Interim Results - Part 2

Woolwich PLC 2 August 2000 Part 2 1.SUMMARISED PROFIT AND LOSS ACCOUNT Half year Half year Year to 30 to 30 to 31 June June December 2000 1999 1999 Restated Restated £m £m £m Net interest income 339.3 329.3 663.5 Non-interest income 155.4 136.7 320.8 --------- --------- --------- Operating income 494.7 466.0 984.3 Operating expenses (237.4) (198.6) (410.9) Provisions for bad and (23.5) (13.7) (32.9) doubtful debts Share of operating loss in (1.5) - (1.8) joint ventures --------- --------- --------- Headline profit before tax 232.3 253.7 538.7 Cost of restructuring - - (9.9) --------- --------- --------- Profit on ordinary 232.3 253.7 528.8 activities before tax Tax on profit on ordinary (72.0) (80.5) (168.3) activities Tax relief on conversion 22.0 - - costs --------- --------- --------- Profit on ordinary 182.3 173.2 360.5 activities after tax Minority interests - equity (1.9) (1.3) (4.1) --------- --------- --------- Profit attributable to the 180.4 171.9 356.4 shareholders of Woolwich plc Dividends (66.4) (60.7) (185.2) --------- --------- --------- Profit for the period 114.0 111.2 171.2 --------- --------- --------- Dividends per ordinary share: Interim 4.4p 3.9p 3.9p Final - - 8.1p 1999 figures restated for change of accounting policy for commissions payable to introducers of certain lending business. Full details are set out under Basis of Preparation on page 22 RNS Number:8466O Woolwich PLC 2 August 2000 2.SEGMENTAL PROFIT AND LOSS ACCOUNT Half year to 30 June 2000 UK Cont- Treasury Capital Total Retail inental £m £m £m £m Europe £m Net interest 245.8 17.3 18.3 57.9 339.3 income Non-interest 153.8 3.1 (1.5) - 155.4 income ------ ------- -------- ------- ------ Total income 399.6 20.4 16.8 57.9 494.7 Operating (219.3) (15.7) (2.4) - (237.4) expenses Provisions for (21.9) (1.6) - - (23.5) bad and doubtful debts Share of (1.5) - - - (1.5) operating loss in joint ventures ------ ------- -------- ------- ------ Operational 156.9 3.1 14.4 57.9 232.3 profit Income from 40.6 2.1 1.4 (44.1) - capital ------- ------- -------- ------- ------ Headline profit 197.5 5.2 15.8 13.8 232.3 before tax ------- ------- -------- ------- ------ Half year to 30 June 1999 (Restated) UK Cont- Treasury Capital Total Retail inental £m £m £m £m Europe £m Net interest 226.9 19.5 21.5 61.4 329.3 income Non-interest 133.4 2.6 0.7 - 136.7 income ------- ------- -------- ------- ------ Total income 360.3 22.1 22.2 61.4 466.0 Operating (180.4) (15.2) (3.0) - (198.6) expenses Provisions for (12.2) (1.5) - - (13.7) bad and doubtful debts Share of - - - - - operating loss in joint ventures ------- ------- -------- ------- ------ Operational 167.7 5.4 19.2 61.4 253.7 profit Income from 38.1 1.3 2.4 (41.8) - capital ------- ------- -------- ------- ------ Headline profit 205.8 6.7 21.6 19.6 253.7 before tax ------- ------- -------- ------- ------ Year to 31 December 1999 (Restated) UK Cont- Treasury Capital Total Retail inental £m £m £m £m Europe £m Net interest 470.7 38.0 36.7 118.1 663.5 income Non-interest 315.2 5.1 0.5 - 320.8 income ------- ------- -------- ------- ------ Total income 785.9 43.1 37.2 118.1 984.3 Operating (375.0) (29.9) (6.0) - (410.9) expenses Provisions for (29.6) (3.3) - - (32.9) bad and doubtful debts Share of (1.8) - - - (1.8) operating loss in joint ventures ------- ------- -------- ------- ------ Operational 379.5 9.9 31.2 118.1 538.7 profit Income from 75.6 3.0 4.0 (82.6) - capital ------- ------- -------- ------- ------ Headline profit 455.1 12.9 35.2 35.5 538.7 before tax ------- ------- -------- ------- ------ Note: Income from capital comprises notional and actual interest earnings on equity capital. Within Woolwich plc capital is allocated to UK Retail and Treasury on the basis of risk weighted assets and a Tier 1 ratio of 7%. 3. PROFIT BEFORE TAX AND INTEREST ON CAPITAL Half year Half year Year to to 30 to 30 31 December June June 2000 1999 1999 Restated Restated £m £m £m Headline profit before 232.3 253.7 538.7 tax Deduct: interest (57.9) (61.4) (118.1) earnings on capital --------- ---------- ----------- Profit before tax and 174.4 192.3 420.6 interest on capital --------- ---------- ----------- 4. NET INTEREST INCOME a) Group Net Interest Margin Half year Half year Year to 31 to 30 June to 30 June December 2000 1999 1999 £m £m £m Interest receivable 1,142.2 1,067.8 2,094.5 Interest payable (802.9) (738.5) (1,431.0) ----------- ----------- ----------- Net interest income 339.3 329.3 663.5 ----------- ----------- ----------- Average interest earning 32,844.2 31,577.1 31,743.6 assets Average interest bearing 31,058.5 29,611.1 29,712.4 liabilities Gross yield on interest 6.99% 6.82% 6.60% earning assets Cost of interest bearing 5.20% 5.03% 4.82% liabilities ----------- ----------- ----------- Net interest spread 1.79% 1.79% 1.78% ----------- ----------- ----------- Net interest margin on 2.08% 2.10% 2.09% average interest earning assets Net interest margin on 1.95% 2.00% 1.98% total assets b) Segmental Analysis Half year to 30 June 2000 UK Cont- Treasury Capital Total Retail inental £m £m £m £m Europe £m Operating 245.8 17.3 18.3 57.9 339.3 interest income Interest income 40.6 2.1 1.4 (44.1) - from capital ------ ------- --------- ------- ------- Total interest 286.4 19.4 19.7 13.8 339.3 income ------ ------- --------- ------- ------- Average interest 27,720 2,434 11,846 32,844 earning assets Customer spread 2.17 1.41 2.10 % Net interest 2.08 1.60 0.33 2.08 margin on average interest earning assets % Half year to 30 June 1999 UK Cont- Treasury Capital Total Retail inental £m £m £m £m Europe £m Operating 226.9 19.5 21.5 61.4 329.3 interest income Interest income 38.1 1.3 2.4 (41.8) - from capital ------ ------- --------- ------- ------- Total interest 265.0 20.8 23.9 19.6 329.3 income ------ ------- --------- ------- ------- Average interest 25,479 2,064 9,552 31,577 earning assets Customer spread 2.08 1.87 2.06 % Net interest 2.10 2.03 0.50 2.10 margin on average interest earning assets% Year to 31 December 1999 UK Cont- Treasury Capital Total Retail inental £m £m £m £m Europe £m Operating 470.7 38.0 36.7 118.1 663.5 interest income Interest income 75.6 3.0 4.0 (82.6) - from capital ------ ------- --------- ------- ------- Total interest 546.3 41.0 40.7 35.5 663.5 income ------ ------- --------- ------- ------- Average interest 26,063 2,173 10,100 31,744 earning assets Customer spread 2.15 1.76 2.11 % Net interest 2.10 1.89 0.40 2.09 margin on average interest earning assets% UK retail customer spreads increased from 2.08% to 2.17% reflecting net overall improvements in both lending and deposit spreads and a controlled increase in the proportion of higher margin lending business such as consumer finance. In both France and Italy, which are money market funded, customer lending spreads fell from 1.87% to 1.41% in the light of increased competition and the gearing effect of new business. The net interest margin overall was maintained, falling only 0.02% to 2.08% as a result of the wider customer spreads offset by money market funded asset growth. Interest on capital has reduced from £19.6m to £13.8m as a result of the continuing capital return programme. Notes: Net interest margins on average interest earning assets are calculated by dividing total interest income, including income from capital, by the average of the month end interest earning assets. Net interest margins on total assets are calculated by dividing total interest income, including income from capital, by the average of the opening and closing total assets. Customer spread is the combination of the average spread over the cost of wholesale funds earned on loans and advances to customers, plus the average spread below the cost of wholesale funds payable on customer accounts. Total customer spread is the weighted average of the UK retail and Continental Europe customer spreads. 5.NON-INTEREST INCOME a)Summary analysis Half Half Year to year to year to 31 30 June 30 June December 2000 1999 1999 Restated Restated £m £m £m Loans and advances 24.2 21.7 45.3 Retail banking 26.4 20.4 42.9 General insurance 14.5 16.1 63.5 Independent financial advice 24.9 24.6 51.4 Life assurance and pensions 30.2 21.1 51.3 Unit Trusts, ISAs and PEPs 19.0 15.6 33.3 Property services 14.6 13.9 27.5 -------- -------- -------- UK Retail 153.8 133.4 315.2 Continental Europe 3.1 2.6 5.1 Treasury (1.5) 0.7 0.5 -------- -------- -------- Total non-interest income 155.4 136.7 320.8 -------- -------- -------- Non-interest income reflects a change to the accounting policy for FirstPlus broker commissions which are now amortised over the expected life of the loan. A prior year adjustment of £3.4m for the half year and £8.4m for the full year has been included in the 1999 results. Income from loans and advances was £2.5m (11.5%) higher than 1999. This was due to recharges to joint ventures and higher fee income from increased business, in particular at FirstPlus. Retail banking fees increased by £6.0m (29.4%) due to growth in current account numbers and earnings from card based accounts. General insurance was £1.6m (9.9%) lower than 1999 due principally to a lower level of income per insured case as a result of the more competitive pricing structure introduced in 1999. Income from the existing independent financial adviser business was marginally up compared with 1999. Sedgwick Independent Financial Consultants, in which The Woolwich has a 50% interest, generated IFA income of £11.2m in the period, the attributable proportion of which was treated as part of the Group's share of results in joint ventures. Life assurance and pensions benefited from an £8m increase in embedded value resulting from the decision to move administrative services in-house. Unit trusts, ISAs and PEPs were £3.4m (21.8%) higher than 1999 resulting from increased annual management charges. 30/06/00 30/06/99 31/12/99 b) Unit trusts, ISAs and PEPs Funds under management (£m) 2,197 2,018 2,200 Number of accounts 351,500 339,000 342,000 c) Life assurance and pensions Funds under management (£m) 686 564 659 Number of accounts 187,000 176,000 184,000 Sums assured (£m) 6,100 5,700 6,000 6. OPERATING EXPENSES a)Summary Analysis Half Half Year to year to year to 31 30 June 30 June December 2000 1999 1999 £m £m £m Salaries 72.3 76.6 160.8 Other staff costs 13.5 14.0 27.6 Other administrative expenses 126.6 83.5 173.3 Depreciation and amortisation 25.0 24.5 49.2 -------- -------- -------- Operating expenses 237.4 198.6 410.9 Cost of restructuring - - 9.9 -------- -------- -------- Total operating expenses 237.4 198.6 420.8 -------- -------- -------- Included in the half year to June 2000 was incremental expenditure of £30.8m on marketing, fulfilment and technology for the Open Plan roll out. Excluding this expenditure, existing costs increased by £8.0m, an increase of 4% over the same period in 1999. The increase in the other administrative expenses category is partly due to the outsourcing arrangement entered into with GHL, which has moved costs from salaries and other staff costs, and partly to the effects of increased business volumes and transitional costs arising during the conversion of mortgage processing. b)Staff Numbers Average number of employees Full Time 30/06/00 30/06/99 31/12/99 United Kingdom 4,776 5,395 5,386 Continental Europe 393 363 370 -------- -------- -------- Total 5,169 5,758 5,756 -------- -------- -------- Part Time United Kingdom 1,336 1,583 1,551 Continental Europe 3 1 3 -------- -------- -------- Total 1,339 1,584 1,554 -------- -------- -------- Period end number of employees Full Time 30/06/00 30/06/99 31/12/99 United Kingdom 4,716 5,497 4,758 Continental Europe 400 370 376 -------- -------- -------- Total 5,116 5,867 5,134 -------- -------- -------- Part Time United Kingdom 1,313 1,629 1,374 Continental Europe 3 1 3 -------- -------- -------- Total 1,316 1,630 1,377 -------- -------- -------- The reduction in the number of UK staff is primarily attributable to the transfer of 731 staff in H2 1999 and 135 staff in 2000 to the mortgage processing joint venture, Global Home Loans Limited. Continental European staff numbers have continued to increase with the expansion of the business generally and the larger distribution network. c)Distribution 30/06/00 30/06/99 31/12/99 UK branch and service centres 412* 415 415 Woolwich ATMs 602 493 529 Tied financial advisers 366 481 458 Independent financial advisers 222 199 215 * UK branch and service centres include 10 service centres at 30 June 2000 transferred to Global Home Loans d) Economic And Monetary Union The Woolwich's Economic and Monetary Union (EMU) Programme continues to monitor EMU issues and maintain its assessment of the impact of UK entry on the Group. Preparations for full euro operation by the Group's French and Italian subsidiaries are on-going. The impact on the Group of the UK joining EMU has been assessed and full costs for UK entry are estimated at between £23m and £30m. While the position on UK entry remains uncertain the Group will continue to seek to avoid significant expenditure on preparation where it may prudently do so. 7. TAXATION Tax on profit on ordinary activities was £72.0m (H1 1999: £80.5m). The effective tax charge for H1 2000 is lower than that for H1 1999 due to the lower standard corporation tax rate and lower levels of disallowable expenditure. The rate remains higher than the current UK corporation tax rate due primarily to depreciation of that part of the Group's property assets which do not qualify for tax allowances. In addition, the accounts include an exceptional tax credit of £22m in respect of tax relief on costs incurred in 1996 and 1997 in converting from Woolwich Building Society to Woolwich plc, following the decision of the Special Commissioners of Income Tax, which the Inland Revenue has not appealed. 8. LOANS AND ADVANCES TO CUSTOMERS a)Gross balances UK UK Consumer Continental Total Mortgages Credit Europe £m £m £m £m 31/12/98 24,763.1 314.9 2,031.1 27,109.1 Advances 2,735.1 382.2 454.4 3,571.7 Redemptions (1,962.6) (130.0) (167.1) (2,259.7) and repayments Exchange - - (155.2) (155.2) differences --------- ----------- ----------- --------- 30/06/99 25,535.6 567.1 2,163.2 28,265.9 Advances 3,277.2 425.4 463.4 4,166.0 Redemptions (2,486.0) (227.7) (181.4) (2,895.1) and repayments Exchange - - (118.0) (118.0) differences --------- ----------- ----------- --------- 31/12/99 26,326.8 764.8 2,327.2 29,418.8 Advances 3,292.6 490.6 495.7 4,278.9 Redemptions (2,059.0) (306.2) (143.6) (2,508.8) and repayments Exchange - - 53.6 53.6 differences --------- ----------- ----------- --------- 30/06/00 27,560.4 949.2 2,732.9 31,242.5 --------- ----------- ----------- --------- UK Consumer Credit net lending comprises: Half year Half year Year to 31 to 30 June to 30 June December 2000 1999 1999 £m £m £m FirstPlus loans 110.0 87.2 202.8 Personal loans 55.2 145.6 213.1 Credit cards 11.2 10.9 19.0 Overdrafts 8.0 8.5 16.6 Other - - (1.6) ---------- ---------- ---------- 184.4 252.2 449.9 ---------- ---------- ---------- b)Provisions for bad and doubtful debts UK UK Cont- Total Mortgages Consumer inental £m £m Credit £m Europe £m Specific 31/12/98 43.1 13.9 12.0 69.0 Charge 1.9 7.9 1.0 10.8 Amounts written off (5.1) (4.1) (0.1) (9.3) Exchange difference - - (0.7) (0.7) --------- --------- --------- --------- 30/06/99 39.9 17.7 12.2 69.8 Charge (3.1) 18.4 1.6 16.9 Amounts written off (6.6) (10.6) (0.3) (17.5) Exchange difference - - (0.8) (0.8) --------- --------- --------- --------- 31/12/99 30.2 25.5 12.7 68.4 Charge 0.7 19.6 0.7 21.0 Amounts written off (3.4) (11.6) (0.4) (15.4) Exchange difference - - 0.1 0.1 --------- --------- --------- --------- 30/06/00 27.5 33.5 13.1 74.1 --------- --------- --------- --------- General 31/12/98 34.0 6.7 4.4 45.1 Charge - 2.4 0.5 2.9 Exchange difference - - (0.3) (0.3) --------- --------- --------- --------- 30/06/99 34.0 9.1 4.6 47.7 Charge - 2.1 0.2 2.3 Exchange difference - - (0.3) (0.3) --------- --------- --------- --------- 31/12/99 34.0 11.2 4.5 49.7 Charge - 1.6 0.9 2.5 Exchange difference - - 0.3 0.3 --------- --------- --------- --------- 30/06/00 34.0 12.8 5.7 52.5 --------- --------- --------- --------- Total 31/12/98 77.1 20.6 16.4 114.1 Charge 1.9 10.3 1.5 13.7 Amounts written off (5.1) (4.1) (0.1) (9.3) Exchange difference - - (1.0) (1.0) --------- --------- --------- --------- 30/06/99 73.9 26.8 16.8 117.5 Charge (3.1) 20.5 1.8 19.2 Amounts written off (6.6) (10.6) (0.3) (17.5) Exchange difference - - (1.1) (1.1) --------- --------- --------- --------- 31/12/99 64.2 36.7 17.2 118.1 Charge 0.7 21.2 1.6 23.5 Amounts written off (3.4) (11.6) (0.4) (15.4) Exchange difference - - 0.4 0.4 --------- --------- --------- --------- 30/06/00 61.5 46.3 18.8 126.6 --------- --------- --------- --------- In addition to total UK mortgage provisions of £61.5m, the Group has arranged indemnity insurance both with external insurance companies and its own captive insurance subsidiary. The captive has available funds totalling £45m. The ratios of closing provision balances to gross loans and advances balances were as follows: 30/06/00 30/06/99 31/12/99 % % % UK Mortgages 0.2 0.3 0.2 Consumer Credit Loans 4.9 4.7 4.8 Continental Europe 0.7 0.8 0.7 Total 0.4 0.4 0.4 c)Percentage of mortgage balances 2.5% or more in arrears 30/06/00 30/06/99 31/12/99 % % % UK 1.63 1.87 1.75 France 1.56 2.20 1.84 Italy 1.23 1.70 1.32 d)UK mortgages balances in arrears 30/06/00 30/06/99 31/12/99 £m % £m % £m % 2.5 - 5% 283.3 1.03 276.0 1.08 283.5 1.08 5 - 7.5% 83.5 0.31 86.7 0.34 81.4 0.31 7.5 - 10% 28.4 0.10 34.6 0.14 31.1 0.12 10%+ 35.6 0.13 49.9 0.20 41.8 0.16 Possessions 17.1 0.06 29.2 0.11 22.4 0.08 ------ ------ ------ ------ ------ ------ 447.9 1.63 476.4 1.87 460.2 1.75 ------ ------ ------ ------ ------ ------ Current market conditions combined with strong management have resulted in a further reduction in UK mortgage arrears from 1.87% to 1.63% and a fall in the possession stock to the lowest for some years. 9. CAPITAL EXPENDITURE The capital expenditure in the half year was as follows: £m £m Open Plan Services - Corporate IT Projects 10.3 - E-Commerce Projects 1.7 - Call Centre Projects 5.1 ----- 17.1 Other project related expenditure 1.9 Branch enhancements 10.7 Other expenditure mainly of a normal 10.5 recurring nature ------ Total Capital Expenditure 40.2 ------ 10. DEFERRED MORTGAGE INCENTIVES COSTS Cashbacks Discounts Total Mortgage Incentives £m £m £m 31/12/98 54.6 48.4 103.0 Expenditure incurred in 10.0 4.5 14.5 the period Amount charged to profit (16.5) (18.9) (35.4) and loss account ---------- ---------- ---------- 30/06/99 48.1 34.0 82.1 Expenditure incurred in 13.3 4.5 17.8 the period Amount charged to profit (17.6) (16.7) (34.3) and loss account ---------- ---------- ---------- 31/12/99 43.8 21.8 65.6 Expenditure incurred in 12.3 10.1 22.4 the period Amount charged to profit (13.1) (11.3) (24.4) and loss account ---------- ---------- ---------- 30/06/00 43.0 20.6 63.6 ---------- ---------- ---------- In common with a number of other lenders, mortgage incentives, specifically cashbacks and discounts, are deferred and written off over the penalty periods of the loans concerned. Movements in interest rate swap prices have made discounted and cashback variable interest rate business more popular in the first half of 2000. Shorter penalty periods on new business, in line with the market, have resulted in a reduction of £18.5m to £63.6m in the amount carried forward for amortisation in future periods. 11. CAPITAL STRUCTURE 30/06/00 30/06/99 31/12/99 £m £m £m Tier 1 1,786 1,749 1,733 Tier 2 874 723 870 Deductions (207) (155) (191) -------- --------- -------- Total capital 2,453 2,317 2,412 -------- --------- -------- Risk weighted assets 18,014 16,252 16,838 % % % Total capital ratio 13.6 14.3 14.3 Tier 1 ratio 9.9 10.8 10.3 Tier 1 capital includes current year interim profits less proposed interim dividends. During the six month period, Woolwich plc purchased in the market for cancellation 19.1m ordinary shares. The average purchase price was £3.04 per share, resulting in a cost of £58.3m, which has been charged to reserves. Note: Deductions from capital are mainly investments in subsidiaries not consolidated for risk asset ratio purposes. MORE TO FOLLOW

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