Retail
Risks and Uncertainties
The key risks and uncertainties faced by Retail include a slow down in the UK economy, a deterioration in the UK housing market, both in terms of falling house prices and reduced volumes, competitive pressures, availability of funding and regulatory and legislative change.
A significant deterioration in the UK economy driven by materially higher unemployment and/or interest rates could lead to a contraction in the mortgage market or falling house prices and bring further pressure to bear in the unsecured lending market, both of which could result in a downturn in business volumes leading to lower revenues and an increase in impairment losses.
UK house price inflation slowed markedly in the second half of 2007 reflecting reduced affordability of borrowers and less availability of credit from mortgage lenders. While falls in house prices do not, in themselves, lead to higher impairment levels, there is an increased risk that borrowers are unable to refinance to lower mortgage rates. This, together with a reduction in the value of mortgage collateral, could lead to an increase in impairment losses.
In mitigation of these two factors, we have, over the last two to three years, taken a cautious approach to unsecured lending which has seen balances in these markets decline relative to our competitors. Further, in secured markets, the average loan to value in our mortgage book gives significant cushion in the event of falling house prices.
The UK retail banking market is relatively mature and competition is strong. Our ability to continue to grow and deliver our medium term strategic target of a market share of 15%-20% at acceptable returns to shareholders will be affected by competitor activity. Our low cost operating model together with our significant customer base and multiple brands gives us the strategic advantage to operate effectively and deliver a robust performance in the prevailing conditions.
Regulatory intervention is an ongoing feature of UK retail banking and changes could affect the profitability of our business. The main regulatory risk to Retail arises from the ongoing investigation into bank charges where HBOS is one of eight banks involved in a test case to resolve legal uncertainties concerning the fairness and lawfulness of unarranged overdraft charges. The test case was heard in January and February 2008 and we await the outcome.
Our ability to generate profitable growth depends on the pricing and availability of both retail and wholesale funding. To mitigate, we will utilise our enviable savings franchise to attract retail deposits and be very selective about our growth in assets, making judgements on the trade-off between volume, margin and credit risk.