Financial Services Europe

Performance Summary

	Half year to		Fav/ (unfav) change on		Year to		Fav/ (unfav) change on
Australian dollars	Sep 03 $m	Mar 03 $m	Mar 03 %		Sep 03 $m	Sep 02 $m	Sep 02 %
Net interest income	1,129	1,239	(8.9)		2,368	2,433	(2.7)
Other operating income	447	503	(11.1)		950	1,028	(7.6)
Total income	1,576	1,742	(9.5)		3,318	3,461	(4.1)
Pension fund expense	(53)	(40)	(32.5)		(93)	(28)	large
Other operating expenses	(794)	(833)	4.7		(1,627)	(1,649)	1.3
Underlying profit	729	869	(16.1)		1,598	1,784	(10.4)
Charge to provide for doubtful debts	(119)	(135)	11.9		(254)	(378)	32.8
Cash earnings before tax	610	734	(16.9)		1,344	1,406	(4.4)
Income tax expense	(190)	(226)	15.9		(416)	(440)	5.5
Cash earnings before significant items (1)	420	508	(17.3)		928	966	(3.9)
Add: Pension fund expense (after tax)	37	28	(32.5)		65	20	large
Cash earnings before pension fund expense & significant items	457	536	(14.7)		993	986	0.7

⁽¹⁾ Refer to Note 1 (Performance Summary By Division) for a reconciliation of Financial Services Europe's result to Group net profit.

Pounds sterling	£m	£m	%		£m	£m	%
Net interest income	454	449	1.1		903	880	2.6
Other operating income	180	182	(1.1)		362	371	(2.4)
Total income	634	631	0.5		1,265	1,251	1.1
Pension fund expense	(21)	(15)	(40.0)		(36)	(10)	large
Other operating expenses	(320)	(301)	(6.3)		(621)	(596)	(4.2)
Underlying profit	293	315	(7.0)		608	645	(5.7)
Charge to provide for doubtful debts	(48)	(49)	2.0		(97)	(136)	28.7
Cash earnings before tax	245	266	(7.9)		511	509	0.4
Income tax expense	(76)	(82)	7.3		(158)	(159)	0.6
Cash earnings before significant items	169	184	(8.2)		353	350	0.9
Add: Pension fund expense (after tax)	14	11	(40.0)		25	7	large
Cash earnings before pension fund expense & significant items	183	195	(6.2)		378	357	5.9
Underlying profit before pension	314	330	(4.8)		644	655	(1.7)

Key Performance Measures

	Half year to		Fav/ (unfav) change on		Year to		Fav/ (unfav) change on
	Sep 03 £m	Mar 03 £m	Mar 03 %		Sep 03 £m	Sep 02 £m	Sep 02 %
Performance & profitability
Return on average assets (annualised)	1.27%	1.43%			1.36%	1.39%
Cost to income ratio	53.8%	50.1%			51.9%	48.4%
Cost to income ratio (excl. pension fund expense)	50.5%	47.7%			49.1%	47.6%
Cash earnings per average FTE (annualised) (£'000)	29	32			30	29
Net interest income
Net interest margin	4.13%	4.18%			4.16%	4.18%
Net interest spread	3.83%	3.82%			3.82%	3.73%
Average balance sheet (£bn)
Gross loans and acceptances	20.1	19.7	2.0%		19.9	19.3	3.1%
Interest-earning assets	21.6	21.2	1.9%		21.4	20.7	3.4%
Retail deposits(2)	14.2	13.8	2.9%		14.0	13.1	6.9%

⁽²⁾ Retail deposits for September 2002 have been restated for £0.5bn previously classified within wholesale liabilities.

	As at
	Sep 03	Mar 03	Sep 02
Asset quality
Gross non-accrual loans (£m)	122	162	187
Gross loans and acceptances (£bn)	20.5	20.2	19.6
Gross non-accrual loans to gross loans and acceptances	0.59%	0.80%	0.96%
Specific provision to gross impaired assets	39.9%	35.7%	30.3%
Full-time equivalent employees (FTE)	11,423	11,563	11,719

Financial performance (in local currency)

Cash earnings increased 0.9% on the prior year and decreased 8.2% from the March half. The result has been negatively impacted by higher pension fund expenses. Excluding the impact of pension fund expenses, cash earnings increased 5.9% on the prior year and decreased 6.2% on the March 2003 half.

Excluding pension fund expenses, underlying profit decreased 1.7% on the prior year.

• Net interest income reflects growth in mortgage and business lending, and a fall in the net interest margin. Mortgage lending increased 9% on the prior year, (predominantly in the north of England (18%) and Ireland (10%)) and business lending grew 5% on the prior year (predominantly in Ireland (9%) and the north of England (8%)).
• The decrease in net interest margin reflects the impact of falling interest rates on retail deposits, together with a change in product mix resulting from housing growth and the focus on selective business lending to enhance the portfolio asset quality. This was mitigated in part by the reduced requirement for wholesale market funding as a result of retail deposit growth of 6.9%.
• Other operating income was lower due to a reduction in income from sales of creditor insurance, lower account fee income and the outsourcing of the merchant acquiring business, more than offsetting the impact of lending growth.
• Operating expenses, excluding pension expense, increased 4.2% compared with the prior year due to:
  • Increases in personnel costs as a result of annual salary reviews, mitigated by a reduction in staff numbers, particularly in back office functions;
  • An increase in customer-facing staff, including additional staff supporting the growth in the south of England;
  • Increased investment including integration and the front-end teller system;
  • Higher costs associated with compliance activities including FSA mortgage regulation and the EMU write-off;
• Most of the investment occurred in the September half, resulting in a growth rate for expenses of 6.3% on the first half.

The charge to provide for doubtful debts decreased 28.7% on the prior year. During the year the quality of the book improved further, with higher security coverage and a lower risk profile. This was complemented by the repayment of the book value of the largest non-accrual loan and recovery of a large previously written off debt in the March 2003 half.

Key achievements

• Strengthened senior executive leadership, including the appointment of John Stewart as CEO.
• Proceeding to move to the next phase in completing the legal entity merger of Clydesdale and Yorkshire Banks during 2004.
• Program to establish new integrated Financial Services Centres commenced with the first four in Liverpool, Bristol, Reading & Southampton and the next four in Oxford, Milton Keynes, Kent and Hertford.
• Investment in new information technology systems to improve customer service in the branches and integrate back office support functions.