Group Finance Director’s Report
Introduction
Group underlying profit before tax increased by 3% to £5,708m (2006 £5,537m). Underlying net operating income rose by 6% driven by good growth in underlying non-interest income. Underlying operating expenses rose by 7% and impairment losses by 15%.
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.
Basic earnings per share increased by 6% to 106.2p (2006 100.6p). Underlying earnings per share also rose 6% to 106.2p (2006 100.5p) and the proposed final dividend increased by 16% to 32.3p (2006 27.9p). The full year dividend is 48.9p (2006 41.4p), an increase of 18% on 2006. The final dividend will be paid on 12 May 2008 to ordinary shareholders on the register at the close of business on 14 March 2008.
The table below reconciles underlying profit before tax and profit before tax.
| Year ended 31.12.2007 £m |
Year ended 31.12.2006 £m |
|
| Underlying profit before tax | 5,708 | 5,537 |
| Adjusted for: | ||
| Regulatory provisions charge | (122) | (95) |
| Impact of the 2008 change in corporation tax rate on the value of leasing assets | (10) | |
| Profit on sale of Drive | 180 | |
| Goodwill impairment | (5) | (55) |
| Policyholder tax payable | 18 | 220 |
| Short term fluctuations | (115) | (81) |
| Profit before tax | 5,474 | 5,706 |
Regulatory scrutiny and media interest into current account charges has generated an industry wide increase in customer requests for refunds of current account service fees. In 2007, ex gratia refunds, together with the associated administration costs, amounted to £122m, prior to suspension of such payments following the test case launched by the OFT in July. These refunds are reported outside of our underlying results as they relate predominantly to fees charged in prior years.
During 2008 various corporation tax rates will change. The UK rate reduces from 30% to 28% in April 2008 and the German rate reduced from 25% to 15% from January 2008. This has resulted in a net benefit of £171m to profit attributable to ordinary shareholders arising from a reduction in deferred tax net liabilities of £178m, partially offset by a £7m (£10m pre-tax) reduction in the value of leasing assets. This net benefit has been excluded from our underlying results.
The table below reconciles underlying profit attributable to ordinary shareholders to profit attributable to ordinary shareholders.
| Year ended 31.12.2007 £m |
Year ended 31.12.2006 £m |
|
| Underlying profit attributable to ordinary shareholders | 3,965 | 3,816 |
| Adjusted for: | ||
| Regulatory provisions charge | (85) | (67) |
| Impact of the 2008 change in corporation tax rate on: | ||
| the value of leasing assets | (7) | |
| deferred tax net liabilities | 178 | |
| Profit on sale of Drive | 180 | |
| Goodwill impairment | (5) | (55) |
| Short term fluctuations | (81) | (57) |
| Profit of disposal group classified as held for sale attributable to ordinary shareholders | 3 | |
| Profit attributable to ordinary shareholders | 3,965 | 3,820 |
Post Tax Return on Mean Equity
Group post tax return on mean equity (‘ROE’) decreased to 19.7% (2006 20.8%).
| Year ended 31.12.2007 £m |
Year ended 31.12.2006 £m |
|
| Underlying profit attributable to ordinary shareholders | 3,965 | 3,816 |
| Mean Equity | 20,101 | 18,375 |
| % | % | |
| Group post tax return on mean equity | 19.7 | 20.8 |
Note: ROE is calculated by dividing underlying profit attributable to ordinary shareholders by the monthly average of ordinary shareholders’ funds.