Chief Executive’s Report
Outlook
The current turmoil in global financial markets introduces considerable uncertainty into the plans of all financial institutions. We are planning on the assumptions that market conditions will remain uncertain throughout 2008.
In Retail, in this environment we will continue to favour profitable growth over market share. Over the last five months we have seen mortgage prices adjust in the light of increased funding costs. Our strong multi-brand savings franchise has been to the fore in 2007 and we expect to see strong deposit growth in 2008, despite an expected increase in competition for retail funds.
In Corporate, we are now moving into a cycle where the strong contribution from our investment portfolio will give way to a more balanced contribution from origination revenues and investments.
We continue to see good growth potential in the Insurance & Investment contribution to Group profit as the size of our investment in-force business increases to mitigate the strain from new business. We also continue to see good prospects for sales growth in both insurance and investment business lines.
Whilst our International businesses profit performance will be more restrained in 2008 as we increase our investment in their future, we remain confident that this investment will also underpin stronger profit growth in future years.
For our Treasury & Asset Management division, the key focus for our Treasury team is the management of our funding and liquidity during the financial markets dislocation. We entered this period confident in our funding profile and capital base. This has served us well and we intend to maintain robust liquidity and capital positions going forward. The negative fair value adjustments taken in 2007 to the Income Statement and Balance Sheet, which were in respect of non-credit impaired investment securities, are expected to reverse out over time as financial markets stabilise and the relevant assets approach maturity.
The UK economy is forecast to grow by around 2.0%-2.25% this year, just below the long run trend rate. Employment is very high and the Bank of England may well announce further rate cuts during the year. We expect the UK economy to move over time from being consumption led to a better balance between consumer demand and a higher level of savings by UK householders. We expect house price growth to be flat in 2008. Sound fundamentals underpin the housing market, in particular, record levels of employment and a continuing shortage of new properties.
We expect financial markets to be difficult in 2008 but our combination of balance sheet strength, diversified business mix and stringent cost control, together with relative margin stability, leaves us well positioned to take opportunities presented in these markets and deliver good growth in shareholder value over the next few years.
Andy Hornby
Chief Executive