23rd Feb 2005 07:01
Egg PLC23 February 2005 Under Embargo until 07.00h, 23rd February 2005 Egg plc Preliminary Results Announcement (Year Ended 31 December 2004) "In the core UK business Egg made an operating profit of £74 million for thetwelve months to 31 December 2004 compared to the £73 million profit for thesame period last year. Increased competition in the credit card and personalloan markets, rising interest rates and the uncertainty created by the potentialsale of Prudential's stake in Egg adversely impacted performance in the firsthalf of 2004 but we are encouraged by a good recovery in the second half. In Q42004 we delivered an operating profit of £20 million and saw unsecured lendingbalances grow strongly again with our new MasterCard proposition, helping us toincrease our share of the credit card market to 6%. "As we said in October, Egg people are now firmly focused on the futuredevelopment of our core UK business and 2004 has seen us take action consistentwith that focus. Following our decision to withdraw from the French market wecan report that the exit process is ahead of schedule and we expect total costswill be in line with our provision of £113 million. In addition we sold ourinvestments business to Fidelity at a small loss, which will releaseapproximately £20 million of capital back to our core banking business in 2005and lastly, in conjunction with Prudential, we have put Funds Direct, ourinvestment wrap platform business, up for sale and booked a £17 millionimpairment charge in the year end accounts against the full carrying value ofthe underlying assets. The Group result for the full year reflecting theseactions is a loss before tax of £107 million. "We are looking forward to 2005 and beyond with confidence. We will continue tosecure the value inherent in our existing unsecured lending business. Inaddition, given the strong brand consideration that exists among both ourcustomers and the wider UK population, we are in the process of broadening ourproduct range and are delighted with our initial success in sales of generalinsurance policies." Paul Gratton, CEO, Egg plc Highlights: Analysis of Group Profit and Loss Account: 2004 2003 £m £mEgg UK 73.6 72.8Egg France (i) (147.8) (89.1)Other International - (4.2)Subsidiaries/Associates/JV's (ii) (21.0) (3.6)Transaction Costs (6.4) -Restructuring Costs (5.1) (10.3)Group Loss before Tax (106.7) (34.4) (i) Includes both the operating loss before tax of £35.0million for the period from 1 January 2004 to 13 July 2004, the date on whichEgg announced its intention to withdraw from the French market and the totalprovision raised for the estimated costs of exiting the French market of £112.8million. (ii) Includes Funds Direct exceptional impairment charge of £17million Group • Group operating income up 19% to £505 million (2003: £424 million)• Group loss before tax of £107 million (2003: £34 million loss)• Group loss per share was 11.1p (2003: 4.0p)• Total group assets of £12.0 billion (2003: £11.7 billion) UK • Egg UK delivered a Q4 operating profit of £20 million (Q4 2003: £16 million) leading to full year operating profit of £74 million (2003: £73 million)• Return on equity was 13.0% (2003: 11.4%)• Net interest margin was 2.5% (2003: 2.5%)• Cost/Income ratio was 48% (2003: 53%)• Unsecured lending balances grew by £1.4 billion (2003: £1.5 billion) leading to period end balances of £6.2 billion (2003: £4.8 billion)• Personal loan drawdowns were £2.2 billion, up 30% on 2003 (£1.7 billion)• MasterCard launched in June 2004 with year end balances of almost £140 million• Credit quality remains good and benchmarks continue to show Egg's card portfolio significantly outperforming industry norms France • Unsecured lending, savings and brokerage businesses have all been sold• Exit expected to be completed within the £113 million (€170 million) provision. Chief Executive Paul Gratton said: "Our core UK business has delivered a good set of results with a particularlyencouraging performance in the second half of 2004. We made an operating profitof £74 million for the twelve months to 31 December 2004 compared to the £73million profit for the same period last year. This represents a solid resultconsidering the increased competition and rising interest rates that haveimpacted the credit card and personal loan markets and the uncertainty createdby the potential sale of Prudential's stake in Egg. "We have seen strong net growth in unsecured lending of £1.4 billion in thetwelve months taking total balances to £6.2 billion up 30% on last year end.The successful cross selling of personal loans into our credit card customerbase has been complemented by the MasterCard proposition launched in June, whichis proving popular and has now achieved almost £140 million in balances. "Revenues in the UK in 2004 of £497 million grew by almost 20% compared to theprevious year, with non-interest income providing the majority of the increase.Margins were under pressure throughout the year from both increased competition,especially in the first half, and rising base rates. Against this background wewere pleased that net interest income grew by almost 10% year on year. Otherincome grew impressively, up 34% to £209 million, with a particularly strongshowing in the final quarter. Record loan disbursements and good card balancegrowth, with associated revenue from cross sales of insurances, were the mainfactors in this result. We are keeping tight control on costs and creditquality remains good with increased provision levels reflecting the continuinggrowth in the unsecured lending portfolio, the stage in the life cycle of thecard and loan books and the increasing proportion of personal loans in the book. "The Group result for the full year is a loss before tax of £107 million, whichincludes £148 million incurred in respect of Egg France. Following our decisionto withdraw from that market we have sold the unsecured lending, savings andbrokerage portfolios and we have now closed the current account business in2005. Our expectations with regard to the total exit costs remain unchanged.In addition, consistent with our stated intention to focus on our successful UKbusiness we have sold our investments business to Fidelity at a small loss,which will release approximately £20 million of capital back to our core bankingbusiness in 2005 and we have, in conjunction with Prudential, put Funds Direct,our investment wrap platform business, up for sale and booked a £17 millionimpairment charge in Q4 2004 against the full carrying value of the underlyingassets. Outlook "Looking forward we have a highly attractive unsecured lending portfolio withthe opportunity to grow it further and deliver healthy returns. In addition wewill be building on our strong relationship with our customers and theencouraging levels of their consideration to buy other products from Egg asevidenced by the strong growth in general insurance cross sales in the fourthquarter. To this end we will look to offer a broader range of products andservices in 2005 and beyond." Overview of Group Results Summary profit and loss account by quarter (Unaudited) Q4 2004 Q3 2004 Q2 2004 Q1 2004 Q4 2003UK £m £m £m £m £mNet Interest Income 73.3 70.4 70.1 73.7 72.5Other Operating Income 66.3 48.3 49.9 44.7 39.4Egg UK Operating Income 139.6 118.7 120.0 118.4 111.9Operational and Administrative Expenses (40.7) (34.5) (38.4) (41.3) (39.7)Brand and Marketing Costs (12.4) (9.0) (10.6) (9.6) (8.5)Development Costs (6.2) (5.2) (4.7) (5.9) (4.5)Depreciation and Amortisation (7.1) (4.3) (5.6) (5.2) (6.5)Amounts written off Fixed Asset - - - - (4.3)InvestmentProvisions for Bad and Doubtful Debts (52.8) (47.1) (41.3) (41.2) (32.3)Egg UK Operating Profit 20.4 18.6 19.4 15.2 16.1FranceNet Interest Income 0.8 1.8 2.1 1.9 1.5Other Operating Income (0.3) 0.9 (0.1) - (0.2)Egg France Operating Income 0.5 2.7 2.0 1.9 1.3Operational and Administrative Expenses (10.1) (8.5) (9.9) (9.1) (10.4)Brand and Marketing Costs - - (0.9) (1.6) (3.2)Development Costs - - (0.2) (0.4) (0.9)Depreciation and Amortisation (0.4) (3.1) (2.0) (1.7) (2.1)Provisions for Bad and Doubtful Debts (5.8) (3.9) (5.5) (4.9) (4.3)Utilisation of Exit Cost Provision 15.8 10.1 - - -Egg France Operating Loss - (2.7) (16.5) (15.8) (19.6)Other International - - - - (0.7)Subsidiaries/Associates/JV's (18.1) (1.2) (1.0) (0.7) (0.2)Transaction Costs (2.7) (1.1) (1.3) (1.3) -Provision for France Exit Costs - (112.8) - - -Restructuring Costs (3.0) - 0.2 (2.3) (5.1)Group Profit/(Loss) Before Tax (3.4) (99.2) 0.8 (4.9) (9.5) Egg UK Revenues Net interest income in Q4 2004 was £73.3 million increasing in line withexpectations on the back of the re-pricing of the credit card portfolio offsetslightly by higher funding costs arising from the increase in savings balancesat bonus rates. For the full year net interest income increased by almost 10%to £287.5 million compared to 2003 on the back of growth in retail balances andholding our margins flat, which is a good result against the background of stiffcompetition for card balances and the margin pressure caused by base rate risesduring 2004. Egg saw significant growth in non-interest income in Q4 2004 to £66.3 million(Q3 2004: £48.3 million). The quarterly increase reflected strong loan salesand increases in card balances with higher revenues emerging from commission forsales of associated insurances. This accounted for almost £10 million of theincrease quarter on quarter. Sales of general insurance policies in Q4 werealso much higher adding £1.5 million to revenues. Q4 also saw £5.8 million ofprofit on disposal of investment securities (Q3: £0.4 million loss) with fullyear profit of £7.5 million in 2004 (2003: £5.3 million). Looking at 2004 as awhole, non-interest income grew strongly by 34% to £209 million compared to2003. This excellent growth rate was driven by record personal loan sales withresulting commission income on selling associated insurances. In 2005 we expect other income to continue to grow but the rate of growth willslow compared to 2004. This primarily reflects a tactical decision in Decemberto tighten lending criteria at this stage in the interest rate and creditcycles. This is expected to lower our personal loans sales volumes inparticular with resulting impact on commission income on associated insurances. Costs Operational and administrative costs at £40.7 million for the quarter remaintightly managed (Q3: £34.5 million). The quarterly variance is predominantlydue to the £4.4 million release in Q3 in the provision no longer required forthe cost of the various share schemes in operation to incentivise Egg staff.For the full year operational and administrative costs were up 8% to £154.9million (2003: £143.7 million). This compares to revenue growth of 18% and is akey factor in the improvement in the cost/income ratio to 48% from 53%. Movingforward we expect to achieve further economies of scale as we focus on our coreUK business and continue to target a cost/income ratio of 40% by 2007. Brand and marketing costs were £12.4 million in Q4 2004 (Q3: £9.0 million).This reflected a tactical increase in credit card marketing activity after thetraditionally slower summer season in Q3 and further investment in the brand andmarketing effort supporting the increased sales of general insurance and thebonus savings accounts. Sales performance on cards was also satisfactory with119,000 new accounts acquired in the final quarter and strong growth in balances(£280 million). The full year spend reached £41.6 million (2003: £33.9 million)which was in line with our revised expectations following the strong competitionexperienced in the first half of the year. Development costs were £6.2 million for the quarter, a slight increase on Q3(£5.2 million) in line with our plans bringing the total expenditure for 2004 to£22.0 million, up £2.1 million on the previous year. The increase reflects theinvestment in systems and processes in preparation for IFRS, Basel 2 and otherregulatory changes. Depreciation and amortisation at £7.1 million in Q4 2004 reflects the fact thatthe Q3 charge was understated due to some errors made on transition of the fixedasset register to a new system in August. The full year charge of £22.2 millionis higher than 2003 (£18.3 million) reflecting the investment in assets in theperiod. Bad Debt Provisions Credit quality remains good and the increasing provision levels reflect thecontinuing growth in the unsecured lending portfolio, the stage in the lifecycle of the card and loan books and the increasing proportion of personal loansin the book. The Q4 charge for bad and doubtful debts of £52.8 million was inline with expectations given the strong growth in lending balances in thequarter. Similarly the full year charge of £182.4 million (2003: £126.7million) reflects the increased balance growth and the greater mix of loans inthe unsecured book with the charge as a percentage of 12 month lagged assetsremaining stable at 3.8% year on year for the unsecured lending portfolio.However within the portfolio we have seen the credit card bad debt chargeimprove to 2.4% of lagged assets in 2004 driven by higher recoveries thanexpected (2003: 3.1%) and the personal loan charge deteriorate to 6.2% of laggedassets due to the stage in the life cycle of the portfolio given the relativeimmaturity of the book (2003: 5.4%). Moving forward the impact of our decisionto tighten lending criteria, allied to the fact that the personal loan book willhave matured further should see the charge as a percentage of lagged assetsreduce significantly on loans. This should more than offset the projected smallincrease in credit card charges, given the benefit of the improved recoveriesperformance has now been reflected in the provisions. At the year end bad debt provisions on the balance sheet represented 3.2% ofassets compared to 2.8% in 2003 with the higher mix of unsecured borrowing ascompared to mortgages in the retail asset portfolio, the main factor behind theincrease. Egg France and Provision for Exit Costs In Q4 2004 the operating losses in France were all charged to the exit costsprovision and thus had nil impact on the profit and loss account. Of the £113million (€170 million) provided in July 2004, £96 million has now been utilised(including exchange adjustments of £4 million) leaving £17 million on thebalance sheet to cover the remaining exit costs which include closing outvarious contracts, completing the handover of the lending and savings businessesand winding down the current account business. We expect the total exit coststo remain in line with our provision. Subsidiaries/Associates/JV's The £18.1 million net loss in Q4 2004 primarily reflects the impairment chargeof £16.6 million booked against the full carrying value of Funds Direct'sunderlying assets following the decision, in conjunction with Prudential, to putthe company up for sale. On consolidation £0.8 million of this charge isreversed within the minority interest calculation. The full year charge of £21.0 million reflects £19.7 million for Funds Direct(including the £16.6 million impairment charge), a loss after goodwillamortisation of £1.6 million on IfOnline and a small profit from MarlboroughStirling Mortgage Services. Transaction Costs These costs relate to incremental expenses incurred in relation to the processwhereby Prudential was considering proposals for its shareholding in Egg. TheQ4 costs of £2.7 million include the final settlement of all legal andinvestment banking fees (£1.1 million) and retention bonuses for the managementteam (£1.0 million). The largest cost within the £6.4 million for the full yearwas the loyalty bonus scheme for all Egg UK people that paid out in October andwas used as a retention tool during the auction process. Restructuring Costs As previously announced the £3.0 million cost in Q4 relates to the migration andother exit costs associated with the transfer of our funds supermarket business,which has assets under management of around £170 million, to FidelityFundsNetwork and this will lead to future annual savings of a similar amount.In addition this disposal will free up approximately £20 million of capitalduring 2005 to be reallocated to the core banking business in the UK. The remaining £2.1 million within the full year charge related to exit costs onone of our leased properties within Egg France in Q1 2004 prior to the decisionto withdraw from the market. Preparation for IFRS Following the adoption of Regulation No. 1606/2002 on the 19 July 2002 by theEuropean Parliament, Egg, along with all other European listed entities, will berequired to prepare consolidated financial statements in accordance withInternational Financial Reporting Standards (IFRS) as endorsed by the EuropeanUnion (EU) from 1 January 2005. Egg will apply IFRS in its annual report for the year ended 31 December 2005,and will prepare 2004 comparatives under IFRS, excluding the impact of IAS 32and 39. The Group's first reporting period under IFRS will be for the threemonths ended 31 March 2005. The introduction of IFRS will not significantly affect Egg's underlying businessor its cash flows. However, it does represent a significant change to itsaccounting and reporting. The following is a summary of the likely key impactsof these changes. For this purpose, we have assumed that all existing standardsfrom the International Accounting Standards Board (IASB) will be fully endorsedby the EU for the year ended 31 December 2005. Wholesale assets will be classified as available for sale and held at fair valuewith unrealised gains and losses reflected in equity rather than the incomestatement. Liabilities will be measured at amortised cost with no effectcompared to UK GAAP except where set-up fees had been previously expensed butshould now, under IFRS, be capitalised and amortised. Derivatives will be the only products for which changes in fair value willaffect the result for the year. However, for interest rate swaps whicheconomically hedge fixed rate personal loans, by matching them against thevariable rate savings book, Egg will apply macro cash flow hedge accountingunder IAS 39. Changes in the fair value of these hedges will be recorded directto equity in the balance sheet and not the income statement (except wherehedging is ineffective). The impact of the other IAS 39 changes to the accounting for retail productssuch as adjustments for effective interest rate calculations, dormant accounts,and bad debts is dependant on a range of factors but, based on currentindications, is expected to be relatively neutral overall. Of the remaining standards, IFRS 2 on share-based payment represents the biggestchange. Egg will now recognise an annual charge in the profit and loss accountover the relevant vesting period based on the fair value of the share and optionschemes as calculated using option pricing models at grant date. Overall, we anticipate that the impact of IFRS on earnings in 2005 will not bematerial compared to the current market consensus profit before tax for Egg's UKbusiness, which has been prepared on a UK GAAP basis. In addition the impact onshareholders' funds on transition is expected to be a reduction of less than 5%.The impact on regulatory capital will likely be even lower if as expected thefair value adjustments are excluded by the FSA from the calculation ofrisk-asset ratios. Egg UK Summary New Business Figures by Quarter Q4 Q3 Q2 Q1 Q4 2004 2004 2004 2004 2003 Products £m £m £m £m £m - Egg Card Balance Growth 280 215 81 (5) 122 - Egg Personal Loan Drawdowns 599 496 574 563 526 - Egg Mortgage Drawdowns 61 54 57 60 58 - Egg Savings Flows (net) 193 (339) 244 (47) (229) Cumulative Figures 31 Dec 31 Dec 2004 2003 Product balances £m £m - Egg Card 3,578 3,015 - Egg Savings 6,215 6,164 - Egg Personal Loans 2,618 1,773 - Egg Mortgages 1,102 1,197 - Prudential Savings 121 185 - Prudential Mortgages 591 798 - Prudential Personal Loans 1 2 Egg UK Customers Egg has 3.1 million customers who are defined as "marketable" based on theiractivity levels. Moving forward, in line with our strategy, we are focused onhow we grow lending balances and fee income through a mix of both acquisitionand cross sales rather than by customer acquisition as the key growth metric. Unsecured Lending Net lending balance growth was an impressive £495 million in Q4 (Q3: £362million) bringing the total net increase to £1.4 billion for the year. Withinthis, credit card balance growth was a £280 million net increase in the fourthquarter building on the momentum established in Q3 and reflects the success ofour new MasterCard offer, stronger acquisition of new Visa Card customers andthe continuing impact of our retention programme which includes the anniversarybalance transfer offer to existing customers. Q4 also saw record volumes ofpersonal loan sales with almost £600 million disbursed to take the year endtotal to £2.2 billion. The product remains predominantly cross sold to cardcustomers. We have had a strong start to 2005 on card volumes, acquiring 75,000 newaccounts in January, which was our highest month ever. Reflecting the tacticalchanges we have made to credit scorecards, loan volumes are, as expected,tracking behind the record levels achieved in Q4. The impact of these twofactors is likely to lead to lower profits in the first half of 2005 as comparedto recent quarterly trends but to substantially increased profits in the secondhalf. Savings Q4 2004 saw a net inflow on Egg deposits of £193 million. This was in line withour expectations following the re-introduction of the bonus account in Octoberand gives an overall result of a £51 million net inflow for the full yearcompared to £1,545 million net outflow last year. The reduction in outflowsreflects the success of our tactical use of the bonus account offering as partof Egg's funding strategy. Investments We announced in October 2004 an agreement with Fidelity whereby from Q1 2005,Egg will host Fidelity's FundsNetwork on its website as its exclusive investmentplatform. This partnership will significantly increase the level of funds Eggcan offer its customers to over 900 funds from 56 managers, from its currentlevel of 220 funds from 25 managers. The new platform will also offer enhancedtools, information and services to all Egg Invest users. As part of this agreement we have agreed to sell our existing funds supermarketbusiness, which has assets under management of around £170 million, to FidelityFundsNetwork. The transaction has resulted in one-off costs of £3 million andwill lead to annual savings of a similar amount moving forward. Insure Egg Insure had an excellent quarter with almost 60,000 new policies soldreflecting an increased focus and some marketing effort. This compares to ourprevious run-rate of 15,000-25,000 a quarter. These were predominantly traveland motor insurance policies. This is consistent with our intention to extendour product range given research in our customer base shows a high propensity tobuy general insurance policies from Egg. We will continue to raise awarenessof our general insurance product range in 2005. Mortgages The fourth quarter continued the trend seen over the past year of approximately£60 million of disbursements each quarter. The Egg Discount Tracker product isone of the best value mortgage offers in the market over both the short and thelong term and is consistent with Egg's brand positioning. Financial Review This section analyses Group results for the twelve months ended 31 December 2004compared to the same period last year, as set out in the consolidated profit andloss account and balance sheet. Net interest income increased by 9% to £294 million for the year (2003: £269million). Margins have remained stable at 2.5% and the increase reflects thegrowth in interest earning assets during 2004 which were also up 9% to £11.5billion. Other operating income increased by £56 million (36%) to £211 million. This haslargely resulted from the continued success of our cross sales strategy inunsecured personal loans, with commissions and profit share from sellingcreditor insurance on loans in the UK up by £32 million (31%) to £110 million.In addition, non-interest income on credit cards in the UK increased by £17million to £93 million reflecting the larger book and the reduction in cashbackduring the year. Operational and administrative expenses increased by £5 million (2%) to £208million. This has resulted from a combination of factors; there has been anincrease in the core UK operational costs of £11 million (8%) demonstratingeconomies of scale, offset by savings of £6 million in France reflecting theincreased cost control as the business is being wound down. Elsewheretransaction and restructuring costs (excluding France exit costs) were £10million in each year. Brand and marketing costs have decreased by £16 million (25%) to £44 million.This reflects the fact that Egg France reduced its investment in marketing by£24 million given the decision to withdraw from the market. In the UK costswere £8 million higher than in 2003 reflecting both the competitive market forunsecured lending and marketing support for the bonus savings accounts andgeneral insurance products. Development costs have decreased by £3 million (12%) to £23 million. There wasa decrease in costs relating to France of £2 million. In the core UK businesscosts were £2 million higher in 2004 due to preparations for the additionalregulatory burden but this was offset by the fact that R&D expenditure in theUSA of £2 million was not repeated this year. Depreciation and amortisation increased by £19 million (72%). Within the UK,depreciation has increased by £4 million in line with expectations following theoccupation of an additional building in Derby and the investment in our CustomerData Warehouse and new finance, risk and treasury systems as part of preparationfor Basel 2 and IFRS. In addition there has been an exceptional impairmentcharge of £17 million to write down the carrying value of goodwill and fixedassets related to Funds Direct. The charge for bad and doubtful debts was £203 million (31 December 2003: £137million). The increase in this figure over the previous year has predominantlyresulted from strong growth in the UK personal loan book due to the success ofthe cross-sales strategy and the increasing mix of unsecured lending in theoverall retail asset portfolio. Our delinquency levels on cards remain wellbelow the industry average. The Egg France bad debt charge doubled to £20million in line with growth in the book prior to the sale of the unsecuredlending business to Banque Accord. Provision for loss on termination of discontinued operation of £113 millionrepresents the provision for exit costs booked in July on announcement of theintention to exit the French market. The main components of the cost are theprovision for future operating losses of £32 million of which £26 million hasbeen utilised in the period to 31 December 2004, the loss on disposal of thelending, savings and brokerage businesses of £39 million, redundancy costs of£25 million, a write down of goodwill and fixed assets of £9 million and othercosts of £8 million including costs of exiting various contracts. The tax credit was £14 million (31 December 2003: £1 million). The increase inthe tax credit reflects the higher group loss following the France exit costsprovision. Loss attributable to ordinary shareholders after tax and minority interests was£91 million compared to a loss of £33 million for the twelve month period to 31December 2003. Loss per share was 11.1p compared to 4.0p for the twelve month period to 31December 2003. Total assets increased to £12.0 billion as at 31 December 2004 (31 December2003: £11.7 billion) mainly due to the ongoing growth in UK unsecured lendingbalances partly offset by a reduction in wholesale assets as part of our balancesheet and capital management strategies. Total liabilities increased to £11.7 billion as at 31 December 2004 (31 December2003: £11.3 billion), largely due to a further securitisations of credit cardsof £750 million in 2004 offset by a net reduction in wholesale funding ofapproximately £300 million. Capital ratios for Egg Banking plc at 31 December 2004 were 8.6% (tier 1) and14.3% (total) (31 December 2003: 10.0% (tier1) and 17.5% (total)). On aconsolidated basis the total capital ratio was 12.5% (2003: 17.5%). Thereduction in capital ratios predominantly reflects the provision for exit costsin France and impairment of Funds Direct. Egg remains well capitalised and the Board believes that future retained profitsand other capital management options available to Egg will enable us to grow thebusiness in line with our plans and maintain the bank's tier 1 capital ratio inour target range of 7% to 9%. During 2005, we intend to undertake a restructuring of share capital andreserves with a view to eliminating the Company's profit and loss deficitagainst other reserves including the share premium account. This restructuringwill allow the payment of dividends as and when sufficient distributablereserves have been generated and the Board considers it to be in the bestinterests of the Company. This process will require approval of a SpecialResolution to be presented to the Company's shareholders at the forthcomingAnnual General Meeting and, following that, approval by the High Court. Consolidated profit and loss account Continuing Discontinued 2004 Continuing Discontinued 2003 £m £m £m £m £m £mInterest receivable 902.9 15.4 918.3 821.8 9.0 830.8Interest payable (615.7) (8.8) (624.5) (558.6) (3.4) (562.0)Net interest income 287.2 6.6 293.8 263.2 5.6 268.8Other operating income 210.4 0.5 210.9 156.6 (1.3) 155.2Operating income 497.6 7.1 504.7 419.6 4.4 424.0Administrative expenses - operational and (168.0) (39.7) (207.7) (157.3) (45.3) (202.6)administrative expenses - brand and marketing costs (41.7) (2.4) (44.1) (34.0) (26.0) (60.0) - development costs (22.0) (0.6) (22.6) (22.3) (3.4) (25.7) (231.7) (42.7) (274.4) (213.6) (74.7) (288.3)Depreciation and amortisation - non-exceptional (22.4) (7.3) (29.7) (18.4) (8.5) (26.9) - exceptional (16.6) - (16.6) - - - (39.0) (7.3) (46.3) (18.4) (8.5) (26.9)Provisions for bad and (182.4) (20.1) (202.5) (126.7) (10.3) (137.0)doubtful debtsAmounts written off fixed - - - (4.3) - (4.3)asset investmentUtilisation of provision for - 25.9 25.9 - - -loss on termination ofdiscontinued operationsOperating profit/(loss) 44.5 (37.1) 7.4 56.6 (89.1) (32.5)Provisions for loss on - (112.8) (112.8) - - -termination of discontinuedoperationsShare of operating profit of 0.3 - 0.3 0.1 - 0.1joint venturesShare of associates losses (1.6) - (1.6) (2.0) - (2.0)Profit/(loss) on ordinary 43.2 (149.9) (106.7) 54.7 (89.1) (34.4)activities before taxTax credit on loss on ordinary 13.9 1.4activitiesMinority interests 1.4 0.2Retained loss for the (91.4) (32.8)financial yearLoss per share (pence per (11.1p) (4.0p)share) Consolidated statement of total recognised gains and losses 2004 2003 £m £mRetained loss for the financial year (91.4) (32.8)Currency translation differences on foreign currency net (7.4) 4.4investmentsPrior year adjustment to reserves in respect of recognition - (2.2)of own shares held for Employee Share Option Plans as aresult of UITF 17 (Revised) and UITF 38 see note (a)Total recognised losses related to the year (98.8) (30.5) Note on prior year adjustment:Total recognised gains and losses related to year as above (98.8)Prior year adjustment (see note (a)) (2.2)Total losses recognised for 2004 (101.0) Consolidated balance sheet 2004 2003 Restated £m £mAssetsCash and balances at central banks 14.0 13.3Loans and advances to banks 615.9 329.6Securities purchased under agreements to resell 319.4 -Loans and advances to customers 7,642.0 6,718.0Debt securities 3,119.7 4,156.5Shares in joint ventures 1.2 0.9Investment in associated undertakings 3.8 5.4Intangible fixed assets - 6.1Tangible fixed assets 96.5 95.3Other assets 129.1 268.6Deferred tax 28.2 23.3Prepayments and accrued income 58.3 75.5Total assets 12,028.1 11,692.5 LiabilitiesDeposits by banks 2,352.0 1,610.4Securities sold under agreements to repurchase 130.5 829.2Customer accounts 6,607.4 6,451.7Debt securities issued 1,806.5 1,422.9Other liabilities 110.5 340.1Accruals and deferred income 215.0 153.7Provisions for liabilities and charges 16.8 -Subordinated liabilities- Dated loan capital 450.8 450.8Total liabilities 11,689.5 11,258.8 2004 2003 Restated £m £mShareholders' fundsCalled up share capital 412.2 410.3Share premium account 111.0 107.5Capital reserve 359.7 359.7Profit and loss account (544.2) (445.0)Shareholders' funds (all attributable to equity 338.7 432.5interests)Minority interests (equity) (0.1) 1.2Total liabilities and shareholders' funds 12,028.1 11,692.5 Figures for 2003 have been restated where necessary following implementation ofUITF Abstract 17 (Revised) "Employee Share Schemes" and UITF Abstract 38, "Accounting for ESOP Trusts" (see note a)) Consolidated Cash Flow Statement 2004 2003 £m £mNet cash outflow from operating activities (817.1) (259.9)Return on investments and servicing of finance (32.6) (25.9)Taxation:Group relief received/(tax paid) 15.0 (3.8)Capital expenditure and financial investment:Sale proceeds on sale of France unsecured loan book 96.5 -Purchase of tangible fixed assets (59.6) (46.7)Proceeds on sale of France tangible fixed assets 3.1 -Restricted share plan purchase of shares - (3.0)Purchase of investments (6,447.7) (5,960.7)Sale of investments 7,435.3 5,996.9Net cash inflow/(outflow) from capital expenditure 1,027.6 (13.5)and investmentFinancing:Issue of dated loan capital - 249.1Issue of share capital 5.4 0.4Net cash inflow from financing 5.4 249.5Increase/(decrease) in net cash 198.3 (53.6) Reconciliation of operating profit/(loss) to net operating cash flows 2004 2003 £m £mOperating profit/(loss) 7.4 (32.5)Provision for loss on termination of discontinued (60.5) -operationsDecrease in prepayments and accrued income 16.1 0.6Increase in accruals and deferred income 64.1 8.1Provision for bad and doubtful debts 80.1 64.2Profit on sale of financial investments (7.5) (5.3)Depreciation, impairment and amortisation 68.8 47.6Interest on subordinated liabilities 32.6 25.9Net increase in loans and advances to banks and customers (1,195.9) (1,379.0)Net (increase)/decrease in securities purchased under (319.4) 150.0agreements to resellNet increase/(decrease) in deposits by banks and customer 860.4 (455.2)accountsNet (decrease)/increase in securities sold under (698.7) 829.2agreements to repurchaseNet increase in debt securities in issue 383.6 408.0Net decrease/(increase) in other assets 92.6 (47.1)Net (decrease)/increase in other liabilities (161.2) 165.8Net decrease/(increase) in settlement balances 27.2 (44.9)Other non-cash movements (6.8) 4.7Net cash outflow from operating activities (817.1) (259.9) Reconciliation of movement in shareholders' funds 2004 2003 £m £mAt beginning of year - as previously stated 434.7 460.2Prior year adjustment for UITF 38 (note a)) (2.2) (2.2)At beginning of the year as restated 432.5 458.0Retained loss for the financial year (91.4) (32.8)Exchange and other adjustments (6.7) 4.5Increase in share capital 1.9 0.2Share premium 3.5 0.2Awards under incentives schemes (1.1) 2.4Balance at end of year 338.7 432.5 Notes on financial information a) The financial information has been prepared on the basis of theaccounting policies set out in the Notes to the Financial Statements within theEgg plc Annual Report and Accounts for the year ended 31 December 2004. TheGroup has adopted accounting policies which, in the opinion of the Directors,are the most appropriate to its circumstances during the year. In particularit has adopted UITF 17 (Revised) "Employee Share Schemes" and UITF Abstract 38 "Accounting for ESOP Trusts" during the year to reflect new guidance on theaccounting for Employee Share Option Plan trusts. The impact of this was toclassify own shares of £2.2 million to the profit and loss reserves inshareholders' funds. The comparative balance sheet has been restatedaccordingly. There has been no material impact on the profit for the year orprior year. b) The financial information set out above does not constitute the Group'sstatutory accounts for the years ended 31 December 2004 or 2003, but is derivedfrom those accounts. Statutory accounts for 2003 have been delivered to theregistrar of companies, and those for 2004 will be delivered following Egg plc'sannual general meeting. The auditors have reported on both those sets ofaccounts: their reports were unqualified and did not contain statements undersection 237(2) or (3) of the Companies Act 1985. c) Group operating loss is stated after charging provisions for bad anddoubtful debts of £202.5 million (31 December 2003: £137.0 million). The balancesheet provisions for bad and doubtful debts and movements thereon were: General Specific Total £m £m £mBalance at 1 January 2004 51.2 142.2 193.4Exchange adjustments - 0.4 0.4Amounts written off (124.4) (124.4)New and additional provisions 7.5 195.0 202.5Net charge against profit and loss 7.5 195.0 202.5Release of provision on disposal of Francecredit card and personal loan book (2.2) (19.4) (21.6)Balance at 31 Dec 2004 56.5 193.8 250.3Balance at 31 Dec 2003 51.2 142.2 193.4 Provisions at 31 December 2004 were 3.2% of advances to customers (31 December2003: 2.8%). d) The movement on the provision for loss on termination of discontinuedoperations in France is as follows: 2004 2003 £m £mOpening balance - -Provision raised 112.8 -Amounts utilised (99.8) -Exchange adjustments 3.8 -Closing balance 16.8 - The amounts utilised represent operating losses of £25.9 million, the loss ondisposal of the lending, savings and brokerage businesses of £39.3 million,write off of goodwill and fixed assets of £9.6 million and redundancy costs of£25.0 million. e) The taxation charge assumes a UK corporation tax rate of 30% (2003: 30%)and comprises: 2004 2003 £m £mTax credit 13.9 1.4 f) Loss per share of 11.1p (31 December 2003: 4.0p) is calculated bydividing the loss after tax for the financial year of £91.4 million (31 December2003: £32.8 million) by the weighted average of 820 million (31 December 2003:815 million) ordinary shares in issue during the year. g) Egg's share of the gross assets and liabilities in respect of jointventure undertakings is as follows: 2004 2003 £m £mGross assets 2.6 2.9Gross liabilities (1.4) (1.9)Shares in joint ventures 1.2 1.0 h) The table below analyses the Group results for the 12 months to 31December 2004 by the geographical area in which business is generated. Certaincosts incurred in the UK on behalf of France are included in the results ofFrance. UK France Group £m £m £m Interest receivable 902.9 15.4 918.3Fees and commissions receivable 220.7 4.5 225.2Other operating income 14.9 - 14.9Gross income 1,138.5 19.9 1,158.4 Operating profit/(loss) 44.5 (37.1) 7.4Provision for loss on termination of discontinued operations - (112.8) (112.8)Share of operating profit of joint venture 0.3 - 0.3Share of operating loss of associates and amortisation of goodwill (1.6) - (1.6)Profit/(loss) before taxation 43.2 (149.9) (106.7) Average Balance Sheet (UK Business Only) (£m, except percentages) 31 December 31 December 2004 2003 Avg. Avg. Avg. Avg. Balance Rate % Balance Rate %AssetsWholesale assets 4,212 4.51 4,345 4.11Mortgages 1,835 5.09 2,210 4.74Personal loans 2,228 7.25 1,326 8.03Credit cards 3,175 9.61 2,650 9.59Total average interest-earning assets 11,450 6.55 10,531 6.12 Fixed and other assets 155 159Total assets 11,605 10,690LiabilitiesCustomer accounts 6,280 3.90 7,149 3.32Wholesale liabilities and subordinated debt 4,540 4.67 2,875 5.00Total average interest- bearing liabilities 10,819 4.22 10,024 3.80Other liabilities 387 234Total liabilities 11,207 10,258Shareholders' funds 398 432Total liabilities and 11,605 10,690shareholders funds Note: The above analysis represents interest earned or borne on on-balance sheetassets and liabilities only. Average Yields (UK Business Only) 31 December 31 December 2004 2003 Average rate Average rate % %Interest income as a percentage of average 6.55 6.12interest-earning assetsInterest expense as a percentage of average 4.22 3.80interest-bearing liabilitiesInterest spread 2.33 2.32Net interest margin (includes interest on off-balance 2.50 2.50sheet items) Note: This press release contains certain forward-looking statements with respect tothe financial condition, results of operations, and businesses of the Egg Group.These statements and forecasts involve risk and uncertainty because theyrelate to events that depend upon circumstances that will occur in the future.There are a number of factors that could cause actual results or developments todiffer materially from those expressed or implied by these forward-lookingstatements and forecasts. The statements have been made with reference toforecast price changes, economic conditions and the current regulatoryenvironment. Nothing in this press release should be construed as a profitforecast. Ends For further information: Media: Egg Press Office (main number): 020 7526 2600 Mark Maguire: 020 7526 2651 / mobile: 07771 808 624 Analysts / Investors: Kieran Coleman: 020 7526 2648 / mobile: 07711 717 358 Notes to Editors: 1. Egg plc is the world's largest pure online bank, providing financial services products through its Internet site and other distribution channels. 2. Egg plc floated on 12 June 2000 and is listed on the London Stock Exchange. Prudential plc holds 78% of the share capital. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Prudential