Chairman’s Report
Dennis Stevenson
Chairman
The Chairman’s lot is a happy one when, as last year, the Annual Report can laud a share price out performance both against the FTSE 100 and the FTSE Banks index. Not so in 2007, where our share price fell some 35%, a performance that was in the middle of the pack, but of little consolation for a bank that seeks to outperform. This year’s report will therefore examine with our usual frankness the performance in 2007 and the strategy we are pursuing for our shareholders in 2008.
Shareholder returns
Underlying earnings per share grew 6% in 2007 to 106.2p (2006 100.5p). This is after recording negative fair value adjustments on traded investment securities of £227m and claims of £135m arising from the summer 2007 floods. Profit before tax fell by 4% to £5,474m (2006 £5,706m), also reflecting the disposal of Drive in 2006 and the reduction in policyholder tax payable. Profit after tax increased 4% to £4,109m (2006 £3,934m). The proposed final dividend per share of 32.3p takes the full year dividend to 48.9p, up 18% on the previous year. The Board’s decision at the half year to increase the payout ratio to some 46% from 41% has been reaffirmed. This is a clear demonstration of the confidence we have in the continuing earnings momentum and strong cash generative capabilities of HBOS. During 2007 we completed the planned buyback programme, purchasing some £500m of shares in issue for cancellation, with a positive impact on earnings per share for current shareholders.
Market dislocation
If ever the boards of banks, regulators or rating agencies needed a reminder of the importance of strong liquidity and strong capital, the second half of 2007 served as a wake-up call. Seemingly overnight, we moved from a scenario where the economic cycle looked set to play out in a relatively benign way, to one where a credit crunch in the USA rapidly deteriorated into what is, as I write this, a worldwide liquidity dislocation.