | | | 84 | |
| 22 Mar 2005 | | Abbey National December Leasing (4) Limited | | | 188 | |
| 30 Mar 2005 | | Abbey National December Leasing (7) Limited | | | 13 | |
| 06 Jun 2005 | | Abbey National June Leasing (4) Limited | | | 38 | |
| 31 Aug 2005 | | Agecroft Properties (No. 2) Limited | | | 42 | |
| 30 Sep 2005 | | Abbey National September Leasing (1) Limited | | £ | 89m cash |
10 Mar 2004 | | Royal St Georges Banque, S.A. | | £ | 37m cash |
26 Mar 2004 | | Abbey National September Leasing (2) Limited | | £ | 251m cash |
30 Jun 2004 | | Asset Finance & Leasing Business | | £ | 875m cash |
31 Jul 2004 | | Abbey National March Leasing (5) Limited | | £ | nil444 | |
17 Sep 2004 | | Abbey National September Leasing (6) Limited | | £ | 13m cash |
21 Oct 2004 | | Abbey National June Leasing (6) Limited | | £ | 23m cash |
16 Nov 2004 | | Abbey National France S.A. | | £ | 1,525m cash |
25 Nov 2004 | | Porterbrook Leasing Company (Euro) Limited | | £ | 117m cash |
301 Dec 2004 | | Eole Finance S.A. | | £ | 3m cash |
9 Dec 2004 | | Abbey National June Leasing (2) Limited | | £ | 78m cash |
9 Dec 20042005 | | Abbey National December Leasing (2)(1) Limited | | £ | 169m cash |
|
Total cash consideration | | | 36 | £ | 3,180m cash |
| |
The principal subsidiaries of Abbey National plc at 31 December 20042005 are shown below, all of which are directly held and unlisted except where indicated. The Directors consider that to give full particulars of all subsidiary undertakings would lead to a statement of excessive length. In accordance with s.231(5) of the Companies Act 1985 the following information relates to those subsidiary undertakings whose results or financial position, in the opinion of the directors, principally affect the results of the group. Full particulars of all subsidiary undertakings will be annexed to the Company’s next annual return in accordance with s.231(6)(b) Companies Act 1985.
128
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | |
| | | | | | | | | Country of Incorporation |
| Principal subsidiary | | Nature of business | | Country of Incorporation % Interest held | | or registration |
| |
Abbey National Leasing Companies* (9 companies) | | Finance leasing | | England & Wales |
| Abbey National Treasury Services plc | | Treasury operations | | | 100 | % | | England & Wales |
Abbey National Unit Trust Managers*Managers Ltd* | | Unit trust management | | | 100 | % | | Scotland |
Abbey National Treasury International Ltd* | | Personal finance | | | 100 | % | | Jersey |
| Cater Allen International Ltd* | | Money market and broker dealerSecurities financing | | | 100 | % | | England & Wales |
| Scottish Mutual Investment Managers Ltd* | | Investment managers | | Scotland |
Carfax Insurance Ltd100 | % | | Insurance | | GuernseyScotland |
| Abbey National Life plc | | Insurance | | | 100 | % | | England & Wales |
| Abbey National PEP and ISA Managers Ltd* | | PEP and ISA management | | | 100 | % | | Scotland |
| Scottish Mutual Assurance plc* | | Insurance | | | 100 | % | | Scotland |
| Scottish Provident Ltd* | | Insurance | | | 100 | % | | Scotland |
Scottish Mutual Pension Funds Investment LtdLtd* | | Investment | | | 100 | % | | Scotland |
Abbey National North America CorporationLLC* | | Funding | | | 100 | % | | United States |
Abbey National Securities IncInc* | | Broker DealerSecurities financing | | | 100 | % | | United States |
| Porterbrook Leasing Company Limited | | Leasing | | | 100 | % | | England & Wales |
| |
| | |
| * | | Held indirectly through subsidiary companies. |
All of the above entities have accounting reference dates of 31 December with the exception of the following: Abbey National March Leasing (1) and (2) Limited (both 31 March); Abbey National June Leasing (3), Limited (30 June); and Abbey National September Leasing Limited (30 September).
All the above companies are included in the Consolidated Financial Statements. The Company holds directly or indirectly 100% of the issued ordinary share capital of its principal subsidiaries. All companies operate principally in their country of incorporation or registration. Abbey National Treasury Services plc also has a branch office in the US. Abbey National plc has branches in
Francethe Isle of Man, Northern Ireland and
the Republic of Ireland and a representative office in Dubai. Abbey National International Limited has branches in the Isle of Man and
Portugal. Scottish Mutual Investment Managers Limited has a
representative officebranch in
Dubai.24. SaleNorthern Ireland. Scottish Mutual Assurance plc has branches in Northern Ireland and the Republic of Subsidiary Undertaking
On 16 November 2004 the Group sold its 100% interestIreland. Scottish Provident Limited has a branch in the ordinary share capitalRepublic of Abbey National France SA. Ireland.
24. Investment in associated undertakings
The profitmovement in interests in associated undertakings for 2005 was as follows:
| | | | | | | | | |
| | | Group | | | Company | |
| | | 2005 | | | 2005 | |
| | | £m | | | £m | |
| |
| At 1 January 2005 | | | 25 | | | | 19 | |
| Additional investment | | | 5 | | | | 5 | |
| Share of results | | | (2 | ) | | | — | |
| Share of tax | | | (1 | ) | | | — | |
| Dividends received | | | (3 | ) | | | — | |
| |
At 31 December 2005 | | | 24 | | | | 24 | |
| |
The principal associated undertakings at 31 December 2005 were:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Country of | | | Assets | | | Liabilities | | | Income | | | Expense | | | | |
| Name and nature of business | | incorporation | | | £m | | | £m | | | £m | | | £m | | | % interest held | |
| |
| PSA Finance plc, Personal finance | | England and Wales | | | 44 | | | | (3 | ) | | | (4 | ) | | | 6 | | | | 50.0 | |
| Santander Consumer Finance | | |
| (UK) plc | | England and Wales | | | 48 | | | | (41 | ) | | | (3 | ) | | | 7 | | | | 49.9 | |
| |
All associated undertakings are unlisted and have a year-end of Abbey National France SA up to31 December.
25. Intangible assets
a) Goodwill
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Cost | | | | | | | | | | | | | | | | |
| At 1 January | | | 776 | | | | 782 | | | | — | | | | — | |
| Disposals | | | — | | | | (6 | ) | | | — | | | | — | |
| |
| At 31 December | | | 776 | | | | 776 | | | | — | | | | — | |
| |
| | | | | | | | | | | | | | | | | |
Accumulated impairment | | | | | | | | | | | | | | | | |
| At 1 January | | | 640 | | | | 635 | | | | — | | | | — | |
| Impairment losses | | | — | | | | 7 | | | | — | | | | — | |
| Disposals | | | — | | | | (2 | ) | | | — | | | | — | |
| |
| At 31 December | | | 640 | | | | 640 | | | | — | | | | — | |
| |
Net book value | | | 136 | | | | 136 | | | | — | | | | — | |
| |
Impairment review of Goodwill
During 2005 there was no impairment of goodwill (2004: £7m). Impairment testing in respect of goodwill is performed annually and comprises a comparison of the
datecarrying amount of
disposal was £10m, and forthe cash-generating unit with its
last financial year £7m. Net Assets disposedrecoverable amount: the higher of
and the
related sales proceeds were as follows. | | | | |
| | £m | |
|
Loans and Advances to Customers | | | 1,528 | |
Loans and advances to Banks | | | 8 | |
Other Assets | | | 25 | |
Deposits by Banks | | | (15 | ) |
Other Liabilities | | | (27 | ) |
|
Net Assets
| | | 1,519 | |
Goodwill Written Back | | | 6 | |
Profit on Sale | | | — | |
|
Sales Proceeds
| | | 1,525 | |
Satisfied by cash | | | 1,525 | |
|
Net Cash Inflows in respect of sale comprise
| | | | |
Cash Consideration | | | | |
Cash at Bank and in Hand Sold | | | 1,525 | |
|
127129
Notes to the Financial Statementscontinued
25. Intangible fixed assets
| | | | |
| | Purchased | |
| | goodwill | |
| | Group | |
| | £m | |
|
Cost | | | | |
At 1 January 2004 | | | 1,073 | |
Additions | | | — | |
Disposals | | | (6 | ) |
|
At 31 December 2004 | | | 1,067 | |
|
Amortisation and impairment | | | | |
At 1 January 2004 | | | 732 | |
Charge for the year | | | 20 | |
Disposals | | | (2 | ) |
Impairments | | | — | |
|
At 31 December 2004 | | | 750 | |
|
Net book value | | | | |
At 31 December 2004 | | | 317 | |
At 31 December 2003 | | | 341 | |
|
cash-generating unit’s net selling price and its value in use. Net selling price is calculated by reference to the amount at which the asset could be disposed of in a binding sale agreement in an arm’s length transaction evidenced by an active market or recent transactions for similar assets. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset’s continued use, including those resulting from its ultimate disposal, at a market based discount rate on a pre -tax basis.Intangible fixed
The following cash-generating units include in their carrying value goodwill that is a significant proportion of total goodwill reported by Abbey. These cash-generating units do not carry on their balance sheet any intangible assets comprise positive purchased goodwillwith indefinite useful lives, other than goodwill.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Goodwill | | | | | | | | | | | | | |
| Significant | | | | | | 2005 | | | 2004 | | | Basis of | | | Key | | | Discount | | | | |
| Business Division | | Cash Generating Unit | | | £m | | | £m | | | valuation | | | assumptions | | | rate | | | Growth rate | |
| |
| Retail Banking | | Cater Allen Private | | | 90 | | | | 90 | | | Value in use: | | 3 year plan | | | 6.6 | % | | | 2.3 | % |
| | | Banking | | | | | | | | | | cash flow | | | | | | | | | | | | |
| Insurance and Asset | | Insurance and | | | 46 | | | | 46 | | | Value in use: | | 2006 Budget | | | 7.0 | % | | | 5.0 | % |
| Management | | Asset Management | | | | | | | | | | cash flow | | | | | | | | | | |
| |
There was no evidence of impairment arising on acquisitionsfrom this review.
b) Other intangibles
| | | | | | | | | | | | | |
| | | Group | |
| | | Trademarks | | | Distribution channels | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| |
Cost | | | | | | | | | | | | |
| At 1 January 2005 | | | 24 | | | | 235 | | | | 259 | |
| |
| At 31 December 2005 | | | 24 | | | | 235 | | | | 259 | |
| |
| |
| | | | | | | | | | | | | |
Accumulated amortisation / impairment | | | | | | | | | | | | |
| At 1 January 2005 | | | 4 | | | | 216 | | | | 220 | |
| Charge for the year | | | 1 | | | | 3 | | | | 4 | |
| |
| |
| At 31 December 2005 | | | 5 | | | | 219 | | | | 224 | |
| |
| |
| Net book value | | | 19 | | | | 16 | | | | 35 | |
| |
| |
| | | | | | | | | | | | | |
| | | Group | |
| | | Trademarks | | | Distribution channels | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| |
Cost | | | | | | | | | | | | |
| At 1 January 2004 | | | 24 | | | | 235 | | | | 259 | |
| |
| At 31 December 2004 | | | 24 | | | | 235 | | | | 259 | |
| |
| |
| | | | | | | | | | | | | |
Accumulated amortisation / impairment | | | | | | | | | | | | |
| At 1 January 2004 | | | 3 | | | | 70 | | | | 73 | |
| Amortisation charge for the year | | | 1 | | | | 11 | | | | 12 | |
| Impairment losses | | | — | | | | 135 | | | | 135 | |
| |
| |
| At 31 December 2004 | | | 4 | | | | 216 | | | | 220 | |
| |
| |
| Net book value | | | 20 | | | | 19 | | | | 39 | |
| |
| |
In 2004, an impairment in the value of subsidiary undertakings and purchasesdistribution channels was recognised due to the expectation of businesses made sincereduced profitability in a competitive UK protection market through the independent financial adviser channels in place at the date of Scottish Provident’s acquisition.
26. Value of in-force business
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Cost | | | | | | | | | | | | | | | | |
| At 1 January | | | 1,777 | | | | 1,467 | | | | — | | | | — | |
| Changes in value of in-force business | | | (56 | ) | | | 377 | | | | — | | | | — | |
| |
| At 31 December | | | 1,721 | | | | 1,844 | | | | — | | | | — | |
| |
Following the adoption of IFRS 4 “Insurance contracts” the value of in-force business at 31 December 2004 of £1,844m was restated to £1,777m at 1 January 1998.2005.
Goodwill included above in respect of all material acquisitions is currently being amortised over a period of 20 years. Previously, goodwill arising on acquisitions of subsidiary undertakings and purchases of businesses was taken directly to reserves.
In accordance with FRS 11, ‘Impairment of fixed assets and goodwill’, the carrying value of goodwill has been reviewed for impairment if there is some indication that impairment has occurred.
The cumulative amount of goodwill taken to the Profit and Loss Account reserve in previous periods by the Group and not subsequently recognised in the Profit and Loss Account is £613m (2003: £620m), and by the Company £528m (2003: £528m).
26. Tangible fixed assets excluding operating lease assets
| | | | | | | | | | | | | |
| | | Group | |
| | | Premises | | | Equipment | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| Cost or valuation | | | | | | | | | | | | |
| At 1 January 2004 | | | 43 | | | | 982 | | | | 1,025 | |
| Disposals of subsidiary undertakings | | | — | | | | (7 | ) | | | (7 | ) |
| Additions | | | 6 | | | | 84 | | | | 90 | |
| Disposals | | | (7 | ) | | | (41 | ) | | | (48 | ) |
| |
| At 31 December 2004 | | | 42 | | | | 1,018 | | | | 1,060 | |
| |
| Depreciation | | | | | | | | | | | | |
| At 1 January 2004 | | | 9 | | | | 748 | | | | 757 | |
| Disposals of subsidiary undertakings | | | — | | | | (6 | ) | | | (6 | ) |
| Charge for the year | | | 3 | | | | 78 | | | | 81 | |
| Disposals | | | (2 | ) | | | (16 | ) | | | (18 | ) |
| |
| At 31 December 2004 | | | 10 | | | | 804 | | | | 814 | |
| |
| Net book value | | | | | | | | | | | | |
| At 31 December 2004 | | | 32 | | | | 214 | | | | 246 | |
| At 31 December 2003 | | | 34 | | | | 234 | | | | 268 | |
| |
| | | | | | | | | | | | | |
| | | Company | |
| | | Premises | | | Equipment | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| Cost | | | | | | | | | | | | |
| 1 January 2004 | | | 24 | | | | 945 | | | | 969 | |
| Disposal of businesses | | | — | | | | — | | | | — | |
| Additions | | | 9 | | | | 82 | | | | 91 | |
| Disposals | | | (2 | ) | | | (36 | ) | | | (38 | ) |
| |
| At 31 December 2004 | | | 31 | | | | 991 | | | | 1,022 | |
| |
| Depreciation | | | | | | | | | | | | |
| At 1 January 2004 | | | 4 | | | | 726 | | | | 730 | |
| Disposal of businesses | | | — | | | | — | | | | — | |
| Charge for the year | | | 3 | | | | 75 | | | | 78 | |
| Disposals | | | — | | | | (12 | ) | | | (12 | ) |
| |
| At 31 December 2004 | | | 7 | | | | 789 | | | | 796 | |
| |
| Net book value | | | | | | | | | | | | |
| At 31 December 2004 | | | 24 | | | | 202 | | | | 226 | |
| At 31 December 2003 | | | 20 | | | | 219 | | | | 239 | |
| |
128130
Notes to the Financial Statementscontinued
27. Property, plant and equipment (excluding operating lease assets)
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Group | |
| | | Owner-occupied | | | Office fixtures | | | Computer | | | | |
| | | properties | | | and equipment | | | software | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Cost: | | | | | | | | | | | | | | | | |
| At 1 January 2005 | | | 50 | | | | 1,018 | | | | 265 | | | | 1,333 | |
| Additions | | | 14 | | | | 92 | | | | 84 | | | | 190 | |
| Disposals | | | (18 | ) | | | (67 | ) | | | (2 | ) | | | (87 | ) |
| |
| At 31 December 2005 | | | 46 | | | | 1,043 | | | | 347 | | | | 1,436 | |
| |
Accumulated depreciation: | | | | | | | | | | | | | | | | |
| At 1 January 2005 | | | 10 | | | | 804 | | | | 257 | | | | 1,071 | |
| Depreciation charge for the year | | | 3 | | | | 64 | | | | 5 | | | | 72 | |
| Disposals | | | (1 | ) | | | (18 | ) | | | (2 | ) | | | (21 | ) |
| |
| At 31 December 2005 | | | 12 | | | | 850 | | | | 260 | | | | 1,122 | |
| |
| Closing net book amount | | | 34 | | | | 193 | | | | 87 | | | | 314 | |
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Group | |
| | | Owner-occupied | | | Office fixtures | | | Computer | | | | |
| | | properties | | | and equipment | | | software | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Cost: | | | | | | | | | | | | | | | | |
| At 1 January 2004 | | | 101 | | | | 982 | | | | 357 | | | | 1,440 | |
| Disposal of subsidiary undertakings (Note 23) | | | — | | | | (7 | ) | | | — | | | | (7 | ) |
| Additions | | | 6 | | | | 84 | | | | 25 | | | | 115 | |
| Disposals | | | (7 | ) | | | (41 | ) | | | (117 | ) | | | (165 | ) |
| Transfers from (to) investment property | | | (50 | ) | | | — | | | | — | | | | (50 | ) |
| |
| At 31 December 2004 | | | 50 | | | | 1,018 | | | | 265 | | | | 1,333 | |
| |
Accumulated depreciation: | | | | | | | | | | | | | | | | |
| At 1 January 2004 | | | 11 | | | | 748 | | | | 240 | | | | 999 | |
| Disposal of subsidiary undertakings | | | — | | | | (6 | ) | | | — | | | | (6 | ) |
| Depreciation charge for the year | | | 3 | | | | 78 | | | | 68 | | | | 149 | |
| Impairment charge | | | 14 | | | | — | | | | 48 | | | | 62 | |
| Disposals | | | (16 | ) | | | (16 | ) | | | (99 | ) | | | (131 | ) |
| Transfers to investment property | | | (2 | ) | | | — | | | | — | | | | (2 | ) |
| |
| At 31 December 2004 | | | 10 | | | | 804 | | | | 257 | | | | 1,071 | |
| |
| Closing net book amount | | | 40 | | | | 214 | | | | 8 | | | | 262 | |
| |
In 2004 Abbey reviewed its computer software for impairments. The net book valuemajority of Other premises comprises:amounts previously capitalised were disposed/impaired following the Banco Santander Central Hispano, S.A. acquisition.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Freeholds | | | 7 | | | | 9 | | | | — | | | | 1 | |
| Long leaseholds | | | 3 | | | | 5 | | | | 1 | | | | 1 | |
| Short leaseholds | | | 22 | | | | 20 | | | | 22 | | | | 17 | |
| |
| Net book value at 31 December | | | 32 | | | | 34 | | | | 23 | | | | 19 | |
| Of which occupied for own use | | | 29 | | | | 32 | | | | 23 | | | | 19 | |
| |
| The net book value of Other premises includes: | | | | | | | | | | | | | | | | |
| Assets held under finance leases | | | — | | | | 1 | | | | — | | | | 1 | |
| Depreciation charge for the year on these assets | | | — | | | | 3 | | | | — | | | | 3 | |
| Capital expenditure which has been contracted, but not provided for in the financial statements | | | 13 | | | | 38 | | | | 13 | | | | 38 | |
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Computer | |
| | | Owner-occupied | | | Office fixtures | | | Computer | | | | |
| | | properties | | | and equipment | | | software | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Cost: | | | | | | | | | | | | | | | | |
| At 1 January 2005 | | | 31 | | | | 991 | | | | 115 | | | | 1,137 | |
| Additions | | | 12 | | | | 89 | | | | 84 | | | | 185 | |
| Disposals | | | (5 | ) | | | (63 | ) | | | — | | | | (68 | ) |
| |
| At 31 December 2005 | | | 38 | | | | 1,017 | | | | 199 | | | | 1,254 | |
| |
Accumulated depreciation: | | | | | | | | | | | | | | | | |
| At 1 January 2005 | | | 7 | | | | 789 | | | | 110 | | | | 906 | |
| Depreciation charge | | | 3 | | | | 60 | | | | 3 | | | | 66 | |
| Disposals | | | (1 | ) | | | (15 | ) | | | — | | | | (16 | ) |
| |
| At 31 December 2005 | | | 9 | | | | 834 | | | | 113 | | | | 956 | |
| |
| Closing net book amount | | | 29 | | | | 183 | | | | 86 | | | | 298 | |
| |
131
27.Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Computer | |
| | | Owner-occupied | | | Office fixtures | | | Computer | | | | |
| | | properties | | | and equipment | | | software | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Cost: | | | | | | | | | | | | | | | | |
| At 1 January 2004 | | | 24 | | | | 945 | | | | 203 | | | | 1,172 | |
| Additions | | | 9 | | | | 82 | | | | 23 | | | | 114 | |
| Disposals | | | (2 | ) | | | (36 | ) | | | (111 | ) | | | (149 | ) |
| |
| At 31 December 2004 | | | 31 | | | | 991 | | | | 115 | | | | 1,137 | |
| |
Accumulated depreciation: | | | | | | | | | | | | | | | | |
| At 1 January 2004 | | | 4 | | | | 726 | | | | 139 | | | | 869 | |
| Depreciation charge | | | 3 | | | | 75 | | | | 37 | | | | 115 | |
| Impairment charge | | | — | | | | — | | | | 29 | | | | 29 | |
| Disposals | | | — | | | | (12 | ) | | | (95 | ) | | | (107 | ) |
| |
| At 31 December 2004 | | | 7 | | | | 789 | | | | 110 | | | | 906 | |
| |
| Closing net book amount | | | 24 | | | | 202 | | | | 5 | | | | 231 | |
| |
Depreciation expense of £72m (2004: £81m) has been charged in Administration expenses.
At 31 December 2005 capital expenditure contracted, but not provided for was £17m (2004: £13m) in respect of property, plant and equipment.
28. Operating lease assets
| | | | | | | | | |
| | | | | | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
Cost | | | | | | | | |
| At 1 January | | | 3,275 | | | | 3,763 | |
| Additions | | | 139 | | | | 316 | |
| Disposals | | | (162 | ) | | | (804 | ) |
| |
| At 31 December | | | 3,252 | | | | 3,275 | |
| |
Depreciation and impairment | | | | | | | | |
| At 1 January | | | 1,000 | | | | 1,325 | |
| Charge for the year | | | 123 | | | | 160 | |
| Impairment charge | | | — | | | | 22 | |
| Disposals | | | (43 | ) | | | (507 | ) |
| |
| At 31 December | | | 1,080 | | | | 1,000 | |
| |
| Closing net book amount | | | 2,172 | | | | 2,275 | |
| |
Future minimum lease receipts under non-cancellable operating leases are due over the following periods:
| | | | | | | | | |
| | | | | | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| In no more than 1 year | | | 253 | | | | 292 | |
| In more than 1 year but no more than 5 years | | | 581 | | | | 735 | |
| In more than 5 years | | | 286 | | | | 366 | |
| |
| | | | 1,120 | | | | 1,393 | |
| |
| Contingent rents recognised as income | | | — | | | | — | |
| |
| Capital expenditure which has been contracted, but not provided for in the financial statements | | | 81 | | | | 267 | |
| |
The operating lease assets of the Group mainly consist of trains.
The amounts disclosed above relate to the Group. The Company does not have any operating lease assets.
132
Financial Statements
Notes to the Financial Statementscontinued
29. Investment property
| | | | | |
| | | Group | |
| | | £m | |
| |
CostFair Value | | | | |
| At 1 January 2005 | | | 1,228 | |
| Net gain/(losses) from fair value adjustments | | | (127 | ) |
| Disposals | | | (1,101 | ) |
|
At 31 December 2005 | | | — | |
|
| At 1 January 2004 | | | 3,7631,345 | |
| Additions | | | 31635 | |
| Capitalised expenditure on existing properties | | | 2 | |
| Net gain from fair value adjustments | | | 96 | |
| Disposals | | | (766241 | ) |
| Retrospective IFRS adjustment | | | (9 | ) |
| |
| At 31 December 2004 | | | 3,312 | |
|
Depreciation and impairment | | | | |
At 1 January 2004 | | | 1,234 | |
Charge for the year | | | 151 | |
Disposals | | | (413 | ) |
|
At 31 December 2004 | | | 971 | |
|
Net book value | | | | |
At 31 December 2004 | | | 2,341 | |
At 31 December 2003 | | | 2,5291,228 | |
| |
In 2005, following a review of the investment strategy for the with-profit funds, management decided to stop investing in direct holdings of investment property. Consequently, the entire portfolio of investment property was sold to third parties.
30. Deferred tax
Deferred income taxes are calculated on temporary differences under the liability method using an effective tax rate of 30% (2004: 30%).
The net book value of operating leasemovement on the deferred tax account is as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January | | | (563 | ) | | | (844 | ) | | | 494 | | | | 409 | |
| Tax effect of adopting IAS 32, IAS 39 and IFRS 4 | | | 136 | | | | — | | | | 146 | | | | — | |
| Income statement charge | | | 12 | | | | 56 | | | | 17 | | | | 61 | |
| Charged to equity | | | 46 | | | | 30 | | | | 45 | | | | 24 | |
| Disposal of subsidiary undertaking | | | 279 | | | | 195 | | | | — | | | | — | |
| |
At 31 December | | | (90 | ) | | | (563 | ) | | | 702 | | | | 494 | |
| |
Deferred tax assets includes residual values at the end of current lease terms, which will be recovered through reletting or disposal inand liabilities are attributable to the following periods:items:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| In not more than 1 year | | | 87 | | | | 493 | |
| In more than 1 year but not more than 2 years | | | 364 | | | | 102 | |
| In more than 2 years but not more than 5 years | | | 347 | | | | 432 | |
| In more than 5 years | | | 1,312 | | | | 1,223 | |
| |
| | | | 2,110 | | | | 2,250 | |
| |
| Capital expenditure which has been contracted, but not provided for in the financial statements | | | 267 | | | | 324 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | 3m | |
| |
Deferred tax liabilities | | | | | | | | | | | | | | | | |
| Accelerated tax depreciation | | | (489 | ) | | | (383 | ) | | | — | | | | — | |
| Capital allowances on finance lease receivables | | | — | | | | (335 | ) | | | — | | | | — | |
| Other temporary differences | | | (397 | ) | | | (346 | ) | | | — | | | | — | |
| |
| | | | (886 | ) | | | (1,064 | ) | | | — | | | | — | |
| |
Deferred tax assets | | | | | | | | | | | | | | | | |
| Pensions and other post retirement benefits | | | 414 | | | | 359 | | | | 372 | | | | 318 | |
| Accelerated book depreciation | | | 35 | | | | 68 | | | | 24 | | | | 61 | |
| IAS 32 & IAS 39 transitional adjustments spreading | | | 108 | | | | — | | | | 146 | | | | — | |
| Other temporary differences | | | 150 | | | | 74 | | | | 71 | | | | 115 | |
| Tax losses carried forward | | | 89 | | | | — | | | | 89 | | | | — | |
| |
| | | | 796 | | | | 501 | | | | 702 | | | | 494 | |
| |
The aggregate current and deferred tax relating to items charged or credited to equity is:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Deferred tax relating to pensions and other post retirement benefits | | | 398 | | | | 352 | | | | 363 | | | | 318 | |
| |
The deferred tax assets scheduled above have been recognised in both the Company and the Group on the evidence of future taxable profits forecast within the foreseeable future sufficient to allow for the utilisation of the assets as they reverse. The benefit of the tax losses carried forward in Abbey National plc may only be realised by utilisation against the future taxable profits of the Company.
28. Other assets
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Foreign exchange, interest rate, equity & credit contracts: | | | | | | | | | | | | | | | | |
| Positive market value of trading derivative contracts (note 51) | | | 2,377 | | | | 1,643 | | | | — | | | | — | |
| Translation differences on foreign exchange derivatives used for hedging purposes | | | 214 | | | | 209 | | | | — | | | | — | |
| Debtors and other settlement balances | | | 915 | | | | 909 | | | | 147 | | | | 213 | |
| Introducer fees | | | 22 | | | | 80 | | | | 6 | | | | 8 | |
| Deferred tax asset (note 37) | | | — | | | | | | | | 160 | | | | 122 | |
| Other | | | 1,133 | | | | 1,321 | | | | 980 | | | | 658 | |
| |
| | | | 4,661 | | | | 4,162 | | | | 1,293 | | | | 1,001 | |
| |
129133
Notes to the Financial Statementscontinued
29. Prepayments
The deferred tax charge in the income statement comprises the following temporary differences:
| | | | | | | | | |
| | | | | | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Accelerated tax depreciation | | | (83 | ) | | | 21 | |
| Pensions and other post-retirement benefits | | | 7 | | | | — | |
| Allowances for loan losses | | | — | | | | (23 | ) |
| Other provisions | | | (1 | ) | | | (1 | ) |
| Tax loss carry forwards | | | 89 | | | | — | |
| Other temporary differences | | | — | | | | 59 | |
| |
| | | | 12 | | | | 56 | |
| |
At the balance sheet date the aggregate amount of the temporary differences associated with undistributed earnings of subsidiaries for which deferred tax liabilities have not been recognised is £69m (2004: £59m). No liability has been recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and accrued incomeit is probable that such differences will not reverse in the future.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Accrued interest due from subsidiaries | | | — | | | | — | | | | 46 | | | | 88 | |
| Unamortised lending-related fees (see note 3) | | | 63 | | | | 125 | | | | 64 | | | | 125 | |
| Other accrued interest | | | 812 | | | | 831 | | | | 187 | | | | 197 | |
| Prepayments and other accruals | | | 320 | | | | 274 | | | | 82 | | | | 91 | |
| |
| | | | 1,195 | | | | 1,230 | | | | 379 | | | | 501 | |
| |
31. Other accrued interest includes interest on dealing assets.
assets
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Trade & other receivables | | | 1,749 | | | | 2,549 | | | | 404 | | | | 1,172 | |
| Prepayments | | | 336 | | | | 389 | | | | 37 | | | | 146 | |
| Accrued interest | | | — | | | | 812 | | | | — | | | | 187 | |
| Accrued income | | | 9 | | | | 270 | | | | — | | | | — | |
| Reinsurance assets | | | 1,292 | | | | 1,961 | | | | — | | | | — | |
| Insurance assets and other receivables | | | 617 | | | | 186 | | | | 112 | | | | — | |
| Translation differences on foreign exchange derivatives used for hedging purposes | | | — | | | | 214 | | | | — | | | | — | |
| |
| Total other assets | | | 4,003 | | | | 6,381 | | | | 553 | | | | 1,505 | |
| |
30. Assets subject to sale and repurchase transactions| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities | | | 457 | | | | 1,968 | | | | — | | | | — | |
| |
The above amounts are the assets held under sale and repurchase transactions included within the amounts disclosed in note 19, Debt securities.
31.32. Deposits by banks
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | | Company | | | Group | | Company | |
| | | 2004 | | 2003 | | 2004 | | 2003 | | | 2005 | | 2004 | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | |
| | Items in the course of transmission | | 161 | | 204 | | 161 | | 191 | | | 248 | | 161 | | 242 | | 161 | |
| Amounts due to subsidiaries | | — | | — | | 15,536 | | 18,589 | | |
| Sale and repurchase agreements | | 6,592 | | 9,390 | | — | | — | | | — | | 6,592 | | — | | — | |
| Other deposits | | 11,659 | | 12,531 | | — | | — | | | 5,369 | | 11,659 | | 48,025 | | 35,536 | |
| Total deposits by banks | | | 5,617 | | 18,412 | | 48,267 | | 35,697 | |
| | | 18,412 | | 22,125 | | 15,697 | | 18,780 | | |
| | | |
| Repayable: | | |
| On demand | | 1,166 | | 5,422 | | 2 | | 372 | | | 845 | | 1,166 | | 19,490 | | 2 | |
| In not more than 3 months | | 15,343 | | 14,766 | | 13,565 | | 17,480 | | | 4,767 | | 15,343 | | 3,921 | | 13,565 | |
| In more than 3 months but not more than 1 year | | 874 | | 1,502 | | 639 | | 58 | | | 3 | | 874 | | 182 | | 639 | |
| In more than 1 year but not more than 5 years | | 316 | | 18 | | 342 | | — | | | — | | 316 | | 24,672 | | 20,342 | |
| In more than 5 years | | 713 | | 417 | | 1,149 | | 870 | | | 2 | | 713 | | 2 | | 1,149 | |
| | | | 18,412 | | 22,125 | | 15,697 | | 18,780 | | | 5,617 | | 18,412 | | 48,267 | | 35,697 | |
| | Banking business | | 8,578 | | 1,178 | | 15,697 | | 18,780 | | |
| Trading business | | 9,834 | | 20,947 | | — | | — | | |
| | |
| | | 18,412 | | 22,125 | | 15,697 | | 18,780 | | |
| | |
32. Customer accounts33. Deposits by Customers
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Retail deposits | | | 61,887 | | | | 60,534 | | | | 52,919 | | | | 51,469 | |
| Amounts due to subsidiaries | | | — | | | | — | | | | 10,394 | | | | 3,886 | |
| Sale and repurchase agreements | | | 7,843 | | | | 4,602 | | | | — | | | | — | |
| Other customer accounts | | | 9,120 | | | | 9,265 | | | | 2,597 | | | | 2,545 | |
| |
| | | | 78,850 | | | | 74,401 | | | | 65,910 | | | | 57,900 | |
| |
| Repayable: | | | | | | | | | | | | | | | | |
| On demand | | | 52,746 | | | | 46,847 | | | | 57,990 | | | | 43,404 | |
| In not more than 3 months | | | 21,293 | | | | 21,900 | | | | 7,184 | | | | 13,526 | |
| In more than 3 months but not more than 1 year | | | 2,116 | | | | 2,820 | | | | 52 | | | | 77 | |
| In more than 1 year but not more than 5 years | | | 1,097 | | | | 641 | | | | 54 | | | | 27 | |
| In more than 5 years | | | 1,598 | | | | 2,193 | | | | 630 | | | | 866 | |
| |
| | | | 78,850 | | | | 74,401 | | | | 65,910 | | | | 57,900 | |
| |
| Banking business | | | 69,348 | | | | 63,638 | | | | 65,910 | | | | 57,900 | |
| Trading business | | | 9,502 | | | | 10,763 | | | | — | | | | — | |
| |
| | | | 78,850 | | | | 74,401 | | | | 65,910 | | | | 57,900 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Retail deposits | | | 62,775 | | | | 61,697 | | | | 56,074 | | | | 52,919 | |
| Sale and repurchase agreements | | | — | | | | 7,843 | | | | — | | | | — | |
| Amounts due to subsidiaries | | | — | | | | — | | | | 22,125 | | | | 10,394 | |
| Wholesale customer accounts | | | 3,114 | | | | 9,120 | | | | 1,089 | | | | 2,597 | |
| |
Total deposits by customers | | | 65,889 | | | | 78,660 | | | | 79,288 | | | | 65,910 | |
| |
| | | | | | | | | | | | | | | | | |
| Repayable: | | | | | | | | | | | | | | | | |
| In no more than 3 months | | | 62,531 | | | | 73,849 | | | | 64,535 | | | | 65,174 | |
| In more than 3 months but no more than 1 year | | | 2,464 | | | | 2,116 | | | | 1,017 | | | | 52 | |
| In more than 1 year but no more than 5 years | | | 546 | | | | 1,097 | | | | 2,047 | | | | 54 | |
| In more than 5 years | | | 348 | | | | 1,598 | | | | 11,689 | | | | 630 | |
| |
| | | | 65,889 | | | | 78,660 | | | | 79,288 | | | | 65,910 | |
| |
Included in Group and Company customer accounts are amounts due to associated undertakings of £nil (2003: £15m) and £nil (2003: £15m), respectively.
130
Financial Statements
Notes to the Financial Statementscontinued
Contracts involving the receipt of cash on which customers receivereceived an index-linkedindex linked return are accounted for in substance as equity index-linkedindex linked deposits. The current market value of the contract is reported within Other customer accounts.
33. Debt securities in issue
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Book | | | Market | | | Book | | | Market | |
| | | value | | | value | | | value | | | value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Bonds and medium-term notes | | | 13,015 | | | | 14,397 | | | | 14,939 | | | | 14,996 | |
| Other debt securities in issue | | | 8,954 | | | | 8,917 | | | | 9,895 | | | | 9,897 | |
| |
| | | | 21,969 | | | | 23,314 | | | | 24,834 | | | | 24,893 | |
| |
The market values for medium and long-term debt securities in issue have been determined using quoted market prices where reliable prices are available. In other cases, market values have been determined using in-house pricing models, or stated at amortised cost.
| | | | | | | | | |
| | | Company | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Bonds and medium-term notes | | | — | | | | — | |
| Other debt securities in issue | | | 4 | | | | 4 | |
| |
| | | | 4 | | | | 4 | |
| |
Bonds and medium-term notes are repayable:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| In not more than 3 months | | | 410 | | | | 4,295 | | | | — | | | | — | |
| In more than 3 months but not more than 1 year | | | 2,060 | | | | 1,742 | | | | — | | | | — | |
| In more than 1 year but not more than 2 years | | | 4,468 | | | | 2,095 | | | | — | | | | — | |
| In more than 2 years but not more than 5 years | | | 4,688 | | | | 4,391 | | | | — | | | | — | |
| In more than 5 years | | | 1,389 | | | | 2,416 | | | | — | | | | — | |
| |
| | | | 13,015 | | | | 14,939 | | | | — | | | | — | |
| |
Other debt securities in issue are repayable:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| In not more than 3 months | | | 5,369 | | | | 5,114 | | | | — | | | | — | |
| In more than 3 months but not more than 1 year | | | 3,215 | | | | 3,573 | | | | — | | | | — | |
| In more than 1 year but not more than 2 years | | | 128 | | | | 789 | | | | 4 | | | | — | |
| In more than 2 years but not more than 5 years | | | 7 | | | | 21 | | | | — | | | | 4 | |
| In more than 5 years | | | 235 | | | | 398 | | | | — | | | | — | |
| |
| | | | 8,954 | | | | 9,895 | | | | 4 | | | | 4 | |
| |
34. Other liabilities
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Creditors and accrued expenses | | | 2,417 | | | | 2,122 | | | | 975 | | | | 1,051 | |
| |
| Short positions in government debt securities and equity shares | | | 2,715 | | | | 4,303 | | | | — | | | | — | |
| Taxation | | | 37 | | | | (5 | ) | | | (64 | ) | | | (137 | ) |
| Foreign exchange, interest rate, equity & credit contracts: | | | | | | | | | | | | | | | | |
| Negative market value of trading derivative contracts (see note 51) | | | 3,665 | | | | 4,762 | | | | — | | | | — | |
| Translation differences on foreign exchange derivatives used for hedging purposes | | | 336 | | | | 269 | | | | 199 | | | | 115 | |
| Obligations under finance leases all payable in: | | | | | | | | | | | | | | | | |
| Less than 1 year | | | — | | | | 1 | | | | 1 | | | | 1 | |
| 1 year to 5 years | | | — | | | | — | | | | — | | | | — | |
| |
| | | | 9,170 | | | | 11,452 | | | | 1,114 | | | | 1,030 | |
| |
Short positions in government debt securities are mainly held for trading liquidity and hedging purposes. The market value of short positions in debt securities and equity shares is £2,715m (2003: £4,303m).
131134
Notes to the Financial Statementscontinued
34. Trading liabilities
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Deposits by banks | | | 21,861 | | | | — | | | | — | | | | — | |
| Deposits by customers | | | 9,591 | | | | — | | | | — | | | | — | |
| Short positions in securities | | | 7,629 | | | | — | | | | — | | | | — | |
| Debt securities in issue | | | 13,583 | | | | — | | | | — | | | | — | |
| |
Total trading liabilities | | | 52,664 | | | | — | | | | — | | | | — | |
| |
35. AccrualsOther Financial liabilities at fair value through profit or loss
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Debt securities in issue | | | 7,948 | | | | — | | | | — | | | | — | |
| |
Total trading liabilities | | | 7,948 | | | | — | | | | — | | | | — | |
| |
Financial liabilities are designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring asset and
deferred income| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Interest due to subsidiaries | | | — | | | | — | | | | 108 | | | | 89 | |
| Other accrued interest | | | 1,578 | | | | 1,284 | | | | 886 | | | | 700 | |
| Deferred income from residential mortgage lending | | | 43 | | | | 79 | | | | — | | | | — | |
| Other deferred income | | | 108 | | | | 219 | | | | 14 | | | | 34 | |
| |
| | | | 1,729 | | | | 1,582 | | | | 1,008 | | | | 823 | |
| |
Duringliabilities or recognising the year, £37m (2003: £45m) of deferred income relating to high loan-to-value lending was taken to the profit and loss account.
Other accrued interest includes interestgains or losses on dealing liabilities.
36. Provisions for liabilities and charges
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Deferred taxation (see note 37) | | | 550 | | | | 690 | | | | — | | | | — | |
| Other provisions for liabilities and charges (see note 38) | | | 320 | | | | 146 | | | | 224 | | | | 100 | |
| |
| | | | 870 | | | | 836 | | | | 224 | | | | 100 | |
| |
37. Deferred taxation
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Tax effect of timing differences due to: | | | | | | | | | | | | | | | | |
| Excess of capital allowances over depreciation | | | (68 | ) | | | (64 | ) | | | (60 | ) | | | (54 | ) |
| Other | | | (75 | ) | | | (98 | ) | | | (100 | ) | | | (68 | ) |
| Capital allowances on finance lease receivables | | | 693 | | | | 852 | | | | — | | | | — | |
| |
| | | | 550 | | | | 690 | | | | (160 | ) | | | (122 | ) |
| |
| | | | | | | | | |
| | | Group | | | Company | |
| | | £m | | | £m | |
| |
| At 1 January 2004 | | | 690 | | | | (122 | ) |
| Transfer from profit and loss account | | | 55 | | | | (38 | ) |
| Disposals of subsidiary undertakings | | | (195 | ) | | | — | |
| |
| At 31 December 2004 | | | 550 | | | | (160 | ) |
| |
| Deferred tax asset (see note 28) | | | — | | | | (160 | ) |
| Deferred tax liabilities | | | 550 | | | | — | |
| |
38. Other provisions for liabilities and charges
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | Pension and | | | | | | | | | | |
| | | other similar | | | Provisions for | | | Other provisions | | | | |
| | | obligations(1) | | | commitments(2) | | | (3) | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 7 | | | | 24 | | | | 115 | | | | 146 | |
| Transfer from profit and loss account | | | 123 | | | | 17 | | | | 201 | | | | 341 | |
| Pension contributions/provisions utilised | | | (95 | ) | | | (3 | ) | | | (58 | ) | | | (156 | ) |
| Provision reversed | | | (11 | ) | | | — | | | | — | | | | (11 | ) |
| |
| At 31 December 2004 | | | 24 | | | | 38 | | | | 258 | | | | 320 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Company | |
| | | Pension and | | | | | | | | | | |
| | | other similar | | | Provisions for | | | Other provisions | | | | |
| | | obligations(1) | | | commitments(2) | | | (3) | | | Total | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | (28 | ) | | | 20 | | | | 108 | | | | 100 | |
| Transfer from profit and loss account | | | 104 | | | | 17 | | | | 153 | | | | 274 | |
| Pension contributions/provisions utilised | | | (76 | ) | | | (6 | ) | | | (68 | ) | | | (150 | ) |
| |
| At 31 December 2004 | | | — | | | | 31 | | | | 193 | | | | 224 | |
| |
132
Financial Statements
Notes to the Financial Statementscontinued
them on a different basis. The £202m charge shown in the Profit and Loss Account in respect of provisions for contingent liabilities and commitments comprises the amounts transferred from the Profit and Loss Account and unutilised provisions reversed for provisions for commitments, pension misselling compensation and other provisions.
(1) Pension and other similar obligations
The above balance represents the difference between amounts paid to the respective pension schemes of the Group and amounts charged to the Profit and Loss Account in accordance with SSAP 24, Accounting for pension costs.
In addition to pension and other similar obligations included in the above table, a balance in respect of the pension surplus acquired with the purchase of the business of National and Provincial Building Society (N&P) is included within other assets. This balance, which was £13m (2003: £15m) at 31 December 2004, is being amortised over the remaining service lives of employees contributing to the scheme, and £2m (2003: £2m) was charged to the profit and loss account in the year ended 31 December 2004. See also note 53, ‘Retirement benefits’.
(2) Provisions for commitments
This comprises amounts in respect of committed expenditure, including amounts in respect of vacant premises.
(3) Other provisions
Other provisions principally comprise amounts in respect of litigation and related expenses and various other claims with respect to product misselling exposures.
39. Subordinated liabilities including convertible debt
| | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
Dated subordinated liabilities: | | | | | | | | |
| Subordinated guaranteed floating rate notes 2003 (US $100m) | | | | | | | | |
| Subordinated collared floating rate notes 2004 (CAN $100m) | | | — | | | | 43 | |
| 8.75% Subordinated guaranteed bond 2004 | | | — | | | | 150 | |
| 8.2% Subordinated bond 2004 (US $500m) | | | — | | | | 280 | |
| 6.69% Subordinated bond 2005 (US $750m) | | | 388 | | | | 420 | |
| 10.75% Subordinated bond 2006 | | | 100 | | | | 100 | |
| Subordinated guaranteed floating rate step-up notes 2009 (Swiss Fr 130m) | | | — | | | | 59 | |
| 5.00% Subordinated bond 2009 (€511.3m) | | | 360 | | | | 359 | |
| 4.625% Subordinated notes 2011 (€500m) | | | 352 | | | | 352 | |
| 11.50% Subordinated guaranteed bond 2017 | | | 149 | | | | 149 | |
| 10.125% Subordinated guaranteed bond 2023 | | | 149 | | | | 149 | |
| 7.57% Subordinated notes 2029 (US $1,000m) | | | 512 | | | | 554 | |
| 6.50% Subordinated notes 2030 | | | 149 | | | | 149 | |
| 7.25% Subordinated notes 2021 | | | 200 | | | | 200 | |
| Callable capped subordinated floating rate notes 2012 (US $50m) | | | 26 | | | | 28 | |
| Callable subordinated floating rate notes 2012 (US $50m) | | | 26 | | | | 28 | |
| Callable subordinated floating rate notes 2012 (€500m) | | | 352 | | | | 352 | |
| |
| | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
Undated subordinated liabilities: | | | | | | | | |
| 10.0625% Exchangeable subordinated capital securities | | | 200 | | | | 199 | |
| 7.35% Perpetual subordinated reset capital securities (US $500m) | | | 258 | | | | 279 | |
| 7.25% Perpetual subordinated capital securities (US $150m) | | | — | | | | 84 | |
| 7.10% Perpetual callable subordinated notes (US $150m) | | | — | | | | 84 | |
| 7.00% Perpetual subordinated capital securities (US $250m) | | | — | | | | 140 | |
| 6.70% Perpetual subordinated reset capital securities (US $500m) | | | 258 | | | | 279 | |
| 6.00% Step-down Perpetual callable subordinated notes (€100m) | | | 70 | | | | 71 | |
| 5.56% Subordinated guaranteed notes (YEN 15,000m) | | | 76 | | | | 79 | |
| 5.50% Subordinated guaranteed notes (YEN 5,000m) | | | 25 | | | | 26 | |
| Fixed/Floating rate subordinated notes (YEN 5,000m) | | | 25 | | | | 26 | |
| 7.50% 10 Year step-up perpetual subordinated notes | | | 322 | | | | 321 | |
| 7.50% 15 Year step-up perpetual subordinated notes | | | 425 | | | | 425 | |
| 7.38% 20 Year step-up perpetual subordinated notes | | | 173 | | | | 173 | |
| 7.13% 30 Year step-up perpetual subordinated notes | | | 279 | | | | 279 | |
| 7.13% Fixed to floating rate perpetual subordinated notes (€400m) | | | 281 | | | | 280 | |
| 7.25% Perpetual callable subordinated notes (US $400m) | | | 205 | | | | 220 | |
| |
| | | | 5,360 | | | | 6,337 | |
| |
133
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | |
| | | Company | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
Dated subordinated liabilities: | | | | | | | | |
| Subordinated floating rate notes 2003 (US $75m) | | | | | | | | |
| Subordinated floating rate notes 2004 (US $74m)* | | | — | | | | 41 | |
| Subordinated floating rate notes 2004* | | | — | | | | 150 | |
| Subordinated floating rate notes 2004 (US $500m)* | | | — | | | | 280 | |
| 6.69% Subordinated bond 2005 (US $750m) | | | 388 | | | | 420 | |
| 10.75% Subordinated bond 2006 | | | 100 | | | | 100 | |
| Subordinated floating rate notes 2009 (US $102m)* | | | — | | | | 57 | |
| Subordinated floating rate notes 2009 (€511.3m) | | | 359 | | | | 359 | |
| 4.625% Subordinated notes 2011 (€500m) | | | 352 | | | | 352 | |
| 11.59% Subordinated loan stock 2017* | | | 149 | | | | 150 | |
| 10.18% Subordinated loan stock 2023* | | | 149 | | | | 150 | |
| 7.57% Subordinated notes 2029 (US $1,000m) | | | 512 | | | | 554 | |
| 6.50% Subordinated notes 2030 | | | 149 | | | | 149 | |
| 8.96% Subordinated notes 2030 (US $1,000m)** | | | 514 | | | | 554 | |
| Callable capped subordinated floating rate notes 2012 (US $50m) | | | 26 | | | | 28 | |
| Callable subordinated floating rate notes 2012 (US $50m) | | | 26 | | | | 28 | |
| Callable subordinated floating rate notes 2012 (€500m) | | | 352 | | | | 352 | |
| |
| | | | | | | | | |
| | | Company | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
Undated subordinated liabilities: | | | | | | | | |
| 10.0625% Exchangeable subordinated capital securities | | | 200 | | | | 199 | |
| 7.35% Perpetual subordinated reset capital securities (US $500m) | | | 258 | | | | 279 | |
| 7.25% Perpetual subordinated capital securities (US $150m) | | | — | | | | 84 | |
| 7.10% Perpetual callable subordinated notes (US $150m) | | | — | | | | 84 | |
| 7.00% Perpetual subordinated capital securities (US $250m) | | | — | | | | 140 | |
| 6.70% Perpetual subordinated reset capital securities (US $500m) | | | 258 | | | | 279 | |
| 6.00% Step-down perpetual callable subordinated notes (€100m) | | | 70 | | | | 71 | |
| 5.56% Subordinated guaranteed notes (YEN 15,000m) | | | 76 | | | | 79 | |
| 5.50% Subordinated guaranteed notes (YEN 5,000m) | | | 25 | | | | 26 | |
| Fixed/Floating rate subordinated notes (YEN 5,000m) | | | 25 | | | | 26 | |
| 7.50% 10 Year step-up perpetual subordinated notes | | | 322 | | | | 321 | |
| 7.50% 15 Year step-up perpetual subordinated notes | | | 425 | | | | 425 | |
| 7.38% 20 Year step-up perpetual subordinated notes | | | 173 | | | | 173 | |
| 7.13% 30 Year step-up perpetual subordinated notes | | | 279 | | | | 279 | |
| 7.13% Fixed to floating rate perpetual subordinated notes (€400m) | | | 281 | | | | 280 | |
| 7.25% Perpetual callable subordinated notes (US $400m) | | | 205 | | | | 220 | |
| |
| | | | 5,673 | | | | 6,689 | |
| |
* | | These represent the on-lending to the Company, on a subordinated basis, of issues by subsidiary companies. |
|
** | | This represents the on-lending to the Company, on a subordinated basis, of the issue of preferred securities (see note 41). |
The subordinated floating rate notes pay a rate of interest related to the LIBOR of the currency of denomination.
�� The 10.0625% Exchangeable subordinated capital securities are exchangeable into fully paid 10.375% non-cumulative non-redeemable sterling preference shares of £1 each, at the option of Abbey. Exchange may take place on any interest payment date providing that between 30 and 60 days notice“fair value option” has been given to the holders. The holders will receive one new sterling preference share for each £1 principal amount of capital securities held. Note 42 details the rights attaching to these shares, as they are the same.
The 7.35% Perpetual subordinated reset capital securities are redeemable at par, at the option of Abbey, on 15 October 2006 and each fifth anniversary thereafter.
The 7.25% Perpetual subordinated capital securities were redeemed at par on the 15 June 2004.
The 7.10% Perpetual callable subordinated notes were redeemed at par on the 12 March 2004.
The 7.00% Perpetual subordinated capital securities were redeemed at par on the 29 April 2004.
The 6.70% Perpetual subordinated reset capital securities are redeemable at par, at the option of Abbey, on 15 June 2008 and each fifth anniversary thereafter.
The 6.00% Step-down perpetual callable subordinated notes are redeemable at par, at the option of Abbey, on each interest payment date.
The 5.56% Subordinated guaranteed notes are redeemable at par, at the option of Abbey, on 31 January 2015 and each fifth anniversary thereafter.
The 5.50% Subordinated guaranteed notes are redeemable at par, at the option of Abbey, on 27 June 2015 and each fifth anniversary thereafter.
The Fixed/Floating rate subordinated notes are redeemable at par, at the option of Abbey, on 27 December 2016 and each interest payment date anniversary thereafter.
134
Financial Statements
Notes to the Financial Statementscontinued
The 7.50% 10 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2010 and each fifth anniversary thereafter.
The 7.50% 15 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2015 and each fifth anniversary thereafter.
The 7.38% 20 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2020 and each fifth anniversary thereafter.
The 7.13% 30 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 30 September 2030 and each fifth anniversary thereafter.
The 7.13% Fixed to Floating rate perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2010 and each fifth anniversary thereafter.
The 7.25% perpetual callable subordinated notes are redeemable at par, at the option of Abbey, at any time on or after 15 August 2006.
In common with other debt securities issued by Group companies, the subordinated liabilities are redeemable in whole at the option of Abbey, on any interest payment date, in the event of certain tax changes affecting the treatment of payments of interest on the subordinated liabilities in the United Kingdom, at their principal amount together with any accrued interest.
Subordinated liabilities including convertibleused where debt securities in issue would otherwise be measured at amortised cost, and the associated derivatives used to economically hedge the risk are repayable:held at fair value.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| In 1 year or less | | | 388 | | | | 473 | | | | 388 | | | | 472 | |
| In more than 1 year but not more than 2 years | | | 100 | | | | 420 | | | | 100 | | | | 420 | |
| In more than 2 years but not more than 5 years | | | 360 | | | | 100 | | | | 360 | | | | 100 | |
| In more than 5 years | | | 1,915 | | | | 2,379 | | | | 2,228 | | | | 2,733 | |
| Undated | | | 2,597 | | | | 2,965 | | | | 2,597 | | | | 2,964 | |
| |
| | | | 5,360 | | | | 6,337 | | | | 5,673 | | | | 6,689 | |
| |
Subordinated liabilities including convertible
36. Debt securities in issue
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Bonds and medium term notes | | | 21,252 | | | | 28,113 | | | | — | | | | — | |
| Other Debt securities in issue | | | 24 | | | | 8,954 | | | | 4 | | | | 4 | |
| |
Total Debt Securities in issue | | | 21,276 | | | | 37,067 | | | | 4 | | | | 4 | |
| |
| Repayable: | | | | | | | | | | | | | | | | |
| In no more than 3 months | | | 1,075 | | | | 5,779 | | | | — | | | | — | |
| In more than 3 months but no more than 1 year | | | 2,272 | | | | 6,250 | | | | — | | | | — | |
| In more than 1 year but no more than 5 years | | | 6,955 | | | | 14,764 | | | | 4 | | | | 4 | |
| In more than 5 years | | | 10,974 | | | | 10,274 | | | | — | | | | — | |
| |
| | | | 21,276 | | | | 37,067 | | | | 4 | | | | 4 | |
| |
37. Other borrowed funds
Details of debt issued by the Group
have a market value, calculated using quoted market prices where available, of £5,656m (2003: £7,068m).at 31 December are as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| £300m Step Up Callable Perpetual Reserve Capital Instrument | | | 359 | | | | 298 | | | | 359 | | | | 298 | |
| $500 Tier One Perpetual Subordinated Debt Instruments | | | 292 | | | | 250 | | | | 292 | | | | 250 | |
| £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities | | | 182 | | | | 174 | | | | 182 | | | | 174 | |
| $1,000m Non-Cumulative Trust Preferred Securities | | | 792 | | | | — | | | | — | | | | — | |
| £325m Sterling Preference shares | | | 342 | | | | — | | | | 342 | | | | — | |
| $450m US Dollar Preference Shares | | | 277 | | | | — | | | | 277 | | | | — | |
| |
Total other borrowed funds | | | 2,244 | | | | 722 | | | | 1,452 | | | | 722 | |
| |
40. Other long-term capital instruments| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Other long-term capital instruments | | | 722 | | | | 742 | | | | 722 | | | | 742 | |
| |
Other long-term capital instruments comprise £300m Step-up Callable Perpetual Reserve Capital Instruments (RCIs), $500m tier One Perpetual Subordinated Debt Securities (Securities) and £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities (TOPICs).
£300m Step-up Callable Perpetual Reserve Capital Instruments
The Reserve Capital Instruments were issued in 2001 by Abbey National plc. Reserve Capital Instruments are redeemable by Abbey on 14 February 2026 or on each coupon payment date thereafter, subject to the prior approval of the Financial Services Authority and provided that the auditors have reported to the Trustee within the previous six months that the solvency condition is met.
The Reserve Capital Instruments bear interest at a rate of 7.037% per annum, payable annually in arrears, from 14 February 2001 to 14 February 2026. Thereafter, the reserve capital instruments will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption yield on the UK five year benchmark gilt rate.
135
Financial Statements
Notes to the Financial Statementscontinued
$500m Tier One Perpetual Subordinated Debt Securities The Securities were issued on 8 August 2002 by Abbey National plc. The Securities have no maturity date. However, Abbey National plc has the option to redeem the Securities in whole, but not in part on 15 September 2007 or on each coupon payment date thereafter.
The Securities bear interest at a rate of 7.375% per annum, payable in US dollars quarterly in arrears.
£175m Fixed/Floating Rate Tier One Preferred Income The Tier One Preferred Income Capital Securities were issued on 9 August 2002 by Abbey National plc. The Tier One Preferred Income Capital Securities are redeemable by Abbey National plc in whole but not in part on 9 February 2018 or on each coupon payment date thereafter, subject to the prior approval of the Financial Services Authority.
The Tier One Preferred Income Capital Securities bear interest at a rate of 6.984%
parper annum, payable semi-annually in arrears. From (and including) 9 February 2018, the Tier One Preferred Income Capital Securities will bear interest, at a rate reset semi-annually of 1.86% per annum above the six-month sterling LIBOR rate, payable semi-annually in arrears.
135
Financial Statements
Notes to the Financial Statementscontinued
The Reserve Capital Instruments, Securities and Tier One Preferred Income Capital Securities are not redeemable at the option of the holders and the holders do not have any rights against other Abbey Group companies. Upon the occurrence of certain tax or regulatory events, the Reserve Capital Instruments may be exchanged, their terms varied, or redeemed.
Interest payments may be deferred, but Abbey National plc may not declare or pay dividends on or redeem or repurchase any junior securities until Abbey National plc next make a scheduled payment on the Reserve Capital Instruments, Securities and Tier One Preferred Income Capital Securities.
The Reserve Capital Instruments, Securities and Tier One Preferred Income Capital Securities are unsecured securities of Abbey National plc and are subordinated to the claims of unsubordinated creditors and subordinated creditors holding Abbey National plc loan capital. Upon the winding up of Abbey National plc, the holder of each Reserve Capital Instruments, Securities and Tier One Preferred Income Capital will rank
pari passuwith the holders of the most senior class or classes of preference shares (if any) of Abbey National plc then in issue and in priority to all other Abbey shareholders.
41. Minority interests — non-equity
$1,000m Non-Cumulative Trust Preferred Securities
Abbey National First Capital BV, Abbey National Capital Trust I, Abbey National Capital Trust II, Abbey National Capital LP I and Abbey National Capital LP II are each 100% owned finance subsidiaries of Abbey National plc. Abbey National First Capital BV has registered with the Securities and Exchange Commission and issued to the public subordinated notes and medium-term notes that have been fully and unconditionally guaranteed by Abbey National plc. Abbey National Capital Trust I and Abbey National Capital Trust II have registered trust preferred securities, and Abbey National Capital LP I and Abbey National Capital LP II have registered partnership preferred securities, for issuance in the US. Abbey National Capital Trust I and Abbey National Capital Trust II each serve solely as passive vehicles holding the partnership preferred securities issued by Abbey National Capital LP I and Abbey National Capital LP II, respectively, and each has passed all the rights relating to such partnership preferred securities to the holders of the issued trust preferred securities. All of the trust preferred securities and the partnership preferred securities have been fully and unconditionally guaranteed on a subordinated basis by Abbey National plc. Abbey National Capital Trust I has issued to the public US $1,000,000,000 of 8.963% Non-Cumulative Trust Preferred Securities. There are no significant restrictions on the ability of Abbey National plc to obtain funds, by dividend or loan, from any subsidiary. After 30 June 2030, the distribution rate on the preferred securities will be at the rate of 2.825% per annum above the three-month US $ LIBOR rate for the relevant distribution period.
The preferred securities are not redeemable at the option of the holders and the holders do not have any rights against other Abbey Group companies. The partnership preferred securities may be redeemed by the partnership, in whole or in part, on 30 June 2030 and on each distribution payment date thereafter. Redemption by the partnership of the partnership preferred securities may also occur in the event of a tax or regulatory change. Generally, holders of the preferred securities will have no voting rights.
On a return of capital or on a distribution of assets on a winding up of the partnership, holders of the partnership preferred securities will be entitled to receive, for each partnership preferred security a liquidation preference of US $1,000, together with any due and accrued distributions and any additional amounts, out of the assets of the partnership available for distribution.
The preferred securities, the partnership preferred securities and the subordinated guarantees taken together will not entitle the holders to receive more than they would have been entitled to receive had they been the holders of directly issued non-cumulative, non-voting preference shares of Abbey National plc.
42. Called up share capital and share premium account
| | | | | | | | | | | | | | | | | | | | | |
| | | Ordinary shares | | | Preference | | | Preference | | | Preference | | | | |
| | | of 10 pence | | | shares of | | | shares of | | | shares of | | | | |
| | | each | | | £1 each | | | US$0.01 each | | | €0.01 each | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Authorised share capital | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2003 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| At 31 December 2004 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| |
| Issued and fully paid share capital | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2003 | | | 146 | | | | 325 | | | | — | | | | — | | | | 471 | |
| At 31 December 2004 | | | 148 | | | | 325 | | | | — | | | | — | | | | 473 | |
| |
| Share premium account | | | | | | | | | | | | | | | | | | | | |
| At 1 January 2004 | | | 1,752 | | | | 10 | | | | 297 | | | | — | | | | 2,059 | |
| Shares issued | | | 105 | | | | — | | | | — | | | | — | | | | 105 | |
| Redemptions | | | — | | | | — | | | | — | | | | — | | | | — | |
| Amortisation of issue costs | | | — | | | | — | | | | 3 | | | | — | | | | 3 | |
| Transfer from profit and loss reserve | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| |
| At 31 December 2004 | | | 1,857 | | | | 10 | | | | 297 | | | | — | | | | 2,164 | |
| |
136
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | Ordinary shares | | | Preference | | | Preference | | | Preference | | | | |
| | | of 10 pence | | | shares of | | | shares of | | | shares of | | | | |
| | | each | | | £1 each | | | US$0.01 each | | | €0.01 each | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Authorised share capital | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2002 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| At 31 December 2003 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| |
| Issued and fully paid share capital | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2002 | | | 146 | | | | 325 | | | | — | | | | — | | | | 471 | |
| At 31 December 2003 | | | 146 | | | | 325 | | | | — | | | | — | | | | 471 | |
| |
| Share premium account | | | | | | | | | | | | | | | | | | | | |
| At 1 January 2003 | | | 1,732 | | | | 9 | | | | 414 | | | | — | | | | 2,155 | |
| Shares issued | | | 20 | | | | — | | | | — | | | | — | | | | 20 | |
| Redemptions | | | — | | | | — | | | | (116 | ) | | | — | | | | (116 | ) |
| Amortisation of issue costs | | | — | | | | — | | | | (2 | ) | | | — | | | | (2 | ) |
| Transfer from profit and loss reserve | | | — | | | | — | | | | 2 | | | | — | | | | 2 | |
| |
| At 31 December 2003 | | | 1,752 | | | | 9 | | | | 298 | | | | — | | | | 2,059 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | Ordinary shares | | | Preference | | | Preference | | | Preference | | | | |
| | | of 10 pence | | | shares of | | | shares of | | | shares of | | | | |
| | | each | | | £1 each | | | US$0.01 each | | | €0.01 each | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Authorised share capital | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2001 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| At 31 December 2002 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| |
| Issued and fully paid share capital | | | | | | | | | | | | | | | | | | | | |
| At 31 December 2001 | | | 145 | | | | 325 | | | | — | | | | — | | | | 470 | |
| At 31 December 2002 | | | 146 | | | | 325 | | | | — | | | | — | | | | 471 | |
| |
| Share premium account | | | | | | | | | | | | | | | | | | | | |
| At 1 January 2002 | | | 1,627 | | | | 9 | | | | 414 | | | | — | | | | 2,050 | |
| Shares issued | | | 98 | | | | — | | | | — | | | | — | | | | 98 | |
| Capitalisation of reserves in respect of shares issued via QUEST | | | 7 | | | | — | | | | — | | | | — | | | | 7 | |
| Amortisation of issue costs | | | — | | | | — | | | | 3 | | | | — | | | | 3 | |
| Transfer from profit and loss reserve | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| |
| At 31 December 2002 | | | 1,732 | | | | 9 | | | | 414 | | | | — | | | | 2,155 | |
| |
Under the Company’s Executive, All Employee and Sharesave Schemes, employees hold options to subscribe for 17,675,567 (2003: 52,418,724) ordinary£325m Sterling Preference shares at prices ranging from 420 to 644 pence per share, exercisable up to April 2014. In addition, 17,791,398 ordinary shares were issued in lieu of cash for dividends in 2004, in accordance with the terms of the Alternative Dividend Plan.
The Qualifying Employee Share Trust operates in conjunction with the Sharesave Scheme by acquiring shares in the Company and using them to satisfy Sharesave options, by delivering the shares to the employees on payment of the option price.
The shares were all transferred by the Qualifying Employee Share Trust to participants in Abbey’s Sharesave Scheme in satisfaction of their options. The price paid by option holders, including executive Directors, was 997 pence per share (three year options), 989 pence per share (five year options) and 607 pence per share (seven year options). The Company’s contribution has been included as a capitalisation of reserves.
Abbey National plc sponsored the Abbey National ESOP Trust, a discretionary trust for the benefit of employees and former employees of the Abbey Group and the AN Employee Trust, a discretionary trust for the benefit of Directors and former Directors of Abbey National plc. The Company has provided £nil to the trustees of Abbey National ESOP Trust and £nil to the trustees of Abbey National Trust, interest free irrevocable loans and gifts of £nil and £nil respectively, to enable them to purchase Abbey National plc ordinary shares, which are used to satisfy options and share awards granted by the Company to meet its commitments arising under employee and Directors’ share schemes. Under the terms of the trusts, the trustees have waived all but a nominal dividend on the shares they hold. The cost of providing these shares, less any amounts paid by employees or Directors, is charged to the profit and loss account on a systematic basis over the relevant performance period for the employees and Directors. At 31 December 2004 and 2003 the number and value of shares held were:
| | | | | | | | | | | | | | | | | |
| | | AN ESOP Trust | | | AN Employee Trust | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Number of shares held (‘000) | | | — | | | | 7,613 | | | | — | | | | 1,530 | |
| Book value of shares held | | | — | | | | 67 | | | | — | | | | 13 | |
| Market value of shares held | | | — | | | | 40 | | | | — | | | | 8 | |
| |
137
Financial Statements
Notes to the Financial Statementscontinued
Prior to 2003 such shares were held as an asset within other assets on the balance sheet at the lower of cost and net realisable value with any impairments being taken to the profit and loss account. With the issue of UITF 38 Accounting for ESOP Trusts such shares are now held at cost and treated as treasury shares and are taken as a deduction from shareholders equity. The 2003 Profit and Loss Account and Balance Sheet have been restated accordingly.
As of 31 December 2004 there were 780 shareholders. The following tables show an analysis of their holdings:
| | | | | | | | | |
| Size of shareholding | | Shareholders | | | Number of ordinary shares of 10 pence each | |
| |
| 1-100 | �� | | — | | | | — | |
| 101-1,000 | | | — | | | | — | |
| 1,001+ | | | 1 | | | | 1,485,893,636 | |
| |
| | | | 1 | | | | 1,485,893,636 | |
| |
| | | | | | | | | | | | | | | | | |
| Size of shareholding | | Shareholders | | Preference shares of £1 each | | | Shareholders | | Preference shares of £1 each | |
| | 1-100 | | 1 | | 198 | | | 2 | | 123 | |
| 101-1,000 | | 8 | | 31,037 | | | 39 | | 28,399 | |
| 1,001+ | | 738 | | 324,968,765 | | | 1,669 | | 324,971,478 | |
| | | | 747 | | 325,000,000 | | | 1,710 | | 325,000,000 | |
|
| | | | | | | | | |
| Size of shareholding | | Shareholders | | | Preference shares of US$0.01 each | |
| |
| 1-100 | | | — | | | | — | |
| 101-1,000 | | | 28 | | | | 12,460 | |
| 1,001+ | | | 4 | | | | 17,987,540 | |
| |
| | | | 32 | | | | 18,000,000 | |
| |
Sterling preference shares
Holders of the sterling preference shares are entitled to receive a biannual non-cumulative preferential dividend payable in sterling out of the distributable profits of the Company. The rate per annum will ensure that the sum of the dividend payable on such date and the associated tax credit (as defined in the terms of the sterling preference shares) represents an annual rate of 8 5/8% per annum of the nominal amount of shares issued in 1997, and an annual rate of 10 3/8% for shares issued in 1995 and 1996. On a return of capital or on a distribution of assets on a winding up, the sterling preference shares shall rankpari passu
136
Financial Statements
Notes to the Financial Statementscontinued
with any other shares that are expressed to rank
pari passutherewith as regards participation in assets, and otherwise in priority to any other share capital of the Company.
On such a return of capital or winding up, each sterling preference share shall, out of the surplus assets of the Company available for distribution amongst the members after payment of the Company’s liabilities, carry the right to receive an amount equal to the amount paid up or credited as paid together with any premium paid on issue and the full amount of any dividend otherwise due for payment.
Other than as set out above, no sterling preference share confers any right to participate on a return of capital or a distribution of assets of the Company.
Holders of the sterling preference shares are not entitled to receive notice of or attend, speak and vote at general meetings of the Company unless the business of the meeting includes the consideration of a resolution to wind up the Company or any resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to the sterling preference shares or if the dividend on the sterling preference shares has not been paid in full for the three consecutive dividend periods immediately prior to the relevant general meeting.
In any such case, the sterling preference shareholders are entitled to receive notice of and attend the general meeting at which such resolution is proposed and will be entitled to speak and vote on such a resolution but not on any other resolution.
US dollar preference sharesDollar Preference Shares
| | | | | | | | | |
| Size of shareholding | | Shareholders | | | Preference shares of US$0.01 each | |
| |
| 1-100 | | | 1 | | | | 25 | |
| 101-1,000 | | | 26 | | | | 11,985 | |
| 1,001+ | | | 4 | | | | 17,987,990 | |
| |
| | | | 31 | | | | 18,000,000 | |
| |
Holders of the US dollar preference shares issued on 8 November 2001 are entitled to receive a quarterly non-cumulative preferential dividend payable in US dollars out of the distributable profits of the Company payable at the fixed rate of US$1.84375 per share annually (or 7.375% of the US$25 offer price).
The US dollar preference shares are redeemable, in whole or in part, at the option of Abbey at any time and from time to time after five years and one day after the date of original issue.
On a return of capital or on a distribution of assets on a winding up, the US dollar preference shares shall rank
pari passuwith any other shares that are expressed to rank
pari passutherewith as regards participation in assets, and otherwise in priority to any other share capital of the Company. On such a return of capital or winding up, each US dollar preference share shall, out of the surplus assets of the Company available for distribution amongst the members after payment of the Company’s liabilities, carry the right to receive an amount equal to $25, payable in US dollars together with any accrued and unpaid dividends at that time.
Other than as set out above, no US dollar preference share confers any right to participate in a return of capital or a distribution of assets of the Company.
Holders of the US dollar preference shares are not entitled to receive notice of or attend, speak and vote at general meetings of the Company unless the business of the meeting includes the consideration of a resolution to wind up the Company or any resolution varying, altering or abrogating any of the rights, privileges, limitations or restrictions attached to
138
Financial Statements
Notes to the Financial Statementscontinued
the US-dollar preference shares or if the dividend on the US-dollar preference shares has not been paid in full for the six consecutive quarters immediately prior to the relevant general meeting.
In any such case, the US dollar preference shareholders are entitled to receive notice of and attend the general meeting at which such resolution is proposed and will be entitled to speak and vote on such a resolution but not on any other resolution.
137
43. Reserves and profit and loss account
| | | | | | | | | |
| | | Profit and loss account | |
| | | Group | | | Company | |
| | | £m | | | £m | |
| |
| At 1 January 2004 | | | 2,527 | | | | 2,306 | |
| (Loss) retained for the financial year | | | (504 | ) | | | (862 | ) |
| Write-off of goodwill previously taken to reserves | | | 6 | | | | — | |
| Exchange differences | | | (2 | ) | | | — | |
| Transfer to share premium | | | 1 | | | | 1 | |
| Share option compensation costs taken to reserves | | | (4 | ) | | | (3 | ) |
| Transfer to treasury share reserve | | | (43 | ) | | | — | |
| |
| At 31 December 2004 | | | 1,981 | | | | 1,442 | |
| |
| | | | | | | | | |
| | | Profit and loss account | |
| | | Group | | | Company | |
| | | £m | | | £m | |
| |
| At 1 January 2003 | | | 3,650 | | | | 2,895 | |
| (Loss) retained for the financial year | | | (1,323 | ) | | | (591 | ) |
| Write-off of goodwill previously taken to reserves | | | 5 | | | | — | |
| Goodwill transferred to profit and loss account during the year | | | 190 | | | | — | |
| Exchange differences | | | (1 | ) | | | (4 | ) |
| Transfer to share premium | | | (2 | ) | | | (2 | ) |
| Share option compensation costs taken to reserves | | | 8 | | | | 8 | |
| |
| At 31 December 2003 | | | 2,527 | | | | 2,306 | |
| |
| | | | | | | | | |
| | | Profit and loss account | |
| | | Group | | | Company | |
| | | £m | | | £m | |
| |
| At 1 January 2002 | | | 4,585 | | | | 3,815 | |
| (Loss) retained for the financial year | | | (1,322 | ) | | | (921 | ) |
| Write-off of goodwill previously taken to reserves | | | 373 | | | | — | |
| Goodwill transferred to profit and loss account during the year | | | 13 | | | | — | |
| Exchange differences | | | (2 | ) | | | (2 | ) |
| Transfer from share premium | | | 3 | | | | 3 | |
| Share option compensation costs taken to reserves | | | 7 | | | | 7 | |
| Capitalised on exercise of share options issued via QUEST | | | (7 | ) | | | (7 | ) |
| |
| At 31 December 2002 | | | 3,650 | | | | 2,895 | |
| |
Exchange gains arising from foreign currency borrowings used to hedge investments in overseas Group undertakings of £2m (2003: £1m) have been taken
Financial Statements
Notes to the reservesFinancial Statementscontinued
38. Subordinated Liabilities
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Dated subordinated liabilities: | | | | | | | | | | | | | | | | |
| 6.69% Subordinated bond 2005 (US $750m) | | | — | | | | 388 | | | | — | | | | 388 | |
| 10.75% Subordinated bond 2006 | | | 105 | | | | 100 | | | | 105 | | | | 100 | |
5.00% Subordinated bond 2009 (€511.3m) | | | 381 | | | | 360 | | | | — | | | | — | |
Subordinated floating rate notes 2009 (€511.3m) | | | — | | | | — | | | | 381 | | | | 359 | |
4.625% Subordinated notes 2011 (€500m) | | | 372 | | | | 352 | | | | 372 | | | | 352 | |
| 10.125% Subordinated guaranteed bond 2023 | | | 232 | | | | 149 | | | | — | | | | — | |
| 11.50% Subordinated guaranteed bond 2017 | | | 221 | | | | 149 | | | | — | | | | — | |
| 11.59% Subordinated loan stock 2017 | | | — | | | | — | | | | 150 | | | | 149 | |
| 10.18% Subordinated loan stock 2023 | | | — | | | | — | | | | 150 | | | | 149 | |
| 7.57% Subordinated notes 2029 (US $1,000m) | | | 606 | | | | 512 | | | | 606 | | | | 512 | |
| 6.50% Subordinated notes 2030 | | | 154 | | | | 149 | | | | 154 | | | | 149 | |
| 8.9% Subordinated notes 2030 (US $1,000m) | | | — | | | | — | | | | 792 | | | | 515 | |
| 7.25% Subordinated notes 2021 | | | 200 | | | | 200 | | | | — | | | | — | |
| 5.25% Subordinated notes 2015 | | | 210 | | | | — | | | | 210 | | | | — | |
| Subordinated floating rate EURIB notes 2015 | | | 344 | | | | — | | | | 344 | | | | — | |
| Callable capped subordinated floating rate notes 2012 (US $50m) | | | 29 | | | | 26 | | | | 29 | | | | 26 | |
| Callable subordinated floating rate notes 2012 (US $50m) | | | 29 | | | | 26 | | | | 29 | | | | 26 | |
Callable subordinated floating rate notes 2012 (€500m) | | | 343 | | | | 352 | | | | 343 | | | | 352 | |
| |
| | | | 3,226 | | | | 2,763 | | | | 3,665 | | | | 3,077 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Undated subordinated liabilities: | | | | | | | | | | | | | | | | |
| 10.0625% Exchangeable subordinated capital securities | | | 204 | | | | 200 | | | | 204 | | | | 200 | |
| 7.35% Perpetual subordinated reset capital securities (US $500m) | | | 299 | | | | 258 | | | | 299 | | | | 258 | |
| 6.70% Perpetual subordinated reset capital securities (US $500m) | | | 299 | | | | 258 | | | | 299 | | | | 258 | |
6.00% Step-down Perpetual callable subordinated notes (€100m) | | | — | | | | 70 | | | | — | | | | 70 | |
| 5.56% Subordinated guaranteed notes (YEN 15,000m) | | | 119 | | | | 76 | | | | 97 | | | | 76 | |
| 5.50% Subordinated guaranteed notes (YEN 5,000m) | | | 39 | | | | 25 | | | | 32 | | | | 25 | |
| Fixed/Floating rate subordinated notes (YEN 5,000m) | | | 37 | | | | 25 | | | | 31 | | | | 25 | |
| 7.50% 10 Year step-up perpetual subordinated notes | | | 350 | | | | 322 | | | | 350 | | | | 322 | |
| 7.50% 15 Year step-up perpetual subordinated notes | | | 458 | | | | 425 | | | | 458 | | | | 425 | |
| 7.38% 20 Year step-up perpetual subordinated notes | | | 201 | | | | 173 | | | | 201 | | | | 173 | |
| 7.13% 30 Year step-up perpetual subordinated notes | | | 302 | | | | 279 | | | | 302 | | | | 279 | |
7.13% Fixed to floating rate perpetual subordinated notes (€400m) | | | 300 | | | | 281 | | | | 300 | | | | 281 | |
| 7.25% Perpetual callable subordinated notes (US $400m) | | | 239 | | | | 205 | | | | 239 | | | | 205 | |
| 8.75% Subordinated guaranteed bonds | | | 132 | | | | 124 | | | | — | | | | — | |
| |
| | | | 2,979 | | | | 2,721 | | | | 2,812 | | | | 2,597 | |
| |
| | | | 6,205 | | | | 5,484 | | | | 6,477 | | | | 5,674 | |
| |
The subordinated floating rate notes pay a rate of interest related to the LIBOR of the Groupcurrency of denomination.
The 10.0625% Exchangeable subordinated capital securities are exchangeable into fully paid 10.375% non-cumulative non-redeemable sterling preference shares of £1 each, at the option of Abbey. Exchange may take place on any interest payment date providing that between 30 and Company. These exchange movements60 days notice has been given to the holders. The holders will receive one new sterling preference share for each £1 principal amount of capital securities held. Note 37 details the rights attaching to these shares, as they are matched by corresponding exchange movementsthe same.
The 6.69% Subordinated bond was redeemed at par on the net investments19 April 2005.
The 7.35% Perpetual subordinated reset capital securities are redeemable at par, at the option of Abbey, on 15 October 2006 and each fifth anniversary thereafter.
The 6.00% Step down callable subordinated notes were redeemed at par on the 17 October 2005.
The 6.70% Perpetual subordinated reset capital securities are redeemable at par, at the option of Abbey, on 15 June 2008 and each fifth anniversary thereafter.
The 6.00% Step-down perpetual callable subordinated notes are redeemable at par, at the option of Abbey, on each interest payment date.
The 5.56% Subordinated guaranteed notes are redeemable at par, at the option of Abbey, on 31 January 2015 and each fifth anniversary thereafter.
The 5.50% Subordinated guaranteed notes are redeemable at par, at the option of Abbey, on 27 June 2015 and each fifth anniversary thereafter.
The Fixed/Floating rate subordinated notes are redeemable at par, at the option of Abbey, on 27 December 2016 and each interest payment date anniversary thereafter.
138
Financial Statements
Notes to the Financial Statementscontinued
The 7.50% 10 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2010 and each fifth anniversary thereafter.
The 7.50% 15 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2015 and each fifth anniversary thereafter.
The 7.38% 20 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2020 and each fifth anniversary thereafter.
The 7.13% 30 Year step-up perpetual subordinated notes are redeemable at par, at the option of Abbey, on 30 September 2030 and each fifth anniversary thereafter.
The 7.13% Fixed to Floating rate perpetual subordinated notes are redeemable at par, at the option of Abbey, on 28 September 2010 and each fifth anniversary thereafter.
The 7.25% perpetual callable subordinated notes are redeemable at par, at the option of Abbey, at any time on or after 15 August 2006.
In common with other debt securities issued by Group companies, the subordinated liabilities are redeemable in whole at the option of Abbey, on any interest payment date, in the
financial statementsevent of
certain tax changes affecting the
Company and exchange movementstreatment of payments of interest on the
net assets of overseas Group undertakingssubordinated liabilities in the
Group financial statements.| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Treasury shares reserve | |
| | | Non-distributable reserve | | | (restated) | |
| | | Group | | | Company | | | Group | | | Company | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 353 | | | | — | | | | (79 | ) | | | — | |
| Transfer from profit and loss account | | | (47 | ) | | | — | | | | 43 | | | | — | |
| |
| Proceeds on sale of own shares | | | — | | | | — | | | | 36 | | | | — | |
| |
| At 31 December 2004 | | | 306 | | | | — | | | | — | | | | — | |
| |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Treasury shares reserve | |
| | | Non-distributable reserve | | | (restated) | |
| | | Group | | | Company | | | Group | | | Company | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2003 | | | 153 | | | | — | | | | (79 | ) | | | — | |
| Transfer from profit and loss account | | | 200 | | | | — | | | | — | | | | — | |
| |
| At 31 December 2003 | | | 353 | | | | — | | | | (79 | ) | | | — | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| In no more than 3 months | | | — | | | | 388 | | | | — | | | | 388 | |
| In more than 3 months but no more than 1 year | | | 105 | | | | 100 | | | | 105 | | | | 100 | |
| In more than 1 year but no more than 5 years | | | 381 | | | | 360 | | | | 381 | | | | 360 | |
| In more than 5 years | | | 2,496 | | | | 2,039 | | | | 3,183 | | | | 2,229 | |
| Undated | | | 3,223 | | | | 2,597 | | | | 2,808 | | | | 2,597 | |
| |
| | | | 6,205 | | | | 5,484 | | | | 6,477 | | | | 5,674 | |
| |
39. Insurance contracts and reinsurance liabilities
a) Insurance contract liabilities
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Non-participating insurance contract liabilities | | | 9,577 | | | | 9,197 | | | | — | | | | — | |
| Participating insurance and investment contract liabilities (including unallocated surplus) | | | 11,924 | | | | 15,726 | | | | — | | | | — | |
| |
Total non-participating insurance contracts and participating
contracts, gross | | | 21,501 | | | | 24,923 | | | | — | | | | — | |
| |
Recoverable from reinsurers: | | | | | | | | | | | | | | | | |
| Non-participating insurance contract liabilities | | | 1,289 | | | | 1,956 | | | | — | | | | — | |
| Participating insurance contract liabilities | | | 3 | | | | 5 | | | | — | | | | — | |
| |
Total reinsurers’ share of insurance liabilities | | | 1,292 | | | | 1,961 | | | | — | | | | — | |
| |
| Non-participating insurance contract liabilities | | | 8,288 | | | | 7,241 | | | | — | | | | — | |
| Participating insurance and investment contract liabilities (including unallocated surplus) | | | 11,921 | | | | 15,721 | | | | — | | | | — | |
| |
Total non-participating insurance contracts and participating
contracts, net | | | 20,209 | | | | 22,962 | | | | — | | | | — | |
| |
The table below summarises the movement in insurance contract liabilities and participating investment liabilities in the year:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Participating | | | | | | | | | | | Non-participating | | | | |
| | | | | | | insurance and | | | | | | | | | | | investment | | | | |
| | | Insurance | | | investment | | | Non-participating | | | | | | | contracts | | | | |
| | | liabilities | | | contracts | | | insurance contracts | | | Total | | | (see Note 41) | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| As at 31 December 2004 | | | 24,404 | | | | — | | | | 519 | | | | 24,923 | | | | — | | | | 24,923 | |
Change in accounting policy IFRS 4/
FRS 27 | | | (21,191 | ) | | | 12,513 | | | | 8,678 | | | | — | | | | — | | | | — | |
| Change in accounting policy IAS 39 | | | (3,213 | ) | | | — | | | | — | | | | (3,213 | ) | | | 3,213 | | | | — | |
| |
| As at 1 January 2005 | | | — | | | | 12,513 | | | | 9,197 | | | | 21,710 | | | | 3,213 | | | | 24,923 | |
| Movement in year | | | — | | | | (589 | ) | | | 380 | | | | (209 | ) | | | 93 | | | | (116 | ) |
| |
| As at 31 December 2005 | | | — | | | | 11,924 | | | | 9,577 | | | | 21,501 | | | | 3,306 | | | | 24,807 | |
| |
In 2005, profits distributed from the with-profits funds to participating insurance and investment contracts amounted to £121m (2004: £124m), of which £115m (2004: £118m) was added to contract liabilities as supplemental benefits, and £6m (2004: £6m) was available for distribution to shareholders.
139
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Treasury shares reserve | |
| | | Revaluation reserve | | | Non-distributable reserve | | | (restated) | |
| | | Group | | | Company | | | Group | | | Company | | | Group | | | Company | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2002 | | | — | | | | — | | | | 416 | | | | — | | | | (43 | ) | | | — | |
| Purchase of own shares | | | — | | | | — | | | | — | | | | — | | | | (36 | ) | | | — | |
| Transfer from profit and loss account | | | — | | | | — | | | | (263 | ) | | | — | | | | — | | | | — | |
| |
| At 31 December 2002 | | | — | | | | — | | | | 153 | | | | — | | | | (79 | ) | | | — | |
| |
The non-distributable reserve representsprincipal assumptions underlying the calculation of the long-term business provision are provided below:
b) Participating insurance and investment contracts
Measurement of participating contracts
All participating contracts have been valued on a realistic basis. An analysis of the realistic liabilities is provided below:
| | | | |
| | £m | |
|
| With profits benefits reserves | | | 10,440 | |
| Future cost of contractual guarantees | | | 745 | |
| Future cost of financial options | | | 302 | |
| Other liabilities | | | 64 | |
|
Total realistic liabilities (excluding unallocated surplus) | | | 11,551 | |
|
With-profits benefits reserves are primarily calculated retrospectively on the basis of the actual experience of the fund. The cost of guarantees and financial options are calculated using a stochastic simulation methodology, with the model calibrated to the relevant financial markets as at 31 December 2005.
The base value of guarantees is calculated using a stochastic asset-liability model. The guarantee cost is derived for each guarantee bearing policy by calculating the excess of the guaranteed policyholder payout over the value of the Group’s shareholders’ interestassets backing the policy on the guarantee exercise date and discounting back.
Options are assumed to be taken up at a dynamic rate that depends on how far in or out of the money the option is under each economic scenario. Once the option is exercised, it is valued as a guarantee.
Options & Guarantees
The guarantees within the with-profits funds fall into three main categories: cash guarantees, guaranteed annuity options, and guaranteed cash options.
Guaranteed annuity options and guaranteed cash options represent the right to convert contractual benefits denominated in terms of cash into annuities and vice versa, at conversion rates guaranteed in advance, usually at inception of the policy.
For conventional with-profit business, cash guarantees constitute the minimum amount payable at maturity (or other specified date), for example in terms of guaranteed sums assured and vested bonuses declared at the valuation date, excluding discretionary terminal bonus.
For unitised with profit business, cash guarantees constitute the minimum amount payable at specified future dates in terms of the value of units allocated to the policy as at the valuation date. Such units usually have a guaranteed minimum rate of future accumulation (which may be zero, but can be higher for some older classes of business) along with a guarantee that no negative market value adjustment will be applied either on maturity or, in the long-term assurancecase of certain unitised with-profits bonds, at a specified future date or range of dates exercisable at the policyholder’s discretion. Any such guarantees applicable to future contractual premiums are also included within the calculation.
Outside the UK, with-profit funds to the extent of guarantees and options included in the terms of in-force business will not, in aggregate, have a material effect on the amount, timing or uncertainty of the life assurance businesses. company’s future cashflows.
Measurement of participating investment contracts
The treasury shares reserve represented sharesGroup cannot measure reliably the fair value of Abbey National plc that were held by Employee Share Ownership Trusts and other entitiesparticipating investment contracts.
Participating investment contracts give investors in these contracts the contractual right to receive supplemental discretionary returns through participation in the surplus arising in the with-profits fund. These supplemental discretionary returns are subject to the discretion of the Group. The Group has the discretion within the Abbey groupconstraints of companies. The treasury shares reserve no longer existsthe terms and conditions of the contract to allocate part of the surplus to the contract holders and part to the Group’s shareholders.
It is impracticable to determine the fair value of such instruments due to the winding uplack of a reliable basis to measure such supplemental discretionary returns.
Process used to decide assumptions
The assumptions that have the greatest effect on the measurement of liabilities, including options and guarantees are:
| | |
| > | | Economic Assumptions |
| | |
| > | | Persistency Rates |
| | |
| > | | Expenses |
| | |
| > | | Mortality |
| | |
| > | | Take-up rates of guarantees and options |
Economic Assumptions
For the purposes of the
Employee Share Ownership Trusts.44. Reconciliationdetermination of movements in shareholders’ funds
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Profit/(loss) attributable to shareholders | | | 80 | | | | (699 | ) | | | (231 | ) | | | (167 | ) |
| Dividends | | | (631 | ) | | | (424 | ) | | | (631 | ) | | | (424 | ) |
| |
| | | | (551 | ) | | | (1,123 | ) | | | (862 | ) | | | (591 | ) |
| Other recognised net losses relating to the year | | | (1 | ) | | | (3 | ) | | | — | | | | (6 | ) |
| Increases in ordinary share capital including share premium | | | 107 | | | | 20 | | | | 108 | | | | 20 | |
| Share option compensation costs taken to reserves | | | (4 | ) | | | 8 | | | | (3 | ) | | | 8 | |
| Redemptions of preference share capital including share premium | | | — | | | | (116 | ) | | | — | | | | (116 | ) |
| Capitalised reserves on exercise of share options | | | — | | | | — | | | | — | | | | — | |
| Goodwill written off in period | | | 6 | | | | 5 | | | | — | | | | — | |
| Goodwill transferred from profit and loss account | | | — | | | | 190 | | | | — | | | | — | |
| Proceeds on sale of own shares | | | 36 | | | | — | | | | — | | | | — | |
| |
Net reduction to shareholders’ funds | | | (407 | ) | | | (1,019 | ) | | | (757 | ) | | | (685 | ) |
| |
Shareholders’ funds at 1 January | | | 5,331 | | | | 6,350 | | | | 4,836 | | | | 5,521 | |
| |
Shareholders’ funds at 31 December | | | 4,924 | | | | 5,331 | | | | 4,079 | | | | 4,836 | |
| |
| Equity shareholders’ funds | | | 4,292 | | | | 4,699 | | | | 3,447 | | | | 4,204 | |
| Non-equity shareholders’ funds | | | 632 | | | | 632 | | | | 632 | | | | 632 | |
| |
| At 31 December | | | 4,924 | | | | 5,331 | | | | 4,079 | | | | 4,836 | |
| |
Equity shareholders’ funds comprise called up ordinary share capital, ordinary share premium account, profit and loss account and reserves.
Non-equity shareholders’ funds comprise called-up preference share capital and preference share premium account.
45. Assets and liabilities denominated in foreign currency
The aggregate amounts ofrealistic assets and liabilities, denominated in currencies other than sterling were as follows:a proprietary Economic Scenario Generator package that has been calibrated to market prices is used. For Financial Services Authority regulatory basis liabilities, economic assumptions are based on the prevailing market rates and current asset mix of each fund and include margins for prudence.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Assets | | | 21,682 | | | | 35,140 | | | | 672 | | | | 1,213 | |
| Liabilities | | | 26,567 | | | | 48,034 | | | | 1,656 | | | | 4,342 | |
| |
The
above assets and liabilities denominated in foreign currencies do not indicate Abbey’s exposure to foreign exchange risk. The Group’s foreign currency positionsmagnitude of policy lapses has a significant impact on the cost of providing guarantees, particularly of unitised with profit bond products with Market Value Adjustment (MVA). Lapses are
substantially hedged by off-balance sheet hedging instruments, or by on-balance sheet assets and liabilities denominatedalso important in the
same currency.46. Guarantees and assets pledged as collateral security
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Guarantees given by Abbey National plc of subsidiaries liabilities | | | — | | | | — | | | | 63,009 | | | | 69,487 | |
| Guarantees given to third parties | | | 756 | | | | 1,788 | | | | — | | | | — | |
| Mortgaged assets granted | | | 328 | | | | 360 | | | | — | | | | — | |
| |
| | | | 1,084 | | | | 2,148 | | | | 63,009 | | | | 69,487 | |
| |
140
Notes to the Financial Statementscontinued
and cash options where policyholders may choose to transfer the policy away from the company before the guarantee crystallises.
These rates are calculated using standard actuarial methodology, on the basis of experienced rates, with adjustments as appropriate where past experience does not capture the policy features now in force, or the prevalent economic conditions.
Expenses
Expenses are based on future budgeted levels allowing for inflation in future years.
Mortality
As with persistency rates, these assumptions are calculated in line with standard actuarial methodology, on the basis of past experience adjusted for a best estimate of how the various factors affecting the parameters may change in future — for example, mortality improvements for annuity business. Mortality assumptions, which are based on standard industry published tables, are more stable than the persistency rates.
Take-up Rates
The rate of take-up of future guarantees and options affects the quantum and timing of guaranteed payments identified above. The assumptions are determined by considering past experience and taking into account how far the options are in and out of the money, on the basis that the further the option is in the money the greater the propensity for it to be exercised by policyholders.
Change in assumptions
Expected future persistency rates of certain unitised with-profit single premium bonds have increased with a consequent reduction in the future cost of contractual guarantees.
c) Non participating insurance contracts
Measurement of contracts
The assumptions that have the greatest effect on the measurement of liabilities are:
| | |
| > | | Economic Assumptions |
| | |
| > | | Mortality and morbidity |
| | |
| > | | Expenses |
Economic Assumptions
Economic assumptions are based on the prevailing market rates and current asset mix of each fund and include margins for prudence.
Mortality and morbidity
Mortality and morbidity assumptions are calculated in line with standard actuarial methodology, on the basis of past experience adjusted for a best estimate of how the various factors affecting the parameters may change in the future — for example, mortality improvements for annuity business. A margin for prudence is also added.
A prudent assessment is made of lapse and withdrawal rates in calculating the liabilities. Withdrawals or cessation of premiums are assumed where this would lead to an increase in the long-term business provision.
Expenses
Expenses are based on future budgeted levels allowing for inflation in future years and a margin for prudence.
The level of expenses included in the valuation is based on current year expenses allowing for cost inflation.
Process used to decide assumptions
Assumptions are set by reference to publicly available market data and then validating that the current assumptions continue to reflect actual experience.
Change in assumptions
The principal changes to assumptions made since the previous year are the change in interest assumptions reflecting changes during 2005 in investment returns on assets supporting the provisions and changes to mortality rates reflecting current experience.
141
Financial Statements
Notes to the Financial Statementscontinued
Analysis of available capital
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | SPL | | | | | | | | | | | Life share- | | | | |
| | | SMA | | | With profits | | | UK Non-profits | | | Overseas life | | | holders | | | Total Life | |
| | | With profits fund | | | Fund | | | fund | | | assurance | | | Funds | | | Business | |
| 31 December 2005 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Shareholders’ funds outside fund | | | — | | | | — | | | | 1,337 | | | | 84 | | | | 1,165 | | | | 2,586 | |
| Shareholders’ funds held in fund | | | — | | | | — | | | | 1,346 | | | | 79 | | | | 1 | | | | 1,426 | |
| |
Total shareholders’ funds | | | — | | | | — | | | | 2,683 | | | | 163 | | | | 1,166 | | | | 4,012 | |
| Adjustments onto regulatory basis: | | | | | | | | | | | | | | | | | | | | | | | | |
FFA(1) | | | 184 | | | | 253 | | | | — | | | | 19 | | | | — | | | | 456 | |
| Adjustments to assets | | | (4 | ) | | | (1 | ) | | | (1,314 | ) | | | (84 | ) | | | (282 | ) | | | (1,685 | ) |
| Other qualifying capital | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Loan capital | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Restriction on loan capital | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
Total available capital resources | | | 180 | | | | 252 | | | | 1,369 | | | | 98 | | | | 884 | | | | 2,783 | |
| |
| | |
| (1) | | The fund for future appropriations represents the excess assets over liabilities in the with-profit funds calculated on a statutory basis. |
|
| (2) | | The above analysis excludes non-underwriting companies and consolidation adjustments |
|
| (3) | | The capital resources shown above are not readily transferable to other Group companies |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | SPL | | | | | | | | | | | Life share- | | | | |
| | | SMA | | | With profits | | | UK Non-profits | | | Overseas life | | | holders | | | Total Life | |
| | | With profits fund | | | Fund | | | fund | | | assurance | | | Funds | | | Business | |
| 31 December 2004 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Shareholders’ funds outside fund | | | — | | | | — | | | | 1,381 | | | | 111 | | | | 1,128 | | | | 2,620 | |
| Shareholders’ funds held in fund | | | — | | | | — | | | | 1,380 | | | | 50 | | | | — | | | | 1,430 | |
| |
Total shareholders’ funds | | | — | | | | — | | | | 2,761 | | | | 161 | | | | 1,128 | | | | 4,050 | |
| Adjustments onto regulatory basis: | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
FFA(1) | | | 86 | | | | 224 | | | | — | | | | 19 | | | | — | | | | 329 | |
| Adjustments to assets | | | (10 | ) | | | — | | | | (1,412 | ) | | | (111 | ) | | | (234 | ) | | | (1,767 | ) |
| Other qualifying capital | | | — | | | | — | | | | 125 | | | | — | | | | — | | | | 125 | |
| Loan capital | | | — | | | | 124 | | | | 200 | | | | — | | | | — | | | | 324 | |
| Restriction on loan capital | | | — | | | | (66 | ) | | | — | | | | — | | | | — | | | | (66 | ) |
| |
Total available capital resources | | | 76 | | | | 282 | | | | 1,674 | | | | 69 | | | | 894 | | | | 2,995 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | SPL | | | | | | | | | | | Life share- | | | | |
| | | SMA | | | With profits | | | UK Non-profits | | | Overseas life | | | holders | | | Total Life | |
| | | With profits fund | | | Fund | | | fund | | | assurance | | | Funds | | | Business | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| 31 December 2004 available capital resources | | | 76 | | | | 282 | | | | 1,674 | | | | 69 | | | | 894 | | | | 2,995 | |
| Changes in assumptions | | | (77 | ) | | | 11 | | | | 60 | | | | — | | | | — | | | | (6 | ) |
| Changes in management policy | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Changes in regulatory requirements | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| New business and other factors | | | 181 | | | | (41 | ) | | | (365 | ) | | | 29 | | | | (10 | ) | | | (206 | ) |
31 December 2005 available capital resources | | | 180 | | | | 252 | | | | 1,369 | | | | 98 | | | | 884 | | | | 2,783 | |
| |
Regulatory Capital Requirements
Under the Financial Services Authority Integrated Prudential Sourcebook, the capital requirements for life funds are determined from the minimum of the Pillar 1 assessment (based upon specific Financial Services Authority valuation rules) and the Pillar 2 risk based capital assessment (based upon the firm’s individual assessment of risk and controls). The Pillar 1 assessment also introduces a “twin peaks” approach for with-profit funds of greater than £500m. The non-profit fund continues to use regulatory basis as in the past. The twin peak approach requires a comparison of the minimum solvency and resilience requirements, determined in accordance with Financial Services Authority valuation rules, with the capital position calculated reflecting a realistic value of the liabilities coupled with a risk capital margin. Risk capital margin is determined from the most onerous stress test, involving adverse market and credit shock and lapse worsening happening simultaneously. It incorporates the actions management would take in the event of such changes in the market conditions.
The Pillar 2 framework requires a life insurance company to self-assess the capital appropriate to its individual risk profile as a component to the minimum capital requirement for Pillar 1. This process to establish Pillar 2 capital is called Individual Capital Assessment (‘ICA’). This assessment is open to challenge by the Financial Services Authority who may issue Individual Capital Guidance (‘ICG’) following any review, and thereby require an increase in the level of capital needed under Pillar 2.
142
Financial Statements
Notes to the Financial Statementscontinued
The offshore companies Scottish Provident International Life Assurance Limited and Scottish Mutual International Plc are subject to regulations in the Isle of Man and Ireland respectively, which are similar to the Financial Services Authority statutory solvency requirements.
Amounts have been earmarked in the Scottish Provident Non-Profit fund (£125m) and Scottish Mutual Non-Profit fund (£250m) in respect of risks arising in the respective with-profit funds as Risk Based Capital (‘RBC’). These RBC amounts will only be utilised after taking into account any management actions deemed appropriate and are not expected to be utilised on a realistic basis.
Capital sensitivity
The sensitivities of assets and liabilities to changes in market conditions, key assumptions and other variables have been carried out in the Peak 1 and Peak 2 capital assessment. There has been shown to be sufficient capital under the stochastic modelling exercise. For the Individual Capital Assessment (‘ICA’) the capital availability for each major life entity was investigated. A range of scenario and stress tests were carried out which when combined would constitute a 99.5% over one year default test. Incorporating management actions there is sufficient capital to withstand adverse scenarios.
Capital management policies
At 31 December 2005, there is sufficient available capital to cover the Financial Services Authority’s capital requirement. Most of the shareholder capital in Abbey’s life businesses is located in the shareholders funds, which are mainly held in cash and high-grade short-term debt securities. Shareholders capital in the non-profit business is invested in the same asset instruments as the assets backing the liabilities. With respect to the with-profit funds, management can take actions to prevent deterioration of capital position should such circumstance arise, in accordance with the disclosures made in the respective Principles and Practices of Financial Management (‘PPFM’) documents.
In 2004, Abbey entered into significant hedging arrangements to manage exposure to the cost of options and guarantees in the with-profit funds.
Capital independence
All life insurance legal entities within Abbey have sufficient capital on a stand-alone basis, and therefore no capital injections are expected to be needed in the future. As the companies operate as separate legal entities any transfer of capital out of any life companies would require the continued satisfaction of various regulatory capital requirements.
Intra-group capital arrangements
During 2005 a loan of £200m was made from the Scottish Provident shareholders fund to the Abbey National Scottish Mutual Assurance Holdings company, this loan is not due to be repaid until 2030.
The other capital arrangements are internal reinsurance arrangements in relation to the reinsurance of a large portion of the Scottish Mutual International with-profit business and all of the with-profit business of Abbey National Life into the Scottish Mutual with-profit fund.
Disclosures required by IFRS 4 “Insurance contracts” relating to the nature and extent of risks arising from insurance contracts may be found in the “Risk Management” section of the Business and Financial Review on pages 59 to 73, which form part of these financial statements.
40. Other liabilities
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Trade and other payables | | | 1,128 | | | | 3,439 | | | | 814 | | | | 1,308 | |
| Accrued interest | | | — | | | | 1,579 | | | | — | | | | 886 | |
| Deferred income | | | 145 | | | | 158 | | | | — | | | | 14 | |
| Reinsurance & insurance | | | 1,917 | | | | 617 | | | | — | | | | — | |
| Short positions in government debt securities and equity shares | | | — | | | | 2,715 | | | | — | | | | — | |
| Translation differences on foreign exchange derivatives used for hedging purposes | | | — | | | | 336 | | | | — | | | | 199 | |
| |
| | | | 3,190 | | | | 8,844 | | | | 814 | | | | 2,407 | |
| |
41. Investment contract liabilities
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Investment contracts (without DPF) | | | 3,306 | | | | — | | | | — | | | | — | |
| |
The related comparative value in 2004 was included within the insurance liabilities line on the balance sheet (see note 39). The related value in 2004 was £3,213m.
All investment contract liabilities have been designated by the Group as being classified as fair value through profit and loss.
The maturity value of these financial liabilities is determined by the fair value of the linked assets at maturity date. There will be no difference between the carrying amount and the maturity amount at maturity date.
143
Financial Statements
Notes to the Financial Statementscontinued
The movements in the liabilities arising from investment contracts are summarised below:
| | | | | | | | | | | | | | | | | |
| | | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2004 | | | — | | | | — | | | | — | | | | — | |
| Change in accounting policy IAS 39 | | | 3,213 | | | | — | | | | — | | | | — | |
| |
| At 1 January 2005 | | | 3,213 | | | | — | | | | — | | | | — | |
| Premiums received | | | 419 | | | | — | | | | — | | | | — | |
| Claims paid | | | (400 | ) | | | — | | | | — | | | | — | |
| Change in investment contract benefits | | | 80 | | | | — | | | | — | | | | — | |
| Sterling reserves | | | (6 | ) | | | — | | | | — | | | | — | |
| |
| | | | 3,306 | | | | — | | | | — | | | | — | |
| |
Change in investment contract benefits include deductions in respect of fees charged and policyholder investment return.
42. Provisions
| | | | | | | | | | | | | |
| | | | | | | | | | Group | |
| | | | | | | Other | | | | |
| | | Misselling(1) | | | provisions(2) | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2005 | | | 186 | | | | 116 | | | | 302 | |
| Additional provisions | | | 12 | | | | 15 | | | | 27 | |
| Provisions released | | | (2 | ) | | | (22 | ) | | | (24 | ) |
| Used during the year | | | (4 | ) | | | (48 | ) | | | (52 | ) |
| |
| At 31 December 2005 | | | 192 | | | | 61 | | | | 253 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Other | | | | |
| | | Misselling(1) | | | provisions(2) | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| Analysis of total provisions: | | | | | | | | | | | | |
| Provisions to be settled within 12 months | | | 191 | | | | 60 | | | | 251 | |
| Provisions to be settled in more than 12 months | | | 1 | | | | 1 | | | | 2 | |
| |
| | | | 192 | | | | 61 | | | | 253 | |
| |
| | | | | | | | | | | | | |
| | | | | | | | | | Company | |
| | | | | | | Other | | | | |
| | | Misselling(1) | | | provisions(2) | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2005 | | | 185 | | | | 52 | | | | 237 | |
| Additional provisions | | | 10 | | | | — | | | | 10 | |
| Provisions released | | | (2 | ) | | | (8 | ) | | | (10 | ) |
| Used during the year | | | (3 | ) | | | (32 | ) | | | (35 | ) |
| |
| At 31 December 2005 | | | 190 | | | | 12 | | | | 202 | |
| |
| | | | | | | | | | | | | |
| | | | | | | Other | | | | |
| | | Misselling(1) | | | provisions(2) | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| Analysis of total provisions: | | | | | | | | | | | | |
| Provisions to be settled within 12 months | | | 190 | | | | 12 | | | | 202 | |
| Provisions to be settled in more than 12 months | | | — | | | | — | | | | — | |
| |
| | | | 190 | | | | 12 | | | | 202 | |
| |
The £3m charge shown under other operating expenses in the income statement in respect of provisions for contingent liabilities and commitments comprises the amounts transferred from the income statement and provisions released for provisions for commitments, misselling compensation and other provisions.
(1) Misselling provision
Misselling provision comprises various claims with respect to product misselling. In calculating the misselling provision, management’s best estimate of the provision was calculated based on conclusions regarding the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case.
(2) Other provisions
Other provisions comprise amounts in respect of litigation and related expenses, restructuring expenses and other post retirement benefits and provisions for loyalty bonuses payable in certain unit trusts managed within the Life Assurance businesses.
144
Financial Statements
Notes to the Financial Statementscontinued
43. Retirement benefit obligations
Defined Contribution Pension schemes
The Group operates a number of Defined Contribution pension schemes, of which the Stakeholder scheme introduced in 2001 is the principal scheme. The scheme assets are held separately from those of the Company by an independently administered scheme.
An amount of £4m was recognised as an expense for defined contribution plans in 2005 and £4m in 2004. The amount is included in staff costs in the income statement. None of this amount was recognised in respect of key management personnel for the years ended 31 December 2005 and 31 December 2004 respectively.
Defined Benefit Pension schemes
The Group operates a number of Defined Benefit pension schemes; the Abbey National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated Bodies Pension Fund, Scottish Mutual Assurance Staff Pension Scheme, Scottish Provident Institutional Staff Pension Fund and National & Provincial Building Society Pension Fund are the principal pension schemes within the Group, covering 60% (2004: 62%) of the Group’s employees, and are all funded defined benefits schemes. All are closed schemes, and under the projected unit method, the current service cost will increase as members of the schemes reach retirement.
Formal actuarial valuations of the assets and liabilities of the schemes are carried out on a triennial basis by an independent professionally qualified actuary and valued for accounting purposes at each balance sheet date. The latest formal actuarial valuation was made as at 31 March 2005 for the Amalgamated Fund, Associated Bodies Fund, Group Pension Scheme and the National & Provincial Building Society Pension Fund, 31 December 2004 for the Scottish Provident Institution Staff Pension Fund and the Scottish Mutual Assurance Staff Pension Scheme.
Amounts recognised in the income statement:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Pension benefits | | | 160 | | | | 183 | | | | 142 | | | | 169 | |
| |
Amounts recognised in the balance sheet:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Pension schemes | | | (1,380 | ) | | | (1,197 | ) | | | (1,240 | ) | | | (1,060 | ) |
| |
The amounts recognised in the balance sheet are determined as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Present value of defined benefit obligation | | | (4,354 | ) | | | (3,686 | ) | | | (3,822 | ) | | | (3,229 | ) |
| Fair value of plan assets | | | 2,974 | | | | 2,489 | | | | 2,582 | | | | 2,169 | |
| |
| Unfunded benefit obligation | | | (1,380 | ) | | | (1,197 | ) | | | (1,240 | ) | | | (1,060 | ) |
| |
| Net liability in the balance sheet | | | (1,380 | ) | | | (1,197 | ) | | | (1,240 | ) | | | (1,060 | ) |
| |
Abbey’s pension schemes did not directly hold any equity securities of Abbey or any of its related parties at 31 December 2005 (2004: nil). In addition, Abbey does not hold insurance policies over the plans, nor has Abbey entered into any significant transactions with the plans.
The total expenses charged to the income statement are as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Current service cost | | | 102 | | | | 121 | | | | 85 | | | | 108 | |
| Past service cost | | | 21 | | | | 24 | | | | 18 | | | | 21 | |
| (Gain)/ loss on settlements or curtailments | | | — | | | | (4 | ) | | | — | | | | 2 | |
| Expected return on pension scheme assets | | | (163 | ) | | | (140 | ) | | | (136 | ) | | | (123 | ) |
| Interest cost | | | 200 | | | | 182 | | | | 175 | | | | 161 | |
| |
| Total included in staff costs | | | 160 | | | | 183 | | | | 142 | | | | 169 | |
| |
The actual return on plan assets was £445m (2004: £247m).
145
Financial Statements
Notes to the Financial Statementscontinued
Movement in the defined benefit obligations were as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Movement in the defined benefit obligation during the year: | | | | | | | | | | | | | | | | |
| Balance at 1 January | | | 3,686 | | | | 3,301 | | | | 3,229 | | | | 2,899 | |
| Current service cost | | | 102 | | | | 121 | | | | 85 | | | | 108 | |
| Interest cost | | | 200 | | | | 182 | | | | 175 | | | | 161 | |
| Employee contributions | | | 12 | | | | 14 | | | | 12 | | | | 13 | |
| Past service cost | | | 21 | | | | 24 | | | | 18 | | | | 21 | |
| Actuarial loss | | | 436 | | | | 164 | | | | 387 | | | | 133 | |
| Experience loss on scheme liabilities | | | — | | | | 13 | | | | 7 | | | | 10 | |
| Actual benefit payments | | | (103 | ) | | | (88 | ) | | | (91 | ) | | | (78 | ) |
| Settlement/curtailment | | | — | | | | (45 | ) | | | — | | | | (38 | ) |
| |
| Balance at 31 December | | | 4,354 | | | | 3,686 | | | | 3,822 | | | | 3,229 | |
| |
Movements in the present value of fair value of scheme assets during the year were as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Movement in the present value of fair value of scheme assets during the year: | | | | | | | | | | | | | | | | |
| Balance at 1 January | | | 2,489 | | | | 2,200 | | | | 2,169 | | | | 1,917 | |
| Expected return on scheme assets | | | 163 | | | | 140 | | | | 136 | | | | 123 | |
| Actuarial gain/(loss) on scheme assets | | | 282 | | | | 107 | | | | 242 | | | | 94 | |
| Company contributions paid (regular) | | | 110 | | | | 132 | | | | 96 | | | | 119 | |
| Company contributions paid (special) | | | 21 | | | | 24 | | | | 18 | | | | 21 | |
| Employee contributions | | | 12 | | | | 14 | | | | 12 | | | | 13 | |
| Settlements | | | — | | | | (40 | ) | | | — | | | | (40 | ) |
| Benefits | | | (103 | ) | | | (88 | ) | | | (91 | ) | | | (78 | ) |
| |
| Balance at 31 December | | | 2,974 | | | | 2,489 | | | | 2,582 | | | | 2,169 | |
| |
The amounts recognised in the statement of recognised income and expense for the period were:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Amounts recognised in the statement of recognised income and expense for the period | | | | | | | | | | | | | | | | |
| Experience gain / (loss) on scheme liabilities | | | — | | | | 13 | | | | 7 | | | | 10 | |
| % of Defined benefit obligation at end of period | | | 0.0 | % | | | 0.3 | % | | | 0.0 | % | | | 0.3 | % |
| Actuarial loss on scheme liabilities | | | 436 | | | | 164 | | | | 387 | | | | 133 | |
| Actuarial gain on scheme assets | | | (282 | ) | | | (107 | ) | | | (242 | ) | | | (94 | ) |
| % of scheme assets at end of period | | | 9.5 | % | | | 4.3 | % | | | 9.0 | % | | | 4.3 | % |
| |
| Total amount recognised in statement of recognised income and expense for the period | | | 154 | | | | 70 | | | | 152 | | | | 49 | |
| |
The principal actuarial assumptions used for Group and Company were as follows:
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | Nominal per | | | Nominal per | | | Nominal per | |
| | | annum | | | annum | | | annum | |
| | | % | | | % | | | % | |
| |
| To determine benefit obligations: | | | | | | | | | | | | |
| Discount rate for scheme liabilities | | | 4.85 | | | | 5.4 | | | | 5.5 | |
| General salary increase | | | 4.3 | | | | 4.3 | | | | 4.2 | |
| General price inflation | | | 2.8 | | | | 2.8 | | | | 2.7 | |
| Expected rate of pension increase | | | 2.8 | | | | 2.8 | | | | 4.2 | |
| Expected rate of return on plan assets | | | 6.5 | | | | 6.3 | | | | 6.5 | |
| |
| To determine net period benefit cost: | | | | | | | | | | | | |
| Discount rate | | | 5.4 | | | | 5.5 | | | | 5.75 | |
| Expected rate of pension increase | | | 2.8 | | | | 2.7 | | | | 2.4 | |
| Expected rate of return on plan assets | | | 6.5 | | | | 6.25 | | | | 6.5 | |
| |
Abbey determined its expense measurements above based upon long-term assumptions taking into account target asset allocations of equities and bonds set at the beginning of the year, offset by actual returns during the year. Year-end obligation measurements are determined by reference to market conditions at the balance sheet date. Assumptions are set in consultation with third party advisors, and in-house expertise.
146
Financial Statements
Notes to the Financial Statementscontinued
The trustees of the Abbey National pension schemes are required under the Pensions Act 2004 to prepare a statement of investment principles. The principal duty of the trustees is to act in the best interest of the members of the schemes and have developed the following investment policies and strategies:
| | |
| > | | To maintain a portfolio of suitable assets of appropriate liquidity which will generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future benefits which the Fund provides, as set out in the Trust Deed and Rules. |
| | |
| > | | To limit the risk of the assets failing to meet the liabilities, over the long-term and on a shorter-term basis as required by prevailing legislation. |
| | |
| > | | To minimise the long-term costs of the Fund by maximising the return on the assets whilst having regard to the objectives shown above. |
The statement of investment principles has set the target allocation of plan assets at 50% Equities, 30% Bonds and 20% gilts which is unchanged from 2004.
The expected rate of return by asset class used to calculate the expected return for 2005 are Equities 8.0% (2004: 7.25%), Bonds 5.3% (2004: 5.5%) and Gilts 4.6% (2004: 4.75%). The overall long-term rate of return on the assets employed has been determined after considering projected movements in asset indices.
The major categories of assets in the scheme as a percentage of total assets in the scheme for Group and Company are as follows:
| | | | | | | | | | | | | |
| | | 2005 | | | 2004 | | | 2003 | |
| | | % | | | % | | | % | |
| |
| UK equities | | | 26 | | | | 26 | | | | 26 | |
| Overseas equities | | | 25 | | | | 25 | | | | 26 | |
| Corporate Bonds | | | 26 | | | | 25 | | | | 26 | |
| Govt Fixed Interest | | | 12 | | | | 12 | | | | 12 | |
| Govt Index Linked | | | 10 | | | | 10 | | | | 9 | |
| Others | | | 1 | | | | 2 | | | | 1 | |
| |
| | | | 100 | | | | 100 | | | | 100 | |
| |
Abbey expects to contribute £102m to its defined benefit pension plans in 2006. The benefits expected to be paid in each of the next five years, and in the aggregate for the five years thereafter are:
| | | | | |
| Year ended 31 December: | | £m | |
| |
| 2006 | | | 111 | |
| 2007 | | | 120 | |
| 2008 | | | 129 | |
| 2009 | | | 139 | |
| 2010 | | | 149 | |
| Five years ended 31 December 2015 | | | 936 | |
| |
44. Contingent liabilities and commitments
Abbey gives guarantees on behalf of customers. These guarantees have been made in the normal course of business. A financial guarantee represents an undertaking that the Group will meet a customer’s
obligationsobligation to third parties if the customer fails to do so. The Group expects most of the guarantees it provides to expire unused.
The current carrying amount and the maximum undiscounted potential amount of future payments of third party guarantees is £756m of which £353m will be immediately recoverable in the event of liquidation.
Mortgaged
Mortgage assets granted are to secure future obligations to third parties who have provided security to the leasing subsidiaries.
47. Other contingent liabilities
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Other contingent liabilities | | | 116 | | | | 159 | | | | 8 | | | | 8 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Guarantees given by Abbey National plc to subsidiaries | | | — | | | | — | | | | 94,328 | | | | 72,764 | |
| Guarantees given to third parties | | | 172 | | | | 756 | | | | — | | | | — | |
| Mortgage assets granted | | | — | | | | 328 | | | | — | | | | — | |
| Formal standby facilities, credit lines and other commitments: | | | | | | | | | | | | | | | | |
| – Original term to maturity of one year or less | | | 1,779 | | | | 1,739 | | | | 1,769 | | | | 1,733 | |
| – Original term to maturity of more than one year | | | 1,100 | | | | 1,110 | | | | — | | | | — | |
| |
| | | | 3,051 | | | | 3,933 | | | | 96,097 | | | | 74,497 | |
| |
The principal other contingent liabilities are as follows:
Overseas tax demand
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Other contingent liabilities | | | 83 | | | | 124 | | | | 9 | | | | 8 | |
| |
| | | | 83 | | | | 124 | | | | 9 | | | | 8 | |
| |
Abbey National Treasury Services plc has received a demand from an overseas tax authority relating to the repayment of certain tax credits and related charges. Following certain modifications to the demand, its nominal amount now stands at £101m£57m (at the balance sheet exchange rate) (2003:(2004: £101m) as compared with the original demand of £113m (at the balance sheet exchange rate) (2003: £112m). As at 31 December 20042005 additional interest in relation to the demand could amount to £16m£17m (at the balance sheet exchange rate) (2003: £14m)(2004: £16m). The amount of additional interest has been reduced from the amount disclosed at 31 December 2003 of £36m due to certain modifications
147
Financial Statements
Notes to the basis on which additional interest might be due.Financial Statementscontinued
Abbey National Treasury Services plc has received legal advice that it has strong grounds to challenge the validity of the demanddemand.
As part of the sale of subsidiaries, and
accordingly no specific provisionas is normal in such circumstances, the Group has
been made.48. Commitments
given warranties and indemnities to the purchasers.
Commitments
Obligations under stock borrowing and lending agreements
Obligations under stock borrowing and lending agreements represent contractual commitments to return stock borrowed. These obligations totalling
£20,508m£21,153m at 31 December
2004 (2003: £25,649m)2005 (2004: £20,508m) are offset by a contractual right to receive stock under other contractual agreements.
Other off-balance sheet commitments The table below shows the contract or principal amount ofGroup has commitments other than those relating to derivatives (see note 51).lend at fixed interest rates which expose it to interest rate risk.
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Formal standby facilities, credit lines and other commitments to lend: | | | | | | | | | | | | | | | | |
| Less than one year | | | 1,739 | | | | 1,634 | | | | 1,733 | | | | 1,627 | |
| One year and over | | | 1,110 | | | | 1,384 | | | | — | | | | — | |
| |
| | | | 2,849 | | | | 3,018 | | | | 1,733 | | | | 1,627 | |
| |
49. Operating leaseslease commitments
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Property | | | Equipment | | | Property | | | Equipment | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Rental commitments under operating leases expiring: | | | | | | | | | | | | | | | | |
| In not more than 1 year | | | 6 | | | | 1 | | | | 22 | | | | 3 | |
| In more than 1 year but not more than 5 years | | | 23 | | | | 1 | | | | 19 | | | | 7 | |
| In more than 5 years | | | 82 | | | | — | | | | 87 | | | | — | |
| |
| | | | 111 | | | | 2 | | | | 128 | | | | 10 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Rental commitments under operating leases expiring: | | | | | | | | | | | | | | | | |
| No later than 1 year | | | 122 | | | | 130 | | | | 106 | | | | 109 | |
| Later than 1 year but no later than 5 years | | | 444 | | | | 448 | | | | 384 | | | | 392 | |
| Later than 5 years | | | 860 | | | | 922 | | | | 786 | | | | 841 | |
| |
| | | | 1,426 | | | | 1,500 | | | | 1,276 | | | | 1,342 | |
| |
141
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | |
| | | Company | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | Property | | | Equipment | | | Property | | | Equipment | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Rental commitments under operating leases expiring: | | | | | | | | | | | | | | | | |
| In not more than 1 year | | | 5 | | | | 1 | | | | 16 | | | | 3 | |
| In more than 1 year but not more than 5 years | | | 22 | | | | 1 | | | | 16 | | | | 7 | |
| In more than 5 years | | | 80 | | | | — | | | | 78 | | | | — | |
| |
| | | | 107 | | | | 2 | | | | 110 | | | | 10 | |
| |
At 31 December 2004 Abbey2005 the Group held various leases on land and buildings, many for extended periods, and other leases for equipment, which require the following aggregate annual rentalminimum lease payments:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Year ended 31 December: | | | | | | | | | | | | | | | | |
| 2004 | | | — | | | | 135 | | | | — | | | | 118 | |
| 2005 | | | 113 | | | | 135 | | | | 109 | | | | 118 | |
| 2006 | | | 111 | | | | 118 | | | | 108 | | | | 105 | |
| 2007 | | | 108 | | | | 112 | | | | 105 | | | | 100 | |
| 2008 | | | 96 | | | | 112 | | | | 93 | | | | 99 | |
| 2009 | | | 89 | | | | 112 | | | | 86 | | | | 100 | |
| |
| Total thereafter | | | 858 | | | | 992 | | | | 841 | | | | 957 | |
| |
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Group rental expense comprises: | | | | | | | | | | | | |
| In respect of minimum rentals | | | 118 | | | | 118 | | | | 117 | |
| Less: sub-lease rentals | | | (3 | ) | | | (3 | ) | | | (3 | ) |
| |
| | | | 115 | | | | 115 | | | | 114 | |
| |
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Year ended 31 December: | | | | | | | | | | | | | | | | |
| 2005 | | | — | | | | 130 | | | | — | | | | 109 | |
| 2006 | | | 122 | | | | 122 | | | | 106 | | | | 108 | |
| 2007 | | | 118 | | | | 119 | | | | 104 | | | | 105 | |
| 2008 | | | 118 | | | | 107 | | | | 104 | | | | 93 | |
| 2009 | | | 103 | | | | 100 | | | | 88 | | | | 86 | |
| 2010 | | | 105 | | | | n/a | | | | 88 | | | | n/a | |
| Total thereafter | | | 860 | | | | 922 | | | | 786 | | | | 841 | |
| |
| | | | | | | | | |
| | | | | | | Group | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Group rental expense comprises: | | | | | | | | |
| In respect of minimum rentals | | | 109 | | | | 117 | |
| Less: sub-lease rentals | | | — | | | | (3 | ) |
| |
| | | | 109 | | | | 114 | |
| |
The Group’s main operating lease commitments relate to operating leases on property.
45. Share capital
| | | | | | | | | |
| | | | | | | Group | |
| | | 2005 | | | 2004 | |
| Ordinary Share capital | | £m | | | £m | |
| |
| Balance at 1 January | | | 148 | | | | 146 | |
| Issue of share capital | | | — | | | | 2 | |
| |
Balance at 31 December | | | 148 | | | | 148 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | Ordinary | | | Preference | | | Preference | | | Preference | | | | |
| | | shares of 10 | | | shares of £1 | | | shares of | | | shares of | | | | |
| | | pence each | | | each | | | US$0.01 each | | | €0.01 each | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Authorised share capital
At 31 December 2004 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| |
At 31 December 2005 | | | 175 | | | | 1,000 | | | | 6 | | | | 6 | | | | 1,187 | |
| |
Issued and fully paid share capital
At 31 December 2004 | | | 148 | | | | 325 | | | | — | | | | — | | | | 473 | |
| |
At 31 December 2005 | | | 148 | | | | 325 | | | | — | | | | — | | | | 473 | |
| |
148
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | |
| | | | | | | Group | |
| | | 2005 | | | 2004 | |
| Ordinary Share premium | | £m | | | £m | |
| |
| Balance at 1 January | | | 1,857 | | | | 2,059 | |
| Issue of share capital | | | — | | | | 105 | |
| |
Balance at 31 December | | | 1,857 | | | | 2,164 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | Ordinary | | | Preference | | | Preference | | | Preference | | | | |
| | | shares of 10 | | | shares of £1 | | | shares of | | | shares of | | | | |
| | | pence each | | | each | | | US$0.01 | | | €0.01 each | | | Total | |
| | | £m | | | £m | | | each £m | | | £m | | | £m | |
| |
| Share premium account At 1 January 2004 | | | 1,752 | | | | 10 | | | | 297 | | | | — | | | | 2,059 | |
| Shares issued | | | 105 | | | | — | | | | — | | | | — | | | | 105 | |
| Amortisation of issue costs | | | — | | | | — | | | | 3 | | | | — | | | | 3 | |
| Transfers from profit and loss account | | | — | | | | — | | | | (3 | ) | | | — | | | | (3 | ) |
| |
| At 31 December 2004 | | | 1,857 | | | | 10 | | | | 297 | | | | — | | | | 2,164 | |
| |
| At 1 January 2005 | | | 1,857 | | | | 10 | | | | 297 | | | | — | | | | 2,164 | |
| Reclassification to other borrowed funds on transition to IFRS | | | — | | | | (10 | ) | | | (297 | ) | | | — | | | | (307 | ) |
| |
At 31 December 2005 | | | 1,857 | | | | — | | | | — | | | | — | | | | 1,857 | |
| |
In 2004, all preference shares were included within share capital. On transition to IAS 32, Financial Instruments: Presentation on 1 January 2005, these have been reclassified and disclosed within Other Borrowed Funds on the balance sheet (see Note 37).
46. Retained Earnings
Movements in retained earnings were as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December (UK GAAP) | | | — | | | | 2,801 | | | | — | | | | 2,305 | |
| Retrospective IFRS Adjustments | | | — | | | | (708 | ) | | | — | | | | (438 | ) |
| |
| Restated 31 December (IFRS) | | | 1,083 | | | | 2,093 | | | | 650 | | | | 1,867 | |
| Prospective IFRS adjustments | | | (293 | ) | | | — | | | | (332 | ) | | | — | |
| |
| Restated 1 January (IFRS) | | | 790 | | | | 2,093 | | | | 318 | | | | 1,867 | |
| Profit/(loss) for the period | | | 420 | | | | (54 | ) | | | 691 | | | | (284 | ) |
| Post tax actuarial movement on defined benefit pension schemes | | | (108 | ) | | | (49 | ) | | | (106 | ) | | | (34 | ) |
| Exchange differences on translation of foreign operations | | | 3 | | | | (2 | ) | | | — | | | | — | |
| Equity dividends | | | — | | | | (874 | ) | | | — | | | | (874 | ) |
| Stock option expensing | | | — | | | | (21 | ) | | | — | | | | (21 | ) |
| Other movements | | | — | | | | (10 | ) | | | — | | | | (4 | ) |
| |
| At 31 December | | | 1,105 | | | | 1,083 | | | | 903 | | | | 650 | |
| |
Breakdown of the equity dividends paid is as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Ordinary shares (equity): | | | | | | | | | | | | | | | | |
| 2003 Final | | | — | | | | 244 | | | | — | | | | 244 | |
| 2004 Interim | | | — | | | | 122 | | | | — | | | | 122 | |
| 2004 Special | | | — | | | | 461 | | | | — | | | | 461 | |
| |
| | | | — | | | | 827 | | | | — | | | | 827 | |
| Preference shares (non-equity) | | | — | | | | 47 | | | | — | | | | 47 | |
| |
| Total dividends paid | | | — | | | | 874 | | | | — | | | | 874 | |
| |
| | | | | | | | | | | | | | | | | |
| | | | | | Group | | | | | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | Pence per | | | Pence per | | | Pence per | | | Pence per | |
| | | share | | | share | | | share | | | share | |
| |
| Ordinary shares (equity): | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2003 Final | | | — | | | | 16.67 | | | | — | | | | 16.67 | |
| 2004 Interim | | | — | | | | 8.33 | | | | — | | | | 8.33 | |
| 2004 Special | | | — | | | | 31.00 | | | | — | | | | 31.00 | |
| |
| Total | | | — | | | | 56.00 | | | | — | | | | 56.00 | |
| |
149
Financial Statements
Notes to the Financial Statementscontinued
47. Consolidated cash flow statement
a) Reconciliation of profit/(loss) before tax to net cash inflow/(outflow) from operating activities:
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Group operating profit/(loss) | | | 596 | | | | (21 | ) | | | 699 | | | | (490 | ) |
| | | | | | | | | | | | | | | | | |
Non Cash items included in net profit | | | | | | | | | | | | | | | | |
| Decrease/(increase) in prepayments and accrued income | | | (306 | ) | | | 157 | | | | (203 | ) | | | (52 | ) |
| (Decrease)/increase in accruals and deferred income | | | (220 | ) | | | 588 | | | | 109 | | | | 508 | |
| Depreciation and amortisation | | | 199 | | | | 252 | | | | 66 | | | | (66 | ) |
| Profits on sale of subsidiary and associated undertakings | | | (62 | ) | | | (46 | ) | | | — | | | | — | |
| Change in value of in-force Long Term Assurance Business | | | 56 | | | | (452 | ) | | | — | | | | — | |
| Provisions for liabilities and charges | | | 3 | | | | 233 | | | | — | | | | 170 | |
| Provision for impairment | | | 218 | | | | (38 | ) | | | (296 | ) | | | 54 | |
| Other non-cash items | | | 204 | | | | (874 | ) | | | 203 | | | | (580 | ) |
| |
| | | | 688 | | | | (201 | ) | | | 578 | | | | (456 | ) |
| |
| | | | | | | | | | | | | | | | | |
Changes in operating assets and liabilities | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Net decrease/(increase) in trading assets | | | (5,651 | ) | | | — | | | | — | | | | — | |
| Movement in fair value of derivatives | | | (2,006 | ) | | | (1,821 | ) | | | (347 | ) | | | — | |
| Net decrease/(increase) in financial assets designated at fair value | | | (2,859 | ) | | | — | | | | (79 | ) | | | — | |
| Net decrease/(increase) in loans and advances to banks and customers | | | (2,260 | ) | | | (653 | ) | | | (8,232 | ) | | | (4,472 | ) |
| Net decrease/(increase) in debt securities, treasury bills and other eligible bills | | | — | | | | 1,451 | | | | — | | | | — | |
| Net decrease/(increase) in other assets | | | 2,653 | | | | 346 | | | | 943 | | | | 84 | |
| Net decrease/(increase) in deferred acquisition costs | | | 67 | | | | — | | | | — | | | | — | |
| Net (decrease)/increase in deposits by banks and customer accounts | | | (6,258 | ) | | | 850 | | | | 2,894 | | | | 9,212 | |
| Net (decrease)/increase in trading liabilities | | | 13,509 | | | | — | | | | — | | | | — | |
| Net (decrease)/increase in financial liabilities designated at fair value | | | 21 | | | | — | | | | — | | | | — | |
| Net (decrease)/increase in insurance contract liabilities | | | (231 | ) | | | (1,279 | ) | | | — | | | | — | |
| Net (decrease)/increase in investment contract liabilities | | | 93 | | | | — | | | | — | | | | — | |
| Net (decrease)/increase in debt issued | | | 1,145 | | | | (1,414 | ) | | | 1 | | | | — | |
| Net (decrease)/increase in other liabilities | | | (4,009 | ) | | | (2,098 | ) | | | (1,580 | ) | | | 187 | |
| |
Net cash flow from / (Used in) operating activities before tax | | | (5,098 | ) | | | (4,819 | ) | | | (5,822 | ) | | | 4,555 | |
| |
| Income tax paid | | | (132 | ) | | | (12 | ) | | | (8 | ) | | | 2 | |
| |
Net cash flow from / (used in) operating activities | | | (5,230 | ) | | | (4,831 | ) | | | (5,830 | ) | | | 4,557 | |
| |
b) Analysis of the balances of cash and cash equivalents in the balance sheet
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Cash and balances with central banks | | | 991 | | | | 454 | | | | 370 | | | | 443 | |
| Debt securities | | | 16,117 | | | | 12,215 | | | | — | | | | — | |
| Net trading other cash equivalents | | | (5,175 | ) | | | 3,282 | | | | — | | | | — | |
| Net non trading other cash equivalents | | | (3,692 | ) | | | (4,692 | ) | | | (15,454 | ) | | | (9,961 | ) |
| |
Cash and cash equivalents at the end of the year | | | 8,241 | | | | 11,259 | | | | (15,084 | ) | | | (9,518 | ) |
| |
150
Financial Statements
Notes to the Financial Statementscontinued
c) Sale of subsidiaries, associates undertakings and businesses
| | | | | | | | | | | | | | | | | |
| | | Group | | Company | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Net asset disposed of: | | | | | | | | | | | | | | | | |
| Loans and advances to banks | | | — | | | | 9 | | | | — | | | | — | |
| Loans and advances to customers | | | 1,092 | | | | 3,772 | | | | — | | | | — | |
| Investment securities | | | — | | | | 6 | | | | — | | | | — | |
| Tangible fixed assets | | | — | | | | 1 | | | | — | | | | — | |
| Other assets | | | 20 | | | | 36 | | | | — | | | | — | |
| Prepayments and accrued income | | | — | | | | 2 | | | | — | | | | — | |
| Deposits by banks | | | — | | | | (386 | ) | | | — | | | | — | |
| Other liabilities | | | (329 | ) | | | (107 | ) | | | — | | | | — | |
| Accruals and deferred income | | | — | | | | (17 | ) | | | — | | | | — | |
| Provisions for liabilities and charges | | | — | | | | (194 | ) | | | — | | | | — | |
| Goodwill disposed off | | | — | | | | 6 | | | | — | | | | — | |
| Goodwill written back | | | — | | | | 6 | | | | — | | | | — | |
| Profit on disposal | | | 62 | | | | 46 | | | | — | | | | — | |
| |
| | | | 845 | | | | 3,180 | | | | — | | | | — | |
| |
| | | | | | | | | | | | | | | | | |
| Satisfied by: | | | | | | | | | | | | | | | | |
| Cash | | | 845 | | | | 3,180 | | | | — | | | | — | |
| |
48. Collateral pledged and received
Abbey and its subsidiaries in the course of its business will pledge assets as collateral. This occurs in the following areas of the business.
Abbey National plc (‘the Company’) enters into securitisation transactions whereby portfolios of residential mortgages loans are purchased by or assigned to special purpose securitisation companies, and have been funded primarily through the issue of mortgage backed securities. Holders of the securities are only entitled to obtain payments of principal and interest to the extent that the resources of the securitisation companies are sufficient to support such payments and the holders of the securities have agreed in writing not to seek recourse in any other form. At 31 December 2005 £13,828m of residential mortgage loans were so assigned.
In 2005, the Company also established a covered bond programme, whereby securities are issued to investors and are secured by a pool of ring fenced residential mortgages. At 31 December 2005 £1,900m of residential mortgages loans had been so secured.
Collateral is also provided by Abbey National Treasury Services plc in the normal course of its derivative business to counter parties. As at 31 December 2005 £802m of such collateral in the form of cash had been pledged.
As part of structured transactions entered into by subsidiaries of the Company, assets are provided as collateral. As at 31 December 2005 £4,021m of assets had been pledged in relation to these transactions.
A number of subsidiaries of the Company enter into sale and repurchase agreements and similar transactions, which are accounted for as secured borrowings. Upon entering into such transactions, the subsidiaries pledge collateral equal to 100%-105% of the borrowed amount. The carrying amount of assets that were so pledged at 31 December 2005 was £18,050m.
Subsidiaries of the Company also enter into purchase and resale agreements and similar transactions, which are accounted for as collateralised loans. Upon entering into such transactions, the companies receive collateral equal to 100%-105% of the loan amount. The level of collateral held is monitored daily and if required, further calls are made to ensure the market values of collateral remains equal to the loan balance. The companies are permitted to sell or repledge the collateral held. At 31 December 2005, the fair value of such collateral was £42,917m of which £42,917m was sold or repledged. The companies have an obligation to return the collateral that it has sold or pledged with a fair value of £42,917m.
49. Share-based compensation
Abbey granted share options to executive officers and employees principally under the Executive Share Option scheme, Sharesave scheme and the Employee Share Option scheme prior to being acquired by Banco Santander Central Hispano, S.A on 12 November 2004. Options granted under the Executive Share Option scheme are generally exercisable between the third and tenth anniversaries of the grant date, provided that certain performance criteria are met. Under the Sharesave scheme, eligible employees can elect to exercise their options either three, five or seven years after the grant date. These options were accounted for as equity settled share-based payments under UK GAAP. All of the share options prior to the 12 November 2004 relate to shares in Abbey National plc. After 12 November 2004, all share options relate to shares in Banco Santander Central Hispano, S.A. On 12 November 2004 all holders of options in ordinary shares of Abbey National plc were given the option to exercise their options, to cancel their shares in return for a cash payment or to transfer their options to options in shares of Banco Santander Central Hispano, S.A. The options over Banco Santander Central Hispano, S.A shares are accounted for as cash settled share-based transactions. On acquisition of Abbey by Banco Santander Central Hispano, S.A there was no fair value adjustment of options modified to rights over Banco Santander Central Hispano, S.A. shares.
The total compensation expense for equity-settled share based transactions recognised in the income statement was nil (2004: £12m). The total compensation expense for cash-settled share based transactions recognised in the income statement
151
Financial Statements
Notes to the Financial Statementscontinued
statement was £25m (2004: £29m). The total carrying amount at the end of the period for liabilities arising from share-based payment transactions was £55m (2004: £30m).
The fair value of each option for 2005 and 2004 have been estimated at the date of acquisition or grant using a Partial Differential Equation Euro American model with the following assumptions:
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| |
| Risk free interest rate | | | 4.5%-4.6 | % | | | 4.4%-4.6 | % |
| Dividend growth, based solely upon average growth since 1989 | | | 10 | % | | | 10 | % |
| Volatility of underlying shares based upon historical volatility over five years | | 16.96%-17.58 | % | | 18.0%-21.54 | % |
| Expected lives of options granted under: | | | | | | | | |
Employee Sharesave scheme* | | 3,5 & 7 years | | | 3,5 & 7 years | |
| Executive Share Option scheme | | 10 years | | | 10 years | |
| Employee Share Option scheme | | 10 years | | | 10 years | |
| Medium term incentive plan | | 3 years | | | 3 years | |
| |
| | |
| * For three, five and seven year schemes respectively. |
With the exception of those that include terms related to market conditions, vesting conditions included in the terms of the grant are not taken into account in estimating fair value. Non-market vesting conditions are taken into account by adjusting the number of shares or share options included in the measurement of the cost of the employee service so that ultimately, the amount recognised in the income statement reflects the number of vested shares or share options. Where vesting conditions are related to market conditions, the charges for the services received are recognised regardless of whether or not the market related vesting conditions are met, provided that, the non-market vesting conditions are met. Share price volatility has been based upon the range of implied volatility for the Banco Santander Central Hispano, S.A shares at the strikes and tenors in which the majority of the sensitivities lie.
The following table summarises the movement in the number of share options between those outstanding at the beginning and end of the year, together with the changes in weighted average exercise price over the same period.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Executive Share Option scheme | | | Employee Sharesave scheme | | | Employee Share Option scheme | |
| | | | | | | Weighted | | | | | | | Weighted | | | | | | | Weighted | |
| | | | | | | average | | | | | | | average | | | | | | | average | |
| | | Number of | | | exercise price | | | Number of | | | exercise price | | | Number of | | | exercise price | |
| | | options | | | (£) | | | options | | | (£) | | | options | | | (£) | |
| |
2005 | | | | | | | | | | | | | | | | | | | | | | | | |
| Options outstanding at the beginning of the year | | | 358,844 | | | | 4.16 | | | | 17,260,173 | | | | 3.56 | | | | 56,550 | | | | 5.91 | |
| Options granted during the year | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Options exercised during the year | | | (89,305 | ) | | | 4.43 | | | | (1,677,361 | ) | | | 4.45 | | | | (2,550 | ) | | | 5.91 | |
| Options forfeited during the year | | | — | | | | — | | | | (1,774,550 | ) | | | 4.07 | | | | — | | | | — | |
| Options expired during the year | | | — | | | | — | | | | (9,120 | ) | | | 7.69 | | | | — | | | | — | |
| Options outstanding at the end of the year | | | 269,539 | | | | 4.08 | | | | 13,799,142 | | | | 3.38 | | | | 54,000 | | | | 5.91 | |
| Options exercisable at the end of the year | | | 269,539 | | | | 4.08 | | | | 2,834 | | | | 7.17 | | | | 54,000 | | | | 5.91 | |
| The weighted-average grant-date fair value of options granted during the year | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
2004 | | | | | | | | | | | | | | | | | | | | | | | | |
| Options outstanding at the beginning of the year | | | 15,180,932 | | | | 6.27 | | | | 28,328,589 | | | | 3.61 | | | | 8,909,143 | | | | 11.07 | |
| Options granted during the year | | | 2,039,702 | | | | 4.61 | | | | 3,877,757 | | | | 3.98 | | | | — | | | | — | |
| Options exercised during the year | | | (4,360,768 | ) | | | 3.93 | | | | (1,767,758 | ) | | | 3.51 | | | | (10,350 | ) | | | 5.91 | |
| Options forfeited during the year | | | (12,501,022 | ) | | | 6.88 | | | | (13,175,058 | ) | | | 3.79 | | | | (1,666,643 | ) | | | 10.28 | |
| Options expired during the year | | | — | | | | — | | | | (3,357 | ) | | | 7.65 | | | | (7,175,600 | ) | | | 11.25 | |
| Options outstanding at the end of the year | | | 358,844 | | | | 4.16 | | | | 17,260,173 | | | | 3.56 | | | | 56,550 | | | | 5.91 | |
| Options exercisable at the end of the year | | | 358,844 | | | | 4.16 | | | | — | | | | — | | | | 56,550 | | | | 5.91 | |
| The weighted-average grant-date fair value of options granted during the year | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
152
Financial Statements
Notes to the Financial Statementscontinued
The following table summarises information about the options outstanding at 31 December 2005.
| | | | | | | | | | | | | | | | | | | | | |
| Executive share option scheme | | | | | | Options outstanding | | | Options exercisable | |
| | | | | | | Weighted | | | | | | | | |
| | | | | | | average | | | Weighted | | | | | | | Weighted | |
| | | Number out- | | | remaining | | | average | | | Number | | | average | |
| | | standing at | | | contractual life | | | exercise price | | | exercisable at | | | exercise price | |
| Range of exercise prices | | 31/12/2005 | | | (years) | | | (£) | | | 31/12/2005 | | | (£) | |
| |
| Between £3 and £4 | | | 154,338 | | | | 7 | | | | 3.73 | | | | 154,338 | | | | 3.73 | |
| Between £4 and £5 | | | 115,201 | | | | 8 | | | | 4.54 | | | | 115,201 | | | | 4.54 | |
| |
Under the Employee Sharesave scheme, the weighted-average exercise prices of options are less than the market prices of the shares on the relevant grant dates.
| | | | | | | | | | | | | | | | | | | | | |
| Employee share option scheme | | | | | | Options outstanding | | | Options exercisable | |
| | | | | | | Weighted | | | | | | | | |
| | | | | | | average | | | Weighted | | | | | | | Weighted | |
| | | Number out- | | | remaining | | | average | | | Number | | | average | |
| | | standing at | | | contractual life | | | exercise price | | | exercisable at | | | exercise price | |
| Range of exercise prices | | 31/12/2005 | | | (years) | | | (£) | | | 31/12/2005 | | | (£) | |
| |
| Between £5 and £6 | | | 54,000 | | | | 1 | | | | 5.91 | | | | 54,000 | | | | 5.91 | |
| |
Medium Term Incentive Plan
During the year conditional share grants were awarded to Senior Management of Abbey and seconded employees of Banco Santander Central Hispano, S.A. The conditional share grant will vest in 2008 with the award actually vesting depending upon achievement by Abbey of certain turnover and profit targets in the three-year period from 2005 to 2008.
| | | | | | | | | | | | | |
| | | | | | | Weighted | | | | | |
| | | Number of | | | average | | | | | |
| | | options | | | exercise | | | | | |
| Medium term incentive plan | | granted | | | price (£) | | | | | |
| |
2005 | | | | | | | | | | | | |
| Conditional awards outstanding at the beginning of the year | | | — | | | | — | | | | | |
| Conditional awards granted during the year | | | 2,650,779 | | | | 7.25 | | | | | |
| Conditional awards exercised during the year | | | — | | | | — | | | | | |
| Conditional awards forfeited during the year | | | 132,284 | | | | 7.25 | | | | | |
| Conditional awards expired during the year | | | — | | | | — | | | | | |
| Conditional awards outstanding at the end of the year | | | 2,518,495 | | | | 7.34 | | | | | |
| Conditional awards exercisable at the end of the year | | | — | | | | — | | | | | |
| The weighted-average grant-date fair value of conditional awards granted during the year | | | — | | | | 7.25 | | | | | |
| |
50. Directors’ emoluments and interests
Ex gratia pensions paid to former Directors of Abbey National plc in 2005, which have been provided for previously, amounted to £39,164 (2004: £44,630). In 1992, the Board decided not to award any new such ex gratia pensions.
Details of loans, quasi loans and credit transactions entered into or agreed by the Company or its subsidiaries with persons who are or were Directors, Other Key Management Personnel and each of their connected persons during the year were as follows:
| | | | | | | | | |
| | | | | | | Aggregate | |
| | | | | | | amount | |
| | | Number of | | | outstanding | |
| | | persons | | | £000 | |
| |
Directors | | | | | | | | |
| Loans | | | — | | | | — | |
| Quasi loans | | | — | | | | — | |
| Credit transactions | | | — | | | | — | |
| |
Other Key Management Personnel | | | | | | | | |
| Loans | | | 1 | | | | 215 | |
| Quasi loans | | | — | | | | — | |
| Credit transactions | | | — | | | | — | |
| |
| | |
| * | | Other Key Management Personnel are defined as the Executive Committee of Abbey and the Board and Executive Committee of Abbey’ parent company, Banco Santander Central Hispano, S.A. who served during 2005. |
153
Financial instrumentsStatements
Notes to the Financial Statementscontinued
51. Related party disclosures
Transactions with Directors, Other Key Management Personnel and each of their connected persons
Directors, Other Key Management Personnel and their connected persons have undertaken the following transactions with Abbey in the course of normal banking and life assurance business.
| | | | | | | | | |
| | | | | | | Amounts in respect of | |
| | | | | | | directors, Other Key | |
| | | | | | | Management | |
| | | Number of directors and | | | Personnel(1) and their | |
| | | Other Key Management | | | connected persons | |
| | | Personnel (1) | | | 2005 | |
| | | 2005 | | | £000 | |
| |
Secured loans, unsecured loans and overdrafts | | | | | | | | |
| Loans outstanding at 1 January | | | 1 | | | | 240 | |
| Net movements in the year | | | — | | | | (25 | ) |
| |
| Loans outstanding as at 31 December | | | 1 | | | | 215 | |
| |
Deposit, bank and instant access accounts and investments | | | | | | | | |
| Deposits, bank instant access accounts and investments at 1 January | | | 8 | | | | 2,080 | |
| Net movements in the year | | | 4 | | | | 2,824 | |
| |
| Balances outstanding as at 31 December | | | 12 | | | | 4,904 | |
| |
Life assurance policies | | | | | | | | |
| Life assurance policies at 1 January | | | 3 | | | | 50 | |
| Net movements in the year | | | 3 | | | | 1,152 | |
| |
| Total sum insured/value of investment | | | 6 | | | | 1,202 | |
| |
| | |
| (1) | | Other Key Management Personnel are defined as the Executive Committee of Abbey and the Board and Executive Committee of Abbey’s parent company, Banco Santander Central Hispano, S.A., who served during 2005. |
| | | | | | | | | |
| | | | | | | Amounts in respect of | |
| | | | | | | directors, Other Key | |
| | | | | | | Management | |
| | | Number of directors and | | | Personnel(1) and their | |
| | | Other Key Management | | | connected persons | |
| | | Personnel (1) | | | 2004 | |
| | | 2004 | | | £000 | |
| |
Secured loans, unsecured loans and overdrafts | | | | | | | | |
| Loans outstanding at 1 January | | | 1 | | | | 14 | |
| Net movement in the year | | | — | | | | 226 | |
| |
| Loans outstanding as at 31 December | | | 1 | | | | 240 | |
| |
Deposit, bank and instant access accounts and investments | | | | | | | | |
| Deposits, bank instant access accounts, investments at 1 January | | | 9 | | | | 1,165 | |
| Net movement in the year | | | (1 | ) | | | 915 | |
| |
| Balances outstanding as at 31 December | | | 8 | | | | 2,080 | |
| |
Life assurance policies | | | | | | | | |
| Life assurance policies at 1 January | | | 2 | | | | 107 | |
| Net movement in the year | | | 1 | | | | (57 | ) |
| |
| Total sum insured/value of investment | | | 3 | | | | 50 | |
| |
| | |
| (1) | | Other Key Management Personnel are defined as the Executive Committee of Abbey and the Board and Executive Committee of Abbey’s parent company, Banco Santander Central Hispano, S.A., who served during 2005. |
Directors have also undertaken sharedealing transactions through an execution only stockbroker subsidiary company of an aggregate net value of £23,100. The transactions were on normal business terms and standard commission rates were payable.
Secured and unsecured loans are made to Directors, Other Key Management Personnel and their connected persons, in the ordinary course of business, with terms prevailing for comparable transactions and on the same terms and conditions as applicable to other employees within Abbey. Such loans do not involve more than the normal risk of collectability or present any unfavourable features.
Amounts deposited by Directors, Other Key Management Personnel and their connected persons earn interest at the same rates as those offered to the market or on the same terms and conditions applicable to other employees within Abbey.
Life assurance policies and investments are entered into by Directors, Other Key Management Personnel and their connected persons on normal market terms and conditions, or on the same terms and conditions as applicable to other employees within Abbey.
Remuneration of Key Management Personnel
The remuneration of the Directors, and Other Key Management Personnel of Abbey, is set out in aggregate for each of the categories specified in IAS 24 Related Party Disclosures. Further information about aggregate remuneration of the Directors is provided in the Directors’ Report at pages 78 and 79.
154
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | |
| | | 2005 | | | 2004* | |
| Key management compensation | | £ | | | £ | |
| |
| Short-term employee benefits | | | 14,700,960 | | | | 7,421,848 | |
| Post employment benefits | | | 4,138,247 | | | | 424,747 | |
| Other long term benefits | | | — | | | | — | |
| Termination benefits | | | 771,661 | | | | 450,842 | |
| Share-based payments | | | 984,105 | | | | — | |
| |
Total key management compensation | | | 20,594,973 | | | | 8,297,437 | |
| |
| | |
| * | | Key management compensation figures for 2004 are only in respect of Directors who served during 2004 and do not include Other Key Management Personnel. |
Medium Term Incentive Plan
For 2005, two Executive Directors and five Other Key Management Personnel were granted conditional awards of shares in Banco Santander Central Hispano, S.A. under the Abbey National plc Medium-Term Incentive Plan for a total aggregate value of £2,952,316. The value attributable to the current year of these conditional awards is included in share-based payments above.
Under the Medium-Term Incentive Plan granted on 20 October 2005, certain Executive Directors, Other Key Management Personnel and other nominated individuals were granted a conditional award of shares in Banco Santander Central Hispano, S.A. The amount of shares participants will receive at the end of a three-year period depends on the performance of Abbey during this period. The performance conditions are set by the Remuneration Committee and are linked to Abbey’s three-year plan. Performance will be measured in two ways, half of the award depends on Abbey achieving an attributable profit target for the 2007 financial year, and the remainder depends on the achievement of a revenue target for the 2007 financial year.
Parent undertaking and controlling party
The company’s immediate and ultimate parent and controlling party is Banco Santander Central Hispano, S.A. The smallest and largest group into which the Group’s results are included is the group accounts of Banco Santander Central Hispano, S.A. copies of which may be obtained from Santander Shareholder Department, Santander, Santander House, 100 Ludgate Hill, London EC4M 7NJ.
Transactions with related parties
During the year, the group entered into the following transactions with related parties:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest, fees and other | | | Interest, fees and other | | | Amounts owed by related | | | Amounts owed to related | |
| | | income received | | | expense paid | | | parties | | | parties | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Parent company | | | (16 | ) | | | — | | | | 40 | | | | — | | | | 50 | | | | — | | | | (2,025 | ) | | | — | |
| Fellow subsidiaries | | | — | | | | — | | | | 108 | | | | — | | | | 1 | | | | — | | | | (82 | ) | | | — | |
| Associates | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | — | |
| |
| | | | (16 | ) | | | — | | | | 148 | | | | — | | | | 52 | | | | — | | | | (2,107 | ) | | | — | |
| |
| |
| During the year, the company entered into the following transactions with related parties: |
| |
| | | Interest, fees and other | | | Interest, fees and other | | | Amounts owed by related | | | Amounts owed to related | |
| | | income received | | | expense paid | | | parties | | | parties | |
| | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Subsidiaries | | | (1,541 | ) | | | (956 | ) | | | 3,442 | | | | 2,069 | | | | 34,361 | | | | 4,423 | | | | (71,847 | ) | | | (26,850 | ) |
| Associates | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | — | | | | — | |
| |
| | | | (1,541 | ) | | | (956 | ) | | | 3,442 | | | | 2,069 | | | | 34,362 | | | | 4,423 | | | | (71,847 | ) | | | (26,850 | ) |
| |
The above transactions were typically made in the ordinary course of business and substantially on the same terms as for comparable transactions with third party counterparties.
52. Events after the balance sheet date
No material events have occurred that require disclosure.
53. Financial Instruments
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The accounting policies note describe how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the financial assets and liabilities in the balance sheet by the class of financial instrument to which they are assigned, and by the measurement basis:
155
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Group | |
| | | | | | | | | | | | | | | | | | | Financial | | | | | | | | |
| | | | | | | | | | | | | | | | | | | liabilities at | | | | | | | | |
| | | Held for | | | Designated | | | Loans and | | | Available- | | | amortised | | | | | | | | |
| | | trading | | | at fair value | | | Receivables | | | for-sale | | | cost | | | Derivatives | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | — | | | | — | | | | 991 | | | | — | | | | — | | | | — | | | | 991 | |
| Trading assets | | | 58,231 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 58,231 | |
| Derivative financial instruments | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11,855 | | | | 11,855 | |
| Financial assets designated at fair value | | | — | | | | 30,597 | | | | — | | | | — | | | | — | | | | — | | | | 30,597 | |
| Loans and advances to banks | | | — | | | | — | | | | 444 | | | | — | | | | — | | | | — | | | | 444 | |
| Loans and advances to customers | | | — | | | | — | | | | 95,467 | | | | — | | | | — | | | | — | | | | 95,467 | |
| Investment securities | | | — | | | | — | | | | — | | | | 13 | | | | — | | | | — | | | | 13 | |
| |
Total financial assets | | | 58,231 | | | | 30,597 | | | | 96,902 | | | | 13 | | | | — | | | | 11,855 | | | | 197,598 | |
| Total non financial assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,436 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 207,034 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | — | | | | — | | | | — | | | | — | | | | 5,617 | | | | — | | | | 5,617 | |
| Customer accounts | | | — | | | | — | | | | — | | | | — | | | | 65,889 | | | | — | | | | 65,889 | |
| Derivative financial instruments | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11,264 | | | | 11,264 | |
| Trading liabilities | | | 52,664 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 52,664 | |
| Financial liabilities designated at fair value | | | — | | | | 7,948 | | | | — | | | | — | | | | — | | | | — | | | | 7,948 | |
| Debt securities in issue | | | — | | | | — | | | | — | | | | — | | | | 21,276 | | | | — | | | | 21,276 | |
| Other borrowed funds | | | — | | | | — | | | | — | | | | — | | | | 2,244 | | | | — | | | | 2,244 | |
| Subordinated liabilities | | | — | | | | — | | | | — | | | | — | | | | 6,205 | | | | — | | | | 6,205 | |
| Investment contract liabilities | | | — | | | | 3,306 | | | | — | | | | — | | | | — | | | | — | | | | 3,306 | |
| |
Total financial liabilities | | | 52,664 | | | | 11,254 | | | | — | | | | — | | | | 101,231 | | | | 11,264 | | | | 176,413 | |
| Total non financial liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 27,511 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 203,924 | |
Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,110 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and equity | | | | | | | | | | | | | | | | | | | | | | | | | | | 207,034 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | Company |
| | | | | | | | | | | | | | | | | | | Financial | | | | | | | | |
| | | | | | | | | | | | | | | | | | | liabilities at | | | | | | | | |
| | | | | | | Designated | | | Loans and | | | Available- | | | amortised | | | | | | | | |
| | | | | | | at fair value | | | Receivables | | | for-sale | | | cost | | | Derivatives | | | Total | |
| | | | | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | | | | | — | | | | 370 | | | | — | | | | — | | | | — | | | | 370 | |
| Derivative financial instruments | | | | | | | — | | | | — | | | | — | | | | — | | | | 1,227 | | | | 1,227 | |
| Financial assets designated at fair value | | | | | | | 790 | | | | — | | | | — | | | | — | | | | — | | | | 790 | |
| Loans and advances to banks | | | | | | | — | | | | 33,009 | | | | — | | | | — | | | | — | | | | 33,009 | |
| Loans and advances to customers | | | | | | | — | | | | 95,230 | | | | — | | | | — | | | | — | | | | 95,230 | |
| Investment securities | | | | | | | — | | | | — | | | | 272 | | | | — | | | | — | | | | 272 | |
| |
Total financial assets | | | | | | | 790 | | | | 128,609 | | | | 272 | | | | — | | | | 1,227 | | | | 130,898 | |
| Total non financial assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,502 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | | | | | | | | | | | | | | | | | | | | | | | | | | 141,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | | | | | — | | | | — | | | | — | | | | 48,267 | | | | — | | | | 48,267 | |
| Customer accounts | | | | | | | — | | | | — | | | | — | | | | 79,288 | | | | — | | | | 79,288 | |
| Derivative financial instruments | | | | | | | — | | | | — | | | | — | | | | — | | | | 623 | | | | 623 | |
| Debt securities in issue | | | | | | | — | | | | — | | | | — | | | | 4 | | | | — | | | | 4 | |
| Other borrowed funds | | | | | | | — | | | | — | | | | — | | | | 1,452 | | | | — | | | | 1,452 | |
| Subordinated liabilities | | | | | | | — | | | | — | | | | — | | | | 6,477 | | | | — | | | | 6,477 | |
| |
Total financial liabilities | | | | | | | — | | | | — | | | | — | | | | 135,488 | | | | 623 | | | | 136,111 | |
| Total non financial liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,381 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | 138,492 | |
Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,908 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and equity | | | | | | | | | | | | | | | | | | | | | | | | | | | 141,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
156
Financial Statements
Notes to the Financial Statementscontinued
The following tables provide an analysis of the fair value of financial instruments not measured at fair value in the balance sheet:
| | | | | | | | | | | | | |
| | | Group | |
| | | Carrying | | | | | | | Surplus/ | |
| | | value | | | Fair value | | | (deficit) | |
| | | 2005 | | | 2005 | | | 2005 | |
| | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | |
| Cash and balances at central banks | | | 991 | | | | 991 | | | | — | |
| Loans and advances to banks | | | 444 | | | | 444 | | | | — | |
| Loans and advances to customers | | | 95,467 | | | | 95,871 | | | | 404 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
| Deposits by banks | | | 5,617 | | | | 5,617 | | | | — | |
| Customer accounts | | | 65,889 | | | | 66,066 | | | | (177 | ) |
| Debt securities in issue | | | 21,276 | | | | 20,591 | | | | 685 | |
| Other borrowed funds | | | 2,244 | | | | 2,540 | | | | (296 | ) |
| Subordinated liabilities | | | 6,205 | | | | 7,204 | | | | (999 | ) |
| |
| | | | | | | | | | | | | |
| | | Company | |
| | | Carrying | | | | | | | Surplus/ | |
| | | value | | | Fair value | | | (deficit) | |
| | | 2005 | | | 2005 | | | 2005 | |
| | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | |
| Cash and balances at central banks | | | 370 | | | | 370 | | | | — | |
| Loans and advances to banks | | | 33,009 | | | | 33,009 | | | | — | |
| Loans and advances to customers | | | 95,230 | | | | 95,634 | | | | 404 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
| Deposits by banks | | | 48,267 | | | | 48,267 | | | | — | |
| Customer accounts | | | 79,288 | | | | 79,464 | | | | (176 | ) |
| Debt securities in issue | | | 4 | | | | 4 | | | | — | |
| Other borrowed funds | | | 1,452 | | | | 1,747 | | | | (295 | ) |
| Subordinated liabilities | | | 6,477 | | | | 7,469 | | | | (992 | ) |
| |
| | | | | | | | | | | | | |
| | | Group | |
| | | Carrying | | | | | | | Surplus/ | |
| | | value | | | Fair value | | | (deficit) | |
| | | 2004 | | | 2004 | | | 2004 | |
| | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | |
| Cash and balances at central banks | | | 454 | | | | 454 | | | | — | |
| Loans and advances to banks | | | 3,068 | | | | 3,069 | | | | 1 | |
| Loans and advances to customers | | | 96,951 | | | | 97,205 | | | | 254 | |
| Non trading derivatives | | | (50 | ) | | | (357 | ) | | | (307 | ) |
| Debt securities | | | 672 | | | | 724 | | | | 52 | |
| Equity shares & other similar interests | | | 30 | | | | 32 | | | | 2 | |
| | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
| Deposits by banks | | | 8,578 | | | | 8,553 | | | | 25 | |
| Customer accounts | | | 69,348 | | | | 69,540 | | | | (192 | ) |
| Debt securities in issue | | | 37,067 | | | | 35,809 | | | | 1,258 | |
| Other borrowed funds | | | 722 | | | | 805 | | | | (83 | ) |
| Subordinated liabilities | | | 5,360 | | | | 5,656 | | | | (296 | ) |
| Non trading derivatives | | | (255 | ) | | | (278 | ) | | | 23 | |
| |
The surplus/(deficit) in the table above represents the surplus/(deficit) of fair value compared to the carrying amount of those financial instruments for which fair values have been estimated.
Fair value measurement
The fair value of financial instruments is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted market price is available for an instrument, the fair value is calculated based on the market price.
Where quoted market prices are not available fair value is determined using pricing models which use a mathematical methodology based on accepted financial theories, depending on the product type and its components.
Pricing models take into account the contract terms of the securities as well as market-based valuation parameters, such as interest rates, volatility, exchange rates and the credit rating of the counterparty. Valuation adjustments are an integral component of the fair value estimation process and are taken on individual positions where either the absolute size of the trade or other specific features of the trade or the particular market (such as counterparty credit risk, concentration or market liquidity) require more than the simple application of pricing models.
157
Financial Statements
Notes to the Financial Statementscontinued
Fair value management
The fair value exposures, as tabled above, are managed by using a combination of hedging derivatives and offsetting on balance sheet positions.
The approach to specific categories of financial instruments is described below.
Assets:
Cash and balances at central banks/ Loans and advances to banks
The carrying amount is deemed a reasonable approximation of the fair value, because they are short term in nature.
Loans and advances to customers
Loans and advances to personal customers are made both at variable and at fixed rates. As there is no active secondary market in the UK for such loans and advances, there is no reliable market value available for such a significant portfolio.
a) Variable rate
The Directors believe that, the carrying value of the variable rate loans may be assumed to be their fair value.
b) Fixed rate
Certain of the loans secured on residential properties are at a fixed rate for a limited period, typically two to five years from their commencement. At the end of this period these loans revert to the relevant variable rate. The excess of fair value over carrying value of each of these loans has been estimated by reference to the market rates available at 31 December 2005 for similar loans of maturity equal to the remaining fixed period.
Liabilities:
Deposits by banks
The carrying amount is deemed a reasonable approximation of the fair value, because they are short term in nature.
Deposits by customers
The majority of deposit liabilities are payable on demand and therefore can be deemed short term in nature with the fair value equal to the carrying value. However, given the long-term and continuing nature of the relationships with Abbey’s customers, the Directors believe there is significant value to Abbey in this source of funds. Certain of the deposit liabilities are at a fixed rate until maturity. The deficit of fair value over carrying value of these liabilities has been estimated by reference to the market rates available at 31 December 2005 for similar deposit liabilities of similar maturities.
Debt securities in issue and subordinated liabilities
Where reliable prices are available, the fair value of debt securities in issue and subordinated liabilities has been calculated using quoted market prices. Other market values have been determined using in-house pricing models.
Intra Group balances
Included in the asset and liability categories on the Company balance sheet are outstanding intra group balances. The directors regard the carrying amount as a reasonable approximation of the fair value, due to the loans and deposits being short term in nature with a variable interest rate linked to 3 month LIBOR.
Financial Instruments disclosures under UK GAAP Standard FRS 13 “Derivatives and Other Financial Instruments: Disclosures”
The following are the financial instrument disclosures for 2004 as previously required by FRS13.
In accordance with FRS 13, interest rate repricing gap information is shown in the table (the ‘gap table’) below, at 31 December 2004. It provides an estimate of the repricing profile of Abbey’s assets, liabilities and other off-balance sheet exposures for non-trading activities. For the major categories of assets and liabilities, the gap table shows the values of interest earning assets and interest bearing liabilities which reprice within selected time bands. Items are allocated to time bands by reference to the earlier of the next interest rate repricing date and the legal maturity date. This leads to an apparent timing mismatch where the anticipated maturity date is different from the legal maturity date and hedges have been structured accordingly.
The positions shown reflect both the repricing behaviour of the administered rates on mortgage and savings products (over which Abbey has control) and contracted wholesale on and off-balance sheet positions. The tables do not purport to measure market risk exposure.
142158
Notes to the Financial Statementscontinued
Interest rate repricing gap at 31 December 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | In more | | In more | | | | | | | | | | | |
| | | In more | | In more | | In more | | | | | | | | | | | than 3 | | than 6 | | | | | | | | | | | |
| | | than 3 | | than 6 | | than 1 | | | | | | | | | | | months | | months | | | | | | | | | | | |
| | | months | | months | | year but | | Non- | | | | | | | | | but not | | but not | | In more than | | Non- | | | | | | | |
| | | Not more | | but not | | but not | | not more | | In more | | interest | | Non- | | | | | | | Not more | | more | | more than | | 1 year but | | In more | | interest | | Non- | | | | | |
| | | than 3 | | more than | | more than | | than 5 | | than 5 | | bearing | | Trading | | | | | | | than 3 | | than 6 | | 12 | | not more | | than 5 | | bearing | | Trading | | | | | |
| | | months | | 6 months | | 12 months | | years | | years | | amounts | | Total | | Trading | | Total | | | months | | months | | months | | than 5 years | | years | | amounts | | Total | | Trading | | Total | |
| | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | £m | |
| Assets | | |
| Treasury and other eligible bills | | — | | — | | — | | — | | — | | — | | — | | 1,990 | | 1,990 | | | — | | — | | — | | — | | — | | — | | — | | 1,990 | | 1,990 | |
Cash and loans and advances to banks (1) | | 453 | | — | | — | | — | | — | | 967 | | 1,420 | | 9,182 | | 10,602 | | | 453 | | — | | — | | — | | — | | 967 | | 1,420 | | 9,182 | | 10,602 | |
Loans and advances to customers(2) | | 59,282 | | 1,982 | | 3,305 | | 12,903 | | 3,242 | | 1,138 | | 81,852 | | 11,357 | | 93,209 | | | 59,282 | | 1,982 | | 3,305 | | 12,903 | | 3,242 | | 1,138 | | 81,852 | | 11,357 | | 93,209 | |
| Net investment in finance leases | | 948 | | 46 | | 146 | | 2 | | 2 | | 4 | | 1,148 | | — | | 1,148 | | | 948 | | 46 | | 146 | | 2 | | 2 | | 4 | | 1,148 | | — | | 1,148 | |
| Securities and investments | | 394 | | 173 | | 44 | | 40 | | 13 | | 38 | | 702 | | 23,157 | | 23,859 | | | 394 | | 173 | | 44 | | 40 | | 13 | | 38 | | 702 | | 23,157 | | 23,859 | |
| Other assets | | — | | — | | — | | — | | — | | 9,376 | | 9,376 | | 2,377 | | 11,753 | | | — | | — | | — | | — | | — | | 9,376 | | 9,376 | | 2,377 | | 11,753 | |
| Assets of long-term assurance funds | | — | | — | | — | | — | | — | | 27,180 | | 27,180 | | — | | 27,180 | | | — | | — | | — | | — | | — | | 27,180 | | 27,180 | | — | | 27,180 | |
| | Total assets | | 61,077 | | 2,201 | | 3,495 | | 12,945 | | 3,257 | | 38,703 | | 121,678 | | 48,063 | | 169,741 | | | 61,077 | | 2,201 | | 3,495 | | 12,945 | | 3,257 | | 38,703 | | 121,678 | | 48,063 | | 169,741 | |
|
| |
Liabilities | | |
Deposits by banks(1) | | | (349 | ) | | — | | — | | — | | — | | | (161 | ) | | | (510 | ) | | | (17,902 | ) | | | (18,412 | ) | | | (349 | ) | | — | | — | | — | | — | | | (161 | ) | | | (510 | ) | | | (17,902 | ) | | | (18,412 | ) |
| Customer accounts | | | (63,690 | ) | | | (1,084 | ) | | | (2,016 | ) | | | (2,541 | ) | | | (17 | ) | | — | | | (69,348 | ) | | | (9,502 | ) | | | (78,850 | ) | | | (63,690 | ) | | | (1,084 | ) | | | (2,016 | ) | | | (2,541 | ) | | | (17 | ) | | — | | | (69,348 | ) | | | (9,502 | ) | | | (78,850 | ) |
| Debt securities in issue | | | (7,991 | ) | | | (1,003 | ) | | | (444 | ) | | | (3,332 | ) | | | (252 | ) | | — | | | (13,022 | ) | | | (8,947 | ) | | | (21,969 | ) | | | (7,991 | ) | | | (1,003 | ) | | | (444 | ) | | | (3,332 | ) | | | (252 | ) | | — | | | (13,022 | ) | | | (8,947 | ) | | | (21,969 | ) |
| Subordinated liabilities and other long-term capital instruments | | | (405 | ) | | — | | | (388 | ) | | | (1,328 | ) | | | (3,057 | ) | | | (704 | ) | | | (6,082 | ) | | — | | | (6,082 | ) | | | (405 | ) | | — | | | (388 | ) | | | (1,528 | ) | | | (3,057 | ) | | | (704 | ) | | | (6,082 | ) | | — | | | (6,082 | ) |
| Other liabilities | | — | | — | | — | | — | | — | | | (5,431 | ) | | | (5,432 | ) | | | (6,381 | ) | | | (11,812 | ) | | — | | — | | — | | — | | — | | | (5,431 | ) | | | (5,431 | ) | | | (6,381 | ) | | | (11,812 | ) |
| Funding of trading book | | 5,331 | | — | | — | | — | | — | | — | | 5,331 | | | (5,331 | ) | | — | | | 5,331 | | — | | — | | — | | — | | — | | 5,331 | | | (5,331 | ) | | — | |
| Liabilities of long-term assurance funds | | — | | — | | — | | — | | — | | | (27,180 | ) | | | (27,180 | ) | | — | | | (27,180 | ) | | — | | — | | — | | — | | — | | | (27,180 | ) | | | (27,180 | ) | | — | | | (27,180 | ) |
| Minority interests – non-equity | | — | | — | | — | | — | | — | | | (512 | ) | | | (512 | ) | | — | | | (512 | ) | |
| Shareholders’ funds | | |
| – non-equity | | — | | — | | — | | — | | — | | | (632 | ) | | | (632 | ) | | — | | | (632 | ) | |
| – equity | | — | | — | | — | | — | | — | | | (4,292 | ) | | | (4,292 | ) | | — | | | (4,292 | ) | |
Minority interests
— non-equity | | | — | | — | | — | | — | | — | | | (512 | ) | | | (512 | ) | | — | | | (512 | ) |
Shareholders’ funds
— non-equity | | | — | | — | | — | | — | | — | | | (632 | ) | | | (632 | ) | | — | | | (632 | ) |
| — equity | | | — | | — | | — | | — | | — | | | (4,292 | ) | | | (4,292 | ) | | — | | | (4,292 | ) |
| Total liabilities | | | (67,104 | ) | | | (2,087 | ) | | | (2,848 | ) | | | (7,401 | ) | | | (3,326 | ) | | | (38,912 | ) | | | (121,678 | ) | | | (48,063 | ) | | | (169,741 | ) | | | (67,104 | ) | | | (2,087 | ) | | | (2,848 | ) | | | (7,401 | ) | | | (3,326 | ) | | | (38,912 | ) | | | (121,678 | ) | | | (48,063 | ) | | | (169,741 | ) |
| Off-balance sheet items (3) | | | (5,295 | ) | | 1,730 | | 1,446 | | | (2,022 | ) | | 4,218 | | | (77 | ) | | | | (5,295 | ) | | 1,730 | | 1,446 | | | (2,022 | ) | | 4,218 | | | (77 | ) | |
| Interest rate repricing gap | | | (11,322 | ) | | 1,844 | | 2,093 | | 3,522 | | 4,149 | | | (286 | ) | | | | (11,322 | ) | | 1,844 | | 2,093 | | 3,522 | | 4,149 | | | (286 | ) | |
2004 Cumulative gap | | | (1,322 | ) | | | (9,478 | ) | | | (7,385 | ) | | | (3,863 | ) | | 286 | | — | | | | (11,322 | ) | | | (9,478 | ) | | | (7,385 | ) | | | (3,863 | ) | | 286 | | — | |
| | 2003 Cumulative gap | | | (6,760 | ) | | | (7,356 | ) | | | (6,309 | ) | | 2,511 | | 691 | | — | | — | | — | | — | | |
| | |
| | |
| (1) | | Non-interest bearing items within Loans and advances to banks and Deposits by banks include items in the course of collection and items in the course of transmission, respectively. These are short-term receipts and payments within the UK retail banking clearing system. The remaining non-interest bearing item within Loans and advances to banks relates to the interest free deposit maintained with the Bank of England. |
| |
| (2) | | Non-interest bearing items within Loans and advances to customers relate to non-accruing lendings after deduction of associated provisions.
|
| |
| (3) | | Off-balance sheet items are classified in the table above according to the interest terms contained in the contracts. |
Negative gaps are liability sensitive and, all other things being equal, would indicate a benefit if interest rates decline. A positive gap is asset sensitive and, all other things being equal, would indicate a benefit if interest rates increase. Gap positions shown within the interest rate repricing table are attributable to the balance sheet management of the Abbey’s capital, low rate and non-interest bearing liabilities, aimed at reducing income volatility. Fixed rate assets and liabilities are hedged in line with a broadly risk neutral management objective. A notional allocation of liabilities has been made to the trading book for the purposes of the gap table. Such an allocation represents the proportion of general funding supporting the trading book.
A number of Abbey non-trading assets and liabilities are subject to more complex repricing than can be reflected in the above table or repriced with reference to indices other than interest rates. The market risk exposure is minimised through the use of matching derivatives.
The risks associated with such instruments, and their hedges, are reflected in note 51 to the financial statements.143
Financial Statements
Notes to the Financial Statementscontinued
Foreign exchange risk
Abbey’s main overseas operations are in the US. The main operating (or ‘functional’) currencies of its operations are therefore sterling, euro and US dollar. As Abbey prepares its Consolidated Financial Statements in sterling, these will be affected by
159
Financial Statements
Notes to the Financial Statementscontinued
movements in the euro/sterling and dollar/sterling exchange rates. The structural currency exposures contained in Abbey’s Consolidated Balance Sheet is predominantly affected by movements in the exchange rates between the euro and sterling. This structural currency exposure is not the same as structural market risk which arises from a variety of exposures inherent in a product or portfolio. Translation gains and losses arising from these exposures are recognised in the Statements of total recognised gains and losses.
Abbey mitigates the effect of this exposure by financing a significant proportion of its net investments in its overseas operations with borrowings in the currency of the local operation.
Abbey’s structural currency exposures at 31 December 2004 were as follows:
| | | | | | | | | | | | | | | | | | |
| | | Borrowings | | | | | | | | | | | | | | | | | |
| | | Net | | hedging net | | Net structural | | Net structural | | | Borrowings hedging | | | |
| | | investments in | | investment in | | currency | | currency | | | Net investments in | | net investment in | | Net structural | |
| | | operations | | overseas | | exposures | | exposures | | | operations | | overseas operations | | currency exposures | |
| | | 2004 | | operations 2004 | | 2004 | | 2003 | | | 2004 | | 2004 | | 2004 | |
| | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | |
| | Euro – Subsidiary | | — | | — | | — | | | (17 | ) | | — | | — | | — | |
| – Branches | | | (1 | ) | | — | | | (1 | ) | | | (29 | ) | | | (1 | ) | | — | | | (1 | ) |
| Other non-sterling amounts | | 1 | | — | | 1 | | 1 | | | 1 | | — | | 1 | |
| | | | — | | — | | — | | | (45 | ) | | — | | — | | — | |
|
Abbey also has some transactional (or non-structural) currency exposures. Such exposures arise from the activities of Abbey where the operating unit undertakes activities in currencies other than the unit’s functional currency. Where such activities show currency mismatches between assets and liabilities, Abbey uses a variety of derivative products to eliminate some or all of the currency risk depending on the amount and nature of the transaction. Controls are in place to limit the size of Abbey’s open transactional foreign exchange positions.
Certain transactional currency exposures give rise to net currency gains and losses which are recognised in the Profit and Loss Account. Such exposures comprise the monetary assets and monetary liabilities of Abbey that are not denominated in the functional currency of the operating unit involved, other than certain non-sterling borrowings treated as hedges of net investments in overseas operations (as shown in the above table). Transactional currency exposures are stated net of derivatives used to hedge currency risk.
Abbey’s transactional currency exposures at 31 December 2004
and 2003 were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 — Net foreign currency monetary assets/(liabilities) | |
| | | Sterling | | | US Dollar | | | Euro | | | Other | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Sterling | | | n/a | | | | 527 | | | | 70 | | | | 32 | | | | 629 | |
| Euro | | | 88 | | | | — | | | | n/a | | | | — | | | | 88 | |
| |
| | | | 88 | | | | 527 | | | | 70 | | | | 32 | | | | 717 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2003 — Net foreign currency monetary assets/(liabilities) | | | 2004 – Net foreign currency monetary assets/(liabilities) | |
| | | Sterling | | US Dollar | | Euro | | Other | | Total | | | Sterling | | US Dollar | | Euro | | Other | | Total | |
| | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | | £m | |
| | Sterling | | n/a | | 268 | | | (20 | ) | | 32 | | 280 | | | n/a | | 527 | | 70 | | 32 | | 629 | |
| Euro | | 81 | | — | | n/a | | — | | 81 | | | 88 | | — | | n/a | | — | | 88 | |
| | | | 81 | | 268 | | | (20 | ) | | 32 | | 361 | | | 88 | | 527 | | 70 | | 32 | | 717 | |
|
Certain areas of the business generate a significant proportion of their income in currencies other than the functional currency, and may use forward foreign exchange contracts to fix the functional currency equivalent of their forecast income. The outstanding nominal amount of such transactions at 31 December 2004 was nil.
54. Explanation of transition to International Financial Reporting Standards
Abbey, in line with all listed entities in the European Union (“EU”), was required to adopt International Financial Reporting Standards (“IFRS”) in preparing its consolidated financial statements for the year ended 31 December 2005.
Up to 31 December 2004, the Group prepared its financial statements in accordance with UK Generally Accepted Accounting Principles (“UK GAAP”).
Key standards IAS 32 “Financial Instruments: Disclosure and Presentation”, and IAS 39 “Financial Instruments: Recognition and Measurement”, IFRS 4 “Insurance Contracts” and IFRS 5 “Non-current Assets Held for Sale & Discontinued Operations” have been applied prospectively from 1 January 2005. All other standards are required to be applied retrospectively.
144160
Notes to the Financial Statementscontinued
51. Derivatives
Derivative financial instruments (derivatives) are contracts or agreements whose value is derived from one or more underlying indices or asset values inherent in
Reconciliation of profit attributable to shareholders under UK GAAP to profit attributable to shareholders under IFRS for the contract or agreement. They include interest rate, cross-currency, equity and other index swaps, forward rate agreements, futures, caps, floors, options, swaptions, credit default and total return swaps, equity index contracts and exchange traded interest rate futures and equity index options. Derivatives are used for trading and non-trading purposes. These terms are defined in Accounting policies – Derivatives.Non-trading derivatives
The main non-trading derivatives are interest rate and cross-currency swaps, and credit default swaps, which are used12 months to hedge Abbey’s exposures to interest rates, credit spread movements and exchange rates inherent in non-trading assets, liabilities and positions, including fixed rate lending and structured savings products within banking and saving segments and medium term note issues, capital issues and fixed rate asset purchases within Abbey National Treasury Services.
The following table illustrates activities undertaken by Abbey, the related risks associated with such activities and the types of derivatives used in managing such risks. Such risks may also be managed using on-balance sheet instruments as part of an integrated approach to risk management.31 December 2004
| | | | | |
Activity | | RiskGroup | |
| | Type of Hedge2004 | |
| | £m | |
| |
Management of the return on variable rate assets financed by shareholders’ funds and net non-interest bearing liabilities.Profit attributable to Shareholders | | Reduced profitability due to falls in interest rates. | | Receive fixed interest rate swaps. |
Profit before tax under UK GAAP | | | 273 | |
| Employee benefits | | | 1 | |
| Leasing | | | (11 | ) |
| Software | | | (109 | ) |
| Goodwill | | | 14 | |
| Other intangible assets | | | (147 | ) |
| New entities | | | (1 | ) |
| Insurance business | | | (45 | ) |
| Other | | | 4 | |
| |
Fixed rate lending and investments.Profit before tax under IFRS | | Sensitivity to increases in interest rates. | (21 | Pay fixed interest rate swaps.) |
| |
Fixed rate retail and wholesale funding. | | Sensitivity to falls in interest rates. | | Receive fixed interest rate swaps. |
| Taxation – UK GAAP | | | (144 | ) |
| Taxation – IFRS adjustments | | | 111 | |
| |
Equity-linked retail funding.Profit attributable to shareholders under IFRS | | Sensitivity to increases in equity market indices. | (54 | Receive equity swaps. |
|
Management of other net interest income on retail activities. | | Sensitivity of returns to changes in interest rates. | | Interest rate swaps and caps/floors according to the type of risk identified. |
|
Profits earned in foreign currency. | | Sensitivity to strengthening of sterling against other currencies. | | Forward foreign exchange contracts. |
|
Investment in foreign currency assets. | | Sensitivity to strengthening of sterling against other currencies. | | Cross-currency and foreign exchange swaps. Foreign currency funding. |
|
Issuance of products with embedded equity options. | | Sensitivity to changes in underlying rate and rate volatility causing option exercise. | | Interest rate swaps combined with equity options. |
|
Lending and investments. | | Sensitivity to weakening credit quality. | | Purchase credit default and total return swaps. |
|
Investment in, and issuance of, products with embedded interest rate options. | | Sensitivity to changes in underlying rate and rate volatility causing option exercise. | | Interest rate swaps plus caps/floors, and other matched options. |
|
Investment in, and issuance of, bonds with put/call features. | | Sensitivity to changes in rates causing option exercise. | | Interest rate swaps combined with swaptions (1) and other matched options. |
|
Firm commitments (e.g. asset purchases, issues arranged). | | Sensitivity to changes in rates between arranging a transaction and completion. | | Hedges are arranged at the time of commitments if there is exposure to rate movements.) |
| |
(1) | | A swaption is an option on a swap which gives the holder the right but not the obligation to buy or sell a swap. |
|
(2) | | Exchange-traded derivatives may additionally be used as hedges in any of the above activities in lieu of interest rate swaps. |
Derivative products which are combinations
Reconciliation of more basic derivatives (such as swaps with embedded option features), or which have leverage features, may be used in circumstances where the underlying position being hedged contains the same risk features. In such cases the derivative used will be structuredshareholders’ funds under UK GAAP to match the risks of the underlying asset or liability. Exposure to market risk on such contracts is therefore hedged. The following tables show the contract or underlying principal amounts, positiveshareholders equity under IFRS at 1 January 2004 and negative market values and related book values of derivatives held for non-trading purposes at 31 December 2004
| | | | | | | | | | | | | | | | | |
| | | Group | | | | | | | Company | |
| | | 1 Jan.2004 | | | 31 Dec 2004 | | | 1 Jan.2004 | | | 31 Dec 2004 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Shareholders’ Equity | | | | | | | | | | | | | | | | |
Shareholders’ equity as previously reported under UK GAAP | | | 5,331 | | | | 4,924 | | | | 4,836 | | | | 4,079 | |
| Employee benefits | | | (1,104 | ) | | | (1,202 | ) | | | (990 | ) | | | (1,089 | ) |
| Leasing | | | (151 | ) | | | (162 | ) | | | (1 | ) | | | — | |
| Software | | | 108 | | | | (1 | ) | | | 63 | | | | 5 | |
| Goodwill | | | — | | | | 14 | | | | — | | | | — | |
| Other intangible assets | | | — | | | | (147 | ) | | | — | | | | — | |
| Dividends | | | 245 | | | | — | | | | 245 | | | | — | |
| New entities | | | 10 | | | | (3 | ) | | | — | | | | — | |
| Other | | | (10 | ) | | | 6 | | | | (44 | ) | | | (42 | ) |
| Tax impact on the above adjustments | | | 285 | | | | 360 | | | | 288 | | | | 334 | |
| Deferred taxation | | | (90 | ) | | | (69 | ) | | | — | | | | — | |
| |
Total shareholders’ equity under IFRS | | | 4,624 | | | | 3,720 | | | | 4,397 | | | | 3,287 | |
| |
Explanation of material adjustments to profit attributable to shareholders and 2003. Contract or underlying principal amounts indicateshareholders’ equity for 2004
Insurance Business
IAS 27 “Consolidated and Separate Financial Statements” requires that all entities be consolidated on a line-by-line basis when control exists. Historically Abbey has consolidated its insurance subsidiaries in aggregate on a single line basis presented on the volumeface of business outstanding at the balance sheet dateas “Long-term assurance business”. The impact on profit before tax is due to the gross up of the ‘Value of in-force business’ asset for the deferred tax provision. There is no impact on profit after tax.
Securitisation
In accordance with FRS 5 under UK GAAP, qualifying securitisation transactions are accounted for on a linked presentation basis. Linked presentation is not available under IFRS. Therefore, the gross assets and do not represent amounts at risk. the related funding are presented separately on the balance sheet.
Employee benefits
a) Pensions
The fair values representequity charge reflects the amount at which a contract could be exchanged in an arm’s length transaction, calculated at market rates current atactuarial pension deficit being recognised on the balance sheet date.as required by IAS 19 “Employee Benefits”. The positive and negative market valuesprofit before tax impact in 2004 is not material since the increased pension charge after applying a discount rate to liabilities is offset by the release of existing SSAP 24 accruals. The increase in ongoing pension costs should be substantially offset by the forecast level of full time equivalent (FTE) staff reductions.
From a regulatory perspective, the IAS equity impact will be substituted with a charge based on the amount of the derivativespension fund deficit that the company would have to meet by way of additional payments (over-and-above “normal” annual contributions) over the next five years.
b) Stock Option Expensing
The treatment of share options granted to staff by subsidiaries in the shares of the parent is still being finalised by the International Financial Reporting Interpretations Committee (IFRIC). The present guidance is that a subsidiary should not be viewed in isolation because they are substantially matched by negative and positive market values, respectively, on the assets, liabilities and positions being hedged.treat such
145161
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2004 | | | 2004 | | | | | | | 2004 | | | 2004 | |
| | | Contract or | | | Positive | | | 2004 | | | Negative | | | Related | |
| | | underlying | | | market | | | Related | | | market | | | book | |
| | | principal(1) | | | values(2) | | | book value | | | values(2) | | | value | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | | | | | | | | | |
| Cross-currency swaps | | | 23,311 | | | | 761 | | | | 240 | | | | 1,440 | | | | 359 | |
| Foreign exchange swaps and forwards | | | 1,194 | | | | 7 | | | | — | | | | — | | | | — | |
| Foreign exchange options | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| | | | 24,505 | | | | 768 | | | | 240 | | | | 1,440 | | | | 359 | |
| |
| Interest rate contracts: | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | 49,143 | | | | 1,136 | | | | 374 | | | | 376 | | | | 66 | |
| Caps, floors and swaptions | | | 1,707 | | | | 6 | | | | 16 | | | | 1 | | | | — | |
| Futures (exchange traded) | | | — | | | | — | | | | — | | | | — | | | | — | |
| Forward rate agreements | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| | | | 50,850 | | | | 1,142 | | | | 390 | | | | 377 | | | | 66 | |
| |
| Equity and commodity contracts: | | | | | | | | | | | | | | | | | | | | |
| Equity index options and similar products | | | 256 | | | | — | | | | — | | | | 140 | | | | — | |
| Equity and commodity index swaps | | | 418 | | | | 18 | | | | — | | | | 50 | | | | — | |
| |
| | | | 674 | | | | 18 | | | | — | | | | 190 | | | | — | |
| |
| | | | 76,029 | | | | 1,928 | | | | 630 | | | | 2,007 | | | | 425 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | Group | |
| | | 2003 | | | 2003 | | | | | | | 2003 | | | 2003 | |
| | | Contract or | | | Positive | | | 2003 | | | Negative | | | Related | |
| | | underlying | | | market | | | Related | | | market | | | book | |
| | | principal(1) | | | values(2) | | | book value | | | values (2) | | | value | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | | | | | | | | | |
| Cross-currency swaps | | | 22,214 | | | | 928 | | | | 124 | | | | 1,380 | | | | 183 | |
| Foreign exchange swaps and forwards | | | 1,630 | | | | — | | | | 8 | | | | — | | | | — | |
| Foreign exchange options | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| | | | 23,844 | | | | 928 | | | | 132 | | | | 1,380 | | | | 183 | |
| |
| Interest rate contracts: | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | 69,433 | | | | 2,067 | | | | 650 | | | | 1,432 | | | | 362 | |
| Caps, floors and swaptions | | | 2,484 | | | | 21 | | | | 37 | | | | 1 | | | | — | |
| Futures (exchange traded) | | | 4,907 | | | | — | | | | — | | | | — | | | | — | |
| Forward rate agreements | | | 2,213 | | | | — | | | | — | | | | — | | | | — | |
| |
| | | | 79,037 | | | | 2,088 | | | | 687 | | | | 1,433 | | | | 362 | |
| |
| Equity and commodity contracts: | | | | | | | | | | | | | | | | | | | | |
| Equity index options and similar products | | | 257 | | | | — | | | | — | | | | 86 | | | | — | |
| Equity and commodity index swaps | | | 673 | | | | 22 | | | | 9 | | | | 20 | | | | 3 | |
| |
| | | | 930 | | | | 22 | | | | 9 | | | | 106 | | | | 3 | |
| |
| | | | 103,811 | | | | 3,038 | | | | 828 | | | | 2,919 | | | | 548 | |
| |
(1) | | Includedoptions as “cash settled” in the above analysis of non-trading derivatives are exchange rate contracts, interest rate contracts and equity and commodity contracts, with underlying principal amounts of £1,644m, (2003: £1,574m), £17,936m (2003: £47,685m) and £333m (2003: £363m), respectively, which were undertaken by Group entities with Abbey National Financial Products. The total net positive market value of such contracts amounted to £505m (2003: net positive £189m). Associated contracts which Abbey National Financial Products transacted with external counterparties are included in the analysis of trading derivatives. Net positive market values of £505m (2003: net positive £189m) on all contracts held by Abbey National Financial Products with other Group entities are included within Other assets. |
|
(2) | | Positive market values arise where the present value of cash inflows exceeds the present value of cash outflows on a contract-by-contract basis. Negative market values arise where the present value of cash outflows exceeds the present value of cash inflows on a contract-by-contract basis. |
The following table analyses over-the-counter (OTC) and other non-exchange traded derivatives held for non-trading purposes by remaining maturity:
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | Contract or | | | | | | | Contract or | | | | |
| | | underlying | | | | | | | underlying | | | | |
| | | principal | | | Replacement cost | | | principal | | | Replacement cost | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Non-trading derivatives maturing: | | | | | | | | | | | | | | | | |
| In not more than one year | | | 26,673 | | | | 286 | | | | 36,368 | | | | 806 | |
| In more than one year but not more than five years | | | 38,727 | | | | 912 | | | | 47,672 | | | | 1,257 | |
| In more than five years | | | 10,629 | | | | 730 | | | | 14,864 | | | | 975 | |
| |
| | | | 76,029 | | | | 1,928 | | | | 98,904 | | | | 3,038 | |
| |
146
Financial Statements
Notes to the Financial Statementscontinued
The following table shows, by nominal amount,subsidiary accounts, whereas in the activity in interest rate and cross currency swaps entered into for hedging purposes, with third parties and Abbey National Financial Products (ANFP).
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | Interest | | | Cross | | | | | | | Interest | | | Cross | | | | |
| | | rate | | | currency | | | | | | | rate | | | currency | | | | |
| | | swaps | | | swaps | | | Total | | | swaps | | | swaps | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January (third party contracts) | | | 20,011 | | | | 20,641 | | | | 40,652 | | | | 46,219 | | | | 22,252 | | | | 68,471 | |
| At 1 January (contracts with) ANFP | | | 49,422 | | | | 1,573 | | | | 50,995 | | | | 53,320 | | | | 1,597 | | | | 54,917 | |
| New contracts | | | 25,618 | | | | 3,924 | | | | 29,542 | | | | 22,362 | | | | 5,483 | | | | 27,845 | |
| Acquisitions of subsidiary undertakings | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Matured and amortised contracts | | | (8,926 | ) | | | (2,237 | ) | | | (11,163 | ) | | | (32,416 | ) | | | (2,636 | ) | | | (35,052 | ) |
| Terminated contracts | | | (5,776 | ) | | | (587 | ) | | | (6,363 | ) | | | (14,502 | ) | | | (4,430 | ) | | | (18,932 | ) |
| Effect of foreign exchange rate and other movements | | | 280 | | | | (74 | ) | | | 206 | | | | (1,652 | ) | | | (28 | ) | | | (1,680 | ) |
| Net (decrease) increase in contracts with ANFP | | | (31,486 | ) | | | 71 | | | | (31,415 | ) | | | (3,898 | ) | | | (24 | ) | | | (3,922 | ) |
| |
| At 31 December | | | 49,143 | | | | 23,311 | | | | 72,454 | | | | 69,433 | | | | 22,214 | | | | 91,647 | |
| |
Abbey uses interest rate swaps and cross-currency swaps predominantly for hedging fixed-rate assets and liabilities so that they become, in effect, floating-rate assets and liabilities. For interest rate swaps and cross-currency swaps used for these purposes, the weighted average pay fixed rates, receive fixed rates, pay variable rates and receive variable rates by maturity and contract amount at 31 December 2004 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pay fixed | | | Receive fixed | | | Pay variable | | | Receive variable | |
| | | Nominal | | | | | | | Nominal | | | | | | | Nominal | | | | | | | Nominal | | | | |
| | | amount | | | Rate | | | amount | | | Rate | | | amount | | | Rate | | | amount | | | Rate | |
| | | £m | | | % | | | £m | | | % | | | £m | | | % | | | £m | | | % | |
| |
Contracts maturing: (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than one year | | | 4,449 | | | | 4.32 | | | | 11,822 | | | | 3.99 | | | | 22,076 | | | | 3.83 | | | | 15,315 | | | | 4.12 | |
| One to three years | | | 2,787 | | | | 4.87 | | | | 1,768 | | | | 5.02 | | | | 14,797 | | | | 3.46 | | | | 15,811 | | | | 4.11 | |
| Three to five years | | | 1,812 | | | | 5.01 | | | | 1,275 | | | | 6.32 | | | | 15,500 | | | | 4.14 | | | | 16,086 | | | | 4.61 | |
| Over five years | | | 2,126 | | | | 6.06 | | | | 5,090 | | | | 7.24 | | | | 8,067 | | | | 5.05 | | | | 4,941 | | | | 4.37 | |
| |
| | | | 11,174 | | | | | | | | 19,955 | | | | | | | | 60,440 | | | | | | | | 52,153 | | | | | |
| |
(1) | | For the purpose of this analysis, the maturity date has been taken to be the date when the contract expires. |
The total pay fixed nominal amount comprises £11,133m in respect of interest rate swaps and £41m in respect of cross-currency swaps. The total receive fixed nominal amount comprises £18,178m in respect of interest rate swaps and £1,777m in respect of cross-currency swaps. The total pay variable nominal amount comprises £38,008m in respect of interest rate swaps and £22,432m in respect of cross-currency swaps. The total receive variable nominal amount comprises £30,964m in respect of interest rate swaps and £21,189m in respect of cross-currency swaps.
A difference arises when comparing nominal contract assets and nominal contract liabilities. Whereas with single currency swaps there are equal and opposite nominal balances on either side of the swap leg, this is not necessarily the case with cross-currency swaps. At contract date sterling equivalent nominal amountsparent accounts such options should be equal and opposite, however, subsequent exchange rate movements will result in divergence in the nominal amounts. This exchange rate divergence explains the difference between nominal contract asset balances and nominal contract liability balances.
The weighted average interest rates presented in the tables above reflect interest rates intreated as “equity settled”.
Abbey became a
range of currencies. These rates should not be analysed in isolation from the rates on the underlying instruments. The effect of hedges has been included in the average interest rates presented in the Average balance sheet included elsewhere in this Annual Report. The contract amount of each type of end-use contract (excluding cross-currency swaps and interest rate swaps which are included in the swaps detailed above) at 31 December 2004 are set forth by currency in the table below. Of these contracts £1,194m mature within one year and £2,381m mature after one year.
| | | | | | | | | | | | | | | | | | | | | |
| | | Contract type by nominal amount | |
| | | Forward foreign | | | | | | | | | | | | | |
| | | exchange and foreign | | | Forward rate | | | Options caps and | | | Futures (exchange | | | | |
| | | exchange swaps | | | agreements | | | floors (OTC)(1) | | | traded) | | | Equity contracts | |
| 2004 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Sterling | | | 543 | | | | — | | | | 1,707 | | | | — | | | | 355 | |
| US dollars | | | 522 | | | | — | | | | — | | | | — | | | | 43 | |
| Euro | | | 120 | | | | — | | | | — | | | | — | | | | 288 | |
| Hong Kong dollar | | | — | | | | — | | | | — | | | | — | | | | — | |
| Switzerland franc | | | 9 | | | | — | | | | — | | | | — | | | | 8 | |
| |
| Total | | | 1,194 | | | | — | | | | 1,707 | | | | — | | | | 674 | |
| |
| (1) All over-the-counter option contracts are in respect of interest related instruments. |
147
Financial Statements
Notes to the Financial Statementscontinued
Trading derivatives
The following table sets forth the contract or underlying principal (nominal) amounts, positive market values and negative market values of derivatives held for trading purposes at 31 December 2004 and 2003.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | |
| | | Contract or | | | Positive | | | Negative | | | Contract or | | | Positive | | | Negative | |
| | | underlying | | | market values | | | market values | | | underlying | | | market values | | | market values | |
| | | principal 2004 | | | 2004 | | | 2004 | | | principal 2003 | | | 2003 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Exchange rate contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cross-currency swaps | | | 8,817 | | | | 194 | | | | 393 | | | | 10,572 | | | | 253 | | | | 428 | |
| Foreign exchange swaps and forwards | | | 3,533 | | | | 13 | | | | 164 | | | | 19,399 | | | | 76 | | | | 72 | |
| |
| | | | 12,350 | | | | 207 | | | | 557 | | | | 29,971 | | | | 329 | | | | 500 | |
| |
| Interest rate contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | | 377,931 | | | | 8,350 | | | | 8,694 | | | | 380,989 | | | | 8,254 | | | | 8,794 | |
| Caps, floors and swaptions | | | 54,074 | | | | 824 | | | | 765 | | | | 56,436 | | | | 771 | | | | 796 | |
| Futures (exchange traded) | | | 1,069 | | | | — | | | | — | | | | 5,348 | | | | 32 | | | | 28 | |
| Forward rate agreements | | | 2,290 | | | | — | | | | — | | | | 4,547 | | | | 2 | | | | 1 | |
| |
| | | | 435,364 | | | | 9,174 | | | | 9,459 | | | | 447,320 | | | | 9,059 | | | | 9,619 | |
| |
| Equity and credit contracts: | | | | | | | | | | | | | | | | | | | | | | | | |
| Equity index and similar products | | | 15,696 | | | | 581 | | | | 1,750 | | | | 11,561 | | | | 538 | | | | 2,535 | |
| Equity index options (exchange traded) | | | 3,487 | | | | 128 | | | | 127 | | | | 8,363 | | | | 70 | | | | 301 | |
| Credit default swaps and similar products | | | 17,156 | | | | 90 | | | | 80 | | | | 16,171 | | | | 103 | | | | 74 | |
| |
| | | | 36,339 | | | | 799 | | | | 1,957 | | | | 36,095 | | | | 711 | | | | 2,910 | |
| |
| Total | | | 484,053 | | | | 10,180 | | | | 11,973 | | | | 513,386 | | | | 10,099 | | | | 13,029 | |
| |
| Effect of netting | | | | | | | (8,308 | ) | | | (8,308 | ) | | | | | | | (8,456 | ) | | | (8,456 | ) |
Fair values of contracts between ANFP and other Group entities(1) | | | | | | | 505 | | | | — | | | | | | | | — | | | | 189 | |
| |
| Amount included in Other assets/Other liabilities | | | | | | | 2,377 | | | | 3,665 | | | | | | | | 1,643 | | | | 4,762 | |
| |
(1) | | Associated contracts which Abbey National Financial Products has transacted with external counterparties are included in the analysis of trading derivatives. |
Positive fair values arise where gross positive fair values exceed gross negative fair values on a contract-by-contract basis. This equates to net replacement cost. Negative fair values arise where gross negative fair values exceed gross positive fair values on a contract-by-contract basis. The totals of positive and negative fair values arising on trading derivatives at 31 December 2004 have been netted where the Group has a legal right of offset with the relevant counterparty.
All exchange-traded instruments are subject to cash requirements under the standard margin arrangements applied by the individual exchanges. Such instruments are not subject to significant credit risk.
Abbey National Treasury Services plc has a mandate to deal in credit derivatives. Abbey National Treasury Services plc acts as principal under this mandate, and takes a fee for guaranteeing the counterparty against the default of the senior obligations of a third party. Amounts in respect of non-trading credit derivative contracts are included under note 46, Guarantees and assets pledged as collateral security.
Substantially all of Abbey’s over-the-counter derivatives activity is contracted with financial institutions.
The following table analyses replacement cost for over-the-counter and other non-exchange traded derivatives with positive market values held for trading purposes by remaining maturity before netting:
| | | | | | | | | | | | | | | | | |
| | | Group | |
| | | Contacts or | | | | | | | Contacts or | | | | |
| | | underlying | | | Replacement | | | underlying | | | Replacement | |
| | | principal cost | | | cost | | | principal cost | | | cost | |
| | | 2004 | | | 2004 | | | 2003 | | | 2003 | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Trading derivatives maturing (before netting): | | | | | | | | | | | | | | | | |
| In not more than one year | | | 80,237 | | | | 820 | | | | 105,884 | | | | 1,018 | |
| In more than one year but not more than five years | | | 222,234 | | | | 3,470 | | | | 219,871 | | | | 3,914 | |
| In more than five years | | | 177,026 | | | | 5,762 | | | | 173,920 | | | | 5,065 | |
| |
| | | | 479,497 | | | | 10,052 | | | | 499,675 | | | | 9,997 | |
| |
148
Financial Statements
Notes to the Financial Statementscontinued
Unrecognised gains and losses on financial assets and financial liabilities resulting from hedge accounting
Gains and losses on financial instruments used for hedging are not recognised until the exposure that is being hedged is itself recognised. Unrecognised gains and losses on instruments used for hedging are as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | Group | |
| | | 2004 | | | 2004 | | | 2004 | |
| | | Gains | | | Losses | | | Net gains | |
| | | £m | | | £m | | | (losses) | |
| | | | | | | | | | | £m | |
| |
| Gains and losses expected to be recognised: | | | | | | | | | | | | |
| In one year or less | | | 209 | | | | (89 | ) | | | 120 | |
| After one year | | | 1,328 | | | | (1,732 | ) | | | (404 | ) |
| |
| | | | 1,537 | | | | (1,821 | ) | | | (284 | ) |
| |
| | | | | | | | | | | | | |
| | | | | | | | | | | Group | |
| | | 2003 | | | 2003 | | | 2003 | |
| | | Gains | | | Losses | | | Net gains (losses) | |
| | | £m | | | £m | | | £m | |
| |
| Gains and losses expected to be recognised: | | | | | | | | | | | | |
| In one year or less | | | 633 | | | | (423 | ) | | | 210 | |
| After one year | | | 1,561 | | | | (2,071 | ) | | | (510 | ) |
| |
| | | | 2,194 | | | | (2,494 | ) | | | (300 | ) |
| |
The net gain unrecognised as at the start of the year and recognised during the year was £210m (2003: £129m).
Deferred gains and losses on financial assets and financial liabilities resulting from hedge accounting
Deferred balances relating to settled derivatives and other financial transactions previously used as hedges will be released to the profit and loss account in the same periods as the income and expense flows from the underlying hedged transactions. The movement in the period is as follows:
| | | | | | | | | | | | | |
| | | | | | | | | | | Group | |
| | | | | | | | | | | Total net gains | |
| | | Gains | | | Losses | | | (losses) | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 46 | | | | (11 | ) | | | 35 | |
| Previous year’s deferred gains and losses recognised in the year | | | (4 | ) | | | 1 | | | | (3 | ) |
| Gains and losses deferred in the year | | | 13 | | | | (48 | ) | | | (35 | ) |
| |
| At 31 December 2004 | | | 55 | | | | (58 | ) | | | (3 | ) |
| |
| Gains and losses expected to be recognised: | | | | | | | | | | | | |
| In one year or less | | | 41 | | | | (7 | ) | | | 34 | |
| After one year | | | 14 | | | | (51 | ) | | | (37 | ) |
| |
| | | | 55 | | | | (58 | ) | | | (3 | ) |
| |
52. Consolidated cash flow statement
a) Reconciliation of (loss)/profit before tax to net cash inflow from operating activities
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Profit/(loss) on ordinary activities before tax | | | 273 | | | | (686 | ) | | | (984 | ) |
| Decrease in interest receivable and prepaid expenses | | | 192 | | | | 531 | | | | 540 | |
| (Decrease)/increase in interest payable and accrued expenses | | | 735 | | | | 26 | | | | (25 | ) |
| Provisions for bad and doubtful debts | | | (35 | ) | | | 474 | | | | 514 | |
| Provisions for contingent liabilities and commitments | | | 233 | | | | 104 | | | | 50 | |
| Net advances written off | | | (293 | ) | | | (267 | ) | | | (289 | ) |
| Decrease before tax from Long-term Assurance business | | | (76 | ) | | | 202 | | | | 311 | |
| Depreciation and amortisation | | | 252 | | | | 401 | | | | 1,585 | |
| Income from associated undertakings | | | (6 | ) | | | (12 | ) | | | (17 | ) |
| Profit on sale of subsidiary and associated undertakings | | | (46 | ) | | | (89 | ) | | | (48 | ) |
| Profit/(loss) on sale of tangible fixed assets and investments | | | 128 | | | | 497 | | | | 55 | |
| Effect of other deferrals and accruals of cash flows from operating activities | | | (303 | ) | | | (278 | ) | | | 190 | |
| |
| Net cash inflow from trading activities | | | 1,054 | | | | 903 | | | | 1,882 | |
| Net (increase)/decrease in loans and advances to banks and customers | | | (4,295 | ) | | | (10,943 | ) | | | (5,104 | ) |
| Net (increase)/decrease in investment in finance leases | | | 77 | | | | (13 | ) | | | 404 | |
| Net (increase)/decrease in bills and securities | | | 6,380 | | | | 1,115 | | | | (5,643 | ) |
| Net (decrease) in deposits and customer accounts | | | 602 | | | | (3,291 | ) | | | (369 | ) |
| Net (decrease) in debt securities in issue | | | (2,030 | ) | | | (21,778 | ) | | | (4,432 | ) |
| Net increase in other liabilities less assets | | | (3,175 | ) | | | 1,947 | | | | 2,006 | |
| Exchange movements | | | (633 | ) | | | (618 | ) | | | 304 | |
| |
| Net cash (outflow)/inflow from operating activities | | | (2,019 | ) | | | (32,678 | ) | | | (10,952 | ) |
| |
149
Financial Statements
Notes to the Financial Statementscontinued
Exchange movements represent exchange movements on cash balances and investing and financing activities. The movements are not indicative of Abbey’s exposure to foreign exchange risk on these items, because foreign currency positions in such balances are substantially hedged by other on-balance sheet and off-balance sheet foreign currency amounts. All other exchange movements, including movements on hedges, are included in the relevant captions in the above reconciliation.
b) Analysis of the balances of cash as shown in the balance sheet
Included in the balance sheet are the following amounts of cash:
| | | | | | | | | | | | | |
| | | | | | | Loans and | | | | |
| | | | | | | advances to | | | | |
| | | Cash and | | | other banks | | | | |
| | | balances with | | | repayable on | | | | |
| | | central banks | | | demand | | | Total | |
| | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 439 | | | | 3,089 | | | | 3,528 | |
| Net cash inflow/(outflow) | | | 15 | | | | (203 | ) | | | (188 | ) |
| |
| At 31 December 2004 | | | 454 | | | | 2,886 | | | | 3,340 | |
| |
| At 1 January 2003 | | | 396 | | | | 2,698 | | | | 3,094 | |
| Net cash inflow | | | 43 | | | | 391 | | | | 434 | |
| |
| At 31 December 2003 | | | 439 | | | | 3,089 | | | | 3,528 | |
| |
| At 1 January 2002 | | | 494 | | | | 5,452 | | | | 5,946 | |
| Net cash (outflow) | | | (98 | ) | | | (2,754 | ) | | | (2,852 | ) |
| |
| At 31 December 2002 | | | 396 | | | | 2,698 | | | | 3,094 | |
| |
Abbey is required to maintain balances with the Bank of England which at 31 December 2004 amounted to £131m (2003: £127m, 2002: £131m). These are shown in loans and advances to banks, and are not included in cash for the purposes of the Cash Flow Statement.
c) Analysis of changes in financing during the year
| | | | | | | | | | | | | | | | | | | | | |
| | | Share | | | Non-equity | | | Sub- | | | Other long-term | | | | |
| | | capital inc. | | | minority | | | ordinated | | | capital | | | | |
| | | share premium | | | interests | | | liabilities | | | instruments | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 1 January 2004 | | | 2,522 | | | | 554 | | | | 6,337 | | | | 742 | | | | 10,155 | |
| Net cash (outflow) from financing | | | 13 | | | | — | | | | (813 | ) | | | — | | | | (800 | ) |
| Shares issued for a non-cash consideration | | | 101 | | | | — | | | | — | | | | — | | | | 101 | |
| Effect of foreign exchange rate changes | | | — | | | | (42 | ) | | | (164 | ) | | | (20 | ) | | | (226 | ) |
| |
| At 31 December 2004 | | | 2,636 | | | | 512 | | | | 5,360 | | | | 722 | | | | 9,230 | |
| |
| At 1 January 2003 | | | 2,626 | | | | 627 | | | | 6,532 | | | | 771 | | | | 10,556 | |
| Net cash (outflow) from financing | | | (122 | ) | | | (15 | ) | | | (56 | ) | | | — | | | | (193 | ) |
| Shares issued for a non-cash consideration | | | 18 | | | | — | | | | — | | | | — | | | | 18 | |
| Effect of foreign exchange rate changes | | | — | | | | (58 | ) | | | (139 | ) | | | (29 | ) | | | (226 | ) |
| |
| At 31 December 2003 | | | 2,522 | | | | 554 | | | | 6,337 | | | | 742 | | | | 10,155 | |
| |
| At 1 January 2002 | | | 2,520 | | | | 681 | | | | 6,590 | | | | 297 | | | | 10,088 | |
| Net cash inflow from financing | | | 17 | | | | 15 | | | | 170 | | | | 485 | | | | 687 | |
| Shares issued for a non-cash consideration | | | 82 | | | | — | | | | — | | | | — | | | | 82 | |
| Capitalised on exercise of share options | | | 7 | | | | — | | | | — | | | | — | | | | 7 | |
| Effect of foreign exchange rate changes | | | — | | | | (69 | ) | | | (228 | ) | | | (11 | ) | | | (308 | ) |
| |
| At 31 December 2002 | | | 2,626 | | | | 627 | | | | 6,532 | | | | 771 | | | | 10,556 | |
| |
150
Financial Statements
Notes to the Financial Statementscontinued
d) Acquisitions of subsidiary undertakings and purchase of businesses
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Net assets acquired: | | | | | | | | | | | | |
| Loans and advances to banks | | | — | | | | — | | | | — | |
| Loans and advances to customers | | | — | | | | — | | | | 281 | |
| Operating lease assets | | | — | | | | — | | | | — | |
| Tangible fixed assets | | | — | | | | — | | | | — | |
| Other assets | | | — | | | | — | | | | 6 | |
| Debt securities | | | — | | | | — | | | | — | |
| Long-term assurance business | | | — | | | | — | | | | — | |
| Assets of Long-term assurance funds | | | — | | | | — | | | | — | |
| Customer accounts | | | — | | | | — | | | | — | |
| Deposits by banks | | | — | | | | — | | | | (50 | ) |
| Debt securities in issue | | | — | | | | — | | | | (31 | ) |
| Provisions for liabilities and charges | | | — | | | | — | | | | (2 | ) |
| Other liabilities | | | — | | | | — | | | | (8 | ) |
| Liabilities of long-term assurance funds | | | — | | | | — | | | | — | |
| Goodwill on acquisitions | | | — | | | | — | | | | 8 | |
| |
| | | | — | | | | — | | | | 204 | |
| |
| Satisfied by: | | | | | | | | | | | | |
| Cash | | | — | | | | — | | | | 1,597 | |
Deferred cash/loan notes* | | | — | | | | — | | | | (1,393 | ) |
| |
| | | | — | | | | — | | | | 204 | |
| |
* | Such items relate to the consideration for the settlement of Scottish Provident of £1,393m settled in cash and £220m in loan notes at the option of the members during 2002. |
e) Analysis of the net outflow of cash in respect of acquisitions of subsidiary undertakings and purchase of businesses
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Cash consideration | | | — | | | | — | | | | 1,597 | |
| |
f) Sale of subsidiary, associated undertakings and businesses
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Net assets disposed of: | | | | | | | | | | | | |
| Cash at bank and in hand | | | — | | | | 11 | | | | — | |
| Loans and advances to banks | | | 9 | | | | 26 | | | | 10 | |
| Loans and advances to customers | | | 2,423 | | | | 7,780 | | | | 21 | |
| Net investment in finance leases | | | 1,349 | | | | 887 | | | | 887 | |
| Debt securities | | | 6 | | | | 16 | | | | — | |
| Equity shares and other similar interests | | | | | | | — | | | | — | |
| Other assets | | | 36 | | | | 144 | | | | 54 | |
| Prepayments and accrued income | | | 2 | | | | — | | | | — | |
| Tangible fixed assets | | | 1 | | | | 14 | | | | 1 | |
| Operating lease assets | | | — | | | | 75 | | | | 362 | |
| Interests in associated undertakings | | | | | | | — | | | | — | |
| Deposits by banks | | | (386 | ) | | | (56 | ) | | | (12 | ) |
| Customer accounts | | | — | | | | (1 | ) | | | — | |
| Debt Securities in Issue | | | — | | | | (23 | ) | | | — | |
| Other liabilities | | | (107 | ) | | | (74 | ) | | | (107 | ) |
| Accruals and deferred income | | | (17 | ) | | | — | | | | — | |
| Provisions for liabilities and charges | | | (194 | ) | | | (266 | ) | | | (262 | ) |
| Goodwill disposed of | | | 6 | | | | 2 | | | | 46 | |
| Goodwill written back | | | 6 | | | | 190 | | | | 13 | |
| Profit on disposal | | | 46 | | | | 89 | | | | 48 | |
| |
| | | | 3,180 | | | | 8,814 | | | | 1,061 | |
| |
| Satisfied by: | | | | | | | | | | | | |
| Cash | | | 3,180 | | | | 8,814 | | | | 1,061 | |
| |
g) Analysis of the net inflow of cash in respect of the sale of subsidiary and associated undertakings
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Cash received as consideration | | | 3,180 | | | | 8,814 | | | | 1,061 | |
| Cash disposed of | | | — | | | | (11 | ) | | | — | |
| |
| Net cash inflow in respect of sale of subsidiary and associated undertakings | | | 3,180 | | | | 8,803 | | | | 1,061 | |
| |
151
Financial Statements
Notes to the Financial Statementscontinued
53. Retirement benefits
The Abbey National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey National Associated Bodies Pension Fund, Scottish Mutual Assurance Staff Pension Scheme, Scottish Provident Institutional Staff Pension Fund and National and Provincial Building Society Pension Fund are the principal pension schemes within Abbey, covering 62% (2003: 70%) of Abbey’s employees, and are all funded defined benefits schemes. All are closed schemes, thus under the projected unit method the current service cost will increase as members of the schemes reach retirement.
Formal actuarial valuations of the assets and liabilities of the schemes are carried out on a triennial basis by an independent professionally qualified actuary. The latest formal actuarial valuation was made at 31 March 2002 for the Amalgamated Fund, Associated Bodies Fund and Group Pension Scheme, and the Scottish Provident Institution Staff Pension Fund, 31 March 2003 for the National and Provincial Building Society Pension Fund and 31 December 2003 for the Scottish Mutual Assurance Staff Pension Scheme. In addition, there is an annual review by the appointed actuary. The results of these reviews are included in the Consolidated Financial Statements.
The main long-term financial assumptions, as stated in absolute terms, used in the 2004 annual review were:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | Nominal per annum | | | Nominal per annum | |
| | | % | | | % | |
| |
| Investment returns | | | 6.4 | | | | 6.6 | |
| Pension increases | | | 2.5 | | | | 2.5 | |
| General salary increase | | | 4.0 | | | | 4.0 | |
| General price inflation | | | 2.5 | | | | 2.5 | |
| |
At the latest actuarial review date, the market value of the combined assets was £2,280m and the combined funding level was 80.6%. All of the pension fund liabilities are valued on an actuarial basis using the projected unit method. In the period ended 31 December 2004, the employer’s contribution rates to the schemes ranged between 9.9% and 49.2%. In consultation with the actuary, the agreed contribution rates for future years range from 9.8% to 52.6%.
As shown in the table below, the pension cost reflects the regular contribution rate less amounts in respect of the surplus or deficit being recognised over the expected remaining service lives of the members of all Abbey’s schemes in accordance with SSAP 24, Accounting for pension costs. Surpluses or deficits are amortised on the basis of a percentage of payroll to align with contribution rates. The pension cost charged to the Profit and Loss Account for the year was as follows:
| | | | | | | | | |
| | | | | | | Group | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Regular cost | | | 66 | | | | 75 | |
| Amortisation of surpluses arising on pension schemes | | | — | | | | — | |
| Amortisation of deficits arising on pension schemes | | | 50 | | | | 45 | |
| Amortisation of surplus arising from fair value adjustment on acquisition of National and Provincial | | | 2 | | | | 2 | |
| |
| Charged to profit and loss account (note 38) | | | 118 | | | | 122 | |
| |
During 2004 an additional £31m (2003: £15) was paid to the schemes in respect of contractual termination benefits arising from restructuring. In addition £4m (2003: £6m) was contributed to defined contribution and overseas pensions schemes.
Balances representing the difference between amounts paid to the respective pension schemes of Abbey and any amounts charged to the Profit and Loss Account, in accordance with SSAP 24, are included in the Balance Sheet. At 31 December 2004, an asset of £21m (2003: £23m) and a liability of £40m (2003: £38m) have been included in the balance sheet accordingly. In addition, included in other assets at 31 December 2004 was an amount of £14m (2003: £15m) in respect of the unamortised pension scheme surplus assessed at the date the business of National and Provincial was purchased. This was based on an actuarial assessment of the scheme at that date and is included in the Balance Sheet in accordance with FRS 17. This balance is being amortised over the average remaining service lives of employees in the scheme as shown above.
During 2004 an additional £31m (2003: £15m) was paid to the scheme in respect of contractual termination benefits arising from restructuring and various business disposals.
Additional disclosures required under the transition provisions of FRS 17:
Disclosures required under the transition provisions of FRS 17 are included below.
The main long-term financial assumptions, as stated in absolute terms, under the provisions of FRS 17 are as follows:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | Nominal per annum | | | Nominal per annum | | | Nominal per annum | |
| | | % | | | % | | | % | |
| |
| Discount rate for scheme liabilities | | | 5.4 | | | | 5.5 | | | | 5.75 | |
| Pension and deferred pension increases | | | 2.8 | | | | 2.7 | | | | 2.4 | |
| General salary increase | | | 4.3 | | | | 4.2 | | | | 3.9 | |
| General price inflation | | | 2.8 | | | | 2.7 | | | | 2.4 | |
| |
152
Financial Statements
Notes to the Financial Statementscontinued
The fair value of the assets held by the pension schemes at 31 December 2004, and the expected rate of return for each class of assets for the current period, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 2004 | | | | | | | 2003 | | | | | | | 2002 | |
| | | Expected rate of | | | Fair | | | Expected rate of | | | Fair | | | Expected rate of | | | Fair | |
| | | return | | | value | | | return | | | value | | | return | | | value | |
| | | % | | | £m | | | % | | | £m | | | % | | | £m | |
| |
| Equities | | | 7.25 | | | | 1,265 | | | | 7.25 | | | | 1,150 | | | | 8.0 | | | | 1,477 | |
| Bonds | | | 5.0 | | | | 1,076 | | | | 5.2 | | | | 1,025 | | | | 4.5 | | | | 326 | |
| Others | | | 5.0 | | | | 152 | | | | 4.4 | | | | 30 | | | | 4.0 | | | | 77 | |
| |
| | | | | | | | 2,493 | | | | | | | | 2,205 | | | | | | | | 1,880 | |
| |
Pension fund liabilities are valued on an actuarial basis using the projected unit method and pension assets are stated at their fair value.
The net pension scheme deficit measured under FRS 17 at 31 December 2004 comprised the following:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Total market value of assets | | | 2,493 | | | | 2,205 | | | | 1,880 | |
| Present value of scheme liabilities | | | (3,689 | ) | | | (3,306 | ) | | | (2,722 | ) |
| FRS 17 scheme deficit | | | (1,196 | ) | | | (1,101 | ) | | | (842 | ) |
| Related deferred tax asset | | | 359 | | | | 330 | | | | 253 | |
| |
| Net FRS 17 scheme deficit | | | (837 | ) | | | (771 | ) | | | (589 | ) |
| |
The following amounts would be reflected in the Profit and Loss Account and statement of total recognised gains and losses on implementation of FRS 17:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Amount that would be charged to operating profits: | | | | | | | | |
| Current service cost | | | 120 | | | | 118 | |
| Past service cost | | | 24 | | | | 15 | |
| Gains on settlements | | | (4 | ) | | | (13 | ) |
| |
| Total operating charge | | | 140 | | | | 120 | |
| Amount that would be credited to finance income: | | | | | | | | |
| Expected return on pension scheme assets | | | (139 | ) | | | (140 | ) |
| Interest on pension scheme liabilities | | | 182 | | | | 160 | |
| |
| Net return | | | 43 | | | | 20 | |
| |
Amount that would be recognised in the statement of total recognised gains and losses: | | | | | | | | |
| Actual return less expected return on pension scheme assets | | | 104 | | | | 94 | |
| Experience gains and losses arising on scheme liabilities | | | (10 | ) | | | 31 | |
| Gains arising from changes in assumptions underlying the present value of scheme liabilities | | | (162 | ) | | | (359 | ) |
| |
| Actuarial (loss) | | | (68 | ) | | | (234 | ) |
| |
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
Movement on pension scheme deficits during the year: | | | | | | | | |
| Deficit at 1 January | | | (1,101 | ) | | | (842 | ) |
| Current service cost | | | (120 | ) | | | (118 | ) |
| Contributions | | | 156 | | | | 115 | |
| Past service cost | | | (24 | ) | | | (15 | ) |
| Gain on settlements | | | 4 | | | | 13 | |
| Other finance income | | | (43 | ) | | | (20 | ) |
| Actuarial (loss) | | | (68 | ) | | | (234 | ) |
| |
| Deficit at 31 December | | | (1,196 | ) | | | (1,101 | ) |
| |
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
History of experience gains/(losses) | | | | | | | | |
| Difference between expected and actual return on scheme assets: | | | | | | | | |
| Amount (£m) | | | 104 | | | | 94 | |
| Percentage (%) of scheme assets | | | 4.2 | | | | 4.3 | |
| Experience gains/(losses) on scheme liabilities: | | | | | | | | |
| Amount (£m) | | | (10 | ) | | | 31 | |
| Percentage (%) of the present value of scheme liabilities | | | 0.3 | | | | 0.9 | |
| Total gain/(loss) recognised: | | | | | | | | |
| Gain/(loss) on change of assumptions | | | (68 | ) | | | (234 | ) |
| Percentage (%) of the present value of scheme liabilities | | | 1.8 | | | | 7.1 | |
| |
153
Financial Statements
Notes to the Financial Statementscontinued
If the full provisions of FRS 17 were reflected in the Consolidated Financial Statements, the Group Profit and Loss Account reserve of £1,981m would be reduced by £834m (2003: £787m) to £1,147m (2003: £1,740m). This reduction reflects the FRS 17 position shown above and the reversal of the remaining unamortised asset relating to the surplus in the National and Provincial pension fund at acquisition.
54. Directors’ emoluments and interests
Further details of Directors’ emoluments and interests are included in the Directors’ Report on pages 83 to 91.
Ex gratiapensions paid to former Directors and the spouses of deceased Directors of Abbey in 2004, which would have been provided for previously, amounted to £54,020 (2003: £74,199).
Details of loans, quasi loans and credit transactions entered into or agreed by the Company or its subsidiaries with persons who are or were Directors and connected persons and officers of the Company during the year were as follows:
| | | | | | | | | |
| | | Number of | | | Aggregate amount outstanding | |
| | | persons | | | £000 | |
| |
Directors | | | | | | | | |
| Loans | | | 1 | | | | 240 | |
| Quasi loans | | | — | | | | — | |
| Credit transactions | | | — | | | | — | |
| |
Officers(1) | | | | | | | | |
| Loans | | | — | | | | — | |
| Quasi loans | | | — | | | | — | |
| Credit transactions | | | — | | | | — | |
| |
(1) | | Officers are defined as the Company Secretary and those non-Board members who, during the year, were head of a division. |
Such loans were made in the ordinary course of business and the mortgage loan was provided on the same terms as those to other non-affiliated persons.
No Director had a material interest in any contract of significance, other than a service contract, with the Company or any of its subsidiaries at any time during the year. The Directors did not have any interests in shares or debentures of subsidiaries. Further disclosures relating to these transactions, as required under FRS 8, Related party disclosures, are given in note 56.
55. Share-based payments
Abbey granted share options to executive officers and employees principally under the Executive Share Option scheme, Sharesave scheme and the Employee Share Option scheme.
Options granted under the Executive Share Option scheme are generally exercisable between the third and tenth anniversaries of the grant date, provided that certain performance criteria are met.
Under the Sharesave scheme, eligible employees could elect to exercise their options either three, five or seven years after the grant date. See note 42 to the Consolidated Financial Statements for a description of the options granted under this scheme.
The number of options authorised to be granted was limited to 10% of the total number of shares issued since conversion.
The total compensation expense for equity-settled share based transactions recognised in the Profit and Loss Account was £12m (2003: £8m, 2002: £7m).
The fair value of each option for 2004, 2003 and 2002 has been estimated as at the grant date using the Black-Scholes option pricing model using the following assumptions:
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| |
| Risk free interest rate | | | 3.7%-7.3 | % | | | 3.7%-7.3 | % | | | 4.2% - 7.9 | % |
| Dividend growth, based solely upon average growth since 1989 | | | 14 | % | | | 14 | % | | | 14 | % |
| Volatility of underlying shares based upon historical volatility over five years | | | 22.7%-42.3 | % | | | 22.7%-42.3 | % | | | 22.7% - 40.0 | % |
| Expected lives of options granted under: | | | | | | | | | | | | |
| Employee Sharesave scheme | | 3, 5 and 7 years* | | 3, 5 and 7 years* | | 3, 5 and 7 years* |
| Executive Share Option scheme | | 6 years | | 6 years | | 6 years |
| Employee Share Option scheme | | 5 years | | 5 years | | 5 years |
| |
* | | For three, five and seven year schemes respectively. |
The following table summarises the movement in the number of share options between those outstanding at the beginning and end of the year, together with the changes in weighted average exercise price over the same period. All of the shares options prior to 12 November 2004 relate to shares in Abbey National plc. After 12 November 2004 all share options relate to shares in Banco Santander Central Hispano, S. A. On 12 November 2004 all holders of options in ordinary shares of Abbey National plc were given the option to exercise their options, to cancel their shares in return for a cash payment or to transfer their options to options in shares of Banco Santander Central Hispano, S.A.
154
Financial Statements
NotesS.A (BSCH) and part of Santander in 2004, and at that time a number of options in the shares of Abbey were rolled over into BSCH shares. Such options in line with their treatment as “cash settled shares” are fair valued at date of grant and the cost is spread through the income statement over the vesting period. In addition, at each balance sheet date, the options are revalued and this movement is taken to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Executive Share Option scheme | | | Employee Sharesave scheme | | | Employee Share Option scheme | |
| | | | | | | Weighted average | | | | | | | Weighted average | | | | | | | Weighted average | |
| | | Number of options | | | exercise price | | | Number of options | | | exercise price | | | Number of options | | | exercise price | |
| | | granted | | | £ | | | granted | | | £ | | | granted | | | £ | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | |
| Options outstanding at the beginning of the year | | | 15,180,932 | | | | 6.27 | | | | 28,328,589 | | | | 3.61 | | | | 8,909,143 | | | | 11.07 | |
| Options granted before 12 November | | | 2,039,702 | | | | 4.61 | | | | 3,877,757 | | | | 3.98 | | | | — | | | | — | |
| Options exercised before 12 November | | | (4,360,768 | ) | | | 3.93 | | | | (1,727,980 | ) | | | 3.51 | | | | (4,050 | ) | | | 5.91 | |
| Options forfeited before 12 November | | | (12,501,022 | ) | | | 6.88 | | | | (13,094,132 | ) | | | 3.79 | | | | (1,666,493 | ) | | | 10.28 | |
| Options expired before 12 November | | | — | | | | — | | | | (12,734 | ) | | | 7.65 | | | | — | | | | — | |
| Options outstanding at 12 November | | | 358,844 | | | | 4.16 | | | | 17,371,500 | | | | 3.56 | | | | 7,238,600 | | | | 11.25 | |
| Options granted after 12 November | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Options exercised after 12 November | | | — | | | | — | | | | (39,778 | ) | | | 3.41 | | | | (6,300 | ) | | | 5.91 | |
| Options forfeited after 12 November | | | — | | | | — | | | | (80,926 | ) | | | 4.23 | | | | (150 | ) | | | 5.91 | |
| Options expired after 12 November | | | — | | | | — | | | | — | | | | — | | | | (7,175,600 | ) | | | 11.30 | |
| |
| Options outstanding at the year end | | | 358,844 | | | | 4.16 | | | | 17,250,796 | | | | 3.56 | | | | 56,550 | | | | 5.91 | |
| |
| Options exercisable at the end of the year | | | 11,327 | | | | 5.65 | | | | — | | | | — | | | | 56,550 | | | | 5.91 | |
| |
| The weighted-average grant-date fair value of options granted during the year | | | | | | | 0.96 | | | | | | | | 0.99 | | | | | | | | — | |
| |
2003 | | | | | | | | | | | | | | | | | | | | | | | | |
| Options outstanding at the beginning of the year | | | 8,005,206 | | | | 9.15 | | | | 18,173,482 | | | | 6.32 | | | | 10,507,253 | | | | 11.08 | |
| Options granted during the year | | | 8,576,826 | | | | 3.80 | | | | 27,113,143 | | | | 3.20 | | | | — | | | | — | |
| Options exercised during the year | | | (114,990 | ) | | | 3.98 | | | | (246,456 | ) | | | 4.06 | | | | (450 | ) | | | 5.91 | |
| Options forfeited during the year | | | (522,772 | ) | | | 8.84 | | | | (6,574,266 | ) | | | 5.10 | | | | (1,597,660 | ) | | | 11.16 | |
| Options expired during the year | | | (763,338 | ) | | | 7.13 | | | | (10,137,314 | ) | | | 6.39 | | | | — | | | | — | |
| |
| Options outstanding at the end of the year | | | 15,180,932 | | | | 6.27 | | | | 28,328,589 | | | | 3.61 | | | | 8,909,143 | | | | 11.07 | |
| |
| Options exercisable at the end of the year | | | 2,859,158 | | | | 8.39 | | | | — | | | | — | | | | 2,965,128 | | | | 10.59 | |
| |
| The weighted-average grant-date fair value of options granted during the year | | | | | | | 0.52 | | | | | | | | 0.38 | | | | | | | | — | |
| |
2002 | | | | | | | | | | | | | | | | | | | | | | | | |
| Options outstanding at the beginning of the year | | | 5,366,178 | | | | 8.85 | | | | 18,919,108 | | | | 6.02 | | | | 11,335,103 | | | | 11.04 | |
| Options granted during the year | | | 3,822,618 | | | | 9.37 | | | | 4,800,602 | | | | 7.95 | | | | — | | | | — | |
| Options exercised during the year | | | (454,919 | ) | | | 6.43 | | | | (2,502,602 | ) | | | 5.76 | | | | (113,100 | ) | | | 5.91 | |
| Options forfeited during the year | | | (622,983 | ) | | | 9.53 | | | | (2,142,906 | ) | | | 7.34 | | | | (396,500 | ) | | | 11.25 | |
| Options expired during the year | | | (105,688 | ) | | | 11.91 | | | | (900,720 | ) | | | 7.81 | | | | (318,250 | ) | | | 11.25 | |
| |
| Options outstanding at the end of the year | | | 8,005,206 | | | | 9.15 | | | | 18,173,482 | | | | 6.32 | | | | 10,507,253 | | | | 11.08 | |
| |
| Options exercisable at the end of the year | | | 2,098,028 | | | | 9.52 | | | | 39,182 | | | | 4.82 | | | | 561,128 | | | | 5.91 | |
| |
| The weighted-average grant-date fair value of options granted during the year | | | | | | | 0.99 | | | | | | | | 2.37 | | | | | | | | — | |
| |
The following table summarises information aboutincome statement over the options outstanding at 31 December 2004.vesting period.
| | | | | | | | | | | | | | | | | | | | | |
| Executive Share Option | | | | | | Options outstanding | | | | | | | Options exercisable | |
| | | | | | | Weighted | | | | | | | | | | | |
| | | | | | | average | | | Weighted | | | | | | | Weighted | |
| | | Number | | | remaining | | | average | | | Number | | | average | |
| | | outstanding at | | | contractual life | | | exercise | | | exercisable at | | | exercise prices | |
| Range of exercise prices | | 31/12/2004 | | | (years) | | | price (£) | | | 31/12/2004 | | | (£) | |
| |
| Between £3 and £4 | | | 182,474 | | | | 8.25 | | | | 3.73 | | | | — | | | | — | |
| Between £4 and £5 | | | 165,043 | | | | 9.25 | | | | 4.54 | | | | — | | | | — | |
| Between £5 and £6 | | | 11,327 | | | | 0.24 | | | | 5.65 | | | | 11,327 | | | | 5.65 | |
| |
| | | | 358,844 | | | | | | | | | | | | 11,327 | | | | | |
| |
Under
IAS 17 ”Leases” requires finance lease income to be recognised to give a constant rate of return on the
Employee Sharesave scheme,net cash investment with no account taken in calculating the
weighted-average exercise prices of options are less than the market pricesnet investment of the
shares ontax effects of the
relevant grant dates.| | | | | | | | | | | | | | | | | | | | | |
| Employee Share Option Scheme | | | | | | Options outstanding | | | | | | | Options exercisable | |
| | | | | | | Weighted | | | | | | | | | | | |
| | | | | | | average | | | Weighted | | | | | | | Weighted | |
| | | Number | | | remaining | | | average | | | Number | | | average | |
| | | outstanding at | | | contractual life | | | exercise | | | exercisable at | | | exercise prices | |
| Range of exercise prices | | 31/12/2004 | | | (years) | | | price (£) | | | 31/12/2004 | | | (£) | |
| |
| Between £5 and £6 | | | 56,550 | | | | 1.66 | | | | 5.91 | | | | 56,550 | | | | 5.91 | |
| |
155
Financial Statements
Noteslease. The 2004 profit before tax impact relates to the Financial Statementscontinued
56. Related party disclosures
a) Transactions with directors, executive officersmove from the actuarial after tax method of recognising finance lease income that was applied under UK GAAP, resulting in a lower net book value and their close family members
Directors, executive officersincrease in profit on sale of leasing assets. This adjustment also reflects the depreciation of operating lease assets being recognised on a straight-line basis under IFRS, compared to recognition at a constant rate of return under UK GAAP.
Software Capitalisation
IAS 38 “Intangible Assets” requires software costs to be capitalised and
members of their close families have undertaken the following transactions with Abbey in the course of normal banking and life assurance business.| | | | | | | | | |
| | | | | | | Amounts in respect of directors, | |
| | | | | | | executive officers(1) and their | |
| | | Number of directors and | | | close family members 2004 | |
| | | executive officers(1) 2004 | | | £000 | |
| |
Secured loans, unsecured loans and overdrafts | | | | | | | | |
| Net movements in the year | | | — | | | | 226 | |
| Balances outstanding as at 31 December | | | 1 | | | | 240 | |
Deposit, bank and instant access accounts and investments | | | | | | | | |
| Net movements in the year | | | (1 | ) | | | 915 | |
| Balances outstanding as at 31 December | | | 8 | | | | 2,080 | |
Life assurance policies | | | | | | | | |
| Net movements in the year | | | 1 | | | | (57 | ) |
| Total sum insured/value of investment | | | 3 | | | | 50 | |
| |
| | | | | | | | | |
| | | | | | | Amounts in respect of directors, | |
| | | | | | | executive officers(1) and their | |
| | | Number of directors and | | | close family members 2003 | |
| | | executive officers(1) 2003 | | | £000 | |
| |
Secured loans, unsecured loans and overdrafts | | | | | | | | |
| Net movements in the year | | | 1 | | | | (375 | ) |
| Balances outstanding as at 31 December | | | 1 | | | | 14 | |
Deposit, bank and instant access accounts and investments | | | | | | | | |
| Net movements in the year | | | 9 | | | | (3,310 | ) |
| Balances outstanding as at 31 December | | | 9 | | | | 1,165 | |
Life assurance policies | | | | | | | | |
| Net movements in the year | | | 1 | | | | 7 | |
| Total sum insured/value of investment | | | 2 | | | | 107 | |
| |
(1) | | Executive officers are defined as the Company Secretary and those non-Board members who during the year were head of a Division. |
Directors have also undertaken sharedealing transactions through an execution only stockbroker subsidiary company of an aggregate net value of £2,280,413.amortised rather than expensed immediately. The transactions were on normal business terms and standard commission rates were payable.
Secured and unsecured loans are made to Directors, executive officers and their close family members on the same terms and conditions as applicable to other employees within Abbey.
Amounts deposited by Directors, executive officers and their close family members earn interest at the same rates as those offeredcharge to the market orincome statement reflects the impairment of amounts capitalised on the same terms and conditions applicable to other employees within Abbey. Such loans did not involve more than the normal risk of collectibility or present other infavourable features.
Life assurance policies and investments are entered into by Directors, Executive Officers and their close family members on normal market terms and conditions, or on the same terms and conditions as applicable to other employees within Abbey. Abbey entered into these loan agreements in the ordinary course of business, with terms prevailing for comparable transactions with others and these did not involve more than the normal risk of collectibility or present other unfavourable features.
b) Transactions with associated undertakings
Abbey National plc holds a 50% share in PSA Finance plc (PSA), a subsidiary of Peugeot SA. PSA is a finance organisation providing financial services to the Peugeot-Citroën car dealership network. The income receivable from Abbey’s interest in PSA amounted to £6m (2003: £12m) in the year.
Abbey has a 25% interest in EDS Credit Services Ltd, a subsidiary of Electronic Data Systems Ltd. Electronic Data Systems Ltd is a professional services firm specialising in information technology. The income receivable from Abbey’s interest in EDS Credit Services Ltd amounted to £nil (2003: £nil) in the period.
Balances outstanding between Abbey and associated companies at 31 December 2004 are detailed in note 32. Further details of Abbey’s interests in associated undertakings are shown in note 23.
c) Transactions with Long-term Assurance Funds
The long-term assurance funds are related parties for the purposes of this disclosure because the assets and liabilities of the long-term assurance funds are included in the Balance Sheet.
At 31 December 2004, Abbey entities owed £666m (2003: £858m) to, and were owed £1,354m (2003: £411m) by, the long-term assurance funds. Of these respective amounts £662m (2003: £852m) relates to amounts deposited by the long-term assurance funds with non-life assurance entities, and £1,327m (2003: £376m) relates to amounts owed by the long-term assurance funds to non-life assurance entities. The remaining amounts represent balances between the long-
156
Financial Statements
Notes to the Financial Statementscontinued
term assurance funds and the shareholders’ funds of the life assurance businesses. In addition, the long-term assurance funds have lent £1,930m (2003: £1,647m) of investment assets to a subsidiary of Abbey National Treasury Services under stock lending agreements at 31 December 2004.
Included in Fees and commissions receivable in the year is an amount of £17m (2003: £27m) receivable from the long-term assurance fund of Abbey National Life plc in respect of life assurance products sold through the retail branch network, and an amount of £nil payable (2003: £272m receivable) to the long-term assurance funds of Abbey National Life and Scottish Mutual Assurance in respect of option premiums paid from/to Abbey Financial Markets.
During the year Abbey National Financial Investment Services plc incurred costs amounting to £213m (2003: £223m) on behalf of the long-term assurance funds. All such costs were recharged to the long-term assurance funds and included within the charge to income from long-term assurance business. Included within fees and commissions receivable are management fees received by Abbey National Financial Investment Services totalling £200m (2003: £200m) from the long-term assurance funds.
Details of transfers of funds between shareholders’ funds and long-term assurance funds are provided in note 21. Included within assets of long-term assurance funds and liabilities of long-term assurance funds are amounts owing between the long-term assurance funds of £6m (2003: £15m).
The value of the funds’ holdings in internally managed unit trusts amounted to £4,438m (2003: £4,604m) at 31 December 2004. The unit trusts are managed by Abbey National Unit Trust Management Ltd, Scottish Mutual Investment Fund Managers Ltd, Scottish Mutual Investment Managers Ltd and Abbey National Asset Managers Ltd.
d) Subsidiary undertakings
In accordance with Financial Reporting Standard 8 “Related Party Disclosures” (“FRS 8”), transactions or balances between group entities that have been eliminated on consolidation are not reported.
e) Parent undertaking and controlling party
Since 12 November 2004 the company’s immediate and ultimate parent, and controlling party is Banco Santander Central Hispano, S.A. The smallest and largest group into which the Group’s results are included is the group accounts of Banco Santander Central Hispano, S.A. copies of which may be obtained from Grupo Santander, Shareholder Department, Grupo Santander, Santander House, 100 Ludgate Hill, London EC4M 7NJ.
57. Profit/(Loss) on sale or termination of a business
As a consequence oftransition following the acquisition of Abbey by Banco Santander Central Hispano, S.A. in November
Goodwill
IFRS 3 “Business Combinations” requires amortisation of goodwill to cease on transition to IFRS, but instead subject it to annual impairment tests. The 2004 certain decisions were made to reorganise certain areasimpact represents the write back of the business. As a result, a loss of £31m has been recognised during the year in relation to the exit of particular parts of the business. A loss of £33m was recognised in 20032004 amortisation charge under UK GAAP offset by impairments as a result of Abbey’s reorganisation announcedthe higher goodwill carrying value.
Intangible Assets
IFRS 3 “Business Combinations” requires separately identifiable intangibles within goodwill to be reclassified on transition as other intangible assets if requirements under IAS 38 are met, and amortised over their expected useful lives. The 2004 impact mainly represents the impairment charge resulting from a change in February 2003.the mix of Top 20 independent financial advisors identified on the acquisition of Scottish Provident.
Dividends
Represents the write-back of dividends, proposed not declared, at 1 January 2004 as required by IAS 10 “Event after the Balance Sheet Date”. These dividends have been paid during 2004 and with no further dividends declared there is no impact on shareholders’ equity at 31 December 2004.
New Entities
SIC-12 “Consolidation – Special Purpose Entities” requires consolidation of special purpose entities (“SPE”) when the substance of the relationship between the SPE and reporting entity indicates that the SPE is controlled by the entity. As a result Abbey have consolidated some funds, unit trusts and open ended investment companies which are part of its insurance and asset management business.
Explanation of material adjustments to cash flow statement for 2004
Abbey previously prepared its cash flow statement in accordance with the UK Financial Reporting Standard (Revised 1996) “Cash flow statements” (“FRS 1 (Revised)”). Its objectives and principles are similar to those set out in IAS 7 “Cash Flow Statements”.
FRS 1 (Revised) defines cash as cash and balances at central banks and advances to banks payable on demand. IAS 7 in addition includes “Cash Equivalents”, which are defined as short term highly liquid investments, held for the purpose of meeting short term cash commitments rather than investment, that are both convertible to known amounts of cash, and so near their maturity that they present an insignificant risk of changes in value.
The
total charge comprises £11m (2003: £16m)other principal differences between IFRS and UK GAAP are in respect of
employee redundancy costsclassification. Under UK GAAP, Abbey presented its cash flows by: (a) operating activities; (b) dividends received from associates; (c) returns on investments and
£20m (2003: £17m)servicing of
other costs.| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Opening balance | | | 33 | | | | — | |
| Transfer to profit and loss | | | 31 | | | | 33 | |
| Utilised | | | (15 | ) | | | — | |
| |
| Closing balance | | | 49 | | | | 33 | |
| |
162
58.
Financial Statements
Notes to the Financial Statementscontinued
Reconciliation of consolidated balance sheet at 31 December 2004
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | | | | | | | | | | | Company | |
| | | | | | | Effect of | | | | | | | | | | | Effect of | | | | |
| | | | | | | transition | | | | | | | | | | | transition | | | | |
| | | UK GAAP | | | to IFRS | | | IFRS | | | UK GAAP | | | to IFRS | | | IFRS | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | 454 | | | | — | | | | 454 | | | | 443 | | | | — | | | | 443 | |
| Treasury bills and other eligible bills | | | 1,990 | | | | (1,990 | ) | | | — | | | | — | | | | — | | | | — | |
| Derivative financial instruments | | | — | | | | 2,377 | | | | 2,377 | | | | — | | | | — | | | | — | |
| Loans and advances to banks | | | 10,148 | | | | 1,603 | | | | 11,751 | | | | 23,605 | | | | — | | | | 23,605 | |
| Loans and advances to customers | | | 93,209 | | | | 16,207 | | | | 109,416 | | | | 79,857 | | | | 3 | | | | 79,860 | |
| Debt securities | | | 22,683 | | | | 14,327 | | | | 37,010 | | | | 405 | | | | — | | | | 405 | |
| Equity shares and other variable interest securities | | | 1,176 | | | | 9,616 | | | | 10,792 | | | | 1 | | | | — | | | | 1 | |
| Investment in associated undertakings | | | 25 | | | | — | | | | 25 | | | | 19 | | | | — | | | | 19 | |
| Net investment in finance leases | | | 1,148 | | | | (1,148 | ) | | | — | | | | 3 | | | | (3 | ) | | | — | |
| Long-term assurance business | | | 2,968 | | | | (2,968 | ) | | | — | | | | — | | | | — | | | | — | |
| Investment in subsidiary undertakings | | | — | | | | — | | | | — | | | | 8,250 | | | | — | | | | 8,250 | |
| Intangible assets | | | 317 | | | | (142 | ) | | | 175 | | | | — | | | | — | | | | — | |
| Value of in-force business | | | — | | | | 1,844 | | | | 1,844 | | | | — | | | | — | | | | — | |
| Property, plant and equipment | | | 246 | | | | 16 | | | | 262 | | | | 226 | | | | 5 | | | | 231 | |
| Operating lease assets | | | 2,341 | | | | (66 | ) | | | 2,275 | | | | — | | | | — | | | | — | |
| Investment property | | | — | | | | 1,228 | | | | 1,228 | | | | — | | | | — | | | | — | |
| Prepayments and accrued income | | | 1,195 | | | | (1,195 | ) | | | — | | | | 379 | | | | (379 | ) | | | — | |
| Current tax asset | | | — | | | | 242 | | | | 242 | | | | — | | | | 242 | | | | 242 | |
| Deferred tax assets | | | — | | | | 501 | | | | 501 | | | | 160 | | | | 334 | | | | 494 | |
| Other assets | | | 4,661 | | | | 1,720 | | | | 6,381 | | | | 1,126 | | | | 379 | | | | 1,505 | |
| Assets of long-term assurance funds | | | 27,180 | | | | (27,180 | ) | | | — | | | | — | | | | — | | | | — | |
| |
Total assets | | | 169,741 | | | | 14,992 | | | | 184,733 | | | | 114,474 | | | | 581 | | | | 115,055 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 18,412 | | | | — | | | | 18,412 | | | | 35,697 | | | | — | | | | 35,697 | |
| Customer accounts | | | 78,850 | | | | (190 | ) | | | 78,660 | | | | 65,910 | | | | — | | | | 65,910 | |
| Derivative financial instruments | | | — | | | | 3,665 | | | | 3,665 | | | | — | | | | — | | | | — | |
| Debt securities in issue | | | 21,969 | | | | 15,098 | | | | 37,067 | | | | 4 | | | | — | | | | 4 | |
| Other borrowed funds | | | — | | | | 722 | | | | 722 | | | | — | | | | 722 | | | | 722 | |
| Accruals and deferred income | | | 1,729 | | | | (1,729 | ) | | | — | | | | 1,008 | | | | (1,008 | ) | | | — | |
| Subordinated liabilities | | | 5,360 | | | | 124 | | | | 5,484 | | | | 5,673 | | | | 1 | | | | 5,674 | |
| Other long-term capital instruments | | | 722 | | | | (722 | ) | | | — | | | | 722 | | | | (722 | ) | | | — | |
| Insurance and reinsurance liabilities | | | — | | | | 24,923 | | | | 24,923 | | | | — | | | | — | | | | — | |
| Other liabilities | | | 9,250 | | | | (406 | ) | | | 8,844 | | | | 1,188 | | | | 1,219 | | | | 2,407 | |
| Liabilities of long-term assurance funds | | | 27,180 | | | | (27,180 | ) | | | — | | | | — | | | | — | | | | — | |
| Other provisions | | | 258 | | | | 44 | | | | 302 | | | | 193 | | | | 44 | | | | 237 | |
| Current tax liability | | | — | | | | 161 | | | | 161 | | | | — | | | | 57 | | | | 57 | |
| Deferred tax liabilities | | | 551 | | | | 513 | | | | 1,064 | | | | — | | | | — | | | | — | |
| Retirement benefit obligations | | | 24 | | | | 1,173 | | | | 1,197 | | | | — | | | | 1,060 | | | | 1,060 | |
| Minority Interest – non-equity | | | 512 | | | | — | | | | 512 | | | | — | | | | — | | | | — | |
| |
Total liabilities | | | 164,817 | | | | 16,196 | | | | 181,013 | | | | 110,395 | | | | 1,373 | | | | 111,768 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| Called up share capital – ordinary shares | | | 148 | | | | — | | | | 148 | | | | 148 | | | | — | | | | 148 | |
| Called up share capital – preference shares | | | 325 | | | | — | | | | 325 | | | | 325 | | | | — | | | | 325 | |
| Share premium account | | | 2,164 | | | | — | | | | 2,164 | | | | 2,164 | | | | — | | | | 2,164 | |
| Retained earnings | | | 2,287 | | | | (1,204 | ) | | | 1,083 | | | | 1,442 | | | | (792 | ) | | | 650 | |
| |
Total shareholders’ equity | | | 4,924 | | | | (1,204 | ) | | | 3,720 | | | | 4,079 | | | | (792 | ) | | | 3,287 | |
| |
Total equity and liabilities | | | 169,741 | | | | 14,992 | | | | 184,733 | | | | 114,474 | | | | 581 | | | | 115,055 | |
| |
163
Financial Statements
Notes to the Financial Statementscontinued
Restated Group balance sheet at 31 December 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | |
| | | | | | | | | | Insur- | | | | | | | Emplo- | | | | | | | | | | | | | | | Other | | | | | | | | | | | IFRS | | | | |
| | | UK | | | Reclassi- | | | ance | | | Securit- | | | yee | | | | | | | Soft- | | | Good- | | | Intang- | | | New | | | | | | | Adjust- | | | | |
| | | GAAP | | | fication | | | Business | | | isation | | | benefits | | | Leasing | | | ware | | | will | | | ibles | | | Entities | | | Other | | | ment | | | IFRS | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Cash and balances at central banks | | | 454 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 454 | |
| Treasury bills and other eligible bills | | | 1,990 | | | | (1,990 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,990 | ) | | | — | |
| Derivatives | | | — | | | | 2,377 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,377 | | | | 2,377 | |
| Loans and advances to banks | | | 10,148 | | | | — | | | | 1,603 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,603 | | | | 11,751 | |
| Loans and advances to customers | | | 93,209 | | | | 1,148 | | | | — | | | | 15,098 | | | | — | | | | (40 | ) | | | — | | | | — | | | | — | | | | — | | | | 1 | | | | 16,207 | | | | 109,416 | |
| Debt securities | | | 22,683 | | | | 1,990 | | | | 11,335 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,002 | | | | — | | | | 14,327 | | | | 37,010 | |
| Equity shares and other variable interest securities | | | 1,176 | | | | — | | | | 10,232 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (616 | ) | | | — | | | | 9,616 | | | | 10,792 | |
| Investment in associated undertakings | | | 25 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25 | |
| Net investment in finance leases | | | 1,148 | | | | (1,148 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,148 | ) | | | — | |
| Long-term assurance business | | | 2,968 | | | | — | | | | (2,968 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2,968 | ) | | | — | |
| Intangible assets | | | 317 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5 | | | | (147 | ) | | | — | | | | — | | | | (142 | ) | | | 175 | |
| Value of in-force business | | | — | | | | — | | | | 1,844 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,844 | | | | 1,844 | |
| Property, plant and equipment | | | 246 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 9 | | | | — | | | | — | | | | 7 | | | | 16 | | | | 262 | |
| Operating lease assets | | | 2,341 | | | | — | | | | — | | | | — | | | | — | | | | (66 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (66 | ) | | | 2,275 | |
| Investment property | | | — | | | | — | | | | 1,237 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (9 | ) | | | 1,228 | | | | 1,228 | |
| Prepayments and accrued income | | | 1,195 | | | | (1,195 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,195 | ) | | | — | |
| Current tax asset | | | — | | | | 242 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 242 | | | | 242 | |
| Deferred tax assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 501 | | | | 501 | | | | 501 | |
| Other assets | | | 4,661 | | | | (1,182 | ) | | | 2,911 | | | | — | | | | — | | | | (56 | ) | | | (1 | ) | | | — | | | | — | | | | 48 | | | | — | | | | 1,720 | | | | 6,381 | |
| Assets of long-term assurance funds | | | 27,180 | | | | — | | | | (27,180 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (27,180 | ) | | | — | |
| |
Total assets | | | 169,741 | | | | 242 | | | | (986 | ) | | | 15,098 | | | | — | | | | (162 | ) | | | (1 | ) | | | 14 | | | | (147 | ) | | | 434 | | | | 500 | | | | 14,992 | | | | 184,733 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 18,412 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 18,412 | |
| Customer accounts | | | 78,850 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (190 | ) | | | — | | | | (190 | ) | | | 78,660 | |
| Derivatives financial instruments | | | — | | | | 3,665 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,665 | | | | 3,665 | |
| Debt securities in issue | | | 21,969 | | | | — | | | | — | | | | 15,098 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 15,098 | | | | 37,067 | |
| Other borrowed funds | | | — | | | | 722 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 722 | | | | 722 | |
| Accruals and deferred income | | | 1,729 | | | | (1,729 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1,729 | ) | | | — | |
| Subordinated liabilities | | | 5,360 | | | | — | | | | 124 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 124 | | | | 5,484 | |
| Other long-term capital instruments | | | 722 | | | | (722 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (722 | ) | | | — | |
| Insurance and reinsurance liabilities | | | — | | | | — | | | | 24,404 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 523 | | | | (4 | ) | | | 24,923 | | | | 24,923 | |
| Other liabilities | | | 9,250 | | | | (1,855 | ) | | | 1,318 | | | | — | | | | 29 | | | | — | | | | — | | | | — | | | | — | | | | 104 | | | | (2 | ) | | | (406 | ) | | | 8,844 | |
| Liabilities of long-term assurance funds | | | 27,180 | | | | — | | | | (27,180 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (27,180 | ) | | | — | |
| Other provisions | | | 258 | | | | — | | | | 44 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 44 | | | | 302 | |
| Current tax liability | | | — | | | | 161 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 161 | | | | 161 | |
| Deferred tax liabilities | | | 551 | | | | — | | | | 304 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 209 | | | | 513 | | | | 1,064 | |
| Retirement benefit obligations | | | 24 | | | | — | | | | — | | | | — | | | | 1,173 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,173 | | | | 1,197 | |
| Minority Interest – non-equity | | | 512 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 512 | |
| |
Total liabilities | | | 164,817 | | | | 242 | | | | (986 | ) | | | 15,098 | | | | 1,202 | | | | — | | | | — | | | | — | | | | — | | | | 437 | | | | 203 | | | | 16,196 | | | | 181,013 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Called up share capital – ordinary shares | | | 148 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 148 | |
| Called up share capital – preference shares | | | 325 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 325 | |
| Share premium account | | | 2,164 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,164 | |
| Retained earnings | | | 2,287 | | | | — | | | | — | | | | — | | | | (1,202 | ) | | | (162 | ) | | | (1 | ) | | | 14 | | | | (147 | ) | | | (3 | ) | | | 297 | | | | (1,204 | ) | | | 1,083 | |
| |
Total shareholders’ equity | | | 4,924 | | | | — | | | | — | | | | — | | | | (1,202 | ) | | | (162 | ) | | | (1 | ) | | | 14 | | | | (147 | ) | | | (3 | ) | | | 297 | | | | (1,204 | ) | | | 3,720 | |
| |
Total equity and liabilities | | | 169,741 | | | | 242 | | | | (986 | ) | | | 15,098 | | | | — | | | | (162 | ) | | | (1 | ) | | | 14 | | | | (147 | ) | | | 434 | | | | 500 | | | | 14,992 | | | | 184,733 | |
| |
164
Financial Statements
Notes to the Financial Statementscontinued
Restated Company balance sheet at 31 December 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Company | |
| | | | | | | | | | Employee | | | | | | | | | | | Total IFRS | | | | |
| | | UK GAAP | | | Reclassification | | | benefits | | | Software | | | Other | | | Adjustment | | | IFRS | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | 443 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 443 | |
| Loans and advances to banks | | | 23,605 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 23,605 | |
| Loans and advances to customers | | | 79,857 | | | | 3 | | | | — | | | | — | | | | — | | | | 3 | | | | 79,860 | |
| Debt securities | | | 405 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 405 | |
| Equity shares and other variable interest securities | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | |
| Investment in associated undertakings | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 19 | |
| Net investment in finance leases | | | 3 | | | | (3 | ) | | | — | | | | — | | | | — | | | | (3 | ) | | | — | |
| Investment in subsidiary undertakings | | | 8,250 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,250 | |
| Property, plant and equipment | | | 226 | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | 231 | |
| Prepayments and accrued income | | | 379 | | | | (379 | ) | | | — | | | | — | | | | — | | | | (379 | ) | | | — | |
| Current tax asset | | | — | | | | 242 | | | | — | | | | — | | | | — | | | | 242 | | | | 242 | |
| Deferred tax assets | | | 160 | | | | — | | | | — | | | | — | | | | 334 | | | | 334 | | | | 494 | |
| Other assets | | | 1,126 | | | | 379 | | | | — | | | | — | | | | — | | | | 379 | | | | 1,505 | |
| |
Total assets | | | 114,474 | | | | 242 | | | | — | | | | 5 | | | | 334 | | | | 581 | | | | 115,055 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 35,697 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 35,697 | |
| Customer accounts | | | 65,910 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 65,910 | |
| Debt securities in issue | | | 4 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4 | |
| Other borrowed funds | | | — | | | | 722 | | | | — | | | | — | | | | — | | | | 722 | | | | 722 | |
| Accruals and deferred income | | | 1,008 | | | | (1,008 | ) | | | — | | | | — | | | | — | | | | (1,008 | ) | | | — | |
| Subordinated liabilities | | | 5,673 | | | | — | | | | — | | | | — | | | | 1 | | | | 1 | | | | 5,674 | |
| Other long-term capital instruments | | | 722 | | | | (722 | ) | | | — | | | | — | | | | — | | | | (722 | ) | | | — | |
| Other liabilities | | | 1,188 | | | | 1,193 | | | | 29 | | | | — | | | | (3 | ) | | | 1,219 | | | | 2,407 | |
| Other provisions | | | 193 | | | | — | | | | — | | | | — | | | | 44 | | | | 44 | | | | 237 | |
| Current tax liability | | | — | | | | 57 | | | | — | | | | — | | | | — | | | | 57 | | | | 57 | |
| Retirement benefit obligations | | | — | | | | — | | | | 1,060 | | | | — | | | | — | | | | 1,060 | | | | 1,060 | |
| |
Total liabilities | | | 110,395 | | | | 242 | | | | 1,089 | | | | — | | | | 42 | | | | 1,373 | | | | 111,768 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Called up share capital – ordinary shares | | | 148 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 148 | |
| Called up share capital – preference shares | | | 325 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 325 | |
| Share premium account | | | 2,164 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,164 | |
| Retained earnings | | | 1,442 | | | | — | | | | (1,089 | ) | | | 5 | | | | 292 | | | | (792 | ) | | | 650 | |
| |
Total shareholders’ equity | | | 4,079 | | | | — | | | | (1,089 | ) | | | 5 | | | | 292 | | | | (792 | ) | | | 3,287 | |
| |
Total equity and liabilities | | | 114,474 | | | | 242 | | | | — | | | | 5 | | | | 334 | | | | 581 | | | | 115,055 | |
| |
165
Financial Statements
Notes to the Financial Statementscontinued
Reconciliation of the Group income statement for the year ended 31 December 2004
| | | | | | | | | | | | | |
| | | Group | |
| | | | | | | Effect of transition | | | | |
| | | UK GAAP | | | to IFRS | | | IFRS | |
| | | £m | | | £m | | | £m | |
| |
| Interest and similar income | | | 4,925 | | | | 712 | | | | 5,637 | |
| Interest expense and similar charges | | | (3,395 | ) | | | (779 | ) | | | (4,174 | ) |
| |
| Net Interest Income | | | 1,530 | | | | (67 | ) | | | 1,463 | |
| Fees and commission income | | | 639 | | | | 14 | | | | 653 | |
| Fee and commission expense | | | (114 | ) | | | (1 | ) | | | (115 | ) |
| |
| Net fee and commission income | | | 525 | | | | 13 | | | | 538 | |
| Dividend income | | | 1 | | | | — | | | | 1 | |
| Net earned insurance premiums | | | — | | | | 750 | | | | 750 | |
| Net trading income | | | — | | | | 846 | | | | 846 | |
| Dealing profits | | | 268 | | | | (268 | ) | | | — | |
| Income from long-term assurance business | | | 76 | | | | (76 | ) | | | — | |
| Other operating income | | | 244 | | | | 97 | | | | 341 | |
| |
| Total operating income | | | 2,644 | | | | 1,295 | | | | 3,939 | |
| |
| Net insurance claims incurred and movement in policyholder liabilities | | | — | | | | (1,094 | ) | | | (1,094 | ) |
| |
| Total income net of insurance claims | | | 2,644 | | | | 201 | | | | 2,845 | |
| |
| Administration expenses | | | (2,053 | ) | | | (168 | ) | | | (2,221 | ) |
| Depreciation and amortisation | | | (253 | ) | | | (294 | ) | | | (547 | ) |
| |
| Total operating expenses | | | (2,306 | ) | | | (462 | ) | | | (2,768 | ) |
| Impairment losses on loans and advances | | | 36 | | | | 19 | | | | 55 | |
| Impairment recoveries/ (losses) on fixed asset investments | | | 80 | | | | — | | | | 80 | |
| Provisions for contingent liabilities and commitments | | | (233 | ) | | | — | | | | (233 | ) |
| |
| Operating profit/(loss) | | | 221 | | | | (242 | ) | | | (21 | ) |
| Share of profit of associates | | | 6 | | | | (6 | ) | | | — | |
| Profit on disposal of group undertakings | | | 46 | | | | (46 | ) | | | — | |
| |
| Profit/(loss) before tax | | | 273 | | | | (294 | ) | | | (21 | ) |
| Taxation expense | | | (144 | ) | | | 111 | | | | (33 | ) |
| |
| Profit/(loss) for the year | | | 129 | | | | (183 | ) | | | (54 | ) |
| |
166
Financial Statements
Notes to the Financial Statementscontinued
Restated Group income statement for the year ended 31 December 2004
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Recla- | | | Empl- | | | | | | | | | | | | | | | Other | | | | | | | Insur- | | | | | | | | | | | Total IFRS | | | | |
| | | | | | | ssifica- | | | oyee | | | Leasi | | | Soft- | | | Good- | | | Intang- | | | New | | | ance | | | Securitis | | | | | | | Adjust- | | | | |
| | | UK GAAP | | | tion | | | benefits | | | ng | | | ware | | | will | | | ibles | | | Entities | | | Business | | | -ation | | | Other | | | ment | | | IFRS | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Interest and similar income | | | 4,925 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5 | ) | | | — | | | | 717 | | | | — | | | | 712 | | | | 5,637 | |
| Interest expense and similar charges | | | (3,395 | ) | | | — | | | | (43 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (736 | ) | | | — | | | | (779 | ) | | | (4,174 | ) |
| |
| Net Interest Income | | | 1,530 | | | | — | | | | (43 | ) | | | — | | | | — | | | | — | | | | — | | | | (5 | ) | | | — | | | | (19 | ) | | | — | | | | (67 | ) | | | 1,463 | |
| Fees and commission income | | | 639 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 14 | | | | 14 | | | | 653 | |
| Fee and commission expense | | | (114 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | (1 | ) | | | (115 | ) |
| |
| Net fee and commission income | | | 525 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 13 | | | | 13 | | | | 538 | |
| Dividend income | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1 | |
| Net earned insurance premiums | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 750 | | | | — | | | | — | | | | 750 | | | | 750 | |
| Net trading income – banking | | | — | | | | 268 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (18 | ) | | | 596 | | | | — | | | | — | | | | 846 | | | | 846 | |
| Dealing profits | | | 268 | | | | (268 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (268 | ) | | | — | |
| Income from long-term assurance business | | | 76 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (76 | ) | | | — | | | | — | | | | (76 | ) | | | — | |
| Other operating income | | | 244 | | | | 52 | | | | — | | | | 20 | | | | — | | | | — | | | | — | | | | 7 | | | | 19 | | | | — | | | | (1 | ) | | | 97 | | | | 341 | |
| |
| Total operating income | | | 2,644 | | | | 52 | | | | (43 | ) | | | 20 | | | | — | | | | — | | | | — | | | | (16 | ) | | | 1,289 | | | | (19 | ) | | | 12 | | | | 1,295 | | | | 3,939 | |
| |
| Net insurance claims incurred and movement in policyholder liabilities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 17 | | | | (1,111 | ) | | | — | | | | — | | | | (1,094 | ) | | | (1,094 | ) |
| |
| Total income net of insurance claims | | | 2,644 | | | | 52 | | | | (43 | ) | | | 20 | | | | — | | | | — | | | | — | | | | 1 | | | | 178 | | | | (19 | ) | | | 12 | | | | 201 | | | | 2,845 | |
| |
| Administration expenses | | | (2,053 | ) | | | — | | | | 44 | | | | — | | | | 9 | | | | — | | | | — | | | | (2 | ) | | | (223 | ) | | | — | | | | 4 | | | | (168 | ) | | | (2,221 | ) |
| Depreciation and amortisation | | | (253 | ) | | | — | | | | — | | | | (31 | ) | | | (118 | ) | | | 14 | | | | (147 | ) | | | — | | | | — | | | | — | | | | (12 | ) | | | (294 | ) | | | (547 | ) |
| |
| Total operating expenses | | | (2,306 | ) | | | — | | | | 44 | | | | (31 | ) | | | (109 | ) | | | 14 | | | | (147 | ) | | | (2 | ) | | | (223 | ) | | | — | | | | (8 | ) | | | (462 | ) | | | (2,768 | ) |
| |
| Impairment losses on loans and advances | | | 36 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 19 | | | | — | | | | 19 | | | | 55 | |
| Impairment recoveries/ (losses) on fixed asset investments | | | 80 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 80 | |
| Provisions for contingent liabilities and commitments | | | (233 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (233 | ) |
| |
| Operating profit | | | 221 | | | | 52 | | | | 1 | | | | (11 | ) | | | (109 | ) | | | 14 | | | | (147 | ) | | | (1 | ) | | | (45 | ) | | | — | | | | 4 | | | | (242 | ) | | | (21 | ) |
| |
| Income for associated undertakings | | | 6 | | | | (6 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (6 | ) | | | — | |
| Profit on disposal of group undertakings | | | 46 | | | | (46 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (46 | ) | | | — | |
| |
| Profit/(loss) before tax | | | 273 | | | | — | | | | 1 | | | | (11 | ) | | | (109 | ) | | | 14 | | | | (147 | ) | | | (1 | ) | | | (45 | ) | | | — | | | | 4 | | | | (294 | ) | | | (21 | ) |
| Taxation expense | | | (144 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 45 | | | | — | | | | 66 | | | | 111 | | | | (33 | ) |
| |
| Profit/(loss) for the year | | | 129 | | | | — | | | | 1 | | | | (11 | ) | | | (109 | ) | | | 14 | | | | (147 | ) | | | (1 | ) | | | — | | | | — | | | | 70 | | | | (183 | ) | | | (54 | ) |
| |
Key impact analysis on the Opening Balance Sheet as at 1 January 2005
Reconciliation of previously reported shareholder funds’ under UK GAAP to total shareholders’ equity under IFRS at 1 January 2005
| | | | | | | | | |
| | | Group | | | Company | |
| | | At 1 January | | | At 1 January | |
| | | 2005 | | | 2005 | |
| | | £m | | | £m | |
| |
Shareholders’ Equity Shareholders’ equity as previously reported under UK GAAP | | | 4,924 | | | | 4,079 | |
| Non IAS 32, IAS 39 and IFRS 4 adjustments | | | (1,204 | ) | | | (792 | ) |
| |
Shareholders’ equity before IAS 32, IAS 39 and IFRS 4 adjustments | | | 3,720 | | | | 3,287 | |
| De-recognition of liabilities | | | (154 | ) | | | (154 | ) |
| Fees & Commissions | | | (73 | ) | | | (113 | ) |
| Non-trading derivatives | | | (288 | ) | | | (238 | ) |
| Fair value classification | | | 141 | | | | 16 | |
| Preference shares reclassification to debt | | | (570 | ) | | | (570 | ) |
| Life investment products | | | (84 | ) | | | — | |
| Other | | | (34 | ) | | | (51 | ) |
| Deferred tax | | | 29 | | | | — | |
| Tax impact of the above items | | | 108 | | | | 146 | |
| |
Total shareholders’ equity under IFRS | | | 2,795 | | | | 2,323 | |
| |
167
Financial Statements
Notes to the Financial Statementscontinued
Explanation of material adjustments to shareholders’ equity at 1 January 2005
Reclassifications
These mainly consist of two significant reclassifications. Firstly moving Abbey’s trading book financial assets and liabilities from the underlying categories as presented under UK GAAP to the ‘trading assets’ and ‘trading liabilities’ categories on the face of the IFRS balance sheet. Secondly classifying the assets and liabilities of the long-term business funds as financial assets and liabilities designated at fair value from the underlying categories. Abbey’s trading book and long-term business funds had been fair valued under UK GAAP and therefore no impact on shareholders’ equity on transition to IFRS.
Offsetting of financial assets and liabilities
Under UK GAAP the netting of asset and liability balances in the balance sheet is only allowed when there is the ability to insist on net settlement. Under IAS 32 “Financial Instruments: Disclosure and Presentation” the offsetting of financial assets and financial liabilities is only allowed when there is a legally enforceable right to offset and the intention to settle net. The change from an ability to insist on net settlement to an intention to settle on a net basis is not in line with market practice in a number of areas. As a result certain financial instruments have been presented gross on the balance sheet, mainly trading derivatives.
Derecognition of liabilities
IAS 39 “Financial Instruments: Recognition and Measurement” allows liabilities to be de-recognised only when legally extinguished. The equity adjustment represents the reinstatement of certain liabilities (including unclaimed dividends and dormant account balances) to their contractual values.
Fees and Commissions
This reflects the impact of origination fees receivable on loans (e.g. booking/application fees, high loan-to-value (LTV) fees, survey fees), early redemption fees receivable, and directly related incremental costs of originating loans (e.g. survey fees and introducer commissions on mortgages), and issue costs on floating rate notes (FRNs) in special purpose vehicles (SPVs) being deferred and recognised in income over the expected life of the loan on an effective yield basis as required by IAS 39 “Financial Instruments: Recognition and Measurement” rather than being recognised on receipt or amortised on a different basis under UK GAAP.
Non-trading derivatives
Under UK GAAP derivatives were classified as trading or non-trading. Trading derivatives were reported at market value in the balance sheet, with movements in market value recognised immediately in the income statement. Non-trading derivatives, which were transacted for hedging and risk management purposes, were accounted for on an accruals basis, equivalent to the assets, liabilities or net positions being hedged.
The application of IAS 39 “Financial Instruments: Recognition and Measurement” as at 1 January 2005 resulted in the recognition of additional assets and liabilities relating to the fair values of derivatives at that date which were previously accounted for on an accruals basis. In addition, as required by IFRS 1 the carrying values of non-derivative financial instruments, which were part of a qualifying fair value hedge relationship under UK GAAP, were adjusted at 1 January 2005 to the fair value attributable to the hedged risks of those financial instruments.
Fair value classification
Under IAS 39 “Financial Instruments: Recognition and Measurement”, non-trading financial assets and liabilities, if certain criteria are met, may be designated at fair value, with changes in the fair value recognised in the income statement, or classified as available for sale securities at fair value, with changes in fair value recognised in equity. At 1 January 2005 Abbey has designated some investment securities at fair value, with the remaining non-trading investment securities classified as available for sale securities. Abbey also designated at fair value certain loans and advances to customers, other financial investments and some debt securities in issue meeting the criteria for designation at fair value. The impact on the 1 January 2005 balance sheet as follows:
| | | | | | | | | | | | | | | | | |
| | | Group | | | Company | |
| | | UK GAAP | | | IFRS | | | UK GAAP | | | IFRS | |
| | | Carrying value | | | Fair value | | | Carrying value | | | Fair value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
Financial Assets: | | | | | | | | | | | | | | | | |
| Financial assets designated at fair value | | | 3,996 | | | | 4,306 | | | | 695 | | | | 711 | |
| Available for sale securities | | | 11 | | | | 11 | | | | 379 | | | | 379 | |
| |
Financial Liabilities: | | | | | | | | | | | | | | | | |
| Financial Liabilities designated at fair value | | | 7,758 | | | | 7,927 | | | | — | | | | — | |
| |
Preference share reclassification
IAS 32 “Financial Instruments: Disclosure and Presentation” requires preference shares to be classified as either liabilities or equities depending on their substance. Abbey’s preference shares have a contractual obligation to transfer cash and therefore they have been reclassified as liabilities and the coupon payments are reflected as interest payable rather than dividends. The equity adjustment comprises this reclassification and the translation of Abbey USD preference shares to local currency based on the year-end rate, compared to UK GAAP carrying value at historic rate.
168
Financial Statements
Notes to the Financial Statementscontinued
Life investment products
Under IFRS 4 “Insurance contracts”, life assurance contracts that are largely investment in nature (i.e. do not contain significant insurance risk) will be accounted for as financial instruments under IAS 39 “Financial Instruments: Recognition and Measurement”. Whilst the discounted value of future profits (“DVFP”) will no longer be 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 IFRS are limited, and the DAC asset recognised is significantly lower than the loss in DVFP.
The above adjustments would have been required to comply with IAS32/39 and IFRS4 in the 2004 comparatives.
Reconciliation of consolidated balance sheet at 1 January 2005
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Group | | | | | | | | | | Company |
| | | | | | | |
| | | | | | | Effect of | | | | | | | | | | | Effect of | | | | |
| | | | | | | adoption | | | | | | | | | | | adoption | | | | |
| | | | | | | of IAS 32, | | | | | | | | | | | of IAS 32, | | | | |
| | | IFRSs | | | IAS 39 | | | IFRSs | | | IFRSs | | | IAS 39 | | | IFRSs | |
| | | 31 Dec | | | and IFRS | | | 1 Jan | | | 31 Dec | | | and IFRS | | | 1 Jan | |
| | | 2004 | | | 4 | | | 2005 | | | 2004 | | | 4 | | | 2005 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
ASSETS | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | 454 | | | | — | | | | 454 | | | | 443 | | | | — | | | | 443 | |
| Trading assets | | | — | | | | 45,001 | | | | 45,001 | | | | — | | | | — | | | | — | |
| Derivative financial instruments | | | 2,377 | | | | 7,761 | | | | 10,138 | | | | — | | | | 257 | | | | 257 | |
| Financial assets at fair value | | | — | | | | 26,255 | | | | 26,255 | | | | — | | | | 711 | | | | 711 | |
| Loans and advances to banks | | | 11,751 | | | | (6,440 | ) | | | 5,311 | | | | 23,605 | | | | — | | | | 23,605 | |
| Loans and advances to customers | | | 109,416 | | | | (15,026 | ) | | | 94,390 | | | | 79,860 | | | | 12,194 | | | | 92,054 | |
| Debt securities | | | 37,010 | | | | (37,010 | ) | | | — | | | | 405 | | | | (405 | ) | | | — | |
| Equity shares and other variable interest securities | | | 10,792 | | | | (10,792 | ) | | | — | | | | 1 | | | | (1 | ) | | | — | |
| Available for sale securities | | | — | | | | 11 | | | | 11 | | | | — | | | | 379 | | | | 379 | |
| Investment in associated undertakings | | | 25 | | | | — | | | | 25 | | | | 19 | | | | — | | | | 19 | |
| Investment in subsidiary undertakings | | | — | | | | — | | | | — | | | | 8,250 | | | | — | | | | 8,250 | |
| Intangible assets | | | 175 | | | | — | | | | 175 | | | | — | | | | — | | | | — | |
| Value of in-force business | | | 1,844 | | | | (67 | ) | | | 1,777 | | | | — | | | | — | | | | — | |
| Property, plant and equipment | | | 262 | | | | — | | | | 262 | | | | 231 | | | | — | | | | 231 | |
| Operating lease assets | | | 2,275 | | | | — | | | | 2,275 | | | | — | | | | — | | | | — | |
| Investment property | | | 1,228 | | | | — | | | | 1,228 | | | | — | | | | — | | | | — | |
| Current tax asset | | | 242 | | | | — | | | | 242 | | | | 242 | | | | — | | | | 242 | |
| Deferred tax assets | | | 501 | | | | 29 | | | | 530 | | | | 494 | | | | 146 | | | | 640 | |
| Macro hedge of interest rate risk | | | — | | | | 10 | | | | 10 | | | | — | | | | 10 | | | | 10 | |
| Other assets | | | 6,381 | | | | 179 | | | | 6,560 | | | | 1,505 | | | | (157 | ) | | | 1,348 | |
| |
Total assets | | | 184,733 | | | | 9,911 | | | | 194,644 | | | | 115,055 | | | | 13,134 | | | | 128,189 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 18,412 | | | | (7,314 | ) | | | 11,098 | | | | 35,697 | | | | 40 | | | | 35,737 | |
| Customer accounts | | | 78,660 | | | | (7,566 | ) | | | 71,094 | | | | 65,910 | | | | 13,016 | | | | 78,926 | |
| Derivative financial instruments and other trading liabilities | | | 3,665 | | | | 7,888 | | | | 11,553 | | | | — | | | | — | | | | — | |
| Trading liabilities | | | — | | | | 27,021 | | | | 27,021 | | | | — | | | | — | | | | — | |
| Financial liabilities designated at fair value | | | — | | | | 7,927 | | | | 7,927 | | | | — | | | | — | | | | — | |
| Debt securities in issue | | | 37,067 | | | | (16,645 | ) | | | 20,422 | | | | 4 | | | | (1 | ) | | | 3 | |
| Other borrowed funds | | | 722 | | | | 1,082 | | | | 1,804 | | | | 722 | | | | 570 | | | | 1,292 | |
| Subordinated liabilities | | | 5,484 | | | | 617 | | | | 6,101 | | | | 5,674 | | | | 485 | | | | 6,159 | |
| Insurance and reinsurance liabilities | | | 24,923 | | | | (3,213 | ) | | | 21,710 | | | | — | | | | — | | | | — | |
| Other liabilities | | | 8,844 | | | | (1,536 | ) | | | 7,308 | | | | 2,407 | | | | (12 | ) | | | 2,395 | |
| Investment contract liabilities | | | — | | | | 3,213 | | | | 3,213 | | | | — | | | | — | | | | — | |
| Other provisions | | | 302 | | | | (19 | ) | | | 283 | | | | 237 | | | | — | | | | 237 | |
| Current tax liability | | | 161 | | | | — | | | | 161 | | | | 57 | | | | — | | | | 57 | |
| Deferred tax liabilities | | | 1,064 | | | | (107 | ) | | | 957 | | | | — | | | | — | | | | — | |
| Retirement benefit obligations | | | 1,197 | | | | — | | | | 1,197 | | | | 1,060 | | | | — | | | | 1,060 | |
| Minority Interest — Non Equity | | | 512 | | | | (512 | ) | | | — | | | | — | | | | — | | | | — | |
| |
Total liabilities | | | 181,013 | | | | 10,836 | | | | 191,849 | | | | 111,768 | | | | 14,098 | | | | 125,866 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
EQUITY | | | | | | | | | | | | | | | | | | | | | | | | |
| Called up share capital — ordinary shares | | | 148 | | | | — | | | | 148 | | | | 148 | | | | — | | | | 148 | |
| Called up share capital — preference shares | | | 325 | | | | (325 | ) | | | — | | | | 325 | | | | (325 | ) | | | — | |
| Share premium account | | | 2,164 | | | | (307 | ) | | | 1,857 | | | | 2,164 | | | | (307 | ) | | | 1,857 | |
| Retained earnings | | | 1,083 | | | | (293 | ) | | | 790 | | | | 650 | | | | (332 | ) | | | 318 | |
| |
Total shareholders’ equity | | | 3,720 | | | | (925 | ) | | | 2,795 | | | | 3,287 | | | | (964 | ) | | | 2,323 | |
| |
Total equity and liabilities | | | 184,733 | | | | 9,911 | | | | 194,644 | | | | 115,055 | | | | 13,134 | | | | 128,189 | |
| |
169
Financial Statements
Notes to the Financial Statementscontinued
Restated Group balance sheet at 1 January 2005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Group | |
| | | IFRS | | | | | | | | | | | De- | | | Fees & | | | | | | | | | | | | | Life | | | | | | | | | | | IFRS | |
| | | 31 December | | | Reclassifi- | | | Derivative | | | recognition | | | Commiss- | | | Non-trading | | | Fair value | | | Preference | | | Investment | | | | | | | Total IFRS | | | 1 January | |
| | | 2004 | | | cations | | | Offsetting | | | of Liabilities | | | ions | | | derivatives | | | classification | | | Shares | | | products | | | Other | | | Adjustments | | | 2005 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | 454 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 454 | |
| Trading Assets | | | — | | | | 43,179 | | | | 1,728 | | | | — | | | | — | | | | 94 | | | | — | | | | ��� | | | | — | | | | — | | | | 45,001 | | | | 45,001 | |
| Derivative financial instruments | | | 2,377 | | | | — | | | | 7,659 | | | | — | | | | — | | | | 138 | | | | — | | | | — | | | | — | | | | (36 | ) | | | 7,761 | | | | 10,138 | |
| Financial Assets designated at fair value | | | — | | | | 21,954 | | | | — | | | | — | | | | — | | | | — | | | | 4,306 | | | | — | | | | (5 | ) | | | — | | | | 26,255 | | | | 26,255 | |
| Loans and advances to banks | | | 11,751 | | | | (6,397 | ) | | | (78 | ) | | | — | | | | — | | | | 35 | | | | — | | | | — | | | | — | | | | — | | | | (6,440 | ) | | | 5,311 | |
| Loans and advances to customers | | | 109,416 | | | | (11,257 | ) | | | — | | | | — | | | | (54 | ) | | | 12 | | | | (3,711 | ) | | | — | | | | — | | | | (16 | ) | | | (15,026 | ) | | | 94,390 | |
| Debt securities | | | 37,010 | | | | (36,687 | ) | | | — | | | | — | | | | — | | | | — | | | | (296 | ) | | | — | | | | — | | | | (27 | ) | | | (37,010 | ) | | | — | |
| Equity shares and other variable interest securities | | | 10,792 | | | | (10,792 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (10,792 | ) | | | — | |
| Available for sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11 | | | | — | | | | — | | | | — | | | | 11 | | | | 11 | |
| Investments in associated undertakings | | | 25 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25 | |
| Intangible assets | | | 175 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 175 | |
| Value of in force business | | | 1,844 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (67 | ) | | | — | | | | (67 | ) | | | 1,777 | |
| Property plant and equipment | | | 262 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 262 | |
| Operating lease assets | | | 2,275 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,275 | |
| Investment property | | | 1,228 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,228 | |
| Current tax asset | | | 242 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 242 | |
| Deferred tax assets | | | 501 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 29 | | | | 29 | | | | 530 | |
| Macro hedge of interest rate risk | | | — | | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | 10 | |
| Other assets | | | 6,381 | | | | — | | | | 557 | | | | — | | | | (141 | ) | | | (249 | ) | | | — | | | | — | | | | 14 | | | | (2 | ) | | | 179 | | | | 6,560 | |
| |
Total assets | | | 184,733 | | | | — | | | | 9,866 | | | | — | | | | (195 | ) | | | 40 | | | | 310 | | | | — | | | | (58 | ) | | | (52 | ) | | | 9,911 | | | | 194,644 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 18,412 | | | | (6,592 | ) | | | (757 | ) | | | — | | | | (10 | ) | | | 46 | | | | — | | | | — | | | | — | | | | (1 | ) | | | (7,314 | ) | | | 11,098 | |
| Customer accounts | | | 78,660 | | | | (7,843 | ) | | | 214 | | | | 68 | | | | — | | | | (6 | ) | | | — | | | | — | | | | — | | | | 1 | | | | (7,566 | ) | | | 71,094 | |
| Derivative financial instruments | | | 3,665 | | | | — | | | | 7,498 | | | | — | | | | — | | | | 390 | | | | — | | | | — | | | | — | | | | — | | | | 7,888 | | | | 11,553 | |
| Trading liabilities | | | — | | | | 25,415 | | | | 1,606 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 27,021 | | | | 27,021 | |
| Financial liabilities designated at fair value | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 7,927 | | | | — | | | | — | | | | — | | | | 7,927 | | | | 7,927 | |
| Debt securities in issue | | | 37,067 | | | | (8,265 | ) | | | — | | | | — | | | | (12 | ) | | | (610 | ) | | | (7,758 | ) | | | — | | | | — | | | | — | | | | (16,645 | ) | | | 20,422 | |
| Other Borrowed Funds | | | 722 | | | | 512 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 570 | | | | — | | | | — | | | | 1,082 | | | | 1,804 | |
| Subordinated liabilities | | | 5,484 | | | | — | | | | — | | | | — | | | | — | | | | 610 | | | | — | | | | — | | | | — | | | | 7 | | | | 617 | | | | 6,101 | |
| Insurance and reinsurance liabilities | | | 24,923 | | | | (3,213 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,213 | ) | | | 21,710 | |
| Other liabilities | | | 8,844 | | | | (2,715 | ) | | | 1,305 | | | | 86 | | | | (100 | ) | | | (102 | ) | | | — | | | | — | | | | 26 | | | | (36 | ) | | | (1,536 | ) | | | 7,308 | |
| Investment contract liabilities | | | — | | | | 3,213 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,213 | | | | 3,213 | |
| Other provisions | | | 302 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (19 | ) | | | (19 | ) | | | 283 | |
| Current tax liability | | | 161 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 161 | |
| Deferred tax liabilities | | | 1,064 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (107 | ) | | | (107 | ) | | | 957 | |
| Retirement benefit obligations | | | 1,197 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,197 | |
| Minority interests — non equity | | | 512 | | | | (512 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (512 | ) | | | — | |
| |
Total liabilities | | | 181,013 | | | | — | | | | 9,866 | | | | 154 | | | | (122 | ) | | | 328 | | | | 169 | | | | 570 | | | | 26 | | | | (155 | ) | | | 10,836 | | | | 191,849 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Called up share capital — ordinary shares | | | 148 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 148 | |
| Called up share capital — preference shares | | | 325 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (325 | ) | | | — | | | | — | | | | (325 | ) | | | — | |
| Share premium account | | | 2,164 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (307 | ) | | | — | | | | — | | | | (307 | ) | | | 1,857 | |
| Retained earnings | | | 1,083 | | | | — | | | | — | | | | (154 | ) | | | (73 | ) | | | (288 | ) | | | 141 | | | | 62 | | | | (84 | ) | | | 103 | | | | (293 | ) | | | 790 | |
| |
Total shareholders’ equity | | | 3,720 | | | | — | | | | — | | | | (154 | ) | | | (73 | ) | | | (288 | ) | | | 141 | | | | (570 | ) | | | (84 | ) | | | 103 | | | | (925 | ) | | | 2,795 | |
| |
Total liabilities and equity | | | 184,733 | | | | — | | | | 9,866 | | | | — | | | | (195 | ) | | | 40 | | | | 310 | | | | — | | | | (58 | ) | | | (52 | ) | | | 9,911 | | | | 194,644 | |
| |
170
Financial Statements
Notes to the Financial Statementscontinued
Restated Company balance Sheet at 1 January 2005
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Company | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | IFRS | |
| | | IFRS | | | | | | | Derecog- | | | | | | | | | | | | | | | | | | | | | | | Total IFRS | | | 1 | |
| | | 31 December | | | Reclassi- | | | nition of | | | Fees & | | | Non-trading | | | Fair value | | | Preference | | | | | | | Adjust- | | | January | |
| | | 2004 | | | fications | | | Liabilities | | | Commissions | | | derivatives | | | classification | | | Shares | | | Other | | | ments | | | 2005 | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | 443 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 443 | |
| Derivative financial instruments | | | — | | | | — | | | | — | | | | — | | | | 257 | | | | — | | | | — | | | | — | | | | 257 | | | | 257 | |
| Financial Assets designated at fair value | | | — | | | | — | | | | — | | | | — | | | | — | | | | 711 | | | | — | | | | — | | | | 711 | | | | 711 | |
| Loans and advances to banks | | | 23,605 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 23,605 | |
| Loans and advances to customers | | | 79,860 | | | | 12,948 | | | | — | | | | (52 | ) | | | 13 | | | | (695 | ) | | | — | | | | (20 | ) | | | 12,194 | | | | 92,054 | |
| Debt securities | | | 405 | | | | — | | | | — | | | | — | | | | — | | | | (378 | ) | | | — | | | | (27 | ) | | | (405 | ) | | | — | |
| Investments in associated undertakings | | | 19 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 19 | |
| Equity shares and other variable interest securities | | | 1 | | | | — | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | — | | | | (1 | ) | | | — | |
| Available for sale securities | | | — | | | | — | | | | — | | | | — | | | | — | | | | 379 | | | | — | | | | — | | | | 379 | | | | 379 | |
| Investment in subsidiary undertakings | | | 8,250 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 8,250 | |
| Property plant and equipment | | | 231 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 231 | |
| Current tax asset | | | 242 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 242 | |
| Deferred tax assets | | | 494 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 146 | | | | 146 | | | | 640 | |
| Macro hedge of interest rate risk | | | — | | | | — | | | | — | | | | — | | | | 10 | | | | — | | | | — | | | | — | | | | 10 | | | | 10 | |
| Other assets | | | 1,505 | | | | — | | | | — | | | | (119 | ) | | | — | | | | — | | | | — | | | | (38 | ) | | | (157 | ) | | | 1,348 | |
| |
Total assets | | | 115,055 | | | | 12,948 | | | | — | | | | (171 | ) | | | 280 | | | | 16 | | | | — | | | | 61 | | | | 13,134 | | | | 128,189 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 35,697 | | | | — | | | | — | | | | — | | | | 40 | | | | — | | | | — | | | | — | | | | 40 | | | | 35,737 | |
| Customer accounts | | | 65,910 | | | | 12,948 | | | | 68 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 13,016 | | | | 78,926 | |
| Debt securities in issue | | | 4 | | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) | | | 3 | |
| Other Borrowed Funds | | | 722 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 570 | | | | — | | | | 570 | | | | 1,292 | |
| Subordinated liabilities | | | 5,674 | | | | — | | | | — | | | | — | | | | 478 | | | | — | | | | — | | | | 7 | | | | 485 | | | | 6,159 | |
| Other liabilities | | | 2,407 | | | | — | | | | 86 | | | | (58 | ) | | | 1 | | | | — | | | | — | | | | (41 | ) | | | (12 | ) | | | 2,395 | |
| Other provisions | | | 237 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 237 | |
| Current tax liability | | | 57 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 57 | |
| Retirement benefit obligations | | | 1,060 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,060 | |
| |
Total liabilities | | | 111,768 | | | | 12,948 | | | | 154 | | | | (58 | ) | | | 518 | | | | — | | | | 570 | | | | (34 | ) | | | 14,098 | | | | 125,866 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Called up share capital — ordinary shares | | | 148 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 148 | |
| Called up share capital — preference shares | | | 325 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (325 | ) | | | — | | | | (325 | ) | | | — | |
| Share premium account | | | 2,164 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (307 | ) | | | — | | | | (307 | ) | | | 1,857 | |
| Retained earnings | | | 650 | | | | — | | | | (154 | ) | | | (113 | ) | | | (238 | ) | | | 16 | | | | 62 | | | | 95 | | | | (332 | ) | | | 318 | |
| |
Total shareholders’ equity | | | 3,287 | | | | — | | | | (154 | ) | | | (113 | ) | | | (238 | ) | | | 16 | | | | (570 | ) | | | 95 | | | | (964 | ) | | | 2,323 | |
| |
Total liabilities and equity | | | 115,055 | | | | 12,948 | | | | — | | | | (171 | ) | | | 280 | | | | 16 | | | | — | | | | 61 | | | | 13,134 | | | | 128,189 | |
| |
171
Financial Statements
Notes to the Financial Statementscontinued
55. Differences between UKIFRS and US GAAP The significant differences applicable to Abbey’s Consolidated Financial Statements are summarised below.
UK GAAPIFRSUnder IFRS 3 “Business Combinations”, goodwill resulting from acquisitions is capitalised and tested annually for impairment at the cash generating unit level. Goodwill
arisingis carried at cost less accumulated impairment losses. The Group has applied IFRS 3 to business combinations that occurred on
consolidation as a result of the acquisitions of subsidiary and associated undertakingsor after 1 January
1998, and2004. Business combinations before that date have not been restated. Prior to that date, goodwill arising on
the purchase of businessesacquisitions after 1
JanuaryOctober 1998
iswas capitalised
under the heading, Intangible fixed assets, and amortised over its
expectedestimated useful economic
life,life. Goodwill arising on acquisitions before 1 October 1998 was deducted from equity. In addition, under previous GAAP, goodwill was subject to
a maximum period of 20 years. Such goodwill is subject to review foran annual impairment
in accordance with FRS 11, Impairment of fixed assets and goodwill, which allows testing for impairmenttest at the income generating unit level.
The useful economic life is calculated using a valuation model which determines the period of time over which returns are expected to exceed the cost of capital. Goodwill arising on consolidation as a result of the acquisitions of subsidiary and associated undertakings prior to 1 January 1998, and goodwill which arose on the purchase of businesses prior to 1 January 1998, has previously been taken to shareholders’ funds as reserves.US GAAPStatement of Financial Accounting Standards (“SFAS”) 142, “Goodwill and Other Intangible Assets”, requires that goodwill resulting from acquisitions be capitalised.
Until 2002, goodwill balances were amortised. Goodwill balances are
notno longer amortised, but are subject to an annual impairment test at a reporting unit level. Goodwill is written off to the extent that it is judged to be impaired.
Prior to the adoption of SFAS 142, goodwill resulting from acquisitions was capitalised and amortised in the consolidated statement of net income over the period in which the benefits were estimated to accrue. In the course of 2002 Abbey recorded an impairment of £604m related to the goodwill on Scottish Provident Limited. UK GAAP requires impairment analysis at the income generating unit level. Under US GAAP, Abbey tested Scottish Provident Limited for impairment at the reporting unit level. As a result of this difference in analysis and the US GAAP book value of Scottish Provident Limited being approximately £1.4bn less due to differences in accounting for shareholders’ interest in long-term assurance business, there is no similar impairment of goodwill under US GAAP.
157
Financial Statements
Notes to the Financial Statementscontinued
Other intangible assets
UK GAAPIFRSAn intangible asset is a non-financial asset that does not have physical substance but is identifiable and controlled by the entity through custody or legal rights. Under
UK GAAP,IFRS, in connection with acquisitions, the values of depositor relationships
distribution channels, trademarks and brands have not beenare normally considered separately identifiable
assets and are includedassets. However, under the IFRS transition rules, the values of the depositor relationships arising on acquisitions prior to the adoption date of IFRS did not meet the recognition criteria in
Goodwill.IFRS 1, as they would not have been recorded in the acquired company balance sheet.
US GAAPAn intangible asset shall be recognised if it arises from contracted or other legal rights or if it is capable of being separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged. Under US GAAP, in connection with acquisitions, the values of depositor relationships distribution channels, trademarks and brands are considered separately identifiable assets. To the extent that such assets are recognised there are equivalent reductions in goodwill. The value ascribed to depositor relationships is amortised to net income over the average life of the depositor relationship in question. The values ascribed
Pension costs
IFRSFor defined benefit schemes, IAS 19 ‘Employee Benefits’ (‘IAS 19’) requires pension liabilities to
distribution channels, trademarks and brands are amortised to net income over their estimated lives.Computer software
UK GAAPExpensesbe determined on the purchase or developmentbasis of computer software are charged to the Profitcurrent actuarial valuations performed on each plan, and Loss Account as incurred.
US GAAPThe American Institute of Certified Public Accountants (AICPA) Statement of Position 98-1 “Accounting for the costs of computer software developed or obtained for internal use” requires certain costs relating to software developed or obtained for internal usepension assets to be capitalisedmeasured at fair value. The net pension surplus or deficit, representing the difference between plan assets and amortised on a straight-line basis over the expected useful life of the software. Capitalised software costs are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount is not recoverable and exceeds its fair value.
Pension costs
UK GAAPWhere pensions are provided by means of a funded defined benefits scheme, annual contributions are based on actuarial advice. The expected cost of providing pensionsliabilities, is recognised on the balance sheet. In accordance with IAS 19 (revised 2004), Abbey has elected to record all actuarial gains and losses on the pension surplus or deficit in the year in which they occur within the ‘Statement of recognised income and expense’.
US GAAPFor defined benefit schemes, SFAS 87, ‘Employers’ Accounting for Pensions’, prescribes a
systematic basissimilar method of actuarial valuation for pension liabilities and requires the measurement of plan assets at fair value. When the value of benefits accrued based on employee service up to the balance sheet date (the accumulated benefit obligation) exceeds the value of plan assets, Abbey recognises an additional minimum pension liability to the extent that the excess is greater than any accrual already established for unfunded pension costs. SFAS 87 does not permit recognition of all actuarial gains and losses in a statement other than the primary income statement. As permitted by US GAAP, Abbey uses the ‘corridor method’, whereby actuarial gains and losses outside a certain range are recognised in the income statement in equal amounts over the
expected average remaining service lives of the members of the scheme. Variations from regular cost are spread over the average remaining service lives of current
employees onemployees. That range is 10% of the greater of plan assets and plan liabilities. The remaining additional minimum pension liability is recognised directly in ‘Other comprehensive income’. In addition, Abbey uses a
straight-line basis.US GAAPSFAS 87, “Employers Accounting for Pensions”, prescribes the method of actuarial valuation, which includes differences from certain assumptions usedmarket-related value approach for the UK GAAP actuarial computation. In addition, assetsamortization of gains and losses related to plan assets.
Long-term assurance business
IFRSThe long-term assurance business issues insurance contracts and investment contracts. Insurance contracts are assessedthose contracts, which transfer significant insurance risk. Investment contracts are those contracts which carry no significant insurance risk.
A number of insurance and investment contracts contain a discretionary participation feature which entitles the holder to receive, as a supplement to guaranteed benefits, additional benefits or bonuses that are likely to be a significant portion of the total contractual benefits and whose amount or timing is contractually at
fair valuethe discretion of the Group and
liabilities are assessed at current settlement rates. Certain variations from regular cost are allocated in equal amounts over the average remaining service lives of current employees.Leasing
UK GAAPFor lessors, income from finance leases, including benefits from declining tax rates, is credited to the Profit and Loss Account using the actuarial after tax method to give a constant periodic rate of returnbased on the net cash investment. For lessees, leasesperformance of specified assets. Contracts containing a discretionary participation feature are categorisedreferred to as finance leases when the substance of the agreement is that of a financing transaction and the lessee assumes substantially all of the risks and benefits relating to the asset. All other leases are categorised as operating leases.
For assets leased to customers under operating leases, income and depreciation are recognised in the Profit and Loss account using either the actuarial after-tax method or the straight-line method, depending on the nature of the operating lease.
In connection with a sale and leaseback, for the seller/lessee, a gain on sale is recognised where the leaseback is an operating lease.
US GAAPFor lessors, finance lease income is recognised so as to give a level rate of return on the investment in the lease, but without taking into account tax payments and receipts. For lessees, the general principles of UK GAAP and US GAAP are similar, however the latter has more stringent requirements to classify leases as finance leases. These requirements are outlined in SFAS 13, “Accounting for Leases”, and include, among other things, an assessment of whether the lease contains a bargain purchase option and a minimum lease term of 75% of the leased asset’s useful life. All other leases are classified as operating leases.
For assets leased to customers under operating leases, income and depreciation are recognised in the Profit and Loss account using the straight-line method.
In connection with a sale and leaseback, for the seller/lessee, US GAAP precludes the immediate recognition of a gain under certain conditions on a sale where the leaseback is an operating lease. Rather this gain is deferred and amortised over the life of the contract.
Shareholders’ interest in long-term assurance business
UK GAAPparticipating contracts.
Abbey accounts for
its life assurance operationsthe insurance contracts and participating investment contracts using the
IFRS embedded value basis of accounting
under UK GAAP applicable toused by banking
groups. An embedded value is an actuarially determined estimate of the economic value of agroups that own life assurance
company, excluding any value which may be attributedoperations, modified, as necessary, to
future new business. The embedded value iscomply with the
sumrequirements of
the shareholders’ share of net assetsIFRS. In particular, this includes a consolidation on a line by line basis of the life
assurance company andinsurance business relating to these contracts into the Abbey Group financial statements, along with the present value of
the shareholders’ share of emerging surplus from the existing business. The value of the existingin force business,
which is calculated by projecting future
surpluses and other net cash flows
using appropriate economicattributable to the shareholder arising from business written by the balance sheet date and
actuarial best estimate assumptions anddiscounting the result
discounted at a rate which reflects the shareholders’ overall risk premium.
In Abbey’s balance sheet, the shareholders’ and policyholders’ interests
Investment contracts that are non-participating are accounted for as financial instruments in
the long-term assurance business are shown separately as one-line items in order to reflect their different nature. The valueaccordance with IAS 39. All of the
long-term assurance business represents the embedded value described above. Assets of long-term assurance funds mainly consist of investments held in the long-term assurance funds either on behalf of policyholders, or which have not yet been allocated to either the policyholders or the shareholder. Liabilities of long-term assurance funds mainly comprise policyholder benefits provisions.158
Group’s non-participating investment contracts are unit linked.
Financial Statements
Notes to the Financial Statementscontinued
US GAAPExcept as regards acquired blocks of business the net present value of the profits of the in-force business is not recognised under US GAAP. Contracts which cover with-profits pension (with minimal insurance risk), unitised with-profits, unit linked and annuity in payment policies are classified as universal life or investment or limited payment policiescontracts and accounted for in accordance with SFAS 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and Realised Gains and Losses from the Sale of Investments.”
172
Financial Statements
Notes to the Financial Statementscontinued
Investments” and SOP 03-1 “Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts”. Contracts for all other policies with significant mortality and/or morbidity risk including endowment, term and whole of life policies are accounted for in accordance with SFAS 60, “Accounting and Reporting by Insurance Enterprises.”
UK GAAPIFRSThe changePremiums received in
embedded value during any reported period adjusted for any dividends declared or capital injected,respect of life insurance contracts and
grossed up atparticipating investment contracts are recognised as revenue when due and shown before deduction of commission. Fee and charge income is recognised in relation to investment non-participating contracts in line with the
underlying rate of corporation tax, is reflected in Abbey’s Profit and Loss Account as income from life assurance business.investment management service provided.
US GAAPPremiums for
SFAS 60long duration products are recognised as revenue when due from policyholders and the costs of claims are recognised
when insured eventsover the contract period through the establishment of a liability for future policy benefits. For short-duration contracts, the premium is recognised over the contract period with costs or claims recognised as they occur.
Acquisition costs are chargedFor long duration contracts the liability for future policy benefits is determined as the present value of future benefits to
be paid less the
Profit and Loss Account in proportionpresent value of the net premiums to
premium revenue recognised.be collected. Premiums for universal life and investment contracts are applied as increases to policyholder account balances when received. Revenues derived from these policies consist of mortality charges, policy administration charges, investment management fees, and surrender charges that are deducted from the policyholder account balances. Premiums and policy charges received from customers that relate to future periods are deferred until the period to which they relate and are recorded as a deferred income liability. For limited payment contracts, the excess of the gross premium over the US GAAP net benefit premium is deferred and amortised in relation to expected future benefit payments. For investment and universal life contracts, policy charges that relate to future periods and related acquisition costs are deferred and amortised in relation to
expectedestimated gross profits.
ExpectedEstimated gross profits are projected on current best estimate assumptions with no provisions for adverse deviation. Costs of claims
in excess of the policyholder account balance are recognised when insured events occur. To the extent that a reinsurance contract does not, despite its form, provide for indemnification of the insured by the
reinsurerre-insurer against loss or liability, the premium paid less the amount of the premium to be retained by the
reinsurerre-insurer is accounted for as a deposit by the insured company.
Deferred acquisition costs UK GAAPIFRSTheIn relation to insurance contracts and participating contracts, the cost of acquiring new and renewal life assurance business is recognised in the
IFRS embedded value calculation as
incurred under UK GAAP applicableincurred. In relation to
banking groups.investment contracts, directly incremental commissions that vary with and are related to either securing new or renewing existing non-participating investment contracts are capitalised as an intangible asset; all other costs are recognised as expenses when incurred. This asset is subsequently amortised over the period of the provision of investment management services and is reviewed for impairment in circumstances where its carrying amount may not be recoverable.
US GAAPUnder US GAAP the costs incurred by the insurer in the acquisition of new and renewal life insurance business are capitalised.
TheseAcquisition costs consist
principally of
the acquisition costs, principally, commissions and other variable sales costs.
Deferred acquisition costs for SFAS 60 products are amortised in relation to premium income using assumptions consistent with those used in computing policyholder benefits provisions. Deferred acquisition costs related to investment and universal life contracts are amortised in proportion to the estimated gross profits arising from the contracts.
On the acquisition of another insurance company, an intangible asset (value of business acquired) is recognised which represents the present value of estimated future cash flows embedded in the existing contracts acquired. The amortisation is based upon the equivalent method for amortising the deferred acquisition costs, as above.
UK GAAPIFRS Liabilities – life insurance contracts or participating investment contracts, which are not unit linkedFuture policyholder
A liability for contractual benefits that are expected to be incurred in the future is recorded when the premium is recognised. The liability is calculated by estimating the future cash flows over the duration of the in-force policies and discounting them back to the valuation date allowing for probabilities of occurrence. The liability will vary with movements in interest rates and with the cost of life assurance and annuity benefits where future mortality is uncertain.
Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs. For conventional life and pensions business, the gross premium valuation method has been used.
Liabilities – life insurance contracts or participating investment contracts, which are unit linked
Allocated premiums in respect of unit linked contacts that are either life assurance contracts or participating investment contracts are recognised as liabilities. These liabilities are increased or reduced by the change in the unit prices and are reduced by policy administration fees, mortality and surrender charges and any withdrawals and include any amounts necessary to compensate the Group for services to be performed over future periods. The mortality charges deducted in each period from the policyholders as a group are considered adequate to cover the expected total death benefits claims in excess of the contract account balances in each period and hence no additional liability is established for these claims in excess of the contract balances. Revenue consists of fees deducted for mortality, policy administration and surrender charges. Interest or changes in the unit prices credited to the account balances and excess benefit provisions includedclaims in Abbey’sexcess of the account balances incurred in the period are charged as expenses in the income statement.
Liabilities – investment contracts which are unit linked
These contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet are calculated, under UK GAAP applicabledate. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable.
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Financial Statements
Notes to banking groups, using approved actuarial methods (such as net and gross premium methods) for with-profit life insurance and other protection-type policies and are based on fund value for unitised with-profits insurance policies and investment-type policies. Net premiums are calculated using assumptions for interest, mortality, morbidity and expenses. These assumptions are determined as prudent best estimates at the date of valuation. Liabilities are not established for future annual and terminal bonus declarations.Financial Statementscontinued
US GAAPFor SFAS 97 defined products, the liability is represented by the policyholder’s account balance before any applicable surrender charges. Policyholder benefit liabilities for products defined by SFAS 60 are developed using the net level premiums method. Assumptions for interest, mortality, morbidity withdrawals and expenses are prepared using best estimates at date of policy issue (or date of company acquisition by Abbey, if later) plus a provision for adverse deviation based on the insurer’s
experience.With-profitsexperience, and are not revised unless a loss recognition event arises. In the event where future expected claim costs exceed related unearned premiums, a liability is accrued to the extent that it exceeds any unamortised acquisition costs.
Participating or “with-profits” business With-profits policies entitle the policyholder to participate in the surplus within the with-profits life fund of the insurance company, which issued the policy. Regular bonuses are determined and declared annually by the issuing company’s Board of Directors on the advice of the with-profits actuary. Bonuses take the form of additional benefits, which are only paid on termination of the policy. The bonuses that may be declared are highly correlated, over a period of time, to the overall performance of the underlying assets and liabilities of the fund in which the contract is invested over that same period of time.
Bonuses are designed to provide policyholders with a share of the total performance of the fund during the period of the contract broadly consistent with the “asset share” of the individual contract.
The contract for with-profits business written into the with-profits fund provides that approximately 90 per cent of the surplus arising from the net assets of the fund which is distributed is allocated to policyholders in the form of either annual bonuses or terminal bonuses which are allocated at the end of the contract. For unitised with-profits business written into the with-profits fund all of the surplus that is distributed is allocated to policyholders as bonus.
UK GAAPIFRSAll amounts inThe Group has an obligation to pay policyholders a specified portion of all interest and realisable gains and losses arising from the
with-profits fundsassets backing participating contracts. Any amounts not yet
allocateddetermined as being due to policyholders
or shareholders are
recorded in the liabilities attributable to policyholders on Abbey’s balance sheet.recognised as a liability.
US GAAPA liability is established for undistributed policyholder allocations. The excess of assets over liabilities in the with-profits fund is allocated to the policyholders and shareholders in accordance with the proportions prescribed by the contracts. The remaining liability comprises the obligation of the insurance company to the policyholders. Any deficit arising in the with-profit fund is provided for in full.
159
Financial Statements
Notes to the Financial Statementscontinued
Guaranteed Annuity Options
Abbey has issued a number of with-profits pensions contracts, both regular and single premium, which have a guaranteed convertibility option on maturity, fixing a minimum rate at which conversion into an immediate annuity will be made.
UK GAAPIFRSAn estimate of the fair value of the guarantee payable to the policyholders, on a net present value basis, is provided for in the liabilities of the
with-profitwith profit fund.
US GAAPThe guaranteed annuity option is considered to only give rise to a mortality risk when the right to purchase is exercised by the policyholder. If purchased, the annuity is a new contract and evaluated under SFAS 97 at that time. As a result of the adoption of SOP 03-1, an additional liability has been recognised to allow for potential benefits in additionmust be established if, at the expected annuitisation date, the present value of the expected annuitisation payments (plus related expenses) exceeds the projected account balance. The additional liability is calculated by accumulating that portion of the policy assessments that will exactly amount to the account balancepresent value of the additional liability on the expected annuitisation date, using a range of scenarios.
Financial instruments
IFRSUnder IAS 39, from 1 January 2005, the Group classifies its financial assets in the following categories: financial assets at fair value through profit and loss, loans and receivables, and available-for-sale financial assets. Management determines the classification of its investments at initial recognition.
(a) Financial assets at fair value through profit and loss
Financial assets are classified as fair value through profit or loss if they are either held for trading or otherwise designated at fair value through profit or loss on initial recognition (as separately described in the next section). A financial asset is classified as held for trading if it is a derivative or it is acquired principally for the purpose of selling in the near term, or forms part of a portfolio of financial instruments that are payablemanaged together and for which there is evidence of short term profit taking.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments and which are not classified as available for sale. They arise when the Group provides money or services directly to a customer with no intention of trading the loan. Loans and receivables are initially recognised at fair value including direct and incremental transaction costs. They are subsequently valued at amortised cost, using the effective interest method. They are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all of the risks and rewards of ownership.
(c) Available for sale
Available for sale investments are non-derivative financial investments that are designated as available for sale and are not categorised into any of the other categories described above. They are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses arising from changes in fair value are included as a separate component of equity until sale when the cumulative gain or loss is transferred to the income statement. Interest is determined using the effective interest method. Income on investments in equity shares and other similar interests is recognised as and when dividends are declared and interest is accrued. These amounts are recorded in the income statement. Impairment losses and translation differences on monetary items are recognised in the income statement. The investments are derecognised when the rights to receive cash flows have expired or the Group has transferred substantially all the risks and rewards of ownership.
Prior to 1 January 2005, financial assets were only
upon annuitisation.Investments inaccounted for at fair value through profit and loss if they were classified as trading; the accounting for loans and receivables was unchanged; and securities
UK GAAP were classified as held for investment purposes or not held for investment purposes (i.e. trading). Securities held for investment purposes arewere stated at cost adjusted for any amortisation of premium or discount. Provision iswas made for any impairment in value.
All securities not
174
Financial Statements
Notes to the Financial Statementscontinued
held for investment purposes
arewere stated at fair value and profits and losses arising from this revaluation
arewere taken to the
profit and loss account.income statement. Debt and Equity securities
arewere periodically reviewed on a case-by-case basis to determine whether any decline in fair value below the carrying value
iswas an indication of impairment. A review for impairment of a security
includes,included, among other things, consideration of the credit risk associated with the security, including an assessment of the likelihood of collection of amounts due pursuant to the contractual terms of the security in excess of the cost of the security.
Should an event reversehave reversed the effects of a previous impairment, the carrying value of the security may behave been written up to a value no higher than the original cost which would have been recognised had the original impairment not occurred.
Providing a general allowance for unidentified impairment losses in a portfolio of securities is permitted.
US GAAPInvestments in
equity securities with readily determinable market values
and all debt securities are classified as trading securities, available for sale securities,
andor held to maturity securities in accordance with SFAS 115.
DebtAbbey has no securities classified as held to
maturity represent securities that Abbey has both the ability and the intent to hold until maturity.
Held to maturity securities are stated at cost and adjusted for any amortisation of premium or discount. Securities classified as trading represent securities that Abbey bought and holds principally for the purpose of selling them in the near term.term or that were designated at their purchase date as such. Trading securities are accounted for in the same way as trading securities not held for investment purposes under UK GAAP.IAS 39. Debt and Equityequity securities classified as available for sale represent securities not classified as either held to maturity or trading securities. AvailableThey are initially recognised at fair value including direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses on available for sale securities arising from changes in fair value are reported at fair value. Where a security, or proportion of a security, is unhedged, the unrealised gains and losses are excluded from earnings and reported inincluded as a separate component of shareholders’ funds.equity until sale when the cumulative gain or loss is transferred to the income statement. Foreign exchange gains or lossesdifferences on available-for-sale securities denominated in foreign currency denominated available-for-sale securities are also excluded from earnings and recorded as part of the same separate component of shareholders’ funds. Where a security, or a proportion of a security, is hedged by a fair value hedge, the unrealised gain or loss on both the security and the derivative financial instrument hedging the available for sale security will be taken to earnings.
Securities classified as either available-for-sale or held-to-maturity are required to be reviewed on an individual basis to identify whether their fair values have declined to a level below amortised cost and, if so, whether the decline is other-than-temporary. Provision is reflected in earnings as a realised loss for any impairment that is considered to be other-than-temporary. If it is probable that an investor will be unable to collect all amounts due according to the contractual terms of a debt security, an other-than-temporary impairment is considered to have occurred. Recognition of other-than-temporary impairment may be required as a result of a decline in a security’s value due to deterioration in the issuer’s creditworthiness, an increase in market interest rates or a change in foreign exchange rates since acquisition. Other circumstances in which a decline in the fair value of a debt security may be other-than-temporary include situations where the security will be disposed of before it matures or the investment is not realisable.
Emerging Issues Task Force (EITF) pronouncement EITF 99-20 “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitised Financial Assets” (EITF 99-20) requires impairment testing on applicable asset backed securities to be performed using a discounted cash flow model on an individual security basis. If the present value of the security’s original cash flows estimated at the initial transaction date (or the last date previously revised) is greater than the present value of the current estimated cash flows at the financial reporting date, an other-than-temporary impairment is
usually considered to have occurred. The security is written down to fair value
(i.e. the present value of the current estimated cash flows) with the resulting change being included in income.
In 2003, Abbey
reviewed its UK impairment testing procedures andhas adopted the specific impairment testing methodology required by EITF 99-20 for applicable asset backed securities for
UK GAAPIFRS purposes.
If an impairment loss is recognised, the cost basis of the individual security is written down to fair value as a new cost basis. The new cost basis is not changed for subsequent recoveries in fair value.
Providing a general allowance for unidentified impairment losses in a portfolio of securities is not permitted.
Loan origination fees and costs UK GAAPIFRSLoanUnder IAS 39, from 1 January 2005, interest income on loans is determined using the effective interest rate method. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset. The calculation includes all amounts paid or received by the Group that are an integral part of the overall return, direct incremental transaction costs related to the acquisition, issue or disposal of a financial instrument and all other premiums or discounts. Prior to 1 January 2005, loan origination fees received in respect of services provided
arewere taken to the
Profit and Loss Accountincome statement when the related services
arewere performed. Where loan origination fees or costs
arewere in the nature of interest or income, they
arewere recognised in the
profit and loss accountincome statement over the expected life of the transaction to which they
relaterelated or over the period of time in which Abbey
hashad the right to recover the incentives in the event of early redemption.
160
Financial Statements
Notes to the Financial Statementscontinued
US GAAPTo the extent that loanLoan origination fees are not offset by related direct costs, theyinternal costs, and discount mortgage incentives are deferred and amortised through the Profit and Loss Accountincome statement over the life of the loan, in accordance with SFAS 91, “Accounting for Non-refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Losses”. Abbey includes estimates of future prepayments in the calculation of constantthe effective yield. These estimates are based on detailed mortgage prepayment models.
Securitised assets
UK GAAPUnder FRS 5, “Reporting When the substanceinterest rate increases during the term of transactions”, where assets are financed in such a waythe loan, SFAS 91 prohibits the recognition of interest income to the extent that the maximum loss that Abbey can suffer is limitedloan would increase to a fixed monetaryan amount whilst not changinggreater than the amount at which the borrower could settle the loan.
Securitised assets
IFRSThe Group has entered into certain arrangements where undertakings have issued mortgage-backed securities or have entered into funding arrangements with lenders in
any significant wayorder to finance specific loans and advances to customers. All such financial instruments continue to be held on the
entity’s access to the benefits (including servicing fees) or risks of holding those assets, then providing certain conditions are met the assets remain onGroup balance sheet, and
any finance received is deducted froma liability recognised for the
assets. Specifically, paragraph D8(c)proceeds of
Application Note D to FRS 5, stipulates that derecognition isthe funding transaction, as Abbey has not
appropriate where the originator retains rights to further sums, including among other things, in the form of servicing fees. Such treatment is referred to as ‘linked presentation.’ Special purpose vehicles are treated as quasi-subsidiaries and are consolidated wheretransferred substantially all the risks and rewards
from operations are similar to those which would be obtained for a subsidiary.associated with the loans.
US GAAPSFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, requires that after a transfer of financial assets an entity recognises the financial and servicing assets it controls and the liabilities it has incurred, derecognises financial assets when control has been surrendered, and derecognises liabilities when extinguished. The statement contains rules for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The interests that Abbey retains in itsUnder US GAAP, Abbey’s mortgage securitisation transactionsvehicles are interest-only securities. Contrary to UK GAAP,considered “qualifying special purpose entities” and fall outside the retentionscope of a servicing asset does not, of itself, preclude the transfer of financial assets to be treated as a sale. In accordance with SFAS 140,FIN 46R. Consequently, Abbey treats its securitisations of mortgage loans as sales and, where appropriate, recognises a servicing asset and an interest receivable asset.interest-only security. The servicing asset is amortised over the periods in which the benefits
175
Financial Statements
Notes to the Financial Statementscontinued
are expected to be received and the
receivableinterest-only security is accounted for as an available for sale
security.Derivativessecurity, and Hedging Activities
is evaluated for impairment in accordance with EITF 99-20.
UKDesignation of financial assets at fair value through profit and loss
IFRSFrom 1 January 2005, under IAS 39, in certain circumstances financial assets and liabilities other than those that are held for trading may be designated at fair value through profit or loss where this results in more relevant information because it significantly reduces a measurement inconsistency that would otherwise arise from measuring assets or recognising the gains or losses on them on a different basis, or where a financial liability contains one or more embedded derivatives which are not closely related to the host contract. Abbey has designated at fair value with effect from 1 January 2005 certain loans and advances to customers, investments securities and other financial investments, as well as some debt securities in issue meeting the criteria for designation at fair value. Prior to 1 January 2005, such an option did not exist.
US GAAP.Abbey early adopted SFAS 155 on 1 January 2005. Under SFAS 155, financial assets and financial liabilities may be measured at fair value through the income statement where they contain substantive embedded derivatives that would otherwise require bifurcation under SFAS 133. The difference between the total carrying amount of the individual components of an existing bifurcated hybrid financial instrument and the fair value of the combined hybrid financial instrument upon the adoption of SFAS 155 on 1 January 2005 was not material. Prior to 1 January 2005, such an option did not exist. Abbey early adopted the fair value option provided under SFAS 155 principally for selected debt securities in issue qualifying as hybrid financial instruments that had been bifurcated under SFAS 133 in order to achieve greater consistency with the accounting requirements of the fair value option under IAS 39. Other financial assets and liabilities designated as fair value through profit and loss under IFRS that did not meet the criteria for measurement at fair value through the income statement under SFAS 155, such as loans and advances to customers, investments securities and other financial investments, as well as some debt securities in issue are accounted for under the appropriate US GAAP for such items, as described earlier in this section.
Derivatives
IFRSUnder IAS 39, from 1 January 2005, derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. The Group designates certain derivatives as hedges of the fair value of recognised assets or liabilities or firm commitments (fair value hedge) provided certain criteria are met. At the time a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged items(s). Documentation includes its risk management objectives and its strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. Accordingly, the Group formally assesses, both at the inception of the hedge and on an ongoing basis, whether the hedging derivatives have been highly effective in offsetting changes in the fair value of the hedged items. The Group discontinues hedge accounting when it is determined that: a derivative is not, or is not expected to be, highly effective as a hedge; when the derivative expires, or is sold, terminated, or exercised; or when the hedged item matures or is sold or repaid.
Prior to 1 January 2005, derivatives were classified as trading or non-trading. Derivatives classified as trading
arewere carried at market value in the balance sheet. Gains and losses
arewere taken directly to the
profit and loss account and reported within dealing profits. Derivatives classified as non-trading are those entered into for the purpose of hedging risk from potential movements in foreign exchange rates, interest rates, and equity prices inherent in Abbey’s non-trading assets, liabilities and positions.income statement. Non-trading derivatives, are accountedwhich were transacted for in a manner consistent with the assets, liabilities or positions being hedged. Incomehedging and expense on non-trading derivatives are recognised on an accruals basis. Credit derivatives, designated as non-trading and through which credit risk is taken on, are reported as guarantees, which best reflects the economic substance of those transactions.
The majority of Abbey’s hedging contracts are transacted with an in-house risk management and trading operation, Abbey National Financial Products, in order to manage financial risks with external markets efficiently. Abbey National Financial Products transfers substantially all such risks into external markets on a portfolio basis in order to benefit from economies of scale, managing risk within predetermined limits. In Abbey’s accounts, derivatives held as non-trading instruments arepurposes, were accounted for on an accruals basis.
basis, equivalent to the assets, liabilities or net positions being hedged.
US GAAPSFAS 133, “Accounting for Derivatives Instruments and Hedging Activities”, requires that all
derivativesderivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or
Otherother comprehensive income, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions in which Abbey is hedging changes in the fair value of an asset, liability, or firm commitment, changes in the fair value of the derivative will generally be offset in the income statement by changes in the hedged item’s fair value.
For Abbey has no cash flow hedge transactions,transactions.
Debt securities in issue
IFRSFrom 1 January 2005, under IAS 39, the Group has designated certain debt securities in issue as fair value though profit or loss, as described above. In addition, from 1 January 2005, also under IAS 39, the Group has claimed hedge accounting for other debt securities in issue, as also described above. Prior to 1 January 2005, all debt securities in issue were accrual accounted.
The application of IAS 39 “Financial Instruments: Recognition and Measurement” as at 1 January 2005 resulted in the recognition of additional assets and liabilities relating to the fair values of derivatives at that date which Abbey is hedgingwere previously accounted for on an accruals basis. In addition, the variabilitycarrying values of cash flows relatednon-derivative financial instruments subject to a variable-rate asset, liability, or a forecasted transaction, changesfair value hedges were adjusted at 1 January 2005 in relation to the fair value of the derivative instrument are reported in Other comprehensive income. The gains and losses on the derivative instrument that are reported in Other comprehensive income are reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows ofattributable to the hedged item. The ineffective portionrisks of all hedges are recognisedthose financial instruments.
US GAAPFrom 1 January 2005, as previously described, Abbey early adopted the fair value option provided under SFAS 155 for selected debt securities in
current-period earnings. The majority of Abbey’s hedges are undertaken with its in-house trading operation, Abbey National Financial Products. Abbey National Financial Products match internal hedges with third party derivatives on an aggregate rather than individual basis and hedges the net outstanding position where Abbey has assets and liabilities, which largely offset the overall risk to Abbey. These hedges do not qualifyissue that qualified as hybrid financial instruments that had been bifurcated under SFAS 133, in order to be treated as cash flow,achieve greater consistency with the accounting requirements of the fair value or foreign exchange hedges. For this reason,option under IAS 39.
Prior to 1 January 2005, the Group claimed hedge accounting under US GAAP for only a limited number of debt securities in issue, primarily due to the additional administrative burden associated with complying with the detailed hedge accounting requirements of SFAS 133, such
contracts are restated at market value fordocumentation and testing not being otherwise required before the
purposesadoption of IAS 39. As Abbey’s business model is now primarily structured to maximise use of the
fair value option under IFRS, the Group decided to cease claiming any hedge accounting for US GAAP
reconciliation.Restructuring costs
UKpurposes, and de-designated all its hedges under US GAAPProvisions for vacant property may be recognised at from 1 January 2005 in order to reduce the date whenadministrative burden on the decision hasGroup. In addition, the effects of applying hedge accounting under IFRS have been taken to vacate the property.
reversed. US GAAPProvisions for vacant property can only be recognised when the property has been vacated.
161
176
Notes to the Financial Statementscontinued
Consolidation
IFRSSubsidiaries, which are those companies and other entities (including Special Purpose Entities) in which the Group, directly or indirectly, has power to govern the financial and operating policies, are consolidated. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity.
US GAAPAbbey is required to consolidate variable interest entities for which it is deemed to be the primary beneficiary and to deconsolidate variable interest entities for which it is not deemed to be the primary beneficiary.
Investment property
IFRSProperty held for long-term rental yields and capital appreciation within the long-term assurance funds is classified as investment property. Investment property is stated at fair value, which is determined annually as the open market value. These valuations are reviewed annually by an independent valuation expert. Changes in fair values are recorded in the income statement.
US GAAP. Investment property is stated at historical cost and is depreciated on a straight-line basis over its useful life.
Preference shares
IFRSFrom 1 January 2005, preference shares are classified as financial liabilities, and presented in other borrowed funds. Preference shares denominated in a foreign currency are retranslated at each balance sheet date. The dividends on preference shares are recognised in the income statement as interest expense on an amortised cost basis using the effective interest method. Prior to 1 January 2005, preference shares were classified in shareholders’ equity. Preference shares denominated in a foreign currency were not retranslated at each balance sheet date, and the dividends on preference shares were accounted for as an appropriation of profit.
US GAAPPreference shares are classified in shareholders’ equity if they are not mandatorily redeemable and do not have redemption features that are not solely within the control of Abbey. Preference shares denominated in a foreign currency are not retranslated at each balance sheet date. The dividends on preference shares are accounted for as an appropriation of profit.
Derecognition of liabilities UK GAAPIFRSAFrom 1 January 2005, under IAS 39, a debt
mayis removed from the balance sheet when, and only when, it is extinguished — i.e. when the obligation specified in the contract is discharged or cancelled or expires. Prior to 1 January 2005, a debt could be derecognised for financial reporting purposes when it
iswas beyond reasonable doubt that performance
willwould not be required under the obligation.
US GAAP. A debt is considered extinguished for financial reporting purposes only when the debtor pays the creditor and is relieved of all its obligations with respect to the debt; or the debtor is legally released as the primary obligor under the debt, either judicially or by the creditor.
Consolidation
UK GAAPA company With the adoption of IAS 39, there is required to consolidate all its subsidiary undertakings.
no longer a difference between IFRS and US GAAPA company is required to consolidate variable interest entities for which it is deemed to be the primary beneficiary and to deconsolidate variable interest entities for which it is not deemed to be the primary beneficiary.
Dividend payable
GAAP.
UK GAAPDividends declared are recorded in the period to which they relate.US GAAPDividends are recorded in the period in which they are declared.
Deferred Tax
UK GAAPDeferred tax is provided for all timing differences between the recognition of gains and losses in the financial statements and their recognition in a tax computation. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.
US GAAPUnder SFAS 109 “Accounting for Income Taxes” deferred tax assets and liabilities are recorded for all temporary differences. A valuation allowance is recorded against a deferred tax asset where it is more likely than not that some portion of the deferred tax asset will not be realised. Deferred tax is provided on enacted tax rates.
59.56. Current developments in UK and US GAAP
FAS 150:
SFAS 155: Accounting for Certain Hybrid Financial Instruments with CharacteristicsInstruments—an amendment of both LiabilitiesSFAS 133 and EquitySFAS140
In
May 2003,February 2006, the
Financial Accounting Standards Board (FASB)FASB issued SFAS
150,155 “Accounting for Certain
Hybrid Financial
Instruments with CharacteristicsInstruments—an amendment of
both LiabilitiesFASB Statements No. 133 and
Equity.” SFAS 150 addresses how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires an issuer to classify a financial instrument that is within its scope as a liability (or asset in some circumstances)140”. SFAS
150 is effective for financial instruments entered into or modified after 31 May 2003, and otherwise is effective at the beginning of the first interim period beginning after 15 June 2003.155 amends SFAS
150 did not have a material impact on Abbey’s financial position or results of operations.FIN 46 R: Consolidation of Variable Interest Entities.
In January 2003, the FASB released FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) which was revised by the FASB in December 2003. The revised interpretation (FIN 46R) changes the method of determining whether certain entities, including securitisation entities, should be included in Abbey’s Consolidated Financial Statements. An entity is subject to FIN 46R and is called a variable interest entity (VIE) if it has (1) equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, (2) equity investors that cannot make significant decisions about the entity’s operations, or that do not absorb the expected losses or receive the expected returns of the entity or (3) equity investors that have voting rights that are not proportionate to their economic interests and substantially all the activities of the entity involve, or are conducted on behalf of, an investor with a disproportionately small voting interest. A variable interest entity is consolidated by its primary beneficiary, which is the party involved with the variable interest entity that has a majority of the expected losses or a majority of the expected residual returns or both.
Abbey has adopted the provisions of FIN 46R to all the entities subject to this interpretation.
The impact on the adoption of FIN 46 R is reflected in note 62(h) on page 174.
EITF 03-1: The Meaning of Other -Than -Temporary Impairment and Its Application to Certain Investments
In March 2004, the FASB ratified EITF Issue No 03-1, “The Meaning of Other -Than -Temporary Impairment and Its Application to Certain Investments” which provides guidance on recognising other-than-temporary impairments on certain investments. The issue is effective for other-than-temporary impairment evaluations for investments accounted for under SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities”, as well as non-marketable securities accounted for under the cost method. The measurement provisions of this issue have been indefinitely deferred.
The disclosures now required are set out on page 172.
162
Financial Statements
Notes to the Financial Statementscontinued
EITF 03-7: Accounting for the settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to be Settled in Stock (Instrument C in issue 90-19)
In August 2003, the FASB ratified EITF 03-7, “Accounting for the Settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to be Settled in Stock (Instrument C in issue 90-19)”. EITF 03-7 addresses how an issuer should account for the partial cash-based and partial stock-based settlement of a debt instrument that is structured in the form of an Instrument C of EITF 90-19. Upon the settlement of the debt by payment of the principal in cash and settlement of the conversion spread with stock, only the cash payment is to be included in the computation of the gain or loss on extinguishment of the debt. EITF 03-7 is applied prospectively for transactions or arrangements entered into by Abbey after 1 January 2004. The adoption of EITF 03-7 did not have a material impact on Abbey’s financial position or results of operations.
EITF 03-11: Reporting Gains and Losses on Derivative Instruments that are Subject to FASB No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and “Not HeldSFAS 140, “Accounting for Trading Purposes” as definedTransfers and Servicing of Financial Assets and Extinguishments of Liabilities” and resolves issues addressed in EITFSFAS 133 Implementation Issue No. 02-03, “Issues RelatedD1, “Application of Statement 133 to Accounting for Contracts InvolvedBeneficial Interests in Energy Trading and Risk Management Activities”
In August 2003, the FASB ratified EITF 03-11, “Reporting Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities”, and “Not Held for Trading Purposes”Securitized Financial Assets” as Defined in EITF Issue No. 02-3, “Issues Related to Accounting for Contracts Involved in Energy Trading and Risk Management Activities”. EITF 03-11 requires companies, when determining whether realised gains and losses on derivative contracts not held for trading purposes should be reported on a net or gross basis, to make such determinations as a matter of judgement that depends on the relevant facts and circumstances.
EITF 03-11 is to be applied prospectively for transactions or arrangements entered into by Abbey after 1 January 2004. The application of EITF 03-11 did not have a material impact on Abbey’s financial position or results of operations.
SOP 03-1: Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts.
In July 2003, the AICPA issued Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-Duration Contracts and for Separate Accounts”. SOP 03-1 provides guidance related to the reporting and disclosure of certain insurance contracts and separate accounts, including the accounting for annuitisation options. SOP 03-1 also addresses the capitalisation and amortisation of sales inducements to contract holders. SOP 03-1follows:
| | |
| > | | Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation |
| | |
| > | | Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133 |
| | |
| > | | Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation |
| | |
| > | | Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives |
| | |
| > | | Amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. |
SFAS 155 is effective for
all financial instruments acquired or issued after the first fiscal
yearsyear beginning after 15
December 2003.September 2006. With effect from 1 January 2005, Abbey adopted the fair value option provided under SFAS 155 for selected hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS 133 in order to achieve greater consistency with the accounting requirements of the fair value option under IAS 39. The impact of SOP 03-1 on Abbey’s results of operations and financial condition is included in the US GAAP reconciliation in the adjustment “Shareholders’ interest in long-term assurance business”.
SAB 105: Application of Accounting Principles to Loan Commitments
In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 105, “Application of Accounting Principles to Loan Commitments”. SAB 105 requires that the fair value measurement of loan commitments, which are derivatives, exclude any expected future cash flows related to the customer relationship or servicing rights. The guidance in SAB 105 must be applied to loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not have a material impact on Abbey’s financial position or results of operations.
163
Financial Statements
Notes to the Financial Statementscontinued
60. Future developmentsSFAS 155 is disclosed in US GAAP
Note 59(o).
SOP 03-3: Accounting for Certain Loans or Debt Securities Acquired in a Transfer In December 2003, the AICPA issued Statement of Position 03-3 “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows expected to be collected fromform an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. It includes such loans acquired in purchase business combinations, but does not apply to loans originated by the entity. SOP 03-3 limits the yield that may be accreted to the excess of the investor’s estimate of undiscounted expected principal, interest and other cash flows over the investor’s initial investment in the loan. The SOP requires that the excess of contractual cash flows over cash flows expected to be collected (non-accretable difference) not be recognised as an adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 also prohibits investors from displaying accretable yield and non-accretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected
177
Financial Statements
Notes to the Financial Statementscontinued
generally should be recognised prospectively through adjustment of the
loan’sloans yield over its remaining life. Decreases in cash flows expected to be collected should be recognised as impairment.
SOP 03-3 is effective for loans acquired in fiscal years beginning after 15 December 2004.
Abbey does not expect theThe adoption of SOP 03-3
todid not have a material impact on the company’s financial position or results of operations.
FAS 123 R
57. Future developments in US GAAP
SFAS 123R: Share-Based Payment
On December 16, 2004, the FASB issued
FASB Statement
of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004)
“Share-Based“Share-based Payment”, which is a revision of SFAS 123, “Accounting for Stock-Based Compensation”. SFAS 123R supersedes APB
Opinionopinion No. 25, “Accounting for Stock
Issuedissued to Employees” and its interpretations, and
amendsrevises SFAS
95, “Statement123 “Accounting for Stock-Based Compensation”. SFAS 123R eliminates the alternative to use APB Opinion 25’s intrinsic value method of
Cash Flows”. Generally, the approach to accounting
for share-based paymentsthat was provided in SFAS
123R is similar to the fair-value approach permitted in SFAS 123. However,123 as originally issued. SFAS 123R requires
all share-based paymentsentities to
employees, including grantsrecognize the cost of employee
stock options, to be recognizedservices received in
the financial statementsexchange for awards of equity instruments based on
theirthe grant-date fair
values (i.e., pro forma disclosurevalue of those awards, which is
no longer an alternative to financial statement recognition).consistent with Abbey’s accounting under SFAS 123. SFAS 123R
is effective at the beginning ofapplies to all awards granted and modified, repurchased, or cancelled after the first interim or annual period beginning after
15 June
15, 2005. Abbey does not expect the adoption of SFAS 123R to have a material impact on the company’s financial position or results of operations.
SFAS 153: Exchanges of Nonmonetary Assets — an amendment of APB 29
In December 2004, the FASB
Staff Position 97-1, “Situationsissued SFAS 153 “Exchanges of Nonmonetary Assets —an amendment of APB Opinion No. 29”. SFAS 153 carries forward the guidance in
Which Paragraphs 17(b)APB 29, “Accounting for Nonmonetary Transactions”, which is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS 153 amends APB Opinion No. 29, in that it eliminates the exception for nonmonetary exchanges of similar productive assets and
20replaces it with a general exception for exchanges of
FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses fromnonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the
Salefuture cash flows of
Investments, Permit or Require Accrual of an Unearned Revenue Liability”On June 18, 2004, FASB Staff Position 97-1 was issued to clarify the accounting requirements of SFAS 97. SFAS 97 requires the recognition of an unearned revenue liability for amounts that have been assessed to compensate insurers for services to be performed over future periods. Paragraph 26 of SOP 03-1 cites one situation (assessments resulting in profits in early years and losses in subsequent years from the insurance benefit function) for which the recognition of an unearned revenue liability is required. FASB Staff Position 97-1 clarifies that this requirement of SOP 03-1 does not amend SFAS 97 and does not limit the requirement of SFAS 97 to recognise a liability for unearned revenue only to those situations where profitsentity are expected to be followed by losses.change significantly as a result of the exchange. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal years beginning after 15 June 2005. Abbey does not expect the adoption of FASB Staff Position 97-1SFAS 153 to have a material impact on the company’s financial position or results of operations.
International
SFAS 154: Accounting Standards (IAS)Abbey,Changes and Error Corrections — a replacement of APB 20 and SFAS 3
In May 2005, the FASB issued SFAS 154 “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS 154 replaces APB 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting Changes in line with all companies listed on exchangesInterim Financial Statements”, and amends the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 establishes retrospective application, unless impracticable, as the required method for reporting a change in accounting principle in the European Union, will be requiredabsence of explicit transition requirements specific to prepare itsthe newly adopted accounting principle. SFAS 154 also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. Under SFAS 154, the correction of an error in previously issued financial statements is not an accounting change, but involves adjustments to previously issued financial statements. In many, but not all aspects, under SFAS 154 the accounting for changes and error corrections are converged with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after 15 December 2005. Abbey does not expect the adoption of SFAS 154 to have a material impact on the company’s financial position or results of operations.
SFAS 156: Accounting for Servicing of Financial Assets — an amendment of SFAS 140
In March 2006, the FASB issued SFAS 156 “Accounting for Servicing of Financial Assets—an amendment of FASB Statement No. 140”. SFAS 156 amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS 156 requires a company to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract principally in a transfer of the servicer’s financial assets that either meets the requirements for sale accounting, or is to a qualifying special-purpose entity in a guaranteed mortgage securitisation in which the transferor retains all of the resulting securities and classifies them as either available-for-sale securities or trading securities in accordance with IAS from 1 January 2005.SFAS 115, Accounting for Certain Investments in Debt and Equity Securities . SFAS 156 requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable, and permits a company to choose to subsequently measure each class of separately recognized servicing assets and servicing liabilities using either a specified amortisation method or a specified fair value measurement method. At its initial adoption, SFAS 156 permits a one-time reclassification of available-for-sale securities to trading securities by companies with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under SFAS 115, provided that the available-for-sale securities are identified in some manner as offsetting the company’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value. SFAS 156 is applicable to all transactions entered into in fiscal years that begin after September 15, 2006. Abbey is currently assessingevaluating the impactrequirements of this changeSFAS 156.
SOP 05-1: Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts
In September 2005, the AICPA issued Statement of Position (“SOP”) 05-1 “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts”. SOP 05-1 provides guidance on its US GAAP reconciliations. For further detailsaccounting by insurance enterprises for deferred acquisition costs on the conversioninternal replacements of IAS, see page 15.insurance and investment contracts other than those specifically described in SFAS 97 “Accounting and Reporting by Insurance Enterprises for Certain
164
178
Notes to the Financial Statementscontinued
Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. Abbey does not expect the adoption of SOP 05-1 to have a material impact on the company’s financial position or results of operations.
SFAS 133 Implementation Issue No. B38, Embedded Derivatives: Evaluation of Net Settlement With Respect to the Settlement of a Debt Instrument Through Exercise of an Embedded Put Option or Call Option
In June 2005, the FASB issued SFAS 133 Implementation Issue No. B38, “Embedded Derivatives: Evaluation of Net Settlement With Respect to the Settlement of a Debt Instrument Through Exercise of an Embedded Put Option or Call Option” (“DIG Issue 38”). DIG Issue 38 clarifies that in applying paragraph 12(c) of SFAS 133 to a put option or call option (including a prepayment option) embedded in a debt instrument, the potential settlement of the debtor’s obligation to the creditor that would occur upon exercise of the put option or call option does not meet the net settlement criterion in paragraph 9(a) of SFAS 133. The application of paragraph 12(c) is relevant when an embedded put option or call option is not considered to be clearly and closely related to the debt host under paragraph 12(a) and related paragraph 13 or 61(d). DIG Issue 38 is effective for fiscal years beginning after December 15, 2005. Abbey does not expect the adoption of DIG Issue 38 to have a material impact on the company’s financial position or results of operations.
SFAS 133 Implementation Issue No. B39, Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor
In June 2005, the FASB issued SFAS 133 Implementation Issue No. B39, “Embedded Derivatives: Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor” (“DIG Issue 39”). DIG Issue 39 describes the circumstances in which an embedded call option (including a prepayment option) that can accelerate the settlement of a hybrid instrument containing a debt host contract would not be subject to the conditions in paragraph 13(b) of SFAS 133. DIG Issue B39 is effective for fiscal years beginning after December 15, 2005. Abbey does not expect the adoption of DIG Issue B39 to have a material impact on the company’s financial position or results of operations.
179
61.
Financial Statements
Notes to the Financial Statementscontinued
58. US GAAP reconciliation The following table summarises the significant adjustments to consolidated net income and shareholders’
fundsequity which would result from the application of US GAAP instead of
UK GAAP.IFRS. Where applicable, the adjustments are stated gross of tax with the cumulative tax effect of all adjustments included separately.
| | | | | | | | | | | | | |
| | | 2004 | | | 2003(1) | | | 2002(1) | |
| Income statement | | £m | | | £m | | | £m | |
| |
| Profit/(loss) attributable to the shareholders of Abbey National plc — UK GAAP | | | 80 | | | | (699 | ) | | | (1,161 | ) |
| Dividends on preference shares | | | (48 | ) | | | (60 | ) | | | (62 | ) |
| |
| | | | 32 | | | | (759 | ) | | | (1,223 | ) |
| US GAAP adjustments: | | | | | | | | | | | | |
| Goodwill | | | 5 | | | | 22 | | | | 714 | |
| Other intangible assets | | | (162 | ) | | | (53 | ) | | | (120 | ) |
| Computer software | | | (109 | ) | | | (42 | ) | | | (24 | ) |
| Pensions cost | | | (78 | ) | | | (7 | ) | | | (28 | ) |
| Securitisation | | | 30 | | | | 37 | | | | 26 | |
| Shareholders’ interest in long-term assurance business | | | 109 | | | | 270 | | | | (673 | ) |
| Derivatives and hedging activities | | | 54 | | | | 303 | | | | (138 | ) |
| Loan origination fees and costs | | | 12 | | | | 37 | | | | 73 | |
| Leasing | | | 1 | | | | (30 | ) | | | 94 | |
| Other | | | (66 | ) | | | 2 | | | | (37 | ) |
| Tax effect on the above adjustments | | | 104 | | | | 92 | | | | (71 | ) |
| |
| Net (loss)/income available to ordinary shareholders — US GAAP | | | (68 | ) | | | (128 | ) | | | (1,407 | ) |
| |
| Net income/(loss) from continuing operations — US GAAP | | | (103 | ) | | | 278 | | | | (676 | ) |
| Net (loss)/income of discontinued operations — US GAAP | | | 35 | | | | (406 | ) | | | (731 | ) |
| |
| Net (loss)/income available to ordinary shareholders — US GAAP | | | (68 | ) | | | (128 | ) | | | (1,407 | ) |
| |
| (Loss)/earnings per 10 pence ordinary share: | | | | | | | | | | | | |
| - from continuing operations | | | | | | | | | | | | |
| - basic and diluted | | | (7.1)p | | | | 19.2p | | | | (47.5)p | |
| - from discontinued operations | | | | | | | | | | | | |
| - basic and diluted | | | 2.4p | | | | (28.0)p | | | | (50.7)p | |
| - from net (loss)/income available to ordinary shareholders | | | | | | | | | | | | |
| - basic and diluted | | | (4.7)p | | | | (8.8)p | | | | (98.2)p | |
| |
| | | | | | | | | |
| | | 2004 | | | 2003(1) | |
| Shareholders’ funds | | £m | | | £m | |
| |
| Shareholders’ funds including non-equity interests — UK GAAP | | | 4,924 | | | | 5,331 | |
| US GAAP adjustments: | | | | | | | | |
| Goodwill | | | 678 | | | | 673 | |
| Other intangible assets | | | 89 | | | | 251 | |
| Computer software | | | 8 | | | | 117 | |
| Pensions cost | | | (583 | ) | | | (464 | ) |
| Securitisation | | | 368 | | | | 310 | |
| Shareholders’ interest in long-term assurance business | | | (935 | ) | | | (1,044 | ) |
| Derivatives and hedging activities | | | 206 | | | | 152 | |
| Loan origination fees and costs | | | 70 | | | | 58 | |
| Leasing | | | (197 | ) | | | (198 | ) |
| Other | | | (138 | ) | | | (72 | ) |
| Securities and investments | | | 52 | | | | 89 | |
| Dividend payable | | | — | | | | 242 | |
| Tax effect on the above adjustments | | | 301 | | | | 184 | |
| |
| Shareholders’ funds — US GAAP | | | 4,843 | | | | 5,629 | |
| |
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Income statement | | £m | | | £m | |
| |
| Profit/(loss) for the year – IFRS | | | 420 | | | | (54 | ) |
| US GAAP adjustments: | | | | | | | | |
| Goodwill | | | (533 | ) | | | (9 | ) |
| Other intangible assets | | | (14 | ) | | | (15 | ) |
| Pensions cost | | | (78 | ) | | | (79 | ) |
| Securities and investments | | | (66 | ) | | | — | |
| Securitised assets | | | 50 | | | | 30 | |
| Derivatives | | | — | | | | 54 | |
| Gain on sale of investment property | | | 286 | | | | 27 | |
| Value of business acquired | | | (82 | ) | | | 5 | |
| Deferred acquisition costs | | | (78 | ) | | | (69 | ) |
| Deferred income reserve | | | 4 | | | | (4 | ) |
| Insurance claims and policyholder liabilities | | | 20 | | | | 195 | |
| Loan origination fees and costs | | | 54 | | | | 12 | |
| Debt securities in issue | | | 180 | | | | — | |
| Preference shares | | | 88 | | | | — | |
| Consolidation | | | — | | | | (49 | ) |
| Derecognition of assets and liabilities | | | — | | | | (41 | ) |
| Other | | | 4 | | | | (16 | ) |
| Tax effect of the above adjustments | | | (2 | ) | | | (7 | ) |
| |
| Net income/(loss) – US GAAP | | | 253 | | | | (20 | ) |
| |
(1) | | Restated for the matters described in note 62 (t). |
165
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Shareholders’ equity | | £m | | | £m | |
| |
| Shareholders’ equity – IFRS | | | 3,110 | | | | 3,720 | |
| US GAAP adjustments: | | | | | | | | |
| Goodwill | | | 326 | | | | 859 | |
| Other intangible assets | | | 36 | | | | 50 | |
| Pensions cost | | | 603 | | | | 590 | |
| Securities and investments | | | (162 | ) | | | 52 | |
| Securitised assets | | | 331 | | | | 368 | |
| Derivatives | | | — | | | | 338 | |
| Value of in-force business | | | (1,301 | ) | | | (1,360 | ) |
| Deferred acquisition costs | | | 774 | | | | 885 | |
| Policy liabilities | | | 95 | | | | (185 | ) |
| Loan origination fees and costs | | | 187 | | | | 70 | |
| Debt securities in issue | | | 734 | | | | (132 | ) |
| Preference shares | | | 612 | | | | — | |
| Derecognition of assets and liabilities | | | — | | | | (148 | ) |
| Other | | | 21 | | | | 1 | |
| Tax effect of the above adjustments | | | (406 | ) | | | (265 | ) |
| |
| Shareholders’ equity – US GAAP | | | 4,960 | | | | 4,843 | |
| |
Financial Statements
NotesNet income/(loss) available to ordinary shareholders for the Financial Statementscontinued
62.year ended 31 December 2005 was £202m (2004: £(68)m) after the deduction of preference dividends of £51m (2004: £48m). Details of discontinued operations are set out in Note 59(p).
59. Further note disclosures on differences between UKIFRS and US GAAP, and certain additional US disclosures a) Goodwill and other intangible assets The following tables provide analyses of goodwill and
certain intangible assets included in the balance sheet under US GAAP for the
two years ended 31 December
2004,2005, and
2003.2004.
The changes in the carrying amounts of goodwill, by segment, for the years ended 31 December
2004,2005 and
20032004 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Motor | | | | | | | | |
| | | Banking | | | Investment | | | | | | | | | | | Finance & | | | | | | | | |
| | | and | | | and | | | General | | | Wholesale | | | Litigation | | | | | | | Group | |
| | | savings | | | protection | | | Insurance | | | Banking | | | Funding | | | Other | | | Total | |
| Goodwill | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Carrying value at 1 January 2004 | | | 257 | | | | 674 | | | | 4 | | | | 70 | | | | — | | | | 9 | | | | 1,014 | |
| Disposals | | | (3 | ) | | | (2 | ) | | | (4 | ) | | | — | | | | — | | | | (9 | ) | | | (18 | ) |
| Other movements | | | — | | | | — | | | | — | | | | (1 | ) | | | — | | | | — | | | | (1 | ) |
| |
| Carrying value at 31 December 2004 | | | 254 | | | | 672 | | | | — | | | | 69 | | | | — | | | | — | | | | 995 | |
| Total Goodwill capitalised per UK GAAP | | | 90 | | | | 227 | | | | — | | | | — | | | | — | | | | — | | | | 317 | |
| US/UK GAAP adjustment to shareholders’ funds | | | 164 | | | | 445 | | | | — | | | | 69 | | | | — | | | | — | | | | 678 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Motor | | | | | | | | |
| | | Banking | | | Investment | | | | | | | | | | | Finance & | | | | | | | | |
| | | and | | | and | | | General | | | Wholesale | | | Litigation | | | | | | | Group | |
| | | savings | | | protection | | | Insurance | | | Banking | | | Funding | | | Other | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Carrying value at 1 January 2003 | | | 273 | | | | 674 | | | | 4 | | | | 70 | | | | 190 | | | | 11 | | | | 1,222 | |
| Disposals | | | — | | | | — | | | | — | | | | — | | | | (190 | ) | | | (4 | ) | | | (194 | ) |
| Other movements | | | (16 | ) | | | — | | | | — | | | | — | | | | — | | | | 2 | | | | (14 | ) |
| |
| Carrying value at 31 December 2003 | | | 257 | | | | 674 | | | | 4 | | | | 70 | | | | — | | | | 9 | | | | 1,014 | |
| Total Goodwill capitalised per UK GAAP | | | 95 | | | | 240 | | | | — | | | | — | | | | — | | | | 6 | | | | 341 | |
| US/UK GAAP adjustment to shareholders’ funds | | | 162 | | | | 434 | | | | 4 | | | | 70 | | | | — | | | | 3 | | | | 673 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance and | | | | | | | | | | | |
| | | Retail | | | Asset | | | Portfolio Business | | | | | | | Group | |
| | | Banking | | | Management | | | Unit | | | Other | | | Total | |
| Goodwill | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Carrying value at 1 January 2005 | | | 254 | | | | 672 | | | | 69 | | | | — | | | | 995 | |
| Disposals | | | — | | | | — | | | | — | | | | — | | | | — | |
| Impairments | | | — | | | | (533 | ) | | | — | | | | — | | | | (533 | ) |
| |
| Carrying value at 31 December 2005 | | | 254 | | | | 139 | | | | 69 | | | | — | | | | 462 | |
| Total capitalised per IFRS | | | 90 | | | | 46 | | | | — | | | | — | | | | 136 | |
| US GAAP adjustment to shareholders’ equity | | | 164 | | | | 93 | | | | 69 | | | | — | | | | 326 | |
| |
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| Other intangible assets | | £m | | | £m | |
| |
| Arising on consolidation | | | | | | | | |
| At 1 January | | | 675 | | | | 675 | |
| Transfers from goodwill | | | — | | | | — | |
| Additions | | | — | | | | — | |
| |
| At 31 December | | | 675 | | | | 675 | |
| Amortisation | | | | | | | | |
| At 1 January | | | 424 | | | | 371 | |
| Impairments | | | 135 | | | | — | |
| Charge for the year | | | 27 | | | | 53 | |
| |
| At 31 December | | | 586 | | | | 424 | |
| |
| Net book value | | | | | | | | |
| Total capitalised per US GAAP | | | 89 | | | | 251 | |
| Total capitalised per UK GAAP | | | — | | | | — | |
| |
| US GAAP adjustment to shareholders’ funds | | | 89 | | | | 251 | |
| Total US GAAP adjustments to shareholders’ funds for goodwill and other intangible assets | | | 767 | | | | 924 | |
| |
180
Total net book value of £89m (2003: £251m) consists of core deposits £51m (2003: £64m), trademarks £20m (2003: £21m) and distribution channels £18m (2003: £166m).
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Insurance and | | | | | | | | | | | |
| | | Retail | | | Asset | | | Portfolio Business | | | | | | | Group | |
| | | Banking | | | Management | | | Unit | | | Other | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Carrying value at 1 January 2004 | | | 261 | | | | 674 | | | | 70 | | | | 9 | | | | 1,014 | |
| Disposals | | | (7 | ) | | | (2 | ) | | | — | | | | (9 | ) | | | (18 | ) |
| Other movements | | | — | | | | — | | | | (1 | ) | | | — | | | | (1 | ) |
| |
| Carrying value at 31 December 2004 | | | 254 | | | | 672 | | | | 69 | | | | — | | | | 995 | |
| Total capitalised per IFRS | | | 90 | | | | 46 | | | | — | | | | — | | | | 136 | |
| US GAAP adjustment to shareholders’ equity | | | 164 | | | | 626 | | | | 69 | | | | — | | | | 859 | |
| |
Abbey reviewedreviews its other intangible assetsgoodwill for impairments,impairment, in accordance with the requirements of SFAS 142. In 2004,2005, an impairment in the value of goodwill in the Insurance and Asset Management segment was recognised due to expected lower future profitability given higher lapse rates in 2005, coupled with projected lower volumes of new business being written at lower margins in a competitive market.
Under IFRS and US GAAP, intangible assets have been recognised in the balance sheet in connection with trademarks and distribution channels acquired in business combinations, and the value of in-force insurance business. In addition, for US GAAP purposes only, an intangible asset has been recognised in the Retail Banking segment in connection with the value of depositor relationships acquired, also known as core deposit intangibles, as follows:
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Core deposit intangibles | | £m | | | £m | |
| |
| Cost | | | | | | | | |
| At 1 January and 31 December | | | 416 | | | | 416 | |
| |
| Accumulated amortisation/impairment | | | | | | | | |
| At 1 January | | | 366 | | | | 351 | |
| Charge for the year | | | 14 | | | | 15 | |
| |
| At 31 December | | | 380 | | | | 366 | |
| |
| Net book value | | | | | | | | |
| Total capitalised per US GAAP | | | 36 | | | | 50 | |
| Total capitalised per IFRS | | | — | | | | — | |
| |
| US GAAP adjustment to shareholders’ equity | | | 36 | | | | 50 | |
| |
The US GAAP adjustment to the value of in-force business in the Insurance and Asset Management segment represents the reversal of IFRS discounted value of future profits intangible asset and the recording of a value of business acquired intangible asset. The changes in the carrying amount of value of business acquired are as follows:
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| Value of business acquired | | £m | | | £m | |
| |
| At 1 January | | | 461 | | | | 538 | |
| Amortisation | | | (70 | ) | | | (77 | ) |
| |
| At 31 December | | | 391 | | | | 461 | |
| |
Abbey reviews its intangible assets for impairment, in accordance with the requirements of SFAS 142. No impairment charge was required in either of the periods presented, except for the impairment in the value of distribution channels
was recognised due to the expectation of reduced profitability in
a competitive UK protection market through the independent financial adviser channels2004 described in
place at the date of Scottish Provident’s acquisition. No impairment charge was required in any of the other periods presented.Note 25.
All intangible assets (excluding goodwill) are amortised over their estimated average life. The estimated future amortisation expense of all Abbey’s intangibles is as follows:
| | | | | | | | | |
| Year ended 31 December: | | £m | | | £m | |
| | 2005 | | 17 | | |
| 2006 | | 17 | | | 62 | |
| 2007 | | 17 | | | 57 | |
| 2008 | | 11 | | | 46 | |
| 2009 | | 3 | | | 34 | |
| 2010 | | | 30 | |
|
b) Investment properties
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Cost or valuation | | | | | | | | |
| At 1 January | | | 1,164 | | | | 1,309 | |
| Additions | | | — | | | | 78 | |
| Disposals | | | (1,164 | ) | | | (223 | ) |
| |
| At 31 December | | | — | | | | 1,164 | |
| |
| Amortisation | | | | | | | | |
| At 1 January | | | 154 | | | | 111 | |
| Disposals | | | (186 | ) | | | (30 | ) |
| Charge for the year | | | 32 | | | | 73 | |
| |
| At 31 December | | | — | | | | 154 | |
| |
| Net book value | | | — | | | | 1,010 | |
| |
166
181
Notes to the Financial Statementscontinued
b) Tangible fixed assets
The following tables provide analyses
In 2005, the portfolio of
tangible fixed assets included ininvestment property held within the
Balance SheetInsurance and Asset Management segment was sold for a total consideration of £1,332m, realising a gain of £354m under US GAAP,
for the two years ended 31 December 2004 and 2003.| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| Computer software | | £m | | | £m | |
| |
Cost or valuation | | | | | | | | |
| At 1 January | | | 357 | | | | 333 | |
| Additions | | | 25 | | | | 34 | |
| Disposals | | | (117 | ) | | | (10 | ) |
| |
| At 31 December | | | 265 | | | | 357 | |
| |
| | | | | | | | | |
Amortisation | | | | | | | | |
| At 1 January | | | 240 | | | | 173 | |
| Disposals | | | (99 | ) | | | (4 | ) |
| Impairment | | | 48 | | | | — | |
| Charge for the year | | | 68 | | | | 71 | |
| |
| At 31 December | | | 257 | | | | 240 | |
| |
| | | | | | | | | |
Net book value | | | | | | | | |
| Total capitalised per US GAAP | | | 8 | | | | 117 | |
| Total capitalised per UK GAAP | | | — | | | | — | |
| |
| US GAAP adjustment to shareholders’ funds | | | 8 | | | | 117 | |
| |
Abbey reviewed its computer software for impairments,of which £68m had already been recognized in accordance with the requirements of SFAS 144. In 2004, the amounts previously capitalised were disposed/impaired following the Banco Santander Central Hispano S.A. acquisition.2005 as market value movements under IFRS.
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| Investment properties | | £m | | | £m | |
| |
| Cost or valuation | | | | | | | | |
| At 1 January | | | 1,309 | | | | 1,320 | |
| Additions | | | 78 | | | | 120 | |
| Disposals | | | (223 | ) | | | (131 | ) |
| |
| At 31 December | | | 1,164 | | | | 1,309 | |
| |
| Amortisation | | | | | | | | |
| At 1 January | | | 111 | | | | 65 | |
| Disposals | | | (30 | ) | | | (4 | ) |
| Charge for the year | | | 73 | | | | 50 | |
| |
| At 31 December | | | 154 | | | | 111 | |
| |
| Net book value | | | 1,010 | | | | 1,198 | |
| |
c) Pension costs
For the purposes of US GAAP, Abbey adopts the provisions of SFAS 87,
Employers“Employers Accounting for
Pensions,Pensions”, as amended by SFAS 132,
Employers’“Employers’ Disclosures about Pensions and Other Post-retirement
Benefits” and SFAS 132(R), “Employers’ Disclosure about Pension and Other Post-retirement Benefits,
an amendment to FASB Statements No. 87, 88 and 106”, in respect of its
defined benefits pension plans,
Theprincipally the Abbey National Amalgamated Pension Fund, the
Abbey National Group Pension Scheme, the Abbey National Associated Bodies Pension Fund, the Scottish Mutual Assurance
plc Staff
Pension Scheme, the National and Provincial Pension Fund, the Abbey National Group Pension Scheme, the Scottish Provident Institution Staff Pension Fund, and the
Abbey National
Associated Bodiesand Provincial Building Society Pension Fund.
The components of the estimated net periodic pension cost computed under SFAS 87 are as follows:| | | | | | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Service cost | | | 124 | | | | 122 | | | | 145 | |
| Interest cost | | | 182 | | | | 160 | | | | 145 | |
| Expected return on assets | | | (140 | ) | | | (152 | ) | | | (155 | ) |
| Amortisation of initial transition amount | | | — | | | | (10 | ) | | | (8 | ) |
| Special termination benefits | | | 24 | | | | 15 | | | | — | |
| Recognised (gain)/loss | | | 52 | | | | 8 | | | | (1 | ) |
| Recognised prior service cost | | | 1 | | | | 2 | | | | 2 | |
| |
| Net periodic pension cost | | | 243 | | | | 145 | | | | 128 | |
| |
The pensions costs calculated under UK and US GAAP are not directly comparable due to different treatment of amounts charged to life businesses.
167
Financial Statements
Notes to the Financial Statementscontinued
The following table sets forth a reconciliation of beginning and ending balances of the projected benefit obligation:
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Benefit obligation at beginning of the year | | | 3,357 | | | | 2,798 | |
| Service cost | | | 124 | | | | 122 | |
| Interest cost | | | 182 | | | | 160 | |
| Members’ contributions | | | 14 | | | | 17 | |
| Business transfer | | | — | | | | 50 | |
| Special termination benefits | | | 24 | | | | 15 | |
| Settlements and curtailments | | | (44 | ) | | | — | |
| Actuarial loss | | | 161 | | | | 276 | |
| Benefits paid | | | (88 | ) | | | (81 | ) |
| |
| Benefit obligation at end of year | | | 3,730 | | | | 3,357 | |
| |
The following table sets forth a reconciliation of the fair value of plan assets for the period 1 January to 31 December.
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Fair value of plan assets at beginning of year | | | 2,204 | | | | 1,880 | |
| Actual return on plan assets | | | 243 | | | | 231 | |
| Business transfer | | | — | | | | 42 | |
| Settlements | | | (40 | ) | | | — | |
| Employer contributions | | | 156 | | | | 115 | |
| Employee contributions | | | 14 | | | | 17 | |
| Benefits paid | | | (88 | ) | | | (81 | ) |
| |
| Fair value of plan assets at end of year | | | 2,489 | | | | 2,204 | |
| |
The following table sets forth the funded status of the plans.
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Funded status | | | (1,241 | ) | | | (1,153 | ) |
| Unrecognised prior service cost | | | 1 | | | | 2 | |
| Unrecognised loss | | | 934 | | | | 937 | |
| |
| Accrued liabilities | | | (306 | ) | | | (214 | ) |
| |
The estimated accumulated benefit obligation at 31 December 2004 amounted to £3,090m (2003: £2,675m). This requires a minimum additional liability of £304m to be recognised, of which £263m was recognised in 2003.
For the purposes of amortising gains and losses the “10% corridor” has been adopted, and the market-related value of assets recognises realised and unrealised capital gains and losses over a rolling three-year period. The financial assumptions used to calculate the projected benefit obligations for the principal pension plans listed above were as follows:
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| | | % | | | % | |
| |
| Discount rate (Weighted Average) | | | 5.4 | | | | 5.5 | |
| Rate of pay escalation | | | 4.3 | | | | 4.2 | |
| Rate of pension increase | | | 2.8 | | | | 2.7 | |
| |
Abbey determined its expense measurements above based upon long-term assumptions taking into account target asset allocations of equities and bonds set at the beginning of the year, offset by actual returns during the year. Year end obligation measurements are determined by reference to market conditions at the balance sheet date. Assumptions are set in consultation with third party advisors, and in house expertise.
The financial assumptions used to determine the net period benefit costs are the same as those used for IFRS which are set out in Note 43.
The components of the estimated net periodic pension cost computed under SFAS 87 are as follows:
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Service cost | | | 105 | | | | 124 | |
| Interest cost | | | 200 | | | | 182 | |
| Expected return on assets | | | (149 | ) | | | (140 | ) |
| Contractual termination benefits | | | 21 | | | | 24 | |
| Recognised (gain)/loss | | | 61 | | | | 52 | |
| Recognised prior service cost | | | — | | | | 1 | |
| |
| Net periodic pension cost | | | 238 | | | | 243 | |
| |
The following table sets forth a reconciliation of beginning and ending balances of the projected benefit obligation.
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Benefit obligation at 1 January | | | 3,730 | | | | 3,357 | |
| Service cost | | | 105 | | | | 124 | |
| Interest cost | | | 200 | | | | 182 | |
| Members’ contributions | | | 12 | | | | 14 | |
| Business transfer | | | — | | | | — | |
| Contractual termination benefits | | | 21 | | | | 24 | |
| Settlements and curtailments | | | — | | | | (44 | ) |
| Actuarial loss | | | 439 | | | | 161 | |
| Benefits paid | | | (103 | ) | | | (88 | ) |
| |
| Benefit obligation at 31 December | | | 4,404 | | | | 3,730 | |
| |
The following table sets forth a reconciliation of the fair value of plan assets for the period 1 January to 31 December.
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Fair value of plan assets at beginning of year | | | 2,489 | | | | 2,204 | |
| Expected return on plan assets | | | 149 | | | | 140 | |
| Actuarial gain | | | 303 | | | | 103 | |
| Settlements | | | — | | | | (40 | ) |
| Employer contributions | | | 131 | | | | 156 | |
| Employee contributions | | | 12 | | | | 14 | |
| Benefits paid | | | (103 | ) | | | (88 | ) |
| |
| Fair value of plan assets at end of year | | | 2,981 | | | | 2,489 | |
| |
The following table sets forth the funded status of the plans.
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Funded status | | | (1,423 | ) | | | (1,241 | ) |
| Unrecognised prior service cost | | | 1 | | | | 1 | |
| Unrecognised loss | | | 1,009 | | | | 934 | |
| |
| Accrued liabilities | | | (413 | ) | | | (306 | ) |
| |
The estimated accumulated benefit obligation at 31 December 2005 amounted to £3,752m (2004: £3,090m). The accumulated benefit obligation exceeded assets for all principal
pension plans listed above were as follows.| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2004 | | | 2003 | |
| | | % | | | % | |
| |
| Discount rate (Weighted Average) | | | 5.5 | | | | 5.75 | |
| Rate of pension increase | | | 2.7 | | | | 2.4 | |
| Rate of return on assets | | | 6.25 | | | | 6.5 | |
| |
168182
Notes to the Financial Statementscontinued
Abbey expects to contribute £109m to its defined benefit pension plans in 2005.
d) Taxes
The
benefits expected to be paid in eachtax effects of the
next five years,principal components of deferred tax liabilities and
in the aggregate for the five years thereafter are:| | | | | |
| Year ended 31 December: | | £m | |
| |
| 2005 | | | 89 | |
| 2006 | | | 95 | |
| 2007 | | | 103 | |
| 2008 | | | 111 | |
| 2009 | | | 119 | |
| Five years ended 31 December 2014 | | | 752 | |
| |
Abbey’s pension scheme did not hold any equity securities of Abbey or any of its related partiesdeferred tax assets at 31 December 2005 and 2004 (2003: nil). In addition, Abbey does not hold insurance policies over the plans, nor has Abbey entered into any significant transactions with the plans.
£24m of contractual termination benefits are included in net periodic pension costs. This additional charge was brought about due to the restructuring announcement by Banco Santander Central Hispano, S.A.
Abbey’s contribution to defined contribution plans in 2004 was £120m (2003: £96m).
The trustees of the Abbey National Pension schemes are required under the Pensions Act 1995 to prepare a statement of principles governing investment decisions. The principal duty of the trustees is to act in the best interest of the members of the schemes and have developed the following investment policies and strategies:
| > | To maintain a portfolio of suitable assets of appropriate liquidity which will generate income and capital growth to meet, together with new contributions from members and the employers, the cost of current and future benefits which the Fund provides, as set out in the Trust Deed and Rules. |
|
| > | To limit the risk of the assets failing to meet the liabilities, over the long-term and on a shorter term basis as required by prevailing legislation. |
|
| > | To minimise the long-term costs of the Fund by maximising the return on the assets whilst having regard to the objectives shown above. |
The statement of investment principles has set the target allocation of plan assets at 50% UK equities, 30% Bonds and 20% gilts which is unchanged from 2003. The year end allocation was 51% Equities, 22% Bonds, 21% Gilts, 6% Property and other assets. The corresponding allocations at the end of 2003 were 52% Equities, 26% Bonds, 20% Gilts, 2% Property and other assets.
The expected asset returns by class are equities 8.00%, Bonds 5% and Gilts 4.6%. The overall long-term rate of return on the assets employed has been determined after considering projected movements in asset indices.
d) Leasing
Under US GAAP, SFAS 13 requires the following disclosures relating to finance and operating leases at 31 December 2004 and 2003.
The net investment in direct finance leases at 31 December 2004 and 2003 is as follows:
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Total minimum lease payments to be received | | | 320 | | | | 4,122 | |
| Amounts representing estimated executory costs | | | (15 | ) | | | (18 | ) |
| |
| Minimum lease payments receivable | | | 305 | | | | 4,104 | |
| Unearned income | | | (113 | ) | | | (1,590 | ) |
| |
| Net investment in direct financing leases | | | 192 | | | | 2,514 | |
| |
| | | | | | | | | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Deferred tax assets: | | | | | | | | |
| Pensions and other postretirement benefits | | | 233 | | | | 182 | |
| Provisions and short-term temporary differences | | | 320 | | | | 179 | |
| Excess of capital allowances over depreciation | | | 35 | | | | 68 | |
| Tax losses carried forward | | | 89 | | | | — | |
| Valuation allowance | | | — | | | | (41 | ) |
| |
| | | | 677 | | | | 388 | |
| |
| Deferred tax liabilities: | | | | | | | | |
| Accelerated tax depreciation | | | (489 | ) | | | (718 | ) |
| Provisions and short-term temporary differences | | | (684 | ) | | | (498 | ) |
| |
| | | | (1,173 | ) | | | (1,216 | ) |
| |
| Net deferred tax liabilities | | | (496 | ) | | | (828 | ) |
| |
At 31 December 2004, minimum lease sales-type and direct finance payments to be received for each
Under current UK tax legislation, the tax losses in respect of
the next five years are as follows: £16m in 2005, £16m in 2006, £15m in 2007, £15m in 2008 and £15m in 2009. At 31 December 2004, minimum operating lease payments to be received for each of the next five years are as follows: £52m in 2005; £35m in 2006; £31m in 2007; £28m in 2008 and £22m in 2009.
During the year £41m (2003: £96m, 2002: £149m) of sales-type and direct finance lease contingent rentals was charged to the profit and loss account.
During the year £1m (2003: £1m, 2002: £nil) of operating lease contingent rentals was charged to the profit and loss account.
169
Financial Statements
Notes to the Financial Statementscontinued
e) Taxes
| (i) | During 2004 £36m (2003: £(97)m, 2002: £122m) of tax (benefit) expense were attributable to discontinued operations. |
|
| (ii) | The significant components of tax expense attributable to continuing operations are shown in note 10. |
|
| (iii) | A reconciliation of taxes payable at the standard UK corporation tax rate and Abbey’s effective tax rate for each of the three years ended 31 December 2004, 2003, and 2002 is shown as follows: |
| | | | | | | | | | | | | |
| | | Year ended 31 December | |
| | | | | | | 2003 | | | 2002 | |
| | | 2004 | | | (restated) | | | (restated) | |
| | | £m | | | £m | | | £m | |
| |
| Taxation at standard UK corporation tax rate of 30% (2003: 30%, and 2002: 30%) | | | (8) | | | | (136 | ) | | | (359 | ) |
| Effect of non-allowable provisions and other non-equalised items | | | 47 | | | | 67 | | | | 490 | |
| Effect of non-UK profits and losses | | | 5 | | | | 6 | | | | 36 | |
| Adjustment to prior year tax provisions | | | (2 | ) | | | (71 | ) | | | 56 | |
| Effect of loss utilisation | | | — | | | | — | | | | (1 | ) |
| |
| Taxes | | | 42 | | | | (134 | ) | | | 222 | |
| |
| Effective tax rate (US GAAP) | | | 155.6 | % | | | 29.6 | % | | | (18.6 | %) |
| |
| (i) | The tax effects of the principal components of deferred tax liabilities andwhich deferred tax assets at 31 December 2004 and 2003 were as follows: |
| | | | | | | | | |
| | | | | | | 2003 | |
| | | 2004 | | | (restated) | |
| | | £m | | | £m | |
| |
| Deferred tax assets: | | | | | | | | |
| Provisions and short-term temporary differences | | | 465 | | | | 453 | |
| Excess of capital allowances over depreciation | | | 68 | | | | 64 | |
| Long-term assurance business | | | 334 | | | | 325 | |
| Valuation allowance | | | (41 | ) | | | (41 | ) |
| |
| | | | 826 | | | | 801 | |
| |
| Deferred tax liabilities: | | | | | | | | |
| Capital allowances on finance lease receivables | | | (762 | ) | | | (923 | ) |
| Provisions and short-term temporary differences | | | (254 | ) | | | (330 | ) |
| Undistributed earnings in overseas subsidiaries | | | (60 | ) | | | (52 | ) |
| |
| | | | (1,076 | ) | | | (1,305 | ) |
| |
| Net deferred tax liabilities | | | (250 | ) | | | (504 | ) |
| |
f) Earnings per share
Under US GAAP, SFAS 128 requires certain disclosures relating to earnings per share in addition to the presentation of basic and diluted earnings per share on the face of the income statement.
The following tables provide reconciliations of the income and number of shares used in the calculation of basic and diluted earnings per share from continuing operations; discontinued operations; and net (loss) income available to shareholders in accordance with US GAAP for the years ended 31 December 2004, 2003 and 2002.
| | | | | | | | | | | | | |
| | | Year ended 31 December 2004 | |
| | | Income | | | Shares | | | EPS | |
| Continuing operations | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | (103 | ) | | | 1,465 | | | | (7.1 | ) |
| |
| | | | | | | | | | | | | |
| | | Year ended 31 December 2003 | |
| | | Income | | | | | | | EPS | |
| | | (restated) | | | Shares | | | (restated) | |
| Continuing operations | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | 278 | | | | 1,448 | | | | 19.2 | |
| |
| | | | | | | | | | | | | |
| | | Year ended 31 December 2002 | |
| | | Income | | | | | | | EPS | |
| | | (restated) | | | Shares | | | (restated) | |
| Continuing operations | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | (685 | ) | | | 1,442 | | | | (47.5 | ) |
| |
170
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | |
| | | Year ended 31 December 2004 | |
| | | Income | | | Shares | | | EPS | |
| Discontinued operations | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | 35 | | | | 1,460 | | | | 2.4 | |
| |
| | | | | | | | | | | | | |
| | | Year ended 31 December 2003 | |
| | | Income | | | | | | | EPS | |
| | | (restated) | | | Shares | | | (restated) | |
| Discontinued operations | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | (406 | ) | | | 1,454 | | | | (28.0 | ) |
| |
| | | | | | | | | | | | | |
| | | Year ended 31 December 2002 | |
| | | Income | | | | | | | EPS | |
| | | (restated) | | | Shares | | | (restated) | |
| Discontinued operations | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | (731 | ) | | | 1,442 | | | | (50.7 | ) |
| |
| | | | | | | | | | | | | |
| | | Year ended 31 December 2004 | |
| | | Income | | | Shares | | | EPS | |
| Net loss | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | (68 | ) | | | 1,460 | | | | (4.7 | ) |
| |
| | | | | | | | | | | | | |
| | | Year ended 31 December 2003 | |
| | | Income | | | | | | | EPS | |
| | | (restated) | | | Shares | | | (restated) | |
| Net loss | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | (128 | ) | | | 1,448 | | | | (8.8 | ) |
| |
| | | | | | | | | | | | | |
| | | Year ended 31 December 2002 | |
| | | Income | | | | | | | EPS | |
| | | (restated) | | | Shares | | | (restated) | |
| Net loss | | £m | | | m | | | Pence | |
| |
| Basic and diluted EPS | | | (1,416 | ) | | | 1,442 | | | | (98.2 | ) |
| |
Options to purchase nil ordinary shares (2003: 19.9m, 2002: 13.3m at prices ranging from 2003: £5.13 to £13.06, 2002: £8.53 to £13.06) were outstanding throughout the year ended 31 December 2004 but were not included in the computation of diluted earnings per share because the options’ assumed proceeds were greater than the average market price of the common shares. These options expire at various dates upto September 2013. An option to purchase a further 12.7m ordinary shares (2003: 32.3m, 2002: 19.2m) were not included in the compilation of diluted earnings per share because to do so would have been antidilutive for the periods presented.
Earnings per share, assuming full dilution, is computed based on the average number of common shares outstanding during the period, plus the dilutive effect of stock options. The dilutive effect of stock options is computed using the average market price of the Company’s stock for the period.
171
recognised do not expire.
Financial Statements
Notes to the Financial Statementscontinued
g)e) Securities and investments
| (i) | | Under US GAAP, SFAS 115 requires certain disclosures relating to investments in debt securities, and equity securities that have readily determinable fair values at 31 December 20042005 and 2003.2004. The following table provides an analysis of the balance sheet totals under US GAAP: |
| | | | | | | | | | | | | | | | | |
| | | At 31 December | | | At 31 December | |
| | | 2004 | | 2003 | | | 2005 | | 2004 | |
| | | £m | | £m | | | £m | | £m | |
| | Trading securities | | 42,157 | | 45,902 | | | 60,444 | | 42,157 | |
| Available for sale securities (ii) | | 1,090 | | 2,131 | | | 742 | | 1,122 | |
| Securities held to maturity (iii) | | — | | 20 | | |
| | | |
| | | 43,247 | | 48,053 | | | 61,186 | | 43,279 | |
| | | |
Further disclosures required by SFAS 115 are as follows:
(i)(ii) | | Available for sale securities |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Amortised | | Gross unrealised | | Gross unrealised | | Fair | | | Gross unrealised | | Gross unrealised | | | |
| | | cost | | gains | | losses | | value | | | Amortised cost | | gains | | losses | | Fair value | |
| | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | |
| | At 31 December 2004 | | |
| At 31 December 2005 | | |
| Equity securities | | 30 | | — | | — | | 30 | | | 13 | | — | | — | | 13 | |
| Asset backed and corporate debt securities | | 282 | | 51 | | | (2 | ) | | 331 | | | 287 | | 63 | | | (3 | ) | | 347 | |
| Mortgage backed securities other than those issued or backed by US government agencies | | 213 | | 200 | | | (6 | ) | | 407 | | | 281 | | 58 | | — | | 339 | |
| Other debt securities | | 322 | | — | | — | | 322 | | | 43 | | — | | — | | 43 | |
| | | |
| | | 847 | | 251 | | | (8 | ) | | 1,090 | | | 624 | | 121 | | | (3 | ) | | 742 | |
| | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | Gross unrealised | | | Gross unrealised | | | | |
| | | Amortised cost | | | gains | | | losses | | | Fair value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2004 | | | | | | | | | | | | | | | | |
| Equity securities | | | 30 | | | | 2 | | | | — | | | | 32 | |
| Asset backed and corporate debt securities | | | 282 | | | | 51 | | | | (2 | ) | | | 331 | |
| Mortgage backed securities other than those issued or backed by US government agencies | | | 261 | | | | 152 | | | | (6 | ) | | | 407 | |
| Other debt securities | | | 352 | | | | — | | | | — | | | | 352 | |
| |
| | | | 925 | | | | 205 | | | | (8 | ) | | | 1,122 | |
| |
Available for sale securities include the interest-only strips recognised under US GAAP, not recognised under UK GAAP,IFRS, in connection with Abbey’s securitisations as described in note 62(i)Note 59(g).
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | In more than 1 | | | In more than 5 | | | | | | | |
| | | | | | | year but not | | | years but not | | | | | | | |
| | | Not more than 1 | | | more than 5 | | | more than 10 | | | In more than 10 | | | | |
| | | year | | | years | | | years | | | years | | | Total | |
| Maturity analysis — fair value | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
At 31 December 2005 | | | 128 | | | | 266 | | | | 25 | | | | 323 | | | | 742 | |
| |
| At 31 December 2004 | | | 335 | | | | 410 | | | | 41 | | | | 336 | | | | 1,122 | |
| |
172183
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | |
| | | Amortised | | | Gross unrealised | | | Gross unrealised | | | Fair | |
| | | cost | | | gains | | | losses | | | value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | |
| Equity securities | | | 19 | | | | — | | | | — | | | | 19 | |
| Asset backed and corporate debt securities | | | 1,254 | | | | 93 | | | | (43 | ) | | | 1,304 | |
| Mortgage backed securities other than those issued or backed by US government agencies | | | 215 | | | | 138 | | | | (25 | ) | | | 328 | |
| Other debt securities | | | 437 | | | | 43 | | | | — | | | | 480 | |
| |
| | | | 1,925 | | | | 274 | | | | (68 | ) | | | 2,131 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | In more than 1 | | | In more than 5 | | | | | | | |
| | | | | | | year but not | | | years but not | | | | | | | |
| | | Not more | | | more than 5 | | | more than 10 | | | In more | | | | |
| | | than 1 year | | | years | | | years | | | than 10 years | | | Total | |
| Maturity analysis | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2004 | | | | | | | | | | | | | | | | | | | | |
| Book value | | | 335 | | | | 189 | | | | 41 | | | | 284 | | | | 849 | |
| Fair value | | | 335 | | | | 378 | | | | 41 | | | | 336 | | | | 1,090 | |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| Book value | | | 421 | | | | 606 | | | | 333 | | | | 565 | | | | 1,925 | |
| Fair value | | | 423 | | | | 790 | | | | 397 | | | | 521 | | | | 2,131 | |
| |
The following tables show our investments’ gross unrealised losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealised loss position, at 31 December 20042005 and 2003.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | 12 months or more | | | Total | |
| | | Fair | | | | | | | Fair | | | | | | | Fair | | | | |
| | | value | | | Unrealised losses | | | value | | | Unrealised losses | | | value | | | Unrealised losses | |
| At 31 December 2004 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Asset backed and corporate debt securities | | | 6 | | | | 2 | | | | — | | | | — | | | | 6 | | | | 2 | |
| Mortgage backed securities other than those issued or backed by US government agencies | | | 41 | | | | 6 | | | | — | | | | — | | | | 41 | | | | 6 | |
| |
| Total temporarily impaired securities | | | 47 | | | | 8 | | | | — | | | | — | | | | 47 | | | | 8 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | 12 months or more | | Total | | | Less than 12 months | | 12 months or more | Total | |
| | | Fair | | Fair | | Fair | | | | | Unrealised | | Unrealised | | Unrealised | |
| | | value | | Unrealised losses | | value | | Unrealised losses | | value | | Unrealised losses | | | Fair value | | losses | | Fair value | | losses | | Fair value | | losses | |
| At 31 December 2003 | | £m | | £m | | £m | | £m | | £m | | £m | | |
| At 31 December 2005 | | | £m | | £m | | £m | | £m | | £m | | £m | |
| | Asset backed and corporate debt securities | | 172 | | 41 | | 37 | | 2 | | 209 | | 43 | | | 124 | | 3 | | — | | — | | 124 | | 3 | |
| Mortgage backed securities other than those issued or backed by US government agencies | | 200 | | 25 | | — | | — | | 200 | | 25 | | | — | | — | | — | | — | | — | | — | |
| | | |
| Total temporarily impaired securities | | 372 | | 66 | | 37 | | 2 | | 409 | | 68 | | | 124 | | 3 | | — | | — | | 124 | | 3 | |
| | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less than 12 months | | | | | 12 months or more | Total | |
| | | | | | | Unrealised | | | | | | | Unrealised | | | | | | | Unrealised | |
| | | Fair value | | | losses | | | Fair value | | | losses | | | Fair value | | | losses | |
| At 31 December 2004 | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Asset backed and corporate debt securities | | | 6 | | | | 2 | | | | — | | | | — | | | | 6 | | | | 2 | |
| Mortgage backed securities other than those issued or backed by US government agencies | | | 41 | | | | 6 | | | | — | | | | — | | | | 41 | | | | 6 | |
| |
| Total temporarily impaired securities | | | 47 | | | | 8 | | | | — | | | | — | | | | 47 | | | | 8 | |
| |
The unrealised losses
abovein 2005 arise on securities within
Abbey’s ongoing Personalthe Abbey Financial
Services businesses.Markets and Retail Banking segments. These are securities issued by UK housing
associations and the interest-only strips recognised in connection with Abbey’s mortgage securitisation programme. Theassociations. These losses
on the UK housing association securities are considered temporary as Abbey has the ability and intent to hold the securities to maturity and Abbey is satisfied that there has been no credit deterioration, particularly as to date Abbey has suffered no defaults on this type of issuer. The unrealised losses arise from changes in interest rates.
This is evidenced by the fact that the related derivative hedges, which as they are with Abbey National Financial Products, do not qualify for hedge accounting under FAS 133, have an equal and opposite fair value surplus. The losses on the interest-only strips are also considered temporary as Abbey has the ability and interest to hold the securities until their maturity at the wind-down of the related securitisation programmes and Abbey is satisfied that there has been no credit deterioration, particularly as to date Abbey has suffered no defaults on the mortgage securitisation programme securities.| (iii) | Held to maturity securities |
| | | | | �� | | | | | | | | | | | | |
| | | | | | | Gross unrealised | | | Gross unrealised | | | | |
| | | Amortised cost | | | gains | | | losses | | | Fair value | |
| | | £m | | | £m | | | £m | | | £m | |
| |
| Corporate debt securities | | | | | | | | | | | | | | | | |
At 31 December 2004 | | | — | | | | — | | | | — | | | | — | |
| At 31 December 2003 | | | 20 | | | | — | | | | — | | | | 20 | |
| |
173
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | In more than 1 | | | In more than 5 | | | | | | | |
| | | | | | | year but not | | | years but not | | | | | | | |
| | | Not more | | | more than 5 | | | more than 10 | | | In more | | | | |
| | | than 1 year | | | years | | | years | | | than 10 years | | | Total | |
| Maturity analysis | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| At 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| Book value | | | 20 | | | | — | | | | — | | | | — | | | | 20 | |
| Fair value | | | 20 | | | | — | | | | — | | | | — | | | | 20 | |
| |
(iv) | Sales of available for sale securities during the years ended 31 December 2004, 20032005 and 2002.2004. |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | 2003 | | 2002 | | | 2005 | | 2004 | |
| | | £m | | £m | | £m | | | £m | | £m | |
| | Gross proceeds from sales | | 2,040 | | 26,611 | | 13,837 | | | 334 | | 2,040 | |
| Gross realised losses on sales | | 154 | | 1,297 | | 166 | | | — | | 154 | |
| Gross realised gains on sales | | | (60 | ) | | | (795 | ) | | | (111 | ) | | — | | | (60 | ) |
| | | |
| Amortised cost of sales | | 2,134 | | 27,113 | | 13,892 | | | 334 | | 2,134 | |
| | | |
The cost of available for sale securities is determined by using the weighted average cost basis, with premium/discount arising on purchase being amortised to
profit and lossthe income statement over the expected life of the security.
(v) (iv) | Redemptions and purchases of held to maturity securities during the year ended 31 December: |
| | | | | | | | | |
| | | 2004 | | | 2003 | |
| | | £m | | | £m | |
| |
| Amortised cost b/f | | | 20 | | | | 20 | |
| Acquisitions – cost | | | — | | | | — | |
| Redemptions at maturity | | | (20 | ) | | | — | |
| Exchange adjustments | | | — | | | | — | |
| |
| Amortised cost c/f | | | — | | | | 20 | |
| |
(vi) | There were no realised gains and losses on transfers from available for sale securities during the years ended 31 December 2004, 20032005 and 2002.2004. |
| |
(vii) (v) | The net change in unrealised holding | Net trading gains (losses) on trading securities, before the effect of associated hedges,£1,270m (2004: loss of £213m) were included in income forrelating to trading securities still held at the year to 31 December 2004 is a loss of £213m (2003: gain of £86m, 2002: gain of £216m).year-end. |
h)
f) Consolidation of variable interest entitiesAs defined in FIN 46 and
Under FIN 46R, an entity is considered a variable interest entity
(VIE) subject to consolidation if the equity investment at risk is not sufficient to finance its activities without additional subordinated financial support or if the equity investors lack one of three characteristics of a controlling financial interest. First, the equity investors lack the ability to make decisions about the entity’s activities through voting rights or other similar rights. Second, they do not bear the obligation to absorb the expected losses of the entity if they occur, and
lastlythirdly they do not claim the right to receive expected returns of the entity, if they occur, which are the compensation for the risk of absorbing the expected losses.
VIEsVariable interest entities are consolidated by the primary beneficiary, that is the interest holder that remains exposed to the majority of the entity’s expected losses or residual returns.
Prior to the issuance of FIN 46R,
In 2005, Abbey
consolidated the trust-preferred entities — Abbey National Capital Trust I, Abbey National Capital Trust II, Abbey National Capital LP and Abbey National Capital LPII. Accordingly, the inter-company 8.96% Subordinated notes 2030 issued by Abbey to the trust preferred entities that are held by unaffiliated third parties were presented as minority interests in Abbey’s consolidated balance sheet. The application of FIN 46R has resulted in the deconsolidation of these trust preferred entities and accordingly at 31 December 2004, the £512m of trust preferred securities have been reclassified from minority interests to subordinated liabilities. In addition, there aresold a number of Group companies holding finance lease receivables that meetmet the definition of a variable interest entity. TheIn 2004, the application of FIN 46R hashad resulted in these entities being deconsolidated and equity accounted as parties other than Abbey arewere the primary beneficiaries. This change in accounting treatment hashad no impact on Abbey’s net income and shareholders fundsequity under US GAAP.GAAP at 31 December 2004. The total assets and the maximum exposure to loss of these vehicles at 31 December 2004 were £1,336m and £974m respectively.
i) Securitisations
g) Securitised assets
In accordance with SFAS 140, the assets
whichthat have been transferred to special purpose entities (securitised) and meet the criteria required under SFAS 140 for a sale are no longer retained
on-balanceon the balance sheet. Details
in relation toof the mortgage asset securitisations,
including Abbey’s rights and obligations, are included in note
1721 of the
consolidated financial statements. The assets were transferredConsolidated Financial Statements. Due to
special purpose entities at book value, andthe recognition of a retained interest under US GAAP, gains of
£48m, £22m£60m and
£19m£48m have been recognised for the years ended 31 December
2005 and 2004
2003 and 2002 respectively.
174
Financial Statements
Notes to the Financial Statementscontinued
The remuneration received by Abbey for servicing is considered to be adequate and therefore no servicing assets were recognised.
184
Additionally, as
Financial Statements
Notes to the Financial Statementscontinued
As required by SFAS 140,
ana retained interest
(interest only
strip assetstrip) has been recognised which represents Abbey’s retained interest in the securitised assets. The fair value of the interest only strip is represented by the present value of the future income streams expected to be received from Abbey’s retained interest in the securitised assets. Abbey determines the present value of future income streams by discounting future income by market discount rates for these types of securities.
Abbey’s rights and obligations under the securitisations are detailed in note 17 of the consolidated financial statements. In
complianceaccordance with SFAS 140, the receivable is treated as an available for sale security that is revalued at the end of each reporting period. Increases and decreases in value are taken to the statement of comprehensive
income. The receivablesincome, unless the value of the security falls below its original cost. In such circumstances, other-than-temporary losses are
tested forconsidered to have been occurred and the impairment
in accordance with EITF 99-20. Impairment losses are taken to the
profit and loss account.income statement. There were no impairment losses in any of the periods presented.
Mortgage asset securitisations
| | | | | | | | | | |
| | | 2003 | | | | | | | | | |
| | | 2004 | | (restated) | | | 2005 | | 2004 | |
| | | £m | | £m | | | £m | | £m | |
| Value of interest only strip at inception(1) | | 221 | | 173 | | | 281 | | 221 | |
| Increase/(decrease) in value of interest only strip | | 145 | | 117 | | | 58 | | 145 | |
| | | |
Value of interest only strip at 31 December(1) | | 366 | | 290 | | | 339 | | 366 | |
| | | |
| | |
| (1) | | The valuation of the interest only strip asset is based on the followinga key assumptions: |
| | – Early repayments are based on actual experience at the valuation date. This wasassumption of a range of 10.2% to 69.33% at 31 December 2004 (2003: range 10.2% to 72.56%) |
|
| | – A discount rate of 11.35% (2003: range of 10.05% to 11.2%8.4% (2004:11.3%) |
Summarised cash flows between the special purpose securitisation companies and Abbey are set out below:
| | | | | |
| | | Holmes Financing | |
| | | (No. 1 to No. 8)9) plc | |
| | | £m | |
| |
Inter-company receiptsReceipts | | | 3,2833,797 | |
Inter-company paymentsPayments | | | (3,9844,374 | ) |
| |
| Net cash flows | | | (701577 | ) |
| |
The principal amount of loans held by the above special purpose securitisation companies 90 days or more past due at 31 December
20042005 was
£59m (2003: £67m)£89m (2004: £59m) which represented 0.6% (2004: 0.4%) of the mortgage loans held by those companies. The equivalent statistics for loans held by Abbey were £515m (2004: £444m) and 0.7% (2004: 0.6%). Net credit losses were £2m in the year ended 31 December 2005 (2004: £nil). The equivalent statistic for loans held by Abbey was
£444m (2003: £422m)£5m (2004: £4m).
Net credit losses were £nil in the year ended 31 December 2004 (2003: £0.2m). The equivalent statistic for loans held by Abbey was £4m (2003: £26m).The impact of adverse changes in the rate of repayments and discount rate on the value of interest only strip assets with a balance of £366m£339m at 31 December 20042005 is shown below:
| | | | | |
| | | £m | |
| |
10% adverse change in repayment rate | | | — | |
20% adverse change in repayment rate | | | — | |
10% adverse change in discount rate | | | 15(7 | ) |
| 20% adverse change in discount rate | | | 30(13 | ) |
— |
These sensitivities are hypothetical and should be used with caution. Changes in fair value based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities.
Actual and projected credit losses (%) as of:
| | | | | | | | | | | | | |
| | | Mortgages securitised in | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | % | | | % | | | % | |
| |
| At 31 December 2004 | | | 0.01 | | | | 0.01 | | | | 0.01 | |
| At 31 December 2003 | | | — | | | | 0.01 | | | | 0.01 | |
| At 31 December 2002 | | | — | | | | — | | | | 0.01 | |
| |
| | | | | | | | | |
| | | Mortgages securitised in | |
| | | 2005 | | | 2004 | |
| | | % | | | % | |
| |
| At 31 December 2005 | | | 0.01 | | | | 0.01 | |
| At 31 December 2004 | | | – | | | | 0.01 | |
| |
175
Financial Statements
Notes toh) Presentation of the Financial Statementsconsolidated income statementcontinued
j) Consolidated cash flow statement
Under SFAS 95, “Statement
The presentation of
Cash Flows”, Abbey experienced an outflow of cash and cash equivalents of £5,823m during the
year ended 31 December 2004. Under FRS 1 (Revised), Abbey experienced an outflow of cash of £188m over the same period. Under US GAAP cash equivalents are defined as short term, highly liquid investments which are readily convertible into known amounts of cash without notice and which were within three months of maturity when acquired.
The following table summarises the movement and composition of cash and cash equivalents under US GAAPincome statement for the years ended 31 December 2004, 20032005 and 2002.
| | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | |
| | | £m | | | £m | | | £m | |
| |
| Cash and cash equivalents at 1 January | | | 28,352 | | | | 23,754 | | | | 20,058 | |
| Net cash inflow/(outflow) | | | (5,823 | ) | | | 4,598 | | | | 3,696 | |
| |
| Cash and cash equivalents at 31 December | | | 22,529 | | | | 28,352 | | | | 23,754 | |
| |
| Consisting of: | | | | | | | | | | | | |
| Cash and balances with central banks | | | 454 | | | | 439 | | | | 396 | |
| Treasury and other eligible bills | | | 1,327 | | | | 1,449 | | | | 1,346 | |
| Loans and advances to banks | | | 9,967 | | | | 6,996 | | | | 5,279 | |
| Debt securities | | | 10,781 | | | | 19,468 | | | | 16,733 | |
| |
| | | | 22,529 | | | | 28,352 | | | | 23,754 | |
| |
Other principal differences between FRS 1 and SFAS 95 relate to the classification of cash flow transactions and are as follows:
| | | | |
| | Classification under FRS 1(1) | | Classification under SFAS 95 |
|
Dividends received | | Returns on investment and servicing of finance | | Operating activities |
|
Taxation paid | | Taxation paid | | Operating activities |
|
Preference dividends paid | | Returns on investment and servicing of finance | | Financing activities |
|
Equity dividends paid | | Equity dividends paid | | Financing activities |
|
Purchases/proceeds from disposal of investment securities and fixed assets | | Capital expenditure and financial investment | | Investing activities |
|
Purchases/proceeds from disposal of subsidiary and associated undertakings | | Acquisitions and disposals | | Investing activities |
|
Net change in loans and advances | | Operating activities | | Investing activities |
|
Net change in finance lease receivables | | Operating activities | | Investing activities |
|
Net change in deposits | | Operating activities | | Financing activities |
|
Net change in debt securities in issue | | Operating activities | | Financing activities |
|
(1) | | Under FRS 1, transactions designated as hedges are reported under the same heading as the related assets or liabilities. |
k) Presentation of the consolidated Profit and Loss account
The presentation of the profit and loss accounts for the years ended 31 December 2004 2003 and 2002 as shown on page 98,92, would not be significantly different under US GAAP except provisions would be shown as a component of total operating income, dividends on preference shares would be accounted for as an appropriation of profit, not as interest expense, and the results from Abbey’s life assurance businessincome and expenses of the securitisation companies, as set out in Note 21, would be consolidated ondeconsolidated. In addition, the application of deposit accounting for SFAS 97 products under US GAAP would result in a line by line basis.
l)change to the premium figure as reported under IFRS with a corresponding adjustment to movement in policyholder liabilities.
i) Presentation of the consolidated balance sheetThe
Due to the adoption of IAS 32, IAS 39 and IFRS 4 as described in Note 54, the presentation of the balance sheet at 31 December 20042005 and 20032004 as shown on page 99,93 changed on a prospective basis from 1 January 2005 due to the reclassification of debt securities and equity securities and other variable yield securities to trading assets; the designation of certain assets and liabilities as financial assets and liabilities at fair value; the classification of certain liabilities as trading liabilities; and the separate disclosure of certain insurance-related liabilities as investment contract liabilities. Other than as a result of the adoption of IFRS,
185
Financial Statements
Notes to the Financial Statementscontinued
the presentation of the balance sheet would not be significantly different under US GAAP except
the assets and liabilities of Abbey’s life assurance business would be consolidated on a line by line basis, stock borrowing and lending transactions would be recorded as set out below,
preference shares would be classified in shareholders’ equity, and the
fair valuesassets and liabilities of
hedging derivatives that do not qualify for hedge accounting under US GAAPthe securitisation companies, as set out in Note 21, would be
recognised on the balance sheet.m)deconsolidated.
j) Stock borrowing and lending against non-cash collateral Abbey enters into transactions under which it lends and borrows stock using other stock as collateral, and these are accounted for as Commitments under
UK GAAP.IFRS. Under SFAS 140, these transactions are grossed up on the balance sheet. At 31 December 2004,2005, Abbey would record assets of £20,508m (2003: £25,649m)£18,632m (2004: £20,508m) as collateral received and liabilities of £20,508m (2003: £25,649m)£18,632m (2004: £20,508m) as an obligation to return collateral received.
n)
k) Collateralised loans and secured borrowings Abbey enters into purchase and resale agreements (reverse repos and similar transactions), which are accounted for as collateralised loans under
UK GAAP.IFRS. Upon entering into such transactions Abbey
typically receives collateral equal to 100% – 105% of the loan amount. The level of collateral held is monitored daily and, if required, further calls are made to ensure the market value of collateral remains equal to the loan balance. Net assets of such transactions of
£6,397m (2003: £5,034m)£5,637m (2004: £6,397m) and
£11,257m (2003: £9,372m)£17,941m (2004: £11,257m) are included in Loans and advances to banks and Loans and advances to customers respectively.
Under reverse repos and similar transactions, Abbey is permitted to sell or repledge the collateral held. At 31 December
2004,2005, the fair value of such collateral was
£14,170m (2003: £14,234m)£23,024m (2004: £14,170m) of which
£14,070m (2003: £13,933m)£21,944m (2004: £14,070m) related to collateral that was sold or repledged.
Abbey enters into sale and repurchase (repo) agreements and similar transactions, which are accounted for as secured borrowings under
UK GAAP.IFRS. Upon entering into such transactions Abbey
typically pledges collateral equal to 100% – 105%
176
Financial Statements
Notes to the Financial Statementscontinued
of the borrowed amount. Net liabilities under repos, stock loans and similar transactions of £6,592m (2003: £9,390m)£12,992m (2004: £6,592m) and £7,843m (2003: £4,602m)£4,338m (2004: £7,843m) are included in Deposits by banks and Customer accounts respectively.
Under repos and similar transactions, Abbey sells or pledges collateral to counterparties. Under SFAS 140, where the counterparty has a right to sell or repledge the collateral, any such collateral would be reclassified within Abbey’s balance sheet from securities to securities pledged. At 31 December
2004,2005, the application of SFAS 140 would result in
£8,261m (2003: £17,340m)£16,790m (2004: £9,517m) of debt securities,
and £1,256m (2003: £1,409m) of treasury
bills and eligible bills being reported as securities pledged.
In addition, at 31 December 2004, Abbey also enters into outright equity sales and purchases in combination with total return swaps which are accounted for as in substance reverse repos and repos under UK GAAP. These transactions are treated effectively as outright asset purchases and sales and separate derivative contracts under US GAAP. Under SFAS 140, Loans and advances to customers would be reduced by £896m (2003: £3,583m) and this amount would be reported within Equity shares, representing the equity purchase. Customer accounts would be reduced by £413m (2003: £1,333m) and this amount would be reported within Other liabilities, representing the short equity sale. The related return swaps would be marked to market. Any relevant value is paid or received as margin call. The £1,309m (2003: £4,916m) of nominal value of the return swaps would be included within the trading derivatives disclosures.o)
l) Derivatives and hedging activities The Group has previously claimed hedge accounting under US GAAP for only a limited number of derivatives, primarily due to the additional administrative burden associated with complying with the detailed hedge accounting requirements of SFAS 133, such documentation and testing not being otherwise required before the adoption of IAS 39. With effect from 1 January 2005, Abbey has
adopted the fair value option under IAS 39 and substantially changed its hedging business model as a result. As Abbey’s business model is now primarily structured to maximise use of the fair value option under IFRS, the Group decided to cease claiming any hedge accounting for US GAAP purposes, and de-designated all its hedges under US GAAP from 1 January 2005 in order to reduce the administrative burden on the Group. Prior to 1 January 2005, Abbey had designated certain of its cross-currency and interest rate swaps as fair value hedges of the interest and/or exchange rate risk arising from certain debt securities, debt securities in issue and subordinated
liabilities including convertible debt.liabilities. As a result of the decision to de-designate these swaps as hedges, the hedge accounting adjustment at 31 December 2004 was frozen and is being amortised through the income statement over the remaining lives of the items formerly being hedged.
In addition, as previously described, on 1 January 2005, Abbey
has other non-trading derivatives which are not designated as either aearly adopted the fair value
hedge, cash flow hedge or hedgeoption provided under SFAS 155 for selected hybrid financial instruments that had been bifurcated under SFAS 133 in order to achieve greater consistency with the accounting requirements of the
net investment in a foreign operation in accordance with the criteriafair value option under IAS 39. Upon adoption of SFAS
133. These represent155, there was no significant difference between the fair value of the hybrid financial instruments and the combined values of the host contracts and the embedded derivatives
undertaken with Abbey’s in-house trading operation, Abbey National Financial Products. Abbey National Financial Products generally matches internal hedges with third party derivatives on an aggregate, rather than individual, basis and hedges the net outstanding position where Abbey has assets and liabilities, which largely offset the overall risk to Abbey. All material derivative exposures are transacted with counterparties with whom Abbey have a Collateral Service Agreement. Under the Collateral Service Agreement, cash will be placed with or received from each counterparty according to the net mark-to-market of all derivative exposures to that counterparty. Amounts received or placed will be updated on a regular basis or if the net mark-to-market moves in excess of a pre-defined amount. In the event of a default of a given counterparty, Abbey will be able to gain recourse from any losses on derivative exposures by obtaining absolute right over cash received from the counterparty.
had formerly been bifurcated.
Equity indexed-linkedindex-linked deposits Contracts involving the receipt of cash on which customers receive an index-linked return are accounted for under
UK GAAP in substanceIFRS as equity
indexedindex-linked deposits. There are two principal product types.
Capital at Risk:These products are designed to replicate the investment performance of an equity index, subject to a floor. In the event the index falls under a certain predetermined level, customers forfeit a predetermined percentage of principal up to a predetermined amount.
Capital Guaranteed:These products give the customers a limited participation in the upside growth of an equity index. In the event the index falls in price, a cash principal element is guaranteed.
Under
UKIFRS and US GAAP, Abbey’s equity index-linked deposits are remeasured at fair value at each reporting date with changes in fair values recognised in the
consolidated profit and loss account.income statement. The equity index-linked deposits contain embedded derivatives. These embedded derivatives, in combination with the principal cash deposit element, are designed to replicate the investment performance profile tailored to the return agreed in the contracts with customers.
For US GAAP purposes, such The embedded derivatives are not separated from the host instrument and are not separately accounted for as a derivative instrument, as the entire contract embodies both the embedded derivative and the host instrument and is remeasured at fair value at each reporting date. As such, Abbey is not required to bifurcate the embedded derivative in its equity index-linked deposits.
Abbey’s equity index-linked deposits are managed within the equity derivatives trading book as an integral part of the equity derivatives portfolio. The total fair value of equity index-linked deposits was £2,305m£2,390m at 31 December 2004 (2003: £2,478m)2005 (2004: £2,305m).
Cumulative foreign currency translation adjustment
SFAS 52, Foreign Currency Translation, requires disclosure of the cumulative foreign currency translation adjustment taken directly to reserves, on the consolidation of Abbey’s foreign undertakings and the translation of Abbey’s US dollar preference shares. These cumulative adjustments were £(2)m, £nil and £(26)m, at 31 December 2004, 2003 and 2002 respectively.
177186
Notes to the Financial Statementscontinued
p)
Abbey maintains balance sheet provisions at the level that management deems adequate to absorb actual and inherent losses in Abbey’s loan portfolio from homogeneous portfolios of assets and individually identified loans. An “observed” provision is
established for all past due loans after a specified period of repayment default where it is probable that some of the capital will not be repaid or recovered through enforcement of any applicable security. Once a loan misses a payment (breach of contractual terms) an assessment of the likelihood of collecting the principal and overdue payments is made. This assessment is generally made using statistical techniques developed on previous experience and on management judgement of economic conditions. An “incurred but not yet observed” provision is made against loans which have not missed a payment but are known from past experience to have deteriorated since the initial decision to lend was made. Based on historical evidence, the number of accounts probable to default in the future as a result of events present at the balance sheet date are identified through use of statistical techniques. From 1 January 2005, these statistical techniques were expanded and enhanced. In particular, further detailed examination is now performed on the losses that emerge over a defined period of time after the reporting date called the emergence period. This period is determined to ensure that only those accounts which have a credit deterioration at the reporting date are captured and excludes accounts which will suffer credit deterioration after the reporting period. The emergence period is three months for unsecured lending and twelve months for secured lending. The provision methodology outlined for observed provisions is then applied to accounts identified as impaired in the performing portfolios. The expansion and enhancement of the statistical techniques applied by Abbey did not have a material effect on the level of provisions.
For US GAAP purposes, Abbey applies SFAS 114, “Accounting by Creditors for Impairment of a Loan”, and the subsequent amendment SFAS 118, “Accounting by Creditors for Impairment of a Loan – Income Recognition and Disclosures”. SFAS 114 applies to impaired loans only. Under SFAS 114, a loan is considered impaired, based on current information and events, if it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is primarily based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except for collateral dependent loans where impairment is based on the fair value of the collateral. Smaller balance homogeneous consumer loans (credit card advances, residential mortgages, consumer instalment loans, overdrafts)
, that are collectively evaluated for impairment, leases and debt securities are outside the scope of SFAS 114.
At 31 December 2004 and 2003, Abbey estimated that the difference between the carrying value of its loan portfolio under SFAS 114 and its value in Abbey’s UK GAAP financial statements was such that no adjustment to net income or consolidated shareholders’ equity was required.
Loans and advances within the scope of SFAS 114 consist of wholesale advances. Other loans and advances, consisting of small, homogeneous secured and unsecured advances primarily to personal customers, are assessed for impairment within the scope of SFAS 5. Impaired loans within the scope of SFAS 114 amounted to
£4m (2003: £63m)£13m (2004: £4m). The impairment reserve in respect of these loans estimated in accordance with the provisions of SFAS 114 was £1m
(2003: £34m)(2004: £1m). During the year ended 31 December
2004,2005, impaired loans
including those excluded from SFAS 114, averaged
£1,287m (2003: £1,790m)£8m (2004: £33m) and interest income recognised on these loans was
£3m (2003: £6m)£1m (2004: £3m).
q)
In the ordinary course of business Abbey enters into various financial guarantees. Abbey expects most of its financial guarantees to expire unused.
The majority of Abbey’s financial guarantees are commercial letters of credit. Abbey’s other financial guarantees are summarised as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Maximum potential amount of future payments | | | Maximum potential amount of future payments | |
| | | As of 31 December | | | As of 31 December | |
| | | 1 to 3 | | 3 to 5 | | After 5 | | | | | Less than 1 | | 1 to 3 | | 3 to 5 | | After 5 | | No stated | |
| | | 2003 | | 2004 | | Less than 1 year | | years | | years | | years | | No stated maturity | | | 2005 | | 2004 | | year | | years | | years | | years | | maturity | |
| | | £m | | £m | | £m | | £m | | £m | | £m | | £m | | | £m | | £m | | £m | | £m | | £m | | £m | | £m | |
| Guarantees: (1) | | |
| Stand-by letters of credit | | 472 | | 355 | | — | | — | | 56 | | 298 | | 1 | | | 172 | | 355 | | — | | 51 | | — | | 121 | | — | |
| Guarantees on sale of subsidiaries | | 1,564 | | 2,303 | | 336 | | 650 | | 78 | | 831 | | 408 | | |
| Warranties and indemnities on sale of subsidiaries | | | 2,794 | | 2,303 | | 416 | | 781 | | 655 | | 352 | | 590 | |
| | | |
| | | 2,036 | | 2,658 | | 336 | | 650 | | 134 | | 1,129 | | 409 | | | 2,966 | | 2,658 | | 416 | | 832 | | 655 | | 473 | | 590 | |
| | | |
| | |
| (1) | | In addition, Abbey guarantees the cheques of some of its customers up to a certain limit, typically £50-250.£50-100. The maximum potential amount of future payments in relation to guaranteed cheques has been estimated as £3,981m (2003: £4,304m)£4,079m (2004: £3,981m). These guarantees have no stated maturity. Bank account facilities to which guaranteed cheques relate are regularly assessed based on customers’ behaviour, and amended where necessary. Prior notice of changes is given to customers. |
The provision for guarantees which includes the amortised fair value at 31 December
20042005 was
£18m (2003: £29m)£15m (2004: £18m) and is included in Other Liabilities. Stand-by letters of credit are our conditional commitments to guarantee the performance of a customer to a third party in borrowing arrangements.
GuaranteesWarranties and indemnities on sale of subsidiaries are contingent consideration in a business combination.
The maximum potential amount of future payments represents the notional amounts that could be lost under the guarantees if the counterparty does not perform under the contract, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Such amounts greatly exceed the anticipated losses and, therefore, the contractual amounts are not indicative of the actual credit exposure or future cash flow requirements for such commitments.
Abbey also enters into contracts that contain indemnification provisions. Such indemnification agreements that function as financial guarantees are considered to have a remote risk of loss. Abbey’s maximum exposure to loss and our actual loss experience is not significant. The indemnification clauses are often standard contractual terms and were entered into in the normal course of business based on an assessment that the risk of loss would be remote. In many cases, there are no stated or notional amounts included in the indemnification clauses and the contingencies triggering the obligation to indemnify have not occurred, and are not expected to occur. There are no amounts reflected on the Consolidated Balance Sheet at 31 December 20042005 and 2003,2004 related to these indemnifications. These potential obligations are not included in the table above.
187
Financial Statements
Notes to the Financial Statementscontinued
To mitigate credit risk, Abbey may require the counterparty to pledge collateral in the form of cash, securities or other assets. Cash collateral available to Abbey to reimburse losses realised under these guarantees amounted to
£376m£173m at 31 December
2004 (2003: £602m). Securities and other marketable assets held as collateral amounted to £401m (2003: £854m)2005 (2004: £376m). Other property may also be available to Abbey to cover losses under certain guarantees and indemnifications. However, the value of such property has not been determined.
r) Provisions
o) Fair value option
Abbey has taken the fair value option under both IFRS and US GAAP for
missellingdebt securities in issue that are considered hybrid financial instruments, and has irrevocably elected to initially and subsequently measure those hybrid financial instruments in their entirety at fair value for purposes of US GAAP in order to align the accounting under IFRS and US GAAP. Under US GAAP, the fair value and non-fair-value amounts included in debt securities in issue at 31 December 2005 were £14,912m and £27,986m, respectively. During the year-ended 31 December 2005, changes in the fair value of hybrid financial instruments measured at fair value under the election of £2m were reported in the income statement under US GAAP. The adoption of the fair value option from 1 January 2005 has reduced volatility in the income statement by offsetting changes in the fair value of derivatives.
p) Discontinued operations
In 2005, Abbey estimates provisionssold its remaining businesses holding finance lease receivables. In 2004, Abbey had sold its other subsidiaries holding finance lease receivables, asset finance and leasing business assets, its French subsidiaries, and its residual debt securities investment business. All these businesses, subsidiaries and assets qualify as discontinued operations under US GAAP.
The results of the discontinued operations under US GAAP were as follows:
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| Profit from discontinued operations including profit on disposal of £64m (2004: £15m) | | | 77 | | | | 69 | |
| Taxation expense | | | (24 | ) | | | (35 | ) |
| |
| Profit on discontinued operations | | | 53 | | | | 34 | |
| |
The 2005 business disposals did not result in the discontinuance of a major line of business or operation in a geographic area and therefore did not qualify as discontinued operations under IFRS. Under IFRS, comparative disclosures are not required for misselling2004.
Sale of Life Insurance Businesses
Abbey announced on 7 June 2006 that it has entered into an agreement to sell its entire life insurance business to Resolution plc (“Resolution”) for cash consideration of approximately £3,600m.
Completion of the transaction is expected during the third quarter of 2006 and is conditional upon, among other things, approval from the Financial Services Authority and relevant overseas regulators and the approval of Resolution’s shareholders. The life businesses being sold are Scottish Mutual Assurance plc, Scottish Provident Limited and Abbey National Life plc, as well as the two offshore life companies, Scottish Mutual International plc and Scottish Provident International Life Assurance Limited. Abbey will retain all of its branch-based investment and asset management business, James Hay, its market-leading self-invested personal pension company, and its Wrap business.
Separately, in order to provide continuity of product supply and service to its customers, Abbey has entered into a retail bank distribution agreement and intermediary distribution agreement with Resolution. Under the objective of maintaining reserve levels believedretail bank distribution agreement Abbey will distribute through its retail network Abbey-branded protection, life bonds and stakeholder pension products provided by managementResolution. Under the intermediary distribution agreement Abbey will continue to be sufficientthe exclusive distributor of Scottish Provident protection products to absorb currentintermediaries. The distribution agreement covers Scottish Provident Self Assurance protection products, Scottish Mutual Pegasus protection products and offshore bonds issued by Scottish Provident International Life Assurance Limited. Resolution will use Abbey’s intermediary sales force to distribute Scottish Provident products to intermediaries and will reimburse Abbey’s costs, on a variable basis, in respect of this sales force. The distribution agreements have a term of ten years, subject to a review after five years. In addition, Abbey has secured exclusive access to provide retail banking products to Resolution’s estimated probable losses in connection with compensation and costs relating tofive million policyholders.
Abbey is currently evaluating the handlingaccounting impacts of complaints from customers who claim misselling of endowment policies and other products. The calculation of provisions for misselling is based on the estimated number of claims that will be received, of those, the number that will be upheld,this transaction and the estimated average settlement per case. These assessments are based on managements estimaterelated contracts.
The carrying value of the assets and liabilities of the businesses sold under US GAAP is shown below for each of these three factors. Abbey’s assumptions about estimated losses are based on past claims uphold rates, past customer behaviour,information. The assets and past average settlements, which areliabilities were not necessarily an indication of future losses.classified as held for sale as at 31 December 2005.
| | | | |
| | 2005 | |
| | £m | |
|
| Due from banks | | | 2,335 | |
| Derivative financial instruments | | | 1,253 | |
| Trading securities | | | 24,982 | |
| Value of business acquired | | | 391 | |
| Other assets | | | 2,581 | |
| Goodwill and intangibles | | | 174 | |
| | | |
Total assets | | | 31,716 | |
|
178188
Notes to the Financial Statementscontinued
The financial statements for the year ended 31 December 2004 include a provision charge for misselling in the Banking and Savings segment for an amount equal to £153m. This provision was increased (in 2003 it was £61m), reflecting both increased claims and claims upheld.
In calculating the misselling provision within the Banking and Savings segment, management’s best estimate of the provision was calculated based on conclusions regarding the number of claims that will be received, of those, the number that will be upheld, and the estimated average settlement per case. Had management used different assumptions regarding these factors, a larger or smaller provision for misselling would have resulted in the Banking and Savings segment that could have had a material impact on Abbey’s reported operating profit in 2004. Management are not, however, able to quantify reliably a meaningful sensitivity or range of possible outcomes. Specifically, due to the non-homogenous nature of the population, any of the factors could change in a way that could either offset or amplify the effect of a change in another factor.
s) Segmental analysis
Under US GAAP, SFAS No. 131 “Disclosure about Segments of an Enterprise and Related Information” (SFAS 131) requires the disclosure of certain information about a Company’s operating segments and related information. SFAS 131 defines an operating segment as a component of the business that engages in business activities from which it may earn income or incur expenses and whose operating results are regularly reviewed by the Company’s chief operating decision maker to make decisions about resource allocation and to assess its performance.
SFAS 131 permits the aggregation of operating segments if the segments demonstrate similar economic characteristics and if the segments are similar in the following respects: the nature of the products and services offered; the nature of the production processes; the type or class of customer for their products or services; the distribution channels; and the nature of the regulatory environment.
Abbey has determined that its reportable segments identified in accordance with SFAS 131 also satisfy the requirements of SSAP 25. SSAP 25 requires that the amounts to be disclosed in the UK segmental analysis be presented on a statutory basis. Abbey’s segmental analysis prepared in accordance with UK GAAP is shown in Note 1. SFAS 131 requires that the amounts to be disclosed in the US segmental analysis be presented on the basis used in the board report to evaluate performance. Abbey’s management reviews discrete financial information for each of its segments that includes measures of operating results and assets. However, due to the differing natures of our ongoing Personal Financial Services group of reportable segments and our Portfolio Business Unit group of reportable segments, which are being managed for exit, the Personal Financial Services group of reportable segments and Portfolio Business Unit group of reportable segments are managed differently. The Personal Financial Services group of reportable segments are managed primarily on the basis of their results, which are measured on a trading basis. The Portfolio Business Unit group of reportable segments are managed both on the basis of their results, which are measured on a management basis, and on the basis of their net asset value. On a consolidated level the trading results of the Personal Financial Services group of reportable segments are aggregated with the management results of the Portfolio Business Unit group of reportable segments to give our summarised trading profit and loss account. The trading basis for our Personal Financial Services group of reportable segments and the management basis for our Portfolio Business Unit group of reportable segments are collectively known as the “trading” basis, as presented below.
Management considers that the trading basis provides the most appropriate way of reviewing the performance of the business.
This is because the adjustments are:
> | Embedded value charges and rebasing – these are unpredictable as they depend on both equity and debt market trends which do not affect the underlying performance of what is a very long-term business. The short-term market movements are, however, a very important factor in the management of the business but these are managed separately with a more risk-based focus. | | | |
| | 2005 | |
| | £m | |
| |
> Due to other banks | Re-organisation costs – Abbey is going through a significant costs savings | | (1,120 | ) |
| Derivative financial instruments | | | (135 | ) |
Insurance and re-organisation exercise and management needs to understand the underlying drivers of the cost base that will remain after the exercise is complete and does not want this view to be clouded by the costs of the exercise. Those costs are managed independently.reinsurance liabilities | | | (23,114 | ) |
| Other liabilities | | | (3,845 | ) |
| | | |
Total liabilities | | | (28,214 | ) |
| |
> | Goodwill charges – these charges can vary significantly year on year, and hence can materially affect our profit or loss for that year. As a result we review these charges separately to avoid clouding the presentation of underlying results. |
|
> | Depreciation on operating lease assets – The operating lease businesses are managed as financing businesses and therefore management needs to see the margin earned on the businesses. Residual value risk is separately managed. As a result we net the depreciation against the related income. |
|
> | Income from associated undertakings is included within trading income because it is a regular source of income to our operations. Therefore management believes its inclusion at this level reflects our aggregate income from our activities. |
|
> | Profit on disposal of Group undertakings is included within trading income for similar reasons to those noted above relating to our income from associated undertakings. |
For a detailed explanation
q) Deferred acquisition costs
Under US GAAP, commissions and costs associated with insurance policy issue and renewal are deferred and amortised in relation to premium income or expected gross profits, depending upon the type of these items, please refer toinsurance contract involved, over the “Other material items” sectionpolicy lifetime. The changes in the carrying amount of deferred acquisition costs calculated in accordance with US GAAP are as follows:
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| At 1 January | | | 884 | | | | 1,026 | |
| Additions | | | 77 | | | | 85 | |
| Amortisation | | | (139 | ) | | | (227 | ) |
| |
| At 31 December | | | 822 | | | | 884 | |
| |
Movement on the deferred acquisition costs balance represents the net effect of deferred acquisition costs from new business written and amortisation of the Operatingbalances. The estimated future amortisation expense of deferred acquisition costs is as follows:
| | | | | |
| Year ended 31 December | | £m | |
| |
| 2006 | | | 80 | |
| 2007 | | | 70 | |
| 2008 | | | 62 | |
| 2009 | | | 55 | |
| 2010 | | | 49 | |
| |
r) Policy liabilities
The changes in the carrying amounts of policyholder liabilities calculated in accordance with US GAAP are as follows:
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| At 1 January | | | (21,841 | ) | | | (23,429 | ) |
| (Increase)decrease in the period | | | (201 | ) | | | 1,588 | |
| |
| At 31 December | | | (22,042 | ) | | | (21,841 | ) |
| |
| |
| As described in Note 55, under US GAAP, policyholder liabilities are split between SFAS 60 products and SFAS 97 products. The total liabilities here are shown net of reinsurance. Details of the split are as follows: |
| | | | | | | | | |
| | | Year ended 31 December | |
| | | 2005 | | | 2004 | |
| | | £m | | | £m | |
| |
| SFAS 60 liabilities | | | (4,613 | ) | | | (4,575 | ) |
| SFAS 97 liabilities | | | (16,438 | ) | | | (17,330 | ) |
| Total | | | (21,051 | ) | | | (21,905 | ) |
| Reinsurance | | | 1,072 | | | | 914 | |
| Policyholder liabilities net of reassurance | | | (19,979 | ) | | | (20,991 | ) |
| Policyholder bonus fund | | | (2,063 | ) | | | (850 | ) |
| |
| Total | | | (22,042 | ) | | | (21,841 | ) |
| |
| |
| The economic assumptions used in determining policy liabilities were: |
| | | | | | | | | |
| | | |
| | | 2005 | | | 2004 | |
| |
| Return on equities | | | 6.5 | % | | | 7.0 | % |
| |
| Return on gilts | | | 4.0 | % | | | 4.5 | % |
| |
| Return on corporates | | | 4.5 | % | | | 5.0 | % |
| |
| Inflation (indexation) | | | 2.75 | % | | | 2.75 | % |
| |
| Inflation (expenses) | | | 3.75 | % | | | 3.75 | % |
| |
For SFAS 97 products, the credited rates used ranged from 1.6% to 9.5%, dependant upon the life office and
financial review.The Personal Financial Services group of reportable segments adjustments are the deduction of:
product. > | Embedded value charges and rebasing |
|
> | Re-organisation costs, and |
|
> | Goodwill charges |
There is also a single reclassification adjustment where:
> | Depreciation on operating lease assets is netted within trading income as opposed to being recorded as a part of operating expenses. |
179189
Notes to the Financial Statementscontinued
The Portfolio Business Unit group of reportable segments’ adjustments are:
> | Depreciation on operating lease assets is netted within trading income as opposed to being recorded as a part of operating expenses |
|
|
> | Income from associated undertakings is reported as part of non-interest income as opposed to being reported below the operating loss or profit line |
|
> | Profit on disposal of Group undertakings is also reported as part of non-interest income as opposed to being reported below the operating loss or profit line. |
Also included within trading interest income in 2004 is £3,942m (2003: £2,063m 2002: £2,171m) of inter-segment funding offset against interest expense. This adjustment results in statutory interest income in 2004 of £4,926m (2003: £5,244m; 2002: £6,768m) and statutory interest expense in 2004 of £3,396m (2003: £3,182m; 2002: £4,184m).
Abbey’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Abbey has eight reportable segments. The Banking and Savings segment offers a range of personal banking, savings and mortgage products and services. The Investment and Protection segment offers a range of investment products such as pensions, investment bonds, with-profits bonds, structured products, unit trusts, Individual Savings Accounts, Wrap products and endowment life insurance policies, as well as a range of protection products such as term life insurance, critical illness cover and disability cover. The General Insurance segment offers a range of non-life insurance products, including property, motor, payment protection, accidental death, personal accident and travel insurance. The Abbey Financial Markets segment manages Abbey’s liquidity, supports its funding and capital management activities, and provides risk management services to third parties and Abbey’s other businesses. The Group Infrastructure segment comprises Central Services, Financial Holdings (which contains the earnings on the difference between Abbey’s statutory capital and the target regulatory capital allocated to segments) and the results of certain small non-core businesses. The Wholesale segment earns interest and other similar returns on wholesale banking assets, including Abbey’s debt securities portfolios, leasing and as well as structured corporate banking. The Motor Finance and Litigation Funding segment offers a comprehensive range of loans and insurance products for the purchase or leasing of motor vehicles, and litigation finance. The Other segment consists of Abbey’s international operations, excluding Abbey Offshore and international treasury operations.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Inter-segment transactions are accounted for as if the transactions were to third parties, that is, at current market prices.
180
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Motor | | | | | | | | | | | | | | | |
| | | Banking | | | Investment | | | | Abbey | | | | | | | Group | | | | | | | Finance & | | | | | | | | | | | | | | | |
| | | and | | | and | | | Financial | | | General | | | Infra- | | | Wholesale | | | Litigation | | | | | | | | | | | Adjust- | | | Group | |
| | | Savings | | | protection | | | Markets | | | Insurance | | | structure | | | Banking | | | Funding | | | Other | | | Total | | | ments | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 6,376 | | | | 113 | | | | 1,082 | | | | 1 | | | | 484 | | | | 588 | | | | 158 | | | | 66 | | | | 8,868 | | | | (3,942 | ) | | | 4,926 | |
| Interest expense | | | (4,866 | ) | | | (36 | ) | | | (1,061 | ) | | | (5 | ) | | | (618 | ) | | | (658 | ) | | | (60 | ) | | | (34 | ) | | | (7,338 | ) | | | 3,942 | | | | (3,396 | ) |
| Net interest income | | | 1,510 | | | | 77 | | | | 21 | | | | (4 | ) | | | (134 | ) | | | (70 | ) | | | 98 | | | | 32 | | | | 1,530 | | | | — | | | | 1,530 | |
| Non-interest income | | | 438 | | | | 171 | | | | 291 | | | | 114 | | | | 116 | | | | 154 | | | | (30 | ) | | | (41 | ) | | | 1,213 | | | | (47 | ) | | | 1,166 | |
| Depreciation of operating lease assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | (151 | ) | | | — | | | | — | | | | (151 | ) | | | — | | | | (151 | ) |
| |
Total trading income | | | 1,948 | | | | 248 | | | | 312 | | | | 110 | | | | (18 | ) | | | (67 | ) | | | 68 | | | | (9 | ) | | | 2,592 | | | | (47 | ) | | | 2,545 | |
| |
| Administrative and other expenses | | | (1,051 | ) | | | (82 | ) | | | (108 | ) | | | (39 | ) | | | (239 | ) | | | (30 | ) | | | (22 | ) | | | (38 | ) | | | (1,609 | ) | | | (465 | ) | | | (2,074 | ) |
| Impairments | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| Depreciation of non-operating lease assets | | | (63 | ) | | | (1 | ) | | | (1 | ) | | | (1 | ) | | | (14 | ) | | | — | | | | — | | | | — | | | | (80 | ) | | | — | | | | (80 | ) |
| |
Total trading expenses | | | (1,114 | ) | | | (83 | ) | | | (109 | ) | | | (40 | ) | | | (253 | ) | | | (30 | ) | | | (22 | ) | | | (38 | ) | | | (1,689 | ) | | | (465 | ) | | | (2,154 | ) |
| |
| Provisions for bad and doubtful debts | | | (34 | ) | | | — | | | | — | | | | — | | | | — | | | | 88 | | | | (89 | ) | | | (10 | ) | | | (45 | ) | | | 80 | | | | 35 | |
| Provisions for contingent liabilities and commitments | | | (124 | ) | | | — | | | | — | | | | — | | | | 2 | | | | — | | | | — | | | | — | | | | (122 | ) | | | (111 | ) | | | (233 | ) |
| Amounts written off fixed asset investments | | | — | | | | — | | | | — | | | | — | | | | — | | | | 80 | | | | — | | | | — | | | | 80 | | | | — | | | | 80 | |
| |
Trading profit/(loss) before taxation | | | 676 | | | | 165 | | | | 203 | | | | 70 | | | | (269 | ) | | | 71 | | | | (43 | ) | | | (57 | ) | | | 816 | | | | (543 | ) | | | 273 | |
| |
| Adjust for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded value charges and rebasing | | | — | | | | 21 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 21 | | | | | | | | | |
| Reorganisation expenses | | | (183 | ) | | | (57 | ) | | | (24 | ) | | | (16 | ) | | | (285 | ) | | | — | | | | — | | | | — | | | | (565 | ) | | | | | | | | |
| Goodwill charges | | | — | | | | — | | | | — | | | | — | | | | (20 | ) | | | — | | | | — | | | | — | | | | (20 | ) | | | | | | | | |
| Income from associated undertakings | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6 | | | | — | | | | 6 | | | | | | | | | |
| Profit on disposal of group undertakings | | | — | | | | — | | | | — | | | | — | | | | — | | | | 32 | | | | — | | | | 14 | | | | 46 | | | | | | | | | |
| Loss on the termination of an operation | | | (31 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (31 | ) | | | | | | | | |
| | | | | | | | | |
Operating profit/(loss) | | | 462 | | | | 129 | | | | 179 | | | | 54 | | | | (574 | ) | | | 103 | | | | (37 | ) | | | (43 | ) | | | 273 | | | | | | | | | |
| | | | | | | | | |
Total assets | | | 79,645 | | | | 28,838 | | | | 50,073 | | | | 144 | | | | 812 | | | | 6,956 | | | | 646 | | | | 2,627 | | | | 169,741 | | | | | | | | | |
| | | | | | | | | |
181
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Depreciation | | | Provision | | | Provision | | | Amounts | | | | | | | Profit/ | |
| | | Non- | | | | | | | Depreciation | | | of non- | | | for bad and | | | for | | | written off | | | | | | | (loss) | |
| | | interest | | | Impair- | | | of operating | | | operating | | | doubtful | | | contingent | | | fixed asset | | | Other | | | before | |
| Adjustments | | income | | | ments | | | lease assets | | | lease assets | | | debts | | | liabilities | | | investments | | | expenses | | | taxation | |
| comprise: | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded value charges and rebasing | | | (27 | ) | | | — | | | | — | | | | — | | | | 80 | | | | (32 | ) | | | — | | | | — | | | | 21 | |
| Reorganisation expenses | | | (72 | ) | | | — | | | | — | | | | — | | | | — | | | | (48 | ) | | | — | | | | (445 | ) | | | (565 | ) |
| Goodwill charges | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (20 | ) | | | (20 | ) |
| Income from associated undertakings | | | 6 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6 | |
| Profit on disposal of group undertakings | | | 46 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 46 | |
| Loss on the termination of an operation | | | — | | | | — | | | | — | | | | — | | | | — | | | | (31 | ) | | | — | | | | — | | | | (31 | ) |
| Reclassification of depreciation on operating lease assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| | | | (47 | ) | | | — | | | | — | | | | — | | | | 80 | | | | (111 | ) | | | — | | | | (465 | ) | | | (543 | ) |
| |
182
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Motor | | | | | | | | | | | | | | | |
| | | Banking | | | Investment | | | | Abbey | | | | | | | Group | | | | | | | Finance & | | | | | | | | | | | | | | | |
| | | and | | | and | | | Financial | | | General | | | Infra- | | | Wholesale | | | Litigation | | | | | | | | | | | Adjust- | | | Group | |
| | | Savings | | | protection | | | Markets | | | Insurance | | | structure | | | Banking | | | Funding | | | Other | | | Total | | | ments | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 4,143 | | | | 132 | | | | 1,645 | | | | 3 | | | | 734 | | | | 66 | | | | 387 | | | | 197 | | | | 7,307 | | | | (2,063 | ) | | | 5,244 | |
| Interest expense | | | (2,423 | ) | | | (49 | ) | | | (1,619 | ) | | | (8 | ) | | | (849 | ) | | | (44 | ) | | | (142 | ) | | | (111 | ) | | | (5,245 | ) | | | 2,063 | | | | (3,182 | ) |
| Net interest income | | | 1,720 | | | | 83 | | | | 26 | | | | (5 | ) | | | (115 | ) | | | 22 | | | | 245 | | | | 86 | | | | 2,062 | | | | — | | | | 2,062 | |
| Non-interest income | | | 427 | | | | 214 | | | | 223 | | | | 126 | | | | 90 | | | | (197 | ) | | | (58 | ) | | | 25 | | | | 850 | | | | (480 | ) | | | 370 | |
| Depreciation of operating lease assets | | | — | | | | — | | | | — | | | | — | | | | — | | | | (250 | ) | | | (1 | ) | | | — | | | | (251 | ) | | | 251 | | | | — | |
| |
Total trading income | | | 2,147 | | | | 297 | | | | 249 | | | | 121 | | | | (25 | ) | | | (425 | ) | | | 186 | | | | 111 | | | | 2,661 | | | | (229 | ) | | | 2,432 | |
| |
| Administrative and other expenses | | | (1,064 | ) | | | (57 | ) | | | (105 | ) | | | (48 | ) | | | (196 | ) | | | (96 | ) | | | (135 | ) | | | (73 | ) | | | (1,774 | ) | | | (511 | ) | | | (2,285 | ) |
| Impairments | | | — | | | | — | | | | — | | | | — | | | | (10 | ) | | | — | | | | — | | | | (8 | ) | | | (18 | ) | | | — | | | | (18 | ) |
| Depreciation of non-operating lease assets | | | (68 | ) | | | (1 | ) | | | (4 | ) | | | — | | | | (24 | ) | | | (11 | ) | | | (2 | ) | | | (2 | ) | | | (112 | ) | | | — | | | | (112 | ) |
| |
Total trading expenses | | | (1,132 | ) | | | (58 | ) | | | (109 | ) | | | (48 | ) | | | (230 | ) | | | (107 | ) | | | (137 | ) | | | (83 | ) | | | (1,904 | ) | | | (511 | ) | | | (2,415 | ) |
| |
| Provisions for bad and doubtful debts | | | (130 | ) | | | — | | | | — | | | | — | | | | — | | | | (154 | ) | | | (99 | ) | | | (11 | ) | | | (394 | ) | | | (80 | ) | | | (474 | ) |
| Provisions for contingent liabilities and commitments | | | (9 | ) | | | — | | | | — | | | | — | | | | (52 | ) | | | (2 | ) | | | — | | | | (17 | ) | | | (80 | ) | | | (24 | ) | | | (104 | ) |
| Amounts written off fixed asset investments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (183 | ) | | | — | | | | — | | | | (183 | ) | | | (10 | ) | | | (193 | ) |
| |
Trading profit/(loss) before taxation | | | 876 | | | | 239 | | | | 140 | | | | 73 | | | | (307 | ) | | | (871 | ) | | | (50 | ) | | | — | | | | 100 | | | | (854 | ) | | | (754 | ) |
| |
| Adjust for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded value charges and rebasing | | | — | | | | (443 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (443 | ) | | | | | | | | |
| Reorganisation expenses | | | (169 | ) | | | (16 | ) | | | (19 | ) | | | (41 | ) | | | (70 | ) | | | — | | | | — | | | | — | | | | (315 | ) | | | | | | | | |
| Goodwill charges | | | — | | | | — | | | | — | | | | — | | | | (28 | ) | | | — | | | | — | | | | — | | | | (28 | ) | | | | | | | | |
| Income from associated undertakings | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) | | | — | | | | (12 | ) | | | | | | | | |
| Profit on disposal of group undertakings | | | — | | | | — | | | | — | | | | — | | | | — | | | | (50 | ) | | | 1 | | | | (40 | ) | | | (89 | ) | | | | | | | | |
| Loss on the termination of an operation | | | — | | | | — | | | | — | | | | — | | | | — | | | | 6 | | | | 27 | | | | — | | | | 33 | | | | | | | | | |
| | | | | | | | | |
Operating profit/(loss) | | | 707 | | | | (220 | ) | | | 121 | | | | 32 | | | | (405 | ) | | | (915 | ) | | | (34 | ) | | | (40 | ) | | | (754 | ) | | | | | | | | |
| | | | | | | | | |
Total assets | | | 77,183 | | | | 28,790 | | | | 54,459 | | | | 165 | | | | 564 | | | | 7,426 | | | | 2,160 | | | | 6,027 | | | | 176,774 | | | | | | | | | |
| | | | | | | | | |
183
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Depreciation | | | Depreciation | | | Provision for | | | | | | | Amounts | | | | | | | | |
| | | Non- | | | | | | | of operating | | | of non- | | | bad and | | | Provision for | | | written off | | | | | | | Profit/(loss) | |
| | | interest | | | Impair- | | | lease | | | operating | | | doubtful | | | contingent | | | fixed asset | | | Other | | | before | |
| Adjustments | | income | | | ments | | | Assets | | | lease assets | | | debts | | | liabilities | | | investments | | | expenses | | | taxation | |
| comprise: | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2003 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded value charges and rebasing | | | (363 | ) | | | — | | | | — | | | | — | | | | (80 | ) | | | — | | | | — | | | | — | | | | (443 | ) |
| Reorganisation expenses | | | (16 | ) | | | — | | | | — | | | | — | | | | — | | | | (24 | ) | | | (10 | ) | | | (265 | ) | | | (315 | ) |
| Goodwill charges | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (28 | ) | | | (28 | ) |
| Income from associated undertakings | | | (12 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (12 | ) |
| Profit on disposal of group undertakings | | | (89 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (89 | ) |
| Loss on the termination of an operation | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 33 | | | | 33 | |
| Reclassification of depreciation on operating lease assets | | | — | | | | — | | | | 251 | | | | — | | | | — | | | | — | | | | — | | | | (251 | ) | | | — | |
| |
| | | | (480 | ) | | | — | | | | 251 | | | | — | | | | (80 | ) | | | (24 | ) | | | (10 | ) | | | (511 | ) | | | (854 | ) |
| |
184
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Motor | | | | | | | | | | | | | | | |
| | | Banking | | | Investment | | | | Abbey | | | | | | | Group | | | | | | | Finance & | | | | | | | | | | | | | | | |
| | | and | | | and | | | Financial | | | General | | | Infra- | | | Wholesale | | | Litigation | | | | | | | | | | | Adjust- | | | Group | |
| | | Savings | | | protection | | | Markets | | | Insurance | | | structure | | | Banking | | | Funding | | | Other | | | Total | | | ments | | | Total | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2002 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest income | | | 4,255 | | | | 150 | | | | 2,483 | | | | 4 | | | | 759 | | | | 327 | | | | 801 | | | | 160 | | | | 8,939 | | | | (2,171 | ) | | | 6,768 | |
| Interest expense | | | (2,456 | ) | | | (60 | ) | | | (2,456 | ) | | | (7 | ) | | | (934 | ) | | | — | | | | (337 | ) | | | (105 | ) | | | (6,355 | ) | | | 2,171 | | | | (4,184 | ) |
| Net interest income | | | 1,799 | | | | 90 | | | | 27 | | | | (3 | ) | | | (175 | ) | | | 327 | | | | 464 | | | | 55 | | | | 2,584 | | | | — | | | | 2,584 | |
| Non-interest income | | | 454 | | | | 335 | | | | 231 | | | | 149 | | | | 106 | | | | 378 | | | | (48 | ) | | | (71 | ) | | | 1,534 | | | | (618 | ) | | | 916 | |
| Depreciation of operating lease assets | | | (23 | ) | | | — | | | | — | | | | — | | | | — | | | | (252 | ) | | | (5 | ) | | | — | | | | (280 | ) | | | 280 | | | | — | |
| |
Total trading income | | | 2,230 | | | | 425 | | | | 258 | | | | 146 | | | | (69 | ) | | | 453 | | | | 411 | | | | (16 | ) | | | 3,838 | | | | (338 | ) | | | 3,500 | |
| |
| Administrative and other expenses | | | (1,042 | ) | | | (52 | ) | | | (103 | ) | | | (55 | ) | | | (230 | ) | | | (95 | ) | | | (183 | ) | | | (58 | ) | | | (1,818 | ) | | | (378 | ) | | | (2,196 | ) |
| Impairments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (28 | ) | | | (357 | ) | | | (6 | ) | | | (391 | ) | | | (747 | ) | | | (1,138 | ) |
| Depreciation of non-operating lease assets | | | (66 | ) | | | (1 | ) | | | (7 | ) | | | 1 | | | | (22 | ) | | | — | | | | (6 | ) | | | (2 | ) | | | (103 | ) | | | — | | | | (103 | ) |
| |
Total trading expenses | | | (1,108 | ) | | | (53 | ) | | | (110 | ) | | | (54 | ) | | | (252 | ) | | | (123 | ) | | | (546 | ) | | | (66 | ) | | | (2,312 | ) | | | (1,125 | ) | | | (3,437 | ) |
| |
| Provisions for bad and doubtful debts | | | (151 | ) | | | — | | | | — | | | | — | | | | 1 | | | | (247 | ) | | | (115 | ) | | | (2 | ) | | | (514 | ) | | | — | | | | (514 | ) |
| Provisions for contingent liabilities and commitments | | | (11 | ) | | | — | | | | — | | | | — | | | | (35 | ) | | | — | | | | (4 | ) | | | — | | | | (50 | ) | | | — | | | | (50 | ) |
| Amounts written off fixed asset investments | | | 2 | | | | — | | | | — | | | | — | | | | — | | | | (513 | ) | | | — | | | | — | | | | (511 | ) | | | — | | | | (511 | ) |
| |
Trading profit/(loss) before taxation | | | 962 | | | | 372 | | | | 148 | | | | 92 | | | | (355 | ) | | | (430 | ) | | | (254 | ) | | | (84 | ) | | | 451 | | | | (1,463 | ) | | | (1,012 | ) |
| |
| Adjust for: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded value charges and rebasing | | | — | | | | (553 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (553 | ) | | | | | | | | |
| Reorganisation expenses | | | (23 | ) | | | — | | | | — | | | | — | | | | (11 | ) | | | — | | | | — | | | | — | | | | (34 | ) | | | | | | | | |
| Goodwill charges | | | — | | | | — | | | | — | | | | — | | | | (811 | ) | | | — | | | | — | | | | — | | | | (811 | ) | | | | | | | | |
| Income from associated undertakings | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17 | ) | | | — | | | | (17 | ) | | | | | | | | |
| Profit on disposal of group undertakings | | | — | | | | — | | | | — | | | | — | | | | — | | | | (46 | ) | | | (2 | ) | | | — | | | | (48 | ) | | | | | | | | |
| | | | | | | | | |
Operating profit/(loss) | | | 939 | | | | (181 | ) | | | 148 | | | | 92 | | | | (1,177 | ) | | | (476 | ) | | | (273 | ) | | | (84 | ) | | | (1,012 | ) | | | | | | | | |
| | | | | | | | | |
Total assets | | | 67,264 | | | | 30,404 | | | | 43,603 | | | | 199 | | | | 837 | | | | 48,401 | | | | 7,751 | | | | 6,735 | | | | 205,194 | | | | | | | | | |
| | | | | | | | | |
185
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Depreciation | | | Depreciation | | | Provision for | | | | | | | Amounts | | | | | | | | |
| | | Non- | | | | | | | of operating | | | of non- | | | bad and | | | Provision for | | | written off | | | | | | | Profit/(loss) | |
| | | interest | | | Impair- | | | lease | | | operating | | | doubtful | | | contingent | | | fixed asset | | | Other | | | before | |
| Adjustments | | income | | | ments | | | Assets | | | lease assets | | | debts | | | liabilities | | | investments | | | expenses | | | taxation | |
| comprise | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
2002 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Embedded value charges and rebasing | | | (553 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (553 | ) |
| Reorganisation expenses | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (34 | ) | | | (34 | ) |
| Goodwill charges | | | — | | | | (747 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (64 | ) | | | (811 | ) |
| Income from associated undertakings | | | (17 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (17 | ) |
| Profit on disposal of group undertakings | | | (48 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (48 | ) |
| Reclassification of depreciation on operating lease assets | | | — | | | | — | | | | 280 | | | | — | | | | — | | | | — | | | | — | | | | (280 | ) | | | — | |
| |
| | | | (618 | ) | | | (747 | ) | | | 280 | | | | — | | | | — | | | | — | | | | — | | | | (378 | ) | | | (1,463 | ) |
| |
t) Restatements
During the preparation of Abbey’s 2004 Consolidated Financial Statements, management identified a number of errors in the US GAAP adjustments previously reported. As a result, Abbey’s US GAAP net (loss) income and shareholders’ funds for the years ended 31 December 2003 and 2002 have been restated from the amounts previously reported as follows:
Securitisations
In 2004, Abbey’s models used to calculate the UK GAAP to US GAAP adjustments for securitisations were updated. As part of Abbey’s review of the new models, certain clerical and administrative input errors were discovered in the previous models used to calculate the initial values of interest-only strips and subsequent revaluation gains/losses, and the interest income recognised each year.
Loan origination fees and costs
In 2004, Abbey’s models used to calculate the UK GAAP to US GAAP adjustments for loan origination fees and costs were reviewed. As part of Abbey’s review, certain errors were discovered in the methodologies applied to identify the balances to be deferred. In addition, Abbey identified that one of its divisions had been inappropriately omitted from its previous calculations, and in another division, some fees had been inappropriately deferred.
Goodwill
In 2004, during the preparation of the financial statements, an error was identified in the posting of a 2003 journal relating to the UK GAAP to US GAAP adjustment for goodwill.
Life assurance businesses
In 2004, the models used to calculate the UK GAAP to US GAAP adjustments for Abbey’s life assurance businesses were reviewed. As part of the review, certain clerical input errors were discovered in the models used to calculate deferred acquisition costs.
Operating leases
In 2004, Abbey identified certain fixed assets leased to customers under operating leases for which, in accordance with UK GAAP, depreciation and operating lease income are recognised using the actuarial after-tax method rather than the straight-line method, but for which no UK GAAP to US GAAP adjustment had been calculated in prior years.
Other
In 2004, Abbey identified certain assets and liabilities that, in accordance with UK GAAP, had been derecognised prior to their legal extinguishment, but for which no UK GAAP to US GAAP adjustment had been calculated in prior years.
186
Financial Statements
Notes to the Financial Statementscontinued
These findings have resulted in restatements of the previously reported US GAAP adjustments in respect of “Securitisation”, “Loan origination fees and costs”, “Goodwill”, “Shareholders’ interest in long-term assurance business”, “Leasing” and “Other” with their related tax effects, where applicable, as follows:
| | | | | | | | | |
| | | 2003 | | | 2002 | |
| | | £m | | | £m | |
| |
| Net (loss)/income: | | | | | | | | |
| Net (loss)/income under US GAAP, as previously reported | | | (131 | ) | | | (1,393 | ) |
| Adjustment to “Securitisation” | | | (12 | ) | | | 3 | |
| Adjustment to “Loan origination fees” | | | (107 | ) | | | (57 | ) |
| Adjustment to “Goodwill” | | | 190 | | | | — | |
| Adjustment to “Shareholders’ interest in long-term assurance business” | | | (73 | ) | | | — | |
| Adjustment to “Leasing” | | | (45 | ) | | | 27 | |
| Adjustment to “Other” | | | (9 | ) | | | 3 | |
| Deferred tax effect of adjustments | | | 59 | | | | 10 | |
| Net (loss)/income under US GAAP, as restated | | | (128 | ) | | | (1,407 | ) |
(Loss)/earnings per share: | | | | | | | | |
| Basic (loss)/earnings per share, as previously reported | | | (9.0 | )p | | | (96.6 | )p |
| Effect of adjustments | | | 0.2p | | | | (1.6 | )p |
| Basic (loss)/earnings per share, as restated | | | (8.8 | )p | | | (98.2 | )p |
| Diluted (loss)/earnings per share, as previously reported | | | (9.0 | )p | | | (96.6 | )p |
| Effect of adjustments | | | 0.2p | | | | (1.6 | )p |
| Diluted (loss)/earnings per share, as restated | | | (8.8 | )p | | | (98.2 | )p |
Shareholders’ funds: | | | | | | | | |
| Shareholders’ funds under US GAAP, as previously reported | | | 6,032 | | | | 6,090 | |
| Adjustment to “Securitisation” | | | (54 | ) | | | (31 | ) |
| Adjustment to “Loan origination fees” | | | (298 | ) | | | (191 | ) |
| Adjustment to “Shareholders’ interest in long-term assurance business” | | | (73 | ) | | | — | |
| Adjustment to “Leasing” | | | (91 | ) | | | (46 | ) |
| Adjustment to “Other” | | | (39 | ) | | | (30 | ) |
| Deferred tax effect of adjustments | | | 152 | | | | 107 | |
| Shareholders’ funds under US GAAP, as restated | | | 5,629 | | | | 5,899 | |
| |
The cumulative impact of the restatements on periods prior to 2002 is £(269)m.
63.60. Significant concentrations of credit risk
During
2004,2005, Abbey’s significant exposures to credit risk arose mainly in the residential mortgage portfolio and unsecured lending in
Retail Banking
and Savings and in Abbey Financial
Markets and Wholesale Banking. See “Risk management – Credit risk” for additional information regarding Abbey’s approach to managing credit risk.Markets. Residential mortgages, the asset of all of which is located in the UK, represented 46% (2004: 45% (2003: 42%) of total assets at 31 December 2004; 100% (2003: 98%) of the residential mortgage asset is located in the UK at 31 December 2004.
2005. Although the Abbey Financial Markets operation is based mainly in the UK, it has built up exposures to various entities around the world. At 31 December 2004, 18%2005, 16% of Abbey Financial MarketsMarkets’ credit exposures were to counterparties from the United States, and 50%55% were to counterparties from the UK.
The remaining exposures were mainly to counterparties from Europe. Less than
3%2% of Abbey Financial Markets’ exposures were to countries that are not members of the Organisation for Economic Co-operation and Development.
64. Fair values of financial instruments
The following disclosures are made in accordance with SFAS 107, Disclosures about Fair Value of Financial Instruments.
The fair values have been estimated using quoted market prices where available. Where no ready markets exist and hence quoted market prices are not available, appropriate techniques are used to estimate fair values which typically take account of the characteristics of the instruments, including the future cash flows, market interest rates and prices available for similar instruments. Unless otherwise specified, fair values of financial instruments have been estimated by discounting anticipated future cash flows using market interest rates offered at 31 December 2004 for similar instruments.
By its nature, the estimation of fair values is highly subjective and the results will depend largely upon the assumptions made.
See “Operating review – highlights – Critical accounting policies” for additional information. Considerable caution should therefore be used in interpreting the fair values and particularly if comparing with fair values presented by other financial institutions. The concept of fair values assumes that the financial instruments will be realised by way of sale in the ordinary course of business with adjustments made for liquidity as appropriate.
SFAS 107 does not apply to non-financial assets and liabilities. Accordingly, tangible fixed assets and balances relating to Long-term Assurance business are excluded.
The carrying values and estimated fair values of financial instruments are as follows:
187
Financial Statements
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2004 | | | 2004 | | | 2003 | | | 2003 | | | 2003 | |
| | | Carrying | | | Fair | | | Surplus/ | | | Carrying | | | Fair | | | Surplus/ | |
| | | amount | | | value(1) | | | (deficit) | | | amount | | | value(1) | | | (deficit) | |
| | | £m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Non-trading assets | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | 454 | | | | 454 | | | | – | | | | 439 | | | | 439 | | | | – | |
| Loans and advances to banks | | | 3,068 | | | | 3,069 | | | | 1 | | | | 2,271 | | | | 2,271 | | | | – | |
| Related derivatives | | | – | | | | – | | | | – | | | | 26 | | | | 27 | | | | 1 | |
| Loans and advances to customers | | | 81,853 | | | | 82,093 | | | | 240 | | | | 84,426 | | | | 84,688 | | | | 262 | |
| Related derivatives | | | 3 | | | | (261 | ) | | | (264 | ) | | | (588 | ) | | | (1,061 | ) | | | (473 | ) |
| Debt securities | | | 672 | | | | 724 | | | | 52 | | | | 1,753 | | | | 1,841 | | | | 88 | |
| Related derivatives | | | (53 | ) | | | (96 | ) | | | (43 | ) | | | (58 | ) | | | (199 | ) | | | (141 | ) |
| Equity shares and other variable yield securities | | | 30 | | | | 32 | | | | 2 | | | | 394 | | | | 394 | | | | – | |
Non-trading liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | (8,578 | ) | | | (8,553 | ) | | | 25 | | | | (8,772 | ) | | | (8,793 | ) | | | (21 | ) |
| Related derivatives | | | 84 | | | | 84 | | | | – | | | | (67 | ) | | | (52 | ) | | | 15 | |
| Customer accounts | | | (69,348 | ) | | | (69,540 | ) | | | (192 | ) | | | (68,666 | ) | | | (68,883 | ) | | | (217 | ) |
| Related derivatives | | | 1 | | | | 3 | | | | 2 | | | | 47 | | | | 187 | | | | 140 | |
| Debt securities in issue | | | (21,969 | ) | | | (21,297 | ) | | | 672 | | | | (24,834 | ) | | | (24,893 | ) | | | (59 | ) |
| Related derivatives | | | 275 | | | | (229 | ) | | | (504 | ) | | | 80 | | | | 259 | | | | 179 | |
| Short positions in debt securities and equity shares | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Subordinated liabilities including convertible debt | | | (5,360 | ) | | | (5,656 | ) | | | (296 | ) | | | (6,337 | ) | | | (7,068 | ) | | | (731 | ) |
| Related derivatives | | | (106 | ) | | | 385 | | | | 491 | | | | (99 | ) | | | 425 | | | | 524 | |
| Other long-term capital instruments | | | (722 | ) | | | (805 | ) | | | (83 | ) | | | (742 | ) | | | (896 | ) | | | (154 | ) |
| Related derivatives | | | 2 | | | | 15 | | | | 13 | | | | 1 | | | | 208 | | | | 207 | |
Other non-trading derivatives(2) | | | (1 | ) | | | 20 | | | | 21 | | | | 10 | | | | (5 | ) | | | (15 | ) |
Trading assets/liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Treasury bills & other eligible bills | | | 1,990 | | | | 1,990 | | | | – | | | | 1,630 | | | | 1,630 | | | | – | |
| Loans and advances to banks | | | 7,080 | | | | 7,080 | | | | – | | | | 4,884 | | | | 4,884 | | | | – | |
| Loans and advances to customers | | | 11,357 | | | | 11,357 | | | | – | | | | 9,413 | | | | 9,413 | | | | – | |
| Debt securities | | | 22,011 | | | | 22,011 | | | | – | | | | 28,575 | | | | 28,575 | | | | – | |
| Equity shares and other variable yield securities | | | 1,146 | | | | 1,146 | | | | – | | | | 1,239 | | | | 1,239 | | | | – | |
| Deposits by banks | | | (9,834 | ) | | | (9,834 | ) | | | – | | | | (13,353 | ) | | | (13,353 | ) | | | – | |
| Customer accounts | | | (9,502 | ) | | | (9,502 | ) | | | – | | | | (5,736 | ) | | | (5,736 | ) | | | – | |
| Short positions in government debt securities | | | (2,715 | ) | | | (2,715 | ) | | | – | | | | (4,303 | ) | | | (4,303 | ) | | | – | |
| Derivative contracts with third parties | | | (1,793 | ) | | | (1,793 | ) | | | – | | | | (3,169 | ) | | | (3,169 | ) | | | – | |
| Derivative contracts with ANFP | | | 505 | | | | 505 | | | | – | | | | 50 | | | | 50 | | | | – | |
| |
(1) | | Where quoted market prices are not available, fair values of on-balance sheet financial instruments incorporate the discounted value of the principal amounts, whereas, for associated hedges of the underlying interest flows, fair values of derivatives do not reflect principal amounts. Consequently, movements in the fair values of on-balance sheet financial instruments are not necessarily matched by equal and opposite movements in the fair values of related derivatives. |
|
(2) | | Other non-trading derivatives hedge finance, operating lease assets and non-equity minority interests. SFAS 107 does not require disclosure of the fair value of finance lease debtors. They are therefore excluded from the table. Non-equity minority interests are not classified as liabilities under UK GAAP and have been excluded from the table. |
Fair values include the fair values of derivatives undertaken by Abbey entities for non-trading purposes with Abbey National Financial Products. As part of an integrated approach to risk management, Abbey uses both off–balance sheet and on-balance sheet instruments to manage risk. On-balance sheet instruments which are used as hedges of other on-balance sheet instruments are shown in the relevant standard balance sheet headings on the fair value table, and are not offset.
Other assets, Prepayments and accrued income, Dividend proposed, Other liabilities, Accruals and deferred income and Provisions for liabilities and charges may contain financial instruments which fall within the scope of SFAS 107. Unless specifically included, these financial instruments have been excluded from the above analysis as their fair values approximate to carrying values.
The surplus/(deficit) in the table above represents the surplus/(deficit) of fair value compared to the carrying amount of those financial instruments for which fair values have been estimated under SFAS 107.
The approach to specific categories of financial instruments is described below.
188
Financial Statements
Notes to the Financial Statementscontinued
Assets
Debt securities and equity shares and other variable yield securities
Where available, securities and investments have been valued using quoted market prices. Where quoted market prices are not available, as is the case with certain over-the-counter derivatives (“OTC derivatives”), fair value is determined using pricing models that use a mathematical methodology based on accepted financial theories. Depending on the product type and its components, the fair value of over-the-counter derivatives is modelled using one or a combination of pricing models that are widely accepted in the financial services industry.
Pricing models take into account the contract terms of the securities as well as market-based valuation parameters, such as interest rates, volatility, exchange rates and the credit rating of the counterparty. Valuation adjustments are an integral component of the fair value estimation process and are taken on individual positions where either the absolute size of the trade or other specific features of the trade or the particular market (such as counterparty credit risk, concentration or market liquidity) require more than the simple application of pricing models.
When valuation parameters are not observable in the market or cannot be derived from observable market prices, as is the case with certain over-the-counter derivatives, the fair value is derived either through historical analysis of other observable market data (such as spot prices) or through an estimation of a valuation adjustment appropriate for each product. Typically, historical benchmarks are combined with management judgement in this process.
Loans and advances to customers
Loans and advances to personal customers are made both at variable and at fixed rates. As there is no active secondary market in the UK for such loans and advances, there is no reliable market value available for such a significant portfolio.
However, if a market value could be ascertained, the Directors believe it would reflect the expectation of a long-term and continuing relationship with a majority of the customers. Although substantial, this value is intangible and it cannot therefore be included in the fair value under SFAS 107. Consequently the Directors believe that, for the purposes of SFAS 107, the carrying value of the variable rate loans may be assumed to be their fair value.
Certain of the loans secured on residential properties are at a fixed rate for a limited period, typically two to five years from their commencement. At the end of this period these loans revert to the relevant variable rate. The excess of fair value over carrying value of each of these loans has been estimated by reference to the market rates available at 31 December 2004 for similar loans of maturity equal to the remaining fixed period. The fixed element of such loans is substantially hedged such that any movement in the value of the loan as a result of market interest rate changes will be offset by an equivalent movement in the value of the instrument used as a hedge.
Liabilities
Deposits by banks and customers
SFAS 107 states that the fair value of deposit liabilities payable on demand is equal to the carrying value. However, given the long-term and continuing nature of the relationships with Abbey’s customers, the Directors believe there is significant value to Abbey in this source of funds. Certain of the deposit liabilities are at a fixed rate until maturity. The deficit of fair value over carrying value of the liabilities has been estimated by reference to the market rates available at 31 December 2004 for similar maturities.
Debt securities in issue and subordinated liabilities
Where reliable prices are available, the fair value of debt securities in issue and subordinated liabilities has been calculated using quoted market prices. Other market values have been determined using in-house pricing models, or stated at amortised cost.
Financial commitments and contingent liabilities
The Directors believe that, given the lack of an established market, the diversity of fee structures and the estimation required to separate the value of the instruments from the value of the overall transaction, it is generally difficult to estimate the fair value of financial commitments and contingent liabilities. These are therefore excluded from the above table. However, since the majority of these are at floating rates the book value may be a reasonable approximation to fair value.
Off-balance sheet derivative financial instruments
Abbey uses various market-related off-balance sheet financial instruments. The fair value of these instruments is measured as the sum of positive and negative fair values at the balance sheet date, which is estimated using market prices where available or pricing models consistent with standard market practice.
65.61. Consolidating financial information
Abbey National Treasury Services plc is a wholly owned subsidiary of Abbey National plc and is able to offer and sell certain securities in the US from time to time pursuant to a registration statement on Form F-3 filed with the SEC (the “Registration Statement”). Abbey National plc has fully and unconditionally guaranteed the obligations of Abbey National Treasury Services plc that have been, or will be incurred before 31 July 2008: this guarantee includes all securities issued by Abbey National Treasury Services plc pursuant to the Registration Statement.
The information below has been prepared in accordance with
UK GAAP,IFRS, based on the requirements of the SEC’s Rule 3.10 of Regulation S-X.
Cash flow information relates solely to third party cash flows; Abbey does not maintain accounting records of cash flows on an individual company basis as such information is not required to be presented under UK GAAP. Reconciliations to determine intercompany cash flows are not practicable. This information is presented for: (i) Abbey National plc, on a stand-alone basis as guarantor (“The Company”); (ii) Abbey National Treasury Services plc, on a stand-alone basis; (iii) other non-guarantor subsidiaries of The Company and
189
Financial Statements
Notes to the Financial Statementscontinued
Abbey National Treasury Services plc on a combined basis (“Other”); (iv) consolidation adjustments (“Adjustments”); and (v) total consolidated amounts (“Consolidated”).
UK GAAP
Profit and loss accountsIFRS income statements
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | The Company | | | Treasury Services | | | Other | | | Adjustments | | | Consolidated | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
For the year ended 31 December 2004 | | | | | | | | | | | | | | | | | | | | |
| Net interest income | | | 950 | | | | 272 | | | | 292 | | | | 16 | | | | 1,530 | |
| Fees, commissions and other income | | | 629 | | | | (1 | ) | | | 1,181 | | | | (643 | ) | | | 1,166 | |
| |
| Total operating income | | | 1,579 | | | | 271 | | | | 1,473 | | | | (627 | ) | | | 2,696 | |
| Operating expenses excluding operating lease depreciation | | | (1,812 | ) | | | (127 | ) | | | (428 | ) | | | 213 | | | | (2,154 | ) |
| Depreciation on operating lease assets | | | — | | | | (1 | ) | | | (150 | ) | | | — | | | | (151 | ) |
| Provisions | | | (181 | ) | | | 160 | | | | (19 | ) | | | (78 | ) | | | (118 | ) |
| |
| Operating (loss)/profit on ordinary activities before tax | | | (414 | ) | | | 303 | | | | 876 | | | | (492 | ) | | | 273 | |
| Tax on (loss)/profit on ordinary activities | | | 183 | | | | — | | | | (55 | ) | | | (272 | ) | | | (144 | ) |
| |
| (Loss)/profit on ordinary activities after tax | | | (231 | ) | | | 303 | | | | 821 | | | | (764 | ) | | | 129 | |
| Minority interests – non-equity | | | — | | | | — | | | | (49 | ) | | | — | | | | (49 | ) |
| |
| Loss for the financial year attributable to the shareholders of Abbey National plc | | | (231 | ) | | | 303 | | | | 772 | | | | (764 | ) | | | 80 | |
| Transfer from non-distributable reserve | | | — | | | | — | | | | — | | | | 47 | | | | 47 | |
| Dividends including amounts attributable to non-equity interests | | | (631 | ) | | | 51 | | | | (145 | ) | | | 94 | | | | (631 | ) |
| |
| Retained (loss)/profit for the year | | | (862 | ) | | | 354 | | | | 627 | | | | (623 | ) | | | (504 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
For the year ended 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| |
| Net interest income | | | 1,330 | | | | 18 | | | | 704 | | | | 10 | | | | 2,062 | |
| Fees, commissions and other income | | | 1,109 | | | | 271 | | | | 68 | | | | (977 | ) | | | 471 | |
| |
| Total operating income | | | 2,439 | | | | 289 | | | | 772 | | | | (967 | ) | | | 2,533 | |
| Operating expenses excluding operating lease depreciation | | | (1,677 | ) | | | (695 | ) | | | (42 | ) | | | 217 | | | | (2,197 | ) |
| Depreciation on operating lease assets | | | — | | | | — | | | | (251 | ) | | | — | | | | (251 | ) |
| Provisions | | | (886 | ) | | | (198 | ) | | | (364 | ) | | | 677 | | | | (771 | ) |
| |
| Operating (loss)/profit on ordinary activities before tax | | | (124 | ) | | | (604 | ) | | | 115 | | | | (73 | ) | | | (686 | ) |
| Tax on (loss)/profit on ordinary activities | | | (43 | ) | | | 188 | | | | (83 | ) | | | (20 | ) | | | 42 | |
| |
| (Loss)/profit on ordinary activities after tax | | | (167 | ) | | | (416 | ) | | | 32 | | | | (93 | ) | | | (644 | ) |
| Minority interests – non-equity | | | — | | | | — | | | | (55 | ) | | | — | | | | (55 | ) |
| |
| Loss for the financial year attributable to the shareholders of Abbey National plc | | | (167 | ) | | | (416 | ) | | | (23 | ) | | | (93 | ) | | | (699 | ) |
| Transfer from non-distributable reserve | | | — | | | | — | | | | — | | | | (200 | ) | | | (200 | ) |
| Dividends including amounts attributable to non-equity interests | | | (424 | ) | | | 91 | | | | (569 | ) | | | 478 | | | | (424 | ) |
| |
| Retained (loss)/profit for the year | | | (591 | ) | | | (325 | ) | | | (592 | ) | | | 185 | | | | (1,323 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
For the year ended 31 December 2002 | | | | | | | | | | | | | | | | | | | | |
| |
| Net interest income | | | 1,242 | | | | 239 | | | | 1,095 | | | | 8 | | | | 2,584 | |
| Fees, commissions and other income | | | 1,337 | | | | 350 | | | | 230 | | | | (936 | ) | | | 981 | |
| |
| Total operating income | | | 2,579 | | | | 589 | | | | 1,325 | | | | (928 | ) | | | 3,565 | |
| Operating expenses excluding operating lease depreciation | | | (1,485 | ) | | | (171 | ) | | | (1,401 | ) | | | (100 | ) | | | (3,157 | ) |
| Depreciation on operating lease assets | | | — | | | | — | | | | (280 | ) | | | — | | | | (280 | ) |
| Provisions | | | (1,494 | ) | | | (656 | ) | | | (261 | ) | | | 1,336 | | | | (1,075 | ) |
| |
| Operating (loss)/profit on ordinary activities before tax | | | (400 | ) | | | (238 | ) | | | (617 | ) | | | 308 | | | | (947 | ) |
| Tax on (loss)/profit on ordinary activities | | | (97 | ) | | | 101 | | | | (237 | ) | | | 81 | | | | (152 | ) |
| |
| (Loss)/profit on ordinary activities after tax | | | (497 | ) | | | (137 | ) | | | (854 | ) | | | 389 | | | | (1,099 | ) |
| Minority interests – non-equity | | | — | | | | — | | | | (60 | ) | | | (2 | ) | | | (62 | ) |
| |
| (Loss)/profit for the financial year attributable to the shareholders of Abbey National plc | | | (497 | ) | | | (137 | ) | | | (914 | ) | | | 387 | | | | (1,161 | ) |
| Transfer from non-distributable reserve | | | — | | | | — | | | | — | | | | 263 | | | | 263 | |
| Dividends including amounts attributable to non-equity interests | | | (424 | ) | | | (449 | ) | | | (309 | ) | | | 758 | | | | (424 | ) |
| |
| Retained (loss)/profit for the year | | | (921 | ) | | | (586 | ) | | | (1,223 | ) | | | 1,408 | | | | (1,322 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| For the year ended 31 December 2005 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Net interest income | | | 748 | | | | 156 | | | | 298 | | | | 5 | | | | 1,207 | |
| Fee, commission and other income | | | 1,162 | | | | 240 | | | | 769 | | | | (638 | ) | | | 1,533 | |
| |
Total income net of insurance claims | | | 1,910 | | | | 396 | | | | 1,067 | | | | (633 | ) | | | 2,740 | |
| Administration expenses | | | (1,441 | ) | | | (128 | ) | | | (173 | ) | | | 18 | | | | (1,724 | ) |
| Depreciation and amortisation | | | (66 | ) | | | (3 | ) | | | (130 | ) | | | — | | | | (199 | ) |
| Impairment and provisions | | | 296 | | | | — | | | | (233 | ) | | | (284 | ) | | | (221 | ) |
| |
Profit/(loss) before tax | | | 699 | | | | 265 | | | | 531 | | | | (899 | ) | | | 596 | |
| Taxation expense | | | (8 | ) | | | (89 | ) | | | (69 | ) | | | (10 | ) | | | (176 | ) |
| |
Profit/(loss) for the year | | | 691 | | | | 176 | | | | 462 | | | | (909 | ) | | | 420 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| For the year ended 31 December 2004 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Net interest income | | | 907 | | | | 272 | | | | 268 | | | | 16 | | | | 1,463 | |
| Fee, commission and other income | | | 613 | | | | — | | | | 1,160 | | | | (391 | ) | | | 1,382 | |
| |
Total income net of insurance claims | | | 1,520 | | | | 272 | | | | 1,428 | | | | (375 | ) | | | 2,845 | |
| Administration expenses | | | (1,691 | ) | | | (126 | ) | | | (617 | ) | | | 213 | | | | (2,221 | ) |
| Depreciation and amortisation | | | (142 | ) | | | (2 | ) | | | (403 | ) | | | — | | | | (547 | ) |
| Impairment and provisions | | | (177 | ) | | | 160 | | | | (3 | ) | | | (78 | ) | | | (98 | ) |
| |
Profit/(loss) before tax | | | (490 | ) | | | 304 | | | | 405 | | | | (240 | ) | | | (21 | ) |
| Taxation expense | | | 206 | | | | (107 | ) | | | 140 | | | | (272 | ) | | | (33 | ) |
| |
Profit/(loss) for the year | | | (284 | ) | | | 197 | | | | 545 | | | | (512 | ) | | | (54 | ) |
| |
190
Notes to the Financial Statementscontinued
UK GAAP
BalanceIFRS balance sheets
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | The Company | | | Treasury Services | | | Other | | | Adjustments | | | Consolidated | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
At 31 December 2004 | | | | | | | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | | | | | | | |
| Cash, treasury bills and other eligible bills | | | 443 | | | | 663 | | | | 1,338 | | | | — | | | | 2,444 | |
| Loans and advances to banks | | | 3,605 | | | | 52,448 | | | | 26,207 | | | | (72,112 | ) | | | 10,148 | |
| Loans and advances to customers | | | 79,857 | | | | 3,593 | | | | 25,360 | | | | (15,601 | ) | | | 93,209 | |
| Net investment in finance leases | | | 3 | | | | — | | | | 1,142 | | | | 3 | | | | 1,148 | |
| Securities and investments | | | 406 | | | | 12,067 | | | | 12,635 | | | | (1,249 | ) | | | 23,859 | |
| Long-term assurance business | | | — | | | | — | | | | 1 | | | | 2,967 | | | | 2,968 | |
| Intangible fixed assets | | | — | | | | — | | | | 317 | | | | — | | | | 317 | |
| Tangible fixed assets excluding operating lease assets | | | 226 | | | | 2 | | | | 145 | | | | (127 | ) | | | 246 | |
| Operating lease assets | | | — | | | | — | | | | 2,341 | | | | — | | | | 2,341 | |
| Other assets | | | 1,684 | | | | 3,537 | | | | 967 | | | | (307 | ) | | | 5,881 | |
| Shares in group undertakings | | | 8,250 | | | | 2,704 | | | | 4,642 | | | | (15,596 | ) | | | — | |
| Assets of long-term assurance funds | | | — | | | | — | | | | 29,631 | | | | (2,451 | ) | | | 27,180 | |
| |
Total assets | | | 94,474 | | | | 75,014 | | | | 104,726 | | | | (104,473 | ) | | | 169,741 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 15,697 | | | | 35,268 | | | | 21,800 | | | | (54,353 | ) | | | 18,412 | |
| Customer accounts | | | 65,910 | | | | 12,048 | | | | 19,440 | | | | (18,548 | ) | | | 78,850 | |
| Debt securities in issue | | | 4 | | | | 19,779 | | | | 17,284 | | | | (15,098 | ) | | | 21,969 | |
| Other liabilities | | | 2,389 | | | | 5,279 | | | | 4,289 | | | | (145 | ) | | | 11,812 | |
| Subordinated liabilities including convertible debt | | | 6,395 | | | | 278 | | | | 653 | | | | (1,244 | ) | | | 6,082 | |
| Liabilities of long-term assurance funds | | | — | | | | — | | | | 29,631 | | | | (2,451 | ) | | | 27,180 | |
| |
| | | | 90,395 | | | | 72,652 | | | | 93,097 | | | | (91,839 | ) | | | 164,305 | |
| Minority interests – non-equity | | | — | | | | — | | | | 518 | | | | (6 | ) | | | 512 | |
| Non-equity shareholders’ funds | | | 632 | | | | — | | | | 781 | | | | (781 | ) | | | 632 | |
| Equity Shareholders’ Funds | | | 3,447 | | | | 2,362 | | | | 10,330 | | | | (11,847 | ) | | | 4,292 | |
| |
Total liabilities | | | 94,474 | | | | 75,014 | | | | 104,726 | | | | (104,473 | ) | | | 169,741 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
At 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| |
Assets | | | | | | | | | | | | | | | | | | | | |
| Cash, treasury bills and other eligible bills | | | 417 | | | | 234 | | | | 1,419 | | | | — | | | | 2,070 | |
| Loans and advances to banks | | | 4,218 | | | | 16,977 | | | | 19,386 | | | | (33,426 | ) | | | 7,155 | |
| Loans and advances to customers | | | 76,070 | | | | 18,525 | | | | 15,732 | | | | (16,488 | ) | | | 93,839 | |
| Net investment in finance leases | | | 18 | | | | — | | | | 2,535 | | | | 20 | | | | 2,573 | |
| Securities and investments | | | 482 | | | | 14,399 | | | | 18,945 | | | | (1,865 | ) | | | 31,961 | |
| Long-term assurance business | | | — | | | | — | | | | — | | | | 2,272 | | | | 2,272 | |
| Intangible fixed assets | | | — | | | | — | | | | 341 | | | | — | | | | 341 | |
| Tangible fixed assets excluding operating lease assets | | | 239 | | | | 3 | | | | 157 | | | | (131 | ) | | | 268 | |
| Operating lease assets | | | — | | | | — | | | | 2,529 | | | | — | | | | 2,529 | |
| Other assets | | | 1,534 | | | | 3,631 | | | | 639 | | | | (373 | ) | | | 5,431 | |
| Shares in group undertakings | | | 8,171 | | | | 2,704 | | | | 1,658 | | | | (12,533 | ) | | | — | |
| Assets of long-term assurance funds | | | — | | | | — | | | | 30,978 | | | | (2,642 | ) | | | 28,336 | |
| |
Total assets | | | 91,149 | | | | 56,473 | | | | 94,319 | | | | (65,166 | ) | | | 176,775 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 18,780 | | | | 14,726 | | | | 18,667 | | | | (30,048 | ) | | | 22,125 | |
| Customer accounts | | | 57,900 | | | | 9,782 | | | | 12,227 | | | | (5,508 | ) | | | 74,401 | |
| Debt securities in issue | | | 4 | | | | 22,882 | | | | 16,430 | | | | (14,482 | ) | | | 24,834 | |
| Other liabilities | | | 2,198 | | | | 6,635 | | | | 5,794 | | | | (512 | ) | | | 14,115 | |
| Subordinated liabilities including convertible debt | | | 7,431 | | | | 332 | | | | 1,173 | | | | (1,857 | ) | | | 7,079 | |
| Liabilities of long-term assurance funds | | | — | | | | — | | | | 30,978 | | | | (2,642 | ) | | | 28,336 | |
| |
| | | | 86,313 | | | | 54,357 | | | | 85,269 | | | | (55,049 | ) | | | 170,890 | |
| Minority interests – non-equity | | | — | | | | — | | | | 560 | | | | (6 | ) | | | 554 | |
| Non-equity shareholders’ funds | | | 632 | | | | — | | | | (1,768 | ) | | | 1,768 | | | | 632 | |
| Equity Shareholders’ Funds | | | 4,204 | | | | 2,116 | | | | 10,258 | | | | (11,879 | ) | | | 4,699 | |
| |
Total liabilities | | | 91,149 | | | | 56,473 | | | | 94,319 | | | | (65,166 | ) | | | 176,775 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| At 31 December 2005 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Cash and balances at central banks | | | 370 | | | | — | | | | 1 | | | | 620 | | | | 991 | |
| Trading assets | | | — | | | | 17,613 | | | | 40,633 | | | | (15 | ) | | | 58,231 | |
| Derivative financial instruments | | | 1,227 | | | | 12,422 | | | | 1,793 | | | | (3,587 | ) | | | 11,855 | |
| Financial assets designated at fair value | | | 790 | | | | 3,810 | | | | 25,584 | | | | 413 | | | | 30,597 | |
| Loans and advances to banks | | | 33,009 | | | | 49,556 | | | | 42,582 | | | | (124,703 | ) | | | 444 | |
| Loans and advances to customers | | | 95,230 | | | | 17,545 | | | | 18,542 | | | | (35,850 | ) | | | 95,467 | |
| Securities and investments | | | — | | | | — | | | | — | | | | — | | | | — | |
| Available for sale securities | | | 272 | | | | 52 | | | | 2,159 | | | | (2,470 | ) | | | 13 | |
| Investment in subsidiary undertakings | | | 8,690 | | | | 2,641 | | | | 8,596 | | | | (19,927 | ) | | | — | |
| Intangible assets | | | — | | | | — | | | | 171 | | | | — | | | | 171 | |
| Value of in force business | | | — | | | | — | | | | 1,721 | | | | — | | | | 1,721 | |
| Property, plant and equipment | | | 298 | | | | 5 | | | | 11 | | | | — | | | | 314 | |
| Operating lease assets | | | — | | | | — | | | | 2,172 | | | | — | | | | 2,172 | |
| Investment property | | | — | | | | — | | | | 3 | | | | (3 | ) | | | — | |
| Other assets | | | 1,514 | | | | 680 | | | | 5,118 | | | | (2,254 | ) | | | 5,058 | |
| |
Total assets | | | 141,400 | | | | 104,324 | | | | 149,086 | | | | (187,776 | ) | | | 207,034 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 48,267 | | | | 43,366 | | | | 24,122 | | | | (110,138 | ) | | | 5,617 | |
| Customer accounts | | | 79,288 | | | | 9,287 | | | | 27,805 | | | | (50,491 | ) | | | 65,889 | |
| Derivative financial instruments | | | 623 | | | | 13,483 | | | | 745 | | | | (3,587 | ) | | | 11,264 | |
| Trading liabilities | | | — | | | | 19,485 | | | | 33,220 | | | | (41 | ) | | | 52,664 | |
| Financial liabilities designated at fair value | | | — | | | | 8,308 | | | | — | | | | (360 | ) | | | 7,948 | |
| Debt securities in issue | | | 4 | | | | 7,206 | | | | 14,066 | | | | — | | | | 21,276 | |
| Other borrowed funds | | | 1,452 | | | | — | | | | 1,347 | | | | (555 | ) | | | 2,244 | |
| Subordinated liabilities | | | 6,477 | | | | 269 | | | | 1,215 | | | | (1,756 | ) | | | 6,205 | |
| Insurance and reinsurance liabilities | | | — | | | | — | | | | 22,090 | | | | (589 | ) | | | 21,501 | |
| Investment contract liabilities | | | — | | | | — | | | | 3,730 | | | | (424 | ) | | | 3,306 | |
| Retirement benefit obligations | | | 1,240 | | | | — | | | | 140 | | | | — | | | | 1,380 | |
| Other liabilities | | | 1,141 | | | | 365 | | | | 3,178 | | | | (54 | ) | | | 4,630 | |
| |
Total liabilities | | | 138,492 | | | | 101,769 | | | | 131,658 | | | | (167,995 | ) | | | 203,924 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Total shareholders equity | | | 2,908 | | | | 2,555 | | | | 17,428 | | | | (19,781 | ) | | | 3,110 | |
| |
Total liabilities and equity | | | 141,400 | | | | 104,324 | | | | 149,086 | | | | (187,776 | ) | | | 207,034 | |
| |
191
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| At 31 December 2004 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Cash and balances at central banks | | | 443 | | | | — | | | | 11 | | | | — | | | | 454 | |
| Trading assets | | | — | | | | — | | | | — | | | | — | | | | — | |
| Derivative financial instruments | | | — | | | | 2,330 | | | | 47 | | | | — | | | | 2,377 | |
| Financial assets designated at fair value | | | — | | | | — | | | | — | | | | — | | | | — | |
| Loans and advances to banks | | | 23,605 | | | | 52,448 | | | | 7,810 | | | | (72,112 | ) | | | 11,751 | |
| Loans and advances to customers | | | 79,860 | | | | 3,593 | | | | 41,561 | | | | (15,598 | ) | | | 109,416 | |
| Securities and investments | | | 406 | | | | 12,730 | | | | 35,915 | | | | (1,249 | ) | | | 47,802 | |
| Available for sale securities | | | — | | | | — | | | | — | | | | — | | | | — | |
| Investment in subsidiary undertakings | | | 8,250 | | | | 2,041 | | | | 5,305 | | | | (15,596 | ) | | | — | |
| Intangible assets | | | — | | | | — | | | | 175 | | | | — | | | | 175 | |
| Value of in force business | | | — | | | | — | | | | 1,844 | | | | — | | | | 1,844 | |
| Property, plant and equipment | | | 231 | | | | 6 | | | | 152 | | | | (127 | ) | | | 262 | |
| Operating lease assets | | | — | | | | — | | | | 2,275 | | | | — | | | | 2,275 | |
| Investment property | | | — | | | | — | | | | 1,228 | | | | — | | | | 1,228 | |
| Other assets | | | 2,260 | | | | 1,172 | | | | 1,057 | | | | 2,660 | | | | 7,149 | |
| |
Total assets | | | 115,055 | | | | 74,320 | | | | 97,380 | | | | (102,022 | ) | | | 184,733 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 35,697 | | | | 35,268 | | | | 1,800 | | | | (54,353 | ) | | | 18,412 | |
| Customer accounts | | | 65,910 | | | | 11,385 | | | | 19,913 | | | | (18,548 | ) | | | 78,660 | |
| Derivative financial instruments | | | — | | | | 3,599 | | | | 66 | | | | — | | | | 3,665 | |
| Trading liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| Financial liabilities designated at fair value | | | — | | | | — | | | | — | | | | — | | | | — | |
| Debt securities in issue | | | 4 | | | | 19,779 | | | | 32,382 | | | | (15,098 | ) | | | 37,067 | |
| Other borrowed funds | | | 722 | | | | — | | | | — | | | | — | | | | 722 | |
| Subordinated liabilities | | | 5,674 | | | | 278 | | | | 776 | | | | (1,244 | ) | | | 5,484 | |
| Insurance and reinsurance liabilities | | | — | | | | — | | | | 24,923 | | | | — | | | | 24,923 | |
| Investment contract liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| Retirement benefit obligations | | | 1,060 | | | | — | | | | 137 | | | | — | | | | 1,197 | |
| Other liabilities | | | 2,701 | | | | 1,682 | | | | 6,133 | | | | (145 | ) | | | 10,371 | |
| |
Total liabilities | | | 111,768 | | | | 71,991 | | | | 86,130 | | | | (89,388 | ) | | | 180,501 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| Minority interests – non equity | | | — | | | | — | | | | 518 | | | | (6 | ) | | | 512 | |
| Total shareholders equity | | | 3,287 | | | | 2,329 | | | | 10,732 | | | | (12,628 | ) | | | 3,720 | |
| |
Total liabilities and equity | | | 115,055 | | | | 74,320 | | | | 97,380 | | | | (102,022 | ) | | | 184,733 | |
| |
US GAAP reconciliationsIFRS Cash flow statements
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | The Company | | | Treasury Services | | | Other | | | Adjustments | | | Consolidated | |
| 2004 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Income statement | | | | | | | | | | | | | | | | | | | | |
| Loss attributable to the shareholders – UK GAAP | | | (231 | ) | | | 303 | | | | 772 | | | | (764 | ) | | | 80 | |
| Dividends on preference shares | | | (48 | ) | | | — | | | | — | | | | — | | | | (48 | ) |
| |
| | | | (279 | ) | | | 303 | | | | 772 | | | | (764 | ) | | | 32 | |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 5 | | | | 5 | |
| Other intangible assets | | | — | | | | — | | | | (162 | ) | | | — | | | | (162 | ) |
| Computer software | | | (53 | ) | | | (7 | ) | | | (49 | ) | | | — | | | | (109 | ) |
| Pensions cost | | | (64 | ) | | | (2 | ) | | | (12 | ) | | | — | | | | (78 | ) |
| Securitisation | | | 30 | | | | — | | | | — | | | | — | | | | 30 | |
| Shareholders’ interest in long-term assurance business | | | — | | | | — | | | | 109 | | | | — | | | | 109 | |
| Loan origination fees | | | 12 | | | | — | | | | — | | | | — | | | | 12 | |
| Leasing | | | 12 | | | | — | | | | (11 | ) | | | — | | | | 1 | |
| Other | | | 7 | | | | (5 | ) | | | (68 | ) | | | — | | | | (66 | ) |
| Derivatives and hedging activities | | | (261 | ) | | | 297 | | | | 18 | | | | — | | | | 54 | |
| Tax effect on the above adjustments | | | 95 | | | | (85 | ) | | | 94 | | | | — | | | | 104 | |
| |
| Net (loss)/income available to ordinary shareholders – US GAAP | | | (501 | ) | | | 501 | | | | 691 | | | | (759 | ) | | | (68 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
Shareholders’ funds | | | | | | | | | | | | | | | | | | | | |
| |
| Shareholders’ funds including non-equity interests – UK GAAP | | | 4,079 | | | | 2,362 | | | | 11,111 | | | | (12,628 | ) | | | 4,924 | |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 678 | | | | 678 | |
| Other intangible assets | | | — | | | | — | | | | 89 | | | | — | | | | 89 | |
| Computer software | | | 5 | | | | 3 | | | | — | | | | — | | | | 8 | |
| Pensions cost | | | (476 | ) | | | (14 | ) | | | (93 | ) | | | — | | | | (583 | ) |
| Securitisation | | | 368 | | | | — | | | | — | | | | — | | | | 368 | |
| Shareholders’ interest in long-term assurance business | | | — | | | | — | | | | (935 | ) | | | — | | | | (935 | ) |
| Leasing | | | (36 | ) | | | — | | | | (161 | ) | | | — | | | | (197 | ) |
| Other | | | (85 | ) | | | — | | | | (53 | ) | | | — | | | | (138 | ) |
| Derivatives and hedging activities | | | 121 | | | | 84 | | | | 1 | | | | — | | | | 206 | |
| Loan origination fees | | | 70 | | | | — | | | | — | | | | — | | | | 70 | |
| Securities and Investments | | | — | | | | 52 | | | | — | | | | — | | | | 52 | |
| Dividend payable | | | — | | | | — | | | | — | | | | — | | | | — | |
| Tax effect on the above adjustments | | | 10 | | | | (38 | ) | | | 329 | | | | — | | | | 301 | |
| |
| Shareholders’ funds – US GAAP | | | 4,056 | | | | 2,449 | | | | 10,288 | | | | (11,950 | ) | | | 4,843 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
2003 | | | | | | | | | | | | | | | | | | | | |
| |
Income statement | | | | | | | | | | | | | | | | | | | | |
| Loss attributable to the shareholders – UK GAAP | | | (167 | ) | | | (416 | ) | | | (23 | ) | | | (93 | ) | | | (699 | ) |
| Dividends on preference shares | | | (60 | ) | | | — | | | | — | | | | — | | | | (60 | ) |
| |
| | | | (227 | ) | | | (416 | ) | | | (23 | ) | | | (93 | ) | | | (759 | ) |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 22 | | | | 22 | |
| Other intangible assets | | | — | | | | — | | | | (53 | ) | | | — | | | | (53 | ) |
| Computer software | | | (15 | ) | | | (13 | ) | | | (14 | ) | | | — | | | | (42 | ) |
| Pensions cost | | | (5 | ) | | | — | | | | (2 | ) | | | — | | | | (7 | ) |
| Securitisation | | | 37 | | | | — | | | | — | | | | — | | | | 37 | |
| Shareholders’ interest in long-term assurance business | | | — | | | | — | | | | 270 | | | | — | | | | 270 | |
| Loan origination fees | | | 37 | | | | — | | | | — | | | | — | | | | 37 | |
| Leasing | | | 5 | | | | — | | | | (35 | ) | | | — | | | | (30 | ) |
| Other | | | 15 | | | | 9 | | | | (22 | ) | | | — | | | | 2 | |
| Derivatives and hedging activities | | | (25 | ) | | | 300 | | | | 28 | | | | — | | | | 303 | |
| Tax effect on the above adjustments | | | (30 | ) | | | (74 | ) | | | 196 | | | | — | | | | 92 | |
| |
| Net (loss)/income available to ordinary shareholders – US GAAP | | | (208 | ) | | | (194 | ) | | | 345 | | | | (71 | ) | | | (128 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| For the year ended 31 December 2005 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Net cash flow from/ (used in) operating activities | | | (5,830 | ) | | | (17,044 | ) | | | 17,644 | | | | — | | | | (5,230 | ) |
| Net cash flow from/ (used in) investing activities | | | 46 | | | | 243 | | | | 1,747 | | | | — | | | | 2,036 | |
| Net cash flow from/ (used in) financing activities | | | 96 | | | | (38 | ) | | | 38 | | | | — | | | | 96 | |
| |
Net increase/ (decrease) in cash and cash equivalents | | | (5,688 | ) | | | (16,839 | ) | | | 19,429 | | | | — | | | | (3,098 | ) |
Cash and cash equivalents at the beginning of the period | | | (9,518 | ) | | | 26,392 | | | | (5,615 | ) | | | — | | | | 11,259 | |
| Effects of exchange rate changes on cash and cash equivalent | | | 122 | | | | — | | | | (42 | ) | | | — | | | | 80 | |
| |
Cash and cash equivalents at the end of the period | | | (15,084 | ) | | | 9,553 | | | | 13,772 | | | | — | | | | 8,241 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| For the year ended 31 December 2004 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Net cash flow from/ (used in) operating activities | | | 4,557 | | | | 18,135 | | | | (27,523 | ) | | | — | | | | (4,831 | ) |
| Net cash flow from/ (used in) investing activities | | | 996 | | | | 149 | | | | 2,986 | | | | — | | | | 4,131 | |
| Net cash flow from/ (used in) financing activities | | | (1,561 | ) | | | (32 | ) | | | 96 | | | | — | | | | (1,497 | ) |
| |
Net increase/ (decrease) in cash and cash equivalents | | | 3,992 | | | | 18,252 | | | | (24,441 | ) | | | — | | | | (2,197 | ) |
Cash and cash equivalents at the beginning of the period | | | (13,346 | ) | | | 8,140 | | | | 19,295 | | | | — | | | | 14,089 | |
| Effects of exchange rate changes on cash and cash equivalents | | | (164 | ) | | | — | | | | (469 | ) | | | — | | | | (633 | ) |
| |
Cash and cash equivalents at the end of the period | | | (9,518 | ) | | | 26,392 | | | | (5,615 | ) | | | — | | | | 11,259 | |
| |
192
Notes to the Financial Statementscontinued
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | The Company | | | Treasury Services | | | Other | | | Adjustments | | | Consolidated | |
| Shareholders’ funds | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
| Shareholders’ funds including non-equity interests – UK GAAP | | | 4,836 | | | | 2,116 | | | | 8,490 | | | | (10,111 | ) | | | 5,331 | |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 673 | | | | 673 | |
| Other intangible assets | | | — | | | | — | | | | 251 | | | | — | | | | 251 | |
| Computer software | | | 58 | | | | 10 | | | | 49 | | | | — | | | | 117 | |
| Pensions cost | | | (352 | ) | | | (15 | ) | | | (97 | ) | | | — | | | | (464 | ) |
| Securitisation | | | 310 | | | | — | | | | — | | | | — | | | | 310 | |
| Shareholders’ interest in long-term assurance business | | | — | | | | — | | | | (1,044 | ) | | | — | | | | (1,044 | ) |
| Leasing | | | (48 | ) | | | — | | | | (150 | ) | | | — | | | | (198 | ) |
| Other | | | (92 | ) | | | 5 | | | | 15 | | | | — | | | | (72 | ) |
| Derivatives and hedging activities | | | 382 | | | | (213 | ) | | | (17 | ) | | | — | | | | 152 | |
| Loan origination fees | | | 58 | | | | — | | | | — | | | | — | | | | 58 | |
| Securities and Investments | | | — | | | | 89 | | | | — | | | | — | | | | 89 | |
| Dividend payable | | | 242 | | | | — | | | | — | | | | — | | | | 242 | |
| Tax effect on the above adjustments | | | (95 | ) | | | 37 | | | | 242 | | | | — | | | | 184 | |
| |
| Shareholders’ funds – US GAAP | | | 5,299 | | | | 2,029 | | | | 7,739 | | | | (9,438 | ) | | | 5,629 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
2002 | | | | | | | | | | | | | | | | | | | | |
Income statement | | | | | | | | | | | | | | | | | | | | |
| |
| |
| Loss attributable to the shareholders – UK GAAP | | | (497 | ) | | | (137 | ) | | | (914 | ) | | | 387 | | | | (1,161 | ) |
| Dividends on preference shares | | | (62 | ) | | | — | | | | — | | | | — | | | | (62 | ) |
| |
| | | | (559 | ) | | | (137 | ) | | | (914 | ) | | | 387 | | | | (1,223 | ) |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 714 | | | | 714 | |
| Other intangible assets | | | — | | | | — | | | | (120 | ) | | | — | | | | (120 | ) |
| Computer software | | | 29 | | | | (4 | ) | | | (49 | ) | | | — | | | | (24 | ) |
| Pensions cost | | | (19 | ) | | | (1 | ) | | | (8 | ) | | | — | | | | (28 | ) |
| Securitisation | | | 26 | | | | — | | | | — | | | | — | | | | 26 | |
| Shareholders’ interest in long-term assurance business | | | — | | | | — | | | | (673 | ) | | | — | | | | (673 | ) |
| Loan origination fees | | | 73 | | | | — | | | | — | | | | — | | | | 73 | |
| Leasing | | | 3 | | | | — | | | | 91 | | | | — | | | | 94 | |
| Other | | | (118 | ) | | | 31 | | | | 50 | | | | — | | | | (37 | ) |
| Derivatives and hedging activities | | | 108 | | | | (132 | ) | | | (114 | ) | | | — | | | | (138 | ) |
| Tax effect on the above adjustments | | | (31 | ) | | | 32 | | | | (72 | ) | | | — | | | | (71 | ) |
| |
| Net (loss) income available to ordinary shareholders – US GAAP | | | (488 | ) | | | (211 | ) | | | (1,809 | ) | | | 1,101 | | | | (1,407 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
Shareholders’ funds | | | | | | | | | | | | | | | | | | | | |
| |
| Shareholders’ funds including non-equity interests – UK GAAP | | | 5,521 | | | | 2,440 | | | | 10,845 | | | | (12,456 | ) | | | 6,350 | |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 846 | | | | 846 | |
| Other intangible assets | | | — | | | | — | | | | 304 | | | | — | | | | 304 | |
| Computer software | | | 73 | | | | 23 | | | | 63 | | | | — | | | | 159 | |
| Pensions cost | | | (304 | ) | | | (12 | ) | | | (123 | ) | | | — | | | | (439 | ) |
| Securitisation | | | 188 | | | | — | | | | — | | | | — | | | | 188 | |
| Shareholders’ interest in long-term assurance business | | | — | | | | — | | | | (1,284 | ) | | | — | | | | (1,284 | ) |
| Leasing | | | (53 | ) | | | — | | | | (115 | ) | | | | | | | (168 | ) |
| Other | | | (135 | ) | | | (4 | ) | | | 37 | | | | — | | | | (102 | ) |
| Derivatives and hedging activities | | | 232 | | | | (559 | ) | | | (83 | ) | | | — | | | | (410 | ) |
| Loan origination fees | | | 19 | | | | — | | | | — | | | | — | | | | 19 | |
| Securities and investments | | | — | | | | 137 | | | | — | | | | — | | | | 137 | |
| Dividend payable | | | 107 | | | | — | | | | — | | | | — | | | | 107 | |
| Tax effect on the above adjustments | | | (6 | ) | | | 125 | | | | 73 | | | | — | | | | 192 | |
| |
| Shareholders’ funds – US GAAP | | | 5,642 | | | | 2,150 | | | | 9,717 | | | | (11,610 | ) | | | 5,899 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| 2005 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Income statement | | | | | | | | | | | | | | | | | | | | |
Profit/(loss) for the year — IFRS | | | 691 | | | | 176 | | | | 462 | | | | (909 | ) | | | 420 | |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | (533 | ) | | | (533 | ) |
| Other intangible assets | | | — | | | | — | | | | (14 | ) | | | — | | | | (14 | ) |
| Pensions cost | | | (57 | ) | | | (2 | ) | | | (19 | ) | | | — | | | | (78 | ) |
| Securities and investments | | | (16 | ) | | | (50 | ) | | | — | | | | — | | | | (66 | ) |
| Securitised assets | | | 60 | | | | — | | | | — | | | | (10 | ) | | | 50 | |
| Derivatives | | | — | | | | — | | | | — | | | | — | | | | — | |
| Gain on sale of investment property | | | — | | | | — | | | | 286 | | | | — | | | | 286 | |
| Value of business acquired | | | — | | | | — | | | | (82 | ) | | | — | | | | (82 | ) |
| Deferred acquisition costs | | | — | | | | — | | | | (78 | ) | | | — | | | | (78 | ) |
| Deferred income reserve | | | — | | | | — | | | | 4 | | | | — | | | | 4 | |
| Insurance claims and policy holder liabilities | | | — | | | | — | | | | 20 | | | | — | | | | 20 | |
| Loan origination fees and costs | | | 56 | | | | — | | | | (2 | ) | | | — | | | | 54 | |
| Debt securities in issue | | | 397 | | | | (217 | ) | | | — | | | | — | | | | 180 | |
| Preference shares | | | 88 | | | | — | | | | — | | | | — | | | | 88 | |
| Consolidation | | | — | | | | — | | | | — | | | | — | | | | — | |
| Derecognition of liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| Other | | | (6 | ) | | | 3 | | | | 7 | | | | — | | | | 4 | |
| Tax effect of the above adjustments | | | (130 | ) | | | 80 | | | | 48 | | | | — | | | | (2 | ) |
| |
Net (loss)/income — US GAAP | | | 1,083 | | | | (10 | ) | | | 632 | | | | (1,452 | ) | | | 253 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | | | | | | | | | | |
| |
Shareholders’ equity— IFRS | | | 2,908 | | | | 2,555 | | | | 17,428 | | | | (19,781 | ) | | | 3,110 | |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 326 | | | | 326 | |
| Other intangible assets | | | — | | | | — | | | | 36 | | | | — | | | | 36 | |
| Pensions cost | | | 443 | | | | 14 | | | | 146 | | | | — | | | | 603 | |
| Securities and investments | | | (16 | ) | | | (146 | ) | | | — | | | | — | | | | (162 | ) |
| Securitised assets | | | 339 | | | | — | | | | — | | | | (8 | ) | | | 331 | |
| Derivatives | | | — | | | | — | | | | — | | | | — | | | | — | |
| Value of in force business | | | — | | | | — | | | | (1,301 | ) | | | — | | | | (1,301 | ) |
| Deferred acquisition costs | | | — | | | | — | | | | 774 | | | | — | | | | 774 | |
| Policy liabilities | | | — | | | | — | | | | 95 | | | | — | | | | 95 | |
| Loan origination fees and costs | | | 187 | | | | — | | | | — | | | | — | | | | 187 | |
| Debt securities in issue | | | 785 | | | | (51 | ) | | | — | | | | — | | | | 734 | |
| Preference shares | | | 612 | | | | — | | | | — | | | | — | | | | 612 | |
| Derecognition of liabilities | | | — | | | | — | | | | — | | | | — | | | | — | |
| Other | | | 8 | | | | (1 | ) | | | 14 | | | | — | | | | 21 | |
| Tax effect of the above adjustments | | | (524 | ) | | | 55 | | | | 63 | | | | — | | | | (406 | ) |
| |
Shareholders’ equity — US GAAP | | | 4,742 | | | | 2,426 | | | | 17,255 | | | | (19,463 | ) | | | 4,960 | |
| |
193
Notes to the Financial Statementscontinued
UKUS GAAP
Cash flow statements reconciliations
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | The Company | | | Treasury Services | | | Other | | | Adjustments | | | Consolidated | |
| | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
For the year ended 31 December 2004 | | | | | | | | | | | | | | | | | | | | |
| Net cash inflow from operating activities | | | 945 | | | | 136 | | | | (3,100 | ) | | | — | | | | (2,019 | ) |
| Net cash outflow from returns on investment and servicing of finance | | | (288 | ) | | | 1 | | | | (87 | ) | | | — | | | | (374 | ) |
| Total taxation paid | | | 2 | | | | 129 | | | | (143 | ) | | | — | | | | (12 | ) |
| Net cash outflow from capital expenditure and financial investment | | | 62 | | | | 1,676 | | | | (1,204 | ) | | | — | | | | 534 | |
| Acquisitions and disposals | | | 875 | | | | — | | | | 2,305 | | | | — | | | | 3,180 | |
| Equity dividends paid | | | (699 | ) | | | 50 | | | | (48 | ) | | | — | | | | (697 | ) |
| |
| Net cash (outflow)/inflow before financing | | | 897 | | | | 1,992 | | | | (2,277 | ) | | | — | | | | 612 | |
| Net cash inflow from financing | | | (862 | ) | | | (52 | ) | | | 114 | | | | — | | | | (800 | ) |
| |
| (Decrease)/increase in cash | | | 35 | | | | 1,940 | | | | (2,163 | ) | | | — | | | | (188 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
For the year ended 31 December 2003 | | | | | | | | | | | | | | | | | | | | |
| |
| Net cash inflow from operating activities | | | (2,993 | ) | | | (21,547 | ) | | | (8,138 | ) | | | — | | | | (32,678 | ) |
| Net cash outflow from returns on investment and servicing of finance | | | (284 | ) | | | — | | | | (88 | ) | | | — | | | | (372 | ) |
| Total taxation paid | | | (145 | ) | | | 54 | | | | (8 | ) | | | — | | | | (99 | ) |
| Net cash outflow from capital expenditure and financial investment | | | 499 | | | | (408 | ) | | | 25,098 | | | | — | | | | 25,189 | |
| Acquisitions and disposals | | | 3,320 | | | | 22,570 | | | | (17,087 | ) | | | — | | | | 8,803 | |
| Equity dividends paid | | | (216 | ) | | | 91 | | | | (91 | ) | | | — | | | | (216 | ) |
| |
| Net cash (outflow)/inflow before financing | | | 181 | | | | 760 | | | | (314 | ) | | | — | | | | 627 | |
| Net cash inflow from financing | | | (122 | ) | | | (760 | ) | | | 689 | | | | — | | | | (193 | ) |
| |
| (Decrease)/increase in cash | | | 59 | | | | — | | | | 375 | | | | — | | | | 434 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
For the year ended 31 December 2002 | | | | | | | | | | | | | | | | | | | | |
| |
| Net cash inflow from operating activities | | | 1,298 | | | | (2,024 | ) | | | (10,226 | ) | | | — | | | | (10,952 | ) |
| Net cash outflow from returns on investment and servicing of finance | | | (292 | ) | | | (86 | ) | | | (84 | ) | | | — | | | | (462 | ) |
| Total taxation paid | | | (143 | ) | | | (43 | ) | | | (310 | ) | | | — | | | | (496 | ) |
| Net cash outflow from capital expenditure and financial investment | | | (900 | ) | | | 4,895 | | | | 5,560 | | | | — | | | | 9,555 | |
| Acquisitions and disposals | | | (48 | ) | | | — | | | | (488 | ) | | | — | | | | (536 | ) |
| Equity dividends paid | | | (648 | ) | | | (449 | ) | | | 449 | | | | — | | | | (648 | ) |
| |
| Net cash (outflow)/inflow before financing | | | (733 | ) | | | 2,293 | | | | (5,099 | ) | | | — | | | | (3,539 | ) |
| Net cash inflow from financing | | | 626 | | | | 110 | | | | (49 | ) | | | — | | | | 687 | |
| |
| (Decrease)/increase in cash | | | (107 | ) | | | 2,403 | | | | (5,148 | ) | | | — | | | | (2,852 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| 2004 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Income statement | | | | | | | | | | | | | | | | | | | | |
Profit/(loss) for the year — IFRS | | | (284 | ) | | | 197 | | | | 545 | | | | (512 | ) | | | (54 | ) |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | (9 | ) | | | (9 | ) |
| Other intangible assets | | | — | | | | — | | | | (15 | ) | | | — | | | | (15 | ) |
| Pensions cost | | | (65 | ) | | | (2 | ) | | | (12 | ) | | | — | | | | (79 | ) |
| Securities and investments | | | — | | | | — | | | | — | | | | — | | | | — | |
| Securitised assets | | | 30 | | | | — | | | | — | | | | — | | | | 30 | |
| Derivatives | | | (261 | ) | | | 297 | | | | 18 | | | | — | | | | 54 | |
| Gain on sale of investment property | | | — | | | | — | | | | 27 | | | | — | | | | 27 | |
| Value of business acquired | | | — | | | | — | | | | 5 | | | | — | | | | 5 | |
| Deferred acquisition costs | | | — | | | | — | | | | (69 | ) | | | — | | | | (69 | ) |
| Deferred income reserve | | | — | | | | — | | | | (4 | ) | | | — | | | | (4 | ) |
| Insurance claims and policy holder liabilities | | | — | | | | — | | | | 195 | | | | — | | | | 195 | |
| Loan origination fees and costs | | | 12 | | | | — | | | | — | | | | — | | | | 12 | |
| Debt securities in issue | | | — | | | | — | | | | — | | | | — | | | | — | |
| Preference shares | | | — | | | | — | | | | — | | | | — | | | | — | |
| Consolidation | | | (49 | ) | | | — | | | | — | | | | — | | | | (49 | ) |
| Derecognition of liabilities | | | (9 | ) | | | — | | | | (32 | ) | | | — | | | | (41 | ) |
| Other | | | 24 | | | | (5 | ) | | | (35 | ) | | | — | | | | (16 | ) |
| Tax effect of the above adjustments | | | (81 | ) | | | 87 | | | | (13 | ) | | | — | | | | (7 | ) |
| |
Net (loss)/income — US GAAP | | | (683 | ) | | | 574 | | | | 610 | | | | (521 | ) | | | (20 | ) |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Abbey National | | | | | | | | | | |
| | | | | | | Treasury | | | | | | | | | | |
| | | The Company | | | Services | | | Other | | | Adjustments | | | Consolidated | |
| 2004 | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Shareholders’ equity | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity– IFRS | | | 3,287 | | | | 2,329 | | | | 10,732 | | | | (12,628 | ) | | | 3,720 | |
| US GAAP adjustments: | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | — | | | | — | | | | — | | | | 859 | | | | 859 | |
| Other intangible assets | | | — | | | | — | | | | 50 | | | | — | | | | 50 | |
| Pensions cost | | | 482 | | | | 14 | | | | 94 | | | | — | | | | 590 | |
| Securities and investments | | | — | | | | 52 | | | | — | | | | — | | | | 52 | |
| Securitised assets | | | 368 | | | | — | | | | — | | | | — | | | | 368 | |
| Derivatives | | | 121 | | | | 216 | | | | 1 | | | | — | | | | 338 | |
| Value of in force business | | | — | | | | — | | | | (1,360 | ) | | | — | | | | (1,360 | ) |
| Deferred acquisition costs | | | — | | | | — | | | | 885 | | | | — | | | | 885 | |
| Policy liabilities | | | — | | | | — | | | | (185 | ) | | | — | | | | (185 | ) |
| Loan origination fees and costs | | | 70 | | | | — | | | | — | | | | — | | | | 70 | |
| Debt securities in issue | | | — | | | | (132 | ) | | | — | | | | — | | | | (132 | ) |
| Preference shares | | | — | | | | — | | | | — | | | | — | | | | — | |
| Derecognition of liabilities | | | (154 | ) | | | — | | | | 6 | | | | — | | | | (148 | ) |
| Other | | | (3 | ) | | | 1 | | | | 3 | | | | — | | | | 1 | |
| Tax effect of the above adjustments | | | (265 | ) | | | (45 | ) | | | 45 | | | | — | | | | (265 | ) |
| |
Shareholders’ equity – US GAAP | | | 3,906 | | | | 2,435 | | | | 10,271 | | | | (11,769 | ) | | | 4,843 | |
| |
194
Financial Statements
Five year record
Selected financial data
The
IFRS financial information set forth below for the twelve month periods ended 31 December
2004, 20032005 and
2002,2004 and as at 31 December
20042005 and
20032004 has been derived from the Consolidated Financial Statements of the Group
prepared in accordance with IFRS included elsewhere in this Annual Report. The information should be read in connection with, and is qualified in its entirety by reference to, the Group’s consolidated financial statements and the notes thereto. Financial information set forth below for the twelve-month periods ended 31 December
20012003, 2002 and
2000,2001, and as at 31 December
2003, 2002
2001 and
2000,2001, has been derived from the audited Consolidated Financial Statements of the Group for
2003, 2002
and 2001
and 2000.not included in this Annual Report. The financial information in this selected consolidated financial and statistical data does not constitute statutory accounts within the meaning of the Companies Act 1985. The auditors’ report in the financial statements for each of the five years ended 31 December
20042005 was unqualified and did not include a statement under sections 237(2) and 237(3) of the Companies Act 1985. The Consolidated Financial Statements of the Group for the years ended 31 December
2005, 2004, 2003, 2002
2001 and
2000,2001 were audited by Deloitte & Touche
LLP, independent accountants. The Group’s Consolidated Financial Statements
for the twelve-month periods ended 31 December 2005 and 2004 included elsewhere in this Annual Report have been prepared in accordance with
UK GAAP,IFRS, which differ in certain significant respects from US GAAP. Certain significant differences between
UK GAAPIFRS and US GAAP are discussed in
note 58notes 55 to 57 to the Consolidated Financial Statements, and notes
6158 and
6259 to the Consolidated Financial Statements include reconciliations of certain amounts calculated in accordance with
UK GAAPIFRS to US GAAP.
Profit and loss accountsIncome Statements
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | 2004 | | | 2004 | | | (restated) | | | (restated) | | | (restated) | | | (restated) | |
| | | $m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Net interest income(1, 5) | | | 2,723 | | | | 1,530 | | | | 2,062 | | | | 2,584 | | | | 2,692 | | | | 2,680 | |
Fees, commissions and other income(1, 2) | | | 2,075 | | | | 1,166 | | | | 471 | | | | 981 | | | | 1,400 | | | | 1,512 | |
| Total operating income | | | 4,798 | | | | 2,696 | | | | 2,533 | | | | 3,565 | | | | 4,092 | | | | 4,192 | |
Operating expenses excluding impairment of goodwill and operating lease depreciation(7) | | | (3,835 | ) | | | (2,154 | ) | | | (2,179 | ) | | | (2,019 | ) | | | (1,856 | ) | | | (1,819 | ) |
| Impairment of goodwill | | | — | | | | — | | | | (18 | ) | | | (1,138 | ) | | | — | | | | — | |
Depreciation on operating lease assets(2) | | | (269 | ) | | | (151 | ) | | | (251 | ) | | | (280 | ) | | | (256 | ) | | | (178 | ) |
| Provisions | | | (210 | ) | | | (118 | ) | | | (771 | ) | | | (1,075 | ) | | | (510 | ) | | | (326 | ) |
| |
(Loss)/profit on ordinary activities before tax(6) | | | 484 | | | | 273 | | | | (686 | ) | | | (947 | ) | | | 1,470 | | | | 1,869 | |
| Tax on (loss)/profit on ordinary activities | | | (256 | ) | | | (144 | ) | | | 42 | | | | (152 | ) | | | (464 | ) | | | (513 | ) |
| |
(Loss)/profit on ordinary activities after tax | | | 228 | | | | 129 | | | | (644 | ) | | | (1,099 | ) | | | 1,006 | | | | 1,356 | |
| Minority interests – non-equity | | | (87 | ) | | | (49 | ) | | | (55 | ) | | | (62 | ) | | | (59 | ) | | | (51 | ) |
| |
(Loss)/profit for the financial year attributable to the shareholders of Abbey National plc | | | 141 | | | | 80 | | | | (699 | ) | | | (1,161 | ) | | | 947 | | | | 1,305 | |
| Transfer (to)/from non-distributable reserve | | | 84 | | | | 47 | | | | (200 | ) | | | 263 | | | | 161 | | | | (134 | ) |
| Dividends including amounts attributable to non-equity interests | | | (1,122 | ) | | | (631 | ) | | | (424 | ) | | | (424 | ) | | | (762 | ) | | | (687 | ) |
| |
Retained (loss)/profit for the year | | | (897 | ) | | | (504 | ) | | | (1,323 | ) | | | (1,322 | ) | | | 346 | | | | 484 | |
| |
Selected UK GAAP profit and loss account data | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Earnings/(loss) per ordinary share (pence and cents) | | | | | | | | | | | | | | | | | | | | | | | | |
| – basic | | | 3.9c | | | | 2.2p | | | | (52.4 | )p | | | (84.8 | )p | | | 63.2p | | | | 89.2p | |
| – diluted | | | 3.9c | | | | 2.2p | | | | (52.4 | )p | | | (84.3 | )p | | | 62.8p | | | | 88.6p | |
| Dividends per ordinary share (pence and cents) | | | | | | | | | | | | | | | | | | | | | | | | |
– net(3) | | | 70.0c | | | | 39.3p | | | | 25.0p | | | | 25.0p | | | | 50.0p | | | | 45.5p | |
– gross equivalent (4) | | | 77.8c | | | | 43.7p | | | | 27.8p | | | | 27.8p | | | | 55.6p | | | | 50.6p | |
| Dividend cover (times) | | | 0.10 | | | | 0.10 | | | | (1.60 | ) | | | (2.70 | ) | | | 1.20 | | | | 1.90 | |
| |
Selected US GAAP profit and loss account data | | | | | | | | | | | | | | | | | | | | | | | | |
| |
(Loss)/income from continuing operations(8) | | | (183 | ) | | | (103 | ) | | | 278 | | | | (685 | ) | | | 1,485 | | | | — | |
| Net (loss)/income available to ordinary shareholders | | | (121 | ) | | | (68 | ) | | | (128 | ) | | | (1,407 | ) | | | 947 | | | | 1,175 | |
(Loss)/earnings per ordinary share (pence) from continuing operations(8) | | | | | | | | | | | | | | | | | | | | | | | | |
| – basic and diluted | | | (12.6 | )c | | | (7.1 | )p | | | (19.2 | )p | | | (47.5 | )p | | | 63.4 | p | | | — | |
| from net (loss)/income available to ordinary shareholders | | | | | | | | | | | | | | | | | | | | | | | | |
| – basic and diluted | | | (8.3 | )c | | | (4.7 | )p | | | (8.8 | )p | | | (98.2 | )p | | | 66.2 | p | | | 83.2p | |
| |
| | | | | | | | | | | | | |
| | | 2005(1) | | | 2005(2) | | | 2004 | |
| | | $m | | | £m | | | £m | |
| |
Net interest income | | | 2,076 | | | | 1,207 | | | | 1,463 | |
| |
Net fee and commission income | | | 1,121 | | | | 652 | | | | 538 | |
| Dividend income | | | 2 | | | | 1 | | | | 1 | |
| Net earned insurance premiums | | | 2,105 | | | | 1,224 | | | | 750 | |
| Net trading income – (Banking and Life Assurance) | | | 5,373 | | | | 3,124 | | | | 846 | |
| Other operating income | | | 370 | | | | 215 | | | | 341 | |
| |
Total operating income | | | 11,047 | | | | 6,423 | | | | 3,939 | |
| |
| Net insurance claims incurred and movement in policyholder liabilities | | | (6,335 | ) | | | (3,683 | ) | | | (1,094 | ) |
| |
Total income net of insurance claims | | | 4,712 | | | | 2,740 | | | | 2,845 | |
| |
| Administration expenses | | | (2,965 | ) | | | (1,724 | ) | | | (2,221 | ) |
| Depreciation and amortisation | | | (342 | ) | | | (199 | ) | | | (547 | ) |
| |
Total operating expenses | | | (3,307 | ) | | | (1,923 | ) | | | (2,768 | ) |
| Impairment losses on loans and advances | | | (375 | ) | | | (218 | ) | | | 55 | |
| Impairment recoveries / (losses) on fixed asset investments | | | – | | | | – | | | | 80 | |
| Provisions for contingent liabilities and commitments | | | (5 | ) | | | (3 | ) | | | (233 | ) |
| |
Profit/(loss) before tax | | | 1,025 | | | | 596 | | | | (21 | ) |
| Taxation expense | | | (303 | ) | | | (176 | ) | | | (33 | ) |
| |
Profit/(loss) for the year | | | 722 | | | | 420 | | | | (54 | ) |
| |
195
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005(1) | | | 2005(3) | | | 2004(4) | | | 2003 | | | 2002 | | | 2001 | |
| | | $m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Selected US GAAP income statement data | | | | | | | | | | | | | | | | | | | | | | | | |
| Profit/(loss) from continuing operations | | | 344 | | | | 200 | | | | (54 | ) | | | 278 | | | | (685 | ) | | | 1,485 | |
| Net income/(loss) | | | 435 | | | | 253 | | | | (20 | ) | | | (123 | ) | | | (1,407 | ) | | | 930 | |
| |
Financial Statements
Five year record Continued
Balance sheets
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| | | $m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash, treasury bills and other eligible bills | | | 4,351 | | | | 2,444 | | | | 2,070 | | | | 1,879 | | | | 2,983 | | | | 1,596 | |
| Loans and advances to banks | | | 18,063 | | | | 10,148 | | | | 7,155 | | | | 6,601 | | | | 9,874 | | | | 12,168 | |
| Loans and advances to customers before non-recourse finance | | | 141,210 | | | | 79,331 | | | | 84,488 | | | | 81,427 | | | | 78,650 | | | | 81,752 | |
| Loans and advances subject to securitisation | | | 51,577 | | | | 28,976 | | | | 23,833 | | | | 24,156 | | | | 18,883 | | | | 7,927 | |
| Less: non-recourse finance | | | (26,874 | ) | | | (15,098 | ) | | | (14,482 | ) | | | (15,160 | ) | | | (12,952 | ) | | | (4,629 | ) |
| Loans and advances to customers | | | 165,913 | | | | 93,209 | | | | 93,839 | | | | 90,423 | | | | 84,581 | | | | 85,050 | |
| Net investment in finance leases | | | 2,044 | | | | 1,148 | | | | 2,573 | | | | 3,447 | | | | 4,738 | | | | 5,192 | |
| Securities and investments | | | 42,468 | | | | 23,859 | | | | 31,961 | | | | 60,770 | | | | 68,673 | | | | 69,573 | |
Long-term assurance business(8) | | | 5,283 | | | | 2,968 | | | | 2,272 | | | | 2,316 | | | | 1,662 | | | | 1,513 | |
| Intangible fixed assets | | | 564 | | | | 317 | | | | 341 | | | | 376 | | | | 1,243 | | | | 245 | |
| Tangible fixed assets excluding operating lease assets | | | 438 | | | | 246 | | | | 268 | | | | 371 | | | | 336 | | | | 389 | |
| Operating lease assets | | | 4,166 | | | | 2,341 | | | | 2,529 | | | | 2,573 | | | | 2,522 | | | | 1,963 | |
| Tangible fixed assets | | | 4,604 | | | | 2,587 | | | | 2,797 | | | | 2,944 | | | | 2,858 | | | | 2,352 | |
| Other assets | | | 10,469 | | | | 5,881 | | | | 5,431 | | | | 7,027 | | | | 7,340 | | | | 7,565 | |
| Assets of long-term assurance funds | | | 48,381 | | | | 27,180 | | | | 28,336 | | | | 29,411 | | | | 30,415 | | | | 19,083 | |
| |
| Total assets | | | 302,140 | | | | 169,741 | | | | 176,775 | | | | 205,194 | | | | 214,367 | | | | 204,337 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Deposits by banks | | | 32,774 | | | | 18,412 | | | | 22,125 | | | | 24,174 | | | | 24,945 | | | | 34,996 | |
| Customer accounts | | | 140,354 | | | | 78,850 | | | | 74,401 | | | | 76,766 | | | | 75,809 | | | | 66,795 | |
| Debt securities in issue | | | 39,105 | | | | 21,969 | | | | 24,834 | | | | 48,079 | | | | 54,413 | | | | 57,078 | |
| Other liabilities | | | 21,025 | | | | 11,812 | | | | 14,115 | | | | 12,484 | | | | 13,739 | | | | 12,978 | |
Subordinated liabilities including convertible debt(5) | | | 10,826 | | | | 6,082 | | | | 7,079 | | | | 7,303 | | | | 6,887 | | | | 5,871 | |
| Liabilities of long-term assurance funds | | | 48,380 | | | | 27,180 | | | | 28,336 | | | | 29,411 | | | | 30,415 | | | | 19,083 | |
| |
| | | | 292,463 | | | | 164,305 | | | | 170,890 | | | | 198,217 | | | | 206,208 | | | | 196,801 | |
| Minority interests – non-equity | | | 912 | | | | 512 | | | | 554 | | | | 627 | | | | 681 | | | | 664 | |
Non-equity shareholders’ funds(5) | | | 1,125 | | | | 632 | | | | 632 | | | | 748 | | | | 748 | | | | 450 | |
| Equity shareholders’ funds | | | 7,640 | | | | 4,292 | | | | 4,699 | | | | 5,602 | | | | 6,730 | | | | 6,422 | |
| |
Total liabilities | | | 302,140 | | | | 169,741 | | | | 176,775 | | | | 205,194 | | | | 214,367 | | | | 204,337 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Selected UK GAAP balance sheet data | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Shareholders’ funds, inc non-equity | | | 8,765 | | | | 4,924 | | | | 5,331 | | | | 6,350 | | | | 7,478 | | | | 6,872 | |
| Book value of equity shareholders’ funds per ordinary share | | | 514.1c | | | | 288.8p | | | | 321.3p | | | | 384.2p | | | | 468.3p | | | | 450.6p | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Selected US GAAP balance sheet data | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Shareholders’ funds | | | 8,621 | | | | 4,843 | | | | 5,629 | | | | 5,899 | | | | 8,059 | | | | 7,634 | |
| Book value of equity shareholders’ funds per ordinary share | | | 504.4c | | | | 283.4p | | | | 341.7p | | | | 352.6p | | | | 497.6p | | | | 501.8p | |
| Number of shares in issue, adjusted for changes in capital (m) | | | 1,465 | | | | 1,465 | | | | 1,453 | | | | 1,450 | | | | 1,440 | | | | 1,428 | |
| Total assets | | | 331,552 | | | | 186,265 | | | | 197,836 | | | | 188,161 | | | | 188,689 | | | | 177,773 | |
| |
(1) | | Equivalent US dollar amounts are shown in “Shareholder information – Dividends on ordinary shares”, included elsewhere in this Annual Report. |
|
(2)1. | | The calculation of the gross equivalent dividend per ordinary share applies a tax rate of 10% for grossing-up purposes for dividends. |
|
(3) | | Prior to 2002, Reserve capital instruments were reported as a component of non-equity shareholders’ funds, with coupon payments treated as a non-equity appropriation of profit. Following an accounting presentation change, Reserve capital instruments are now reported within Subordinated liabilities, with coupon payments recorded as Interest payable, within Net interest income. |
The 2001 comparative amounts have been restated to reflect this accounting policy change and as a consequence profit before tax has been reduced by £19m, with profits attributable to shareholders remaining unchanged. Shareholders’ funds including non-equity interests have been reduced by £297m in 2001. Comparative amounts for years prior to 2001 are unaffected. This change results from the application of UITF 33, Obligations in capital instruments, which first applies to the financial statements for the year ended 31 December 2002.
(4) | The application of FRS 19, Deferred tax, for the year ended 31 December 2002 has resulted in deferred taxation being provided on all timing differences that have not reversed before the balance sheet date at the rate of tax expected to apply when those timing differences will reverse. Deferred tax assets are now recognised to the extent that they are regarded as recoverable. Previously, deferred taxation was accounted for where it was probable that a liability or asset would arise. The 2001 and 2000 comparative amounts have been restated to reflect this accounting policy change and as a consequence the tax charge has been reduced by £24m (2001) and £16m (2000), respectively. Shareholders’ funds including non-equity interests have been increased by £120m (2001) and£96m (2000) respectively. |
|
(5) | Amounts stated in dollars have been translated from sterling at the rate of £1.00 – $1.78,$1.72, the noon buying rate on 31 December 20042005. |
| |
(6) 2. | Prior | Abbey, in line with all listed entities in the European Union, was required to 2002, the costs of equity-based instruments issued to employees under compensation schemes were generally accounted for under the intrinsic value method. Abbey now accountsadopt International Financial Reporting Standards (“IFRS”) in preparing its consolidated financial statements for the costs of share-based instruments on a fair value basis. The costs of share-based payments are computed by referenceyear ended 31 December 2005. Up to 31 December 2004, the grant date; such costs are expensed over the vesting period of the instrument. The 2001Group prepared its financial statements in accordance with UK Generally Accepted Accounting Principles (“UK GAAP”). Key standards IAS 32 “Financial Instruments: Disclosure and 2000 ProfitPresentation”, IAS 39 “Financial Instruments: Recognition and Loss accountsMeasurement” and statements of total recognised gains and losses comparative amountsIFRS 4 “Insurance Contracts” have been restatedapplied prospectively from 1 January 2005. All other standards are required to reflect this accounting policy change and as a consequence profit before tax has been reduced by £6m (2001) and £4m (2000) respectively, with a corresponding credit to the statement of total recognised gains and losses. No prior period adjustment to shareholders’ funds is required.be applied retrospectively. |
| |
(7) 3. | In 2002 certain adjustments were made | Abbey early adopted SFAS 155 on 1 January 2005. Under SFAS 155, financial assets and financial liabilities may be measured at fair value through the income statement where they contain substantive embedded derivatives that would otherwise require bifurcation under SFAS 133. Prior to period end market values1 January 2005, such an option did not exist. Abbey early adopted the fair value option provided under SFAS 155 principally for selected debt securities in reporting long-term assurance business. The 2001 and 2000 comparative amounts have been restatedissue in order to reflect this change inachieve greater consistency with the accounting policy. The reported earnings in these periods have been reduced by £443m and £102m, respectively. See note 21 “Long term assurance business” for further information.requirements of the fair value option under IAS 39. |
| |
(8) 4. | Determination | In 2004, Abbey adopted FIN 46R “Consolidation of Variable Interest Entities” which changed the method of determining whether certain entities, including securitisation entities, should be included in Abbey’s consolidated financial statements. The application of FIN 46R did not have any effect on Abbey’s profit/(loss) from continuing operations or net profit/(loss). |
195
Financial Statements
Selected financial data
Balance sheets
| | | | | | | | | | | | | | | | | |
| | | | | | | 2005(1) | | | 2005(2) | | | 2004 | |
| | | Notes | | | $m | | | £m | | | £m | |
| |
Assets | | | | | | | | | | | | | | | | |
| Cash and balances at central banks | | | 13 | | | | 1,705 | | | | 991 | | | | 454 | |
| Trading assets | | | 14 | | | | 100,157 | | | | 58,231 | | | | — | |
| Derivative financial instruments | | | 15 | | | | 20,391 | | | | 11,855 | | | | 2,377 | |
| Financial assets designated at fair value | | | 16 | | | | 52,627 | | | | 30,597 | | | | — | |
| Loans and advances to banks | | | 17 | | | | 764 | | | | 444 | | | | 11,751 | |
| Loans and advances to customers | | | 18 | | | | 164,203 | | | | 95,467 | | | | 109,416 | |
| Debt securities | | | 19 | | | | — | | | | — | | | | 37,010 | |
| Equity securities and other variable yield securities | | | 20 | | | | — | | | | — | | | | 10,792 | |
| Available for sale securities | | | 22 | | | | 22 | | | | 13 | | | | — | |
| Investment in associated undertakings | | | 24 | | | | 41 | | | | 24 | | | | 25 | |
| Intangible assets | | | 25 | | | | 294 | | | | 171 | | | | 175 | |
| Value of in-force business | | | 26 | | | | 2,960 | | | | 1,721 | | | | 1,844 | |
| Property, plant and equipment | | | 27 | | | | 540 | | | | 314 | | | | 262 | |
| Operating lease assets | | | 28 | | | | 3,736 | | | | 2,172 | | | | 2,275 | |
| Investment property | | | 29 | | | | — | | | | — | | | | 1,228 | |
| Current tax assets | | | | | | | 404 | | | | 235 | | | | 242 | |
| Deferred tax assets | | | 30 | | | | 1,369 | | | | 796 | | | | 501 | |
| Other assets | | | 31 | | | | 6,885 | | | | 4,003 | | | | 6,381 | |
| |
Total assets | | | | | | | 356,098 | | | | 207,034 | | | | 184,733 | |
| |
| | | | | | | | | | | | | | | | | |
| Deposits by banks | | | 32 | | | | 9,661 | | | | 5,617 | | | | 18,412 | |
| Customer accounts | | | 33 | | | | 113,329 | | | | 65,889 | | | | 78,660 | |
| Derivative financial instruments | | | 15 | | | | 19,374 | | | | 11,264 | | | | 3,665 | |
| Trading liabilities | | | 34 | | | | 90,582 | | | | 52,664 | | | | — | |
| Financial liabilities designated at fair value | | | 35 | | | | 13,670 | | | | 7,948 | | | | — | |
| Debt securities in issue | | | 36 | | | | 36,595 | | | | 21,276 | | | | 37,067 | |
| Other borrowed funds | | | 37 | | | | 3,860 | | | | 2,244 | | | | 722 | |
| Subordinated liabilities | | | 38 | | | | 10,673 | | | | 6,205 | | | | 5,484 | |
| Insurance and reinsurance liabilities | | | 39 | | | | 36,982 | | | | 21,501 | | | | 24,923 | |
| Macro hedge of interest rate risk | | | | | | | 22 | | | | 13 | | | | — | |
| Other liabilities | | | 40 | | | | 5,487 | | | | 3,190 | | | | 8,844 | |
| Investment contract liabilities | | | 41 | | | | 5,686 | | | | 3,306 | | | | — | |
| Other provisions | | | 42 | | | | 435 | | | | 253 | | | | 302 | |
| Current tax liabilities | | | | | | | 495 | | | | 288 | | | | 161 | |
| Deferred tax liabilities | | | 30 | | | | 1,524 | | | | 886 | | | | 1,064 | |
| Retirement benefit obligations | | | 43 | | | | 2,374 | | | | 1,380 | | | | 1,197 | |
| Minority interests — non-equity | | | | | | | — | | | | — | | | | 512 | |
| |
Total liabilities | | | | | | | 350,749 | | | | 203,924 | | | | 181,013 | |
| |
| | | | | | | | | | | | | | | | | |
| Share capital | | | 45 | | | | 254 | | | | 148 | | | | 473 | |
| Share premium account | | | 45 | | | | 3,194 | | | | 1,857 | | | | 2,164 | |
| Retained earnings | | | 46 | | | | 1,901 | | | | 1,105 | | | | 1,083 | |
| |
Total shareholders equity | | | | | | | 5,349 | | | | 3,110 | | | | 3,720 | |
| |
Total liabilities and equity | | | | | | | 356,098 | | | | 207,034 | | | | 184,733 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2005(1) | | | 2005(3) | | | 2004(4) | | | 2003 | | | 2002 | | | 2001 | |
| | | $m | | | £m | | | £m | | | £m | | | £m | | | £m | |
| |
Selected US GAAP balance sheet data | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ funds | | | 8,531 | | | | 4,960 | | | | 4,843 | | | | 5,629 | | | | 5,889 | | | | 8,059 | |
| Total assets | | | 393,723 | | | | 228,909 | | | | 186,265 | | | | 197,836 | | | | 187,869 | | | | 188,193 | |
| |
| | |
| 1. | | Amounts stated in dollars have been translated from sterling at the rate of £1.00 — $1.72, the noon buying rate on 31 December 2005. |
|
| 2. | | Abbey, in line with all listed entities in the European Union, was required to adopt International Financial Reporting Standards (“IFRS”) in preparing its consolidated financial statements for the year ended 31 December 2005. Up to 31 December 2004, the Group prepared its financial statements in accordance with UK Generally Accepted Accounting Principles (“UK GAAP”). Key standards IAS 32 “Financial Instruments: Disclosure and Presentation”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 4 “Insurance Contracts” have been applied prospectively from 1 January 2005. All other standards are required to be applied retrospectively. |
|
| 3. | | Abbey early adopted SFAS 155 on 1 January 2005. Under SFAS 155, financial assets and financial liabilities may be measured at fair value through the income statement where they contain substantive embedded derivatives that would otherwise require bifurcation under SFAS 133. Prior to 1 January 2005, such an option did not exist. Abbey early adopted the fair value option provided under SFAS 155 principally for selected debt securities in issue in order to achieve greater consistency with the accounting requirements of the splitfair value option under IAS 39. |
|
| 4. | | In 2004, Abbey adopted FIN 46R “Consolidation of Variable Interest Entities” which changed the method of determining whether certain entities, including securitisation entities, should be included in Abbey’s consolidated financial statements. The application of FIN 46R had no effect on Abbey’s net income between continuing operationsassets and discontinued operations, and the related earnings per share amounts for 2000 isdid not practicable.have a significant effect on Abbey’s total assets. |
196
Five year recordSelected financial data Continued
Selected statistical information| | | | | | | | | | | | | | | | | | | | | |
| | | Year ended/as at 31 December | |
| | | | | | | 2003 | | | 2002 | | | | | | | |
| | | 2004 | | | (restated) | | | (restated) | | | 2001 | | | 2000 | |
| | | % | | | % | | | % | | | % | | | % | |
| |
Selected UK GAAP financial statistics | | | | | | | | | | | | | | | | | | | | |
| Profitability ratios: | | | | | | | | | | | | | | | | | | | | |
Return on average total assets (1, 9) | | | 0.02 | | | | (0.39 | ) | | | (0.56 | ) | | | 0.43 | | | | 0.66 | |
Return on average ordinary shareholders’ funds(2) | | | 0.66 | | | | (13.54 | ) | | | (20.01 | ) | | | 13.01 | | | | 20.56 | |
Return on average risk weighted assets(3) | | | 0.05 | | | | (1.10 | ) | | | (1.47 | ) | | | 1.07 | | | | 1.59 | |
Net interest margin (excluding exceptional items)(4, 9) | | | 1.40 | | | | 1.69 | | | | 1.73 | | | | 1.47 | | | | 1.61 | |
Cost: income ratio (including exceptional items)(5) | | | 84.65 | | | | 95.49 | | | | 61.46 | | | | 48.38 | | | | 45.32 | |
Cost: income ratio (excluding exceptional items)(5) | | | 84.65 | | | | 95.49 | | | | 61.46 | | | | 48.38 | | | | 45.32 | |
| Capital ratios: | | | | | | | | | | | | | | | | | | | | |
| Ordinary dividends as a percentage of net income | | | 1814.63 | | | | (47.96 | ) | | | (29.60 | ) | | | 79.56 | | | | 51.22 | |
Average ordinary shareholders’ funds as a percentage of average total assets(9) | | | 2.56 | | | | 2.89 | | | | 2.80 | | | | 3.33 | | | | 3.21 | |
| Risk asset ratios: | | | | | | | | | | | | | | | | | | | | |
| Total | | | 12.0 | | | | 13.3 | | | | 11.6 | | | | 11.6 | | | | 13.5 | |
| Tier 1 | | | 10.4 | | | | 10.1 | | | | 9.2 | | | | 8.4 | | | | 8.8 | |
Credit quality data:(6) | | | | | | | | | | | | | | | | | | | | |
Non-performing loans as a percentage of loans and advances to customers excluding finance leases(6, 7) | | | 1.48 | | | | 3.25 | | | | 2.36 | | | | 2.22 | | | | 2.60 | |
Provisions as a percentage of loans and advances to customers excluding finance leases(6) | | | 0.57 | | | | 1.01 | | | | 0.78 | | | | 0.62 | | | | 0.70 | |
Provisions as a percentage of non-performing loans(6, 7) | | | 38.2 | | | | 31.14 | | | | 35.95 | | | | 27.76 | | | | 26.87 | |
Provisions charge for bad and doubtful debts as a percentage of average loans and advances to customers excluding finance leases(6) | | | (0.04 | ) | | | 0.54 | | | | 0.60 | | | | 0.33 | | | | 0.35 | |
Ratio of earnings to fixed charges:(8) | | | | | | | | | | | | | | | | | | | | |
| Excluding interest on retail deposits | | | 116.35 | | | | 71.72 | | | | 74.68 | | | | 126.93 | | | | 129.62 | |
| Including interest on retail deposits | | | 107.26 | | | | 83.16 | | | | 82.59 | | | | 119.47 | | | | 121.91 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
Selected US GAAP financial statistics | | | | | | | | | | | | | | | | | | | | |
Return on average total assets(1) | | | (0.04 | ) | | | (0.07 | ) | | | (0.76 | ) | | | 0.52 | | | | 0.70 | |
Return on average ordinary shareholders’ funds(2) | | | (1.48 | ) | | | (2.55 | ) | | | (22.77 | ) | | | 12.95 | | | | 17.18 | |
| Dividends as a percentage of net income | | | (1213.22 | ) | | | (178.91 | ) | | | (51.22 | ) | | | 71.29 | | | | 50.89 | |
| Average ordinary shareholders’ funds as a percentage of average total assets | | | 2.40 | | | | 2.63 | | | | 3.33 | | | | 3.99 | | | | 4.07 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number | | Number | | Number | | Number | | Number | | | 2005(9) | | 2004 | |
| | | | % | | % | |
| | | |
Selected IFRS financial statistics | | |
| Profitability ratios: | | |
Return on average total assets (1, 9) | | | 0.21 | | | (0.03 | ) |
Return on average ordinary shareholders’ funds(2) | | | 19.56 | | | (1.17 | ) |
Return on average risk weighted assets(3) | | | 0.75 | | | (0.09 | ) |
Net interest margin(4, 9) | | | 1.19 | | 1.36 | |
Cost: income ratio(5) | | | 70.18 | | 97.29 | |
| Capital ratios: | | |
Average ordinary shareholders’ funds as a percentage of average total assets(9) | | | 1.07 | | 2.23 | |
| Risk asset ratios: | | |
| Total | | | 12.5 | | 12.0 | |
| Tier 1 | | | 10.0 | | 10.4 | |
Credit quality data:(6) | | |
Non-performing loans as a percentage of loans and advances to customers excluding finance leases(6, 7) | | | 0.92 | | 1.04 | |
Provisions as a percentage of loans and advances to customers excluding finance leases(6) | | | 0.41 | | 0.43 | |
Provisions as a percentage of non-performing loans(6, 7) | | | 44.67 | | 40.93 | |
Provisions charge for bad and doubtful debts as a percentage of average loans and advances to customers excluding finance leases(6) | | | 0.22 | | | (0.06 | ) |
Ratio of earnings to fixed charges:(8) | | | | | | |
| Excluding interest on retail deposits | | 1.07 | | 0.92 | | 0.67 | | 1.28 | | 1.26 | | | 135.31 | | 98.99 | |
| Including interest on retail deposits | | 1.03 | | 0.95 | | 0.77 | | 1.20 | | 1.20 | | | 114.02 | | 99.50 | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | | 2005(10) | | | 2004(11) | | | 2003 | | | 2002 | | | 2001 | |
| | | % | | | % | | | % | | | % | | | % | |
| |
Selected US GAAP financial statistics | | | | | | | | | | | | | | | | | | | | |
Return on average total assets(1) | | | 0.12 | | | | (0.01 | ) | | | (0.06 | ) | | | (0.75 | ) | | | 0.51 | |
Return on average equity shareholders’ funds(2) | | | 5.16 | | | | (0.38 | ) | | | (2.14 | ) | | | (20.17 | ) | | | 11.85 | |
| Dividends as a percentage of net income | | | 20.16 | | | | (4,375.00 | ) | | | (233.33 | ) | | | (56.50 | ) | | | 77.10 | |
| Average equity shareholders’ funds as a percentage of average total assets | | | 2.36 | | | | 2.73 | | | | 2.99 | | | | 3.71 | | | | 4.29 | |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | Number | | | Number | | | Number | | | Number | | | Number | |
| |
Ratio of earnings to fixed charges:(8) | | | | | | | | | | | | | | | | | | | | |
| Excluding interest on retail deposits | | | 1.26 | | | | 1.01 | | | | 0.92 | | | | 0.67 | | | | 1.28 | |
| Including interest on retail deposits | | | 1.10 | | | | 1.00 | | | | 0.95 | | | | 0.77 | | | | 1.20 | |
| |
(1) | | |
| 1. | | Profit after tax divided by average total assets. |
| |
(2)2. | | Profit after tax divided by average equity shareholders’ funds. |
| |
(3)3. | | Profit after tax divided by average risk weighted assets. |
| |
(4)4. | | Net interest margin represents net interest income as a percentage of average interest-earning assets. |
| |
(5)5. | | Cost: income ratio equals operating expenses excluding depreciation on operating lease assets divided by total operating income less depreciation on operating lease assets. |
| |
(6)6. | | All credit quality data is calculated using period-end balances, except for provisions for bad and doubtful debts as a percentage of average loans and advances to customers, excluding assets held under purchase and resale agreements. |
| |
(7)7. | | The non-performing loans used in these statistics are calculated in accordance with conventional US definitions. Abbey generally holds a first mortgage over the properties securing the UK residential mortgage loans. The value of non-performing loans represents the aggregate outstanding balance of all loans and advances 90 days or more overdue or, for unsecured loans less than 90 days overdue, the balance of loans where a provision has been made or interest suspended. Interest continues to be debited to substantially all of these loans and advances for collection purposes. The proportion of this interest whose collectability issecurity will in doubt is then suspended and excluded from the profit and loss account. Accordingly, the interest income figures included in the profit and loss account are the same as would be reported in the United States. However,many cases completely cover the value of non-performing loans is higher by the cumulative amountloan and the arrears and in the remainder will considerably reduce the size of this suspended interest.the loss incurred. |
In cases where borrowers have made arrangements to pay off their arrears over a period of time, the arrears remain on the loan accounts until cleared and as a result the loans are included in non-performing loans even though the customers are currently performing and many will ultimately discharge their loans fully.
Abbey generally holds a first mortgage over the properties securing the UK residential mortgage loans. The value of the security will in many cases completely cover the value of the loan and the arrears and in the remainder will considerably reduce the size of the loss incurred.
Non-performing loans also include the full value of loans for which Abbey has enforced its security by taking into possession the borrowers’ properties. In many such cases the value of the losses expected to result on sale of the security is known with some certainty and is included in the specific provisions. However, the value of the losses is not charged off until the properties are sold and the losses have thus been determined precisely. Other banks, including those in the US, may charge off losses more rapidly. Although Abbey’s practice does not affect net income or the carrying value of loans and advances to customers, it does increase the reported value of non-performing loans.
For these reasons, the value of the non-performing loans is not necessarily indicative of the value of losses which Abbey is likely to suffer. Management believes that it is important to consider the quality of Abbey’s UK residential mortgage portfolio compared with those of its competitors. Over the reporting periods covered by this table, the number of mortgage loans which are six months or more in arrears as a percentage of the total number of outstanding mortgage loans has been broadly comparable with the UK Council of Mortgage Lenders’ (CML) industry average. At 31 December 2003, Abbey’s percentage was 0.19% compared with a Council of Mortgage Lenders percentage of 0.36%. The value of these Abbey non- performing loans as a percentage of its total UK
197
Financial Statements
Five year record Continued
residential mortgage loan assets was 0.16%. Non-performing loans in this table also include the value of arrears cases between three and six months in arrears and the value of properties in possession. On this basis, the non-performing UK residential mortgage loans are 0.1% of its total UK residential loans and advances. If the remainder of Abbey’s loans and advances (excluding finance leases) are included, this ratio increases to 3.25%.
(8) |
| 8. | | For the purpose of calculating the ratios of earnings to fixed charges, earnings consistsEarnings consist of income before taxes plus fixed charges. Fixed charges consistsconsist of interest payable, which includes the amortisation of discounts and premiums on debt securities in issue and interest payable on finance lease obligations. |
| |
(9) 9. | These ratios | Abbey, in line with all listed entities in the European Union, was required to adopt International Financial Reporting Standards (“IFRS”) in preparing its consolidated financial statements for the year ended 31 December 2005. Up to 31 December 2004, the Group prepared its financial statements in accordance with UK Generally Accepted Accounting Principles (“UK GAAP”). Key standards IAS 32 “Financial Instruments: Disclosure and Presentation”, IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 4 “Insurance Contracts” have been restatedapplied prospectively from 1 January 2005. All other standards are required to be applied retrospectively. |
|
| 10. | | Abbey early adopted SFAS 155 on 1 January 2005. Under SFAS 155, financial assets and financial liabilities may be measured at fair value through the income statement where they contain substantive embedded derivatives that would otherwise require bifurcation under SFAS 133. Prior to 1 January 2005, such an option did not exist. Abbey early adopted the fair value option provided under SFAS 155 principally for eachselected debt securities in issue in order to achieve greater consistency with the accounting requirements of the comparative periods due tofair value option under IAS 39. |
|
| 11. | | In 2004, Abbey adopted FIN 46R “Consolidation of Variable Interest Entities” which changed the US GAAPmethod of determining whether certain entities, including securitisation entities, should be included in Abbey’s consolidated financial statements. The application of FIN 46R had no effect on Abbey’s net assets and profit after tax and did not have a significant effect on Abbey’s total assets being restated.assets. |
197
Financial Statements
Selected financial data Continued
The following tables set forth, for the periods indicated, certain information concerning the exchange rate for pounds sterling based on the noon buying rate in New York City for cable transfers in foreign currencies, as certified for customs purposes by the Federal Reserve Bank of New York, expressed in US dollars per £1.00. No representation is made that amounts in pounds sterling have been, could have been or could be converted into US dollars at the noon buying rate or at any other rate. The noon buying rate for US dollars on 25 May22 June 2006 was $1.8312$ 1.8306
| | | | | | | | | | | | | | | | | |
| | | High | | | Low | | | Average(1) | | | Period end | |
| Calendar period | | $ Rate | | | $ Rate | | | $ Rate | | | $ Rate | |
| |
| Years ended 31 December: | | | | | | | | | | | | | | | | |
| 2004 | | | 1.95 | | | | 1.75 | | | | 1.83 | | | | 1.78 | |
| 2003 | | | 1.78 | | | | 1.55 | | | | 1.63 | | | | 1.78 | |
| 2002 | | | 1.61 | | | | 1.41 | | | | 1.50 | | | | 1.61 | |
| 2001 | | | 1.50 | | | | 1.37 | | | | 1.44 | | | | 1.45 | |
| 2000 | | | 1.65 | | | | 1.40 | | | | 1.51 | | | | 1.50 | |
| Months ended: | | | | | | | | | | | | | | | | |
May 2005(2) | | | 1.90 | | | | 1.82 | | | | | | | | | |
| April 2005 | | | 1.92 | | | | 1.87 | | | | | | | | | |
| March 2005 | | | 1.93 | | | | 1.87 | | | | | | | | | |
| February 2005 | | | 1.92 | | | | 1.86 | | | | | | | | | |
| January 2005 | | | 1.91 | | | | 1.86 | | | | | | | | | |
| December 2004 | | | 1.95 | | | | 1.91 | | | | | | | | | |
| November 2004 | | | 1.91 | | | | 1.83 | | | | | | | | | |
| |
| | | | | | | | | | | | | | | | | |
| | | High | | | Low | | | Average(1) | | | Period end | |
| Calendar period | | $Rate | | | $Rate | | | $Rate | | | $Rate | |
| |
| Years ended 31 December: | | | | | | | | | | | | | | | | |
2005 | | | 1.93 | | | | 1.72 | | | | 1.81 | | | | 1.72 | |
| 2004 | | | 1.95 | | | | 1.75 | | | | 1.84 | | | | 1.78 | |
| 2003 | | | 1.78 | | | | 1.55 | | | | 1.64 | | | | 1.78 | |
| 2002 | | | 1.61 | | | | 1.41 | | | | 1.51 | | | | 1.61 | |
| 2001 | | | 1.50 | | | | 1.37 | | | | 1.44 | | | | 1.45 | |
| Months ended: | | | | | | | | | | | | | | | | |
June 2006(2) | | | 1.88 | | | | 1.83 | | | | 1.85 | | | | 1.83 | |
| May 2006 | | | 1.89 | | | | 1.83 | | | | 1.87 | | | | 1.89 | |
| April 2006 | | | 1.82 | | | | 1.74 | | | | 1.77 | | | | 1.82 | |
| March 2006 | | | 1.74 | | | | 1.75 | | | | 1.74 | | | | 1.74 | |
| February 2006 | | | 1.78 | | | | 1.73 | | | | 1.75 | | | | 1.75 | |
| January 2006 | | | 1.79 | | | | 1.74 | | | | 1.77 | | | | 1.78 | |
| December 2005 | | | 1.77 | | | | 1.72 | | | | 1.75 | | | | 1.72 | |
| November 2005 | | | 1.78 | | | | 1.71 | | | | 1.73 | | | | 1.73 | |
| October 2005 | | | 1.79 | | | | 1.75 | | | | 1.77 | | | | 1.78 | |
| |
| | |
| (1) | | The average of the noon buying rates on the last business day of each month during the relevant period. |
| |
| (2) | | With respect to May 2005,June 2006, for the period from MayJune 1 to May 25.June 22. |
198
Shareholder Information
Dividend and Share Information
Dividends on ordinary shares
Abbey National plc has paid dividends on its ordinary shares every year without interruption since its incorporation in 1989. At the interim stage in 2004 a dividend of 8.33 pence was paid. In addition a special dividend of 25 pence together with 6 pence dividend differential was paid to Abbey shareholders in December 2004 in relation to the sale to Banco Santander Central Hispano, S.A.
The dividends (including interim dividends) declared for each of the last five years were as follows:
Pence per ordinary share| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| |
| Interim | | | 8.33 | | | | 8.33 | | | | 17.65 | | | | 16.80 | | | | 15.15 | |
Final* | | | 31.00 | | | | 16.67 | | | | 7.35 | | | | 33.20 | | | | 30.35 | |
| |
| Total | | | 39.33 | | | | 25.00 | | | | 25.00 | | | | 50.00 | | | | 45.50 | |
| |
Cents per ordinary share
| | | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2003 | | | 2002 | | | 2001 | | | 2000 | |
| |
| Interim | | | 14.83 | | | | 14.82 | | | | 28.41 | | | | 24.36 | | | | 22.66 | |
Final* | | | 55.18 | | | | 29.67 | | | | 11.83 | | | | 48.14 | | | | 45.39 | |
| |
| Total | | | 70.01 | | | | 44.49 | | | | 40.24 | | | | 72.50 | | | | 68.05 | |
| |
* | | The final dividend column for 2004 includes the special dividend paid in December 2004 in relation to the sale to Banco Santander Central Hispano, S.A. |
Dividends expressed in cents are translated from sterling at the non-buying rate on 31 December of the year to which they relate (or the last business day in December if 31 December was not a business day that particular year). No representation is made that pounds sterling amounts have been, or could have been, or could be, converted into dollars at these rates.
Dividends on dollar-denominated preference shares
Dividends on the non-cumulative dollar-denominated preference shares, are paid quarterly at such rates as will, including the UK associated tax credit and before deduction of UK withholding tax (see “Taxation for US investors” below), result in annual dividends to holders amounting to 7 3/8% of the $25.00 issue price, respectively.
Dollar-denominated preference shares and American Depository Shares At 31 December
2004,2005, Abbey National plc had outstanding 18,000,000 Series B non-cumulative dollar-denominated preference shares, nominal value $0.01 each. The Series B preference shares were issued in November 2001. Currently, the only trading market for these shares is the New York Stock Exchange where they are traded in the form of Series B American Depositary Shares, each representing one preference share.
At 31 December
2004,2005, the
seriesSeries B American Depository Shares were held by
3231 holders, all with US addresses. The Series B American Depository Shares traded on the New York Stock Exchange at prices ranging from a high of
$28.00$27.00 to a low of
$24.37$24.40 during
2004.Share price history
The following tables show the high and low sale prices for the ordinary shares during the periods indicated, based on mid-market prices at the close of business on the London Stock Exchange for the following periods:
(i) | The five most recent financial years; |
|
(ii) | Each financial quarter for the two most recent financial years; and |
|
(iii) | Each of the six most recent months. |
(i) Five most recent financial years
| | | | | | | | | |
| | | Ordinary shares | |
| | | High | | | Low | |
| | | pence | | | pence | |
| |
2004* | | | 644 | | | | 420 | |
| 2003 | | | 596 | | | | 317 | |
| 2002 | | | 1,132 | | | | 487 | |
| 2001 | | | 1,305 | | | | 885 | |
| 2000 | | | 1,219 | | | | 622 | |
| |
* | | The period for which the figures are calculated is up to 12 November 2004 as on that date the ordinary shares were cancelled. |
199
Shareholder Information
Dividend and Share Information Continued
(ii) Quarterly for the two most recent financial years
| | | | | | | | | |
| |
2004: Fourth quarter* | | | 644 | | | | 571 | |
| Third quarter | | | 598 | | | | 469 | |
| Second quarter | | | 513 | | | | 420 | |
| First quarter | | | 587 | | | | 438 | |
| |
| 2003: Fourth quarter | | | 596 | | | | 518 | |
| Third quarter | | | 577 | | | | 470 | |
| Second quarter | | | 538 | | | | 337 | |
| First quarter | | | 539 | | | | 317 | |
| |
* | | The period for which the figures are calculated is up to 12 November 2004, as on that date the ordinary shares were cancelled. |
2005.(iii) The six most recent months
| | | | | | | | | |
| |
November 2004** | | | 644 | | | | 623 | |
| October 2004 | | | 632 | | | | 571 | |
| September 2004 | | | 619 | | | | 550 | |
| August 2004 | | | 598 | | | | 575 | |
| July 2004 | | | 580 | | | | 469 | |
| June 2004 | | | 514 | | | | 448 | |
| |
|
** | | 1 November 2004 through 12 November 2004. |
Major shareholders
As at 31 December
2004,2005, Abbey National plc was a wholly owned subsidiary of Banco Santander Central Hispano, S.A. The acquisition was effected by means of a scheme of arrangement under Section 425 Companies Act on 12 November 2004. The ordinary shares in Abbey National plc were cancelled and holders of Abbey National plc shares who were on the register at 4.30pm on 12 November 2004 received one Banco Santander Central Hispano, S.A. share for each Abbey
National plc share.
There are no United Kingdom laws, decrees or regulations that restrict Abbey’s export or import of capital, including the availability of cash and cash equivalents for use by Abbey, or that affect the remittance of dividends or other shareholder payments to non UKnon-UK Holders of Abbey Shares, except as outlined in the section on “Taxation”.
200199
Shareholder Information
An investment in
Abbey’s sharesAbbey involves a number of risks, certain of which are set forth below. The factors discussed below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties.
Risks concerning borrower credit quality and general economic conditions are inherent in Abbey’s business Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of Abbey’s businesses. Adverse changes in the credit quality of Abbey’s borrowers and counterparties or a general deterioration in UK or global economic conditions, or arising from systemic risks in the financial systems, could reduce the recoverability and value of Abbey’s assets and require an increase in Abbey’s level of provisions for bad and doubtful debts. Deterioration in the UK economy could reduce the profit margins for Abbey’s banking and financial services businesses. See “Risk management” for a discussion of these items.
Market risks associated with fluctuations in interest rates, foreign exchange rates, bond and equity prices and other market factors are inherent in Abbey’s business The most significant market risks Abbey faces are interest rate, foreign exchange and bond and equity price risks.
Changes in interest rate levels, yield curves and spreads may affect the interest rate margin realised between lending and borrowing costs. Over the last year
weAbbey experienced a reduction in
ourits interest rate spread. Should interest rate spreads continue to decrease this could adversely affect
ourAbbey’s profit from banking operations.
Changes in currency rates, particularly in the sterling-dollar and sterling-euro exchange rates, affect the value of assets and liabilities denominated in foreign currencies and affect earnings reported by Abbey’s non-UK businesses.
The performance of financial markets may cause changes in the value of Abbey’s investment and trading portfolios. In addition, Abbey is exposed to changes in the equity markets through its final salary pension scheme (closed to new entrants in 2002) and its life assurance funds, including the requirement to maintain a minimum solvency margin.
As described in Note 59(p) to the Consolidated Financial Statements, on 7 June 2006, Abbey agreed to sell its entire life insurance business.
Abbey has implemented risk management methods to mitigate and control these and other market risks to which Abbey is exposed. However, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on Abbey’s financial performance and business operations. See “Risk management” for a discussion of these risks.
Operational risks are inherent in Abbey’s business Abbey’s businesses depend on the ability to process a large number of transactions efficiently and accurately. Losses can result from inadequate or failed internal control processes, people and systems, or from external events that interrupt normal business operations. See “Risk management
–— Operational risk”.
Abbey’s businesses are subject to substantial legislation, regulatory and governmental oversight Abbey is subject to financial services laws, regulations, administrative actions and policies in each location in which Abbey
operates.operates and in Spain, as a result of being a wholly owned subsidiary of Banco Santander Central Hispano, S.A. Changes in supervision and regulation, in particular in the UK
and Spain, could materially affect Abbey’s business, the products and services offered or the value of assets. Although Abbey works closely with its regulators and continually monitors the situation, future changes in regulation, fiscal or other policies can be unpredictable and are beyond the control of Abbey. See “Supervision and Regulation” for additional information.
The resolution of a number of issues affecting the UK financial services industry, including Abbey, could have a negative impact on Abbey’s results on operations or on its relations with some of its customers and potential customers.
Risks associated with strategic decisions regarding organic growth, the competitive environment and potential acquisitions and disposals Abbey devotes substantial management and planning resources developing strategic plans for organic growth and identifying possible acquisitions and disposals
includingand the restructuring of Abbey’s businesses. If the outcome of these plans do not match expectations, Abbey’s earnings may not develop as forecast. In addition, the market for UK financial services and the other markets within which Abbey operates are highly competitive; Abbey’s ability to generate an appropriate return depends significantly upon management’s response to the competitive environment. See “Business overview
–— Competition” for additional information.
Abbey’s insurance businesses are subject to inherent risks regarding claims provisions Claims in Abbey’s life assurance businesses may be higher than expected as a result of changing trends in claims experience arising from changes in demographic developments, mortality and morbidity rates and other factors outside Abbey’s control. Such changes could affect the profitability of current and future insurance products and services. See “Risk Management” — Life Business.
Risks associated with As described in Note 59(p) to the disposalConsolidated Financial Statements, on 7 June 2006, Abbey agreed to sell its entire life insurance business to Resolution plc. Pending the completion of our assets and/or businesses
Certain businesses are being managed for exit. In some cases this involvestransaction, which is expected to occur in the salethird quarter of assets and/or businesses. Based on information currently available2006, Abbey will continue to us, the value of these assets or businesses shown in our financial statements reflect management’s best estimate of their current value. We believe these values will be close to ultimate disposal values. However there is an inherent uncertainty in predicting the ultimate sales value. As a result we may incur losses on disposal or further amounts to be written off fixed asset investments and/or increases in provisions, therefore reducing our profitability.
operate its life assurance business.201200
Shareholder Information
Taxation for US Investors The following is a summary, under current law, of the principal UK and US federal income tax considerations relating to an investmentthe beneficial ownership by a US taxpayer in the Ordinary Shares, the Series A or B Non-cumulative Dollar-denominated Preference Shares, or the American Depositary Shares (ADSs) representing an interest in such shares. The following summary is provided for general guidance and does not address investors that are subject to special rules or that do not hold the shares (collectively,as capital assets. US residents should consult their local tax advisers, particularly in connection with potential liability to pay US taxes on disposal, lifetime gift or bequest of their shares.
If you hold shares through ADSs, you generally will be treated as owning the “Shares”).underlying shares for US federal income tax purposes, and deposits and withdrawals of shares in exchange for ADSs generally will not be taxable events for such purposes.
United Kingdom taxation on dividends
Under United Kingdom law, income tax is not withheld from dividends paid by United Kingdom companies. Shareholders, whether resident in the United Kingdom or not, receive the full amount of the dividend actual declared.
United States taxation on dividends
If you are a shareholder resident in the US, cash dividends up to the amount of our earnings and profits for United States Federal income tax purposes will be dividend income, which must be included in income on the date that you or the ADS depository receives them. Dividends received by an individual during taxable years before 2011 will be taxed at a maximum rate of 15%, provided the individual has held the shares unhedged for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date, that Abbey National plc is a qualified foreign corporation and certain other conditions are satisfied. Abbey National plc is a qualified foreign corporation for this purpose. Dividends received by an individual for taxable years after 2010 will be subject to tax at ordinary income rates. The dividend is not eligible for the dividends received deduction allowable to corporations. The dividend is foreign source income for US foreign tax credit purposes.
Any portion of the dividend that exceeds our United States earnings and profits is subject to different rules. This summary appliesportion is a tax free return of capital to the extent of your basis in Abbey’s shares, and thereafter is treated as a gain on a disposition of the shares.
United Kingdom taxation on capital gains
Under United Kingdom law, when you only if:sell shares you may be liable to pay capital gains tax. However if you are either:
| | | |
| > | | you are an individual US citizenwho is neither resident nor ordinarily resident in the United Kingdom; or resident, a US corporation, or otherwise subject to US federal income tax on a net income basis in respect of the Shares; |
| |
| > | | you hold the Shares as a capital asset for tax purposes; and |
|
> | | you arecompany which is not resident or ordinarily resident in the UK for UK tax purposes, and do not hold the Shares for the purposes of a trade, profession, or vocation that you carry on in the UK through a branch or agency.United Kingdom; |
This summary does
you will not purportbe liable to United Kingdom tax on any capital gains made on disposal of your shares.
The exception is if the shares are held in connection with a trade or business which is conducted in the United Kingdom through a branch or an agency.
United States taxation of dispositions
Dispositions of Shares by you generally will give rise to capital gain or loss, which will be a comprehensive description of all of the tax considerations that may be relevant to any particular investor, and does not address the tax treatment of investors that arelong-term capital gain or loss, subject to special rules. We have assumed that you are familiar withtaxation at reduced rates for non-corporate taxpayers, if the shares were held for more than one year.
United Kingdom inheritance tax rules applicable to investments in securities generally
Under the current estate and
with any special rules to which you may be subject. You should consult your own tax advisers regarding the tax consequences of the acquisition, ownership, and disposition of the Shares in the light of your own particular circumstances.The discussion is based on laws, treaties, judicial decisions, and regulatory interpretations in effect on the date hereof, all of which are subject to change. On March 31, 2003, representatives of the UK and US exchanged instruments of notification for a new incomegift tax convention (the “New Treaty”). The New Treaty has the force and effect of law in respect of withholding taxes on dividends from May 1, 2003. As discussed below, you will no longer be entitled to claim a special foreign tax credit in respect of dividends that was available under the terms of the Prior Treaty between the USUnited States and the UK from December 31, 1975 (“the Prior Treaty”), except for a limited period of time during which you may elect to apply the entirety of the Prior Treaty in preference to the New Treaty.
In general, the UK and US federal income tax considerations relevant toUnited Kingdom, shares held by an investment in the Shares will be similar to the considerations relevant to investments in equity securities issued by other UK corporations. With regard to UK taxation:individual shareholder who is:
| | | |
| > | | dividends that you receive ondomiciled for the Shares will not be subject to any UK withholding tax;purposes of the convention in the United States; and |
| | |
| > | | dispositionsis not for the purposes of Shares that you make will not give rise to any UK tax on chargeable gains; |
| | |
> | | no UK stamp duty or stamp duty reserve tax will be payable onthe convention a transfernational of Shares in ADS form, provided, in the case of stamp duty, that the ADSs and any instrument of transfer are executed and remain at all times outside the UK; and |
| | |
> | | UK stamp duty or stamp duty reserve tax will generally be payable on a transfer of registered Shares in non-ADS form, and you should consult your own tax advisers with respect to this possibility.United Kingdom; |
With regard
will not be subject to US federal income taxation:United Kingdom inheritance tax on:
| | | |
| > | | if you hold Shares in ADS form, you will be treated as holding the underlying shares for US federal income tax purposes, and deposits and withdrawals of shares in exchange for ADSs will not be taxable events;individual’s death; or |
| | |
| > | | you must include cash dividends paid on the Shares in ordinary income on the date that you or the ADS depositary receive them, translating dividends paid in UK pounds sterling into US dollars using the exchange rate in effect on the date of receipt; |
| | |
> | | subject to certain exceptions for positions that are hedged or held for less than 61 days, an individual holder of Shares generally should be subject to US taxation at a maximum rate of 15% in respect of dividends received in 2004. |
| | |
> | | dispositions of Shares that you make will generally give rise to capital gain or loss, which will be long-term capital gain or loss, subject to taxation at reduced rates for non-corporate taxpayers, if the Shares were held for more than one year; and |
| | |
> | | if you qualify for benefits under the Prior Treaty, you may be eligible, subject to generally applicable limitations, to receive a special US foreign tax credit equal to one-ninthgift of the amount of certain cash dividends that you receive onshares during the Shares, so long as you make an election to include in your income, as an additional notional dividend, an amount equal to the tax credit. This foreign tax credit benefit is generally only available with respect to dividends paid before May 1, 2003, unless you elect to apply the Prior Treaty convention in its entirety for an optional 12-month extension period. You should consult your own tax advisers regarding your potential eligibility for this foreign tax credit benefit.individual’s lifetime. |
The exception is if the shares are part of the business property of a permanent establishment of the individual in the United Kingdom or, in the case of a shareholder who performs independent personal services, pertain to a fixed base situated in the United Kingdom.
202201
Shareholder Information
Abbey National plc registered and principal office and investor relations department
Abbey National House,
2 Triton Square,
Regent’s Place
London
NW1 3AN
Registered Number 2294747
Registered in England and Wales
Grupo Santander shareholder departmentGrupo Santander
Santander House
100, Ludgate Hill
London
EC4M 7NJ
Phone numbernumbers
Abbey Switchboard
+44 (0) 870-607-6000
Santander Shareholder Services
0870 532 9430+44 (0) 870-532-9430
Abbey is subject to the information requirements of the US Securities and Exchange Act 1934. In accordance with these requirements, Abbey files its Annual Report and other related documents with the SEC. These documents may be inspected by US investors at the SEC’s public reference rooms, which are located at
Judiciary Plaza, 450 Fifth100 F Street,
NWNE, Room 1580, Washington, DC
20549.20549-0102. Information on the operation of the public reference rooms can be obtained by calling the SEC on
1-800-SEC-0330.1-202-551-8090 or by looking at the SEC’s website at www.sec.gov.
Web siteCorporate GovernanceFurther information on
A disclosure of the difference between the corporate governance rules applicable to Abbey
and the NYSE corporate governance rules is available on
the Internetour website at
www.abbey.com.www.abbey.com>About Abbey>Our Policies>Corporate Governance>NYSE Corporate Governance.
Memorandum and Articles of Association Pursuant to the requirements of Item
10(b)10(B) of Form 20-F, the following is a summary of the Memorandum and Articles of Association of Abbey National plc.
Abbey is a public company registered in England, registered number 2294747. Abbey’s objects and purposes are set out in the Memorandum
and Articles of Association. These include the power to carry on
all financial business and financial operations as well as a wide range of other specified powers and an overarching power to carry on any business or activity which the Board of Directors believes will enhance the value or profitability of the
business.business of Abbey.
Subject to certain exceptions, as permitted by English law, no director may vote, or be counted in the quorum
for a Board meeting in relation to any resolution concerning his own appointment or the terms of his appointment, or in respect of any contract in which he has a material interest.
Directors’ remuneration is decided by
The Remuneration Committee (a committee of the
Remuneration Committee.Board consisting of at least three non-executive directors) has been constituted pursuant to the Memorandum and Articles of Association to recommend and approve executive directors’ remuneration.
The Board may exercise all the powers of the Company to borrow money and to mortgage or charge all or any part of the Company or to issue debentures and other securities whether outright or as collateral security.
A director has to leave office at the Annual General Meeting following his or her 70
th birthday, although that director may be
re-appointedreappointed at
thethat Annual General Meeting.
No share ownership is required for a
director’s qualification.director to qualify.
Preference shares entitle the holder to receive a preferential dividend payment at a fixed or variable rate,
andsuch dividend to be payable on
such dates as area date determined by the Board prior to
their allotment.the allotment of the shares. The Board will also determine whether these
dividend rights are cumulative or non-cumulative.
The preference shares rank as regards participation in profits pari passu inter se. If dividends are unclaimed for twelve years, the right to the dividend
ceases in accordance with Article 44 of the Articles of Association.ceases.
The holders of any series of preference shares will only be entitled to receive notice of and to attend any general meeting of the Company if the preference dividend on the shares of such series has not, at the date of the notice of the general meeting, been paid in full in respect of such dividend periods as the boardBoard may prior(prior to allotmentallotment) determine, in which case the holders of the preference shares will be entitled to speak and/or vote upon any resolution proposed. Or,proposed; or, if a resolution is proposed at the general meeting, for, or in relation to, the winding-up of the Company; or varying, altering or abrogating any of
202
Shareholder Information
Contact Information continued
the rights, privileges, limitations or restrictions attached to the preference shares of such series, in which case the holders of the preference shares of such series will be entitled to speak and/or vote only upon such resolution; or in such other circumstances, and upon and subject to such terms, as the Board may determine prior to allotment.
If Abbey commences liquidation, the liquidator may, with the sanction of a special resolution and any other sanction required by the Companies Acts.
| | |
> | | divide among the members in kind the whole or any part of the assets of Abbey (whether they shall consist of property of the same kind or not) and, for that purpose, set such values as he deems fair upon any property to be divided and determine how the division shall be carried out as between the members or different classes of members; or |
203
Shareholder Information
Contact Informationcontinued
| | |
> | | vest the whole or any part of the assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction, shall think fit but no member shall be compelled to accept any shares or other assets upon which there is any liability. |
Unless the Board determines, prior to allotment, that the series of preference shares shall be non-redeemable, each series shall be redeemable at the option of Abbey on any date falling not earlier than five years and one day after the date of allotment. On redemption Abbey shall pay the amount due. The formula for calculation of any relevant redemption premium is set out in the Articles.
There are no sinking fund provisions.
Where the preference shares are partly paid, the Board may make further calls upon the holders.
There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.
Ordinary Shares
Dividends are payable to the holders of ordinary shares. These shares are transferable. If dividends are unclaimed, the right to the dividend ceases in accordance with Article 44 of the Articles of Association.
Subject to any special terms as to voting upon which any shares may be issued or may for the time being be held or any suspension or any abrogation of voting rights as set out in the Articles, on a show of hands every member who is present in person at a general meeting of the Company shall have one vote, and on a poll every member who is present in person or by proxy shall have one vote for every share of which he is the holder.
Subject to the prior rights of holders of preference shares, Abbey pays dividends on its ordinary shares only out of its distributable profits and not out of share capital. Dividends are determined by the Board.
If Abbey commences liquidation, the liquidator may, with the sanction of a special resolution and any other sanction required by the Companies Acts:-
| | | |
| > | | divide among the members in kind the whole or any part of the assets of Abbey (whether they shall consist of property of the same kind or not) and, for that purpose, set such values as he deems fair upon any property to be divided and determine how the division shall be carried out as between the members or different classes of members; or |
| |
| > | | vest the whole or any part of the assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction, shall think fit but no member shall be compelled to accept any shares or other assets upon which there is any liability. |
Unless the Board determines, prior to allotment, that the series of preference shares shall be non-redeemable, each series shall be redeemable at the option of Abbey on any date falling not earlier than five years and one day after the date of allotment. On redemption Abbey shall pay the amount due. The formula for calculation of any relevant redemption premium is set out in the Memorandum and Articles of Association.
There are no sinking fund provisions. Where the preference shares are partly paid, the Board may make further calls upon the holders. There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.
Ordinary Shares
Dividends are payable to the holders of ordinary shares. These shares are transferable. If dividends are unclaimed for twelve years, the right to the dividend ceases.
Subject to any special terms as to voting upon which any shares may be issued or may for the time being be held or any suspension or any abrogation of voting rights as set out in the Memorandum and Articles of Association, on a show of hands every member who is present in person at a general meeting of the Company shall have one vote, and on a poll every member who is present in person or by proxy shall have one vote for every share of which he is the holder.
Subject to the prior rights of holders of preference shares, Abbey pays dividends on its ordinary shares only out of its distributable profits and not out of share capital. Dividends are determined by the Board.
If Abbey commences liquidation, the liquidator may, with the sanction of a special resolution and any other sanction required by the Companies Acts:-
| | |
| > | | divide among the members the whole or any part of the assets of Abbey (whether they shall consist of property of the same kind or not) and, for that purpose, set such values as he deems fair upon any property to be divided and determine how the division shall be carried out as between the members or different classes of members; or |
| |
| > | | vest the whole or any part of the assets in trustees upon such trusts for the benefit of the contributories as the liquidator, with the like sanction, shall think fit but no member shall be compelled to accept any shares or other assets upon which there is any liability. |
Abbey’s
Memorandum and Articles
of Association authorise it to issue redeemable shares, but
AbbeyAbbey’s ordinary shares are not redeemable. There are no sinking fund provisions.
The Board may from time to time make calls upon the members in respect of any moneys unpaid on their shares.
There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.
Subject to the provisions of the Companies Acts, all or any of the rights attached to any class of shares (whether or not the Company is being wound up) may be varied with the consent in writing of the holders of not less than three-fourths in nominal value of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of those shares. Additional quorum and voting requirements apply to such
meetings.meeting.
Abbey’s
Memorandum and Articles of Association provide that an Annual General Meeting must be held each year and not more than 15 months after the previous one. Twenty-one days written notice is required to be given.
All other meetings are extraordinary general meetings and may be called by the Board or by shareholders holding at least one-tenth of the paid up share capital carrying voting rights at general meetings. In addition, shareholders holding at least 95% in nominal value of shares carrying voting rights at general meetings may require directors to call an
EGM.extraordinary general meeting. The notice period depends on the resolutions to be put to the meeting and will be
either 14 or 21 days.
There are no restrictions on the rights to own securities for either resident or non-resident shareholders, other than those to which they may be subject as a result of the laws and regulations in their home jurisdiction.
There are no provisions that would have the effect of delaying, deferring or preventing a change in control of Abbey that would operate only with respect to a merger, acquisition or corporate restructuring.
There are no provisions
in the Bylaws governing the ownership threshold above which shareholder ownership must be disclosed.
There are no conditions governing changes in capital in the Memorandum and Articles of Association which are more stringent than those implied by law.
204203
Glossary and Definitions
Glossary and Definitions
| | | |
| Terms used | | US equivalent or brief description of meaning |
| |
| Accounts | | Financial statements |
| Allotted | | Issued |
Articles of Association | | Bylaws |
| Attributable profit | | Net income |
| Balance sheet | | Statement of financial position |
| Bills | | Notes |
| Called up share capital | | Ordinary shares or common stock and preferred stock, issued and fully paid |
| Capital allowances | | Tax depreciation allowances |
| Combined Code | | UK-derived principles of good corporate governance and code of best practice |
| Creditors | | Payables |
| Current account | | Checking account |
| Dealing | | Trading |
| Debtors | | Receivables |
| Deferred tax | | Deferred income tax |
| Depreciation | | Write-down of tangible fixed assets over their estimated useful lives |
| Fees and commissions payable | | Fees and commissions expense |
| Fees and commissions receivable | | Fees and commissions income |
| Finance lease | | Capital lease |
| Freehold | | Ownership with absolute rights in perpetuity |
| Interest payable | | Interest expense |
| Interest receivable | | Interest income |
| Loans and advances | | Lendings |
| Loan capital | | Long-term debt |
| Long-term assurance fund | | Long-term insurance fund |
| Members | | Shareholders |
| Memorandum and Articles of Association | | Bylaws |
| Net asset value | | Book value |
| Nominal value | | Par value |
| One-off | | Non-recurring |
| Ordinary shares | | Common stock |
| Overdraft | | A line of credit established through a customer’s current account and |
| | contractually repayable on demand |
| Preference shares | | Preferred stock |
| Premises | | Real estate |
| Profit | | Income |
Profit and loss account | | Income statement |
Profit and loss account reserves | | Retained earnings |
| Provisions | | Allowances |
| Share capital | | Ordinary shares, or common stock, and preferred stock |
| Shareholders’ funds | | Stockholders’ equity |
| Share premium account | | Additional paid-in capital |
| Shares in issue | | Shares outstanding |
| Tangible fixed assets | | Property, plant and equipment |
| Undistributable reserves | | Restricted surplus |
| Write-offs | | Charge-offs |
| |
204
Cross-reference to Form 20-F
| | | | | | | |
| | | Part I | | | | |
| |
1 | | Identity of Directors, Senior Management and Advisers | | | * | |
| |
2 | | Offer Statistics and Expected Timetable | | | * | |
| |
3 | | Key Information | | | | |
| | | Selected Financial Data | | | 195 | |
| | | Capitalisation and Indebtedness | | | * | |
| | | Reasons for the Offer and use of Proceeds | | | * | |
| | | Exchange Rates | | | 198 | |
| | | Risk Factors | | | 200 | |
| |
4 | | Information on the Company | | | | |
| | | History and Development of the Company | | | 6 | |
| | | Business Overview | | | 6 | |
| | | Supervision and Regulation | | | 86 | |
| | | Organisational Structure | | | 6 | |
| |
5 | | Operating and Financial Review and Prospects | | | | |
| | | Operating Results | | | 10 | |
| | | Liquidity and Capital Resources | | | 49 | |
| | | Research and Development, Patents and Licenses, etc | | | Not applicable | |
| | | Trend Information | | | 10 | |
| | | Off- Balance Sheet Arrangements | | | 51 | |
| | | Contractual Obligations | | | 53 | |
| |
6 | | Directors, Senior Management and Employees | | | | |
| | | Directors | | | 74 | |
| | | Compensation | | | 78 | |
| | | Board Practices | | | 77 | |
| | | Employees | | | 80 | |
| | | Share Ownership | | | 79 | |
| |
7 | | Major Shareholders and Related Party Transactions | | | | |
| | | Major Shareholders | | | 199 | |
| | | Related Party Transactions | | | 79 | |
| | | Interests of Experts and Counsel | | | * | |
| |
8 | | Financial Information | | | | |
| | | Consolidated Statements and Other Financial Information | | | 92 | |
| | | Significant Changes | | | 10 | |
| |
9 | | The Offer and Listing | | | | |
| | | Offer Listing and Details | | | * | |
| | | Plan of Distribution | | | * | |
| | | Selling shareholders | | | * | |
| | | Share Price History | | | 201 | |
| | | Trading Markets | | | * | |
| | | Dilution | | | * | |
| | | Expenses of the Issue | | | * | |
| |
10 | | Additional Information | | | | |
| | | Share Capital | | | * | |
| | | Memorandum and Articles of Association | | | 202 | |
| | | Material Contracts | | | 33 | |
| | | Exchange Controls | | | 199 | |
| | | Taxation | | | 201 | |
| | | Dividends and Paying Agents | | | * | |
| | | Statements by Experts | | | * | |
| | | Documents on Display | | | 202 | |
| | | Subsidiary Information | | | Not applicable | |
| |
11 | | Quantitative and Qualitative Disclosures about Market Risk | | | 59 | |
| |
12 | | Description of Securities Other Than Equity Securities | | | | |
| | | Debt Securities | | | * | |
| | | Warrants and Rights | | | * | |
| | | Other Securities | | | * | |
| | | American Depositary Shares | | | * | |
| | | Part II | | | | |
| |
13 | | Defaults, Dividend Arrearages and Delinquencies | | | Not applicable | |
| |
14 | | Material Modifications to the Rights | | | Not applicable | |
| |
15 | | Controls and Procedures | | | | |
| | | Disclosure Controls and Procedures | | | 84 | |
| | | Management’s Annual Report on Internal Control over Financial Reporting | | | Not applicable | |
| | | Attestation Report of the Registered Public Accounting Firm | | | Not applicable | |
| | | Changes in Internal Control Over Financial Reporting | | | 84 | |
| |
16 | | Internal Control over Financial Reporting | | | | |
| | | Audit Committee Financial Expert | | | 78 | |
205
Cross-reference to Form 20-F
Cross-reference to Form 20-F
| | | | | | | |
| | | Part I | | | | |
| |
1 | | Identity of Directors, Senior Management and Advisers | | | * |
| |
2 | | Offer Statistics and Expected Timetable | | | * |
| |
3 | | Key Information | | | | |
| | | Selected Financial Data | | | 195 |
| | | Capitalisation and Indebtedness | | | * |
| | | Reasons for the Offer and use of Proceeds | | | * |
| | | Exchange Rates | | | 198 |
| | | Risk Factors | | | 201 |
| |
4 | | Information on the Company | | | | |
| | | History and Development of the Company | | | 7 |
| | | Business Overview | | | 7 |
| | | Supervision and Regulation | | | 92 |
| | | Organisational Structure | | | 7 |
| |
5 | | Operating and Financial Review and Prospects | | | | |
| | | Operating Results | | | 11 |
| | | Liquidity and Capital Resources | | | 58 |
| | | Research and Development, Patents and Licenses, etc | | Not applicable |
| | | Trend Information | | | 8 |
| | | Off- Balance Sheet Arrangements | | | 64 |
| | | Contractual Obligations | | | 65 |
| |
6 | | Directors, Senior Management and Employees | | | | |
| | | Directors | | | 80 |
| | | Compensation | | | 85 |
| | | Board Practices | | | 83 |
| | | Employees | | | 87 |
| | | Share Ownership | | | 85 |
| |
7 | | Major Shareholders and Related Party Transactions | | | | |
| | | Major Shareholders | | | 200 |
| | | Related Party Transactions | | 85 |
| | | Interests of Experts and Counsel | | | * |
| |
8 | | Financial Information | | | | |
| | | Consolidated Statements and Other Financial Information | | | 98 |
| | | Significant Changes | | | 11 |
| |
9 | | The Offer and Listing | | | | |
| | | Offer Listing and Details | | | * |
| | | Plan of Distribution | | | * |
| | | Selling shareholders | | | * |
| | | Share Price History | | | 199 |
| | | Trading Markets | | | * |
| | | Dilution | | | * |
| | | Expenses of the Issue | | | * |
| |
10 | | Additional Information | | | | |
| | | Share Capital | | | * |
| | | Memorandum and Articles of Association | | | 203 |
| | | Material Contracts | | | 46 |
| | | Exchange Controls | | | 200 |
| | | Taxation | | | 202 |
| | | Dividends and Paying Agents | | | * |
| | | Statements by Experts | | | * |
| | | Documents on Display | | | 203 |
| | | Subsidiary Information | | Not applicable |
| |
11 | | Quantitative and Qualitative Disclosures about Market Risk | | | 72 |
| |
12 | | Description of Securities Other Than Equity Securities | | | | |
| | | Debt Securities | | | * |
| | | Warrants and Rights | | | * |
| | | Other Securities | | | * |
| | | American Depositary Shares | | | * |
| | | Part II | | | | |
| |
13 | | Defaults, Dividend Arrearages and Delinquencies | | Not applicable |
| |
14 | | Material Modifications to the Rights | | Not applicable |
| |
15 | | Controls and Procedures | | | | |
| | | Disclosure Controls and Procedures | | | 91 |
| | | Changes in Internal Control Over Financial Reporting | | | * |
| |
16 | | Internal Control over Financial Reporting | | | | |
| | | Audit Committee Financial Expert | | | 84 |
| | | | | | | |
| | | Code of Ethics | | | 84 | |
| | | Principal Accountant Fees and Services | | | 115 | |
| | | Exemptions from the Listing Standards for Audit Committees | | | * | |
| | | Part III | | | | |
| |
17 | | Financial Statements | | | Not applicable | |
| |
18 | | Financial Statements | | | 92 | |
| |
19 | | Exhibits | | | Filed with the SEC | |
| |
206
Cross-reference to Form 20-F
Cross-reference to Form 20-F
| | | | | | | |
| | | Code of Ethics | | | 90 |
| | | Principal Accountant Fees and Services | | | 114 |
| | | Exemptions from the Listing Standards for Audit Committees | | | * |
| | | Part III | | | | |
| |
17 | | Financial Statements | | Not applicable |
| |
18 | | Financial Statements | | | 98 |
| |
19 | | Exhibits | | | Filed with the SEC |
| |
| | |
| * | | Not required for an Annual Report. |
207206
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
ABBEY NATIONAL plc
| | | | | |
| | ABBEY NATIONAL plc
|
| By | By | /s/ Francisco Gómez-Roldán |
| | Francisco Gómez-Roldán | |
| | | |
| Francisco Gómez-Roldán | |
| |
Date: 826 June 20052006
| | | | | |
| | 1 | .1 | | Memorandum and Articles of Association of Abbey National plc |
| | 4 | .1 | | Sale and Purchase Agreement between Abbey National plc, Resolution Life Limited and Resolution plc dated 7 June 2006 |
| | 7 | .1 | | Statement of ratio of earnings to fixed charges** |
| | 8 | .1 | | List of Subsidiaries of Abbey National plc |
| | 12 | .1 | | CEO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 12 | .2 | | CFO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| | 13 | .1 | | Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| | 14 | .1 | | Consent of Deloitte & Touche LLP** |
1.1 | Memorandum and Articles of Association of Abbey National plc |
|
8.1 | List of Subsidiaries of Abbey National plc |
|
12.1 | CEO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
12.2 | CFO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
13.1 | Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
14.1 | Consent of Deloitte & Touche LLP ** |
| * | | Documents concerning Abbey National plc referred to within the Annual Report on Form 20-F 2004 2005 may be inspected at Abbey National House, 2 Triton Square, Regent’s Place, London NW1 3AN, the principal executive offices and registered officeaddress of Abbey National plc. |
| |
| ** | | Incorporated by reference toin the Registration StatementsStatement on Form F-3 (No.333-13146) (No. 333-13146). |
