(Mark One) | ||||
o | ||||
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
OR | ||||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR | |||
For the fiscal year ended December 31, | ||||
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 | |||
Title of Each Class | Name of Each Exchange on | |
Non-cumulative Dollar-denominated Preference | ||
Shares of nominal value $0.01 each, Series B | New York Stock Exchange* | |
American Depositary Shares, | ||
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 | ||
(SXA) | New York Stock Exchange | |
7.375% Perpetual Subordinated Capital Securities | ||
(SXP) | New York Stock Exchange |
* | 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
Ordinary Shares of Nominal Value 10 Pence Each | None | |||
103/8% Non-cumulative Preference Shares of nominal | ||||
85/8% Non-cumulative Preference Shares of nominal value £1 each | ||||
125,000,000 | ||||
7 | 18,000,000 |
Yesþ Noo
Item 17o Item 18þ
Contents
1
Chairman’s Statement
This was a
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.
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 |
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
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:
> | statutory profit before tax of | |
> | statutory profit before tax for Personal Financial Services of | |
> | 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; | |
> | trading | |
> | ||
> | a reduction in the Personal Financial Services trading cost:income ratio | |
> | ||
> | reorganisation and other charges, IFRS embedded value charges and rebasing and hedging variances of | |
£546m), including the cost of | ||
> | total retail customer loans of | |
> | capital ratios |
2
New business flows
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.
Strategic Outline
Priorities for 2005:Abbey’s strategic plan:
> | ||
> |
3
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.
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.
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.
> | ||
> |
The intermediary channel remains an important
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:
> | ||
> | ||
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:
> | a |
3
During
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.
4
Business Review and Forward-looking Statements
Chief Executive’s Review
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-RoldánChief Executive
5
Business review and forward-looking statements
> | 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; | |
> | statements of future economic performance; and | |
> | statements of assumptions underlying such statements. |
> | inflation, interest rate, exchange rate, market and monetary fluctuations; | |
> | the effect of, and changes to, regulation and government policy; | |
> | the effects of competition in the geographic and business areas in which Abbey conducts operations; | |
> | changes in consumer spending, saving and borrowing habits in the United Kingdom and in other countries in which Abbey conducts operations; | |
> | the effects of changes in laws, regulations, taxation or accounting standards or practices; | |
> | the ability to increase market share and control expenses; | |
> | 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; | |
> | acquisitions and disposals; | |
> | technological changes; | |
> | the possibility of foreign exchange controls, expropriation, nationalisation or confiscation of assets in countries in which Abbey conducts operations; and | |
> | Abbey’s success at managing the risks of the foregoing. |
65
5.
Latin America.
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.
The new
three business divisions and three support divisions.
> | ||
> | Insurance and Asset Management- responsible for the long-term savings and general insurance business together with the asset management activities of the Group. This | |
> | Finance and Markets- | |
The support divisions consist of: | ||
> | Human Resources- responsible for all human resources strategy and personnel support. This division is headed by | |
> | 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
76
Operating
continued
markets.
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.
base. In February 2006, Abbey announced its intention to commence issuing credit cards directly rather than through MBNA Europe Bank Limited from 2007.
International
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.
87
Operating
Investment
some claims administration to Aviva plc.
> | 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.
associate.
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.
General
The 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.
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.
During 2004, Abbey ceased offering motor and travel insurance.
branded financial service providers.
Abbey and its subsidiaries | £ | 196,094m | ||
Abbey National plc | £ | 131,182m | ||
Abbey National plc | £ | 7,310m | ||
8
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):
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:
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:
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
109
Operating
5.
> | ||
> | Personal Financial Services- this contains a summary of the results, and commentary thereon, by | |
> | Portfolio Business Unit- this contains a summary of the results and commentary thereon on a management | |
> | Other Material Items- this contains detailed information about the statutory to trading basis adjustments. It also contains details of the differences between | |
> | 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. |
Results
> | Retail Banking; | |
> | Insurance and Asset Management; | |
> | Abbey Financial Markets; | |
> | Group Infrastructure; and | |
> | Portfolio Business Unit |
> | Banking and Savings; | |
> | Investment and Protection; | |
> | Abbey Financial Markets; | |
> | General Insurance; | |
> | Group Infrastructure; | |
> | Wholesale Banking; | |
> | Motor Finance | |
> | Other. |
This report reflects
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.
10
advances
11
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 could have chosen, in the current period, estimates that would have had a materially different impact on its financial presentation. For example, theincome statement.
£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.
Securities 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
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.
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
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.
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 | ||||||
12
interest rates and lapses rates which impact the value of assets and liabilities are shown on page 71.
Abbey could have chosen, inbalance sheet.
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.
income statement.
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
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.
Abbey, along with all listed companies
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
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. |
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
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 | ||||||
2004
2004
> | net interest income of | |
> | non-interest income of | |
> | administrative expenses of | |
> | ||
Limited distribution channels and depreciation on operating lease assets of | ||
> | a credit provision | |
> | provisions for | |
> |
1615
Operating
2003 compared to 2002
Loss on ordinary activities before tax of £686m compared to £947m in 2002. Material movements by line included:
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
> | ||
> | Reorganisation and other costs– Comprise implementation costs | |
> | ||
> |
> | 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 | |
> | ||
16
> | IFRS embedded value charges and | |
> | ||
> | Intangible asset charges, | |
> | Hedging variances, | |
> | Proforma IFRS adjustments, and | |
> | ||
The movement of each of these adjustmentssegment is discussed in more detail in the “Other Material Items” section.
1817
Operating
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 | |
> | Retail Banking | |
> | ||
> | Abbey Financial Markets trading profit before tax of | |
> | Group Infrastructure trading loss before tax of | |
2018
Operating
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
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 | ||||||||||
20042005 compared to 2003
2004
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
Operating and Financial Review
Operating Review – Personal Financial Servicescontinued
Retail Deposits
2004.
Bank
New creditimproved systems capability in the branch channel.
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.
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%.
Banking 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.
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
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.
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 | ||||||
2004
2004
Investmentstable net interest income result.
In General Insurance trading income fell £11m to £110m (2003: £121m) caused mainly by reduced new policy sales and lower renewals business.
2004.
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
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
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 |
2004
2004
2003 compared to 2002
Excluding Banking and Savings, net interest income decreased by £50m.
£(29)m.
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 |
(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). |
(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. |
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
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 |
2004
2004
offers.
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
Overall, branch-based2004
2622
Operating
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.
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 | ||||||
2004
2004
new business fees.
sales made through the branch network.
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.
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.
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
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 |
(2) | New business margin is calculated as new business contribution, |
(3) | The |
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.
20042005 compared to 2003
2004
New business contribution
New 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.
ANUTM 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’
2924
Operating
and expense loadings
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 |
Lapse experience of £(37)m improved £10m on the prior year. The2004.
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.
Embeddedwere £22m (2004: £(55)m)
Embedded
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 | |
(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
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 | |
(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 | % | ||||||||
20042005 compared to 2003
2004
> | ||
> | New business premiums in | |
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
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) | Intermediary includes Scottish Mutual Assurance plc, Scottish Provident Ltd, Scottish Provident International Ltd and | |
(2) | 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
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 | ||||||||||||
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 | ||||||
32
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
20042005 compared to 2003
Banking and Savings2004
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.
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.
business during the year. Other cost savings have come from a detailed procurement review and other activities.
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 |
2004
2004
> | Salaries and other compensation benefits | |
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
> | ||
> | ||
> | ||
> | 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 |
27
Bank, legal, marketing
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
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 |
Includes empty premises provisions arising from the review of site locations and certain asset write-downs. |
2004
In total, Personal Financial Services2004
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.
to mortgages, equivalent to approximately 1 basis point.
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.
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 | % | ||||
34
Operating and Financial Review
Operating Review — Personal Financial Servicescontinued
20042005 compared to 2003
2004
housing market for mortgages.
28
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
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 |
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
2004
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
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 |
> | The average loan-to-value of new business has remained broadly constant in | |
> | The proportion of new business written with a high loan-to-value (greater than 90%) has decreased | |
> | 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 | |
> | For niche markets such as Buy-to-Let, Abbey is under-represented and has not significantly increased its exposure. | |
> | The proportion of remortgage business taking further equity release has remained unchanged for the last 18 months. |
29
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 |
2004
Banking2004
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.
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
The increase in personal banking is due to reserves set aside for dormant accounts.
36
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.
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
Operating
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
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 | |
> | Non-interest income increased | |
> | Depreciation on operating lease assets fell | |
> | Trading operating expenses fell to | |
> | ||
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.
> | ||
written down values. |
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.
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 |
The following section provides a detailed analysis of the 2004 balance sheet movements, focusing on the outstanding balances in these exit portfolios.
3931
Operating
Operating 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 | ||||||||||||
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 | ||||||||||||||||||||||
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 | ||||||||||||||||||||
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 | |||||||||||||
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
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 |
period.
The 2003 results included provisions in relation to the realistic balance sheet position of the funds.
fund not repeated in 2005.
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
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 | |||||||||
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.
31 December | 31 December | |||||||
2005 | 2004 | |||||||
£m | £m | |||||||
Hedging variances | (18 | ) | — | |||||
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
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. | |
> |
32
> | In 2005, investment properties held at market value under IFRS, and amortised cost under US GAAP, were | |
> | ||
> | ||
> |
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.
Legal proceedings
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.
4633
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 |
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 |
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 | |||
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 | |||
34
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 | 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 | 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. |
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. |
35
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 | 2,086 | 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. |
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. |
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.
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 | 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 | 3.65 | 3.70 | 2.75 | — | — |
Average balances for | ||
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. |
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
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.
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
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
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. | |
A description of the characteristics of the securities held under each of the subcategories of securities in the table above is provided below.
49
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
US treasury and other US government agencies and corporations
39
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 | |||||||||||||||||||||||||||||||||||
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
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.
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 |
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 | |||||||||
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
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 | |||||||||
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
Balance 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 |
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
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 | ||||||||||||||||||
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 | ||||||||||
52
Operating and Financial Review
Balance Sheet Operating Reviewcontinued
Provisions on loans and advances to customers
> | ||||
> | ||||
> | Amounts written off |
42
realisation of collateral value, or from claiming on any mortgage indemnity guarantee or other insurance. |
53
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
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
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 | ||||||
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 | |||||||||||||||
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 | |||||||||
US 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
55
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 | % |
46
non-performing lending balances are nil.
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 | |||||||||
where the loan is overdue.
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 |
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
Country risk exposure
47
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.
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. |
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. |
At 31 December 2002, Abbey had no aggregate cross border outstandings between 0.75% and 1% of adjusted 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 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.
57
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.
48
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.
5849
Operating
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 |
reserves.
unsecured loan growth.
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 | |||||||
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.
50
improved mortality experiences.
existing assets.
shareholders’ funds.
£m | ||||
Opening value | ||||
Transfers (to)/from shareholders’ funds | ||||
Increase in value of the long-term assurance business before tax | ||||
Tax on increase in value of the long-term assurance business | ( | ) | ||
Dividends paid to Abbey | ( | ) | ||
Capital repatriated to Abbey | (67 | ) | ||
Closing value at 31 December | ||||
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
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 | |||||||||||||||||||||
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.
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:
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
> | 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 | |
> | 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. |
Abbey’s board
51
Cash 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
£2,197m in 2004. The decrease was primarily due | ||||
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.
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.
Programme | Outstanding at 31 December | 2005 | Markets issued in: | |||||||
$15bn medium-term notes | $ | European | ||||||||
$7bn medium-term notes | $ | United States | ||||||||
$4bn commercial paper | $ | European | ||||||||
$20bn commercial paper | $ | United States | ||||||||
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
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 | |||||||||||||||
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
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
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
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
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 |
variable rate retail deposits, subject to competitive pressures.
Wherever possible,
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
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
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
7059
Operating
Retail Banking
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 | ||||||
> | 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
> | 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. |
> | 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 |
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.
71
Operating and Financial Review
Risk Managementcontinued Abbey CML (percentage of total mortgage loans by number) 31 December 2004 0.14 0.23 0.20 0.28 31 December 2004 0.02 0.10 0.03 0.12 31 December 2004 0.02 0.02 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.
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Managing credit riskFinancial Review
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). |
Managing
The 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 | |||
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.
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
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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.
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:
62
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.
> | 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. |
net interest income over the next year
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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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 | ||||||||||||||||||||||||
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
For Abbey’s non-trading instruments the
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 | ||||||||||||||||||||||||
63
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 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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Operating and Financial Review
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 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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Risk Managementcontinued
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.
77
Operating and Financial Review
Risk Managementcontinued
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.
Non-trading
other capital markets funding.
Derivatives used for non-trading activities were accounted for on an accruals basis consistent with the assets, liabilities or positions being hedged.
78
Operating and Financial Review
Risk Managementcontinued
as part of an integrated approach to risk management. Further information is contained in Note 5115 of the Consolidated Financial Statements.
64
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 | 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 | Interest rate swaps combined with equity options. | ||
Lending, | ||||
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. |
65
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 | |||
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 | |||
66
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. | |
67
> | the Treasurer, Head of Asset and Liability Management, is responsible for the rapid assessment of the | |
> | the liquidity crisis management team, under the chairmanship of the Treasurer, Head of Asset and Liability Management, is the decision-making authority in |
68
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 | ||||||||||||||||||
> | marketing derivatives to end users and hedging the resulting exposures efficiently and | |
> | the management of trading exposure reflected on the Group’s balance sheet. |
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 |
69
£3m.
> | 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. |
> | fixed and guaranteed benefits for a fixed future premium; | |
> | the option to pay reduced or no future premiums; |
70
79
> | the option to terminate the contract completely; and | |
> | the option to exercise a guaranteed annuity or cash option. |
> | 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. |
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 | ) | |||||||||
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
> | 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. |
> | variation in interest rates and bond prices; and | |
> | variation in corporate bond spreads. |
72
> | direct holdings of credit debt (principally corporate bonds); | |
> | the impact of credit default on equity holdings; and | |
> | external reinsurance contracts. |
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 | |||||||||||||||||||||||||||
73
Francisco Gómez-Roldán
Tony Wyatt
Tony 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).
Priscilla Vacassin
business development roles.
Priscilla VacassinFinance and Markets
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.
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
National Westminster Bank plc.
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
Gloucester.
Group Limited.
75
Bingley 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.
8276
On
Companies Act 1985.
business review
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).
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.
Director | Title | Date of resignation | ||
Executive Director, Human Resources | 30 | |||
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.
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.
Non-Executive Directors.
77
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.
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.
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.
84
Report of the Directors
Directors’ Reportremunerationcontinued
Directors’ remuneration
£ | ||||
Salaries and fees | ||||
Performance-related payments | ||||
Other taxable benefits | ||||
Total remuneration excluding pension contributions | ||||
Pension contributions | ||||
Compensation for loss of office | ||||
78
, 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.
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.
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.
85
ReportThird Party Indemnities
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.
Employee 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.
employees’ behalf.
directors.
directors.
79
Statements.
Management of Corporate Social Responsibility
76.
responsibility.
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
Workplace
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 | ||||||
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.
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.
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.
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.
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.
roles in 2005.
development
Abbey
81
Working in partnership
Marketplace
Understanding
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.
88
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.
82
Complaints represent a very important area
now largely complete.
Procurement
around £6.0bn.
Abbey is a signatory to, and an active member of, the United Nations Environment Programme Financial Institutions’ Initiative.
Charitable priorities
Abbey has revised its charitable priorities in 2004 to reflect the changes to Abbey’s core values.
89
Report of> education and training;
Directors’ 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.
83
Further details on Abbey’s corporate social responsibility programme can be found via
Directors
76.
90
Report of the Directors
Directors’ Reportcontinued
Disclosure controls and procedures
(Sarbanes-Oxley Act 2002)
Over
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.
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
required to:
> | ||
> | present information, including accounting policies, | |
> | ||
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 | |||
9185
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.
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.
General
86
below:
92
Report of the Directors
Supervision and Regulationcontinued
Banking
2005, respectively).
87
*For business conducted on or after 14 January 2005.
93
Report of the Directors
Supervision and Regulationcontinued
Other main relevant legislation
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.
Following the Chancellor’s Pre-Budget Report in November
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”.
Consumer Credit Bill
The bill was reintroducedcome into force in the new Parliamentsecond half of 2006.
misselling.
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
89
Financial Statements
Financial Statements | ||||
91 | ||||
92 | ||||
93 | ||||
94 | ||||
94 | ||||
95 | ||||
97 | ||||
109 | ||||
195 |
9690
Independent Auditors’ Report to the Member of Abbey National plc
Accounting principles generally accepted in the United KingdomEuropean Union (IFRS).
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).
9791
Income Statement
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 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
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 | ||||||||||
9993
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
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 | ||||||||||
10294
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 | ||||||||||
95
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 | ) | ||||||||||
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 | ) | ||||||||
96
Basis of presentation
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. |
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.
97
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.
98
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.
Depreciation
Tangible fixed assets excluding operating lease assetsbalance sheet. Costs associated with maintaining software programmes are expensed as incurred.
Not | ||
Office fixtures | ||
Computer | 3 to 5 years | |
For
10399
Interest receivable
Interest receivableReceivables
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.
100
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.
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.
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.
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.
101
Wholesale lending
102
103
104
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.
A general provision is made against loans and advances to cover badbanks, net securities financing amounts and doubtful debtsshort-term investments in securities
The specific and general provisionsnew shares, other than on a business combination, are deducted from equity net of any related income taxes.
105
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.
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.
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.
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
106
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 | ||||||
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.
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.
107
cases
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.
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.
108
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 | ||||||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||
> | ||
> | ||
> | ||
> | ||
> | Portfolio Business Unit |
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
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 | ||||||||||||||||||||||||||
110
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 | ||||||||||||||||
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 | |||||||
> | 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
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 | |
> | One-off statutory IFRS adjustments– The conversion to IFRS resulted in |
During 2003, Abbey discontinued
> | IFRS embedded value charges and rebasing, | |
> | Reorganisation costs and other, | |
> | Intangible asset charges, | |
> | Hedging variances, | |
> | Proforma IFRS adjustments, and | |
> | One-off statutory IFRS adjustments. |
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
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
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 | ||||||
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 | ||||||
Group | ||||||||
2005 | 2004 | |||||||
£m | £m | |||||||
Dividend income | 1 | 1 | ||||||
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 | ||||||
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
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 | |||||||
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 | |||||||
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 | ||||||||||
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 |
credit to fees.
78.
114115
Group | ||||||||
2005 | 2004 | |||||||
£m | £m | |||||||
Loans and advances to customers | 218 | (55 | ) | |||||
218 | (55 | ) | ||||||
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 | ||||||
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).
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 Statementscontinued
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 | — | — | — | |||||||||||||
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 | — | — | — | |||||||||||||
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 | — | — | — | |||||||||||||
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
117
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. | ||
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
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
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 | |||||||||
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 | |||||||||
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 | ) | |||||
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
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 | |||||||||||||
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 | — | — | |||||||||||||
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 | ) | ||||||||
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
(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. |
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 | — | — | — | |||||||||||||
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 | — | — | — | |||||||||||||
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
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.
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 | ||||||||||||
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 | |||||||||||||
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 | ||||||||||||||||||
119123
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.
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 | |||||||||||||
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 | ||||||||||||
124
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 | |||||||||
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 | |||||||||||||
125
subsidiaries.
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.
2005.
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 |
The gross assets securitised represent the interest in the trust property | ||
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.
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 | ) | ||||||||
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 investmentfinance 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.
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Debt securities | — | — | 270 | — | ||||||||||||
Equity securities | 13 | — | 2 | — | ||||||||||||
13 | — | 272 | — | |||||||||||||
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Due in more than 10 years | — | — | 270 | — | ||||||||||||
— | — | 270 | — | |||||||||||||
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Other debt securities | — | — | 270 | — | ||||||||||||
— | — | 270 | — | |||||||||||||
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
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 | ||||||
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 | |||||||
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 forended 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.
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.
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:
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 | ||||
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 | |||||
Abbey National December Leasing | ||||||
36 | ||||||
128
Country of Incorporation | ||||||||
Principal subsidiary | Nature of business | or registration | ||||||
Abbey National Treasury Services plc | Treasury operations | 100 | % | England & Wales | ||||
Abbey National Unit Trust | Unit trust management | 100 | % | Scotland | ||||
Abbey National | Personal finance | 100 | % | Jersey | ||||
Cater Allen International Ltd* | 100 | % | England & Wales | |||||
Scottish Mutual Investment Managers Ltd* | Investment managers | |||||||
% | ||||||||
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 | Investment | 100 | % | Scotland | ||||
Abbey National North America | Funding | 100 | % | United States | ||||
Abbey National Securities | 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).
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.
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 | ||||||
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 | ||||||||||||||||
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 | — | — | ||||||||||||
127129
25. Intangible fixed assets
Intangible fixed
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 | ||||||||||||||||||||||||||
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 | |||||||||
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 | — | — | ||||||||||||
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
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 | ||||||||||||
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
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 | ||||||||||||
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 | ||||||
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 | ||||||
132
Group | ||||
£m | ||||
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 | ||||
Additions | ||||
Capitalised expenditure on existing properties | 2 | |||
Net gain from fair value adjustments | 96 | |||
Disposals | ( | ) | ||
Retrospective IFRS adjustment | (9 | ) | ||
At 31 December 2004 | ||||
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 | ||||||||||
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 | |||||||||||||
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Deferred tax relating to pensions and other post retirement benefits | 398 | 352 | 363 | 318 | ||||||||||||
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
29. Prepayments
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 | |||||||
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 | ||||||||||||
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 | |||||||||||||||||||||||||||||
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
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 | — | — | — | ||||||||||||
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Debt securities in issue | 7,948 | — | — | — | ||||||||||||
Total trading liabilities | 7,948 | — | — | — | ||||||||||||
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 | |||||||
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
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 | |||||||||||||
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 | ||||||||||||
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
135
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.
41. Minority interests — non-equity
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
Dollar 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 | |||||||
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.
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
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 | |||||||||||||
138
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 | |||||||||||||
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 | — | — | ||||||||||||
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 | ||||||||||||||||||
139
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:
£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 | |||
> | Economic Assumptions | |
> | Persistency Rates | |
> | Expenses | |
> | Mortality | |
> | Take-up rates of guarantees and options |
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 | ||||||||||||
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
> | Economic Assumptions | |
> | Mortality and morbidity | |
> | Expenses |
141
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 | ||||||||||||||||||
142
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 | |||||||||||||
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Investment contracts (without DPF) | 3,306 | — | — | — | ||||||||||||
143
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 | — | — | — | |||||||||||||
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 | ||||||||||
144
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Pension benefits | 160 | 183 | 142 | 169 | ||||||||||||
Group | Company | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
£m | £m | £m | £m | |||||||||||||
Pension schemes | (1,380 | ) | (1,197 | ) | (1,240 | ) | (1,060 | ) | ||||||||
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 | ) | ||||||||
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 | ||||||||||||
145
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 | ||||||||||||
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 | ||||||||||||
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 | ||||||||||||
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 | |||||||||
146
> | 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. |
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 | ||||||||||
Year ended 31 December: | £m | |||
2006 | 111 | |||
2007 | 120 | |||
2008 | 129 | |||
2009 | 139 | |||
2010 | 149 | |||
Five years ended 31 December 2015 | 936 | |||
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
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 | |||||||||||||
147
Financial Statementscontinued
48. Commitments
given warranties and indemnities to the purchasers.
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 | |||||||
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
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 | |||||||||||||||
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 | ||||||||||||
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
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 | |||||||||
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
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 | — | — | ||||||||||||
151
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. |
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
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 | |||||||||||||||
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 | |||||||||||||||
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 | ||||||||||
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
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. |
154
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. |
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 | ) | |||||||||||||||||||||
155
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
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 | |||||||
157
142158
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. |
143
Financial Statements
Notes to the Financial Statementscontinued
Foreign exchange risk
159
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 | ) | — | — | — |
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 |
144160
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
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
£m | ||||
Profit attributable to Shareholders | ||||
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 | |||
Profit before tax under IFRS | (21 | |||
Taxation – UK GAAP | (144 | ) | ||
Taxation – IFRS adjustments | 111 | |||
Profit attributable to shareholders under IFRS | (54 | |||
Derivative products which are combinations
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 | ||||||||||||
145161
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 | ||||||||||||||||
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 | |||||||||||||||||||||||||||||
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”.
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 | |||||||||||||||
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 | ||||||||||||||||||||
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 | ||||||||||
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 | — | — | ||||||
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 | |||||||||
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
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.
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 | ||||||
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
2004 | 2003 | |||||||
£m | £m | |||||||
Opening balance | 33 | — | ||||||
Transfer to profit and loss | 31 | 33 | ||||||
Utilised | (15 | ) | — | |||||
Closing balance | 49 | 33 | ||||||
162
58.
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
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
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
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
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 | ) | |||||||||||||||||||||||||||||||||
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
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 | — | — | ||||||||||||
168
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
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
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
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
IFRS 1, as they would not have been recorded in the acquired company balance sheet.
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 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.
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.
In Abbey’s balance sheet, the shareholders’ and policyholders’ interests
158
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
investment management service provided.
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.
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.
173
Financial Statementscontinued
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.
recognised as a liability.
159
Financial Statements
Notes to the Financial Statementscontinued
Guaranteed Annuity Options
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
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.
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.
Providing a general allowance for unidentified impairment losses in a portfolio of securities is not permitted.
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.
associated with the loans.
175
Derivativessecurity, and Hedging Activities
is evaluated for impairment in accordance with EITF 99-20.
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.
For Abbey has no cash flow hedge transactions,transactions.
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.
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.
US GAAPProvisions for vacant property can only be recognised when the property has been vacated.
161
176
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.
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:
SFAS140
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. |
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).
177
FAS 123 R
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
Abbey,Changes and Error Corrections — a replacement of APB 20 and SFAS 3
164
178
179
61.
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 | ) | |||||
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).
2004.
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).
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 | |||||||||||||||
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 | ||||||
2005 | 2004 | |||||||
Value of business acquired | £m | £m | ||||||
At 1 January | 461 | 538 | ||||||
Amortisation | (70 | ) | (77 | ) | ||||
At 31 December | 391 | 461 | ||||||
Note 25.
Year ended 31 December: | £m | £m | ||||||
2005 | 17 | |||||||
2006 | 17 | 62 | ||||||
2007 | 17 | 57 | ||||||
2008 | 11 | 46 | ||||||
2009 | 3 | 34 | ||||||
2010 | 30 |
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
b) Tangible fixed assets
The following tables provide analyses
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
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.
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 | ||||||
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 | ||||||
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 | ||||||
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 | ) | ||||
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
Abbey expects to contribute £109m to its defined benefit pension plans in 2005.
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:
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
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
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 | %) | ||||||
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
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 |
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 | |||||||||||||
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 | ||||||||||||
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
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 | ||||||||||||||||||
(iii) |
�� | ||||||||||||||||
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 | |||||||||||||||
Sales of available for sale securities during the years ended 31 December |
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 | |||||||||||||||
2004 | 2003 | |||||||
£m | £m | |||||||
Amortised cost b/f | 20 | 20 | ||||||
Acquisitions – cost | — | — | ||||||
Redemptions at maturity | (20 | ) | — | |||||
Exchange adjustments | — | — | ||||||
Amortised cost c/f | — | 20 | ||||||
There were no realised gains and losses on transfers from available for sale securities during the years ended 31 December | ||
Net trading gains |
h)
As defined in FIN 46 and
Prior to the issuance of FIN 46R,
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
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
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 |
Holmes Financing | ||||
(No. 1 to No. | ||||
£m | ||||
( | ) | |||
Net cash flows | ( | ) | ||
£m | ||||
10% adverse change in | ||||
) | ||||
20% adverse change in discount rate | ) | |||
|
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
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:
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.
The
185
m)deconsolidated.
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)
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.
o)
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.
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.
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.
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
p)
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.
q)
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 |
187
r) Provisions
debt 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.
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 | ||||||
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
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:
2005 | ||||
£m | ||||
(1,120 | ) | |||
Derivative financial instruments | (135 | ) | ||
Insurance and | (23,114 | ) | ||
Other liabilities | (3,845 | ) | ||
Total liabilities | (28,214 | ) | ||
For a detailed explanation
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 | ||||||
Year ended 31 December | £m | |||
2006 | 80 | |||
2007 | 70 | |||
2008 | 62 | |||
2009 | 55 | |||
2010 | 49 | |||
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 | % | ||||
The Personal Financial Services group of reportable segments adjustments are the deduction of:
There is also a single reclassification adjustment where:
179189
The Portfolio Business Unit group of reportable segments’ adjustments are:
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) RestatementsDuring 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
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.
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 | – | ||||||||||||||||||
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
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”).
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
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
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 | ||||||||||||||
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
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
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
Five year record
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 | ||||||||||||||||||
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.
Amounts stated in dollars have been translated from sterling at the rate of £1.00 – | ||||
Abbey, in line with all listed entities in the European Union, was required to | ||||
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 | ||||
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
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 | |
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 |
196
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. | Profit after tax divided by average total assets. | |
Profit after tax divided by average equity shareholders’ funds. | ||
Profit after tax divided by average risk weighted assets. | ||
Net interest margin represents net interest income as a percentage of average interest-earning assets. | ||
Cost: income ratio equals operating expenses excluding depreciation on operating lease assets divided by total operating income less depreciation on operating lease assets. | ||
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. | ||
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 |
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. | For the purpose of calculating the ratios of earnings to fixed charges, | |
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 | ||
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 | |
11. | In 2004, Abbey adopted FIN 46R “Consolidation of Variable Interest Entities” which changed the |
197
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 |
198
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:
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 | |||||||||||||||
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
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) 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 | ||||||
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 | ||||||
(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 | ||||||
Major shareholders
200199
As described in Note 59(p) to the Consolidated Financial Statements, on 7 June 2006, Abbey agreed to sell its entire life insurance 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.
201200
> | ||
> | ||
This summary does
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:
> | ||
> | ||
With regard
> | ||
> | ||
202201
+44 (0) 870-532-9430
1-202-551-8090 or by looking at the SEC’s website at www.sec.gov.
Further information on
www.abbey.com>About Abbey>Our Policies>Corporate Governance>NYSE Corporate Governance.
business of Abbey.
Directors’ remuneration is decided by
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.
director to qualify.
ceases.
202
If Abbey commences liquidation, the liquidator may, with the sanction of a special resolution and any other sanction required by the Companies Acts.
203
Shareholder Information
Contact Informationcontinued
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. |
> | 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. |
There are no provisions discriminating against any existing or prospective shareholder as a result of such shareholder owning a substantial number of shares.
meeting.
204203
Terms used | US equivalent or brief description of meaning | |
Accounts | Financial statements | |
Allotted | Issued | |
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 | |
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
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
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
By | /s/ Francisco Gómez-Roldán | |||
Francisco Gómez-Roldán | ||||
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** |
* | Documents concerning Abbey National plc referred to within the Annual Report on Form 20-F |
** | Incorporated by reference |