27th Jul 2005 07:01
Egg PLC27 July 2005 Under Embargo until 07.00h, 27th July 2005 Egg plc Interim Results - 30 June 2005 "Operating profit in the second quarter was £13 million for the core UK businesson the new IFRS basis of reporting leading to a half year profit of £23 million. The overall Group profit, including discontinued activities, was £15 millionfor the six months ended 30 June 2005. "Egg's UK credit card business has performed well, with balance growth of 5% inthe first half compared with 2% growth in the industry. As planned, personalloan sales have reduced in the period from the record levels seen in 2004following our actions last December to tighten our lending criteria. "Revenues in the UK for the half year grew by 5% compared with the same periodlast year with the higher card income from the bigger book being offset somewhatby our deliberate reduction in personal loan sales volumes and hence the lowerincome generated from selling associated insurances. Costs are falling,reducing by £10 million (8%) when compared with the first half in 2004 and ourcost/income ratio has improved to 44% in the first six months this year from 51%in the same period last year. This is in part due to the restructuring exercisecompleted this quarter which has aligned our cost base to our strategy which isre-focused on the core business and the needs of the UK consumer. We intend tolaunch a number of innovative propositions aimed at helping customers to benefitfrom managing, using and understanding their money more effectively. "Credit quality remains strong and as expected the impairment charge reducedslightly in the second quarter. Also, as we noted in April, we expect a lowercharge in the second half of the year as the benefits from the changes we madeto our loans scorecard in December 2004 and in our collections function continueto emerge. "Overall the result for the first half was in line with our expectations and weremain confident about the remainder of the year." Paul Gratton, CEO, Egg plc Highlights: Analysis of Group Income Statement (adopted IFRS Basis): Half-year to Half-year to 30 June 2005 30 June 2004 (i) £m £m Egg UK 23.0 35.8Egg France (ii) 5.0 (31.8)Subsidiaries/Associates/JV's (iii) (3.1) (1.0)Transaction Costs - (2.6)Restructuring Costs (9.9) (2.1) Group Profit/(Loss) before Tax (including discontinuedactivities) 15.0 (1.7) (i) UK GAAP comparatives restated to IFRS basis (excluding IAS 32 and IAS 39 which are only effective from 1 January 2005). (ii) Profit in 2005 reflects release of surplus in the provision for exit costs (£3.5 million) and foreign exchange gains (£1.5 million). (iii) Q1 2005 includes Funds Direct exit cost provision of £3.3 million. Group • Operating income up 5% to £251 million (H1 2004: £239 million) • Group profit before tax (including discontinued activities) of £15.0 million (H1 2004: £1.7 million loss) • Retained profit after tax of £10.7 million (H1 2004: £0.3 million retained loss) • Group earnings per share of 1.3p (H1 2004: Nil per share) • Total group assets of £11.4 billion (H1 2004: £12.2 billion) UK • Egg UK delivered a H1 operating profit of £23.0 million (H1 2004: £35.8 million) • Net interest margin was 2.45% (H1 2004: 2.56%) • Cost/Income ratio was 44% (H1 2004: 51%) • Card balances grew by £191 million (H1 2004: £76 million) leading to period end balances of £3.8 billion (H1 2004: £3.1 billion) • Personal loan drawdowns were £0.9 billion (H1 2004: £1.1 billion) 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 in the first quarter. • Decision taken to raise exit costs provision of £3.3 million for Funds Direct in Q1 2005. Chief Executive Paul Gratton said: "Operating profit in the second quarter was £13 million for the core UK businesson the new IFRS basis of reporting leading to a half year profit of £23 million. The overall Group profit before tax, including discontinued activities, was£15 million for the six months ended 30 June 2005. "Egg's UK credit card business has performed well, with balance growth of 5% inthe first half compared with 2% for the industry. MasterCard continues toperform well and contributes to the good growth rates seen over the past yearsince its launch. "As planned, following our tightening of lending criteria, personal loan saleshave reduced in the first half from the record levels seen in 2004 and we expecta similar trend for the remainder of the year. "Revenues in the UK in the first half at £251 million were up 5% compared withthe same period last year. This reflected good growth in card income offset byless up front income in terms of the commission earned from selling associatedinsurances on loans due to the tactical reduction in sales. "Costs are falling, reducing by £10 million (8%) when compared with the firsthalf of 2004 and our cost/income ratio has improved to 44% in the first sixmonths this year from 51% for the same period last year. This is in part due tothe restructuring exercise completed this quarter which has aligned our costbase to our strategy which is re-focused on our core business and the needs ofthe UK consumer. We intend to launch a number of innovative propositions aimedat helping customers to benefit from managing, using and understanding theirmoney more effectively. "Credit quality remains strong and as expected the impairment charge reducedslightly in the second quarter and as we noted in April we expect a lower chargein the second half of the year as the benefits from the changes we made to ourloans scorecard and in our collections function continue to emerge. "Our exit from non-core businesses continues and we are confident existingprovisions are adequate. "Overall the result for the first half was in line with our expectations and weremain confident about the remainder of the year." Overview of Group Results Summary Income Statement by quarter (adopted IFRS basis) (unaudited) Q2 2005 Q1 2005 Q4 2004 Q3 2004 Q2 2004 UK £m £m £m £m £m Net Interest Income 75.3 70.8 73.3 70.4 70.1Other Operating Income 51.1 53.8 66.3 48.3 49.9 Egg UK Operating Income 126.4 124.6 139.6 118.7 120.0Operational and Administrative Expenses (36.9) (37.1) (40.7) (39.2) (37.7)Brand and Marketing Costs (8.4) (8.1) (12.4) (9.0) (10.6)Development Costs (2.8) (3.7) (6.2) (5.2) (4.7)Depreciation and Amortisation (6.9) (6.9) (7.1) (4.3) (5.6)Impairment Losses on Loans and Advances to (58.3) (58.9) (52.8) (47.1) (41.3)Customers Egg UK Operating Profit 13.1 9.9 20.4 13.9 20.1 FranceNet Interest Income 0.1 (0.3) 0.8 1.8 2.1Other Operating Income (0.4) 1.3 (7.0) 0.9 (0.1) Egg France Operating Income (0.3) 1.0 (6.2) 2.7 2.0Operational and Administrative Expenses (3.5) (9.0) (10.1) (8.5) (9.9)Brand and Marketing Costs - - - - (0.9)Development Costs - - - - (0.2)Depreciation and Amortisation 1.0 - (0.4) (3.1) (1.7)Impairment Losses on Loans and Advances to - (0.3) (5.8) (3.9) (5.5)CustomersUtilisation of Exit Cost Provision 3.0 9.6 15.8 10.1 - Egg France Operating Profit/(Loss) 0.2 1.3 (6.7) (2.7) (16.2)Subsidiaries/Associates/JV's 0.3 (3.4) (17.6) (1.0) (0.6)Transaction Costs - - (2.7) (1.1) (1.3)Provision for France Exit Costs - 3.5 - (112.8) -Restructuring Costs (3.6) (6.3) (3.0) - 0.2 Group Profit/(Loss) Before Tax (including 10.0 5.0 (9.6) (103.7) 2.2discontinued activities) 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 Q2 2005 was £75.3 million (Q1 2005: £70.8 million). Theincrease has resulted from the growth in standard rate balances on cards thisquarter. Moving forward we expect stronger growth in net interest income in thesecond half following our decision to re-price the card book from August. Non-interest income in Q2 2005 was slightly reduced at £51.1 million (Q1 2005:£53.8 million). Commission income earned from sales of associated insurances onour loan book continued to decline this quarter as penetration rates fell againto 48% (Q1 2005: 51%) but this was offset by £2.2 million of unrealised gains onderivatives arising from the adoption of fair value accounting under IAS 39 (Q12005: £0.6 million unrealised loss) which is purely a timing difference given nogain or loss is expected over the life of the derivatives as they are economichedges and will not be traded. Costs Operational and administrative costs at £36.9 million for the quarter (Q1 2005:£37.1 million) continued their recent downward trend reflecting again someimmediate benefit from the restructuring completed this quarter, which has beentargeted principally at the overhead base. We are on track to deliver at leastthe £12 million of annual savings initially envisaged from the restructuring. Brand and marketing costs were £8.4 million (Q1 2005: £8.1 million). Themarketing mix this quarter was different with less TV advertising on Visa Cardwhich resulted in lower acquisition at 94,000 new accounts (Q1 2005: 139,000).Additional campaigns were run to increase cross sales of personal loans whichwere up 5% over the first quarter. Development costs were £2.8 million for the quarter, a decrease from Q1 2005(£3.7 million). This reduction primarily reflects the fact £0.4 million ofinternal software development costs which had been expensed in Q1 wereidentified as eligible for capitalisation this quarter. Depreciation and amortisation at £6.9 million was unchanged on the firstquarter. This strong overall cost performance has contributed to a further smallimprovement in the cost/income ratio this quarter to 44% (Q1 2005: 45%). Movingforward we expect costs to rise in H2 compared to H1 reflecting the fact thatthe annual pay rise is effective from July each year and we continue to makeinvestments in our credit function to deliver the reducing bad debt charge.However we expect income growth to enable us to drive the cost/income ratio downfurther over time. Impairment for Losses on Loans and Advances to Customers The Q2 charge for impairment of £58.3 million was in line with our expectationsand reduced slightly on the first quarter (£58.9 million). The impairment chargeas a percentage of 12 month lagged assets in the overall unsecured portfolioremained consistent at 4.0% (Q1 2005: 3.9%). Moving forward we expect theimpact of our decision to tighten lending criteria, allied to maturing of thepersonal loan book, should see both the absolute charge and the charge as apercentage of lagged assets start to reduce over the second half of the year. At the period end, impairment provisions on the balance sheet represented 3.5%of assets compared to 3.2% at 31 December 2004 and 3.1% at 30 June 2004. Theincrease reflects the greater level of maturity in the portfolio and the higherpercentage of unsecured assets within it. Egg France and Provision for Exit Costs As noted in April we now expect the final costs of exiting our French businessto be lower than the £113 million (€170 million) provision made in July 2004 andwe therefore released £3.5 million (€5 million) of the provision in the firstquarter. The only net movement in the French profit and loss account in Q2 wasa small exchange gain of £0.2 million. Subsidiaries/Associates/JV's There was no net profit or loss this quarter. The £3.1 million net loss year todate primarily reflects the exit costs provision in respect of Funds Directraised in Q1 2005. Restructuring Costs We completed our review of our total cost base, and in particular the overheadfunctions and a final £3.6 million of costs were incurred or accrued in respectof people who have exited the business taking the total to £9.9 million. Theestimated annual savings resulting from this reorganisation are £12 million. Egg UK Product Information 30 Jun 30 Jun 31 Dec 2005 2004 2004 Product balances £m £m £m Egg Card 3,769 3,091 3,578Egg Personal Loans 2,753 2,256 2,618 Total Unsecured Lending 6,522 5,347 6,196 Egg Mortgages 1,128 1,154 1,102Prudential Mortgages 529 684 591 Total Secured Lending 1,657 1,838 1,693 Egg Savings 6,222 6,402 6,215 Prudential Savings 123 144 121 Total Retail Liabilities 6,345 6,546 6,336 Unsecured Lending Credit card balance growth was a £191 million (5.3%) net increase in the firsthalf, a strong result when compared with the same period last year when balancesincreased by just £76m. It is also encouraging against the background ofindustry balances increasing by just 2.2%. Within the portfolio we have seenstrong acquisition in the first quarter followed by an outflow of incentivebalances in the second quarter reflecting the fact that a number of 6 month and8 month incentive offers from last year came to an end this period. Interestbearing balance growth has been encouraging in the first half and this isreflected in the improving card yields up to 9.9% from 9.6% at 31 December 2004. The Visa Card is predominantly a borrowing card with high levels of balancetransfers driving the growth. This has resulted in above industry averagebalance per card and revolving percentages. We intend to further boost sales ofour MasterCard in the second half with a new improved proposition which will aimto focus on spend, an area where Egg currently has below industry averagepenetration. Personal loan disbursements were £895m for H1 leading to net balance growth of£135 million. This is a solid performance, but as expected, is a reduction onthe record loan volumes achieved last year (H1 2004: Disbursements - £1,137million and Net Balance Growth - £484 million) and reflects our decision,indicated in our preliminary results announcement, to tighten lending criteria. Savings H1 2005 saw a net inflow on Egg deposits of £7 million (H1 2004: £238 millioninflow). Retail liabilities are primarily an element within Egg's overallfunding strategy rather than an acquisition product. Given our strong liquidityposition in the second quarter we withdrew our bonus account offering and haveseen outflows in line with previous experience. We expect the margin on oursavings business to continue to improve in H2. Other Products The Prudential branded mortgage book continues in run-off and the Egg book grewby just 2% in the first half reflecting the fact that we are not currentlypromoting this product. The Egg Insure business acquired 90,000 new policies in H1 putting it on trackfor a record year of acquisition. Egg Money Manager sales have also been on the increase with 69,000 newregistered users in the first half of 2005 compared to 36,000 in the same periodlast year. Capital Capital ratios for Egg Banking plc at 30 June 2005 were 9.1% (tier 1) and 15.0%(total) (30 June 2004: 9.6% (tier1) and 16.8% (total)). On a consolidated basisthe total capital ratio was 13.3% (30 June 2004: 16.5%). The reduction incapital ratios predominantly reflects the provision for exit costs in France andimpairment of Funds Direct. As announced in February we have undertaken 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 required the approval of a Special Resolution at the Annual GeneralMeeting and, following that a series of approvals by the High Court. As at 30June 2005 only one remaining approval of the Court was outstanding and this wasreceived on 6 July 2005 after which the accumulated losses of Egg plc have beenreduced to £72 million from £541 million at 31 December 2004. Independent review report to Egg plc Introduction We have been engaged by the company to review the financial information set outon pages 12 to 39 and we have read the other information contained in theinterim report and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial 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 directors areresponsible 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 financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed on page 12 to the financial information, the next annual financialstatements of the group will be prepared in accordance with IFRSs adopted foruse in 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 the next annual financial statements. There is, however, a possibility thatthe directors may determine that some changes to these policies are necessarywhen preparing the full annual financial statements for the first time inaccordance with those IFRSs adopted for use by the European Union. This isbecause, as disclosed on page 12, the Directors have anticipated that certainStandards, which have yet to be formally adopted for use in the European Union,will be so adopted in time to be applicable to the next annual financialstatements. 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 group management and applying analytical procedures to thefinancial information and underlying financial data and, based thereon,assessing whether the accounting policies and presentation have beenconsistently applied unless otherwise disclosed. A review is substantially lessin scope than an audit performed in accordance with Auditing Standards andtherefore provides a lower level of assurance than an audit. Accordingly, we donot express an audit opinion on the financial information. 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 six monthsended 30 June 2005. KPMG Audit PlcChartered Accountants 27 July 2005 FINANCIAL INFORMATION Financial results prepared in accordance with International Financial ReportingStandards adopted for use in the European Union for the six months ended 30 June2005. 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 IAS 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. A description of the significant accounting policies applied in preparing thefinancial information contained in this report has been included in Note 1 ofthe Notes to the Financial Information below. 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) Six months Three months Six months Three months Year ended ended 30 June ended 30 June ended 30 ended 30 31 December 2005 2005 June 2004 June 2004 2004 (Restated)1 (Restated)1 (Restated)1 Notes £m £m £m £m £m Continuing operations:Interest income 494.4 242.2 433.1 221.3 902.8Interest expense (348.3) (166.9) (288.6) (150.8) (615.4) Net interest income 146.1 75.3 144.5 70.5 287.4Fee and commission income 104.0 49.6 105.8 53.7 220.7Fee and commission expense (9.4) (5.2) (14.8) (4.9) (25.2) Net fee and commission income 94.6 44.4 91.0 48.8 195.5Net trading income 9.3 6.4 - - -Other operating income 1.0 0.3 3.4 0.9 14.7 Operating income 251.0 126.4 238.9 120.2 497.6Administrative expenses - personnel expenses (46.4) (22.1) (44.2) (21.8) (92.7)- depreciation and amortisation (13.8) (6.9) (11.9) (6.0) (22.2) - other administrative expenses (60.6) (29.7) (67.6) (31.9) (139.3) (120.8) (58.7) (123.7) (59.7) (254.2) Impairment losses on loans and 2 (117.2) (58.3) (82.4) (41.4) (182.4)advances to customers Operating profit 13.0 9.4 32.8 19.1 61.0Share of operating (loss)/profit of (0.1) - 0.3 - 0.3joint ventureShare of associate losses - - (0.2) (0.1) (0.4) Profit on continuing ordinary 12.9 9.4 32.9 19.0 60.9activities before tax Tax charge on profit on continuing 3 (3.7) (3.4) (11.5) (5.8) (24.7)ordinary activities Profit on continuing ordinary 9.2 6.0 21.4 13.2 36.2activities after tax Discontinued operations:Profit/(loss) on discontinued ordinary 4 1.5 (3.5) (21.7) (8.8) (137.2)activities after tax Retained profit/(loss) for the period 10.7 2.5 (0.3) 4.4 (101.0) (1) The comparative results for the six months ended 30 June 2004, the threemonths ended 30 June 2004 and the year ended 31 December 2004 have been restatedto reflect the adoption of International Financial Reporting Standards, asexplained on pages 12 and 13. A reconciliation of the income statement, balancesheet and cash flow statement for the period ended 30 June 2004 with UK GAAP, inaccordance with which the comparatives were previously prepared, is shown inAppendix 1. A reconciliation of the income statement, balance sheet and cashflow statement for the year ended 31 December 2004 was shown in Appendix 1 ofour Press Release on the results for the three months ended 31 March 2005 issuedon 27 April 2005. Consolidated income statement (unaudited) (continued) Six months Three months Six months Three months Year ended ended 30 ended 30 ended 30 ended 30 31 December June 2005 June 2005 June 2004 June 2004 2004 (Restated)* (Restated)* (Restated)* Notes £m £m £m £m £mAttributable to:Equity holders of the parent 11.4 2.4 (0.1) 4.7 (99.7)Minority interests (0.7) 0.1 (0.2) (0.3) (1.3) Pence per Pence per Pence per Pence per Pence per share share share share shareConsolidated earnings/(loss) per shareBasic 5 1.3 0.2 - 0.5 (11.3)Diluted 5 1.3 0.2 - 0.5 (11.3) Continuing earnings per shareBasic 5 1.1 0.7 2.6 1.5 4.6Diluted 5 1.1 0.7 2.6 1.5 4.6 * See note (1) on page 14 Consolidated balance sheet (unaudited) 30 June 30 June 31 December 2005 2004 2004 (Restated)* (Restated)* Notes £m £m £mAssetsCash and balances with central banks 7.3 13.1 14.0Loans and advances to banks 747.2 294.7 615.9Securities purchased under agreement to resell 251.2 - 319.4Investment securities 2,264.6 4,145.8 3,119.7Derivative financial instruments 71.4 12.8 16.0Loans and advances to customers 7,915.6 7,105.5 7,642.0Prepayments and accrued income 9.1 77.5 58.3Investments in joint venture and associate 10.1 6.5 6.3Property, plant and equipment 46.9 53.9 48.0Intangible assets 44.1 53.5 49.0Deferred tax 35.8 25.6 28.9Other assets 18.1 436.6 130.6 Total assets 11,421.4 12,225.5 12,048.1 * See note (1) on page 14 Consolidated balance sheet (unaudited) (continued) 30 June 30 June 31 December 2005 2004 2004 (Restated)* (Restated)* Notes £m £m £mLiabilitiesDeposits by banks 2,483.7 2,016.0 2,352.0Securities sold under agreements to repurchase - 816.8 130.5Customer accounts 6,451.2 6,698.6 6,607.4Investment securities in issue 1,404.6 1,339.2 1,806.5Derivative financial instruments 78.7 13.0 17.5Other liabilities 119.6 279.9 110.5Accruals and deferred income 78.2 170.0 215.0Provisions for liabilities and charges 1.9 - 16.8Subordinated liabilities - Dated loan capital 468.0 450.8 450.8 Total liabilities 11,085.9 11,784.3 11,707.0 Shareholders' equityCalled up share capital 6 412.2 412.2 412.2Share premium account 6 - 110.9 111.0Capital reserve 6 179.1 359.7 359.7Other reserves 6 (3.6) 0.3 (0.5)Accumulated losses 6 (251.3) (442.9) (541.2) Total equity attributable to the equity holders 336.4 440.2 341.2of the parentMinority interests (equity) (0.9) 1.0 (0.1) Total equity 335.5 441.2 341.1 Total equity and liabilities 11,421.4 12,225.5 12,048.1 * See note (1) on page 14 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 £m £m £m £m £m £m £mChanges in equity for the sixmonths ended 30 June 2004:Balance at 1 January 2004 aspreviously reported under UKGAAP 410.3 107.5 359.7 - (445.1) 1.2 433.6Changes upon transition to IFRS - - - - 0.5(1) - 0.5 Restated balance under IFRS 410.3 107.5 359.7 - (444.6) 1.2 434.1 Exchange differences onforeign currency translations - - - 0.3 - - 0.3 Net gain recognised directlyin equity - - - 0.3 - - 0.3Loss for the period - - - - (0.1) (0.2) (0.3) Total recognised income andexpense for the period - - - 0.3 (0.1) (0.2) - Increase in share capital 1.9 - - - - - 1.9Increase in share premium - 3.4 - - - - 3.4Share-based paymentadjustment to reserves - - - - 0.9 - 0.9Awards under incentive schemes - - - - 0.9 - 0.9 Balance at 30 June 2004 412.2 110.9 359.7 0.3 (442.9) 1.0 441.2 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) 1.2 434.1Exchange 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 - - - - - 1.9Increase in share premium - 3.5 - - - - 3.5Share-based paymentadjustment to reserves - - - - 2.3 - 2.3Awards under incentive schemes - - - - 0.8 - 0.8 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 £m £m £m £m £m £m £mChanges in equity for the six months ended 30 June 2005:Balance at 31 December 2004 412.2 111.0 359.7 (0.5) (541.2) (0.1) 341.1Changes in accounting policy(adoption of IAS 32 and IAS 39) - - - (0.9) (14.4) - (15.3) Restated balance 412.2 111.0 359.7 (1.4) (555.6) (0.1) 325.8 Available-for-sale investments: Valuation gains taken to equity - - - 4.6 - - 4.6Cash flow hedges:Losses taken to equity - - - (8.3) - - (8.3)Exchange differences onforeign currency translations - - - 1.5 - - 1.5 Net loss recognised directlyin equity - - - (2.2) - - (2.2)Profit/(loss) for the period - - - - 10.7 (0.8) 9.9 Total recognised income and expense for the period - - - (2.2) 10.7 (0.8) 7.7 Adjustments to share premiumand capital reserve due tocapital reconstruction - (111.0) (180.6) - 291.6 - -Share-based paymentadjustment to reserves - - - - 2.0 - 2.0 Balance at 30 June 2005 412.2 - 179.1 (3.6) (251.3) (0.9) 335.5 Consolidated cash flow statement (unaudited) Six months ended 30 Six months ended 30 Year ended 31 June 2005 June 2004 December 2004 (Restated)* (Restated)* Note £m £m £mCash flows from operating activitiesContinuing operations:Operating profit before taxation 13.0 32.8 61.0Adjusted for:Depreciation, impairment and amortisation 13.8 20.9 28.4Impairment losses on loans and advancesto customers 34.3 30.4 70.1Gain on sale of investment securities - (1.9) (7.5)Share schemes adjustment in reserves 2.0 - -Net (increase)/decrease in operating assets: Loans and advances to banks 24.6 38.2 54.8 Derivative financial instruments (60.9) - - Loans and advances to customers (283.9) (399.0) (1,115.6) Securities purchased under agreement to resell 68.9 - (319.4) Accrued income and prepayments (0.8) (1.9) 16.9 Other assets 251.9 (174.1) 99.4Net increase/(decrease) in operating liabilities: Deposits by banks (50.4) 303.4 772.3 Securities sold under agreements to repurchase (131.0) (12.3) (698.7) Customer accounts 30.5 256.8 (53.0) Investment securities in issue (410.5) (83.7) 383.6 Accruals and deferred income (9.2) 13.0 29.6 Derivative financial instruments 28.7 - - Other liabilities (271.7) (26.9) (133.6)Subordinated liabilities 14.8 - -Tax refund received/(taxation paid) 5.4 (0.2) 14.1 Net cash outflow from continuingoperating activities (730.5) (4.5) (797.6) Discontinued operations:Net cash (outflow)/inflow fromdiscontinued operating activities (5.9) 19.3 76.2 Total net cash (outflow)/inflow fromoperating activities (736.4) 14.8 (721.4) * See note (1) on page 14 Consolidated cash flow statement (unaudited) (continued) Six months ended 30 Six months ended 30 Year ended 31 June 2005 June 2004 December 2004 (Restated)* (Restated)* Note £m £m £mCash flows from investing activitiesContinuing operations:Purchase of property, plant and equipment (5.7) (3.6) (13.1)Disposal of property, plant and equipment 1.3 - -Purchase of software intangibles (13.7) (14.2) (37.7)Disposal of software intangibles 7.5 - -Purchase of investment securities (3,986.4) (2,924.4) (6,447.5)Disposal of investment securities 4,858.7 2,904.2 7,435.3 Net cash inflow/(outflow) from continuinginvesting activities 861.7 (38.0) 937.0 Discontinued operations:Net cash (outflow)/inflow fromdiscontinued investing activities - (2.2) 90.6 Total net cash inflow/(outflow)inflowfrom investing activities 861.7 (40.2) 1,027.6 Cash flows from financing activitiesContinuing operations:Proceeds from issue of share capital - 5.3 5.4 Net cash inflow from continuing financingactivities - 5.3 5.4 Discontinued operations:Net cash inflow from discontinuedfinancing activities - - - Total net cash inflow from financing activities - 5.3 5.4 Increase/(decrease) in cash and cashequivalents in the period 125.3 (20.1) 311.6Cash and cash equivalents at the beginning of the period 7 627.6 322.9 322.9Exchange adjustments 1.5 - (6.9) Cash and cash equivalents at the end of the period 7 754.4 302.8 627.6 * See note (1) on page 14 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 30th June 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). 1. Significant accounting policies (continued) 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 interest income,impairment losses and foreign exchange gains and losses which are recognised inthe income statement. Upon derecognition of the asset, or where there isobjective evidence that the investment security is impaired, the cumulativegains and losses recognised in equity are removed from equity and recycled tothe income statement. 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. 1. Significant accounting policies (continued) 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. 1. Significant accounting policies (continued) 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 andliabilities, with the effective part of any gain or loss on the derivativefinancial instrument recognised directly in equity. At inception, the Groupformally designates the hedge, documenting the nature of the hedgingrelationship, the risk management objective and the strategy for undertaking thehedge. Derivatives designated as hedges are tested for effectiveness on inception ofthe hedge relationship and on an ongoing basis. The ineffective part of any gainor loss is recognised in the income statement immediately. Any gain or lossarising from changes in the time value of the derivative is excluded from themeasurement of the hedge effectiveness and is recognised in the incomestatement. Cumulative amounts recognised through equity are taken to the income statementin the period in which the underlying hedged item matures and its associatedgain or loss affects the income statement. Cumulative amounts recognisedthrough equity are also taken to the income statement in the period in which thehedging relationship is broken or the hedge becomes ineffective. The Group has not designated its derivatives as any other type of hedge inaccordance with IAS 39.Related Shares:
Prudential