Lloyds Banking Group PLC (LYG) 2006 Q2 法說會逐字稿

Good morning, everyone, and a very warm welcome to our interim results. Before Phil takes you through the numbers in detail, I'm going to give you a quick overview of our operating results. And whilst it's just Phil and myself presenting today, we do of course have the full executive team here to help you answer your questions, including our two new Executive Directors, Benny Higgins and Jo Dawson.

As we now have a number of new faces, I think it's important that you have an opportunity over the next few months to hear from our leadership team. So we've set aside the morning of the 19th of September to hold a seminar here at Old Broad Street where each of the divisional CEOs will present on their respective businesses. So for now, please save the date -- that's September the 19th -- in your diary, and the IR team will be in touch.

Let's now turn to an overview of our results. We've had a really strong first-half where the underlying quality of our earnings is exemplified by good asset growth, stable margins, impairments down as a percentage of advances, and rigorous cost control, all of which is delivering sustainably strong and enduring returns for our shareholders. We've delivered asset growth at 10% and deposit growth of 7%, both marginally above our expectation at the start of the year.

We've produced good income growth on the back of broadly stable margins and strong growth in non-interest income. For the year as a whole, we've targeted annual cost growth of less than 3.5% in our core UK divisions, and with an annual total growth of no more than 6%. As Phil will cover later, we are well on track to deliver these cost targets for the full year.

Our credit experience has continued to develop much as we expected, with impairments as a percentage of closing customer advances improving, down 5 basis points in the first half. Further deterioration in our retail unsecured book has been fully counteracted by improving trends in our retail secured book and resilient performances in our corporate and international books.

Our capital position remains really strong, with all our ratios at or above the target level, even after setting aside 1 billion pounds for our pension fund. In the first half of the year, we bought back 502 million of shares for cancellation. And I can confirm today that we are increasing the 2006 share buyback program up to 1 billion pounds.

Now to the detail of the numbers. Reported profits are up 17%, underlying profits up 13%, and the dual benefit of our strong operating performance and the share buyback program has driven underlying earnings per share up 15%. We've also increased the interim dividend by 15%, in line with underlying earnings per share, and we continue to target underlying cover of around 2.5 times, with around one-third of the year's dividend paid at the half-year.

Our clear focus of delivering returns through carefully targeted growth has seen the return on equity increase to 20.5%, above our 19% to 20% benchmark range. We've also continued with our unwavering focus on improving efficiency, and the group cost income ratio has reduced again, this time to 40.9%.

I'll now turn to the performance of each of our divisions. Profits and retail were up 4%, a resilient performance particularly given the inevitable pressure of unsecured provisions at this stage of the cycle. With advances growing to an annualized rate of 9%, we delivered income growth of 6%, helped again by strong contributions from the non-interest income line. Our retail margins now stand at 180 basis points for the first half, down just 4 basis points.

Operating costs were again tight, up just 2%. So with income up 6%, yet again the retail team produced positive jaws of 4%. The retail cost income ratio has fallen, now standing at just 38.6%, an efficiency level that gives us a really strong base against which to turn up the pressure further against our retail competitors.

Our share of gross mortgage lending increased to 22%, and we're particularly pleased that we delivered this marketshare whilst keeping the average loan to value of our new lending broadly unchanged at just 61%. Our marketshare of net lending increased dramatically to 21%. The significant strengthening on that marketshare has been driven primarily by improvements in levels of principal repaid. Our share of principal repaid fell from 25% last year to 23%, clear evidence of the increasing effectiveness of our mortgage retention strategy.

In bank accounts and credit cards, we've continued to win share, gaining 400,000 new bank accounts and 380,000 new credit cards. Only in unsecured loans where we still consider for clarity the market to be unattractive in pricing terms has our continued caution led to lower volumes, with outstanding balances remaining unchanged since December 2005.

You'll recall that six months ago I was unhappy with the performance of our savings business last year. We've seen a far stronger performance in 2006, with deposit balances up $4 billion. I'll be looking for even further strengthening in our savings inflows in the course of the next 18 months.

Our retail credit performance is developing, (indiscernible) in line with our expectations. Secured impairments improved in the first half, down to 2.07% of advances from 2.21% at the end of 2005. The slowdown in growth of mortgage areas in mainstream lending that was evidenced in the second half of last year is now also being seen in specialist lending. Secured provisions coverage remained unchanged at 10%.

Our preference for strong asset cover is as always a defining feature of our results, with the average loan to value on new business stable at 61%, and the average LTV of our existing book also stable at just 44%. This excellent level of asset cover provides a really firm underpin to the long-term strength of the HBOS balance sheet.

Unsecured impairment trends reflect continued affordability pressures, growing levels of personal insolvencies industrywide, and the market tightening of credit. The mathematical effect of lower loan growth in recent periods inevitably inflated impairments as a percentage of closing advances up to 13%. Unsecured provisions coverage remained stable at 73%.

We remain confident about our prospects in retail. Long-term we continue to see real scope to grow our marketshare to between 15% and 20% in all key markets. We have so much still to go for.

At this stage of the cycle, we will continue to favor secured lending, with its more attractive credit and return prospects by comparison to unsecured.

Unsecured impairments are bound to continue to season, or grow -- whichever euphemism you prefer. We cannot buck a market trend and neither can our competitors. We are, however, now getting to a point whereby the end of the year, we will have seen the end of the provisioning spike associated with the pre-2004 unsecured personal loans.

We continue to see strong growth potential in our banking and savings businesses. The first half of 2006 has finally seen the UK population deliver a significant improvement in the savings ratio. Over the next three years, our retail business will continue to benefit hugely from our strong franchise on the liability side of the balance sheet.

We are also investing in a customer service infrastructure. Earlier in the year, we announced a branch expansion program of 100 new branches over the next five years. By the end of this year, we will have opened 10 new branches, including one on the ground floor here at our Broad Street.

We can only do all this and deliver real value for our customers by being rigorous on cost management. The retail team has developed a whole series of cost reduction initiatives to be implemented over the next three years, so you can confidently expect a background of continuing improvements in efficiency ratios in our retail bank.

Let's move on to Corporate. Corporate profits rose 14%, continuing the recent strong performance and demonstrating the benefits of our focused return-led strategy. Net interest income was supported by highly resilient margins, up to 234 basis points from 213 basis points in the second half of 2005.

Net interest income rose by 15%, despite the fact that we chose to restrict asset growth to 8%. Underlying non-interest income was 10% lower than this time last year, but this really is an excellent performance, given the exceptionally strong dividend receipts on our investment book in the first half of 2005, whilst net fees and commissions were up a very healthy 16%.

Corporate also delivered a good cost performance, with underlying costs increasing by just 3%. With underlying income up by 7%, underlying costs up by just 3%, Corporate delivered strong jaws and a further improvement in the cost income ratio, now down to just 27.9%.

We've continued our selective approach to lending opportunities in the face of what we all too frequently see as unrealistic price competition. We therefore continue to be very disciplined in either selling down or walking away from transactions which simply do not meet our return criteria. Our growth in advances has therefore been held at 8%. And deposits were down 5% as we sought to avoid the hotter money.

Our Corporate loan portfolio continues to be really well diversified and backed by exceptionally strong collateral. Under Peter Cummings' leadership, we further developed our integrated finance model, which provides a unique, one-stop shop service to our clients, offering the whole street of financing solutions, from senior debt to mezzanine, right through to equity finance. The continued momentum in our non-interest income line is real evidence of the value we are creating in our integrated finance portfolio.

We've consistently said the Corporate credit experience was unlikely to get much better, but once again we've been proven wrong. Impaired loans as a percentage of advances have continued to fall, down to 1.34% from 1.41% at the end of 2005, as have impairment loss as a percentage of average advances, down to 0.22% from 0.26% in the first half of 2005.

We are not, however, seduced into thinking cycles have been abandoned altogether. We have been particularly cautious within the leveraged finance marketplace, where certain deals were, in our view, being completed at inflated multiples. And we will continue to pace our asset growth appropriate to the stage of the cycle.

The strategy for our Corporate business is unchanged. We will maintain our financial discipline and focus on syndication and selldown where that is the right thing to do. We will continue to place great emphasis on the growth of our non-interest income line, where the stock of unrealized gains were higher at the half-year than at the end of 2005.

We have been tighter on costs in this division in the first half and we've seen a good improvement in our efficiency ratios; there should be more of that to come. And we are increasingly managing our Corporate relationships, right through from origination to relationship management, split by asset class. And of course, we will continue to develop our market-leading integrated finance proposition.

In summary, I'm very pleased with the positioning of our Corporate business at this stage of the cycle, and see good visibility for sustainably strong returns going forward, despite increasingly competitive markets.

Turning next to Insurance and Investment. Insurance and Investment profits increased by 17%, with a strong financial performance from both businesses, Insurance profits up 22% and Investment profits up 12%. The profit performance in the Insurance business has been driven by good retention and a strong underwriting performance, which has more than compensated for a slowdown in sales that is fairly typical with this stage of the competitive cycle. Investment profits grew by 12%. Excellent sales growth and robust margins across all of our Investment businesses ensured we are building real profit momentum.

The result for our Investment business is certainly not flattered by international reporting standards. New business drain of our investment contracts, which under IFRS are new longer accounted for under embedded value, reduced our recorded profits by over 130 million pounds. Of course, the impact of IFRS means that we are merely deferring the timing of the recognition of profits, and we are therefore very confident that we are building significant long-term value in our Investment businesses. Phil will expand on this issue later. Margins remained stable at our target levels in the Investment business, with new business profitability at 25% of APE.

Sales in our Insurance business fell marginally, by 2%. We saw strong growth in household insurance sales, up 11%. First-party group distribution of course remains the core of our model. But we're also seeing continuing success in sales through third parties. Repayment insurance sales were down by 6%, not surprising given our very deliberate choice to reduce our growth appetite in unsecured lending.

We were slightly disappointed with our motor sales, down 11%, as increasingly strong price competition, typical of this stage of the underwriting cycle, pegged back growth rates at esure in the short-term. However, we are well-placed to deliver stronger growth as the pricing cycle changes. Strong retention and robust underwriting performance continue to be the core underpins of our high-return General Insurance business.

Our General Insurance business has very sound long-term prospects. We have a large high-quality in-force book, but we still have huge untapped potential to us from our wider customer base. There are an incredible 15 million HBOS customers who do not yet hold a general insurance policy with us.

In the near-term, in my view, sales growth is likely to remain strong in household, but more subdued in both motor insurance and repayment insurance. The cycle will of course turn eventually, and when it does, faster sales growth will return across the board. In the meantime, the cycle is generating good profit growth on the back of our strong track record in underwriting.

As with all our other retail-related businesses, our General Insurance business is built around developing broad, multi-branded distribution, all underpinned by low-cost scale back-end operating platforms, which (indiscernible) well for future value creation.

Turning to Investments. While our distribution channels performed well, with sales up 33%, for once it's not just the Bancassurance channel that steals all the headlines. The sales here grew strongly yet again, up by 25%. Our intermediary sales were up 35%, and we enjoyed particular sales in pension products post ADay.

In Wealth Management, St. James's Place surged ahead. A strong investment performance, coupled with increased partner productivity, contributed to an overall increase in sales of 55%.

The prospects for our Investment business are very strong. All of our Investment businesses are set to benefit from the UK's favorable demographic trends, with all segments of the population needing to save more for pension provision and an increasingly high percentage of Middle Britain now needing to make provision for inheritance tax.

Our Bancassurance business continues to grow strongly, with arguably the UK's two most productive sales forces. Literally the only restriction to continued long-term growth in Bancassurance is our distribution capacity. And we're therefore genuinely excited by the planned new branch openings here in southern England.

Whilst margins remain far tighter in the intermediary channel, we continue to prioritize growth in segments where we see the greatest potential for long-term value creation. We would also continue to avoid sectors which provide unacceptably high levels of longevity risk, such as annuities.

In Wealth Management, supportive demographics coupled with strong growth in levels of wealth in the high net worth segment of the population all point to excellent growth prospects for St. James's Place.

In summary, our multichannel distribution model, coupled with attractive demographic trends, gives us real confidence in the long-term potential of our investment businesses.

Now International. In International, we've seen a strong performance from all three businesses, leading to an overall increase in International profits of 27%. In both Ireland and Australia, where we are partway through ambitious expansion plans, strong contributions from our existing businesses have helped fund the investment required to deliver our growth plans.

In Australia, profits were up 36%, notwithstanding a 22% rise in underlying expenses as we began our East Coast expansion program. Similarly, in Ireland we've seen profits rise 37%, despite underlying expenses increasing by 37% as we pushed ahead with the expansion of our retail branch network.

In Europe and North America, profits rose 17%, with growth across the full range of business activities. In total, our International businesses posted some pretty healthy numbers -- underlying operating income up 27%; annualized advances growth of 22%; and annualized deposit growth of 13%.

In Australia, all our existing businesses are performing well. As we expand from our West Coast heartland, we've seen strong growth in our commercial banking activities, with annualized growth in advances to 29% and 8% in deposits.

Our Retail division, operating under the BankWest brand, continues its push to build market share. Just as in the UK, our Australian Retail business is firmly committed to providing strong customer value, attacking incumbent competition from a low-cost operating platform. Progress is really encouraging. Retail advances grew at an annualized 11%.

Credit quality remains good in Australia. The rise in impairments to 0.98% from 0.66% was driven by a small number of corporate transactions and a change in retail product mix. The long-term potential of our Australian business makes us increasingly confident that we can generate strong shareholder returns from the continued expansion of our East Coast presence.

Similarly in Ireland, we're showing good progress, with annualized growth in advances of 30% and deposits of 23%. We are the clear Number 2 in business banking. Indeed, our business banking operations are increasingly benefiting from a halo effect from the publicity that we are receiving from the expansion of our Retail business. Business banking lending is now growing at an annualized 25%.

The rollout of our Retail presence is well underway. We've now open 17 branches in Ireland and expect to have a total of 46 branches in operation by the end of 2007.

Finally, credit quality remains very resilient, with impaired loans as a percentage of closing advances continuing to trend down to 1.89% from 1.98% at the end of last year.

Our European and North American operations have had a good six months, with annualized growth in advances of 29%. Our corporate banking activities have delivered good growth in both Europe and North America. The economic backdrop has been robust in America and improving in mainland Europe.

Our Retail businesses in Spain and the Netherlands have also continued their measured expansion, with tougher markets in the Netherlands impacting margins, but sustained growth in the Expat business in Spain. And in our European Financial Services business, the integration of Heidelberger Leben is progressing well. All in all, our European and North American operations provide us with a good platform for carefully paced organic growth.

Our international strategy will now be familiar to you. We are taking our proven and successful UK formula to attractive markets which we know and understand. We are able to attack incumbent competitors because we operate off of low-cost operating platforms. And our whole operating model is underpinned by rigorous risk management. What all this gives us is increasing flexibility to grow our International businesses in a way that will provide strong and enduring shareholder returns.

Finally, to complete the tour of our divisions, Treasury and Asset Management. Here, we had an excellent first half, with profits up 46%. Even if you strip out the effects of hedging effectiveness under IFRS, the rise in profits is still 32%, a really respectable result.

As you know, we are not and never will be big risk takers in Treasury. Profits in Treasury have to be earned off the back of trading flows at HBOS. So it's encouraging to see sales and trading income up 33%.

Our focus on asset quality in Treasury is, as always, unaltered. Still 99% of Treasury assets are rated A or better; and once again, no credit provisions were required.

Insight has also continued to grow, with assets under management now 97 billion, an annualized rise of 18%.

As ever, Treasury has been busy on the funding side, and we've seen successful Tier 1, Tier 2, covered bond and securitization issues in the first six months of 2006. Flexibility and access to a wide range of markets continue to drive our funding strategy. For example, we continued to access the securitization market in Australia in the first half of the year.

In Asset Management, Insight has delivered a consistently strong investment performance in both fixed income and property. Our key objective over the next two years is to deliver a similar improvement in the performance of our UK equity funds.

Insight has also developed a reputation as one of the leading providers of liability-driven investment solutions for pension funds. This is a fast-growing area and our expertise bodes well for the future.

That completes my review of operating performance for each of our businesses. I will be back at the end to some up, but for now I'll hand you over to Phil. Phil?

Thank you very much, Andy, and a very good morning to you all. As Andy just highlighted, the combination of strong top-line growth and good cost control has again enabled us to deliver double-digit earnings growth. With underlying profits up 13%, share buybacks have increased underlying earnings per share by 15%. And in line with this, our interim dividend, as Andy said, is up 15% as well.

As you can see, capital generation remained strong. with Tier 1 slightly ahead of our 8% target. And equally healthy is return on equity, slightly north of our 19% to 20% benchmark.

Turning to the income statement, what comes through clearly, I trust, are three things. First, the value of selective asset growth, which has resulted in stable margins and net interest income up 8%. Second, the significant contribution yet again from non-interest income, up 16%. And third, the benefit of positive cost income jaws of 4%. These three ingredients combine to present a powerful and resilient formula, a formula that has served us well in the past and one we expect will continue to drive profit growth ahead of asset growth in the years to come.

As ever, for completeness, there's a reconciliation of underlying profit with reported profits in the RNS, although thankfully on this occasion, there are only two items to highlight, positive policyholder tax of 134 million and negative short-term investment fluctuations of 92 million, leading to reported profit growth of 17% overall.

Incidentally, you will also see from this table that there is no change to our endowment provision, our experience since the turn of the year being materially as expected. But the next major milestone on this topic will be in the autumn, when we start to see the effect of time borrowing as it is introduced across the industry.

Now, asset growth of 10% came in at the top end of our expected range. However, our selective approach to growth continues to distinguish the way in which we create value for shareholders.

In Retail, asset growth has returned to 9%, as the level of principal repaid on mortgages now moves back into line with our gross lending. In Corporate, growth has been maintained at 8%, as pricing conditions continue to encourage us to sell down or walk away when returns looks unattractive. And overall, UK growth has again been supplemented by strong International growth of 22%, as our overseas businesses continue to perform well in economies that today are typically enjoying stronger growth than here in the UK.

The reward for our selective approach to asset growth can be seen in the relative stability of our margins over the past 12 months, the outlook for the second half being broadly similar to the first half.

Non-interest income was up 16% on our underlying basis, and has again made a very strong contribution to our results, as the scale and the diversity of our earnings and fee generation across the Group continues to expand. This uplift was achieved despite, as expected, lower net gains on dividend receipts from our Corporate investment book compared to the very exceptionally strong figures of last year.

At 37% of total income, however, non-interest income has still got some way to go before it matches the more mature position of our competitors, who typically enjoy something closer to 50%. Looking forward, therefore, we can expect that non-interest income will continue to be part of the formula that drives profit growth ahead of asset growth for many years to come.

On the cost front, underlying expenses in the first half were up 7%, with core UK expenses up just 4%. Within this, we have consciously accelerated some of the investments that we're making in our International businesses, given the very favorable markets in which they are operating. Nonetheless, it's very pleasing to report a further improvement to our Group cost income ratio, which now stands at 40.9%. The next milestone is of course to get the ratio below 40%; and beyond that, I see no reason why we can't continue to drive it down further.

Now I knew that some of you are concerned that our passion for cost efficiency might be at the expense of future investment and thus future growth. But let me assure you -- let me assure you that that is not the case. As a powerful illustration of this, not only have we accelerated some of the investments that we are making in International in the first half, but also the acquisition of Lex will add a further 0.6% to year-on-year cost growth.

And at the same time, despite these two investments, we remain confident that we will deliver against our target of 6% cost growth for the Group as a whole and less than 3.5% growth for core UK expenses.

Now the reason we are so passionate about efficiency is that it's absolutely key -- absolutely key to maintaining our competitive position and hence to future growth and to returns. And you can see quite clearly from this slide that whilst over the last few years margins have remained more or less static, at the same time, efficiency has improved simultaneously. We can therefore now afford to improve both the deal to customers and to shareholders at the same time, a true win-win situation. And this is why, of course, our return on equity today is slightly higher than the 19% to 20% level that we judge to be sustainable.

Finally, to complete the tour of the income statement. impairment losses for the Group as a whole rose by 15% in the first half, losses as a percentage of advances increasing in Retail, but declining in both Corporate and in International.

As you can see, impairments in the first half continue to follow the same trends as before, although the slowdown that we saw in Retail in the second half of last year is now very much more mild.

Looking at Retail in a little bit more detail, you can see that the slowdown in Retail is not surprisingly being driven by our secured book, where the effect of historic seasoning has now more or less run its course. And with 93% of our Retail assets secure on property, this is of course very reassuring, especially as the improvement is now showing through in our specialist lending as well as mainstream.

In unsecured, however, impairments remain on an upward trend, driven not only by continued seasoning, but also marketwide pressures on affordability and insolvencies. Now, we've previously been quoted as being bearish on unsecured impairments, unlike others, believing that impairment growth is unlikely to peak in the next 12 months, a view which we continue to hold today, even though the disappointing performance of our personal loans written pre-2004 will soon be behind us.

That said, and as we made clear at the preclose, at a Group level we remain comfortable with the market consensus for full-year impairment losses of 1.9 billion, although clearly the better performance in impairments in the first half now gives us slightly more headroom in the second half.

Turning to the results by division, it's very pleasing to be able to report positive profit growth in each, and just as importantly, of course, further diversification of earnings right across the Group.

In Retail, we delivered another resilient performance, with operating profit before provisions up 10% and underlying profit up 4%. I think the income statement largely speaks for itself, but I just should say that net interest income growth of just 4% doesn't really do justice to the unrealized asset growth of 9%. And the reason for that is that much of the growth that we've seen in the first half of this year was back-end loaded, whereas last year it was the other way around. And so as a result, the growth in average balances -- which of course drives net interest income -- the growth in average balances in the first half was just 6%.

Lastly on Retail, it's also worth noting that the cost of implementing the [RFT's] ruling on credit card fees will be about 20 million pounds in the second half this year and about 40 million pounds next year.

In Corporate, we turned in another good performance, with profits up 14%, asset growth net of selldowns was up 8%, whilst advances before selldowns were up 13%. And both of these, of course, helped drive the income up substantially despite, as Andy, said, as expected, lower net gains in dividend receipts in our Corporate investment book.

Now just in relation to these two line items, in March my guidance was that for the purposes of your modeling that you should assume that 2006 outturn would land somewhere between 2004 and 2005. In practice in the first half, the actual result just slightly behind the average of the two. But nonetheless, for the second half, my view remains that this is still the best assumption for you to make.

Profits in Insurance and Investment were up 17%, and General Insurance was up 22% despite lower sales, and Investment profits were up 12% despite higher sales. Now developing this last point just a bit further, as you know, there has been a lot of talk and discussion recently about the hidden value in our investment book under IFRS, the issue being that while sales of insurance contracts contributed a very substantial profit in the first half, sales of investment contracts contributed a very substantial loss.

Now you may remember this slide from a presentation I gave in February, which was a worked example contrasting the way in which profit emerges on sales under IFRS and old UK GAAP. Now this is just a worked example, but nonetheless, it does illustrate the key point, which is that in essence -- we are roughly in year one or two of this picture -- in essence, there is still a great deal of profit still to emerge on this business.

Just how much profit, of course, is something that many of you have sought to estimate in recent months. And to help you do so, it is our intention to provide you with supplementary information on this point as part of our full-year results in February.

Performance in the International businesses, as Andy said, was very strong and indeed right across the board, with profits up 27%. And as I mentioned earlier, we've accelerated some of the investments that we have been making in these businesses in the first half, and we see no reason to hold back on that acceleration in the second half either. Albeit of course we will do so, while still living within our overall cost target of 6% growth for the Group as a whole.

Last but no means least is Treasury and Asset Management, who also recorded a very strong performance in the first half -- profits up 46%. And this was the result of good trading income, strong fund performance fees, and of course, sound cost control. As Andy said, the results were slightly flattered by the IFRS hedging effectiveness impact, which was nil in the first half of this year, but was 11 million negative in the first half of last year. But nonetheless, this was a very good, solid performance from Treasury and Asset Management.

So if I can conclude, just a few words if I may about capital. Well, as you can see from the results, we continue to generate lots of it. And subject to maintaining strong capital ratios, we continue to give it back to shareholders, when to do otherwise would dilute returns. We therefore increased our share buyback program for this year up to one billion pounds, of which, as you know, 50% is already complete. And we've also now paid 800 million pounds into our pension scheme from the 1 billion or so that we put aside in our capital back in December.

Looking forward, our stance on Basel II remains unchanged. With around three-quarters of our assets secured on property and with strong loan-to-value levels as well, we continue to expect that we will be a net beneficiary from the new regime. But as we've said before, because the benefits of Basel II will emerge over time rather than overnight, we certainly don't see the sense in talking them up today or indeed pricing them away tomorrow. And thankfully, others now seem to be of the same view.

And with that, ladies and gentlemen, it is now my pleasure to hand you back to Andy. Thank you.

Thank you very much, Phil. I would just like to conclude if I may with one single slide on outlook and prospects for HBOS going forward.

I think if there is one defining feature of today's results, you can see very clearly that our primary focus remains firmly on organic growth in our core UK markets. Good top-line income growth right across the board and marketshare growth in every single product sector where we have sought to take share. In most segments, we still see scope for long-term share growth, often to 15 to 20%, and that gives us real confidence in our potential for further organic top-line growth here in the UK.

Equally however, these results do give you the first tangible evidence of good returns from our targeted International expansion. We're very clear here -- we're taking two economies that we know well and understand, formulas that have worked so well for us in the UK, targeting incumbent competitors with very low-cost operating platforms. That is what is driving good earnings momentum in our overseas businesses.

Our capital strength really is clear from today -- strong ROE is driving strong capital surpluses, every single one of our target ratios above plan, and that has allowed us to extend our share buyback program for this year to 1 billion.

But last and by no means least, this formula only works if we are pursuing a genuine cost leadership. The absolute feature of HBOS will be that at the same time as we continue to deliver very strong top-line income growth, we will continually seek cost reduction programs. Phil was very clear -- our target for this year is less than 3.5% in our core UK divisions; maximum is 6% growth across the whole of HBOS, and we will deliver that. It is the combination of all four elements of this formula that should give HBOS shareholders real confidence for future value creation going forward.

That complete the results presentation. As always, we are delighted to take questions. If we could follow the normal format if as you receive the microphone, saying who you are, where you work, and we will take your questions. I'll obviously use my colleagues in the front row to help.

Good morning. J.P. here at Merrill's. Two questions maybe on the Retail business. First, going back to the prelim numbers and just talking about mortgage marketshare. I think the indication was that if market was stronger, your expectation of what you would do in the market would be lower (indiscernible) margin. And I guess the market has been stronger, and if anything, your volume seems to be better than expected. I just wonder if there has been any material change of your view of the market which is driving that. And if you can comment going forward too.

And second, I just wanted to pick up on a couple of points in Retail in the non-interest income categories. I appreciate there's probably some seasonality within this. But for example, credit cards you obviously got flagged by what the RFT impact would be. Was there any of that in the first half or should we just look at that going forward? And if you could just make a comment on the banking side as well, in terms of where the income was (indiscernible) in the second half last year.

Okay. I'll pass to Benny to take all the comments on the non-interest income line, and then to talk through why our mortgage marketshare has improved so much.

I would just make one point. We have pleasantly surprised ourselves in terms of our mortgage performance in the first half. We were very clear here in February in saying we expected our principal repaid performance to improve; it has improved even quicker than we targeted.

We said at the start of the year that 15 to 20% would be a good target for the full year. The fact that we have come in at 21% in the first half clearly gives us confidence we will be at the upper end of the range rather than the lower end of the range.

But our view of the market is fundamentally unchanged, and indeed we will be releasing our highest price forecast at the end of this week. I don't think it's really any secret that we will be coming out with a figure for the full year of mid single digits. So very similar to what we said at the start of the year.

But, Benny, do you want to expand on both what you've done to deliver the improved mortgage performance and pick up on the non-interest income questions?

Sure, Andy. I think one of the things that struck me quite visibly since joining this business is just how strong we are in the mortgage market. And in fact what we have done in the first half is we have actually improved our risk profile by going after lower LTV in the specialist lending area, while growing net lending.

Don't forget that our net lending improvement is down to improving principal repaid as much as anything. And that has been done in response to very specific actions. We've had 100 people added to the number of people who work on retention; we've been using workflow and prioritization processes. So principal repaid is as much a part of that as anything. So that is very, very important.

I think the other point you made was in OFT ruling respect to cards. That is effective today, J.P., so there is no impact in the first half.

And the other point was on banking fees. Banking fees are down as customer behavior is changing with respect to some of the penalty fees. I think the important thing, though, when you look at our performance is that our Jaws performance is very strong; it will stay strong. I'm very confident going into the second half that it will remain strong and that margin that will not be eroded any further.

Thank you, Benny. Ian.

Thanks. I need two questions, please. The first one again on Retail revenues. When you compare against the second half of the year, clearly overall they were down, both net interest income and the non-interest income that you've just talked about. Can you give us some comfort ask to hitting that Jaws comment that you made, Benny, that actually that will come both from revenues growing again, as well as just management of the cost side?

Let me take that, because I think Benny was very clear. Phil showed a very clear chart, actually, which showed how the asset growth in Retail was quite lumped towards the second quarter of this year. Therefore, I do think you will naturally see the back end of impact of the faster asset growth in the second quarter leading to stronger income growth in the second half of this year.

You can absolutely rest assured that the Retail plans have strong continuing top-line income growth alongside tight cost control; it's both that deliver the Jaws.

Thank you. And the second question goes to Phil's comment about you beaten your profitability target and the capsule ratios are also higher than your own target. So are you signaling to us that profitability underlying has peaked and will be coming down, or are you signaling to us that at some stage you'll have to revise upwards your ROE target?

I'll let Phil pick up in more detail. Let me just give a quick intro to that. We are delighted that we've managed to drive ROE up so quickly over the last three years. Clearly, it would not make sense to take it a long way north of 20%. And it would be foolhardy to be setting ourselves targets to be driving it into the mid-20s.

I think we're at a level where we are delivering good returns that is in itself generating strong, sustainable capital, and therefore you shouldn't be expecting us to divert our targets from. Phil.

The only other point I would make is that I do think that today's figure, 20.5%, is a point in time where you're seeing not only strong profit performance, but of course the effect of share buybacks coming through and boosting the ROE. And I share Andy's view that probably the greatest way we can create shareholder value in the long-term is maintaining a balance between growth and returns. And that's why we've set our 19%, 20% benchmark as being the level we judge to be sustainable.

But in the meantime, if we can achieve slightly more than that, then fine.

Thanks. (indiscernible) at UBS. I think Phil would be disappointed with pulling up a new chart if he didn't get a question on it.

So on efficiency versus margins, I sort of read from Phil's comment that you are looking maybe with increased comfort to reinvesting some of your margin in volume growth, perhaps most striking in the mortgage business. Is that a fair comment?

And then given that Retail profits are only up about 20 million quid year-on-year, excluding the right move gain, would that imply for a period of time that that would be not a great deal if pretax momentum in the Retail business while you were doing that in order to build out the franchise?

And then I have a separate, unrelated question.

Let Phil pick up on the detail of that slide. Phil was very clear though when he was presenting the margin outlook slide, which showed, for clarity, completely stable margins in the first half -- I think to be precise, down 1 basis point from the first half of last year, 2 basis points from the second half of last year -- he said he expected the outlook for the second half to be broadly unchanged. So I don't think you should be reading any headline of HBOS are going to be reducing margins considerably.

What we are making the point is we are running at ROE levels that give us flexibility to turn up the pressure on competitors in segments where we see we are getting sustainably strong returns. But that should not mean you should expect strong margin decline in HBOS.

It's a quite interesting chart, isn't it really? Because I just love to see the gap get bigger and bigger between the margins and the efficiency. And the point you've picked up on is quite clearly that it gives us a competitive advantage and we can now choose to deploy that in a balanced way between taking our prices where customers want them to go versus where we want to maintain our shareholder returns. And we've got it in the tank and it's there to be deployed.

As Andy said, in the short-term, our margins are holding up well and hence our ROE is being pushed up. But there aren't many businesses that are in this position of being able to make that choice.

Tom Rayner -- I've got the mid -- at Citigroup. Sort of just stay on the margin, please -- my first question -- and the comments about being broadly similar in the second half at the Group level. Could use sort of extend those comments to talk about Retail and Corporate; it was clearly very different margin performances between the two main lending divisions.

There has been some suggestion that perhaps the better mortgage market share performance could reflect HBOS continue to write fixed-rate business when others pulled away because the yield curve had become less favorable. Could you comment on those trends?

And I have a second question on credit quality, please.

I will pass it to Benny to comment on the Retail margin and Peter on the Corporate margin.

I'll just make one generic point. Both margin movements were very planned. The 4 basis point reduction in the Retail margin was largely driven by us reentering the market mortgage market in scale, taking our share to 21%.

On the Corporate side, I hope I was very clear -- and Peter will expand on it much more eloquently -- that we have been deliberately selective in terms of walking away from deals which we don't feel fit our return criteria. So that improvement in the corporate margin has been very, very deliberate.

But Benny quickly first, then Peter to expand on that.

Yes, I can be very brief. Our margin decline is entirely attributable to mortgages, and it's principally due to going after, as I said, (indiscernible) low to LTV specialist lending. And I don't expect any further erosion in the second half. So I think that is quite clear.

Thank you, Benny? Peter?

Thanks, Andy. Margin improvement is a direct consequence of a focus on returns. There's also an element about [main] business points on redemption (indiscernible) as the market itself accelerates some more redemptions.

The second half, though, should see some margin reductions of that consequence of (indiscernible), running about 7 basis points. And in 2007 that should be around about 12 basis points as is a full year. But there's a continued focus on returns and a continued drive in credit quality.

Thank you, Peter.

Could I -- I have a quick question on credit quality. Thanks. just on the unsecured side, because you mention now that you expect the sort of peak in the pre-2004 vintages to be seen by the end of this year, but not really willing to extend that to the book as a whole. I'm just trying to get a sense for does that mean the post-'04 vintages are seasoning perhaps at a lower quality than you may have previously expected, or is just a general flowing (multiple speakers)?

It's actually very much more simple than that. Our point about pre-'04 business was specific to unsecured personal loans, if you remember. Phil's comments about that fact that our overall credit outlook looks good, but we do expect a further deterioration on our unsecured book in Retail over the next 12 months applies equally to credit cards. Particularly to cards, given the fact we been growing more strongly in cards over the last 18 months than in unsecured loans.

And I'd just revert you to the guidance that Phil said that he was very comfortable with the Group consensus guidance of 1.9, which is where you all came out at the end of the February results.

Simon Samuels, also of Citigroup. I also have two questions as well, actually. The first is I was sort of interested in Phil's comments that in the Retail Bank, very roughly, that the average balance sheet has grown much more slowly than the period end. And obviously (indiscernible) in front of assets, some nice volume momentum.

If I sort of actually look at the Group level there -- so not just focused on Retail, but at Group -- your average customer loans were up about 10% in the first half of the year -- this on page 51 -- up 10%; and your period end balances, which is much earlier in the RNS release, are only up 5%. So it kind of seems at the Group level, you've got the exact opposite. That the average is growing much foster than the period-end customer loans growth.

I was wondering if -- I guess it would be for Phil -- but whether Phil could just comment about what you are signaling in terms of volume momentum.

Thank you for that question. What I see in the business is a business where in Retail the momentum was back-end loaded into the latter part of the first half. And therefore, you'd expect that to continue into the second half. In our International businesses, similarly there's a very strong momentum there, 22%, but it's always forward momentum. It was only slightly in Corporate that we saw slightly lower growth towards the second part of the period.

The combination of the two, I think, led -- all of that led to net interest income going up by 8%. And I think that is a fairer reflection of the momentum of the business.

So I would take it that there won't be any slowdown in the second half, but there will be some differential between divisions.

Thank you. The second one is actually for you, I guess, Andy, which is at the moment, your International divisions comprise about 15% of Group earnings. Obviously you've got your last slide talking about organic growth in the UK and expansion internationally. I was wondering if you can give us any sense, either through a combination of organic growth or acquisitions, what you think the right shape is for the Group in terms of UK and non-UK split.

Let me be absolutely clear at the start. Inorganic plays no part in it. We have absolutely no plans for organic growth at the moment; I see no potential for it. So any comment I'm about to make is purely about organic growth.

I'm not going to give a precise target because I think that would be foolhardy, to give you a percentage of earnings by a given date. But under Colin's leadership, you can see that the International businesses are growing very well. I think we've gone from 12% of earnings to 15% in this period alone, which gives you a feeling of the momentum.

I see no reason why that momentum can't carry on for the next two years. We're starting from a low basis. We're building distribution; that's clearly an item in Austria as we do it. And I regard it as top-line organic growth in just the same way as we're delivering in the UK. Low risk, because it's being done from low-cost operating platforms. And therefore converting into very high-quality earnings.

I'm not going to give you a precise figure, Simon, but clearly we do expect the 15% to increase gradually over the next two years. Yes, the front here.

(indiscernible) from Sanford Bernstein. I just wanted to follow up on unsecured credit losses, where if I'm hearing what you are saying, you're saying that the pre-'04 personal loan vintages are starting to turn and improve. You said credit cards have actually -- there's been a 5% reduction in the number of card customers flowing into arrears in first half of '06 versus '05. And yet you are not calling the peak for another 12 months.

So unless I'm missing something, that must mean that your loss per bad is significantly increasing and you expect that tend to continue.

Benny.

The story on unsecured provisions is really a story of two reporting forces. First of all on one hand, we've got the pre-2004 business, both for personal loans and for credit cards. That's been acknowledged before as being of a purer quality. That in personal loans, the seasoning is reaching its conclusion this year. For credit cards, the process of seasoning takes a little longer. So that is point one.

I'll add to that the business we have been doing in 2004 and 2005 is of a higher quality. One of the things I've looked at in detail since I've arrived has been the dynamic delinquency of the business threatening those two yields, and it is of a materially higher quality. So the seasoning is coming to a close on the pre-2004 and the post-2004 is better business.

However, the opposing force is that the credit environment is not getting any better and the personal insolvency trends are not getting any better either. And it would be someone very brave who thought that those influences were going to come to a close within 12 months.

Thank you, Benny.

[Mark Thomas] of (indiscernible). Two questions. One on the fixed asset write-down in Corporate. Is this a series of one-offs and therefore it is not a sustainable level, or is this trend actually just reflecting the seasoning (indiscernible)?

Peter.

I'm assuming this is the impairment on investments?

The write-down, yes.

Yes. No, that is actually a legacy one-off situation. 90% of that number is a legacy -- old (indiscernible) relationship banking connection.

The other question is really with regard to Ireland. I mean, you talk about the 30% growth, which is the market growth. And obviously you've got a cost growth which is about six times the market. What I am really trying to get a feel for is what type of growth would you expect relative to the Irish market on say a three- to five-year view?

I will bring Colin in to comment in more detail. But let me just make one overarching comment.

What pleases me about our performance in Ireland is despite the fact that we're clearly having to make the cost investment now for the retail branch rollout, and we are putting in place 46 branches -- first time for 100 years anyone has put new branches into Ireland -- over the course of the next 18 months, the strong underlying earnings growth of the existing business is more than funding that, which I think is a really good trend and suggesting that the underlying momentum of our existing operations in Ireland are more than self-funding the cost investment we are needing to put in.

In terms of a longer-term outlook, Colin, why don't you --?

In terms of the two businesses, perhaps I'll answer it for the Commercial and separate for the Retail. For the Commercial business in Ireland, we've consistently shown that we can grow above market trend in the specialist niche markets that we are in. We've done that year-on-year and I don't see that stopping in any way.

And from the Retail side, as Andy says, with the branch opening program that we come from, we're coming from, relatively speaking, such a low base that with the momentum of a new player opening a retail presence with euro-style products a la UK, we've got a number of years of significantly above-trend market growth ahead of us.

Maybe a couple of questions to wrap up. Back to the front here.

Stephen Andrews from UBS. I just want to make sure I've got straight in my head what has driven the mortgage market share change. I think a month and a half ago you were giving guidance on 5% below where it's come in, which would seem to imply that over the last couple of months your net market share has been something well above your share of stock. And I just want to make sure I've got right in my mind what has been driving that.

Is it purely a step change in the retention performance over the last month or so? Or was there a blip in the gross lending? And if it is the retention performance, why are you not increasing your guidance to above share of stock in the second half of the year? Because if it is retention performance and it's an ongoing step change, then you should be --?

Just start with the math; the math is incredibly simple. Our gross lending has gone up from 21% to 22% a share. Our share of principal repaid is reduced from 25% to 23%. And those (indiscernible) fact has driven the 21% net.

We are looking at the market for the second half of the year. We're clearly very pleased for coming at 21%. I'm not going to stand here and be foolhardy and say that that level of improvement is necessarily sustainable for another 18 months. And so the guidance we are giving is to expect our performance in the second half to be at the top end of our long-term range of 15 to 20.

Is it fair to say that the analysis on the trajectory is correct, that the last couple of months have been extremely strong?

We've had a good last couple of months, yes. When I say last couple of months, the May and June -- the last couple of months of the first financial year are strong. That's correct. One more question.

Robert Law of Lehman. Again, as it's your first presentation at the podium as CEO, could I ask you to follow up with some of the Corporate [shake] questions you talked about earlier. You talked about the international and UK split. Could I ask you to talk about how you see the UK businesses developing between the main divisions? And in particular, in terms of the Corporate Bank, where you have gained a lot of share recently, do you still see that continuing and do you need to do more things with the Corporate business to develop that?

Let me take that in three chunks by referring to each of the three businesses in the UK. Clearly, despite the unsecured lending environment in Retail at the moment I do see continued good momentum in Retail. And the very strong volume growth that we're seeing, not only in mortgages, but I do point you to the savings side of the balance sheet. The UK consumer is finally saving more again, and I think always incredibly well for the nation's number one savings institution. So I see continued good momentum in Retail.

I think Peter's strategy in Corporate is frankly working. And that is where I would start and stop the comment. It's been return-led, but it's also leading to good earnings momentum.

Very importantly, I think that the core businesses that we're building in Corporate, most notably our integrated finance proposition and our structured finance business, are growing well and giving incredibly good returns. And I see no reason at all why we can't continue to be driving that going forward.

If you wanted me to predict which of the three will be marginally the fastest-growing -- and I'm saying all three will grow -- I think it will probably be the Insurance and Investment operation. And that is solely down to the point that Phil covered very clearly, I hope, which is through a period when we're seeing very strong growth in our Investment business, with -- 33% sales growth in the first half really is strong by any measurement. The timing of that being transferred into real profit recognition is clearly deferred under IFRS.

So my guidance would be all three will grow. If you're looking for one where the headline profits might be at the top end of the three, I think it will be Insurance and Investment, but that is as much driven from the fact that there was a deferral in terms of profit recognition as any other aspect.

Thank you very much all for your time. We will of course be outside afterwards to answer any further questions. And do come and join us for a cup of coffee. Thank you very much.