Lloyds Banking Group PLC (LYG) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen. It is good to see you here again. In what is a complex set of numbers following the group's transition to IFRS, I am pleased to report a 7% increase in profit before tax.

Our organic growth strategy focused on improving and deepening relationships in our customer franchises, and the retail and corporate businesses has continued to underpin satisfactory levels of earnings growth. In particular, we started to see an increasing share of our customer's financial spend in a number of key retail product areas. We have grown our life pensions and investments market share and significantly improved levels of cross-selling in our corporate businesses.

Each division has delivered positive JAWS with revenues growing faster than costs. Credit quality has remained satisfactory despite the slowing consumer environment, and a number of key profitability measures have improved. We have also continued to improve our product range and we are particularly pleased with the 29% growth in Unitrust sales following the relaunch of our new product suite at the end of last year.

We have also enhanced our customer service levels and improved customer satisfaction ratios throughout the businesses, and we've made clear progress in improving our processing efficiency to support our positive JAWS disciplines. And Helen and Eric will, of course, provide more details on our progress shortly.

As a result of this progress, customer satisfaction levels remain strong and are improving, and we have continued to recruit a higher number of quality customers. With a 22% increase in quality of current to current customers in the retail business in the first half of the year and also strong customer growth in our S&E business where we are a leader in the new business startup markets.

We also saw over 8,500 business customers transfer their banking arrangement to the group from our competitors.

Looking now briefly at the UK economy, it is likely that the economic growth will continue, albeit with many commentators believing growth will slow in 2005. But notwithstanding this likely slowdown, particularly in consumer spending and borrowing, we still expect to see reasonable levels of growth going forward. We continue also to expect unemployment and inflation to remain low, and we share many market commentators' views that interest rates have peaked and will start to reduce shortly. This remains, therefore, a relatively benign economic outlook and operating environment for Lloyds TSP.

The group has continued to maintain satisfactory capital ratios. Our return on equity remains one of the highest amongst the major banks in the world, and the board remains satisfied with the group's capital position. We continue to plan for risk-weighted asset growth of mid to high single digits over the next few years and expect the profit retentions to remain sufficient to support this level of growth within our current capital management policy. As a result, the board has decided to maintain the interim dividends at 10.7 pence per share. I'm also delighted that improve capital efficiency in Scottish Widows should allow us to repatriate significant further capital in the group in the second half of the year.

So overall we have continued to deliver earnings momentum in all divisions while maintaining high returns. Credit quality remains satisfactory, and we are well-positioned to deliver a good trading performance in the second half of 2005 and beyond.

I will now hand over to Helen and Eric to take you through the results. Thank you.

Thanks, Maarten, and good morning, everyone. Over the next 20 minutes or so, I would like to summarize the highlights of our results published today. I will give a brief performance update for each of the divisions, picking out some of the main underlying trends, and I will take a closer look at some of the other key financials.

Starting with the headlines, on a comparable basis, we have continued deliver a good performance into the first half of 2005. As a result of continued earnings momentum in each of our businesses, profit before tax increased by 7%. Earnings per share were up by 10% with the higher rate of growth due to a lower tax charge on a comparable basis and economic profit increased by 11%.

At the same time, we have not only maintained but actually grown our return on equity. In addition, we have retained our interim dividend at 10.7 pence per share. We are continuing to deliver good franchise growth across each of our divisions. Once again, we're showing positive JAWS with income up 5% and cost growth of only 3%, and this discipline is being delivered not just at the group level but also across each of the divisions.

Asset quality remains satisfactory. As we anticipated, there has been a downturn in the retail credit cycle, and we have seen some deterioration in consumer bad debts. But these are more than offset by a very healthy performance from the corporate business so that our total impairment charge grows by only 7% year-on-year on a comparable basis. Our capital position remains robust, and we have also increased our return on shareholders equity. We are delivering growth without reducing returns.

This is the first time that we have published results under IFRS. Although our 2004 numbers are restated for some of the new standards, other standards are applied prospectively only, which makes year-on-year comparisons difficult. We have, therefore, published two sets of figures for 2005 -- our statutory results, which are the full IFRS figures, and a comparable set of results, which include only the retrospective standards and which, therefore, can be compared with our 2004 numbers.

The four main areas of difference between the statutory and comparable figures are set out on this chart. The first is banking volatility, which is the result of the recognition of all derivatives at fair value under IAS 39. We used derivatives, mainly interest rate swaps, to manage the interest rate risks arriving from our banking activity. The majority of these derivatives, including the swaps we have in place to manage the fixed-rate mortgage book, require the group to pay fixed and received wearable amounts. The full and longer-term interest rate expectations during the first half has resulted in mark-to-market losses on the derivative valuations. This effect has not been fully offset by the fair value hedge accounting adjustments resulting in a net negative banking volatility of 73 million pounds. This loss is simply a timing difference as the cash flows from the swaps are clearly unchanged.

The second element is insurance volatility which has two key components. Investment variance, which we have previously reported, and the IFRS 27 requirement to account for the value of options and guarantees in the groups' life funds. The strong performance of the stock market and movements in bond yields have resulted in a strongly positive insurance volatility figure, of which 90 million pounds is due to the investment variance and 14 million to the movement in the value of options and guarantees.

The third element represents the effect of the reclassification of policyholder tax, which under IFRS is required to be included in both the PBT and the group's tax charge and so has no earnings impact. A key point is that all these items are volatility related and will be affected by movements in the stock and bond markets. The increased use of fair values is likely to lead to greater volatility in the earnings of the group with a potential to significantly distort underlying trends. We will, therefore, be presenting these items separately as we have historically done with the investment variance.

The final difference is the impact of the other IFRS standards which were applied prospectively. Although there are a number of such adjustments, the most noteworthy are probably the effective interest rates and the new treatment of loan impairment. The move to effective interest rates means that certain upfront discounts or fees are now spread over the duration of the product.

This change has two effects. Firstly, fees previously recognized on the other income line are now shown in net interest income. And secondly, they are deferred over the expected lifetime of the product. In a business such as ours which is growing, this will clearly result in a slightly lower profit figure.

On loan impairments, the timing of expected cash payments, recoveries and so on is now required to be taken into account in calculating provisions. It's effectively a discounting effect. And what is perhaps counterintuitive is IAS 39 requires the unwind of the discount to be credited to the net interest income line rather than the impairment line. The key thing to remember once again is that this is simply a timing effect on profit recognition and does not change the underlying cash flows of the business.

The net impact of all these changes is a reduction of approximately 7% compared with the UK GAAP figures, just lower than the 8% that we indicated at the time of our IFRS update with the upside primarily coming from slightly higher than anticipated unrealized venture capital gains.

For the remainder of my presentation, I will be focusing on the comparable half on half figures since they provide the most consistent basis for judging the underlying performance of the business and as the business trends that I think you should be focusing on.

Once again, all divisions have made good progress compared to the first half of last year. In the retail bank, we continue to see good growth in our consumer lending portfolio, albeit at a slightly slower rate than in the recent past. Good cost control meant the retail bank's trading circulars grew by 9%; however, this was offset by higher provisions which I will come back to later resulting in the 4% growth in profit before tax that you see here.

The improvement in insurance investments continues to be underpinned by good performance at Scottish Widows where new business profitability once again improved and also a strong set of results from the general insurance business where profits were up 8%. The strong momentum in the wholesale bank has continued as a results of good progress in delivering our strategy of leveraging existing business and corporate customer relationships. Improved cross-selling revenue combined with the lower impairment charge lead to a 14% improvement in profits during the half on top of a 20% plus growth in profits in the first half of 2004.

Before I move on to discuss some of the line by line analysis, I want to provide a little more detail on the life business policyholder gross-up which is required under IAS 27. Under IFRS we're required to consolidate both policyholder assets and liabilities on a line by line basis. This means that we have to include earnings on policyholder's assets in our income lines and the increased liabilities to policyholders, which are, of course, related to the increase in the assets on the claims line as a deduction from income. This chart shows our insurance and investment division IFRS figures for the first half of 2004 on a comparable basis as we are required to report them and then after adjusting for the policyholder gross-up.

As you can see, the net impact on PBT is minimal but the distortion effect on individual lines can be quite significant.

Here we have the same figures for 2005. What is notable is the fact that the policyholder adjustments are much greater than in the first half of last year. This is a volatility effect and represents the better performance of policyholder assets as a result of market conditions in 2005, which is then matched by higher policyholder liabilities.

The last two columns show the I&I divisional results after eliminating the policyholder effect and give a much more meaningful set of numbers by which to judge the performance of the business. What we can see is an underlying 4% growth in income on 1% growth in costs. The overall growth in profit at 6% remains unchanged.

For the rest of the presentation, I will show policyholder gross-up effect on a single line for clarity.

Overall group income growth of 5% is split between net interest income growth of 3% and growth in other income net of insurance claims of 7%. Focusing first on net interest income, the key driver here is, of course, growth in assets and liabilities.

As you can see, we have seen good growth in both our retail and wholesale businesses. In retail despite the slowdown in consumer spending, we have continued to see satisfactory growth in all asset classes. Mortgage balances have grown by 10%, loans by 11% and credit cards by 8% year on year. We have also seen an increase in growth on the liabilities side of the balance sheet with retail deposits up by 7%.

In the wholesale bank, too, we have seen good year-on-year asset growth across all businesses, aided, of course, by the acquisition of the Danske portfolio at the end of last year. As we anticipated, we have continued to see a decline in overall margins with the year-on-year group margin falling by 14 basis points. However, what is most notable is the slowdown in margin decline that we have seen in 2005.

During the half, group net interest margin fell by only 5 basis points, and once you take into account the fact that 3 basis points of this decline is a result of an increase in funding costs, the underlying group margin is essentially flat during the half, a significant change compared with the trends of last year.

Overall then, the strong asset growth has more than offset the year-on-year reduction in margin. In the retail bank, net interest income grew by 1% with the anticipated margin erosion, including the funding effect more than offset by volume growth. Net interest income in the wholesale business increased by 7%, reflecting higher income as a result of strong growth in customer lending in all of our key business units. And just for noting, the fall in net interest income and insurance investments is a result of the 200 million pound dividend payment which was made to the group earlier in the year. The benefit is seen as central group items.

Turning now to other income where we saw growth of 7%, growth was particularly strong in the retail bank, reflecting higher levels of general insurance profit share commissions and a strong growth in fee income as a result of repricing activity where we were out of line with the market. In insurance and investments, we see the benefit both of good growth in new business volumes which were up by 25% and a continued improvement in new business margins.

The 4% growth in wholesale banking reflects good levels of growth in fee income in our relationship businesses and higher levels of cross-selling activity within corporate markets. Offsetting this is a significantly lower level of venture capital gains than we saw in the first half of last year. We anticipate a return to a higher level of realizations in the second half.

The group's cost performance continues to be strong, and as you would expect, good cost control remains a high priority. Costs in the retail bank rose by 2%, largely reflecting last year's pay round. Volume-related cost increases have been absorbed by improved processing efficiency as a result of the application of lean manufacturing and Sigma measurement techniques. For example, over the last year, the backoffice account maintenance processes have been significantly streamlined leading to a cost reduction of over 4 million pounds in the half.

In the insurance and investments division, cost grew by just 1% as Scottish Widows has started to gain the benefits of the significant program of improved operational and process efficiency, which was started some 18 months ago.

Wholesale and International Banking costs increased by 5%. Of just just under half is attributable to further investment in people, particularly in the Corporate Markets area. We expect to see the benefits of this investment starting to show through in the second half. The key here is that we're building our skills and capabilities but in a way that is allied with our overall revenue growth while still maintaining a positive JAWS discipline.

Overall at the group level, the 3% increase in cost is a good performance taking into account the fact that we continue to invest in the business, as well as incurring substantial additional costs as a result of a number of regulatory projects.

Not surprisingly, given what I've just said about our overall cost disciplines, all our divisions have once again delivered income growth ahead of cost growth, positive JAWS. At the group level, our cost income ratio has reduced from almost 55% last year to just under 54% this year.

Moving on now to look at asset quality, the overall growth in the group charge for impairment losses was 35 million pounds or 7%, which is lower than the rated risk in customer lending. As a result, total impairment costs as a percentage of average lending actually fell for the group compared with last year. Within this figure, however, there was a significantly different trend in the retail and wholesale businesses.

In the retail bank, whilst overall asset quality remains satisfactory, impairment losses on loans and advances increased by some 21%. However, it is important to understand the different drivers of this growth, only one of which is a deterioration in credit quality.

The first element is the general mortgage provision released amounting to some 12 million pounds in the first half of last year. Excluding this, the overall retail bank impairment charge was up some 17%. The remainder of the increase is due to be strong growth in the asset book that we have seen over recent years and some deterioration in credit quality.

Turning first to asset growth, typically new lending takes 12 to 18 months to season. Bad debts that are emerging now are, therefore, related to business that we wrote during 2004 or earlier, and you will remember that during this period we were seeing annual growth in unsecured lending of 13 or 14%. Thus, 39 million pounds of the increase in provision or 11% relates to historic growth in the business.

The final component, which actually account for only 6%, is, of course, due to the credit cycle and the downturn in consumer credit quality. This increase in the retail provision charge is in line with our expectations given the marketwide slowdown in the consumer lending environment. Like others we have seen an increase in the number of customers with higher levels of debt, and it is these customers who when faced with a trigger event such as unemployment or divorce tend to experience repayment difficulties.

In addition, we're noticing that when customers are in difficulties our recovery rate is lower than previously. However, we do believe, and these numbers support our contention, that our policy of lending within franchise where we have more customer information and a better ability to monitor the debt means that we should be relatively better placed in the context of a further downtown in the credit cycle.

You will recall that at our preliminaries we disclosed our dynamic delinquency data for the first time and promise to keep you up-to-date with progress. This is one of several measures we used to track the performance of our asset book and assess the general quality of new retail lending business.

What this data shows is that the overall quality of new business remains satisfactory. The uptick in the trend for credit cards is due to a particular tranche of debt that was issued over a year ago following a change to a scorecard and where we've had an adverse credit experience. Using data such as this, the trend was identified and remedial actions taken. The latest six-month data, which, of course, gives earlier monitoring, suggests a move back to a more normal trend.

Credit quality in the wholesale bank is strong with the impairment charge falling by some 28% year on year, reflecting high levels of liquidity in the corporate market and very few customers experiencing repayment difficulties. You will remember at the time of our trading statement we indicated that we expect that the overall impairment rate to be broadly at the same level as last year. You can see that we've actually come in slightly better than expected, a result of cash payments on corporate bad debt received ahead of plan in the last few days of the half.

Look at the overall quality and level of provisioning in the book. As you are aware, under IFRS our previous definition of nonperforming debt no longer applies. Instead the key differentiator is between assets which are classified as impaired and which are written down and good assets. During the half, our overall levels of impaired assets grew by just under 11%, reflecting the strong recent growth in our consumer lending portfolios and some deterioration in overall credit quality.

As a result, impaired assets as a percentage of total lending increased slightly. This increase is not surprising given the downturn in the credit cycle. However, I think the key point to emphasize here is that the overall figures are still low. So a satisfactory credit position with a particularly strong performance in the wholesale bank.

We have previously highlighted return on risk-weighted assets as being a key measure that we use across the business. The merit of this measure rather than something like net interest margin is that it takes into account the trade-offs that we make within the business on a daily basis. Our overall return on risk-weighted assets for the half has actually fallen slightly due to two main factors. Firstly, a mix effect as a result of the more rapid growth of risk-weighted assets in the wholesale division which has a lower return on risk-weighted assets, and secondly, the higher impairment charge in the retail bank.

Economic profit is another key measure of financial performance of the group and has continued to grow steadily increasing by 11% half on half. Progress on these two measures demonstrates that we are generating profit over and above that needed to support the business and improving our returns.

Turning now to capital, our capital ratios have fallen slightly since the beginning of the year with our total capital ratio now standing at 9.6%. There are two main factors behind this reduction. Firstly, the timing of our dividend. Under IFRS dividends are accounted for on a cash basis, and therefore, our 1.3 billion final dividend is now accounted for in the first half of the year, which is a period in which our profits are traditionally lower. As a result, the dividend paid during the half was greater than the first-half retained earnings.

Of course, this effect will reverse in the second half when we pay the interim dividend which is about 700 million pounds lower. The second factor is that our risk-weighted assets grew by approximately 8 billion pounds or 6% during the first six months of the year. This rate of growth, which is above both our long run expected rate and, indeed, the rate of growth that we expect to see in the second half, was driven primarily by our corporate business where we saw strong growth in lending and commitments, particularly towards the back end of the half.

In some cases deals that were anticipated to happen in the second half were finalized early. Clearly because of the back-ended nature of this growth, although the facilities are included in our period end risk-weighted assets, we have not yet seen the benefit in income. That should come through in the second half.

The key point is that we continue to plan for mid to high single digit rates of risk-weighted asset growth and that our capital base remains sufficient to support this level of growth within our existing capital management policy. Under FRS 27 we are required to publish the realistic balance sheet for our life businesses, which shows the realistic values of assets and liabilities in the funds. Because of the structure of the demutualization scheme, the realistic capital position of Scottish Widows is best assessed by considering the long-term fund position. As you can see, this has improved slightly since the year-end, driven by the general market improvement. The overall net surplus within the long-term fund has increased to 4.5 billion pounds, and as a result, our working capital ratio has increased to 19.5% with the risk capital margins over nine times. So Scottish Widows remains one of the best capitalized life businesses in the UK.

As you know, Eric identified the strengthening of financial disciplines as one of the key strategic priorities that he set out at our preliminaries. An area of significant focus is to improve capital management disciplines across the group, and I would now like to briefly update you on some of the recent and planned initiatives arising from this work which will improve our overall capital deficiency.

The first area of focus has been to roll out economic capital disciplines and embed them in individual business units. The economic profit approach is increasingly being used to inform business decisions. The division that is probably furthest advanced is Scottish Widows where internal capital models are increasingly used to inform product design, set risk appetite and manage economic capital.

In the corporate bank, the relationship managers assess their customer relationships using the current and potential economic profit as a measure of value. And as you are aware, in the larger corporate market, traditional lending tends to be at relatively fine margins. It is, therefore, key that we capture a greater share of our customers business.

Internal economic profit models are increasingly used to inform the business sanctioning process, providing information on the optimal pricing and structure of transactions, as well as supporting more active portfolio management.

The secondary focus has been Scottish Widows, which paid the first seven expected regular stream of dividends up to group earlier this year. This dividend was set at a level which was not only broadly consistent with the level of dividend paid by publicly quoted insurers, but also allowed Scottish Widows to retain sufficient capital to support the ongoing growth of the business.

As we have previously mentioned, we have been looking at further ways to improve our capital efficiency within the life businesses and in particular have work under way which we will believe will allow a further repatriation of capital from Scottish Widows to the group where it will be used to support more profitable growth in the banking business. While this is still work-in-progress, we would set expect the amount to be not less than 500 million pounds and that the repatriation will take place during the second half of the year.

Note that this move will not impact the profitable growth plans or the financial strength of Scottish Widows.

In summary then, we have seen good revenue growth across all our businesses despite the slowdown in the consumer sector. Cost control remains strong, and we have once again delivered positive JAWS in all of our divisions. Our credit quality remains satisfactory, and we've seen a particularly strong performance in the wholesale bank. In retail, although we have seen some deterioration in credit quality, our strategy of lending primarily within franchise should continue to help us in the face of any further deterioration in the consumer credit environment. Our earnings growth is strong, but this is not growth at the expense of returns, and over the period we have not only maintained but actually improved the returns from the business.

I would now like to hand over to Eric who will give you an update on the progress on the three priorities that he outlined at the preliminaries.

Good morning. Thank you very much for coming. I'm very pleased to be reporting a good set of results, especially in light of the more challenging operating environment that we are living in. In my view, we are continuing to achieve good growth in earnings with good returns, we are growing our franchise in line with our strategy and asset quality is stable and moving in line with portfolio growth.

As Helen mentioned, we are seeing some softening in the unsecured credit products in the consumer, but these have been offset by gains in wholesale.

When I spoke to you at the full-year results, I said we were opening a second chapter in our growth strategy, and I outlined three strategic priorities that will guide future growth. To remind you, they were to deepen customer relationships, to improve our efficiency and to enhance our group capabilities and processes to support faster growth.

I will spend the rest of my time this morning updating you on the progress against these priorities, starting with the UK retail bank. Trading results in the retail bank are broadly similar to the pattern that we have established over the last couple of years. We have had positive JAWS and we continue to grow balances. However, as Helen mentioned, our profit was impacted by higher provisioning in the unsecured book.

Provisions moved in line with asset growth, then they reflect where we are in the credit cycle. However, I'm currently comfortable as our credit position also reflects our focus on franchise customers, and we have avoided the high risk areas of near prime and sub-prime. The secured book remains in very good shape.

As I told you in March, the UK retail bank was focused on acquiring and retaining customers and deepening relationships. To understand more fully why we focused on these two priorities, this slide illustrates that the opportunity is large. If we can make small changes in our acquisition of quality customers, say 2 percentage points, and small changes in retention of those same customers, say 1 percentage point, that would add about a .25 billion to our bottom-line.

But by far and away the largest opportunity is in deepening. We are already one of the most successful cross-sellers in the UK, but our valuable customers still have the majority of their Financial Services spend with other institutions, our customers. If we can, in fact, move the needle so that we capture 6% greater wallet share, that would add about 700 million to the bottom-line. Our opportunity is large within the franchise and can fuel growth over the next several years.

This slide shows you what the opportunity looks like on a product basis. We're one of the largest personal lenders in the UK, but 50% of our customers take loans from other banks. We have undertaken some testing pilots to provide learnings which we are able to build upon. The pilot showed that we, in fact, can move the so-called away spend when we get higher quality leads to the right channel and we follow it up with a more rigorous sales process and sales tracking.

We have actioned some of the key levers in acquiring and deepening, and we are seeing good results. Customer recruitment is up about 22%, and at the same time we have driven customer satisfaction to new highs. Customer satisfaction is important not only in the retention of customers and deepening wallet share -- but it is also important in deepening wallet share. If a customer is not happy with their existing relationship, we really cannot expect to be able to sell more or penetrate the wallet further.

We're starting to make better use of our customer data to help our sellers understand customer needs more effectively. We're extending our sales through the direct channels which are often viewed as more convenient by our customers. Our progress thus for against these levers validates that we can, in fact, improve our depth of wallet.

We're delighted to welcome Terri Dial as our new head at the retail bank. She will be driving against the levers which I showed you on the previous slide, but she will also be working to refresh our product range and simplify our sales and service processes. We believe that we have to do this to make it easier for customers to deal with us, but also we have to make it easier for our staff to be more effective.

We have some 5000 sellers across the network, and we will seek to increase this as we go forward. But we also find those same 5000 sellers spend less than a third of their time actually interacting with the customers. We can and will change that. The opportunity in the retail franchise is large, and we are convinced that we are working on the right things.

Turning to the Wholesale and International Banking, we saw continued growth during the first half of 2005. The 6% income growth was driven by stronger new business generation despite the highly liquid market in corporates and strong transactional business growth. Our cost growth reflects the balance between efficiency improvements and investment in some of the strategic growth areas. We have reduced our impairment charges. This has been driven by strong recovery performance and also lower gross new provisions. We are growing our business and maintaining our high returns.

The core businesses within the division are performing strongly. The Business Banking recovery is taking place. The investment in the Corporate Markets is beginning to show good results. Asset finance is showing strong results on an underlying trading surplus basis, but the bottom-line reflects higher impairment losses. The international banking is showing lower earnings due to repatriation of capital in the prior year.

The strategy in wholesale remains unchanged with specific focus on two priorities. We wish to continue the improvement in Business Banking through both growing our revenue and simplifying our operating model. We are investing in the Corporate Markets business, targeting growth of new customers and product market shares.

As I mentioned, business bank is getting good traction. We have seen good volume growth. We have a strong share at around 20% of startups, and as Maarten mentioned, we are taking share from our competitors by gaining more of the businesses that switch banks. We're improving our operational efficiency and saw a full 4 percentage point improvement in the cost income ratio.

In our Corporate Markets business, we're continuing our growth strategy and showing early successes in both growing and deepening relationships.

In the large customer segment, 25 to 750 million in turnover, we have grown our active customer base by 3%.

In the commercial segment, 2 million to 25 million turnover. We have increased our market share by 1%. We have also seen progress in specific product markets and moved into first place, for example, in the Euromoney League Table in the UK syndicated mandator leader range or category. These results have won early recognition of our efforts, and we won CBI Bank of the Year. We are continuing to grow our cross-sell income in non-lending product areas, and we are seeing early returns of our investments, particularly in financial markets and asset-based lending.

Turning to the insurance and investment division, we're getting increasingly improved performance in I&I. All of our indicators are moving in the right direction, and we are seeing gains with sales up 25%, share up more than a full percentage point, and we are increasing our profits. Our strategy remains that we want to get the Bancassurance Channel to work more effectively.

We continue to increase our sales through the traditional channels, the IFAs. We would like to continue to boost returns and to grow our general insurance business.

In the direct and bank channels, we grew shares in both life and pensions, as well as in investments. I'm especially pleased that we have started to show progress on the investments front in the branches which had been lagging. Our sales are up 29% since the introduction of the new products last year. Despite the drop in the life and pensions market due to the slowdown in the sales of mortgage protection, we also grew share.

Turning to the IFA channel, we have seen a 41% improvement in weighted sales and a significant gain in share. This is due to the continued improvement of our pensions and investment products at our service.

General insurance continues to perform strongly with profits up 8%, and direct sales are continuing to make a strong contribution with weighted sales up 19%.

Looking forward, Scottish Widows remains one of the most strongly capitalized life insurance companies in the UK. We have begun up streaming dividends to group as promised. We're driving higher sales and better share in Bancassurance, and the IFA performance continues strong. Our general insurance sales continues strong.

Our next priority in this unfolding of the second chapter is to improve group efficiency. As Helen showed you, our efficiency ratio improved from 55% to 54% during the first half of 2005, and it reflects our achievement of positive JAWS. The group maintains its firm cost control discipline, and the growth in expenses were held to 3%. And that is despite investing in strategic areas. We believe that there are good opportunities to further drive efficiency, and we will continue our application of our quality program. But in addition, we will centralize certain of our manufacturing activities. We will manage procurement on a group-wide basis, and we will further simplify our IT platform.

One of the ways in which the central teams add value to the group is through building a framework of skills and competency that allow us to drive higher rates of growth safely. In finance, as Helen pointed out, we are further embedding our economic profit disciplines, and that will improve our pricing decisions and hence our returns.

In the risk area, we're continuing to enhance our governance framework throughout the organization, and this is leading to a more detailed assessment of risk across the business portfolio and greater clarity around the risk reward trade-offs.

We are committed to building a high-performance organization. In addition to further strengthening the executive management team, we have put in place integrated programs to continue raising our performance and enhance our execution.

In summary, I'm pleased to report continued progress. We have delivered good balanced growth. Profits are up, our returns have improved, and we're continuing to make strong progress against our organic growth strategy. We have significant opportunities to grow the franchise ahead of us, and I am confident that we shall. Thank you.

We're now going to questions. But before we go to questions, let me just say a few words. This is the first time we have reported our results under IFRS, and perhaps counterintuitively and perhaps to the dismay of Sir David Tweedie, the results have become more complex. But I just want to, therefore, point out that Helen and Mike will be around after the meeting to answer any questions or detail on IFRS. And I hope well, of course, as usual, you are entirely free to ask any question you want, if you will really be able to focus this on business issues. Having said that, who can I give the floor for the first question? Over here on the left.

You have gone over to the dark side. Good morning. It is Ian Morton from DRKW. Just two questions if I may.

Firstly, on wholesale. Clearly the continuing impressive earnings growth in that business is encouraging. I just wanted one point of clarification on the provisions charge. The improvement in provisionings is clearly welcome, but one would assume that the personal orientated business within the asset finance business might have trends similar to the retail banking. That would seem to tell me that the underlying improvement in Corporate Markets must be exceptionally good. Obviously welcome, but on a through cycle basis, given the growth in areas such as acquisition finance and asset finance to which you referred earlier, it would be helpful if you could give me a little bit more color on where you see trends going in those business lines?

The second question is just the interplay between the retail bank and (inaudible) and investments. Once again, we see strong growth in credit insurance revenues. This is presumably a flowthrough from the points Helen talked about in March, the increased ticket values and improved pricing in that area.

You have helpfully given us disclosure on page 17 showing a 31 million increase in commissions payable to the banking businesses. If I see that most of that number goes into retail, that leaves me with a fairly flat earnings level.

So I guess the forward-looking question is, when we will start to see the benefits flowing through from all the good work you've done in terms of product simplification on the life side into the Bancassurance channel. 4% growth in the Bancassurance was perhaps a little bit disappointing, notwithstanding the slowdown in mortgage gross volumes when we see very impressive 41% growth in the IFA channel.

It is great to hear you still use the word we. Eric, are you taking that?

I could probably spend the next half-hour. Let me try and address some of the principal pieces. First, let's talk about the wholesale recoveries. Truitt (ph), would you give us a little bit of flavor on that, please?

Your observations are right in terms of the split between asset finance, which does have more even though it's not totally a personal finance business. You saw the numbers up there that indicated that they are down 9% on a year-to-year basis. To a certain degree, that is a slowing down or a change in performance. To a certain degree, it is accounting. Under IFRS, the recognition of economic loss based on the performance of arrears. But the fact is the business is continuing to grow quite healthfully, 8 to 11% depending on which of the businesses.

On the corporate side, it is really across the board that I would emphasize we talk about a benign environment and to a certain degree attribute low provisions to that. I would actually make the distinction that one of the values that we have gotten is a very very strong business support unit. It is one of the things that most impressed me when I joined the organization. And what that translates into, that is the group that actually takes the difficult credits and basically tries to turn the businesses around and can generate recoveries to the degree that they are successful.

One of the big drivers in that improvement that you see between '05 and '04 is in the first half of this year we have had 58 million pounds of recoveries versus 30 million pounds in the same period last year. That actually generated that reversal that you're looking at, and it is not limited to the corporate bank, but to the structured finance as well as corporate bank. So yes, a favorable economy, but you can actually make a differentiated gain to the degree that you are out there and working your book aggressively and trying to transform the business.

If you look at the absolute asset quality, it has actually improved the number of low and very low risk as a percentage of a portfolio, which is in low and very low risk versus where we were this time last year.

Thank you. Second, you damned us with faint praise at 4% in terms of the Bancassurance channel. Let me try and reiterate if you turn back to your slide pack, what we really have are two components that I will ask Archie to comment on.

But basically the sales of investments are up 29%. I'm very pleased with that. We had lagged in performance since the introduction of the new products. That is quite a nice pickup.

Yes, you're absolutely correct that on the life and pensions piece, sales are actually down by about 7%. But we still gained market share despite that because as you know the mortgage market is certainly less buoyant than it has been. So whenever you gain share, even it is in a lousy market, it says that you're on the right track and doing the right things. Archie, can you talk a little bit more about why sales are going up?

Okay. Let me start by talking about the IFA channel because we have different products through different channels. That is our participation strategy that we developed about a year ago. The driver in the IFA channel has been pensions and savings on investment products, particularly individual pensions where in Q1 this year we were number one in the market. So that has driven the 41% increase in the IFA channel.

Now in the Bancassurance channel, as I told you the last time, we put in the second half of last year the new simplified OIK (ph) product range. We trained it in in the second half of last year, and the results came through this year. 29% up as you quite rightly said, and that was quite good.

Low and behold, the mortgage market came off in the first half of this year. We sell protection products in the Bancassurance channel as a cross-sell into the mortgage market, and we have reflected as the mortgage market came off the protection -- our protection sales have come often. Now that is clearly a highly profitable product for us, and that was unfortunate.

Now we will continue to build and develop our protection capability on our mortgage cross-selling capability because it will come back, but the timing unfortunately has impacted. So hence we expect it to have a much better performance in Bancassurance, but it was dragged backwards by the mortgage market and the protection sales.

Good morning. It is Stephen Andrews from UBS. I have just got a quick question on capital consumption. If I look at the just mentioned risk-weighted asset growth of 14% year on year at a group level with the 7% profit growth on an adjusted underlined pre-exceptional (inaudible) basis, and it is quite remarkable risk-weighted asset growth of 19% year on year and the wholesale buying, I guess my question is just I'm curious as to the impact on the P&L of the slowdown in risk-weighted asset growth that you're talking about to omit the high single digit sort of level. And whether we can are going to see a detrimental impact on profit growth as this RWA growth slows as well? Because capital consumption certainly looks exceptionally high at the moment.

Thank you for the question. I will ask Helen to answer, but if I can just sort of preface this, what I would remind you is that growth is not linear. It comes in fits and starts. And when you normally see when you grow at corporate banking business is that you actually make commitments and that starts the relationship or gets you to the next stage of the relationship. You then harvest that when it converts into earning assets in that higher quality earning assets and then fee income. So we stand by our statement that we would expect to see for the full year and in future years mid to high single digit risk-weighted asset growth, and no, we don't believe that this is going to have a detriment in our earnings. On the contrary, we think that the relationships will build. Helen?

I mean as I said in my presentation during the half we did see what I think you would consider to be an exceptional growth in risk-weighted assets. As you are aware, the figure that we publish is a period end figure, and what we did see is a significant growth coming through in the last couple of months effectively in the period. We, therefore, would expect to actually see the earnings on that risk-weighted asset growth coming through in the second half. We had some deals that happened just a bit earlier than we had originally expected, so they tucked into the first half rather than being part of the risk-weighted asset growth in the second half.

So the key thing is that the income as a result of some of the risk-weighted assets we have put on in the first half is really only going to come through in the second half, and that is why we don't anticipate the same rate of growth coming through.

In terms of the year-on-year growth, I mean clearly what we have had is two halves of significant momentum. I think in the second half of last year a significant element of that was some structured transactions that went on the book, and then we obviously had the acquisition of the Danske portfolio which was a one-off. We've had a good first half. We expect to see the benefits of that coming through in the second half. So I don't think, as you well know, that you can sort of have a direct one-on-one correlation between risk-weighted asset growth, which is a point measure and income which is obviously a measure over a period of time.

Nick Lord from Deutsche Bank. A couple of questions. First of all, on your slide on the retail banker, you showed areas where effectively you were missing customers, and obviously the percentage of products that are being bought from you varies product by product. Which areas does your research show you will have the biggest upside in terms of being able to get that bigger share of wallet?

And secondly, just on credit quality, Helen spoke about some of the trends we saw there, and obviously you attributed a lot of the increase in the provisioning in the retail bank to an increase in the size of the loan book. But there is some deterioration in credit quality there, especially when we compare it versus December. Could you tell us whereabouts in the cycle you think you are and whether we would expect that to deteriorate further in the second half of the year?

Okay. First, the product and where we expect future growth. It is hard to say -- to make one categoric statement, because as with any bank, we are very good at segmenting our population. And so very clearly what we're going to see, especially among the more affluent, is loan repayments coming over the next part of the cycle. We would guess an increased savings.

I also believe that as high street spending slows we will see generally a greater trend toward savings. However, different segments will behave differently, and we would see that with lower interest rates we could see some take-up in the middle segments of continuing to borrow, albeit that what we think we will see is some conversion from unsecured to secured. So it is hard to give you a broad generalization.

The good thing about being strategically as we are, which is customer centered, is we do not depend on growth at any one particular product area, but rather as the customer's balance sheet and wallet increases, we would like it to increase with us and we would like to further penetrate it. So we are almost product agnostic if you will.

In terms of where we expect credit to go, as I had reported, I am quite sanguine. We are in a difficult part of the cycle. We would expect that that will continue for the next couple of periods. But the reason why we're quite sanguine is that we believe that while we will be impacted since we are such a major lender within the UK retail sector that we have unlike most other banks a much higher percentage of our customers coming from franchise or our lending coming from franchise customers, and we have avoided the high-risk areas. So by and large, while I won't give you a forward forecast, I would say that we are comfortable.

Carol, did you have anything you wish to add?

Carol Sergeant, as you know, is our Head of Risk.

I think the other thing I would add is that it is not -- it is a bit misleading to compare second half with first half. I mean as a pattern we always see higher levels of impairment in the first half. It seems to be something to do with Christmas. And if you look at the pattern over the years, we have seen that for sometime.

The second thing to say is that it is not as if we just sit here and wait for this to happen to us. Obviously we make regular and continuous adjustments to our scorecards for new lending, but there are also a lot of activities you can do on the bank book. We have a whole new strategy on our collections where the trick is to get in much sooner than we have hitherto. We are applying extra resources there, and because we do have such a very large proportion of in franchise lending, we are much able to monitor the behaviors of the customers and get in much sooner, which is the real trick in the environment we see at the moment where we are not actually seeing a whole load more people becoming indebted, but we're seeing them becoming indebted for larger amounts and, therefore, more difficult to recover. If you can get in sooner and you have the data that enables you to spot developments earlier, you are at an advantage.

James Leal at Teather & Greenwood. I will chance my luck with a spreadsheet question. Helen, you mentioned the fact that first-half profits are usually lower than second-half profits. The question is, is that feature likely to be applicable to 2005? And the reason I ask is that you have mentioned a couple of factors which we will see an increased amount of profit in the second half in terms of the benefit from the investment in headcount and the wholesale bank, the back loading of risk-weighted assets in the wholesale bank, and the higher private equity realizations.

Helen, would you care to give a cropped forecast?

Finally enough, probably not. Clearly there were a number of factors where we think we have put things in place in the first half that we think will give further upside I think particularly in the wholesale bank in the second half of the year, and I guess that is what I was trying to indicate through the comments I made. I have observed a historic trend of first-half to second-half profit growth, but I could not possibly comment on the outlook for the second half in that respect.

It is Mark Thomas of Keefe, Bruyette. Two unrelated questions. Firstly, could you just explain a little bit as to what you will actually be doing in terms of the lifecycle business to take out 500 million of dividend but not change the capital strength of the business?

There are a number of options that we are currently looking at. I don't propose to go into those in detail because some of them may or may not work in terms of the ability. So it involves effectively restructuring the funds and the way in which they operate currently and making use of surplus capital that we have there. So that is my response to that question.

Clearly we're a very strongly capitalized life business already, and the amount that we are talking about and the overall context of the funds is not a huge sum.

Second question, you referred to some pseudo IFRS related. In terms of the impairment adjustment, obviously the bad debt charge element of it and the net interest income, could you split how much of the impairment was corporate and how much was personal? Of course, what I am really trying to get is how quickly will the net interest income unwind arise to offset perhaps the higher bad debt?

Yes, I mean as you can see from the pro forma numbers versus the full IFRS numbers that we have got, virtually all of that adjustment is a personal on the retail side of the business.

So we could reasonably expect most of that 159 to come back in net interest income over the next, say, 12 to 18 months?

You could reasonably expect it will all come back into the net interest income in the retail bank.

It is David Ray (ph) from CSFB. I was just looking at your property lending which has increased by 50% in the last year and 20% in the half. I appreciate it is still a relatively small amount of your portfolio, and there may be some acquisition effect on the year-on-year figures. But can you talk a bit about that because it's sort of bucks the trend in what we have been hearing about risk and pricing and commercial property lending?

I would ask Truitt (ph) to comment.

Yes, we are growing in the area. If we have judged that is a space in which we are significantly underweight opposite the competitors, and we have put in place loan to value ratios and caps which we think are relatively conservative. So one of the areas that we have actually invested in in terms of both staffing and expertise allows us to believe that we can actually expand in that area, still stay at the conservative end of total exposure, and yet increase both profitability and our market presence. So it is an area that we think that we can leverage and leverage safely.

Good morning. It is James Eden from Dresdner. I just wondered if you were hopeful of increasing the dividend this decade?

One always remains hopeful. It is the last thing to die. Next question.

Do you still wish you had 1.5 times dividend cover -- (multiple speakers)?

I beg your pardon.

In the past, you said you aspire to have a 1.5 times dividend cover. I wonder if that is one thing that will prevent you increasing the dividend?

I think we said that the 1.5 dividend cover was a guideline. It is just not a hard and fast rule. We revisit our guidelines from time to time, so I would not say that that is carved in stone. We will continue to watch as the business develops, as the Chairman has always said, that the board will look at the quality of earnings, as well as the prospect of future earnings and setting the dividend policy. Right now we're quite content to stay pat.

Roman Noor (ph) of Lehman. Could I ask a question about the capital position, please? You have in here commented about the expectation of releasing some capital from the life insurance business to the bank or the group. Can I ask you to comment further about how we should think about this in a group context?

You have not in the past given indications of where you see your capital position is appropriate, but you have said I think that you can undertake where you have the flexibility to undertake medium-sized acquisitions which we have taken to be hundreds of millions of pounds. Do we see this as -- obviously it is increasing your flexibility, but is it increasing the surplus capital of the group by an equivalent amount?

(multiple speakers). No, I mean the absolute capital within the business remains the same, but we have done is reallocate the capital from -- what we would be doing is reallocating the capital from the life businesses where there were trends that were relatively lower, and we were better to use that capital in the banking business as the returns are relatively higher.

We still have the flexibility as we previously mentioned through mid -- small to mid size as a kind of site order of magnitude that you mentioned. Acquisitions, we look on a regular basis and to any particular point have a number of potential opportunities. However, we do apply quite rigorous disciplines to our valuation of those opportunities, and in particular look at them against the options repatriated in the capital to shareholders.

As of this time, there have been none that we felt delivered appropriate value, but we think it is appropriate we have that kind of relatively limited flexibility. I don't think that we're sitting on a large warchest even with the repatriation and the Scottish Widows regular capital, regular dividend, a large warchest of capital.

(inaudible). I just wanted to come back if I could to one of Carol's answers I think. Talking about the half, I do not wish to be boring about the half on half wholesale split of wholesale provisions, which in the past I think has been one of the drivers of the group's sort of apparently disjointed performance in the sense that the second-half provisions in wholesale are generally lower than the first-half. Is that something you do in the way you look at provisions, in the way there is a year-end round-up that we would expect to continue, or are we now broadly where we would expect to be going forward?

No, unfortunately if we decided to play with our provisions, we would not be around and walking around free. There are very prescribed rules in terms of how we account for provisioning and the asset quality. Basically when you run a book as diverse and as complex as we do, then things -- events will happen, and our results basically show what happens because of our customers. So I think you may have spotted a trend, but it is not something that is consciously driven by management.

John-Paul Crutchley, Merrill Lynch. Two questions -- the first on capital; the second on margins. I'm just trying to understand a bit more about what you're saying on capital, because I think when we've talked about capital in the past, you have talked about the group capital base being run on a largely fungible basis. So whether the capital was in Widows or the group center that the ratios did not make an awful lot of difference when we looked at it from a group perspective, and as a consequence, you're very happy with looking at things on an actual overall group basis.

In essence, by taking capital out of Widows, you've got more capital to play with on a banking balance sheet base if you like and in terms of giving that to wholesale to play with and expand their growth there. I guess I'm thinking in terms of the mechanics of the capital ratios where I guess what happens is at the group level the total risk asset ratio potentially goes up because it actually goes down, but Tier 1 levels nothing much changes at all at group level.

So I am just trying to detect if there is change in the way you are looking at capital on a more compartmentalized basis than you have done previously, and then I have a second question on margins.

Just in terms of the capital question, I mean as I said in my presentation, we're looking at each of our businesses, and we are looking at the economic capital in each of those businesses, and we are determining where we can best apply that capital. What we see from that analysis is the returns -- the returns look really better in the banking business.

Your analysis of our capital ratios and the impact of a move such as this on our capital ratios is correct, but that is sort of the byproduct of the move. In fact, I would have thought the people would be happy because one of the comments that we sometimes get is about the quality of the Tier 1, and this actually improves the quality of our Tier 1 capital. I'm not a personal subscriber necessarily to that view, but that is one that some people seem to hold. So we would see an improvement in the quality of the Tier 1 and an actual improvement in our total capital ratio.

What I would say that is not, that sort of financial engineering that is not the driver behind this. The driver is actually where it is the best -- where do we get the best returns on the capital allocated in the business? At the moment we have surplus capital in our life businesses, and we believe that we can better use that within the banking business.

Next question on margin?

The question I had on margins just, just to understand a bit about maybe you see going forward in optics (ph) because clearly you're saying that for competitive wise it looks as if the strain is coming off on the margin front.

In terms of the way the optics will move forward, it sounds like obviously the provision we have taken, the IFRS adjustment will start to feedback through in terms of the net interest income from the retail business, so that would boost the margin there. And I'm assuming there has been nothing which has come through in terms of that recognition and the first half of these numbers, so you're starting from scratch effectively. I was wondering if you can comment on those dynamics overall?

Basically the numbers I talked about today are comparable numbers, so, therefore, it's not in the numbers. It will be in our full IFRS numbers. So what you will see is a rebasing of the net interest margin effectively on a full IFRS basis. We are focused on the comparable numbers because as all of you understand that's the only way we can give a reasonable year-on-year comparison. When we move up to full IFRS, clearly it will affect our margin.

I think the way it will affect the margin is what you will see in a period when the credit cycle is downturning, you will see less of the credit relatively until there is a catch-up effect. And as the credit cycle turns, you would actually see a delayed effect of the previous provisions you have made beginning then to unwind. So it will have an impact on margin going forward. Clearly it will depend exactly where in the cycle you are. But that is one of the reasons why margin I don't believe is the be all and end all.

I would imagine internally when we would be looking at it we may well eliminate that effect from our overall margin because that is a reporting piece of management information that we look at, and we don't want that distorted through accounting changes. At the moment, we are looking at the comparable, numbers so it does not actually affect them particularly.

And in terms of competition, how do you see that impact on margin going forward? (multiple speakers) -- potential impact on margin going forward? Do you think that these are more stable trends going forward essentially?

(multiple speakers). If you're asking are competitors basically pricing less aggressively than a couple of years ago, I would say yes. I would not have a clue of where it is going to be going forward.

(inaudible). Just slightly taking a quite important question on page 17 of the release, there is a reference to 48 million pounds of unexpected other commission, which is the profit share on the creditor insurance, and it is always nice to find an unexpected 48 million pounds. But sort of can you give us any color where it arose, whether it was a one-off, whether this is sort of the new level of the profit share?

We basically had in the year something of a catch-up on certain elements of the profit share coming through to the retail banking business, so I would say the actual level is a bit higher than we would expect to see on an ongoing basis. But we do as you know from the structure of these types of commissions we basically get a broking fee upfront and then there's a follow-through profit share, and that very much depends on the pattern of historic business coming through. So there was a bit of a catch-up in the period.

So you would not expect necessarily the increase year on year to be as great going forward. But it is part of the nature of the overall contracts, and the actual size of it will depend on the actual experience relating to the policies that have been written.

Ray Cypher, Cypher Consulting. I'm interested in the long-term outlook for Scottish Widows. You are not -- you don't publish a return on equity figures or a return on capital figures by business. But if I roughly guesstimate that by taking the realistic surplus number that you have got here as a rough proxy for the capital in the business, it is still well below the overall group level for Scottish Widows. And I'm curious to know how much of that -- as you look to increase that return, how much of that increase roughly speaking might come from repatriation of capital and further measures to be able to repatriate more capital? And how much from being able to grow the business, particularly given some of the increasing regulatory pressure on some of the business lines there?

That is a fairly complex series of questions. Let me sort of give it a header and turn it over to Archie and to Helen. We are quite pleased with the levels of new business profitability within Scottish Widows. As you know, there is a bank book that you can do very little about. You can manage more efficiently and so on. But that price is pretty locked.

And then there's the new business that we are very pleased with the new business profitability which continues to grow year on year. We're very pleased with the way that Archie and his team are running the efficiency of the book and it gets better every year. So overall returns are continuing to increase. I think there is still further room, and Archie would you tell us a little bit more about where the future lies?

Very much focused on the new business that we are writing, and as Helen mentioned, we are applying economic profit and disciplines. We started off by setting hurdle rates, internal rates of return which we have moved a lot of our products against, and I can say that we have improved the percentage of new business written quite dramatically above all of the internal hurdle rates.

Now we don't publish those internal hurdle rates. But I can tell you we do compare to those others in the marketplace. We take a very prudent view of our IRRs. So the new business that we are writing we're focusing very much on the long-term economic profit impact of that and the risk-adjusted rate of return.

Now when we look at the overall capital employed in the business, so as Eric says, a lot of that is tied up in the bank book, hence this piece of work that we're doing looking at the structure of all of the life funds, trying to see the optimal structure of that and to identify where the surplus capital is and hence to be able to release it. So there's two pieces of work which are connected.

Now what I should also say is we have taken a pretty good hard look at the future plans for our business. In other words, what our growth rates are going to be and what the capital consumption is likely to be. And in doing the restructuring, we're taking a very careful look to make sure that we can continue to grow the business profitability and at the same time release capital. So we don't see it being a constraint on the future growth of our business.

(inaudible) say it is a constraint and how do you see that running off? How quickly do you see that -- how quickly do you see the bank book running off since that seems to be a major constraint on improving returns?

Well, the bank book consists of a range of different products. For example, the (inaudible) profits book, which is a sizable book, runs on for a very very long period of time. So every individual category of policyholder fund runs off over different periods.

Now we don't publish the actual runoff of all of that. But as we look at the cash flow profiles of all of those and the capital tied up, and remember some books like (inaudible) life is a closed book. So we have a different type of profile within a closed book as to an open book, and we look at all of those profiles to allow us to estimate the capital needs going forward in the bank book and in the new business. It is quite a complex process that we go through, but that is the kind of approach that we have been taking.

It is Richard Staite from Socgen. It seems to me that Lloyds has been talking about improving its cross-sell ratio or share of wallet for several years even under the old management team. And, of course, I guess many banks would have the same view. But I would have thought by now you should be showing some improvement. So that slide that you gave on five different product categories in the retail area, can you tell us whether you lost or gained share of wallet in each of those areas then last year?

What I will tell you is that we maintained shares this period overall, and that is not a bad outcome. Trying to watch marketshares change is like watching paint dry. It happens, but it happens slowly. You don't get those kind of results overnight, or if you do get dramatic share gains overnight, hang onto your hat, it means you're probably sweeping the gutter.

So this is one of these things that we will continue to report on it, and when we believe that we have trends to report, we will show you. Consistency in terms of talking about relationship depth and cross-sell I think is a virtue rather than a vice. We will continue to talk about it, and we will continue to make progress.

It is Michael Lever at CSFB. Really continuing in a slightly similar vein, on page 11 of the press release, you gave some figures for lending by different categories in the retail bank. So mortgage is up by 4%, cards by 3%, personal loans by 4%, deposits by 3%, and I don't have all my Bank of England data with me, but I would suggest all those numbers -- I know they are only in the last six months when one needs to look at them on an annualized basis -- all those numbers to me seem to be slightly below the market rates, suggesting that while clearly you have captured a lot of customers, they don't seem to be borrowing much from you at the moment. And certainly the loan growth figures across those categories seem to be submarket, suggesting actually you have possibly lost market share across all those four categories.

I don't believe we have lost share. I will ask Helen to comment further, but I think you have to be somewhat careful about looking at any sort of one period in isolation. What you look for is a trend over time. The dynamic is, are you acquiring the right quality customers? Because if you acquire customers with very thin wallets, you may have 100% wallet share, but it is not meaningful, and you don't have a lot more room to grow.

So are you acquiring the right questioners customers? And we have reported a fairly dramatic increase in customer acquisition. Are you retaining the customers? Our retention is quite, quite good, although we think we can continue to improve it. But to illustrate the leading cause of attrition these days is death, and Terri will undoubtedly figure out how to work that. But in the meantime we are doing very well.

Once you have acquired and retained your customer, you look for high satisfaction. Because if you don't have customer satisfaction, you have no right to expect a future sale. You then identify needs that the customer will have and then you satisfy those needs better than your competitors. You add value to the relationship better. So that is what the dynamic is.

What we're doing is unfolding that dynamic, and I have been reporting to you the progress that we have made on acquisition, on retention, on service and we are starting do see real inroads in cross-sell. So we will continue to report it, and I think that sometime over the next several months we will try and have a day on the UK retail bank and tell you a little bit more about it in-depth.

But it is one of these things where you cannot really take a period in isolation and say well, you did not do a good job. You look at the trend and you look at are you working on the right levers over time.

Helen, did you have anything to add?

No, I just wanted to confirm in terms of market share, our marketshares are (inaudible) stable. That does represent a slowdown in some senses from where we have been because we have been increasing market share over a period of time in a number of these categories. As we go into a slightly more difficult consumer environment, I'm not sure that this is not a rather good place to be in terms of being perhaps a little bit more prudent in terms of the additional assets that we take on. So I think the business remains strong.

Michael, I noticed that you did not preface your comment this time around by saying it would be churlish, not to acknowledge that we've made some progress.

No comment.

It is John Pitzer from CSFB again. Can I ask a question on the dynamic delinquency chart? Because if I look at the card movement, it looks pretty in line with the actual charge increase won on H2 2004. Whereas the personal loans dynamic delinquency two month plus arrears were obviously dropping, whereas the charge again is going up by a reasonably notable amount. Is that because that chart is looking at numbers of arrears as opposed to balances, and if you looked at the balances, would it show a different trend?

Bring the mike over here, please?

The chart is looking at balances, but it is also looking at the quality of the new book that we're putting on. And, of course, it does take awhile for these books to season, so the arrears are not just a feature of the new business that is coming on, it's a feature of the other stuff that is coming through. So what this is telling you is that the quality of the new business we are putting on is pretty good actually, and that we have appropriately adjusted our scorecards for the new environment. We are managing the other stuff that is coming through, and typically it will be over a longer time period than it shown on that chart. So that is what the chart is showing, the quality of the new business essentially that we are putting on.