Chief Executive’s Report
Growth
Advances to customers increased by 14% to £430.0bn (2006 £376.8bn), reflecting the strong growth in Corporate (22%) and International (38%), with lower growth in Retail (7%).
Growth in Corporate lending originations increased in the second half reflecting the changing conditions. However, we continued to approach the market selectively, and despite slower secondary markets we continued to sell down to hold levels with which we are comfortable. During 2007, Corporate lending growth was 30% before sell downs and 22% after sell downs.
International lending grew by 38% with growth being delivered across all three businesses reflecting the continued expansion of our overseas activities.
We enjoyed an extremely strong second half in the mortgage market with our net share of lending increasing to 22% (up from 8% in the first half). As already announced, we will no longer set half-yearly or annual net lending targets and will favour profitable growth over market share.
Customer deposits increased by 15% to £243.2bn (2006 £211.9bn). As the UK’s number one provider of liquid savings, and with a multi-brand approach to the savings market, our Retail division saw customer deposits increase by 9%. In Corporate, deposits increased by 12%, and in International by 35%.
UK Investment sales increased by 14% to £16,300m Present Value of New Business Premiums (‘PVNBP’) (2006 £14,356m) driven by strong growth in Bancassurance (up 17%) and Wealth Management (up 26%). Sales in Intermediary fell 2% as we refocused the business around individual pensions and investment business. General Insurance sales decreased by 1% to £1,761m Gross Written Premiums (‘GWP’) (2006 £1,786m, excluding Paymentshield). Sales of Repayment Insurance fell by 9%, largely offset by increased sales in Household (up 5%) and Motor (up 12%).
Margins
The Group net interest margin fell by 9bps to 1.63% (2006 1.72%). The main driver of this reduction was in Retail where margins fell 12bps reflecting the competitive pressure on mortgages in the first half and the increased costs of wholesale funding in the second half. In Corporate, margins declined by 19bps as a result of competitive pressures in the first half and changes to the asset mix. International margins declined by 4bps reflecting the greater proportion of retail business, particularly in Australia.
Efficiency
Underlying net operating income increased by 6% to £12,903m (2006 £12,117m). Underlying net interest income decreased by 1%, due to the trends in margins. Underlying non-interest income increased by 18%, primarily reflecting strong growth in Corporate.
Underlying operating expenses increased by 7% to £5,274m (2006 £4,908m). This increase includes £75m of costs associated with our cost efficiency programme. Further investment was incurred in expanding our International operations, in particular the continuing rollout of retail branches in Ireland and the commencement of a retail and business banking branch opening programme on Australia’s East Coast.
The cost:income ratio was stable at 40.9% (2006 41.0%). We remain committed to cost leadership as a competitive advantage, while continuing to invest for profitable future growth in attractive markets.