Group Finance Director's Report
Capital Structure
Basel I
Tier 1 and Total regulatory capital ratios are 7.4% (2006 8.1%) and 11.1% (2006 12.0%) respectively. These ratios moved slightly below HBOS normal target operating ranges for capital ratios in the second half of the year. This was primarily due to higher than planned increases in risk weighted assets and our decision not to issue further Tier 1 capital in the second half of 2007. This position also reflected the share buyback of £500m (including costs) in 2007.
Risk Weighted Assets
Risk weighted assets (RWAs) increased by 20% to £330.8bn (2006 £276.0bn). RWAs at 31 December 2007 are based on new prudential rules relating to the consolidation of participations*. Had the new rules been applied at December 2006 RWAs would have been £5.0bn lower at £271.0bn and the actual growth in RWAs in 2007 would have been 22%.
The increase in RWAs was driven by the following factors:
- In Corporate, asset growth in the second half increased as Corporate took advantage of good lending opportunities in the market and saw lower refinancing and selldown in the slower secondary market;
- In Treasury & Asset Management, in the second half of 2007, we chose temporarily to fund maturing Asset Backed Commercial Paper (‘ABCP’), issued by our ABCP conduit, Grampian, from our own strong liquidity resources rather than pay the excessive spreads the ABCP market was demanding in the second half of 2007. As a result, at 31 December 2007, we had funded £7.1bn of Grampian’s ABCP, equivalent to 3% RWA growth and accounting for 16bps of the decline in the Tier 1 ratio. Landale liquidity facility drawn balances at 31 December 2007 were £1.0bn, which after consolidation leaves £0.5bn of RWAs which are reflected in the Corporate figures.
- In International, RWA growth of 38% reflects strong lending growth across the division as we expand our overseas activities.
Excluding the impact of Grampian, the underlying RWA growth is 17%. RWAs are quoted after capital relief, achieved by securitisations. New securitisations during the year provided an additional £7.5bn of capital relief offset by £6.0bn due to the redemption of existing loan securitisations.