Banco Santander SA (SAN) 2003 Q2 法說會逐字稿

... fundamental transformation of PFS (ph) that will take three years -- changed and improved. This brings with it significant execution challenges that could have a short-term impact on business and service performance in the latter part of this year. There will be a focus on delivering these changes, which are absolutely necessary to address the problems of the past. We've already achieved a lot, including annualized cost savings of 125 million pounds. So there's much to do. We are pleased to report that on that we are on track.

This year is about laying the foundation, the tangible improvement in service, advice and choice for customers and to ensure that we can be competitive and profitable in our core market. The reality is that it will be 2004 before you see any significant visible improvement in terms of sales and service performance. But a lot is changing, as you will see today. We will continue to set very clear priorities for each six months and we will report back on our progress. We will also continue to complement this with best in class disclosure and transparency.

And on that know, I will now hand you over to Stephen to take you through the financials.

Thank you (INAUDIBLE) and good morning everyone. As (INAUDIBLE) mentioned, I think we've delivered another tone to you today, in terms of the 53 page release, and I hope you find it useful.

We are trying to be best in class in transparency to really help you understand very accurately what's going on in our business, both the good bits and the bad bits. We're also announcing a change today that instead of during the normal preclose in the future, which is slightly changed again, where you do hand signals six weeks before you give people the real results, but we will give a preclose file announcement for the end of each quarter, as opposed to six weeks before the actual results.

So it'll be the same sort of vital information, but in a sense on a more timely basis so you can understand mid-period what's going on as opposed to end of period.

Turning then to the numbers, as Ludeman (ph) has mentioned, 588 million of trading profit before tax, a bit above the second half and a bit below the first half of last year. And as mentioned, that's a bit better than we flagged in the preclose. It wasn't deliberately undercooking, there were some experienced (INAUDIBLE) who didn't come through revenues, and treasury a little bit better, costs were little bit better than I thought, and that's all ended up to about 40 million or so that I wasn't expecting. Then there's a bunch of charges associated with the PFS business, which we'll obviously go to through in detail with you. And clearly, the loss in the portfolio business unit which is reflecting the advance of our overall losses that we've flagged.

And in fact, they're slightly better relative to the mark to market as you're all seeing. That gives us obviously the earnings per share figures that you can see. It gives us the cost income ratio that's too high at 54 percent. It needs to get into the 40s over the period of our transformation and obviously given the notional capital release that we will talk about more later.

So we'll go through the different line items first of all in PFS and then in the portfolio business units.

So looking at the PFS results, trading results, by business, we have flat result in banking and savings, which has really spread decline, offset by good cost control, good provision results and new business volume growth. Obviously, the main decline year on year is coming from the investment protection businesses, and we'll go through that in more detail, but two-thirds of that represents a swing in experience there (INAUDIBLE) and there general insurance not going the right way, treasury a good result, probably better than it'll do for the full year though, in terms of the run rate, and flat group infrastructure.

Looking at the line items separately, pretty flat. And net interest income, again, reflect thin spread versus volume trade-off. You have non-interest income where the life changes are obviously bringing that down, aside from the insurance businesses that would otherwise have been flattish, flattish trading expenses, which we all obviously analyze some more. The provisions, going down, reflecting improved credit experience and so you get to the bottom line.

Three slides now in terms of new business, and I think the overall take-away that we'd like you to have from these slides is not that these are fabulous new business figures or represent our aspiration, even though most of them are going up, but simply that, given the pace of change going on in our business, the disruption and all our branch restructuring and so on, they're not bad as a starting point. If we look at mortgages, we have now had a growth market share or market share of new lending of more than 10 1/2 percent for 12 months, which is the first time in many years that we've accomplished that. Our redemptions are obviously running at around our stock share and have increased and are running around our stock share at 11 1/2 percent.

So while we clearly have a redemption problem, it's not different than the overall market's problem with redemptions, and that gives us a net market share, as you can see, up on a year ago and are slightly down on the second half of last year.

Deposit flows, much better than a year ago, but still pretty anemic relative to what we need them to be ultimately. Bank account openings, you know, behaving well. Credit card openings behaving well, unsecured lending and so on all, you know, I think reasonable figures.

And then when you turn to our insurance, investment and protection businesses, here we have the trends that we set out to you previously. Our protection business has survived a pretty rocky period in the market, with the need to put very large price increases through the industry as a whole, reflecting reinsurance rate increases. I'll talk about that in the new business profit sense in a second. But nonetheless, having sustained that and sustained a top two market position in the first half.

Our investment sales, obviously, meaningfully down. I think you can see the trends across the market, particularly when you consider that we're not playing in the annuity and the corporate sectors, so this is just personal line. Obviously, most of this is the market and I think a chunk of it is that we need to get our act together much better, having pulled out and with profits, and Ludeman (ph) will be talking a lot more about what we're going to them that area, which we see a lot of potential for.

So now moving into the revenue line, you can see year on year our revenues in PFS down 98 million. 63 million of that relates to -- sorry, 65 to the life businesses, of which as I mentioned over two-thirds is between (INAUDIBLE) which I'll break out to you more later. And I think the rest of the numbers on there are relatively self-explanatory. Treasury stronger, weaker in general insurance and a bit weaker in banking and savings.

Let's talk about the spread. Now, obviously, when different banks talk about spreads we all use totally different definitions, and so trends are more important than absolute amounts. And here, as forecast, our spreads have sharply declined to 161. There are two or three things going on under the covers.

First of all, there's an aspect of our decline relative to the market. And there are a few things there. Our SCR a year and a half ago was something like 35 basis points higher than for example Halifax. So we had been, if you like, milking our business perhaps more than some others in terms of the back book. We've now brought that down to just 4 basis points a drift, so there's been a big move there, although the last 10 basis points of that news only occurred this month.

Our redemption fees, we were also a bit higher than the market, and that has been coming down, which is more than probably other people. And then we, of course, had a much bigger back book as a percent of the total book, which we've not -- somehow, that people have been staying with us more, it's simply we haven't been doing enough new business in past years.

So by accelerating new business as we have over the last 12 months, the mix of the amount of front book stuff on low margins relative to your back book changes and the margin comes down, even though the absolute size of our SCR (ph) assets is only very gently coming down. And so that gets you the spread movements on the asset side.

On the funding side, we have spread compression which is primarily the most profitable deposits that we have, are basically static. In other words, they're not going down, but they're not going up either. And therefore we are funding increased assets with deposit inflows at lower margins and with wholesale funding at lower margins, and that leaves you your spread compression.

What we have not had so far is a big compression from falling base rates. We've been able to pass most of that on (INAUDIBLE) sell a lot further, that wouldn't be the case. Whether they do or not positive (ph), is up for everyone to guess.

I think it's important to note that we do expect this spread to continue narrowing for at least the next 18 months. And for that to be a meaningful narrowing in the second half, part of which, as I mentioned, was our SVR (ph) move also in this last month.

Turning to the life insurance businesses, here we have a reduction in new business contribution. There are two things going on there. One is just simply volume has lower margin in the investment businesses. The other is in a sense a one-off effect in College Provident (ph), which is that we passed the price rises on or the reinsurance price rises into chunks on a lag basis to where our costs have gone.

And so that more or less destroyed the new business margins in the first half. However, at the second half they should return to normal and we should see our protection profits back at more normal levels. The expected return would have gone down by the easy rebating, but the whole -- from the easy rebating was made up by earnings on the capital injections we had to put in last year, the offset of which is in group infrastructure. And then the experience there. And since last year there was a profit from the more (INAUDIBLE) release primarily.

This year we have a loss on experience variances in the first half, 24 million of which is the change in the government tax regime moving from 22 percent to 20 percent. The tax rate for policyholders can we pick up the other side of that. As you see, some of the other insurers reporting similar losses, some of them put it in exceptional items and we haven't put it in the trading side.

I was expecting 16 million or so worse here in terms of protection experience (INAUDIBLE) which didn't come through, which was one of the items in terms of the first half positive surprise. Non easy earnings are down, which is where we book unit trusts and (INAUDIBLE) things that we don't TV (ph) the profits on, and that reflects sales and margins in that area.

Turning to the expense line, what we've done is show you first of all the expenses, and you can see on the face of the P&L, the 760, which is roughly flat. Then add the expenses that are hitting on the easy line. So you can see the total expense line which we have to manage and then show you what the cost increases would have been were our cost program not to have been in place.

So the underlying inflation in the first half was 4.7 percent, which is if you like normal -- let's suppose wage inflation is in the 3 to 4 percent range, but then we had excess pension costs, which obviously were flagged that the beginning of the year, increased pension contributions which took the overall level up. It probably would have been a bit higher still, were it not for all the change we had in our business in the first quarter, where we under spent our own internal budget.

And so in the second half, the underlying number probably will go up a little bit, although obviously we'll have cost savings as well.

Turning to the cost program, in the first half, we booked 46 million of savings. We've said on an annualized basis we've taken action to secure 125 million. That doesn't necessarily mean you'll see 125 million in issues results because some of the actions we've taken we took during the first half of this year and so the full annualized run rate will spill over into next year.

But I think that that result should underpin our continuing confidence that we will deliver more than 200 million in annualized by the end of '05 growth. And you can see the sorts of areas that we've been making cost savings. This pie chart will change a little bit over time because some of the more people intensive business process redesign intensive savings taking longer, whereas things like procurement and outsourcing you can do quicker.

And so I would expect that to reduce, if you like, is a slice of the pie that you can see we've made a number of cost savings both in the procurement and outsourcing area, as well as in the duplication throughout the business. And in terms of headcount, more than 1000 and roles have been removed, however there are other areas that we are investing in our business and the thousand relates to the programs since inception, which was autumn of last year, not just for the first half of this year.

In terms of risk management, the provision charge, as you can see was lower. Notwithstanding that it was lower, reflecting obviously terrific results in terms of arrears, profits in possession, loan to value all in the right direction. We are still carrying over 200 million pounds of general reserves against our PFS lending, so we haven't been depleting those. In fact, they've been increasing.

And the other area of risk in our PFS business is our life insurance funds, where the equity banking ratio has come down still further, and obviously, as you know, we've put in place in the early part of the year a bunch of hedging against some of our guarantee exposures.

And then finally, if you like, below the trading line, the charges associated with the PFS business. 80 million of write-offs of the Scottish Providence contingent loan note, which was the government changing the tax law, that was a tax efficient structuring of the acquisition of Scott Prov, although the cash flow would have come through to us tax-free and now won't anymore. So that's both a pre and post tax charge. The 20 million of investment variances in the first half, then the restructuring costs associated with the cost program, the vast bulk of which is redundancy costs.

Asset write-downs, the biggest number in there is 57 million of expenses that previously were being capitalized on our balance sheet associated with our outsourcing activities in general insurance, claims management and in mortgage processing.

And this is really where we've moved to a more prudent accounting practice. These expenses would otherwise have gone out over 10 years. So this actually won't improve the P&L in the next two or three years, but I think it is taking the pain now for expenses rather than believing that we should be expensing them in the 08, 09,010 and so on.

Turning into the portfolio business units, obviously, we've made much better progress here than I think many people believed, including ourselves, at the beginning of the year. And we got rid of 57 percent of the assets in the first six months, which is some 34 billion pounds worth, which I think stands up pretty well on a global scale in terms of speed and success.

Clearly, that's a tribute to the people doing it, but it's also the fact that the markets have been friendly to us in the first half.

And you can see on this slide, you know, clearly that our reductions have been across the board, but the fastest and biggest was obviously in the debt securities area. Going into that in some more detail, I think the thing that we are pleased about is that this very large pace of decrease comes absolutely across the board in terms of risk. Every single rate and category is down materially.

And interestingly, although the numbers don't show it, but you can see it in a small footnote, the sub investment-grade on an apples to apples basis came down 60 percent, but because of the rating downgrades that we talked about at the beginning of this year, it only looks like it's down 20 percent. But apples to apples, even that was down 60 percent.

And the big single main exposures are coming down rapidly. The triple-B category, although that's still at 200 million, the vast bulk of those top five will disappear in the second half, and I would expect that to be much closer to 100 million by the year-end.

We now have the luxury of honing in more accurately on some of the more difficult areas. And so we highlight here probably the three most difficult areas in terms of the loans and leasing and private equity businesses. And you can see on the one hand these are more difficult in each of these three sectors. We expect to make losses in a greater amount now than we did at Christmas, but on the other hand, in every one of the three sectors, we've already made good progress in reducing the areas, so we've shown that we can do it. And also, by having done some of this, at the moment, have more accurate estimates of what it's likely to cost than we had at the year-end.

And you can see private equity coming down. Our exposure to the U.S. and UK power projects coming down. There's still 500 million of those exposures that are on our internal credit watch. And obviously, our exposure to aircraft, which lies not just in the direct aircraft that we own through our now closed IEM (ph) subsidiary, but actually in larger amount through asset bank securities which have aircraft underlying them, but particularly in the last two months we've been able to start making good progress in selling those as well.

Clearly, a very important indicator to think through is the mark to market disclosures which we give. As it relates to debt securities and loans, at the beginning of the year, we were indicating the expectation of making pretax losses through the disposal process, if market conditions didn't change, of 1.15 billion. As of the 30th of June, we're indicating we think that 574 million less of that to come, so that's improved by 581. 352 million of the 581 is losses we've actually realized by selling stuff in the first half. 133 million is losses that we've taken through the P&L through the form of provisioning, but that attach it to assets not yet sold.

And then there has been a net improvement of 96 million over all in, if you like, the apples to apples estimate of what we think we'll lose in these two areas, Which is a mixture of two big numbers, 283 million of things that have got worse in our estimation, mainly in the aircraft and power areas and 375 million of things that have gotten better, which is across almost all the rest of the portfolio.

Clearly, some of that is our executing better. Some of it is market improving. These figures, of course, exclude profits or losses that we will realized from disposal of our leasing businesses. In the case, clearly, of aircraft though, it'll be losses. Private equity, restructuring charges obviously on the other side there will be some pre provision income and clearly these are pretax numbers.

Profit and loss in the portfolio business unit clearly reflect all that stuff. The only other comment I'd make to it is in the international life businesses, we've taken 33 million and an of embedded value charges, reflecting the two businesses that we've closed to new business. The expenses of those run down and some more conservative assumptions on (INAUDIBLE).

In terms of the income on the wholesale line, we show at the bottom here on the note, the spread, which is slightly down, but basically the movement is more or less in line with average balances. And this slide breaks out for you losses in provisions and where they've been taken and made. And the reason we've broken the provisions line into three is because it's a bit confusing in terms of the way the accountants make us do it.

There are a bunch of -- where we sell things that already have a specific provision attached to them, if we sell it at a bigger loss than the existing provisioning, we have to record that loss as an increased provision, so the 24 million of provisions that are really losses on the sale.

Then there's 46 million of our provision that is really shifting something from an unrealized mark to market deficit into a realized P&L provision. And then there is 126 million of things that you could say got worse during the half that wasn't in our original mark to market estimation and that represents a subset of the things that got worse, which as I mentioned earlier, is more than offset by the things that got better.

Turning to the national equity release, clearly, there are many ways of doing this calculation, but just for the sake of simplicity and illustration, if we'd taken the 15 billion of risk-weighted assets out, which is a subset obviously of the 34 billion of total asset sales, using our year-end equity tier 1 ratio, that's one billion of quote equity release, but the premiums and net tangible assets associated with First National less the losses after-tax mean that a notional equity release of 800 million.

We say notional because obviously in the short term that increases our capital ratios and clearly we'll have the ongoing issue which I'll talk about in a second, about what we do with that. But I think before moving to that, in summarizing the PVU (ph), we're obviously pleased not just with the amount of asset reduction but with where it's come from across the board.

We continue to focus on maximizing the net present value of capital release subject to trying to get the ugly risks down as fast as we can and first. We do continue to believe there'll be a meaningful capital release from this activity overall. We are now confident enough to move forward our estimate. Previously, we thought this would take till the end of 05.

We now think the vast majority will be done by the end of '04, although that's obviously signaling a slower pace going forward than we had in the first half of this year. And although we got a 96 million improvement, if you like, in the mark to market, in the big scheme of things, I think at the moment our view of ultimate costs is much different than it was at the beginning of the year. You know, there's still 25 billion to go.

Looking at capital then, the capital ratios, obviously, have improved, reflecting the PVU. We've got a Tier 1 capital ratio now of 10.9 percent, equity Tier 1 of 7.6, and importantly, one has to continue to understand the double leverage that we get from holding the life businesses. If you were to take that out on the same basis we did in February, again, capital ratios improved, but obviously the equity tier one nearly down at 5.3. And you can see the movement in risk-weighted assets.

Clearly, the PFS business up a bit, reflecting the mortgage lending and the PVU down a lot. It continues to be the case that we are not able to project not only how much capital we will release from the PVU, since there's 25 billion of assets yet to go, but also how much, if any, we will need in our PFS business and how much, if any, we will be able to return to shareholders in some one-off way in two or three years time. And the uncertainties that we mentioned in the preclose we lay out here again.

Clearly, there are many other uncertainties, but among the bigger ones is the impact of Bal 2 (ph), where we ought to be a big gainer from mortgages, a loser from the removal of double leverage in life, and obviously there's some operational risk, capital requirements, but there's still a great deal of uncertainty, although we know (INAUDIBLE) about exactly how big each of those will be, and lots of interpretation from the regulators will be needed until we know that. IEF is an even more uncertain area, both as to what the hell (ph) IEF does to people, balance sheet's and P&L, some of the bigger areas for us being pension funds and life insurance, but also what the regulators do and what the rating agencies to in the light of those changes.

I think the only good news from it all is we should get greater clarity in these areas in a similar timeframe, adding greater parity on having completed the job in PVU.

As a consequence obviously, of the PFS earnings, we are declaring a flat dividend, if you like, on an underlying basis of 8.33P, nearly one-third off 25 P, which was the new base that we sat at the end of last year. That clearly isn't a promise in respect of what we will do at the year-end, but if you like, that's sort of the range that's in our minds today.

Our dividend policy going forward is unchanged from that that we stated at the end of the year.

So I think if we summarize all of this, our PFS earnings on a trading basis are lower than 2002, better than guidance, but I think not in a way that we wish to fundamentally reassess the forecast about that. New business flows are decent, given a level of business change, but clearly something on which we will need to improve in the future. The cost-saving program I think is well under way.

Credit quality is strong, the PVU is going well, but there's still 25 billion to go, and so we're working very hard to obviously stabilize the picture and then have it move forward, and that's what Ludeman (ph) will talk to you about. Thank you.

Thanks Stephen. Just as a reminder, at our full year results presentation in February, we outlined our four (INAUDIBLE) of parity. These were about our customers, the structure, efficiency and capital. When we deliver on these parities, we are certain that we can differentiate ourselves in UK PFS market. There are two stages to this. The first is to address the underperformance gap.

This is about better execution and intense refocus on the PFS business. We have under leverage potential. The business has underperformed and we can see this in terms of relatively low penetration across a range of PFS products, and we can also see this in terms of a cross income ratio in the mid '50s.

We have all the ingredients of a successful PFS business, a strong brand, over 18 million customers, and a full range of distribution channels and PFS products. We think our people are more customer friendly than the other large banks, and if we can leverage all of these ingredients better, then this business should deliver growth in the medium-term.

The second stage is to differentiate Abbey National in the PFS market. We have to be price competitive, and we have to have a lean cost base, but this is not a sustainable point of differentiation. Where we can be different is in terms of service and for providing better price and choice. Get this right and our customers will want to stay with us for positive reasons, not simply for inertia (ph).

Finally, we believe that our pure focus will not only make us better at what we do, but will also make us an attractive investment.

In terms of priority, we highlighted back in February we are firmly on track. Stephen has talked about progress made in the PVU and the challenges outstanding. The new customer focus structure is now fully operational. I would now like to look in more detail at the remaining two priorities. We have to earn our customers commitment and we are laying the foundation to deliver tangible improvements in customer service and sales. We're getting closer to our customers.

The appointment of Angus and Priscilla are integral. The customer board has been formed, chaired by Angus. It has been strengthened by the appointment of Victoria Redicimaivali (ph) to bring a fresh external perspective.

The customer board is key to ensuring that we deepen our understanding of customers and design and deliver better products and services within the context both of the brands positioning and our economic model. We're rolling out our new customer relationship management software to branches, telephone centers and selected head office (INAUDIBLE) around 1700 customer-facing staff are already trained in using it. How we use this capability is not rocket science, but the fact is that we did not have this ability previously. The system uses the latest technology, and by next year we expect it to be available for up to 12,000 users. In service, our aim is to (INAUDIBLE) brilliantly.

Our immediate priority is to tackle fundamental issues. For example, in our call centers, service levels have been below industry averages. We are already making progress. Since the beginning of May, the average wait time for telephone callers during peak times has fallen by two-thirds an average queue lengths have dropped by 40 percent and are now down to levels approaching out target.

We have achieved this through simple things like better recruitment and changes to staffing patterns. And by the end of September, we will have 150 more people to boost service levels in the centers.

We have stressed before that the quality of our people is vital in delivering better service (INAUDIBLE) we have been running a number of pilots to improve recruitment, induction and retention.

These are working. In our work areas, joiner turnover has improved so much that it's now only one-third of what it was six months ago. An average recruitment time for front-line positions has fallen from 65 days to 40 days. We are now rolling these initiatives out on a national basis.

Another priority for 2003 is reintegrating our brands and increasing the effectiveness of our marketing. In the past, our approach has been too fragmented, our investment too (INAUDIBLE) it will be more focused and have assembled a formidable team of internal and external people to carry this out. We need to reduce complexity and make products clearer and easier for customers to understand and make the right choice. We will reduce the number of products we offer in each range and simplify them.

This radical overhaul of our complete product range will begin in earnest in the fourth quarter with a number of new product launches. And this will go hand-in-hand with a far-reaching brand re-launch that will be more fundamental than just brand names. It will change the whole tone of how we speak to our customers and how we behave towards them. We have not re-launched the brand earlier as we first (INAUDIBLE) a whole host of issues from training and staffing to service levels and systems, but we will be ready to do so later in the year. We are also investing in advisement choice.

Our new advice model has two key strands. Firstly, how we interact with our customers, tone of voice, simpler products and fewer handouts. The second plan is to give our customers investment decisions. We are substantially overhauling our capabilities to make sure we capitalize on the opportunities in this area. The advice we will be offering will range from guided choice through to complete advisory service.

In April we began the rollout of this new advice framework across a sales network. As part of this, the roles of 1900 staff have been substantially changed and we are in the process of adding 450 customer facing staff into branches. We will give you a fuller update on this at the year-end.

I would now like to look at what we have been doing to streamline our PFS operations. Here we have started with the basics and are reworking core business processes, initially mortgage and payments processing. As an example of what we can achieve, we currently lag behind our competitors in terms of the speed at which we transfer an existing mortgage customer onto new products.

Getting this right will be positive in terms of our capability to complete beyond price in these markets and will reduce costs.

We have also been reviewing our sourcing strategy (INAUDIBLE) this includes looking hard at the configuration of our administration call centers. Since February, we have closed two sites and announced to close an additional four sites, transferring the work to larger sites where it can be done more efficiently. Over the next four years, the extent of our site consolidation plan will see a significant reduction in the number of sites. We will give you more detail as our plans progress.

We have also taken the decision in principle to offshore some of our telephone and processing operations to India. We already have some experience in this field, as last year we outsourced some work on IT systems development to a company there. We are undertaking a fundamental review of outsourcing that includes existing arrangements. We have also recently outsourced the management of all our desktop infrastructure and our telecoms network that was in need of overhaul. (INAUDIBLE) the scale of the changes that we have put in place over the last few months have affected many of our staff. We are committed to seeing it through and are working closely with staff to explain why the changes unnecessary. This process is about getting the fundamentals in place, ensuring that we have the right people in the right place.

To date, as Stephen mentioned, around 1000 roles have been permanently removed from his business as part of the cost program. All those you saw earlier, and other parts of the business we will be hiring. You have also already heard from Stephen about the progress of the cost program. We are on track to achieve our target and have seen a positive contribution in the first half.

We have already taken the action to achieve annualized savings of 125 million pounds.

I'd now like to bring all this activity together and tackle the issue of revenue growth. For both mortgages and savings, there are two fundamental challenges. Improving fronts of margins and maximizing value through retention.

In many respects, the lever for both mortgage and savings are similar. For mortgages, the volume and gross market share we are currently writing is the best it has been for many years. The problem is that we still have to offer tighter margin than the best of our peers to rise this level of business.

The challenge is how we address this and how we can strengthen our pricing leverage to increase these volumes more profitably. Better branding and marketing can make a significant difference, but we are currently outspent by our direct competition. The ISA channel remains actively integral to RCF (ph) as planned and we are committed to further upgrading our service to ISAs (ph), however, we are also working hard to improve sales productivity in our branches. We should be able to do more business throughout direct channels which currently only provide a minority of our mortgage business. It is through the branch and telephone lending operations that customers will get the full-service and advice proposition which we hope to be able to leverage in pricing and an improved cross sales.

In savings, our salespeople have actually never been incentivized (ph) for deposit flows. This will now change because savings is (INAUDIBLE). Our challenge is to take savings inflow to positive margins whilst meeting the needs of our customers. Because given our strong treasury and funding operations and the winding down of the PVU, we do not need to chase savings as an expensive source of funding.

It has been many years since Abbey has been an innovator in its core market. And in fact, we have not even been a fast follower (ph). This will change. For example, we have not participated in certain segments of the market, such as Allstead (ph), despite positive margin characteristics.

Given our position and franchise, we should be able to compete profitably and prudently in a wider range of segments, and we already have product developments underway for the fourth quarter.

The key issues in mortgage retention are whether the current level of re-mortgaging activity is sustainable and, and will the back book, as we know it, survive?

We think current levels of mortgage activity are not sustainable. Rates have fallen and many customers have already moved, so the potential benefits that customers could now receive is lower, especially given the stable low rate environment we are now facing.

In absolute terms, our repayment levels have increased in the first half of this year, so the market is much bigger and we are still more or less around our natural stock share. There has been no marked increase in underlying SVR (ph) attrition, but previously we were exposed by being significantly more expensive than the competition. We have now close much of the pricing differential in SVR, and as Stephen mentioned, are now are only 4 basis points higher than (INAUDIBLE) compared to 35 basis points 18 months ago.

Turning to back book specifically, no lender has really got this right. We will tackle the back book by increased customer contact, through more sophisticated retention targeting.

We have not been great at this in the past. In part, it is with systems issues. We are addressing this, getting better at reacting to trigger points, such as the end of incentive periods and request for redemption statements, but it is time for us to be smarter.

The end product is transferring certain customers to rates lower than SVR (ph), but still positive margins and still positive MTV (ph) and still (INAUDIBLE) national customers. We're talking about a smaller back book, but not the end of it.

The SVR (ph) bucket will continue to be replenished but whilst the level intern in the market should lessen, we will be smarter about retaining existing profitable customers. The industry dynamics in investment and savings are positive in the medium-term and present significant opportunities. The outcome of depolarization (ph) will become clearer over the next 12 months. From a customer viewpoint, savings habits are changing.

The combination of low interest rates, the gap left by the collapse (INAUDIBLE) profit and pension uncertainties are issues that will drive and change consumer demand. Combined with depolarization, this will mean growth for providers and distributors and there will be a real challenge to the status quo in this segment that we believe we can capitalize on.

We already have the full range of investment and savings products in place. Many are market leading. Sales (ph) divestitures for pensions through James Hayes (ph), protection through Scottish Providence, structured products through ANST (ph), and of course savings through the (INAUDIBLE) bank.

What is different is that for the first time, this entire product range will be brought together fundamentally reorganizing (INAUDIBLE) once we do bring the said (INAUDIBLE) together across all our sales panels and offer them to core Abbey National customers, we will have a real opportunity for growth.

At the upper end of the advice section, we will boost existing wealth management services, in particular through leveraging and scaling the (INAUDIBLE) model. Its multi manager platform offers excellent performance and functionality, and fits with what we want to offer our customers through the Abbey National brand.

Through Abbey National's intermediaries there are a number of products and service improvements in the pipeline for the second half of this year, including RAF (ph). RAF (ph) is an online valuation and transaction platform that will eventually allow intermediaries to manage all of their client access and liabilities online.

Similar products, as you know, have already been a great success in the U.S. and Australia. We are better positioned across this whole area of PFS than most people think. However, it will be next year before this is pulled together and really starting to work.

There are a number of other areas where we have great potential to grow. Firstly, (INAUDIBLE). Here, we do have a market leading position, but we have the scope to leverage the product far more effectively through the Abbey National customer base, and in particular, to cross sell with mortgage lending. Secondly, general insurance is an area of significant under-performance.

A fundamental review of this business is underway. Systems are rolling out that will enhance sufficiency and service and (INAUDIBLE) design of second products. We are reviewing all of the sorting arrangements in this area and we also need to make key senior appointments. The (INAUDIBLE) lending represents only 3 percent of our PFS customer lending.

This again is an opportunity. We will start with our existing customers, as we know them best, especially our mortgage customers. Clearly, a lot of work has talked about an improvement to products and service standards do have implications for our cost base.

This slide shows the main areas of investment. To give you a sense of scale, the additional training we will deliver in 2003 is at a cost of less than 5 million pounds. The relaunch of the brand will be partly offset by the lower spends in the first half of this year, and in terms of ongoing advertising spends, there may be an amount incremental to 2002's (ph) cost base, however some of this money can be redirected in brands not central to our strategy.

Some of these investments will lead to direct costs savings, though they are aimed at revenue growth we will work hard to ensure that these initiatives pay for themselves over time or are funded from savings over and above the 200 million pounds targeted.

So to pull together the drivers of growth we need to improve our sales effectiveness. If we get the custom experience right, we can build greater trust and loyalty. Our sales and performance will improve, with better retention and training of our people, supported by the right systems.

Addressing under investment in the Abbey National brand will give us some more pricing power. We have areas of real potential, we have a diverse view of market leading products, (INAUDIBLE) underperformance in the past. We can do a better job in our core market at managing the margin pressures by improving new business margins, addressing customer retention, and boosting new business volume. And of course, we will be more efficient across all of our operations.

So for the next six months, our first set of priorities revolves around getting closer to our customers. The brand we launch will include much improved marketing and a substantially overhauled product range. You will see a significant change in tone and style in the way retreat at customers.

We have already made progress in developing out our reach themes, and by the end of the year, we'll have increased this resource to around 100 STE (ph) and doubled the number of people proactively calling our customers.

Our priority for service for the rest of the year is to equip our people with IT systems and skills that will drive our success in UK PSF. We expect to deliver 150,000 training days in the second half of the year, a 60 percent increase on the second half of last year. By the end of this year, we should be well (INAUDIBLE) training program. We will also have completed (INAUDIBLE) choice pilot with a view to roll out in the first half of next year.

Battling inefficiencies remain on our priority list. In rationalizing systems, you will see a continuation of progress made in the first half, in investing in our branch and sales IT systems. In addition to roll out of our CRN software, there's also significant projects that will replace outdated infrastructure in branches. We are delivering 15,000 updated workstations, improving and updating operating software, and upgrading service and hardware in general.

On top of this, we are replacing the telecommunications network that support the branches call centers and head office locations. Over one-third of our branches have already been migrated successfully this year onto a new system. We will also continue our program of site rationalization, and a radical review of outsourcing strategy will continue.

In the second half, we will make further progress in winding down the PVU and expect this to be substantially complete by the end of 2004.

When we come back to you about full year results in February, we will provide more specific guidance in terms of a cost program and particularly the overall reinvestment needed to deliver the strategy we have laid out. We will also provide an at that time our high-level KPI's (ph) for 2003.

I would like leave you with a few key points. The timeline here gives you an idea of the phasing of the changes we announced in February. We are well ahead on risk reduction, both in the PVU and our life operations. However, we are still carrying significant risk in the PVU with some difficult exposures in portfolios remaining.

The re-engineering of the PFS business is a much bigger task and will take three years to achieve in full. We are set to be reviewing, re-engineering and shaking up every part of this business. It is a considerable task and could have an impact on business performance and service levels in the short term. We need to strengthen our relationship with customers. That will start to see improvements later this year and more noticeably through 2004.

Our people and customers will then sense that Abbey National is growing stronger, they will see much improved products and services, as we bring together our full PFS product range and (INAUDIBLE) for the first time.

This will be the key to kickstarting growth, but at the same time, we are going to have to work very hard to offset the impact of further margin pressures.

The board remains confident in the ability of this business to meet new challenges. In PFS, the franchise is strong, the people are committed, and they are increasingly energized as they see what we are trying to achieve.

There is under leverage potential in this business. (INAUDIBLE) marketplace the benefit of customers, staff and shareholders.

Now, there's been an awful lot of ground to cover this morning as you get another indicator that you have volume of growth under way. And I'd like to thank you all for listening so patiently.

Now, Stephen and I would be more than happy to take your questions. Thank you.

Thanks very much. Mike Trippit (ph), at HSBC. Aren't you looking on page 48 of the press release? It's a question on personal financial services. What I'm trying to understand is the momentum in the business in the short term, i.e. over the next six months because you pointed out a better first half performance versus the second half, but if you strip out the treasury, and you strip out the group infrastructure movement, then actually, both the core banking savings investment, general insurance business is down about 16 percent on the second half, 12 percent on the first half.

Now, I suppose the question is above and beyond the treasury and the group infrastructure costs that you pointed out, what else is there in the core business that you think surprised you in terms of the first half performance? And I'm really just trying to get an idea of that momentum going into the second half. Maybe in conjunction with that, you could just talk a bit about the spreads as well, as to whether you think -- and you may have mentioned that, or it may be in the information that you have. I may have overlooked it, apologies, but could you just also, in conjunction with that, talk a bit about the spreads going into the second half?

(INAUDIBLE) as you know, we try very hard not to forecast the future, so we'll try hard not to do that. But that being said, if we go down different things in terms of stuff that might be different in the second half from the first, in terms of looking at banking and savings, in terms of the spreads, we do expect the spreads to continue to narrow.

It could easily be a similar magnitude of net earnings in the first half. It's obviously very hard for us to know because some of that is competitive behavior, as well as our success in new business, which obviously changes the spread, even if we're a little bit more successful (INAUDIBLE) as well as some of the unilateral moves, such as the one we already made in July on SVR (ph).

In the second half, also in banking and savings, it would be our expectation that provisions would be a bit higher than the first half because provisions in the first half reflected continuing improvement in arrears. Now, of course, if they continue to improve, that might not be the case. If we look at our investments line I think the new business profits aside from the Scottish Providence improvement in margin, improvement in outline in terms of new business is not really going to be an '03 issue, it's obviously going to be '04 before any our new product array start getting any sort of traction.

And, clearly, who knows what (INAUDIBLE) that's a very unpredictable game I'm afraid. And we are certainly at a point where I think experience variances have a better tendency of being negative been positive, given all the different things that are impacting lot of businesses in one sort or another at the moment.

Then, you know, if we talk about general insurance and treasury, I expect to be a fair amount weaker because they were much stronger than I thought in the first half and just a lot of the trading went right. But on the cost line, there's some difficulty to predict there. You know, on the one hand obviously, we'd expect our cost program to continue to deliver benefits.

On the other hand, as Ludeman (ph) has pointed out, we're doing a lot in the second half. Some of that involves expenditure, and we traditionally have spent more in the second half in any event. And there certainly are a few areas, as I pointed out earlier in the business that under spend in the first half and they may not in the second. You know, I think that's sort of almost the best that I could do. So as I said, you know, we are not a steady staid business. Sometimes it feels a little bit like dancing on the head of a pin to try and get these numbers to (INAUDIBLE) and you know, they can very a little bit, but we are not trying to substantially move the range of consensus for the full year outcome. (INAUDIBLE) in fact.

(INAUDIBLE) just wanted to drill actually down on two of those issues a bit further. First is on cost, Stephen. Looking at slide 11 in your presentation, you obviously say the underlying presaving cost rate of 4.7 percent, and your comment was you think the underlying number will be a bit higher than that for the second half of the year. Just really a point of clarification, are we sort of talking about a growth rate on the 932, the underlying second half of 2002 number? So that's the number that you think will be growing by, to use your language, slightly faster than the first half.

No, no. The second half of '02 is not a great guide because there are a number of one-offy (ph) sort of things in there that made that line higher than it would naturally be. But I do think that the underlying cost growth will be higher than the first half of this year, than the underlying one.

OK. The second question was just drilling a bit further on the margin debate. You know, echoing your comments about these preclose statements become kind of you know, trying to work out what the language means (INAUDIBLE) preclose you expect margin attrition or your actual phrase I think was there could be somewhat more margin pressure in the second half of this year, and you're now talking about (INAUDIBLE) each one times to (INAUDIBLE).

Is that a change in what you're experiencing within your portfolio or am I just being anal in terms of picking up these changes in language?

I think you're being too anal, although I know it's a favorite topic of yours. But the only -- I guess the only thing ...

(INAUDIBLE) complement.

The only thing that is there is that the narrowing that we did on SVR (ph) relative to our competitors in July happened probably earlier because that's when the rate change happened and it was a good excuse to do it as it were then might otherwise have been the case. So probably, that would you know link forward what would've happened or done some time anyway.

(INAUDIBLE) Morgan Stanley. Can I come back to asset spread thing on page 17? Obviously, (INAUDIBLE) now, you tell us basically around 22 percent of the book on SVR, which is somewhat higher I think than the industry average. And you concede that the marginal outlook is somewhat higher than the industry average too.

Not anymore.

Sorry?

Not anymore.

But it's hard. I think it's somewhat harder than the competitors. The overall asset spread however on the book is somewhat lower than the Bank of England data for the industry. And the conclusion, I would -- or the inference I would draw from this is that (INAUDIBLE) SVR book has a very low margin attached to it, around 45 to 50 basis points.

I think the data you can drive from what you report anyway. And a further question really is, look, when you talked about the need to be competitive and the right businesses, lower margins than the competition, but do you really need to write business at sub 50 basis points? Is there not an opportunity to raise the asset spread just to writing less (INAUDIBLE) competitors business or has the brand been affected to such an extent that you would (INAUDIBLE) some 50 basis point margin mortgage business?

I think what we're trying to do in the presentation is address this point in fact. So I think, you know, directionally, your point is actually right. But what we think we can do to improve that very significantly because the other point you could have picked up is that we have a very high level of introduced mortgages, around 55 percent.

So the first thing is to correct that and to do more business, not to do less through the ISO (ph) business (INAUDIBLE) but the more business direct at the branches and telephone and that is going to be a very strong focus. Secondly, is -- a second point about that is we cannot only do, you know, better margins but we can also cross sell. So we can improve the results we have for example in general insurance and protection. And the third is to start getting the marketing much sharper, much better, much more focused, which we will do around the time of the brand relaunch, which will give us permission if you like to be much more focused (INAUDIBLE) so the answer is if we do those things, the front book margins will improve.

I think the only thing that I would add is some of the analytical detail when you compare across people is impossible to do. Because people just prepare their numbers in a different way. For example, some people put the hedge costs associated with translating fixed-rate mortgages into floating-rate and liability. We put ours in assets. An actual (INAUDIBLE) no one is getting 50 basis points but actually there is margin on day one and (INAUDIBLE) much less than that (INAUDIBLE) mix going on in the books that it's very simple to really work out.

That's right. And just (INAUDIBLE) we have been growing -- or we have not been growing actually due to losing market share, but the front book is not being replenished, so (INAUDIBLE) SDR, you know, by having a better front book you can improve margins. The second thing is that we have stayed out of positive margin businesses for the reasons that may or may not be invalid at the time, but advised (INAUDIBLE) large mortgages offset whatever (INAUDIBLE) not doing in the front book the type of businesses which make up quite a large part of the marketplace and which were better margins. So all these things give us opportunity to improve the front book pricing and volume.

(INAUDIBLE) behind you.

Thanks, it's Richard Spink (ph) from SG. As was pointed out earlier, I think the biggest win compared to the second half of last year in PFS is really treasury increased infrastructure. And I was wondering if you could give us more guidance on both of those going forward. There's been obviously quite a lot of (INAUDIBLE) profit in treasury.

How much of that is likely to be -- or how (INAUDIBLE) the business be over the next years given your focus on just being a pure retail bank? And then secondly, on group infrastructure, I think the main improvement there was actually on interest income apart from the one off, which weren't repeated, but on interest (INAUDIBLE) improved a lot and that seems to be going to move them in intercompany spending arrangements and surplus capital. (INAUDIBLE) runs off and you benefit increasingly from capital going into the SF (ph) in that way.

On the treasury activity, obviously by their nature they're a little bit difficult to forecast. I always thought that the aggregate level for last year, which was about 150 million for the whole year, was you know the right sort of thing to think about going forward which is why I think the second half will go down because I think the first half was artificially high. It's a very hard thing to predict. We're obviously -- the people are doing a very good job there and they're also contributing very significantly to our flow of retail unprotected products and so on, but that's what I'd say.

I think in terms of group infrastructure, frankly you know, it's a wash through all sorts of stuff. But two of the biggest things on the negative side is the cost of funding the life businesses where obviously we had to put a lot of capital injections last year and little bit in the first quarter this year. And then offsetting that indeed is as the winding down of the PVU happens, the surplus capital if it turns out to be surplus, is passing group infrastructure. And so that's why that's not set. And then there are one or two sort of one off type things that have created noise. So I think group infrastructure will be a bit worse in the second half.

In the front row here, yes.

Rob Down (ph) from Morgan Stanley. Can I ask three small questions on the PVU side of the business. I know from the private equity side that you have a 49 million charge if you like relating to that in the first half, but curiously you've seen some structured valuation there at March 2003, which is possibly (INAUDIBLE) market. I'm just wondering if you had the feel for how they were used (ph) in the second quarter.

The second question is just obviously we see stories crossing the tape toward (INAUDIBLE) the Italian mortgage book being sold to Unit Credit Phase (Ph). I apologize if that's within this, but can we have the book value on that Italian mortgage book? And just a final point, is there any update on Porterbrook (ph)and your intentions with regards to that business?

With respect to the private equity, the way that we value that through our books, if we haven't sold it, we would just value it where the fund managers put their valuations, which tend to come through on a three or four months lag basis relative to the period. And so we're always in a sense three or four months behind the news in a counting sense.

It's not obvious that there's a direct correlation period to period between equity markets and fund manager valuations, and so personally I don't expect there to be a particular bounce back but I think in general the erosion value there ought to be slowing, if not stopping, from an underlying value, you know, reflecting better economic conditions if they continue in the stock market.

Although there'll still be losses to make in a sense when we sell the positions as you will also see. With respect to the Italian business, I think we give details for both France and Italy actually in the details here. And I don't have the numbers completely at my fingertips, but you know, obviously, it's meaningful but it's not important in the -- you know, I mean it's just not a big number in the context of the PVU and we don't have an announcement to make about either of those businesses, although you know, we're very actively engaged in discussions associated with them.

With respect to Porterbrook (ph), thankfully we haven't even tried to do anything at all with that business, other than run it well, simply because there's nothing inherent in it that is in a sense about to blow up, touch wood. And so we were concentrating all our activities on the stuff where we thought there were risks we needed to shift quickly. And in our internal plans, Porterbrook (ph) is something that we'll get around to dealing with probably next year rather than this year.

(INAUDIBLE)

John, (INAUDIBLE), Merrill Lynch. Two questions. Firstly, on expectations to (INAUDIBLE) capital, Stephen, you've talked about not (INAUDIBLE) change sort of views out there (INAUDIBLE) I was wondering if you could actually clarify as to where you think they are right now. It's obviously -- it's quite hard to gauge where those numbers are, just so, you know, where you think the market is. Then I'd like to come back with a question on capital.

Well, this may not be an arithmetical expression of where the market is, but on the trading PFS line, I think probably the big range was 950 to 1150 narrow range was probably one billion to one billion and one. That would be my observation of we most people would have been.

Thank you. The second question was just on the PVU. I guess what I'm hearing a lot in terms of there is obviously capital risk coming through there, that you aspirate in terms of growing the core PFS business seems to be accelerating agents and core mortgages and being intent (ph) on secured lending, where quite clearly you have been traditionally behind you know competitors there. And I was just wondering if you could see a situation where actually most of that capital actually does get to be absorbed for good reason to go into the core business and there's actually not, at the end of the day, a check which is written out to shareholders in terms of the capital which comes out of PVU.

I think we'd be sort of happy if that happened because it would mean we'd have to be expecting returns above our cost of capital on the new things. But certainly in the near term it's very unlikely that we can lose the dial (ph) enough either on the mortgage business or the unsecured loan business to really eat up that much so I still think that the biggest issue in numerical terms are really around the, you know, the ball (ph) and the IS (ph) type things in terms of a swing factor on that.

Thank you, it's Hugh Pie (ph) from DNP Paragon (ph). My question is on the implementation costs. You say they are 88 million to date and comment that these will be significant -- will increase and will rise relative to the savings. I just wondered if you could give us a bit more granularity on that. I know you said there'll be more clarity later on, but at this stage can you give us anymore on the quantum or the numbers and how much can we expect to be above and how much below the line?

I think that what we've said in the past, which we say again, is that most cost programs out there seem to have had implementation costs of somewhere between one and 1/2 times the annualized cost savings, and that still looks like the right kind of (INAUDIBLE) to us over the whole program. Typically, the more expensive things are the slower things to do, such as the off shoring that we've announced today. You know, it's quite expensive in Indian plantation (ph) terms, but happens more slowly which is why he we just, you know, warn about the pace.

(INAUDIBLE)

(INAUDIBLE) question again about the PVU. Just on some of the assets that perhaps aren't winding down quite as quickly as the others (INAUDIBLE) aircraft (INAUDIBLE) is it just bit by bit reduction of MC (ph) or is it possible that you could engineer something that maybe comes up with some quite lumpy and perhaps quite rapid write-downs (INAUDIBLE) gradually come down.

Well, if you got a bid, the company (INAUDIBLE)

Absolutely not.

But absent that, (INAUDIBLE)

Over here.

Martin Cross (ph) Havel & Greenwood (ph). A complex set of numbers, 64 pages and quite a (inaudible) get your mind around, one thing that you can hang your hat on I suppose is the dividend. And I suspect we're all interested in that. You said your earnings per share I think in the trading basis in PFS were 24 1/2 P. Clearly, in the second half (INAUDIBLE) they're lower than that.

And then anyone's guess what they might be in '04. So something around 40P maybe. A 25 P. dividend looks quite high in that context. Can you -- and forgive me if you've already answered this question six months ago, can you reiterate what you're dividend policy is not. Is it in any sense likely to be affected by anything going worse than expected in the PVU for instance, or is it relative to the PFS earnings?

I think following to the announcement Stephan can certainly substantiate this further, was that it would be set in relation to the PFS earnings, taking into account though the cash elements (INAUDIBLE) earnings with one of the banks and some of the earnings obviously not cash. So we want to be prudent and, you know, we basically set a date and I guess (INAUDIBLE) that stays sort of (INAUDIBLE). Is that clearer?

Hi, it's Ed Phearson (ph) from Credit Innate (ph). Could I ask just a quick question on the asset write-downs, the exceptional asset write-downs that you took in PFS? Just having relate it to costs that were previously capitalized, is that now -- is that like a one off item that's now done or should we expect to see similar one off items if you like coming forward in the asset write-down line over the next two or three years?

That was one off. We still do have cost capitalized on our balance sheet, but associated with those projects and others, as every bank does. It's not obvious to me however that the policies are less prudent than I would want if you like in those other areas.

And so I think that, in a sense, if there were further write-offs they would be as result of us changing an intention to do something. But as an example, you know, we are looking at all our outsourced partnerships in one sort or another to understand whether they can be enhanced, whether they should be changed or whatever. And so, you know, if we were to change the basis of some existing partnership you could see cost or benefit associated with that.

What about at the back, right (INAUDIBLE)

Hi, it's John (INAUDIBLE) just go back to the issue on the potential capital release to shareholders from the PVU? I mean it sounds like you're telling us on page 44 the that you'll be, you know, neutral and (INAUDIBLE) introduction treatment with regards to regulated ratios going down. I know you can't give us any figures for the actual impact to come through from Bowl two (ph), but you know, we can have a guess out of that, but I was wondering if you could basically give us an indication of the equity tier one ratio you will be targeting under Bowl Two (ph) calculations.

No. in a sense we're not going to target a ratio, we're going to target credit strengths, and that is to say that we believe that it is fundamental to our PFS proposition that our customers never have to worry about having their life savings or pensions or anything else with us, and therefore that our capital strength, you know, is enough in touch with the major alternatives they have do not compromise our PFS strategy. And so in a sense, our capital ratio solved that.

Now, from a rating agency standpoint, if we improve our core business and franchise, as we are doing, if we dramatically reduce the risk that can knock us sideways, which we're well on the way of doing, then if the rating agencies are logical, that should allow us to have lower capital ratios for the change that was (INAUDIBLE) when we had before for the same indicator of capital strength. But in a sense, it's that way around.

(INAUDIBLE)

By the way, I said that knowing the rating agencies are in the room, but (INAUDIBLE)

Mark Thomas (ph) at Fox Pit (ph). (INAUDIBLE) coming from share on costs, but I'm still a little bit confused in terms of what your cost savings actually are going to be. If we put you sort of say 70 percent (INAUDIBLE) you'll still be in the high 40s, and that's give or take 100 million of cost savings per half. So 200 million from that.

You've already got at least 50 million booked already, and that would still be well below peer group in terms of cross income ratio. If you booked 125 million from the easy cost savings, surely we should be looking at gross cost savings you know sort of 3 to 400 million and should we therefore interpret that the (INAUDIBLE) is all under the investment?

We didn't bring it back to 200. We've always said it will be more than 200. But we've also said that until we have great confidence ourselves, we're not going to give you a loser (ph) in confidence and therefore we said that we'd next plan to update that number in February. But I would remind you also that the cost income ratio has got two bits to it. One is the cost side, but what we desperately need to do also is get the revenues motoring again, and it's only if we do that that we're going to get to, you know, to where the best of our competitors are.

It's Richard Spink (ph) from SG. When we met here six months ago I remember there was a lot of emphasis in your strategy put on the importance -- well, the lack of importance of price. I think there was a slide showing that (INAUDIBLE) look at that as an important issue and this results -- I note that you're talking about the importance of price competitiveness. I just wonder if your thinking has changed on how important price is over the last six months.

And I guess the question would be over the next six to 12 months if the improvements in service that you hope to come through (INAUDIBLE) results in an increasing market share where you edge further and further towards being more price competitive.

I think actually we didn't get our message across six months ago, and we had not intended it to be taken as an indication that we didn't have to be price competitive. I think the way we try to put it was price competitiveness is a given, but we're not going to lead with price. I remember the words I actually used. By that, what I was saying is we're not going to become a discount operation basically.

And the reason we're not is that we have a very strong franchise and we have a very full product base and a very full distribution. We honestly believe we do not have to be priced low. Now, the thing that bothers us on a mortgage side is we are this priced low compared to the best of our peers, and that's why we've spoken today about the way we're going to overcome that.

So all the things we're trying to do is to ensure that we only have to be price competitive, we don't have to be lower-priced, and that hasn't changed since six months ago. We think that if we do all the things we're intending to do, including the marketing and branding, but also fixing you know the services, the product, everything else, so that will both generate increased demand but altogether better pricing power.

Hugh Pie (ph) again (INAUDIBLE) you've got I think 111,000 small business accounts, which must be very low single digit market share. Does Abbey National still consider itself to be a potential competitor in the S&E (ph) market?

All we do is look at the customers we have and decide what it is we can deliver to them. In the case of the small business, what we've said is that if we want to provide services to the small business sector, which is reasonably (INAUDIBLE) with our personal finance services businesses, because that way we can serve them without investing heavily in new capabilities or distribution mechanisms or whatever. In that area, yes, we will continue to be (INAUDIBLE)

Behind you.

Hi, it's Michael Heltie (ph) from IMG. You mentioned the statement that you anticipate some significant disruption to service levels in the underlying business performance in the second half with all the changes that you're putting through. It seems somewhat curious then that you're going to have a major rebranding push in Q4. Could you just clarify that a little bit please?

Yes, I think it's a fair question, and what we are doing is on the one hand saying that we have to get new systems in place, we have to get the training in place partly to allow us to get the full advice model operating But also more generally because we want to change tone, behavior, quality, service, everything else. So all of that is taking place (INAUDIBLE) at the same time, we're absolutely convinced that we need to have a major marketing push, and to do that we need a major brand relaunch because the brand isn't going to (INAUDIBLE) the way it is now.

And to do that, we're therefore bringing out the new product range and everything else. So on the one hand you have some positive things going on, you know, the new product launch (INAUDIBLE) quite a lot of people by then, we're training everything else.

On the other hand, yes, you will have quite a lot of people being trained. So what we will have to do is try to make sure that when we're putting something into the marketplace, something new, that the right people are in the branches to handle it, or the service centers to handle it, rather than on an away training course. So we think we can handle this.

I think it's important to add to all of that that, you know, these changes we're making, while they're very fundamental, they're ones that then take years to embed in terms of custom perfection. You know, you can change things and customers don't suddenly say, "Oh, light gone on or off, we're going to change." It takes a longtime to really bed down and so I don't think we're expecting miracle cures here, but you know if you don't administer the medicine the patient never gets better also.

Angus, would you like to add something to that?

(INAUDIBLE) Angus (INAUDIBLE)

The brand relaunch is not going to be accomplished in a single day, as Stephen said. And therefore there is no right time to do it. You don't wait until the business has transformed itself and then announce hallelujah, something has changed, but it is a new beginning if you like.

And the second thing is that we believe that if you are going to have a brand relaunch, then you need to do it from the inside out. So whilst there will be elements of it on the marketing and direct communication to customers, it is equally important that the experience they have when they interact with us, whether it's receiving a letter or going into a branch or telephoning us, are also changing.

And therefore all of the other things that are happening are an integral part of what we're trying to achieve with the brand relaunch.

Thanks, Daniel Bettis (ph), ABN Amro. Just two questions. First, on the embedded volume assumptions, presumably there's been some change in the consistency of the Scottish Mutual life insurance with profits book. Can you give us some idea of the impact of that, and could you confirm that that's in the trading profits rather in the adjustments to embedded volume? And second, on the fixed asset write-offs relating to PFS, the majority of those are relating to the decapitalization (ph) of the capitalized costs, but there's about 20 million that's been recorded in the provisions line, and if you could give us a bit more detail on what those are.

Sure. In terms of the last experience, it's a bit early to know the answer because the announcements were really made early in the year and we don't have a settled period. So the last experience hasn't changed dramatically, but I think it's too early to know that. And experience gains or losses (INAUDIBLE) goes through the experience variants line, which is past trading profit.

With respect to the fixed asset write-offs, I don't know about the 20 million to be absolutely honest with you, but certainly there was and 11 million number, which was the marking to market of some equity holdings that were held at historic costs and are captive mortgage insurer (INAUDIBLE) equities in this tool I don't know because we sold them now, but we just didn't -- I didn't catch up with that one at the year-end.

OK, everybody done? Well, thank you all very much.

END