Banco Santander SA (SAN) 2008 Q2 法說會逐字稿

Well, good morning, everyone, and welcome to this presentation of Alliance & Leicester's interim results for the first half of 2008. As usual we're joined this morning by a number of our non-executive directors, and they'll be pleased to speak to you afterwards, although our acting Chairman, Roy Brown who, I have to say, has done a tremendous job since having to set up in such sad circumstances, has not yet perfected the art of being in two places at once, and cannot be with us due to a prior appointment at the other company he chairs.

As you're all aware, on the July 14 the Alliance & Leicester Board recommended an offer from Banco Santander for the entire share capital of the Group. It is expected that the scheme documents will be posted to shareholders during August, and subject to shareholder and regulatory approval, we expect that the scheme will become effective in or around October. As we are now in an offer period, I'm sure you will understand that we are restricted in what we can say about the impact of the transaction, and also with regard to any guidance for the future.

So, moving on to our first half results. Our financial results reflect a robust performance by our customer facing businesses. Core operating profit, excluding fair value, treasury impairments and strategic funding and liquidity costs, was GBP301 million. However, including these items, core operating profit for the half year was GBP22 million, compared with GBP295 million for the same period last year. The Board has approved an interim dividend of GBP0.18 per share in cash, payable on October 6.

At our preliminary results in February, we said that 2008 would be another year of considerable uncertainty and challenge for the banking sector. This has undoubtedly proved to be the case. We set out our priorities to face that environment and our results for the half year show progress against those priorities. We have continued to demonstrate the underlying strength of our customer franchise, building on the diversity of our business. We have maintained the strong asset quality of our customer lending. We are well capitalized. Our funding position has strengthened further. And we have continued to reduce our costs.

Looking first at the strength of our customer franchise, Alliance & Leicester is well diversified, with just 28% of revenues coming from the mortgage and savings business, and with a strong and growing commercial and business banking franchise.

Retail banking core operating profit was GBP211 million, up by GBP4 million on the same period last year. As planned, the focus in Retail Banking has been on growth in customer deposits and in current accounts. Personal customer deposits are up GBP800 million since the beginning of the year, despite a significant increase in competition in that market. The growth has primarily come from our e-Saver and ISA products, which attract relatively sticky funds.

We opened 154,000 new personal current accounts in the first half, slightly below the 170,000 opened in the same period last year, but still a market share well above our share of stock. Current accounts remain a key part of our strategy.

As we signalled previously, we have reduced the size of our mortgage book, reflecting our focus on balance sheet strength. Gross mortgage lending was GBP2.4 billion, and mortgage balances reduced, as planned, by GBP2.1 billion to GBP40.6 billion. We've tightened our lending criteria, including introducing a maximum LTV of 90% for prime mortgages. We've stopped selling our PlusMortgage products in mid-February. We have also slowed the amount of buy-to-let lending we do, introducing a maximum LTV of 75% for that business.

The unsecured personal loan market shrank slightly, and our gross lending of GBP900 million resulted in balances falling from GBP3.7 billion at the end of December to GBP3.6 billion at the end of June. This again reflects our focus on balance sheet strength. Take up of payment protection insurance fell considerable, reflecting the lower level of new lending, and customer reaction to media coverage about regulatory interest in the product.

We continue to offer great value to customers. We receive more best buy mentions in national newspapers for current accounts and savings, and won more of the recent Moneyfacts awards than any competitor. We continue to deliver products and services with an emphasis on the direct channels. 41% of Core 4 sales were made over the Internet, and around 1 million personal current and savings account holders regularly use our Internet banking service.

The deployment of deposit taking ATMs in all our branches is working well, migrating routine transactions away from staff, and helping to deliver a high level of products sales per branch staff member.

Commercial Bank core operating profit increased by GBP11 million to GBP89 million. We continued to grow our commercial lending balances in a prudent way, with balances up GBP600 million since the end of last year to GBP9 billion, focusing on segments of the market where we have specialist skills. Our approach to the SME business banking market continues to be successful; we have 20 business banking centers across the UK. We have concentrated on building the teams in those centers with experienced staff, and on further improving our Internet and telephone offering. We have a good suite of products, and won the award for best business current account from Business Moneyfacts for the sixth year in a row.

We opened 17,200 new business current accounts in the half year, up on the 16,600 opened in the same period last year. We now have over 100,000 active business banking accounts, plus a further 46,000 active community organization accounts, and 54,000 business deposit accounts. Business banking is a strong and growing business for the Group.

We continue to have strong lending asset qualities. Our mortgage arrears remain less than half the industry average, with 0.61% of our mortgage and accounts in arrears by over three months. The average LTV of our new prime mortgages in the half year was 64%. We have no subprime or self-certified mortgages, and buy-to-let mortgages represent just 2% of our book. The asset quality of our mortgages remains excellent.

Arrears in our unsecured personal loan book are also less than half the industry average. The increase in proportion of accounts in arrears from 5.5% to 5.7% principally reflects the reduction in the size of the book. Our commercial lending also continues to perform well with just 0.31% in arrears. Our portfolio is well diversified across a range of sectors, with asset quality continuing to be good.

We're well capitalized. At the end of June the Group's total capital resources were GBP3 billion, and our core Tier I capital ratio was 6.5%. This is in line with our peers, and appropriate for the mix and quality of our assets. We continue to manage our capital proactively. We continue to strengthen our funding position, and have pre-funded maturing medium-term funds into the third quarter of 2009.

We continue to emphasize efficiency improvements across our business. Core operating expenses in the first half of this year were GBP21 million lower than in the same period last year, reflecting lower business volumes in some areas and continuing efficiency improvements.

We also announced an organization structure on July 4, which together with the adoption of a single banking IT system across the Group, will provide further efficiencies. This is part of the plan to deliver our targeted Group cost income ratio of 50% by 2010.

Turning to the economic environment, the outlook for the UK economy had undoubtedly worsened as 2008 has progressed, and the degree of uncertainly around it has increased. Whilst our current base case economic assumptions are broadly in line with consensus, at this early stage in the economic cycle, we see significantly more risks to the downside of our base case forecast than to the upside.

In our base case scenario, UK GDP growth in 2008 and 2009 was expected to remain positive, but significantly below long-term averages. Inflation is expected to peak later this year, although this will depend on wage inflation remaining broadly stable. Unemployment is expected to increase, but to remain lower than experienced in previous periods of economic slowdown.

The UK mortgage market has slowed dramatically. Average house prices are down around 8% in the six months to the end of June, and there's been a general increase in mortgage rates and a tightening of lenders' credit criteria. External forecasts suggest that net mortgage lending could halve in 2008 to around GBP55 billion.

Alliance & Leicester's strategy and the prudent approach we've taken in response to the difficult financial market conditions since August last year have enabled the Group to be resilient in the current very difficult trading environment. The performance of our underlying business remains robust, and Alliance & Leicester remains a well funded, well capitalized business with strong customer asset quality and a good customer franchise.

Going back to the offer from Banco Santander. The terms of the offer are for shareholders to receive one Santander share for every three Alliance & Leicester shares. Taken together with the GBP0.18 dividend, this values the offer at 44.6% above the closing share price on Friday, July 11, the final day before the transaction was announced.

There were two important considerations which the Board factored into its decision to recommend the offer, both of them external to Alliance & Leicester. First we see a genuine risk that the economic outlook could deteriorate, and that financial market turbulence could continue for a significant period of time, prolonging the period of uncertainty.

Second, there is a risk that further shocks to the financial system could generate further general adverse sentiments towards financial groups like Alliance & Leicester. The experience of the past few months is that this sort of adverse sentiment can be indiscriminate, with the result that the clear quality of our customer lending and the diversified nature of the Group's business, have not been reflected in equity markets. These concerns are particularly relevant for a bank of our size.

Overall, therefore, the Board believes we are potentially vulnerable to the risk of external events further eroding shareholder value, and that the value of certainty of being part of a larger group in these circumstances was considerable. Against that background, the proposal from Santander provides both greater stability and greater certainty in uncertain times. Furthermore, there are clear benefits in being part of a global and diversified bank in the current environment, and there is an excellent strategic fit between our business and that of Abbey.

I'd now like to hand over to Chris Rhodes to go through the first half financials in more detail, after which we'll take your questions.

Thank you, David. Good morning, everyone. Our financial results reflect a robust performance by our customer facing businesses. Core operating profit, excluding the changes in fair value and impairment of treasury investments, and the strategic funding and liquidity holding costs, was GBP301 million. Taking these into account, core operating profit for the half year was GBP22 million, compared to GBP295 million for the same period last year.

The impact of treasury impairments on pretax profits in the first half amounted to GBP143 million, and the reduction in the fair value of treasury investments taken through the income statement amounted to GBP66 million, of which GBP53 million was in the first four months of the year.

We completed a number of further strategic funding transactions with commercial banks in the first half of the year. The strategic funding costs, together with the cost of holding liquidity were GBP70 million, in line with our expectations. Statutory profit before tax was GBP2 million, and the Board have approved an interim cash dividend of GBP0.18 per share.

Looking at core operating profits by sector. Retail Bank profits increased by GBP4 million to GBP211 million. The main factor for this increase was a reduction in costs. Commercial Bank profit increased by GBP11 million to GBP89 million, the key driver being higher net interest income. Treasury incurred a loss of GBP272 million. This reflects the impairment and reduction in fair value of certain investments of GBP209 million and GBP70 million relating to strategic funding and liquidity holding costs. Excluding these, treasury operating profit was GBP7 million compared to GBP24 million in the first half of last year. Group items fell by GBP8 million.

In terms of revenues, total Group revenues were down GBP150 million. Net interest income fell GBP57 million. The main factor in this fall was the GBP70 million of strategic funding and liquidity holding costs. The funding costs were GBP51 million and the liquidity holding costs GBP19 million. Group non-interest income, excluding hedging effectiveness, fell by GBP93 million to GBP223 million. Retail banking non-interest income was GBP13 million lower than the first half of 2007, mainly due to lower payment protection insurance and long term investment commission. Commercial bank non-interest income fell by GBP5 million. Treasury non-interest income fell by GBP76 million, mainly due to the GBP66 million reduction in the fair value of certain treasury investments.

Turning to net interest margins, the Group net interest margin was 0.97% for the first half of the year, 4 basis points higher than the fourth quarter of 2007. The increase reflects the higher spreads on new lending, the increase in the average lives of certain mortgage products, partially offset by an increase in the cost of deposits, together with the strategic funding and liquidity holding costs.

Moving on to cost, Group core operating expenses were GBP21 million lower than the same period last year. Retail banking costs of GBP169 million were GBP11 million lower. This reduction reflects lower staff costs as a result of lower new lending volumes and ongoing productivity improvements. Commercial bank costs, excluding operating lease depreciation, were slightly higher than the first half of 2007. Group items were GBP14 million lower than the first half of 2007. The retail banking cost income ratio reduced to 38.8% in the first half, while the Group cost income ratio was 60.6%. The Group ratio, excluding fair value reductions, was 54.4%.

Turning to impairment, the retail bank impairment loss charge was GBP4 million up on the first half of 2007. This was primarily due to the mortgage impairment loss charge of GBP7 million, GBP3 million of which related to cases where we believe there may have been fraudulent or negligent activity by third parties. The remaining GBP4 million reflects the impact of the reduction in house prices in the first half of 2008. The personal loan impairment charge fell by GBP6 million, as a result of the reduction in loan balances and the refinement of the provisioning methodology implemented in the second half of 2007. The current accounts charge increased by GBP3 million, reflecting a refinement in our provisioning methodology, and growth in our account base over recent periods. The commercial bank charge was GBP8 million, GBP2 million higher than in the first half of 2007. Excluding treasury, the Group impairment loss charge increased by only GBP6 million. However, the treasury impairment charge was GBP143 million.

So looking at treasury impairment, the total impairment loss charge was GBP143 million, compared to GBP153 in the second half of 2007. The charge against our CDO portfolio was GBP18 million, with an additional charge of GBP7 million against the loans to our off balance sheet conduit, reflecting the impairment of some CDOs within this vehicle. The remaining GBP118 million of impairment charge relate to our SIV investments.

Turning to the balance sheet, total assets fell by GBP2 billion. We are reducing the size of the treasury portfolio as assets mature and redeem, with total treasury assets falling by GBP0.5 billion since the year end. Customer loans and advances fell by GBP1.7 billion. This was primarily due to reduction in mortgage balances, partially offset by growth in commercial lending balances. Overall asset quality remains strong.

I will now take you through the main areas of the balance sheet in more detail, starting with treasury. We have provided greater detail on our treasury trading and investment securities in today's results announcement. The reduction in fair value taken to non-interest income was GBP66 million, with GBP53 million of this incurred in the first four months of the year. GBP55 million of this reduction was due to a credit default swap that we wrote against a portfolio of securitized assets as part of a SIV restructure. At the end of June, our SIV investments had reduced to GBP95 million from the original GBP390 million. This includes GBP65 million of original capital notes in four SIVs, and GBP30 million of investments in three restructured SIVs. The post tax reduction in fair value through reserves was GBP189 million. The reduction was mainly in respect of FRNs and asset-backed securities. All of this reduction was in the first four months of the year, with April being a particularly bad month. Changes to the available for sale reserve do not impact our regulatory capital. The majority of our treasure investments are FRNs and asset-backed securities. 92% of our FRNs are rated A or above, and all are issued by financial institutions. Our asset-backed securities portfolio remains of very high quality, with 95% rated AAA. We have not seen any signs of impairment in either of these portfolios.

Turning to mortgages, asset quality remains excellent. Despite the fall in UK house prices, our average indexed loan to value of our prime mortgage book was only 47%. Over half our prime residential mortgages have an LTV of less than 50%, with just 4% over 90%. The proportion of mortgage accounts more than three months in arrears was 0.61%. This includes just 11 buy-to-let and 12 PlusMortgage cases. Our mortgage arrears continue to be significantly lower than the industry average of 1.34%. In buy to let lending we tightened the credit criteria during the second quarter of this year, limiting new loans to a maximum LTV of 75%. The value of arrears only rose by GBP1.2 million in the first half of the year. And although our stock of repossessions increased, they still remain at historically low levels, with just 107 properties in possession at the end of June, representing just 0.02% of our total mortgage accounts. This compares to 0.13% for the industry.

In unsecured lending, our asset quality remains strong. Total arrears rose by just GBP1 million in the first six months of the year. The proportion of loans over 30 days in arrears has risen to 5.7%, mainly due to a GBP100 million reduction in balances.

In terms of the dynamic delinquency our new lending in 2006 and 2007 continues to be of significantly better quality than in 2005, due to the tightening of our score card and credit policies in 2005 and early 2006. This can be seen in the dynamic delinquency graph. The 2006 line, shown in pink, is tracking below the 2005 line. And the 2007 line, shown in black, is tracking the 2006 line. Early indicators are showing that lending in 2008 is performing slightly better than 2007.

Commercial lending asset quality remains good. We continue to have a well diversified portfolio by industry and loan size. GBP1.9 billion of the portfolio is covered by bank guarantees or cash deposits. These are mostly against shipping and film. We continue to monitor closely all our lending, given the more uncertain economic outlook. But we remain active in all sectors of the market place where we have proven experience. At this stage, we are not seeing any unusual trends in arrears levels in any sectors. Overall, non-performing assets, loans over 30 days in arrears, represented just 0.31% of the book, compared to 0.46% at the end of 2007.

Moving on to funding, we completed a number of strategic funding transactions in the first half of 2008, and we have now prefunded our maturing medium term wholesale funding, commercial paper and certificates of deposit into the third quarter of 2009. During the first half of 2008 we have continued to increase the proportion of our wholesale funding with a residual maturity of over 12 months. As at the end of June 2008, over 52% of wholesale funds had a residual maturity of over 12 months, compared to 47% at the end of 2007 and 38% in December 2006.

We continue to implement our policy of funding customer loans and advances using customer deposits and wholesale funds with a residual maturity of over six months. At the end of June, this excess was GBP3.1 billion, up from GBP2.3 billion at the end of 2007. Our customer deposits fell in the first half of the year. Retail deposits grew by GBP0.8 billion, but this was offset by a GBP1.3 billion reduction in commercial customer deposit balances, primarily due to lower corporate customer deposit balances held within treasury. The reduction reflects the credit policies of customers whose policies require them to deposit funds at AA rated institutions. Customer loans and advances fell by GBP1.7 billion.

Capital. Total capital resources rose by GBP100 million. The two main movements were the issue of GBP350 million of lower Tier II subordinated debt in the period and the payment of the final dividend of GBP154 million. Our total capital resources of GBP3 billion are above our Basel II individual capital guidance. We regularly stress test our capital requirements. On an aggressive scenario of 30% fall in UK house prices, combined with a 20% rise in unemployment, our mortgage risk weight would increase from its current 9% to around 17%. The Group's high quality assets are demonstrated by the Basel II risk-weighted assets of GBP22.2 billion, being 40% lower than the Basel I risk-weighted assets. Basel 2 risk weighted assets fell by over GBP1.8 billion, mainly due to the purchase of credit protection on a proportion of our unsecured personal loan balances, and the reduction in our treasury investment portfolio. Our core Tier I ratio, after deductions, was 6.5%, in line with those of our peers, and our total capital ratio was 13.3%. We published our Pillar II disclosures on our website in April.

So, to sum up. Profitability of our underlying business is good. We have a strong funding base, we are well capitalized, and we continue to reduce our cost base. Customer asset quality remains strong and we have a good customer franchise. However, as David said earlier, the Board is acutely aware of the significant external risks presented by the deteriorating economic conditions and continuing turbulence in financial markets. Against this background the proposal from Santander provides greater stability and greater certainty in uncertain times.

Thank you. I will now hand you back to David to manage the Q&A session. David?

Thanks, Chris. Chris has been joined by our other two executive directors, Richard Banks, who as you know in July became Group Risk Director having been responsible for the commercial bank up until then, and on the far side Ian Buchanan, who joined the Board as Group Manufacturing Director.

Okay, if you'd like to ask questions please raise your hand and perhaps wait for a microphone, and then if you could say your name and institution that would be helpful. The middle of the first row, Ian?

Good morning. It's Ian Smillie from ABN. Two questions, please. Could you tell us what the cost of the credit protection on the unsecured loan book is? And how much of that is reflected in the first half numbers?

Chris, do you want to answer that?

Yes. Ian, it's in non-interest income in treasury. It's low single-digit millions, and it's paid on an ongoing basis in relation to the amount of loans that we've bought protection on.

And is that in place for the whole of the first half or is it something that came in towards the end?

Pretty much for the whole of the first half. Not quite all of it, but most of it.

Thank you. The second question's on the deposits, particularly on the corporate side. Can you give us some sense as to what might have happened since the Santander announcement and whether you'd expect that book to start to grow again?

The Santander announcement happened nearly two weeks ago (inaudible) so I mean I can't really give any comment on what's happened since then. We showed (inaudible) in the first of the year particularly following the rating agency's -- the rating change in April but I can't comment on what's happened since.

Could you comment on what your expectation might be going forward?

(inaudible) quite difficult to comment on the impact of the transaction whether or not the period (inaudible). I don't really think I can comment on that, I'm afraid.

Okay.

What we can say, Ian, is retail deposits grew about GBP0.5 billion since the IMS and the commercial deposits, including the larger deposits which are linked to credit ratings, grew by about GBP0.1 billion.

Thanks.

Ian, do you just want to hand the microphone over? Yes, thanks.

Thanks. Good morning. It's Rohith Chandra-Rajan from Citigroup. I wonder if I could just explore a little bit more the rationale behind your recommendation of the offer from Santander. You've been very clear today in terms of the risks that you see both in the economic outlook and continued financial market dislocation, but certainly I think the results that you've announced today demonstrate that whilst credit quality is weakening, it remains relatively good, certainly relative to peers. And also you demonstrated the funding solutions that you've put in place. So I was wondering where it is that you see the key risks and the benefits of being part of a larger group, whether it's on the credit side or perhaps, more importantly, on the funding side?

Well, as I just said, there are two big external factors that the Board -- that I think drove the Board's decision. Firstly in terms of the economic environment, I mean that could deteriorate further in our view. I mentioned our base case economic assumptions were a limited GDP growth and next year, but we see more risks on the downside from the base taken to the upside. Now clearly if we get declining -- I'm sorry lower levels of economic growth, that would impact the real economy and the potential credit impacts from that. I think the other point that we made is that we can see the financial turbulence continuing and one of the -- what we think the whole series of shocks round the corner in the last few months and they do -- they have generated adverse sentiment towards groups like A&L, as I said. In particular, I think for banks of our size, we are vulnerable to shocks anywhere in the globe. We've seen problems in the US property market you're well aware of. There's problems in other property markets around the world. So we could see potential shocks. We haven't got anything specific, but we could see potential shocks happening, and the impact of that contagion affecting us adversely. Those were the two key reasons.

Affecting you adversely in what respect? In terms of your ability to fund or the valuation of the company?

I think it's quite difficult -- I think one of the issues here is the sheer uncertainty. We don't know the nature of those shocks. We don't know how long this uncertainty is going to last. So it's difficult actually to be prescriptive and say we could see this event and that. I think it's -- I think the fundamental point is, the outlook is very uncertain and we foresee this period of uncertainty being prolonged. It's quite difficult to be precise exactly how those shocks will manifest themselves, and if you look over the last year or so, we've seen effects on both funding and valuation. I can't speculate going forward.

Thank you.

Just in front there.

Hi, good morning. It's James Invine here from Dresdner Kleinwort. I've got a question for Chris, actually. I was just wondering if you could tell us what your more exotic treasury investments have contributed to the margin when they were still performing? Basically, what I'm getting at is how much pressure is going to be on the margins, because you're now letting those roll off and maybe going to safer lower yielding investments.

I think you can see from treasury operating profit last year, so the first half of last year treasury operating profit was GBP24 million. A large contributor to that was the coupons on the SIVs, they had a reasonably high margin. Effectively they've disappeared out of the margin. So the core treasury operating profit, excluding fair value, etc., has fallen to GBP7 million. So that, I think, is broadly the level of sustainable profit as the book stands at the moment. It will then shrink as pro rata towards shrinking the treasury investments. So the high yield in securities has largely been impaired and written off what's left. As the book shrinks, that GBP7 million will shrink.

And terms in lengthening the maturity of the wholesale funding you've got. It's probably difficult to put a number on this. But how much is that going to cost you, the lengthening process. And I know that all funding has got more expensive, so I'm not really talking about that, but just the fact that you're going from shorter to longer maturities?

It's almost impossible to estimate because securitization covered bond markets have not opened back up yet, so we can't estimate what the cost in the future will be of that -- those funding lines for A&L, so I really don't know.

All right, thanks.

Okay, do you just want to pass the --

Hi, it's Mike Trippet at Oriel. I've just got a question on mortgage impairment charge, the house price related element of it. Is that -- is there any sort of forward looking element to that? Is that just based on house price reductions at the half year and arrears run rates at the half year?

We've lost GBP7 million, of which as we said GBP3 million was down to fraudulent -- potential fraudulent or negligent activity on the part of third parties. So the remainder is due to the house prices and it's not forward looking, it's taking the current position.

And what, (inaudible) methodology and broadly to apply the arrear rates to your high LTV component, so the above 90% that's at risk?

The two components, you look at your current portfolio, particularly those accounts that have got some form of arrears on them and there is an assessment of default within those, I think we say it's 2,700 accounts in arrears. So a proportion of those will become repossessed, so we've forecast that through, depending on the loan to value of each one of those cases that are forecast through the model, you then end up with an individual loss given default, which is largely driven by the loan to value of the property.

Okay. And what's your view on house prices this year and next year? Are you in the 15% to 20%?

We haven't got a definitive house view. We're consistent very much with everybody else. 15% to 20% would be a sensible number to use, I think.

Mike, just one behind you, and then James will come to you in a sec.

Thanks. It's Ross Curran from UBS. I've just got a quick question on capital base. Santander said that they think you're under capitalizing and going to be putting in an extra GBP1 billion worth of capital. What is it in the balance sheet that they are most concerned about that we haven't picked up on?

I'll start and then I'll hand over to Chris for some detail. Let's just be clear on this. They're not going to inject a GBP1 billion of capital layout. They have used an additional GBP1 billion allocation to calculate the ROI they quoted. There are a number of elements within that. The first one is they talked about restructuring costs which are clearly related to the acquisition, second, as part of the acquisition they would have to take the AFS adjustment, and so they've said, well, let's assume a capital allocation for that. And then they do have this element of looking forward through the cycle. Chris, do you want to give the rest of the detail?

That -- the three component parts are the AFS reduction, so on acquisition you crystallize that within your consolidated results, because you fair value the balance sheet. So that AFS adjustment effectively becomes regulatory capital at the point of acquisition within Santander's books. As far as we're aware they will then create a through the cycle general provision, which I think that's what they call it, and I think that's what they're able to do. We will try and provide more detail on comparisons between accounting policies within the scheme document. And then, thirdly, there's a whole range of reorganization costs that they've got to cope with. And they're best placed I think to determine what they are.

Okay Ross. Do you want to (inaudible) your question.

Hi, sorry, it's James Invine here from Dresdner Kleinwort again. Sorry, just got another one for you, Chris. I think the -- on the conference call for the IMS you talked about an absolute number for cost of repossession on a mortgage. I can't quite remember when it was. But I was just wondering, given that clearly the housing market is worse than it was then, have you seen that cost of repossession rise substantially or is it just too early to --?

It's just too early. We've repossessed 89 properties so far this year, we've got 80 in possession, we repossessed 80 last year. There's no material change in our numbers.

Thanks.

Question at the back.

Yes, thank you, and good morning. It's Leigh Goodwin from Fox-Pitt Kelton. Just a couple of questions, one following up the first question on the cost of the credit protection against the secured loan book. I just was actually wondering why you did that, was that driven by capital management issues or was it mainly a risk management?

Chris, do you want to?

Purely capital management. We said in February, that bearing in mind the volatility and the pro-cyclicality of Basel II, we wanted to increase the buffer between available capital and required capital, and that's a cost effective way of achieving that.

Okay, second question, just on the capital. I'm just interested in your comments about your total capital resources being above the, I guess ,what the FSA say you should have. I mean, is a way of looking at this to say we know what, you're showing us what the Pillar I charge is, you're estimating Pillar II to be 30% of total capital. If we were to adjust RWA for Pillar II, I might be over-engineering this, tell me if I am, but we're looking at about a 5% ratio between your equity Tier I -- your equity Tier I ratio on that adjusted basis. Would you say that -- therefore, that's where the regulator thinks you should be as a minimum?

Maybe (inaudible). Just to correct you slightly. You take the Pillar I and the Pillar II is 30% of the Pillar I and then there is a element of regulatory guidance which we haven't talked about. But Chris do you want to?

We haven't and we can't tell you what our individual capital guidance is. All we can tell you is we're above the limit. We give you a view about what that might look like in terms of the Pillar II charge, but we can give you no indication of what the FSA add-on or in theory deduction to that number.

Okay, and then just finally then. I'm just interested in the securitizations you've been undertaking, about GBP9 billion worth in the first half. Should we take it that these are being pledged to the Bank of England, or are some of these being pledged as part of the -- your strategic funding facility?

Vast majorities are strategic funding facility.

Further questions. Any more? Okay, well, thanks very much. Enjoy the rest of the day. Have a great weekend and thanks for your time this morning.