Chief Executive’s Report
Our Performance
Profit growth
Underlying earnings per share increased by 6% to 106.2p (2006 100.5p). This is after recording negative fair value adjustments on traded investment securities of £227m and claims of £135m arising from the 2007 summer floods.
Underlying profit before tax increased by 3% to £5,708m (2006 £5,537m). Corporate, Insurance & Investment and International all achieved double digit underlying profit growth, more than offsetting the reduced profit in Retail and Treasury. Profit after tax increased by 4% to £4,109m (2006 £3,934m). Profit before tax decreased by 4% to £5,474m (2006 £5,706m), predominantly reflecting the disposal of Drive in 2006 and the reduction in policyholder tax payable.
Dividends and capital
We have today proposed a final dividend of 32.3p resulting in a full year dividend up 18% to 48.9p (2006 41.4p).
At the end of 2007, our Basel I Tier 1 ratio was 7.4% (2006 8.1%), reflecting strong risk weighted asset growth in 2007 and our decision not to pursue non-equity capital issuance in the latter part of the year. Tier 1 gearing was stable at 24.7% (2006 25.0%).
Basel II
Basel II capital ratios at 1 January 2008 were 7.7% Tier 1 (Basel I 7.4%) and 11.0% Total Capital (Basel I 11.1%). Our assessment of our capital strength today under Basel II remains broadly unchanged from Basel I and thus we have determined that, going forward, we should set a Basel II Tier 1 target range of 7.5%-8.5%.
Liquidity
During the dislocation in financial markets in the latter part of 2007, customer deposit growth and the supply of wholesale funding to HBOS remained strong. In recent years, prior to the dislocation, we had prudently and consistently lengthened the maturity profile of our wholesale funding, whilst at the same time diversifying the types and sources of funding. This has been at some cost to margins during this period but has given us the necessary flexibility to operate in these challenging markets. We will continue to ensure that we maintain an appropriate liquidity profile consistent with our planned business growth.