Chief Executive’s Report
Credit quality
Credit experience remained relatively benign throughout 2007. In common with industry expectations, going forward we expect some modest deterioration in certain sectors and markets, consistent with the general global economic slowdown.
Impaired loans as a percentage of advances fell to 2.07% (2006 2.18%). Impairment losses increased by 15% to £2,012m (2006 £1,742m) representing 0.50% of average advances (2006 0.48%).
In Retail, secured impairment losses, continuing to reflect the substantial equity in the mortgage book, were only £28m (2006 £108m). As guided, Retail unsecured impairment losses in the second half were lower than in the first half at £576m (H1 2007 £690m).
In Corporate, impaired loans are running at a higher level than the historically low figures seen in 2006 reflecting our reassessment of the outlook for a number of higher risk credits. Corporate impairment losses were higher at 0.61% of average advances (2006 0.50%).
In International, credit quality remains strong as we continue to diversify the lending book across different geographies and markets.
In Treasury, we have not incurred any credit impairments and thus we expect that the £227m negative fair value adjustments taken to the income statement and the £509m post-tax adjustments taken to the available for sales reserve in the balance sheet will reverse over time.
Taxation
Changes in corporation tax rates have resulted in a net benefit of £171m to reported attributable profit arising from a reduction in deferred tax net liabilities of £178m offset by a £7m (£10m pre-tax) reduction in the value of leasing assets. This one-off net benefit has been excluded from our underlying results. The effective tax rate for HBOS in 2007 (excluding policyholder tax and the above one-off benefit) was 28.0% (2006 28.3%).