RNS Number:4180R
Abbey National PLC
29 October 2003
Abbey
2003 Quarter Three Trading Statement
This statement provides a summary of business and financial trends up to 30th
September, and is released ahead of a conference call with analysts at 9:30 this
morning. A replay facility of the conference call will be available from
midday.
Unless otherwise stated, the statement relates to the 3 months to end September,
compared to a pro-rata equivalent of first half 2003 earnings.
Abbey is on track in its 3 year change programme. Much has been accomplished in
just 8 months, though substantial execution risk still remains. In September,
we relaunched our core personal financial services (PFS) business, announcing a
range of product, service and communication changes. These form part of a
radical shift in how we intend to think about and treat customers. They mark the
visible start of actions aimed at capturing the revenue growth opportunity that
Abbey's under-leveraged potential presents. In the Portfolio Business Unit, we
continue to make good progress, with the assets expected to be substantially
removed by the end of 2004, a year ahead of the original schedule.
Financial highlights from today's statement include:
* third quarter trading profit before tax for the ongoing PFS businesses
around 15% below the pro-rata first half 2003 due to a reduction in income
and the impact of expense phasing, both as expected. Income was weaker (as
flagged at the Interims) principally in Treasury Services (which reported
unusually strong performance in half one) but also in Banking and Savings
(from narrowing of the mortgage and savings spread). Costs were also ahead
of the first half run-rate but below the second half run rate in 2002,
reflecting cost programme benefits;
* a further marked reduction in Portfolio Business Unit (PBU) assets to
#20 billion at end September, some 67% lower than December 2002. The 22%
reduction since the interim stage reflects significant sales of both debt
securities and loans, but excludes the sale of the Italian business, which
should complete in the next 3 months. Exit costs continue to be better than
originally anticipated. The 'mark to market' disclosures for wholesale bond
and loan portfolios updated herein show that our loss expectations have
improved in those portfolios by some #100 million since the interims;
* strong net mortgage lending of #6.5 billion year to date, up 55% on the same
point last year, and equivalent to an estimated net lending market share of
9.4%, and an estimated 10.7% share of gross lending;
* new business levels across other product lines remain consistent with first
half performance - while below our future aspirations, these are satisfactory
given the current demands of the change programme on front line staff; and
* PFS credit quality remains strong, with some further improvement since the
interim stage.
At this point in its restructuring programme, Abbey is prioritising fundamental
change and improvement, with consequent lower visibility of quarterly earnings
trends. Subject to this caveat, Abbey is anticipating the fourth quarter PFS
trading result to be modestly weaker than the third quarter, reflecting:
* an increase in costs, largely marketing and other activity to support the
business relaunch. Nevertheless, for the full year, we expect to contain
trading expenses to around the comparable 2002 level. This means that cost
programme benefits (which remain on track) should now largely offset business
relaunch costs, as well as inflation and increased pension costs previously
flagged; and
* it is possible that revenues will decline a little more from third quarter
levels reflecting the full impact of the spread narrowing in mortgages and
savings (full year spread expected to be around 1.54%), with the fourth
quarter expected to be slow for Treasury Services.
The momentum of change established early in the year has been sustained through
the third quarter, including:
* re-launching the business, announcing a radical shift in how we mean to treat
our customers with the aim of turning banking on its head - including
simplifying the product range, reducing the number of brands, launching a new
catalogue presenting the full range of services and beginning the re-write of
all customer letters in a friendlier style with no jargon;
* the launch of innovative new products including Wrap through intermediaries
and Multi-Manager;
* launch of the outreach programme ahead of schedule, with a 60 strong team now
in place and making over 30,000 proactive customer calls per week with
capacity due to increase before the year end;
* the appointment of Tony Wyatt as Customer Operations Director, completing the
Executive Director team, and the completion of the review of the next layer
of management, with substantive changes made and additional recruitment well
progressed (including new heads of advertising, general insurance, risk and
compliance);
* progress made on offshoring and onshore consolidation plans, including a
pilot to move data input processing on protection products to Bangalore from
Glasgow and Edinburgh; and
* continuing progress towards exceeding #200 million gross annualised cost
savings, with third quarter cost savings of #36 million included in the
profit guidance above.
The priorities for the remaining part of 2003 include:
* developing our plans for delivering revenue growth in 2004 and 2005;
* further progress toward improving, simplifying and removing inconsistencies
in other accounts and services, and completing the re-write of all customer
letters;
* progressing and intensifying cost programme initiatives; and
* continuing progress in IT rollouts and recruitment and training of customer
facing staff.
The short-term impact of organisational change, system rollouts, staff training
and related initiatives, whilst representing essential actions for future
growth, will remain a drag on performance through the first half in 2004. The
full year results presentation will provide more guidance on our priorities and
plans to deliver revenue growth, related reinvestment costs and updated cost
saving targets.
Personal Financial Services - Financial Update
PFS trading profit before tax for the 3 months to the end of September was
around 15% below a pro-rata equivalent of first half earnings.
By product line, the main highlights include:
* Banking & Savings trading profit before tax down around 7% versus the first
half run-rate, with fourth quarter profit expected to be adversely affected
by higher costs from the business relaunch with some continued revenue impact
from spread changes (see below);
* earnings from the Life businesses running at similar levels to the first
half, and continuing to represent the majority of the year on year PFS
decline. Second half experience variances, if any, will be assessed at the
year end as usual, though a continuation of certain negatives reported in
half one is likely;
* a modest improvement in General Insurance trading profit before tax in the
third quarter, although the second half result is unlikely to exceed the
equivalent 2002 level;
* Treasury Services profit before tax around 40% lower than the exceptionally
strong first half run-rate, and likely to deliver a full year result broadly
comparable with that of 2002; and
* charges in Group infrastructure slightly higher than those reported in the
first half, and substantially below 2002.
By profit & loss line, the main highlights include:
* a slight reduction in trading income, with an increase in non-interest income
offset by lower net interest income in Treasury Services and to a lesser
extent Banking & Savings;
* the retail banking spread is expected to be around 1.54% for the full year
(first half of 1.61%). This reflects the re-alignment of SVR pricing over
the last 12 months, as well as improved gross lending combined with higher
redemption levels. This changes the mix of the overall book, albeit the SVR
asset has remained relatively static in the third quarter, and now represents
circa 20% of the total mortgage asset. Funding lending growth creates
pressure on deposit margins. This has also been impacted by base rate falls
in the first half. This growth is being funded from wholesale and more
expensive retail funding sources resulting in a higher cost of marginal
funding, compounded by the widening of the LIBOR differential to base rates
as market expectations have shifted towards a possible rate rise;
* costs on a trading basis were ahead of the first half run-rate, and
incorporated #36 million of savings from the cost programme, up 57% on the
first half run rate. As referred to in the summary, fourth quarter costs are
expected to increase due primarily to marketing and other activity around the
business relaunch. Other cost increases in the second half principally
relate to phasing of higher pension accruals and ongoing project spend
previously capitalised; and
* further improvements in credit quality across all products, with 3 month plus
mortgage arrears cases falling to 9,971, 32% lower than the same point in
2002 and a reduction of 10% since the interim stage.
Mortgage credit quality Sep 2003 Jun 2003 Dec 2002
3 month+ mortgage arrears (cases) 9,971 11,100 13,500
Properties in Possession (cases) 411 414 419
New Business:
- % First Time Buyers 17% 16% 18%
- LTV > 90% 9% 9% 14%
- Average LTV (on new business) 57% 56% 61%
As reported at the interim stage, the trading profit guidance above excludes '
one-off' charges. Amongst other things, these will reflect investment variances
in the life funds and current period restructuring costs (which are expected to
be higher in the second half as more expensive restructuring activities are
undertaken). There remains material risk of additional life company charges and
/ or capital requirements during the next 15 months particularly as the impact
of emerging regulatory standards and any changes in lapse data becomes clearer.
Personal Financial Services - New Business Update
9 months to 9 months to 6 months to
Sep 2003 Sep 2002 Jun 2003
Banking & Savings
Gross mortgage lending #20.9bn #15.1bn #12.9bn
Mortgage capital repayments #14.4bn #10.9bn #9.1bn
Net mortgage lending #6.5bn #4.2bn #3.8bn
Market share - gross mortgage lending (estimated) 10.7% 9.6% 10.6%
Market share - net mortgage lending (estimated) 9.4% 7.4% 9.1%
Total net deposit flows #1.0bn #0.6bn #1.5bn
Bank account openings 316,000 341,000 206,000
Credit card openings 205,000 207,000 151,000
Gross unsecured personal lending #1.3bn #1.1bn #0.8bn
Investment Sales
New business premiums - excluding with profits #1,044m #1,610m #694m
New business premiums - with profits (1) #65m #192m #43m
Annualised equivalent - excluding with profits #141m #225m #95m
Insurance Sales
Protection - annualised equivalent #91m #85m #61m
General Insurance new policy sales 373,000 413,000 257,000
(1) Includes sale of Prudential Bond for which only commission is earned,
totalling #63 million in the 9 months to September 2003.
New business highlights for the 9 months to September include:
* gross mortgage lending of #20.9 billion (Sep 2002: #15.1 billion) up 38%,
with capital repayments at #14.4 billion also significantly higher than the
same period in 2002. Overall, net lending market share was estimated at
9.4%, with net lending up significantly to #6.5 billion (Sep 2002: #4.2
billion). The second half of the year is expected to be the third
consecutive 6 month period of 10% plus gross lending market share,
demonstrating Abbey's increased presence in this market without relaxing
lending criteria and with mortgage new business margins relatively stable;
* deposit outflows in the quarter, in part as a result of re-pricing the
Abbey business range and increased bond maturities in the period.;
* strong bank account openings, particularly in the Abbey brand, with good
account balance growth, and although lower, credit card openings still over
50,000 in the quarter;
* investment sales at similar levels to those reported at the interim stage,
largely reflecting market trends in the personal sector and absence of
new product launches. However, the run-rate of sales of the Flexible
Investment Bond has increased in the third quarter, and protection sales
remain strong; and
* general insurance sales broadly in line with first half performance, but down
on the same period last year as a result of lower motor volumes through
direct response, and an increased proportion of introduced mortgage business
resulting in lower cross sales at point of sale.
Portfolio Business Unit
Sep 03 Assets Jun 03 Assets Dec 02 Assets
# bn # bn # bn
Debt securities 3.1 6.9 32.3
Loan portfolio 3.4 5.0 8.4
Leasing businesses 5.4 5.6 5.7
Private Equity 0.5 0.6 0.8
Other 0.0 0.3 1.4
Wholesale Banking exit portfolios 12.4 18.4 48.6
First National 2.7 3.0 8.0
European Banking and other (1) 4.9 4.3 3.4
Total PBU assets 20.0 25.7 60.0
(1) Includes c. #3bn related to our Italian business, the sale of which is
expected to complete in the next 3 months
PBU assets have been reduced by #5.7 billion, or 22%, since the interim stage,
with a similar percentage reduction in risk weighted assets of #3.9 billion. In
addition, we reached an agreement for the sale of the Italian mortgage business
(#3.0 billion of assets) in September. Overall, PBU assets of #20.0 billion are
now 67% lower than the start of the year, with a corresponding reduction in risk
weighted assets of 58% to #13.8 billion.
In the third quarter, losses attributable to the sale of wholesale assets have
been better than implied by the unrealised mark to market (MTM) deficits
disclosed at the interim stage. The MTM reduction in the third quarter (set out
below), results from realised losses and an underlying reduction in loss
estimates (the latter in the region of #100 million) both due to slightly better
market conditions as well as successful execution of asset sales. Other
revenues, expenses and provision charges for the PBU are in line with our
expectations.
Fourth quarter disposal progress is expected to continue consistent with the
revised PBU timetable. Aside from disposal and restructuring costs incurred,
decisions on provisioning (general and specific) which impact the timing of P&L
loss recognition, will primarily be made in the fourth quarter. Dependant on
such decisions, the Group statutory results for 2003 as a whole may well show a
loss.
Wholesale Bank
Unrealised mark to market deficits As at Sep 2003 As at Jun 2003 As at Dec 2002
# m # m # m
Loan portfolio (290) (394) (491)
Debt securities (82) (180) (664)
Total deficit (372) (574) (1,155)
Asset portfolios not included in the above: assets net of
provisions
#bn
Finance & other operating leasing 2.9
Porterbrook 2.0
IEM and other aircraft leasing 0.5
Private Equity 0.5
Whilst good progress has already been made, meaningful risk exposures and
unrealised MTM deficits on certain portfolios remain.
Credit Exposure Sep 03 Jun 03 Dec 02
# bn # bn # bn
AAA 2.8 4.6 15.5
AA 2.6 3.0 7.4
A 1.6 3.6 13.6
BBB 1.9 2.8 8.5
Total investment grade 8.9 14.0 45.0
BB and B 1.2 1.2 2.2
CCC 0.6 0.5 0.6
Total sub investment grade 1.8 1.7 2.8
The sub-investment grade exposures were reduced by 24% in the third quarter,
with sales of around #0.4 billion. However, #0.5 billion of internal downgrades
offset these sales, but reflect previous periods' credit impairment already
captured in the mark to market assessments, rather than further asset
impairment.
In the third quarter, total aircraft exposures (including leasing and ABS
exposures net of provisions) have been reduced by a further #207 million, and
exposure to US and UK power projects by #126 million.
Other PBU businesses
Subject to approval by the Bank of Italy, the sale of our Italian mortgage
business is expected to complete in the next 3 months for a cash premium of up
to #46 million, equivalent to a premium of approximately 50% to regulatory net
assets.
Capital
The equity tier 1 ratio has continued to improve since the interim stage, and
whilst expected to fall somewhat by the year end as a result of the broadly one
third / two thirds anticipated split of dividend payment, will remain
significantly above the December 2002 level.
The redemption of $200 million preference capital in July is expected to reduce
second half preference dividends by around #4 million, with exchange rate
movements further benefiting the charges.
Subject to market conditions, we remain confident of a meaningful capital
release from the PBU wind-down. The extent to which capital retention in the
PFS business is required will be influenced significantly by Basel II,
International Accounting Standards and related regulatory and accounting changes
currently being developed industry-wide.
The probable timeframe for clarification on the accounting and regulatory
issues, as well as the extent of PBU capital release, still remains 2005. In a
similar timeframe, the path of improvement in PFS cashflows and the extent of
the PFS investment opportunities should also be more visible.
Luqman Arnold, CEO, said:
"2003 is about putting the foundations in place that will position Abbey as a
strong and credible competitor in the market, and help pave the way to a return
to growth in the second half of 2004. We are 8 months through our 3 year change
programme - and we are on track.
We have done everything we said we would do at our Interim results in July. We
have re-launched the business, signalling our intent to deliver a truly
different banking experience for our customers. We have launched a range of
innovative investment services - setting the pace in the market for the first
time in many years. And we have continued to make many changes behind the
scenes, increasing the cost savings we have secured, overhauling our
telecommunications and IT capability, and focusing on recruitment and training
of front line staff.
The scale of the changes we are implementing does bring with it execution risk,
and will, as we predicted at the interim stage, have a short-term impact on
business performance and service levels through the first half of 2004. These
changes are essential to revitalise the franchise, and build a stronger position
from which we can compete thereafter.
We remain convinced that we can rebuild value for our shareholders. In the PBU
we are ahead of plan. In PFS our priority is to deliver a distinctive customer
experience - turning banking on its head - and the recent business re-launch was
the first step down this road."
Future diary dates:
2003 Full Year Preliminary Results Announcement 26th February 2004
2003 AGM 22nd April 2004
2004 Interim Results 29th July 2004
Note - as previously stated, Abbey does not intend to release a pre-close
trading statement later this year.
Contacts
Thomas Coops (Communications Director) 020 7756 5536
Jon Burgess (Head of Investor Relations) 020 7756 4182
Matt Young (Media Relations) 020 7756 4232
For more information contact: investor@abbey.com. The telephone number for
the conference call replay facility is 01296 618 700 (pin 650473).
Important notice
This announcement should be read in conjunction with the Interim Results release
for the half year ended June 30th 2003, released on 30th July 2003.
This document contains certain "forward-looking statements" with respect to
certain of Abbey National plc's ('Abbey') plans and its current goals and
expectations relating to its future financial condition, performance and
results. By their nature, all forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances which are
beyond Abbey control including among other things, UK domestic and global
economic and business conditions, market related risks such as fluctuations in
interest rates and exchange rates, the policies and actions of regulatory
authorities, the impact of competition, inflation, deflation, the timing, impact
and other uncertainties of future acquisitions or combinations within relevant
industries, as well as the impact of tax and other legislation and other
regulations in the jurisdictions in which Abbey and its affiliates operate. As
a result, Abbey's actual future financial condition, performance and results may
differ materially from the plans, goals, and expectations set forth in Abbey's
forward-looking statements.
This information is provided by RNS
The company news service from the London Stock Exchange
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