Chairman’s Report
Large scale credit loss announcements gathered pace with those most exposed to the US sub-prime fall out seeking to draw a line under their exposure. Banks with strong liquidity hoarded it, those that needed it either couldn’t get it or paid much more for it. In the eye of the storm, nemesis followed hubris, with traditional market solutions seemingly impossible. Banks now know, as in truth they always did, that first and foremost, it is the duty of the Board to ensure that the Group has financial stability and the wherewithal to continue in business profitably. Gradually this current market liquidity dislocation will pass. The legacy however, will be firstly economic, as the consequences of the medicine will likely make the patient feel worse in the short term and secondly strategic, as banks adjust to the new reality of liquidity and capital having equivalent importance. In this context, we welcome the confirmation from the FSA of our status as an Advanced bank under the new Basel II capital regime.
Unusually perhaps, at so early a part of my report, I would like to thank colleagues from across the Group for their efforts in 2007. In the midst of the unprecedented market dislocation, colleagues have adjusted plans, tightened controls further, communicated well and worked in a truly collegiate manner to see HBOS through the worst of the market disruption in 2007. It is arguably only at such times that you can truly assess the quality of the investment made in colleagues, and the business, over time. The Board has been hugely impressed with the way in which the entire HBOS team has responded.
Strategy
Recent market liquidity considerations do not affect our long-term strategy. Growing the UK businesses, targeted international growth, cost leadership, capital discipline and colleague development remain our five key measures. In the Chief Executive’s report that follows, Andy Hornby reviews our performance in 2007 on these measures.
For 2008 we will continue to pay careful attention to the importance of both strong capital and strong liquidity and to size our balance sheet to the certainty of both. We are, I believe, rightly proud as a Board that we have been altering the risk profile of our liquidity requirements over the last four years, long before the current so-called liquidity crunch and without any external pressures from regulators or other shareholders but purely as part of being good custodians of your business. You may be quite sure that we will continue to bring to bear the same standards of rigour and financial conservatism as the business moves forward.
Shareholder feedback
This year’s independent audit of UK and international investor opinion again makes interesting reading. Investor feedback is currently focused on two large shifts in their views of the sector: a much higher emphasis on capital, liquidity and funding and a lower expectation for earnings growth, with concerns over risks to future earnings forecasts. Sentiment is dominated by the sector liquidity issues in the second half of 2007. Many an investor professes to be in a ‘wait and see’ mode until after the publication of the sector’s 2007 results and the clarity those should bring to the full earnings impact of a truly “annus horribilis”. The messages for us are that we should continue to keep focusing on what we do well, remaining conservative in our planning and decisive in our actions. This does not exclude the continuing imperative of constantly searching for where the growth will come from to continue the earnings momentum. Finally, as much a plea to the sector as to HBOS, investors make the point that in times of uncertainty, communication is vital and transparency is essential. On both we score well relatively but are nonetheless encouraged to do more.