Preliminary Results James Crosby Chief Executive

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Angelina Burke
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2 Preliminary Results 2002 James Crosby Chief Executive

3 Today s Agenda A strategy for shareholders Financial Review Retail Corporate Insurance & Investment Outlook

4 A strategy for shareholders Differentiated strategy Outstanding execution Real competitive advantage Shareholder value The growth payback

5 HBOS Credentials Business balance Financial strength for growth Solid credit quality Low cost advantage Sustainable pricing - broadly stable margins Substantial merger synergies to come Increasing ROE target 20% in 2004

6 Delivering on promises Meeting targets in sales, costs, merger synergies and capital ratios Meeting expectations in margins, in credit quality and in market shares

7 Mike Ellis Group Finance Director

8 Key Financials % Growth Profit before tax 3,062 2, & exceptional items m Underlying earnings per share* (p) Dividends (p) Group Target post tax return on mean equity**(%) * Before exceptional items and goodwill amortisation ** Before exceptionals and after adjusting for short-term fluctuations in investment returns and changes to economic assumptions

9 December 2001 Comparative Figures Profit & Loss Account As Reported m FRS 19 m Embedded UITF 33 Value (*) m m As Restated m Profit before tax & exceptionals 2,853 - (18) (320) 2,515 Profit before tax 2,630 - (18) (320) 2,292 Profit after tax 1, (18) (228) 1,629 Profit attributable to shareholders 1, (218) 1,468 Balance Sheet Total Assets 312,275 (4) - (200) 312,071 Total Assets excluding long term assurance assets 274,674 (4) - (200) 274,470 Shareholders Funds 11, (190) 11,413 (*) Effect of changing to unsmoothed asset values for projecting future cash flows

10 Financial Performance. Divisional Overview - PBTE Retail Banking m 1,426 Restated m 1,205 % Growth 18 Insurance & Investment Business Banking Corporate Banking Treasury BankWest (6) Group Items (247) (240) (3) 3,062 2,515 22

11 Financial Performance Group Overview m Restated m % Growth Net interest income 4,770 4, Non-interest income*^ 2,673 2, Operating expenses* (3,609) (3,331) 8 Operating profit before provisions* 3,834 3, Provisions (832) (608) 37 Share of profits of associates & JVs and Profit on disposal of business Pre-tax profit* 3,062 2, * Excluding exceptional items Includes 25m profit on disposal of merchant services business ^ Includes general insurance claims and amounts written off fixed asset investments

12 Financial Performance Net Interest Income - Margin Trends 2002 % 2001 % Retail Banking Business Banking Corporate Banking Treasury BankWest Group (including trading assets) Group (excluding trading assets)

13 Financial Performance Operating Expenses m m % Growth Operating Expenses 3,762 3,505 7 Exceptional items (153) (174) 3,609 3,331 8 Goodwill amortisation (86) (68) Operating lease depreciation (289) (210) Underlying operating expenses 3,234 3,053 6

14 Retirement Benefits m SSAP 24 Charge FRS17 Charge FRS17 Charge (Forecast) 150 Net pension liability at

15 Merger Synergies Expected Run P&L Impact Rate from In 2002 Jan 2005 m m Retail Banking Insurance & Investment (9) 65 Corporate Banking Business Banking (19) 120 Treasury Group Services HBOS Group

16 Financial Performance Provision for bad debt charge m % of average customer advances m % of average customer advances Retail Banking Business Banking Corporate Banking Other

17 Financial Performance Closing Provisions, Suspended Interest and Non Performing Assets (NPAs) Year End Customer Advances Year End NPAs NPAs as % of Year End Customer Advances Provisions & interest in suspense Provisions & interest in suspense as % of NPAs As at m m % m % UK Residential Mortgages 145,100 1, Other Banking 89,215 2, , Total 234,315 4, , As at m m % m % UK Residential Mortgages 125,900 1, Other Banking 71,993 2, , Total 197,893 4, ,892 46

18 Financial Performance Post-tax Return on Mean Equity Divisional post-tax RoE: % % Retail Banking Insurance & Investment Business Banking Corporate Banking Treasury BankWest Amortisation of Goodwill (0.7) (0.6) Group Target post-tax RoE Short-term fluctuations in investment returns (1.6) (1.7) Group post-tax RoE

19 Financial Performance Group Risk Weighted Assets & Capital Risk Weighted Assets m 187, ,532 Tier 1 Capital m 14,788 12,415 Tier 2 Capital m 8,803 7,700 Total deductions m (4,064) (3,357) Total Capital m 19,527 16,758 Tier 1 Capital Ratio % Risk Asset Ratio %

20 Financial Performance Asset growth and stable margins Merger synergies Sound credit quality Tight cost control Financial Strength Group Target RoE of 20% in 2004

21 Profit Momentum Andy Hornby Chief Executive, Retail

22 Delivering Profitable Growth % v % % % Income + 354m Costs + 44m Profits + 221m

23 The Virtuous Circle Still Works Strong Volumes Cost Income Ratio down from 56.7% to 52.5% Margin Decline Only 6bps (ex IF) Cost Growth Only 2.3% Stable Credit Quality

24 Strong Volume Growth Net mortgage lending share 29% 1.3m new bank accounts 1.2m new credit cards accounts Personal loans up 31% Bancassurance new business up 66%

25 Broadly Stable Margins Movement in Margin: Basis Points Net Interest margin for year ended Add: Credit Cards 3 Consumer Finance 2 Banking 1 Capital Earnings 1 Less: Intelligent Finance (5) Wholesale Funding (6) Mortgages (3) Savings (4) Net Interest Margin for year ended

26 Exceptionally Strong Asset Quality Overall Total NPAs down from 2.14% of advances to 1.84% NPA provisions coverage up from 39% to 43% Mortgages Arrears declined from 1.49% to 1.08% of balances Average loan to value for mortgage book down to 43% from 45% Banking/Consumer Credit Banking NPAs down from 8.0% of balances to 6.8% Personal loan NPAs down from 13.0% of balances to 11.8% Credit card NPAs stable at 8.4% of balances

27 Stringent Cost Control Operating costs up 2.3% (target 3%) Excluding IF & performance bonuses, costs down by 1.3% 62m of merger related cost synergies Cost income ratio falls from 56.7% to 52.5%

28 The Virtuous Circle Continues to Turn Volume Growth Consumer affordability still strong Highly incentivised and productive salesforce Stable Margins Back book migration almost complete Base rate moves help margin management Strong Credit Quality No relaxation in applicant LTVs and credit scoring Pricing for quality Stringent Cost Control 140m of merger cost synergies by % cost growth target readily achievable

29 Targets for 2003 Net mortgage lending greater than share of stock Over one million new bank accounts and credit cards Reaffirm position as the UK s No 1 bancassurer Cost growth limited to 3% Further significant improvement in cost income ratio Further improvement in ROE

30 Return Led Growth George Mitchell Chief Executive, Corporate Banking

31 Return Led Growth Strong controlled growth Robust margins Efficiency gains Improved Returns Sound credit quality

32 Strong But Controlled Growth Lending growth of 25%, slowing as targeted Continuing to operate in markets we know Increasing level of sell down

33 Robust margins Further increase in net interest margin % % Less competition Avoiding commodity business

34 Efficiency Gains A further reduction in our cost : income ratio % % 2003 lower still

35 Sound Credit Quality Predominantly old economy Country risk averse Workout philosophy Bad debt charge as % of average advances 0.74% (0.65%, 2001) NPAs as % of closing advances 1.61% down from 1.69% (2001)

36 Improved Returns 35% growth in net interest income 34% increase in non-interest income 30% growth in profits Increased post-tax Return on Equity % %

37 Prospects Further controlled growth with no change in risk appetite Good margin outlook More efficiency gains Stable credit conditions Sustained/higher ROE

38 Strength & Opportunity Phil Hodkinson Chief Executive, Insurance and Investment

39 IID : Strength and Opportunity Insurance low risk, strong cash flow, high growth weakened competition, growing demand never better placed than today Investment distribution power, scale, financial strength very tough short term trading conditions attractive market growth opportunities

40 Financial Results : IID Profits up 25% to 589m (2001 : 472m*) Return on equity = 16.7% Insurance: Profits up 15% to 400m Income up 12%, expenses up less than 1% Underwriting loss ratios remained stable Investment: Profits up 52% to 189m (2001: 124m*) Underlying profits up 32% New business margins improved * Restated

41 Investment : Underlying growth m m Reported Profit short term investment fluctuations economic assumption changes (90) (60) Underlying performance

42 IID : Improved Disclosure Separate Insurance and Investment results Unsmoothed and smoothed earnings Underlying long term performance Source of profits and balance sheet split Modified statutory solvency results New business profitability by channel Return on equity v internal rate of return Financial strength

43 Operational Results : Insurance Sales up 25% Household sales up 10%: driven by growth in mortgage business, now covering almost 1 in 10 UK households Repayment sales up 27%: driven by growth in loans and credit cards, and continued success in third party business Motor sales up 79%: driven by experienced esure management team and excellent range of distribution channels

44 Prospects : Insurance Strong fundamentals brands, distribution, customers, service and efficiency Excellent trading environment firm rates, competitors weak, strong demand Business momentum sales, low risk, cash flow, profits HBOS never more advantaged than today

45 Operational Results : Investment Sales up 11% overall (EPI) Bancassurance sales up 66%: improved productivity and high sales quality. Now No. 1 bancassurer in UK Intermediary sales down 5%: clear value strategy and improved pricing Wealth management sales down 25%: tough investment market conditions Insight launch successful, boosted by RAM

46 Prospects : Investment Strong fundamentals brands, distribution, scale, financial strength, simple value products and efficient operations Operating environment Bancassurance: positive outlook (e.g. Sandler) Intermediary: clear value strategy SJPC: well positioned for de-polarisation Insight: fixed interest skills give defensive quality Tough trading conditions near term, but demographics underpin medium term growth

47 IID : Strength and Opportunity Insurance low risk, strong cash flow, high growth weakened competition, growing demand never better placed than today Investment distribution power, scale, financial strength very tough short term trading conditions attractive market growth opportunities

49 HBOS in 2002 HBOS credentials reinforced Balance, financial strength, sound credit quality, stable margins Targets achieved Sales, market shares, merger synergies, costs Strategy that delivers in tough times

50 HBOS Prospects Challenging environment Strong competitor in every market Powerful momentum everywhere Driving revenue much harder than costs Increasing returns 20% ROE target reaffirmed

Interim Results. 28 th July 2004

Interim Results. 28 th July 2004 Interim Results 28 th July 2004 James Crosby Chief Executive HBOS Benchmarks Sub 40% cost:income ratio Self funding double digit growth 15-20% market shares potential Sustainable and improved returns 2004