27th Apr 2005 07:23
Egg PLC27 April 2005 PART 1 Under Embargo until 07.00h, 27th April 2005 Egg plc Q1 2005 Financial Results and New Business Figures "Operating profit was £10 million for the core UK business on the new IFRS basisof reporting, which is consistent with the plans we outlined in our preliminaryresults announcement. The overall Group profit was £5 million in the quarter. "Egg's UK credit card business has performed well, with balance growth inexcess of £200 million and good acquisition of new accounts, a result thatcompares favourably to an industry-wide reduction in credit card balances inJanuary and February. As planned, personal loan sales have reduced in theperiod from the record levels seen in 2004 following our actions to tighten ourlending criteria. "Strong acquisition and balance growth on cards has had a negative short-termimpact on revenue due to the funding cost of the introductory offers, which isnow recognised up front under IFRS. Revenues were also impacted by ourdeliberate reduction in personal loan sales volumes and hence the lower incomegenerated from selling associated insurances. Costs continue to be wellcontrolled and we have also delivered a further improvement in unit marketingacquisition costs this quarter. We are close to completing a restructuring thatwill align our cost base to our strategy which is re-focused on the core UKbusiness. To that end we have incurred £6 million of restructuring costs in Q1and expect a further £4 million to be recognised in Q2 on completion of thereview. "Credit quality remains strong in the card book and the increasing provisionsreflect the good growth we have seen in balances. Within the personal loan bookthe quality of new business written this quarter has improved following thechanges to our lending criteria and we expect this to lead to the loansimpairment charge reducing in the second half of the year. "Overall the result for the period was in line with our expectations and weremain confident that operating profit will grow strongly over the remainder ofthe year." Paul Gratton, CEO, Egg plc Highlights: Analysis of Group Income Statement (adopted IFRS Basis): Q1 2005 Q1 2004 (i) £m £mEgg UK 9.9 15.7Egg France (ii) 4.8 (15.6)Subsidiaries/Associates/JV's (iii) (3.4) (0.4)Transaction Costs - (1.3)Restructuring Costs (6.3) (2.3)Group Profit/(Loss) before Tax 5.0 (3.9) (i) UK GAAP comparatives restated to IFRS basis (excluding IAS32 and IAS 39 which are only effective from 1 January 2005). (ii) Profit in 2005 reflects release of surplus in the provision forexit costs (£3.5 million) and foreign exchange gains (£1.3 million). (iii) Q1 2005 includes Funds Direct exit cost provision of £3.3million. Group • Group operating income up 6% to £125 million (Q1 2004: £119 million) • Group profit before tax of £5.0 million (Q1 2004: £3.9 million loss) • Retained profit after tax of £8.2 million (Q1 2004: £4.7 million retained loss) • Group earnings per share of 1.1p (Q1 2004: 0.6p loss per share) • Total group assets of £12.3 billion (Q1 2004: £11.2 billion) UK • Egg UK delivered a Q1 operating profit of £9.9 million (Q1 2004: £15.7 million) • Net interest margin was 2.43% (Q1 2004: 2.54%) • Cost/Income ratio was 45% (Q1 2004: 52%) • Unsecured lending balances grew by £277 million (Q1 2004: £238 million) leading to period end balances of £6.5 billion (Q1 2004: £5.0 billion) • Personal loan drawdowns were £442 million (Q1 2004: £563 million) Other • Exit costs of Egg France now expected to be €165 million and thus €5 million (£3.5 million) of the provision has been released. • Decision taken to raise exit costs provision of £3.3 million for Funds Direct in the period. Chief Executive Paul Gratton said: "Operating profit was £10 million for the core UK business on the new IFRS basisof reporting, which is consistent with the plans we outlined in our preliminaryresults announcement. The overall Group profit was £5 million in the quarter. "Egg's UK credit card business has performed well, with balance growth in excessof £200 million and good acquisition of new accounts, a result that comparesfavourably to an industry-wide reduction in credit card balances in January andFebruary. MasterCard continues to perform well and contribute to the goodgrowth rates seen over the past three quarters. As planned, following ourtightening of lending criteria, personal loan sales have reduced in the firstquarter from the record levels seen in 2004. "Revenues in the UK in the quarter at £125 million were up 4% compared to therun-rate in Q1 through Q3 last year but fell compared to our record performancein Q4 2004. This was expected given the funding cost of our incentive offers onnew cards and the fact that personal loans generate significant up front incomein terms of the commission earned from selling associated insurances. "Costs continue to be well controlled and we have also delivered a furtherimprovement in unit marketing acquisition costs this quarter. In total, costswere £56 million this quarter as compared to £62 million in the same period lastyear and £66 million in Q4 2004. We are close to completing a restructure thatwill align our cost base to our strategy which is re-focused on the core UKbusiness. As we have announced separately today this process includes changesto our Board structure and to the responsibilities of our Executive Directorsand Company Secretary. We have incurred £6 million of restructuring costs in Q1and expect a further £4 million to be recognised in Q2 on completion of thereview. We expect annualised savings to reach £12 million. "Credit quality remains strong in the card book and the increasing provisionsreflect the good growth we have seen in balances. Within the personal loan bookthe quality of new business written this quarter has improved following thechanges to our lending criteria and we expect this to lead to the loans bad debtcharge reducing in the second half of the year. "Our exit from France is complete with closure costs now expected to be €5million (£3 million) lower than our original provision. In addition the Boardhas taken the prudent decision to provide £3 million against the full exit costsof Funds Direct. "Overall the result for the period was in line with our expectations and weremain confident that operating profit will grow strongly over the remainder ofthe year." Overview of Group Results Summary Income Statement by quarter (adopted IFRS basis) (unaudited) Q1 2005 Q4 2004 Q3 2004 Q2 2004 Q1 2004UK £m £m £m £m £m Net Interest Income 70.8 73.3 70.4 70.1 74.0Other Operating Income 53.8 66.3 48.3 49.9 44.7Egg UK Operating Income 124.6 139.6 118.7 120.0 118.7Operational and Administrative Expenses (37.1) (40.7) (39.2) (37.7) (40.6)Brand and Marketing Costs (8.1) (12.4) (9.0) (10.6) (9.6)Development Costs (3.7) (6.2) (5.2) (4.7) (5.9)Depreciation and Amortisation (6.9) (7.1) (4.3) (5.6) (5.9)Impairment Losses on Loans and Advances (58.9) (52.8) (47.1) (41.3) (41.0)to CustomersEgg UK Operating Profit 9.9 20.4 13.9 20.1 15.7FranceNet Interest Income (0.3) 0.8 1.8 2.1 1.6Other Operating Income 1.3 (7.0) 0.9 (0.1) -Egg France Operating Income 1.0 (6.2) 2.7 2.0 1.6Operational and Administrative Expenses (9.0) (10.1) (8.5) (9.9) (9.1)Brand and Marketing Costs - - - (0.9) (1.6)Development Costs - - - (0.2) (0.4)Depreciation and Amortisation - (0.4) (3.1) (1.7) (1.0)Impairment Losses on Loans and Advances (0.3) (5.8) (3.9) (5.5) (5.1)to CustomersUtilisation of Exit Cost Provision 9.6 15.8 10.1 - -Egg France Operating Profit/(Loss) 1.3 (6.7) (2.7) (16.2) (15.6)Subsidiaries/Associates/JV's (3.4) (17.6) (1.0) (0.6) (0.4)Transaction Costs - (2.7) (1.1) (1.3) (1.3)Provision for France Exit Costs 3.5 - (112.8) - -Restructuring Costs (6.3) (3.0) - 0.2 (2.3)Group Profit/(Loss) Before Tax 5.0 (9.6) (103.7) 2.2 (3.9) Note: All comparatives for 2004 have been restated to adopted IFRS basis(excluding the impact of IAS 32 and IAS 39, which only came into effect from 1January 2005).Commentary on Summary Income Statement Egg UK Revenues Net interest income in Q1 2005 was £71 million (Q4 2004: £73 million). Most ofthe decrease reflects the adoption of IAS 39. The revised accounting forincentive offers on the credit card portfolio will mean lower interest income inperiods of strong acquisition of incentive balances similar to that we have seenin Q1. In addition the margin has been negatively affected by higher fundingcosts arising from the increase in savings balances at bonus rates. Non-interest income in Q1 2005 was £54 million (Q4 2004: £66 million). As weexplained in our preliminary results in February the performance in Q4 2004 wasexceptionally strong, with the previous quarterly run-rate last year averaging£48 million. We remain confident that non-interest income for the full year2005 will exceed that of last year. Included in the Q1 2005 operating income figure is £1 million of unrealisedlosses on derivatives arising from the adoption of fair value accounting underIAS 39 which is purely a timing difference given no gain or loss is expectedover the life of the derivatives as they are economic hedges and will not betraded. The two other main factors in the £12 million reduction from Q4 2004 are the £6million profit on disposal of investment securities that was not repeated in Q12005 and the reduction in commission earned on associated insurances resultingfrom the lower personal loan volumes compared to the record high in Q4 2004.Given the lower loans sales reflects our tightening of lending criteria we arenow acquiring a higher credit quality loan book and these customers have arelatively lower propensity to buy associated insurances and therefore ourpenetration rate has also reduced from 59% in 2004 to 51% in the first quarter. Costs Operational and administrative costs at £37 million for the quarter have reducedby 9% over Q4 2004. In part this reduction reflects some immediate benefit fromthe restructuring begun this quarter, which has been mainly targeted at theoverhead base. In addition we have been tightly managing operationalexpenditure and ensuring it is focused on the core business. Brand and marketing costs were £8 million (Q4 2004: £12 million). 139,000 newVisa card accounts were opened in the quarter (Q4 2004: 119,000). Thisrepresented an excellent performance with unit marketing acquisition costs onVisa cards reducing to £32 each compared to £36 in Q4 2004 and £39 in theequivalent period last year. The tactical investment in marketing bonus savingsaccounts and insurance products in Q4 2004 was not repeated. Development costs were £4 million for the quarter, a significant decrease fromQ4 2004 (£6 million). The decrease reflects the fact that the majority of theinvestment in systems and processes in preparation for IFRS, Basel 2 and otherregulatory changes is now complete. Depreciation and amortisation at £7 million is in line with expectations (Q42004: £7 million). This strong overall cost performance has contributed to an improvement in thecost/income ratio this quarter to 45% (Q4 2004: 48%). Moving forward we expectto achieve further operational economies of scale as we focus on our core UKbusiness. The restructuring exercise is expected to deliver total annualsavings of £12 million in our overheads when finalised. Impairment for Losses on Loans and Advances to Customers The Q1 charge for impairment of £59 million was in line with our expectationsgiven the strong growth in card balances in the quarter, the stage in life cycleof the loan book and IFRS accounting changes in the treatment of suspendedinterest which increases both impairment and interest income compared to UKGAAP. The impairment charge as a percentage of 12 month lagged assets in theoverall unsecured portfolio remained consistent at 3.9% (Q4 2004: 3.8%). Movingforward we expect the impact of our decision to tighten lending criteria, alliedto the fact that the personal loan book will have matured further, should seeboth the absolute charge and the charge as a percentage of lagged assets startto reduce over the second half of the year. At the period end, impairment provisions on the balance sheet represented 3.3%of assets compared to 3.2% in December 2004. Egg France and Provision for Exit Costs We now expect the final costs of exiting our French business to be lower thanthe £113 million (€170 million) provision made in July 2004. £106 million (€159million) of this provision has now been utilised and the updated estimate oftotal closure costs is £110 million (€165m). We are therefore releasing £3.5million (€5 million) of the provision this quarter. The IFRS accounts include a £6.7 million loss in Q4 2004 and £1.3 million profitin Q1 2005 within other income in respect of foreign exchange gains and losseson translation of the French balance sheet and profit and loss account (whichpreviously were accounted for through reserves). These did not form part of theexit costs provision. Subsidiaries/Associates/JV's The £3.4 million net loss in Q1 primarily reflects the exit costs provision inrespect of Funds Direct. Restructuring Costs As previously indicated, we are close to completing our review of our total costbase, and in particular the overhead functions, in light of our exit from Franceand the renewed focus on our core UK business. This review is almost completeand by the end of the first quarter £6.3 million of costs had been incurred oraccrued in respect of people who have exited the business. We have now almost completed the review, which has included the Executivestructures at Egg and resulted in the Board changes announced separately today.We expect the additional restructuring costs, which will be recognised in Q22005, will amount to approximately £3.5 million. The estimated annual savings resulting from this reorganisation is £12 millionof which approximately £7 million will benefit the 2005 income statement. Egg UK Product Information 31 Mar 31 Mar 31 Dec 2005 2004 2004 Product balances £m £m £m Egg Card 3,783 3,010 3,578Egg Personal Loans 2,690 2,015 2,618Total Unsecured Lending 6,473 5,025 6,196 Egg Mortgages 1,132 1,181 1,102Prudential Mortgages 561 738 591Total Secured Lending 1,693 1,919 1,693 Egg Savings 6,554 6,117 6,215 Prudential Savings 124 161 121 Total Retail Liabilities 6,678 6,278 6,336 Unsecured Lending Net lending balance growth was £277 million (Q1 2004: £238 million). Creditcard balance growth was a £205 million (5.7%) net increase in the first quarter,a strong result when compared with the same period last year when balancesreduced by £5m. It is also encouraging against the background of industrybalances reducing by 0.6% in January and February. 154,000 new card accountswere opened of which nearly 15,000 were MasterCard. Personal loan disbursements were £442m in the quarter. This is a solidperformance, but as expected, is a reduction on the record loan volumes achievedin 2004 and reflects our decision, indicated in our preliminary resultsannouncement to tighten lending criteria. Savings Q1 2005 saw a strong net inflow on Egg deposits of £339 million as compared withan outflow of £47m in the same period last year. This was driven by the successof Egg's latest bonus account offering. Retail liabilities are an importantelement to Egg's overall funding strategy and the success in Q1 means that wenow have a strong liquidity position and we expect margins to increase over theremainder of the year as the impact of the bonus rates unwinds. Other Products Customers are continuing to show demand for a broad range of Egg brandedproducts. In the period from end Q1 2004 to end Q1 2005, the total number ofthese products (other than our main acquisition product, the Visa card) sold byEgg has increased by 34%. This represents an increase in the number of theseproducts held as a proportion of Visa card accounts from 50% to 58% over theperiod. The vast majority of these additional Egg products are cross-sold toexisting customers. If we also include cross-sales of associated insurances onloans and cards the percentage of other products as a proportion of Visa cardsrises to 97%. These figures demonstrate the increasing ability to cross sell,the propensity of existing customers to take additional products and thecontinuing attractiveness of Egg's brand. Capital Egg's total capital ratio was 12.9% as at 31 March 2005 (31 December 2004:12.5%). The increase in the ratio over the year end position primarily reflectsa further £250 million of credit card securitisation in the quarter. Independent review report by KPMG Audit plc to Egg plc Introduction We have been engaged by the Group to review the financial information set out onpages 12 to 58 for the three months ended 31 March 2005, and we have read theother information contained in the interim report and considered whether itcontains any apparent misstatements or material inconsistencies with thefinancial information. This report is made solely to the Company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the Company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted bylaw, we do not accept or assume responsibility to anyone other than the Companyfor our review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual accounts except where any changes, and the reasons for them,are disclosed. The next annual financial statements of the Group will be prepared in accordancewith those IFRSs adopted for use by the European Union. The accounting policies that have been adopted in preparing the financialinformation are consistent with those that the directors currently intend to usein those next annual financial statements. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of makingenquiries of management and applying analytical procedures to the financialinformation and underlying financial data and based thereon, assessing whetherthe accounting policies and presentation have been consistently applied unlessotherwise disclosed. A review is substantially less in scope than an auditperformed in accordance with Auditing Standards and therefore provides a lowerlevel of assurance than an audit. Accordingly, we do not express an auditopinion on the financial information. Emphasis of matter Without qualifying our review conclusion, we draw your attention to thefollowing matter. As the basis of preparation note to the financial informationexplains there is a possibility that the directors may determine that somechanges to these accounting policies are necessary when it prepares the fullannual financial statements for the first time in accordance those IFRSs adoptedfor use by the European Union. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the three monthsended 31 March 2005. KPMG Audit Plc Chartered Accountants 27 April 2005 FINANCIAL INFORMATION Financial results prepared in accordance with International Financial ReportingStandards adopted for use in the European Union for the three months ended 31March 2005 and for the year ended 31 December 2004. Introduction Following the adoption of IAS Regulation EC 1606/2002 on the 19 July 2002 by theEuropean Parliament, Egg plc ("the Group"), along with all other European listedentities, will be required to prepare consolidated financial statements inaccordance with International Financial Reporting Standards ("IFRS") as endorsedby the European Union ("EU") for years beginning 1 January 2005. The Group will apply IFRS for the year ended 31 December 2005, and will prepareone year's of comparative figures under IFRS. Accordingly, the Group's date oftransition to IFRS is 1 January 2004 and its first reporting period under IFRSis for the three months ended 31 March 2005. This report therefore contains theconsolidated financial results for the 3 months ended 31 March 2005 on the basisof IFRS, and comparatives for the 3 months ended 31 March 2004 and for the yearended 31 December 2004 restated to IFRS. To assist with the understanding of the impact of transition from UK GAAP toIFRS, the Group has presented the Consolidated Statement of Changes in Equity onpages 19 and 20 and further reconciliations in Appendix 1. Basis of preparation EU law (IAS Regulation EC 1606/2002) requires that the next annual consolidatedfinancial statements of the Group for the year ended 31 December 2005 beprepared in accordance with IFRS adopted by the EU (adopted IFRS). The financial information has been prepared on the basis of recognition andmeasurement requirements of IFRS in issue that are either endorsed by the EU andeffective, or are expected to be endorsed and effective at 31 December 2005, theGroup's first annual reporting date at which they are required to use adoptedIFRS. Based on these adopted and unadopted IFRSs, the Directors have madeassumptions about the accounting policies to be applied, as detailed in thedescription of accounting policies set out below. In particular the directors have assumed that the amendment to IAS 19 'EmployeeBenefits - Actuarial Gains and Losses' issued by the IASB will be fully adoptedby the EU and therefore available for use in the annual IFRS FinancialStatements for the year ended 31 December 2005. In respect of financial instruments, the Group's policy has been to adopt IAS 32'Financial Instruments: Disclosure and Presentation' and 39 'FinancialInstruments: Recognition and Measurement' from 1 January 2005, except asrestricted by the European Commissions Accounting Regulatory Committee.Comparatives for 2004 have not been restated to reflect the requirements of IAS32 and IAS 39 and, as permitted by IFRS 1, are accounted for under UK GAAP inaccordance with the accounting policies set out in the annual financialstatements for the year ended 31 December 2004. In addition, the adopted IFRSs that will be effective or available for voluntaryearly adoption in the annual financial statements for the year ended 31 December2005 are still subject to change and to the issue of additional interpretationsand therefore cannot be determined with certainty. Accordingly, the accountingpolicies for the annual period that are relevant to this interim financialinformation will be determined only when the annual financial statements areprepared for the year ended 31 December 2005. The comparative figures for the financial year ended 31 December 2004 are notthe Group's statutory accounts for that financial year. Those accounts, whichwere prepared under UK GAAP in accordance with the Companies Act 1985, have beenreported on by the Company's auditors and delivered to the registrar ofcompanies. The report of the auditors was unqualified and did not containstatements under section 237(2) or (3) of the Companies Act 1985. Transitional arrangements On transition to IFRS, an entity is generally required to apply IFRSretrospectively, except where an exemption is available under IFRS 1 'First-timeAdoption of International Financial Reporting Standards'. The following is asummary of the key elections from IFRS 1 that were made by the Group: • The Group has elected to adopt the IFRS 1 exemption in relation to business combinations and will only apply IFRS 3 'Business Combinations' prospectively from 1 January 2004. As a result, the balance of goodwill under UK GAAP as 31 December 2003 will be deemed the cost of goodwill at 1 January 2004. • The Group has elected to adopt the IFRS 1 option to reset foreign currency cumulative translation reserves to zero on transition to IFRS. Furthermore, the Group has adopted the exemption in IFRS 1 to not preparecomparative information in accordance with IAS 32 'Financial Instruments:Disclosure and Presentation' and IAS 39 'Financial Instruments: Recognition andMeasurement'. These standards will therefore only apply from 1 January 2005 andin the comparative figures for the year ended 31 December 2004, financialinstruments will continue to be accounted for on a UK GAAP basis. The Group hasalso elected to adopt IFRS 5 'Non-current Assets Held for Sale and DiscontinuedOperations' from 1 January 2005. Consolidated income statement (unaudited) Three months Three months ended Year ended 31 ended 31 March 31 March 2004 December 2004 2005 Notes £m £m £mContinuing operations: Interest income 252.2 211.8 902.8Interest expense (181.4) (137.8) (615.4)Net interest income 70.8 74.0 287.4Fee and commission income 54.4 52.1 220.7Fee and commission expense (4.2) (9.9) (25.2)Net fee and commission income 50.2 42.2 195.5Net trading income 2.9 - -Other operating income 0.7 2.5 14.7Operating income 124.6 118.7 497.6Administrative expenses - personnel expenses (24.3) (22.4) (92.7)- depreciation and amortisation (6.9) (5.9) (22.2) - other administrative expenses (30.9) (35.7) (139.3) (62.1) (64.0) (254.2)Impairment losses on loans and advances tocustomers 2 (58.9) (41.0) (182.4) Operating profit 3.6 13.7 61.0Share of operating (loss)/profit of joint venture (0.1) 0.3 0.3 Share of associate losses - (0.1) (0.4)Profit on continuing ordinary activities beforetax 3.5 13.9 60.9 Tax charge on profit on continuing ordinaryactivities 3 (0.3) (5.7) (24.7) Profit on continuing ordinary activities aftertax 3.2 8.2 36.2 Discontinued operations:Profit/(loss) on discontinued ordinary activitiesafter tax 4 5.0 (12.9) (137.2) Retained profit/(loss) for the period 8.2 (4.7) (101.0) Consolidated income statement (continued) (unaudited) Three months Three months ended Year ended 31 ended 31 March 31 March 2004 December 2004 2005 Notes £m £m £mAttributable to: Equity holders of the parent 9.0 (4.6) (99.7)Minority interests (0.8) (0.1) (1.3) Pence per share Pence per share Pence per shareConsolidated earnings/(loss) per share Basic 5 1.1 (0.6) (11.3)Diluted 5 1.1 (0.6) (11.3)Continuing earnings per shareBasic 5 0.4 1.0 4.6Diluted 5 0.4 1.0 4.6 Consolidated balance sheet (unaudited) 31 March 31 March 31 December 2005 2004 2004 £m £m £mAssetsCash and balances with central banks 14.3 13.2 14.0Loans and advances to banks 483.7 268.6 615.9Securities purchased under agreement to resell 321.5 - 319.4Investment securities 3,298.8 3,557.6 3,119.7Derivative financial instruments 48.9 10.3 16.0Loans and advances to customers 7,917.3 6,864.0 7,642.0Prepayments and accrued income 10.5 64.0 58.3Investments in joint venture and associate 9.9 6.5 6.3Property, plant and equipment 48.0 56.1 48.0 Intangible assets 44.5 44.9 49.0Deferred tax 35.6 23.9 28.9Other assets 98.6 326.4 130.6Total assets 12,331.6 11,235.5 12,048.1 Consolidated balance sheet (unaudited) (continued) 31 March 31 March 31 December 2005 2004 2004 £m £m £mLiabilities Deposits by banks 2,548.8 1,613.5 2,352.0Securities sold under agreements to repurchase - 239.2 130.5Customer accounts 6,839.8 6,408.8 6,607.4Investment securities in issue 1,605.6 1,581.6 1,806.5Derivative financial instruments 57.2 11.2 17.5Other liabilities 385.4 347.6 110.5Accruals and deferred income 87.9 147.5 215.0Provisions for liabilities and charges 4.9 - 16.8Subordinated liabilities - Dated loan capital 459.9 450.8 450.8Total liabilities 11,989.5 10,800.2 11,707.0Shareholders' equityCalled up share capital 412.2 411.8 412.2Share premium account 111.0 110.4 111.0Capital reserve 359.7 359.7 359.7Other reserves 5.6 0.2 (0.5)Accumulated losses (545.5) (447.9) (541.2)Total equity attributable to the equity holders 343.0of the parent 434.2 341.2Minority interests (equity) (0.9) 1.1 (0.1)Total equity 342.1 435.3 341.1Total equity and liabilities 12,331.6 11,235.5 12,048.1 Consolidated statement of changes in equity (unaudited) Attributable to equity holders of the Group Minority Total Called up Share Capital Other Accumulated interest share premium reserve reserves losses capital account Note £m £m £m £m £m £m £m Changes in equity for thethree months ended 31 March2004: Balance at 1 January 2004 aspreviously reported under UKGAAP 410.3 107.5 359.7 - (445.1) 1.2 433.6 Changes upon transition to - - - - 0.5(1) - 0.5IFRS Restated balance under IFRS 410.3 107.5 359.7 - (444.6) 1.2 434.1 Exchange differences onforeign currency translations - - - 0.2 - - 0.2 Net gain recognised directlyin equity - - - 0.2 - - 0.2 Loss for the period - - - - (4.6) (0.1) (4.7) Total recognised income andexpense for the period - - - 0.2 (4.6) (0.1) (4.5) Increase in share capital 1.5 - - - - - 1.5 Increase in share premium - 2.9 - - - - 2.9 Share-based paymentadjustment to reserves - - - - 0.4 - 0.4 Awards under incentive - - - - 0.9 - 0.9schemes Balance at 31 March 2004 411.8 110.4 359.7 0.2 (447.9) 1.1 435.3 Changes in equity for theyear ended 31 December 2004: Balance at 1 January 2004 asrestated under IFRS 410.3 107.5 359.7 - (444.6) 1.2 434.1 Exchange differences onforeign currency translations - - - (0.5) - - (0.5) Net loss recognised directlyin equity - - - (0.5) - - (0.5) Loss for the year - - - - (99.7) (1.3) (101.0) Total recognised expense forthe year - - - (0.5) (99.7) (1.3) (101.5) Increase in share capital 1.9 - - - - - 1.9 Increase in share premium - 3.5 - - - - 3.5 Share-based paymentadjustment to reserves - - - - 2.3 - 2.3 Awards under incentive - - - - 0.8 - 0.8schemes Balance at 31 December 2004 412.2 111.0 359.7 (0.5) (541.2) (0.1) 341.1 Consolidated statement of changes in equity (unaudited) (continued) Attributable to equity holders of the Group Minority Total Called up Share Capital Other Accumulated interest share premium reserve reserves losses capital account Note £m £m £m £m £m £m £mChanges in equity for thethree months ended 31 March2005: Balance at 31 December 2004 412.2 111.0 359.7 (0.5) (541.2) (0.1) 341.1 Changes in accounting policy(adoption of IAS 32 and IAS39) Appendix 2 - - - (0.9) (14.4) - (15.3) Restated balance 412.2 111.0 359.7 (1.4) (555.6) (0.1) 325.8 Available-for-saleinvestments: - - - 3.2 - - 3.2 Valuation gains taken toequityCash flow hedges: Gains taken to equity - - - 2.9 - - 2.9 Exchange differences onforeign currency translations - - - 0.9 - - 0.9 Net income recogniseddirectly in equity - - - 7.0 - - 7.0 Profit/(loss) for the period - - - - 9.0 (0.8) 8.2 Total recognised income andexpense for the period - - - 7.0 9.0 (0.8) 15.2 Share-based paymentadjustment to reserves - - - - 1.1 - 1.1 Balance at 31 March 2005 412.2 111.0 359.7 5.6 (545.5) (0.9) 342.1 Consolidated cash flow statement (unaudited) Three months ended Three months ended Year ended 31 31 March 2005 31 March 2004 December 2004 Note £m £m £mCash flows from operating activitiesContinuing operations: Operating profit before taxation 3.6 13.7 61.0 Adjusted for: Depreciation, impairment and amortisation 7.1 8.5 28.4 Impairment losses on loans and advances tocustomers 13.0 16.6 70.1 Gain on sale of investment securities - (1.5) (7.5) Net (increase)/decrease in operatingassets: Loans and advances to banks (189.0) (47.7) 54.8 Derivative financial instruments (16.0) - - Loans and advances to customers (266.8) (110.2) (1,115.6) Securities purchased under agreement to (1.3) - (319.4)resell Accrued income and prepayments 0.1 10.8 16.9 Other assets 70.0 (35.6) 99.4 Net increase/(decrease) in operatingliabilities: Deposits by banks 237.6 (45.7) 772.3 Securities sold under agreements to (131.0) (590.0) (698.7)repurchase Customer accounts 414.5 (34.5) (53.0) Investment securities in issue (209.5) 158.7 383.6 Accruals and deferred income (14.4) (5.3) 29.6 Derivative financial instruments 7.2 - - Other liabilities 226.4 28.9 (133.6) Subordinated liabilities 6.7 - - Group relief/(taxation paid) 2.7 (1.8) 14.1 Net cash inflow/(outflow) from continuingoperating activities 160.9 (635.1) (797.6) Discontinued operations: Net cash (outflow)/inflow from discontinuedoperating activities (168.5) 12.1 76.2 Total net cash inflow/(outflow) fromoperating activities 22.1 (623.0) (721.4) Consolidated cash flow statement (unaudited) (continued) Three months ended Three months ended Year ended 31 31 March 2005 31 March 2004 December 2004 Note £m £m £mCash flows from investing activitiesContinuing operations: Purchase of property, plant and equipment (3.3) (6.2) (13.1)Disposal of property, plant and equipment - (1.2) -Purchase of software intangibles (3.4) (0.6) (37.7)Purchase of investment securities (3,481.0) (1,377.6) (6,447.5)Disposal of investment securities 3,307.2 1,941.1 7,435.3Net cash (outflow)/inflow from continuinginvesting activities (180.5) 555.5 937.0 Discontinued operations: Net cash inflow from discontinued investingactivities 19.4 1.1 90.6 Total net cash (outflow)/inflow frominvesting activities (161.1) 556.6 1,027.6 Cash flows from financing activitiesContinuing operations: Proceeds from issue of share capital - 4.4 5.4Net cash inflow from continuing financingactivities - 4.4 5.4 Discontinued operations: Net cash inflow from discontinued financingactivities - - - Total net cash inflow from financingactivities - 4.4 5.4 (Decrease)/increase in cash and cashequivalents in the period (168.7) (62.0) 311.6 Cash and cash equivalents at the beginningof the period 6 627.7 322.9 322.9 Exchange adjustments 1.6 1.8 (6.9)Cash and cash equivalents at the end of theperiod 6 460.6 262.7 627.6 NOTES TO THE FINANCIAL INFORMATION 1. Significant accounting policies The following is a list of the Group's key accounting policies under IFRS. As aresult of the Group's decision to adopt the IFRS 1 exemption and not restatecomparatives for IAS 32 and IAS 39, certain accounting policies will only applyfrom 1 January 2005 and not to the 2004 comparatives. These policies have beendenoted with an asterisk. Basis of consolidation The financial information of the Group incorporates the assets, liabilities, andresults of the Company and its subsidiary undertakings (including SpecialPurpose Entities) to 31 March 2005. Subsidiary undertakings are all entitiesover which the Group has the power to govern its financial and operatingpolicies so as to obtain benefits from their activities. Inter-companytransactions and balances are eliminated upon consolidation. Associated undertakings and joint ventures An associate is an entity that is neither a subsidiary nor a joint venture, inwhich the Group has the power to exercise significant influence regarding thefinancial and operating policy decisions of the investee. A joint venture is along term contractual arrangement between the Group and one or more otherparties to undertake an economic activity in which the investing partiesexercise joint control. The Group's share of the profits net of losses of associates and of jointventures are included in the consolidated income statement on an equityaccounting basis and its interest in their net assets is included in investmentsin the consolidated balance sheet by reference to its equity holdings. When theGroup's share of losses exceeds its interest in an associate or joint venture,the Group's carrying amount is reduced to nil and recognition of further lossesis discontinued. Financial instruments * The Group classifies its financial assets (excluding derivatives) as eitherloans and receivables or available-for-sale. Other than derivatives, the Groupdoes not classify any of its financial assets as fair value through profit orloss or held-to-maturity. The Group measures all of its financial liabilities at amortised cost, otherthan those derivative financial instruments which have been designated as partof a hedging relationship (see below). a) Loans and receivables and financial liabilities at amortised cost The Group's loans and advances to customers are classified as loans andreceivables. Loans and receivables are non-derivative financial assets withfixed or determinable payments that are not quoted in an active market, andwhose recoverability is based solely on the credit risk of the issuer. TheGroup measures both its loans and receivables and financial liabilities (otherthan derivatives designated as part of a hedging relationship) at amortisedcost, whereby the principal balance is the amount at initial recognition, lessany principal repayments and impairment and adjusted for the cumulativeamortisation calculated using the effective interest method. The effectiveinterest method is a method whereby estimated future cash payments or receiptsare discounted through the expected life of the financial instrument. b) Available-for-sale financial assets Available-for-sale financial assets are non-derivative assets, principally butnot exclusively investment securities, intended to be held for an indefiniteperiod of time. The Group measures these assets at fair value, with subsequentchanges in fair value being recognised in equity except for impairment lossesand foreign exchange gains and losses which are recognised in the incomestatement. Upon derecognition of the asset, or where there is objectiveevidence that the investment security is impaired, the cumulative gains andlosses recognised in equity are removed from equity and recycled to the incomestatement. Impairment losses on loans and advances to customers * The Group assesses its financial assets or groups of financial assets forobjective evidence of impairment at each balance sheet date. An impairment lossis recognised if, and only if, there is a loss event (or events) that hasoccurred after initial recognition and has a reliably measurable impact on theestimated future cash flows of the financial assets or groups of financialassets. a) Assets held at amortised cost Where the financial asset(s) is carried at amortised cost, the Group measuresthe amount of the impairment loss by comparing the carrying amount of the assetwith the present value of its estimated future cash flows. In estimating the future cash flows, the Group looks at the expected cash flowsof the assets and applies historical loss experience of assets with similarcredit risks which have been adjusted for conditions in the historical lossexperience which no longer exist. The estimated future cash flows arediscounted using the financial asset's original or variable effective interestrate and exclude credit losses that have not yet been incurred. The amount of the impairment loss is recognised immediately through the incomestatement and a corresponding reduction in the value of the financial asset isrecognised through the use of an allowance account. b) Available-for-sale financial assets For available-for-sale financial assets, the Group assesses at each balancesheet date whether there is objective evidence that a financial asset or groupof financial assets are impaired. The amount of the loss is measured as thedifference between the asset's carrying amount and the present value ofestimated future cash flows. The rate used to discount the cash flows is theoriginal effective interest rate on the available-for-sale financial asset(s).The amount of the impairment loss is recognised in the income statement. Thisincludes cumulative gains and losses previously recognised in equity which arenow recycled from equity to the income statement. Derivative financial instruments and hedge accounting * a) Derivative financial instruments The Group undertakes transactions in derivative financial instruments, whichinclude currency swaps, interest rate swaps, interest rate caps, forward rateagreements, options, credit derivatives and similar instruments, for non-tradingpurposes. The Group's derivative activities are entered into for the purpose of matchingor eliminating risk from potential movements in interest rates inherent in theGroup's assets, liabilities and positions or for the purpose of reducing creditrisk inherent in the Group's balance sheet. All derivative transactions(including foreign exchange and credit) are for economic hedging purposes and soit is therefore decided at the outset which position the derivative will behedging. Derivatives are reviewed regularly for their effectiveness as hedgesand corrective action taken, if appropriate. Where the derivative has not been designated as a hedge or does not qualify fora hedging relationship in accordance with IAS 39, the derivative is initiallymeasured at fair value, and re-measured at fair value at each balance sheetdate, with the changes in the fair value of the derivative being recognisedthrough the income statement. Fair values are based on quoted market prices inactive markets, and where these are not available, using valuation techniquessuch as discounted cash flow models. Where the fair value of the derivative is positive, the derivative is recognisedon balance sheet as a financial asset. Conversely, where its fair value isnegative, the derivative is recognised on balance sheet as a financialliability. b) Cash flow hedges Where relevant, the Group has elected to designate its derivatives as hedgesagainst the exposure to variability in cash flows of its recognised assets andRelated Shares:
Prudential