Interim Results. 28 th July 2004

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1 Interim Results 28 th July 2004

2 James Crosby Chief Executive

3 HBOS Benchmarks Sub 40% cost:income ratio Self funding double digit growth 15-20% market shares potential Sustainable and improved returns

4 2004 Interims Key Themes Earnings momentum Measured growth Improved efficiency Stable credit Higher shareholder returns

5 2004 Clear Choices Capital retention vs distribution Retail prudence vs volume Insurance manufacturing vs broking Investment transparency vs opacity Corporate quality vs quantity

6 Today s Agenda Financials Retail Corporate and Treasury International Insurance & Investment

7 Mike Ellis Group Finance Director

8 Key Financials % Growth Profit Before Tax - PBT ( m) 2,161 1, PBT and Exceptional Items - PBTE ( m) 2,183 1, PBTE and Short Term Fluctuations ** ( m) 2,244 1, Underlying Earnings Per Share* (p) Dividend Per Share (p) * Before exceptional items and goodwill amortisation ** Before exceptional items and after adjusting for the impact of short term fluctuations in investment returns

9 Post-Tax Return On Mean Equity % % Group Return on Equity * Group Target Return on Equity ** Group Adjusted Target Return on Equity *** * Before exceptional items ** Before exceptional items and after adjusting for the impact of short term fluctuations in investment returns *** Group Target RoE after allowing for the estimated reduction in profit arising from the commencement of household insurance underwriting

10 Financial Performance Divisional PBTE m m % Growth Retail Corporate Treasury Insurance & Investment International Group Items (150) (132) (14) Total 2,183 1,825 20

11 Financial Performance Group PBTE m m % Growth Net Interest Income 2,850 2,648 8 Non-interest Income* 1,853 1, Operating Expenses** (2,005) (1,913) 5 Operating Profit Before Provisions** 2,698 2, Provisions (578) (499) 16 Share of Profits of Associates & JVs and Profit on Disposal of Fixed Assets Profit Before Tax and Exceptional Items 2,183 1, * Includes general insurance claims and amounts written off fixed asset investments ** Excludes exceptional items

12 Financial Performance Group PBTE (excluding Insurance & Investment) m m % Growth Net Interest Income 2,812 2,622 7 Non-interest Income* 1,352 1, Operating Expenses** (1,880) (1,790) 5 Operating Profit Before Provisions** 2,284 1, Provisions (578) (499) 16 Share of Profits of Associates & JVs and Profit on Disposal of Fixed Assets Profit Before Tax and Exceptional Items 1,775 1, * Includes general insurance claims and amounts written off fixed asset investments ** Excludes exceptional items

13 Financial Performance Net interest Income - Margin Trends Half Year Ended % Half Year Ended % Half Year Ended % Retail Corporate Treasury International Group

14 Financial Performance Non-interest Income (excl. Insurance & Investment) Half Year Ended Half Year Ended % Growth Retail Corporate* Treasury International* Total* 1,352 1, * Includes amounts written off fixed asset investments

15 Financial Performance Operating Expenses Half Year Ended Half Year Ended % Growth Operating Expenses 2,027 1,957 4 Exceptional Items (22) (44) (50) 2,005 1,913 5 Goodwill Amortisation (52) (46) 13 Operating Lease Depreciation (203) (159) 28 Underlying Operating Expenses 1,750 1,708 2

16 Financial Performance Underlying Operating Expenses Half Year Ended Half Year Ended % Growth Retail Corporate Treasury International Group Items 1, , ,625 1,585 3 Insurance & Investment Total 1,750 1,708 2

17 Financial Performance Provisions Charge m % of Average Customer Advances m % of Average Customer Advances Retail Corporate International Total

18 Financial Performance Closing Provisions, Suspended Interest and Non Performing Assets (NPAs) Provisions & Interest NPAs as % Provisions in Suspense Customer of Customer & Interest as % of Advances NPAs Advances in Suspense NPAs bn m % m % As at Retail Residential Mortgages , Other Banking , , Total , , As at Retail Residential Mortgages , Other Banking , , Total , ,400 48

19 Financial Performance Insurance & Investment PBTE m m % Growth Net Interest Income Non-interest Income* Operating Expenses** (125) (123) 2 Operating Profit Before Provisions** Share of Profits of Associates & JVs (6) (7) 14 Profit Before Tax and Exceptional Items * Net of general insurance claims of 86m in 2004 and 42m in 2003 and amounts written off fixed asset investments of nil in 2004 and 2m in 2003 ** Excludes exceptional items

20 Financial Performance Group Risk Weighted Assets & Capital m m Risk Weighted Assets 221, ,790 Tier 1 Capital 17,908 16,444 Tier 2 Capital 13,395 12,524 Total Deductions (5,353) (5,100) Total Capital 25,950 23,868 % % Tier 1 Capital Ratio Total Capital Ratio

21 Conclusion... Asset Growth Operating Income Operating Expenses Credit Quality Profitability Capital Strength RoE

22 Andy Hornby Chief Executive, Retail

23 More Profitable Growth Net interest income up 7% despite yield curve Non-interest income up 21% Net interest margin down just 4 bps on H Operating costs up only 0.2% Cost:income Ratio down from 49.3% to 45.1%

24 Strong Jaws +9.7% +9.5% Income +0.2% Costs JAWS

25 Volume Growth Still Strong Net mortgage lending share of 17% 560,000 new bank accounts 770,000 new credit cards 6.1bn growth in savings/banking balances

26 Margins Robust Despite LIBOR Related Funding Pressures Movement in Margin Basis Points Net Interest Margin for H2 ended Dec Mortgages/Savings 2 Banking 5 Personal Lending (3 ) Credit Cards (2 ) Product Spreads 2 Wholesale Funding (5 ) Capital Earnings (1 ) Total (4 ) Net Interest Margin for H1 ended June

27 Strong Momentum in Non-Interest Income Non-Interest Income up 21% Strong fee growth in all product categories mortgages, banking, credit cards Fee Income benefiting from 3 years of book growth in current accounts and cards Strong trends will continue into 2005

28 A Prudent Approach to Credit NPAs up marginally to 1.88% (Dec %) NPA provisions cover stable at 40% (Dec %) Net mortgage lending share reduced to 17% ( %) Average mortgage book LTV 42% (Dec %) Only 7.7% of mortgage book above 85% LTV Personal loan NPAs up to 12.5% but recent delinquency rates improving Credit card NPAs stable at 9.2% and lead indicators strong

29 Ruthless Cost Controls Costs up only 0.2% over H Low cost scale IT systems drive productivity Significant central cost reductions Cost:income ratio 45.1% (H %) 3% cost target for 2004 will be beaten

30 Retail Has Potential For Further Profitable Growth Long-term scope for 15%-20% share in all key markets LIBOR related funding pressures should ease in 2005 Strong momentum in non-interest income Further tightening of LTVs to protect asset quality Rigorous cost control Further reductions in cost:income ratio

31 George Mitchell Chief Executive, Corporate

32 Corporate: Performance 6 Months to June 04 6 Months to June 03 Net Interest Income ( m) % Non-interest Income ( m) % Operating Income ( m) 1,406 1, % Underlying Expenses * ( m) % Cost:income Ratio (%) PBTE ( m) % * Underlying expenses before exceptionals and operating lease depreciation

33 Corporate: Volume and Margin 6 Months to June 04 Lending Growth (annualised) 9% RWA Growth (annualised) 13% Deposits Growth (annualised) 12% 6 Months to June 04 6 Months to Dec 03 Net Interest Spread (bps) Net Interest Margin (bps)

34 Corporate: Provisions Charge m % of Average Advances 6 months to June months to December months to June

35 Corporate: Non Performing Assets m % of Advances As at June , As at December , As at June , Provisions as a % of NPAs As at June % As at December % As at June %

36 Treasury: Performance 6 Months to June 04 6 Months to June 03 Net Interest Income ( m) Net Interest Margin (bps) Non-interest Income ( m) Expenses ( m) Cost:income Ratio (%) PBTE ( m)

37 Treasury: Credit Quality Non performing assets as at: June 03 December 03 June 04 NIL NIL NIL Provisions charge for 6 months to: June 03 December 03 June 04 NIL NIL NIL

38 Outlook Controlled asset growth Strong growth in non-interest income Tightly controlled costs Improving credit quality All leading to improved returns

39 Colin Matthew Chief Executive, International

40 H1 Results Profit Before Tax and Exceptional Items June 2004 June 2003 % 149m 118m +26%

41 H Australia Advances A$33.2bn (5% growth) Deposits A$12.5bn (6% growth) Net Interest Margin 2.07% (H %) Operating Income A$537m (12% increase) Operating Expenses* A$251m (1.6% increase) Cost:income 46.2% (H %) Provisions Charge A$30m (H1 03 A$46m) PBTE A$258m (H1 03 A$191m) * Underlying expenses before exceptionals and operating lease depreciation

42 H Ireland Advances 9.2bn (17% growth) Deposits 5.3bn (21% growth) Net Interest Margin 1.90% (H %) Operating Income 129m (23% increase) Operating Expenses* 55m (15.8% increase) Cost:income 37.6% (H %) Provisions Charge 9m (H m) PBTE 65m (H m) * Underlying expenses before exceptionals and operating lease depreciation

43 Objectives - Australia Drive through integration of our four businesses Ensure continuation of business as usual growth Invest in and launch new initiatives across all our business lines Firmly establish our brands in the Customer Champion space

44 Objectives - Ireland No. 1 Business Bank by 2005 Driver of change in switching, transparency and transmission Expansion of retail franchise

45 Phil Hodkinson Chief Executive, Insurance & Investment

46 First Half Results Profits Reported PBTE up 5% to 408m Adjusted* PBTE up 16% to 451m Insurance up 13% to 239m Investment up 20% to 212m Sales Insurance up 12% to 840m Investment up 5% to 634m (up 6% in UK) * After adjusting for 43m household insurance underwriting impact

47 Household Insurance Underwriting Market Presence 17% growth in 1H 2004; 20% in % market share top 5 player in 2003 Best Direct Home and Contents Provider * Shareholder Returns Low cost distribution Strong underwriting and claims management Weather event protection above 25m * Your Money Direct Awards

48 Growth in Insurance Book Policies (millions) HY HY HY HY HY1 Repayment Household Motor Other

49 Insurance Business Prospects Household Strong growth, up 17% with great opportunity to grow towards 15%+ market share Repayment Already at 15% market share and holding up resiliently in face of slow growth in loans market Motor Strong growth, up 36% and with First Alternative now on-stream, 10%+ share is achievable

50 UK Investment Sales Growth m EPI HY HY2 Bancassurance 2002 HY HY2 UK Intermediary 2003 HY HY HY1 Wealth Management

51 New Business Profitability % EPI Bancassurance Intermediary Wealth Management Overall

52 With Profits Products Not An Issue Less than 3% of UK investment sales Equity backing ratio is 55%, temporarily hedged whilst markets remain uncertain Realistic balance sheet likely to be same or slightly stronger than statutory position

53 Investment Business Prospects Wealth Management Strong recovery in HNW demand; partnership continues to go from strength to strength Intermediary Opportunity to optimise balance between market share and profitability from position of strength Bancassurance Continues to perform; perfectly aligned with Treasury s stakeholder product proposals

54 Stakeholder Products Treasury Proposals 1.5% p.a. maximum No front end charges No exit penalties Balanced & smoothed investment funds Simple, clear design Basic advice process Profitability =? HBOS Bancassurance 1.1% p.a. on average No front end charges No exit penalties Balanced & smoothed investment funds Simple, clear design Full advice process Profitability = 29% EPI

55 Profitable Momentum Multi-brand Halifax, Clerical Medical, Insight, esure, SJPC with appeal to different markets Multi-distribution bancassurance, direct, intermediary and wealth management Scale a significant player in key markets with low cost access to customers and efficiency Regulation competitive barrier being turned to our advantage Profitability a focus on sustainable margins

57 2004 Interims Key Themes Earnings momentum Measured growth Improved efficiency Stable credit Higher shareholder returns

58 Questions and Answers

Preliminary Results James Crosby Chief Executive

Preliminary Results James Crosby Chief Executive Preliminary Results 2002 James Crosby Chief Executive Today s Agenda A strategy for shareholders Financial Review Retail Corporate Insurance & Investment Outlook A strategy for shareholders Differentiated