NatWest Group PLC (NWG) 2003 Q2 法說會逐字稿

Group operating profit by 10 percent to 3,451 million pounds. And I think our ability to deliver these results despite most challenge circumstances demonstrates the benefits we have taken from strength to divest it and flexibility of our group.

In line with the policy which we have followed over recent years, we have announced an interim dividend equivalent to one third of last year's total dividend. Our interim dividend was roughly 14.6 cents per share. And this represents an increase of 15 percent over last year's interim dividend.

Fred Watt will now take you through group and divisional results. Then Fred Goodwin will comment on our strategy and outlook. Fred Watt.

George, and good morning everyone from me. As George has said headline results profit before tax, goodwill and amortization costs up 10 percent and profit before tax up 25 percent. The profit before tax number in particular this year reflects that goodwill charge is essentially flat year-on-year, where as the charge, more importantly the charge for integration cost is much lower in 2003, than it was in 2002.

And overall you'll be glad to hear at least in our case there are no restatements of good numbers, no prior adjustments. So hopefully as we review the numbers, year-on-year comparisons will be pretty straight forward.

In spite of the fact that there are no restatements of prior adjustments, I think quite unusually for us (ph) there have been a large number of external factors effecting a lot of our numbers which I'll take a look through with you in terms of the overall year-on-year growth. If you take income in particular, income is up as George said strongly up 11 percent of nearly 900 million pounds in the first half. And quite a lot of things going on in income externally. Lower interest rates clearly has had an impact on our margin and on our net interest income. That same low interest rate environment, however, has led to the stronger flows of protection for customers in terms of interest rate products, and other financial market products.

And in the U.K., mainly in retail but also in corporate banking, the competition finishing effect. We have implemented from first January the remedies of the conversation -, inquiries -, banking which clearly has an effect in the first half this year. On net interest income as they're both in primarily in retail but also in corporate banking. And often overlooked, but shouldn't forgotten, the U.S. dollar has actually decreased by about 11 percent year-on-year. Therefore the translation of our results -, which we don't hedge, we don't hedge translation of overseas earnings, clearly has been impacted by the declining dollar.

And lastly, a small number of acquisitions in the first half have had a small positive impact on income growth. Taken together, we think all of these factors are broadly offsetting, and the underlying income growth is the same as the headline at around 11 percent. So that would leave in the first half income growth up 11 percent, profit up 10 percent, very similar year-on-year run rates of what were achieving in the second half of last year. So continued - a continuation from where we last profited last year.

Turning to operating profits, and I mentioned acquisitions. So if we strip out the effects of acquisitions this year, income growth will be 10 percent, cost growth up seven. Claims growing in line with insurance premium growth and direct line, provisions (ph) up essentially in line with the -. And profit growth -, acquisitions up nine percent.

As we look at income growth again, across divisions we income growth well spread. And income growth in each division actually very similar to growth in 2002. If you take retail, the underlying growth before competition (ph), permission (ph) inquiry (ph) effect (ph) based on the -, growth citizens (ph) before currency effect, shortly -, is only up four percent before currencies is up 16 percent. Again in line with last year at wealth, a bit lower than last year, but the markets have been garnered (ph) lower even more so.

Looking at the spread of our income, again an important feature of the group is the spread of burst (ph) or income between non interest income and net interest income and for where I received the contribution from the deposits, slightly down before reflecting the floor effect on the part of lower interest rates, and the impact on interest refund of interest rates. We see that contribution slightly lower. On the other hand, as we said before, we do have a strong non interest generating capability in the group. And the non interest income has increased with good increases in general insurance and financial markets, and in operating lease income.

Turning to margin, in February we guided you towards a margin of three percent for 2003, which incidentally it's where it has been for most of the last six or seven years. It did - a large part of the movement in margin actually happened more or less -, January, the competition commission (ph) effect was implemented in first January. And we're seeing lower interest rates year-on-year. In fact, if you were to compress (ph) January with margins for the first half was indeed three percent. And just looking at some of the component parts of that movement, clearly, the competition commission remedy has had a significant impact on margins. Likewise, lower base rates has had an impact on deposit and deposit earnings both in the U.K. and the U.S.

And there has been some small offset in all of that from a slight improvement in lending margins again in the U.K. resulting in overall margins in the first half of three percent.

As we move in to the second half, certainly we see the competition remedy taking full year effect, but that shouldn't have an effect any further on margin rates. However, since we updated you in June, we certainly have been - further interest rates have been both the U.K. and the U.S. And I would suggest that I would take just a couple more basis points off margins for the full year. And as a result, you might actually find yourselves running (ph) down to 2.9 percent, but not a material shift from where we are in the first half.

Cutting (ph) the expenses, we really do have go through each division one-by-one and I will do it in a minute. Suffice it to say that as we've done the expense growth in each division, -, acquisitions. And each division expense growth is inline with our lower van (ph) income growth, and that's true across the whole group. It's a by product of strong income growth and improved efficiency as the fact that the cost (ph) information (ph) will see the further decrease, probably improvements to 43 percent. You'll know that we've adjusted both years for op-ed and leased appreciation consistently with other banks with operating lease portfolios. And then the last trend is the same whether before or after that adjustment. And it did improve year-on-year on the cost in commercial.

Turning to provisions, total provision for bad debt from -, write offs, as we said before you really have to take both lines together. Basically flat year-on-year as a percentage of the book. Flat now for essentially three-and-a-half (ph) years (ph) as we see a trend stabilizing in credit terms and provisions.

Similarly looking briefly at asset quality, and we'll touch more on this later. But in terms of asset quality, -, and lending, and potential problem broadly flat. Balance sheet coverage broadly thinner from the year end position. And again, no change in the level of general provisions.

-, wrap up for each division. Probably (ph) for provisions also up 10 percent. I think importantly for us that the charge of provisions is, again, almost covered six times by the profit before (ph) provisions of 4.2 billion.

Returning to each of the divisions starting with corporate banking and financial markets. There's been a small impact on the relationship between cost and income of acquisitions during the year, proposed to adjust for that in the next slide and talk about the underlying numbers. So excluding acquisitions we see income up 11 percent and costs up 11 percent in corporate banking. The net income - interest income showing a small decrease year-on-year, same principal even for that. Obviously, lower interest rates. Interest deposit income is obviously effected by lower interest rates, not just from deposits themselves, but from interest free funds which are a high. -, we're one of the largest holders of interest free funds.

It's also impacted the level of treasury income year-on-year. You may recall that in the first half of last year, treasury income was extremely strong, less so this year. And that effects beyond (ph) your comparisons. I mentioned already the competition commission (ph) impact. It does have an impact on corporate banking. And it does have an impact, therefore in the net interest income line year-on-year.

And lastly, foreign exchange translation of gold (ph) and related interest clearly has a negative impact on the net interest income line. The underlying growth -, however, still strong with lending margins holding up and still showing a small slight improvement. Average loans an advance (ph) is up nine percent year-on-year in the first half. It had a very similar growth rate for the second half of last year when it was also nine percent compared with a growth of 15 percent in the first half of last year. A faintly (ph) indicated to you about this time last year that these growth rates would be perfectly trending down and that's exactly the case in this half as well.

Non interest income up strongly on the back of volume growth and customer driven business. Greater penetration of the customer base for financial market products. As you know, we've been working for the last three years since the acquisition of Mount West (ph) to improve the penetration of financial market products in our customers. That's everything from phone exchange protection, interest rate protection, right across all of our customer base both in the U.K. and overseas. And that strong position is definitely coming through.

As I said earlier, the lower interest rates, an area we see ourselves in has also increased the demand from customers for interest rate protection, and also the volume of for example mortgage rate securitization or securitization in the U.S. So again, another byproduct of low interest rate environment. We've seen stronger volumes from customers in financial market products.

Also within non interest income we're seeing good growth in operating lease income as I have mentioned all ready. Overall profit from BDFM up 10 percent. And retail banking, retail is the biggest part of the competition commission impact year-on-year. Essentially old businesses (ph) went (ph) up to about one million turnover, treated as small businesses within retail banking. And that's the largest part of the SME segment as defined by the competition commission. So retail takes the biggest hit year-on-year as a result of that. Underlying business volumes, as we'll see later, however, are still very strong. And cost increase up four percent. -, inflation but continued investment in the business, continued investment in the brand of the retail banks.

Provisions up on a similar year-on-year growth rate for last year. Profit up three percent in -, the very large hit from competition commission. Retail direct, just a quick reminder, this is all of a known brand space retail product and it includes credit cards. I know some of the banks include that within their personal financial services division. We keep it separate within retail direct. Good underlying business growth, overall lending balances up, about 16 percent year-on-year, particularly strong growth in our direct mortgage offerings. But one account (ph) -, financial services, Lombard Financial Services (ph). -, growth also -, numbers, 35 percent (ph) numbers growing strongly. And again, strong growth in our -, finance customer base. Total improvement in credit quality most (ph) in (ph) distress (ph) across the portfolio.

-, completed on 31st of July the -, direct business in Germany. So clearly, that will come in for the second half. And that will make us the third largest credit card issuer in Germany. Overall a very strong contribution from retail direct, profits up 22 percent. In manufacturing, overall cost growth held at two percent in spite of handling strong growth in customers across the group in the U.K. and strong -, volumes also in the U.K. And we also transferred two manufacturing from additional processing that was previously carried out by corporate banking, and by wealth. But we've restated the prior year numbers of the divisions -, coming through.

Technology spend has been down year-on-year unless the deflects (ph) the final stages of an out west -, integration benefit still coming through. Property and support task increasing year-on-year, really from the investment that they're putting in to improving the branch network, the office network for the U.K. and the investment in telephone which as you know we are investing heavily of telephony which as you know, we are investing heavily in the are of telephony and allowing customers to call the branch. And thereby improving, we hope, significantly customer service. -, investment certainly (ph) owned (ph) in the business within manufacturing.

In wealth management some improving underlying trends are funds under management, for example, have held up well. Strong market, however, well done in last year, and deposits clearly this is a deposit led business as well. Deposits earnings less than last year given the lower interest rate environment. So proper reduction continues to just 10 percent, which I think compares very well compared to our peer group. Nonetheless, market effect has had an impact on the first half but did a little bit in underlying metrics in terms of customer growth and funds under management.

-, line group. The numbers here reflect another period of good policy growth. Also, premium increases have been achieved in line with what we're hoping. No deterioration in claims experience. Strong growth in profits overall and that's obviously before the acquisition of Churchill which the OFT cleared last week on the 30th of July. So we're now just awaiting clearance from the FFA. And with a bit of luck in following win (ph), that will therefore complete by the end of September. And clearly another step up for -. But the underlying business carries on strongly.

Also -, underlying growth in deposits and lending. The core bank good year-on-year, partly offset in the presentation here by again lower treasury income year-on-year. You may also recall we sold part of our stockbroking (ph) business in the prior year. The lower stockbroking (ph) fees, and hence the reduction in non interest income. Slow increase in the charge for to bad debts albeit offer a very lower base. Underlying growth, therefore, I would suggest stronger than the fine percent shown here, principally because of the effects of the broken business which we disposed of.

Citizen's. As ever some impact of acquisition within the Citizen's numbers. And also this year, I mentioned already the foreign currency effect which has a bigger effect than before. So, as ever, I'll try and break down for you the impact of both of these.

The next slide takes Citizen's back in to dollars, and therefore, eliminates the foreign currency impact. So looking at the business in dollars, we're seeing very strong income in profit growth and come up 16 percent overall. Expense is up less than that as 11 percent. And profit up 23 percent in dollars. And an improving credit environment resulting in actually a reduction in provisions charged.

Shipping our acquisitions, looking at the business excluding Commonwealth (ph) and Medford (ph) so two small acquisitions that come in to the first half of this year and not last year, picking them out for very strong underlying growth, income growth up 12 percent. That sort of hides the fact that there's been margin pressure clearly in the U.S. from very, very lower interest rates. Behind that, however, our volume growth has been particularly strong. Average loans of the known acquired business is up 25 percent. And again, almost exclusively secured consumer lending there with small business lending still held basically flat year-on-year. Very strong deposit growth up 22 percent. New England performance well. Melon (ph) coming through as very, very strongly or what was Melon (ph) in the mid-Atlantic area now called Citizen's. So volume growth is extremely strong, and more than offsetting the effects of marginal reductions.

Strong growth also non interest income from product fees as we've been increasing fee based businesses, and a small increased secured again year-on-year. Overall, continued very strong performance from Citizen's. Overall as before, a good spread of profit growth by division.

Turning to earnings per share, you'll notice here a much smaller difference between basic (ph) earnings per share, and adjusted earnings per share. Integration costs -, to represent 4.2 pence per share. I noticed that some analysts have actually phased -, integration cost across the whole year. The first half includes all of the final and all of the not (ph) west (ph) cost fort his year in the first half, and -, 130 million pounds as we expected. They also included in the first half about 40 million pounds relating to the integration of the various Citizen's acquisitions. That's a number we would probably see repeating in the second half, that is the 40 in the second half. So you can see the bulk of our integration cost is first half related obviously before structural, which depending on timing, may or may not have an impact on the second half.

So adjusting for both goodwill and the integration cost as we normally do, adjusted earnings per share up 10 percent. And dividends as we noticed here in -, are up 15 percent. Dividend -, down a fraction from the previous year.

Capital ratios. Reported capital ratios is well up on the year end position. Basically a combination of strong retained profits in the first half. It's like (ph) some capital raising ahead of the Churchill acquisition. Pro forma for Churchill we'd see that capital ratio is back at around June and December '02 levels.

Now I'll hand over to Fred Goodwin.

Thanks, Fred. Good morning everyone. What I'd like to do is just touch now on the subjects of strategy and outlook and both of which are particularly challenging for us in the sense that as an organization we sort of actively try and avoid having a single strategy as such preferring to concentrate and strategic options -. And as you know, we're patiently adverse to making predictions of future events. And the outlook is a little challenging for us also.

However, what I would like to do is go through this in the way that we have before. And now so much, you know, concrete predictions of what the future will look like. But look at the ingredients and elements that we'll go towards making it up. If you'd like to address the for next question.

(inaudible), what next question, and it's roughly what are the ingredients of it, not the ingredients and the dressing (ph) -, you know, where are we today, where have we come from and where are we going.

I think for my mind the key ingredient is organic growth. It has been about organic growth for a very long time. It's about organic growth and continues to be about organic income growth. Probably efficiency improvement is important too -, some of our outlook there. Stable credit quality with disclosed piece of information and analysis of our portfolio each of the last several sets of results, and I'd like to carry that one today's -, the same analysis and a little bit more detail about the portfolio. And acquisition opportunities, I guess that's a subject on not quite everyone's lips, but almost everyone's lips as we start to look a the strong cash generation in the business. And you need to look at that strong capital generation itself, and see the consequences and implications of that for us.

I'll wrap up, just by looking at what I think, you know, in terms of the famous ticks (ph) and crosses (ph) slide where we now stand in terms of the multiple options which we believe we have for growing our business as we go forward. Firstly then organic income growth. This is a slide I put up in February, it nevertheless it's an important slide. -, thinking about income growth we put it behind the percentages. We just got a fancy of where are we and how we come to be here.

This is a slide, I guess, -, the highlight that contrary, I think, to popular belief, what's been going on over the last few years was not all about integration benefits from out west (ph) and was not all about acquisitions. It was a very strong organic income growth ever - across all of our businesses during that period. Some 70 percent of our income growth of five-and-three-quarter billion pounds. -, four billion pounds came from organic income growth. -, period we've just been talking about, that figure is 79 percent of the total growth is organic or in round numbers 700 million pounds.

I further highlighted there are some -, of impact in the first half which takes us away from the ability to be able to just look at simple percentages and understand that's not in our business. And I'd like to just dig a little bit below the surface now both in relation to retail and CBSM where I think those factors have particular impacted that particular application.

(inaudible), income doesn't just happen, particularly not particular net interest income. It is driven by volume. It is driven balances. It's driven by number of customers. And it's impacted by margins. And Fred has covered all margins on this part of the presentation. But look beneath the income growth figures and look at the growth and assets and liabilities in the group, you'll see strong figures, including acquisitions, strong figures, excluding acquisitions.

Same story applies when we look in to retail banking, we go through average balance growth in six months over the equivalent six month period last year. And again, you see strong growth in the underlying balances which flow through to drive the income of the businesses.

As well as balances it's important to understand -, customers what's happening to our franchise. Well here's some of the highlights, I guess from retail. We're still seeing strong growth in customer numbers. These are net customer numbers. This is in other words, new customers less customers who left, not simply new customers who joined -, sometimes bandied around.

In terms of market share, the share of new business will give you a sense of where we stand. To be honest, -, is two percent up, is two percent up, and one percent down is one percent down. I think I'll leave it on the strength of those figures, because these are given -, external service. That's pretty much -, I think relevant up or down.

Coming to corporate banking, we're looking at it the same way. Loans in advances, average loans in advances to customers are up nine percent on the appropriate period last year, deposits up eight percent. As we look in to -, customer numbers so much in corporate because -, customer numbers are not so huge because we're dealing with relatively strong numbers of customers. These market shares are more relevant things than the retail ones. These two percent growth and three percent growth are about actual growth in their respective franchises. So good underlying performance in corporate banking.

So what is the outlook for organic income growth. And that's a very important part? Well as Fred said, lower interest rates are increasing the pressures margins. You should -, the point that's marginal from the pressure, and margins a few disappoints not allow -. The bulk of it is all ready -, figures that we've seen in the first half. That said the -, customer volume - customer number and volume growth is strong. We have strong momentum across our -, products.

Coming to efficiencies, and if you're familiar with the chart that's what's happened to cost income ratio over the last few years. You're going to spend too much time looking at a chart to see at the rate of decline has slowed down. And the bulk of the decline -. The same information in the medical (ph) form. The much talked about Jaws Effect (ph) is that terribly obvious as you look at the columns over in the right hand side. And there is a sort of temptation though to harp (ph) back and long for the -, days of 2001 and - 2000 and 2001, when we could standup and say income up 12, cost up one. And move quickly on, and we didn't have to spend too much time explaining that.

So I'd swap for the position that I'm in today any time. With other cost income ratio at the level that it's up, the 11 percent income growth and eight percent cost growth is a much better mix for our shareholders and for our business around 12 and one. We've really gone a long way from the days when our cost income ratio was in the high 50s. With LIBOR (ph) where it is today, the gap between income growth and expense is naturally inevitably less.

But in looking at the cost income ratio I would not you to think that the game is up or that we're settling for 40 people -, position we are not. There is solid progress expected in that area. We do continue to centralize a number of our process activities in to manufacturing, Fred again, touched on a couple of historical -, for your restatement to reflect more things which have been pulled in from CBSM and wealth into the manufacturing -. And their scope to do more.

We do still duplicate the number of -. And the process has -, straight forward as it should be. There are, as we speak, and the need to have since the end of 2002, a number of projects -, with a specific intention and outcome of reducing our cost income ratio. These, as I mentioned, to you briefly -, financing. And we'll start to flow through in to the numbers next year.

Credit quality -, should be pretty familiar of the shape of this. We're always presenting this information by way of analysis to back up the assertion that credit quality has remained stable. Now remember, the mapping of the external grid across our internal grid, the distribution of our boot across those credit grades and -, microscope to see the difference there. But if you go and work out the difference, it is an improvement in credit grade across the book.

Distribution across industry sectors, and again it depends on your view of -, and merit of the individual industry sector -, improvement -. And I'll come on a moment and just talk a little bit about international profit. And -, one of the more talked about sectors in the last six months -. Since that -, international property is one as of last. -, a lot of attention there's a factor (ph) in there which is possibly the most tangible security of any other sector (ph) that we talk about. But I'll come on and talk about that separately in a moment.

Distribution by geographic area. -, the changes are pretty marginal, nothing structure or strategic in there, just the way the numbers fall. And some follow up analysis of the rest of -, section. And then -. A couple of project finance deals and other Asia and Australia driving the numbers up bit. -, we have not known and not loved. And to give you a sense of the balance that you have there, -, slightly.

All of those I guess, are disclosures we made before just to update those disclosures and keep the -, moving forward.

I would now like to take a moment to give you some proper analysis on international property book which is has been much talked about in the some of your commentary -, to invest one-on-one. Looking at that sector, taking the box out I just showed you, unless your eyesight was very good, it appeared to be able to walk over, 7.8 percent of the total -. -, the total of what is represents.

And looking within there is a distribution of a portfolio -, where it arises. In the interest of time today, I'm not going to go through the whole -. I'm going to talk a bit more about that, roughly five percent savings which is like the core UTA (ph) portfolio, balances over a million. As I mentioned, just in passing that the U.K. passed under a million. The balances average 135,000. So it's a very small homogenous population.

Looking more deeply at that portfolio, the core U.K. portfolio for a -, analysis and distribution both type of property and by location. And the conclusion, I'm inviting you to draw is relatively well distributed.

Looking at the distribution by type of investment -, the rest of the market. No particularly significant differences. All of them in the area of speculative development where -, exposure is pretty negligible, and it's markedly less than the overall part of the market only -, indication of the market is a very small component of the total. Here's that portfolio of over a million analyzed by the same credit -, that I showed you earlier on and I give you a sense of the quality -.

So hopefully that information gives you some insight in to the international property portfolio. And it gives you a sense of how distributed, actually -. And I can partly understand that the interest has been around it. A segment goal (ph) is one that probably is the most tangible security of any -, industry that we have in our book.

(inaudible), average 65 percent and only nine percent of an LTD of over 80 percent in those particular circumstances.

Looking to the currency outlook for credit quality in total. I've shown you this graph for. And I'm holding to the view that, you know, things were improving, but it was marginal, I want you to wait a bit longer. And get more information under our belt before declaring victory or, you know, declare, you know, things -.

I still -, intuitively reluctant to declare victory as I declare things that are absolutely, categorically, definitely once and for all definitely turned. But you can see the charts the same was as I can. And, you know, you'd have to form a -, credit metrics are - have definitely improved over the last few sets of results. And -, the conclusion about a business which I'll come back to and touch on in just a moment.

But I think I'm being pushed to the point now, I've concluded things have definitely improved. And there is a much strong case to be made -, the worst is probably -, behind us. -. The economic outlook, in looking to credit quality it's hard not to factor in the economic outlook. That's where we stand at the moment. And as much as the way we stand consensus forecast for a -, this year and next year. And -, hung up on any of these individual figures as being absolutely right or absolutely wrong. I think the direction is important. And it's interesting since we last met back in February, forecast for 2003 have edged backwards, not just once but a few times back to the level where it's at now. I think you would still - you could still use the evidence -, about the rate of growth for the end of 2000. You -, can join in the nervousness but that's where the numbers stand in the moment.

What does seem to be clearer is that the forecast for next year both here and in the United States and for January is better than it is for the remainder of this year. We'll see as we get closer to 2004, those numbers start to get clawed (ph) back. -, surprised -, the issue - the question is whether they get clawed (ph) back or not. That said we could afford to come back a little bit and still be somewhere ahead of this year.

So economic outlook, I find it very difficult to call. I mean we still seem to be, you know, -, economic data that comes out -. Some of it's better. Some of it's worse. And it's hard to be terribly, you know, completely and utterly bullish, but I think there is - my old school for optimism and -, to the economy for next year. And some of the remainder of this year.

So we can get our credit quality and the outlook for credit quality. And usually some thought about the directional impact on operation charges are factors we touched on analysis as well. As -, all other things being equal, you would expect the provisioning task (ph) to go up. And we expect the group to continue to grow.

Mix, I don't foresee anything happening in our business, particularly -, mix coming through. So I think mix is a driver one way or another. Economic outlook, I think, is taking us to more provisioning all else being equal. Recovery is, I think, will be pretty flat in the -, and the rest of this year and the next year. It will be a while before we start to see a material uptake in recovery. I'll leave you to add the results, and come up with your own conclusions. I hope you get a sense from what I'm saying that this is a relatively stable outlook on the credit front.

Acquisitions, they will form part of what we do going forward. And the roll call if you like of acquisitions completed and announced in the first half of this year, I don't think there's anything terribly remarkable anything. I think if anything, you would be surprised at all by the fact there have been a number of small Citizen's ones. And that's business as usual. Churchill, I have to say it possibly more less supplies. And there were -, mix in the market to meet up to it. And like I said that is a good acquisition for us. That's such a wonderful fit with -. Fred said we've had the OST approval for that. We're just waiting for the SSA to walk out (ph) with a better -, than Credit Suisse. And we look forward to getting on with that integration.

The credit business in Germany, I think, was up again something we've been hinting at for a while that we're looking to pick up some smaller businesses there and see what we can do with them.

Outlook for acquisitions. What is new here? Though not essential, and as the results we posted just showed, the results we just posted offered very little contribution from acquisitions in them. We don't need to do acquisitions. The businesses are growing strongly. And if we did no acquisitions, I don't think we would feel embarrassed in coming forward with the results that we're generating. So not having to do acquisitions is important to us as one of the best strategic options we could have. And the fact that we don't have to go out and do acquisitions.

That said, in looking at them, we are concentrating in the U.S., Europe, United Kingdom. We're doing that for some time now.

And again this might seem a bit extremely obvious, but I feel because somehow, you get in to this mode, that says, oh my God, you know, we've got to go and do big acquisitions. It's got to be big now because, you know, there's a enough pocket stuff (ph) with capital in it. And I think it's important that we retain not just the capability but a kind of mind set. We're quite happy to do small acquisitions. A, what's too small for the group isn't necessarily small to the business unit that's absorbing it. But there are a lot of small acquisitions out there that are relatively straight forward to do. So -, too full of it to be interested in small acquisitions.

That said, we'd also a reaching a large acquisition -, the criteria. And the criteria, of course, is only the key part in all of this.

Capital generation you've seen that slide before as well. And again, I'm not supposing to fill in the numbers for you. But you can fill in the numbers yourself, and what kind - how much -, surplus cash you think we'll be generating. I think the general view seems to be there will be some, you know, chunky number. And I wouldn't want to dissuade you from that view.

(inaudible), highly scientific now, I apologize in advance. But there are a few things that strike me as screamingly obvious about this. -, obvious until we spend a few minutes just thinking about. And that's what I thought I'd like to do with you today. Naturally, our new numbers on that lovely scale, now you can read anything in to the -. It's just like -, indicating that as we go forward if we do nothing else, the capital just builds up. So over time, we end up with a -, among capital or indeed many estimates we suggest you end up with quite a chunky -, capital relatively quickly.

So that's that line. Here's another line. This is a bit more challenging. Again, -, highly scientific. Not - this -, could look like with acquisitions factored in, assuming we made acquisitions and that sort of -. Again highlighting the screamingly obvious here, ladies and gentlemen, if we make small acquisitions they don't make much of a dent. But you could make big acquisitions that could not only us up all of your surplus capital but need you to come to the market for more capital.

More terribly perhaps is the realization that it's very difficult to have acquisitions to allow yourself to believe that acquisitions could come along neatly, and wonderfully in order that allows just to keep that line perfectly under control and move out there as a beautiful capital ratio. And -, play (ph) acquisitions, we've got to have a small ones.

Maybe one of those, you know, 600 million about now. -, a few 10 million ones here. It is when you start to think about it, I'm sure you all have pretty difficult -, that you can organize your business in that way. And so that's -, take away from that way. And if we just sit back and trust to luck that we can somehow go out there, generate the capital mix acquisitions and everything will be alright on the night, that might but the odds strongly suggest that they won't be completely pleased with the next -. And this is the first time any of my handwriting has appeared on a slide.

And the line there, I guess, is again does not represent anything very much either than the kind of shape that we might be looking at if we apply to the discipline that -, apply going forward as we have applied in the past to the management of our capital.

And -, pretty inevitable that we will generate capital earnings that won't always be absorbed by -. I really don't think you want us to go out there and do deals just for the sake of using up capital. There's a long history there of organizations that use up capital and they've always succeeded. So I think the idea is you kind of want it back rather than destroyed.

So we're not going to do deals just to use up capital. And it also the case, I think, that could well be -, there which represents every opportunities for our business. And in terms of shareholders, that we might not at any moment in time have enough capital to do. I think I would like to go forward on the basis that you - where we can do such transactions that could bring them to you and seek support. We've been able to do that in the past, and we've been grateful for the support we've received. I'd like to think we can do that going forward.

So it takes you to two conclusions, really, that one we will be doing buybacks, I don't know how much or when. But buybacks seem to inevitable, as inevitable as they are desirable. I don't think -, in any way shape or form is an admission of defeat and running out of ideas. But -, a mathematical -, requirement -, any sensible parameters. And there may well be a big transaction out there that we feel meets all of our criteria and we meet with your approval. That we come to you and ask for more money.

The broken line on the chart -, that clearly is a degree point beyond current level of capital in the business that we would probably want to go through to give ourselves more operational headroom that we have at the moment. And again, -, numbers to indicate where that is, automatically beyond where we are today. We passionately believe that a war chest -, is a bad one. And -, comfortable -, money and capital -, to buy things. That really brings about very poor discipline in the business. And the discipline of keeping ourselves -, is one that we value and we hope that you do too.

And here I am it's the last one, I guess, for the moment on surplus capital. The outlook just to recap and all of that, we won't necessarily be able to have the capital to coincide with the acquisitions we want to meet. -, necessarily have acquisitions -.

The commitment maintains -, absolute. And we almost certainly will return capital through buybacks and -depending on opportunity seek further capital for acquisitions.

So we're back to the agenda I put up earlier then of what the ingredients will be going forward. I hope we demonstrated to you that all of those ingredients will be present -, going forward.

Coming finally to the options you give us for growth, this is the slide as it was when I last showed it to you. You remember, I -, sort of paused (ph), -, corporate banking on the business -, analogy of -, accelerators and off and on that we just listed us with the accelerate. We do not think that we were holding back a little bit in growth in corporate banking -. Twenty-five -, last year -, launch -, customers by 18 percent. We've got half that in the second half about nine percent of it is still in the first half of this year.

For reasons I outlined there, like where we think the economy is going and the credit metrics -, kind of takes us to a place that were so important, so cautious an outlook there's no sort of pedal to the metal. But there is a kind of gather pace. And it feels at the moment that it's quite safe and prudent go with that gathering pace a bit. There's no accelerator back to the floor or dramatic -, acceleration. And I'm going to give the accelerator analogy now.

But it's starting to move a little bit. And I think we'll follow that. I'm quite relaxed about what we have done in the last few months. And I still - we'll still - the -, spectacles are still friendly in the drawer (ph). We were made to go in to a lighter shade of gray perhaps. And looking at the world -, of where we're at.-, are pretty much unchanged.

We still see strong opportunity for organic growth across the businesses -. And opportunities for us to -, strategic acquisitions. Remember, I mentioned the last time I talked about strategic in the context of -. It was more strategic as far as the business is concerned -, strategic for the whole group, not -, still applies.

Continental Europe same point. Things are just picking up a little bit now, and I think it will be acceptable for us to follow those rather than to continue to hold ourselves back, otherwise, they're unchanged. Then I could say unchanged -, before. Citizen's -, the numbers show growing very strong organically. It has been able to make further in market acquisitions. -, a number of interesting market extension opportunities available for our Citizen's.

So to conclude then strong income growth in the first half in conditions which were low growth and challenging for income growth. That growth is mainly organic. -, improvement in efficiency, we believe the -, are forth coming. Credit quality has remained stable pretty much as predicted. We have been able to maker several acquisitions. It's always good -, acquisition strategy that we can actually make some acquisitions just to validate it. And believe going forward, -, arguably more important than anything else that we do have multiple options for growth.

So thank you very much for listening. And now we'll turn it over to questions-and-answers.

Thanks, Fred. Could we - could I remind you if you could identify yourself ...

Thank you, ladies and gentlemen, that concludes today's conference call. You may now disconnect your lines. Once again, that concludes today's conference call, you may now disconnect your lines. Thank you.

END