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 Interims Key Themes Earnings momentum Measured growth Improved efficiency Stable credit Higher shareholder returns
2004 Clear Choices Capital retention vs distribution Retail prudence vs volume Insurance manufacturing vs broking Investment transparency vs opacity Corporate quality vs quantity
Today s Agenda Financials Retail Corporate and Treasury International Insurance & Investment
Mike Ellis Group Finance Director
Key Financials 30.06.04 30.06.03 % Growth Profit Before Tax - PBT ( m) 2,161 1,781 21 PBT and Exceptional Items - PBTE ( m) 2,183 1,825 20 PBTE and Short Term Fluctuations ** ( m) 2,244 1,842 22 Underlying Earnings Per Share* (p) 38.7 32.4 19 Dividend Per Share (p) 10.8 10.3 5 * Before exceptional items and goodwill amortisation ** Before exceptional items and after adjusting for the impact of short term fluctuations in investment returns
Post-Tax Return On Mean Equity 30.06.04 % 30.06.03 % Group Return on Equity * 18.6 17.2 Group Target Return on Equity ** 19.1 17.4 Group Adjusted Target Return on Equity *** 19.4 17.4 * 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
Financial Performance Divisional PBTE 30.06.04 m 30.06.03 m % Growth Retail 972 827 18 Corporate 667 514 30 Treasury 137 109 26 Insurance & Investment 408 389 5 International 149 118 26 Group Items (150) (132) (14) Total 2,183 1,825 20
Financial Performance Group PBTE 30.06.04 m 30.06.03 m % Growth Net Interest Income 2,850 2,648 8 Non-interest Income* 1,853 1,567 18 Operating Expenses** (2,005) (1,913) 5 Operating Profit Before Provisions** 2,698 2,302 17 Provisions (578) (499) 16 Share of Profits of Associates & JVs and Profit on Disposal of Fixed Assets 63 22 -- Profit Before Tax and Exceptional Items 2,183 1,825 20 * Includes general insurance claims and amounts written off fixed asset investments ** Excludes exceptional items
Financial Performance Group PBTE (excluding Insurance & Investment) 30.06.04 m 30.06.03 m % Growth Net Interest Income 2,812 2,622 7 Non-interest Income* 1,352 1,074 26 Operating Expenses** (1,880) (1,790) 5 Operating Profit Before Provisions** 2,284 1,906 20 Provisions (578) (499) 16 Share of Profits of Associates & JVs and Profit on Disposal of Fixed Assets 69 29 -- Profit Before Tax and Exceptional Items 1,775 1,436 24 * Includes general insurance claims and amounts written off fixed asset investments ** Excludes exceptional items
Financial Performance Net interest Income - Margin Trends Half Year Ended 30.06.04 % Half Year Ended 31.12.03 % Half Year Ended 30.06.03 % Retail 1.82 1.86 1.97 Corporate 1.92 1.91 2.01 Treasury 0.11 0.13 0.13 International 1.94 2.24 2.33 Group 1.68 1.72 1.82
Financial Performance Non-interest Income (excl. Insurance & Investment) Half Year Ended 30.06.04 Half Year Ended 30.06.03 % Growth Retail 479 395 21 Corporate* 670 533 26 Treasury 104 65 60 International* 99 81 22 Total* 1,352 1,074 26 * Includes amounts written off fixed asset investments
Financial Performance Operating Expenses Half Year Ended 30.06.04 Half Year Ended 30.06.03 % 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
Financial Performance Underlying Operating Expenses Half Year Ended 30.06.04 Half Year Ended 30.06.03 % Growth Retail Corporate Treasury International Group Items 1,026 325 52 124 98 1,024 311 40 124 86-5 30-14 1,625 1,585 3 Insurance & Investment 125 123 2 Total 1,750 1,708 2
Financial Performance Provisions Charge m 30.06.04 % of Average Customer Advances 30.06.03 m % of Average Customer Advances Retail 320 0.16 240 0.14 Corporate 241 0.33 232 0.35 International 17 0.09 27 0.18 Total 578 0.20 499 0.20
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 30.06.04 Retail Residential Mortgages 184.7 2,212 1.20 416 19 Other Banking 114.4 3,005 2.63 2,166 72 Total 299.1 5,217 1.74 2,582 49 As at 31.12.03 Retail Residential Mortgages 175.8 2,056 1.17 407 20 Other Banking 107.7 2,895 2.69 1,993 69 Total 283.5 4,951 1.75 2,400 48
Financial Performance Insurance & Investment PBTE 30.06.04 m 30.06.03 m % Growth Net Interest Income 38 26 46 Non-interest Income* 501 493 2 Operating Expenses** (125) (123) 2 Operating Profit Before Provisions** 414 396 5 Share of Profits of Associates & JVs (6) (7) 14 Profit Before Tax and Exceptional Items 408 389 5 * 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
Financial Performance Group Risk Weighted Assets & Capital 30.06.04 m 31.12.03 m Risk Weighted Assets 221,938 215,790 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 8.1 7.6 Total Capital Ratio 11.7 11.1
Conclusion... Asset Growth Operating Income Operating Expenses Credit Quality Profitability Capital Strength RoE
Andy Hornby Chief Executive, Retail
More Profitable Growth Net interest income up 7% despite yield curve Non-interest income up 21% Net interest margin down just 4 bps on H2 2003 Operating costs up only 0.2% Cost:income Ratio down from 49.3% to 45.1%
Strong Jaws +9.7% +9.5% Income +0.2% Costs JAWS
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
Margins Robust Despite LIBOR Related Funding Pressures Movement in Margin Basis Points Net Interest Margin for H2 ended Dec 2003 186 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 2004 182
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
A Prudent Approach to Credit NPAs up marginally to 1.88% (Dec 2003 1.81%) NPA provisions cover stable at 40% (Dec 2003 40%) Net mortgage lending share reduced to 17% (2003 25%) Average mortgage book LTV 42% (Dec 2003 43%) 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
Ruthless Cost Controls Costs up only 0.2% over H1 2003 Low cost scale IT systems drive productivity Significant central cost reductions Cost:income ratio 45.1% (H1 2003 49.3%) 3% cost target for 2004 will be beaten
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
George Mitchell Chief Executive, Corporate
Corporate: Performance 6 Months to June 04 6 Months to June 03 Net Interest Income ( m) 730 671 +9% Non-interest Income ( m) 676 543 +24% Operating Income ( m) 1,406 1,214 +16% Underlying Expenses * ( m) 325 311 +5% Cost:income Ratio (%) 26.9 29.8 PBTE ( m) 667 514 +30% * Underlying expenses before exceptionals and operating lease depreciation
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) 170 166 Net Interest Margin (bps) 192 191
Corporate: Provisions Charge m % of Average Advances 6 months to June 2003 232 0.35 6 months to December 2003 211 0.30 6 months to June 2004 241 0.33
Corporate: Non Performing Assets m % of Advances As at June 2003 1,352 1.97 As at December 2003 1,309 1.81 As at June 2004 1,260 1.67 Provisions as a % of NPAs As at June 2003 61% As at December 2003 65% As at June 2004 72%
Treasury: Performance 6 Months to June 04 6 Months to June 03 Net Interest Income ( m) 85 84 Net Interest Margin (bps) 11 13 Non-interest Income ( m) 104 65 Expenses ( m) 52 40 Cost:income Ratio (%) 27.5 26.8 PBTE ( m) 137 109
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
Outlook Controlled asset growth Strong growth in non-interest income Tightly controlled costs Improving credit quality All leading to improved returns
Colin Matthew Chief Executive, International
H1 Results Profit Before Tax and Exceptional Items June 2004 June 2003 % 149m 118m +26%
H1 2004 - Australia Advances A$33.2bn (5% growth) Deposits A$12.5bn (6% growth) Net Interest Margin 2.07% (H2 03 2.17%) Operating Income A$537m (12% increase) Operating Expenses* A$251m (1.6% increase) Cost:income 46.2% (H1 03 50.4%) Provisions Charge A$30m (H1 03 A$46m) PBTE A$258m (H1 03 A$191m) * Underlying expenses before exceptionals and operating lease depreciation
H1 2004 - Ireland Advances 9.2bn (17% growth) Deposits 5.3bn (21% growth) Net Interest Margin 1.90% (H2 03 2.04%) Operating Income 129m (23% increase) Operating Expenses* 55m (15.8% increase) Cost:income 37.6% (H1 03 36.5%) Provisions Charge 9m (H1 03 11m) PBTE 65m (H1 03 58m) * Underlying expenses before exceptionals and operating lease depreciation
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
Objectives - Ireland No. 1 Business Bank by 2005 Driver of change in switching, transparency and transmission Expansion of retail franchise
Phil Hodkinson Chief Executive, Insurance & Investment
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
Household Insurance Underwriting Market Presence 17% growth in 1H 2004; 20% in 2003 8% 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
Growth in Insurance Book Policies (millions) 10 8 6 4 2 0 2002 HY1 2002 HY2 2003 HY1 2003 HY2 2004 HY1 Repayment Household Motor Other
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
UK Investment Sales Growth m EPI 600 500 400 300 200 100 0 2001 HY1 2001 HY2 Bancassurance 2002 HY1 2002 HY2 UK Intermediary 2003 HY1 2003 HY2 2004 HY1 Wealth Management
New Business Profitability % EPI 40 30 20 10 0 Bancassurance Intermediary Wealth Management Overall 2001 2002 2003 2004
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
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
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
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
2004 Interims Key Themes Earnings momentum Measured growth Improved efficiency Stable credit Higher shareholder returns
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