##### Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



Form 20-F

|           |  |                                                                                                       
|---------- |  | ------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                       
|o          |  | REGISTRATION STATEMENT PURSUANT
    TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
    1934
|OR        
|          
|þ          |  | ANNUAL REPORT PURSUANT TO
    SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
    1934         
|           |  | For the fiscal year ended
    December 31, 2005                                                       
|          
|OR        
|          
|o          |  | TRANSITION REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934      
|           |  | For the transition period
    from          to                                                        
|OR        
|          
|o          |  | SHELL COMPANY REPORT PURSUANT TO
    SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
    1934   
|           |  | Date of event requiring this
    shell company
    report          to                                 

Commission
file number 0-25670


Abbey National plc


(Exact name of Registrant as specified in its charter)


England


(Jurisdiction of incorporation or organization)


Abbey National House, 2 Triton Square, Regents Place,
London NW1 3AN, England


(Address of principal executive offices)





|                                                     |  |                                          
|---------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                  |  | Name of Each Exchange on Which Registered
|                                                     |  |                                          
|Non-cumulative Dollar-denominated
    Preference     |  |                                          
|Shares of nominal value $0.01 each,
    Series B     |  | New York Stock Exchange*                 
|American Depositary Shares,                          |  |                                          
|each representing one Non-cumulative                 |  |                                          
|Dollar-denominated Preference Share                  |  |                                          
|of nominal value $0.01,
    Series B (ANBPRC)        |  | New York Stock Exchange                  
|7.25% Perpetual Subordinated
    Capital Securities  |  |                                          
|(SXA)                                                |  | New York Stock Exchange                  
|7.375% Perpetual Subordinated
    Capital Securities |  |                                          
|(SXP)                                                |  | New York Stock Exchange                  



|  |                                                                                                   
|- | --------------------------------------------------------------------------------------------------
|* | Not for trading, but only in connection with the listing of
    related American Depositary Shares





|                                                                                                        |  |      |             | 
|------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | 
|Ordinary Shares of Nominal Value 10 Pence Each                                                          |  | None |            
|103/8%
    Non-cumulative Preference Shares of nominal vale £1 each                                     |  |      | 200,000,000 | 
|85/8%
    Non-cumulative Preference Shares of nominal value £1 each                                     |  |      | 125,000,000 | 
|73/8%
    Non-cumulative Dollar-denominated Preference Shares of nominal
    value $0.01 each, Series B |  |      | 18,000,000  | 




þ o


o þ


þ o


12b-2 o o þ


o þ


12b-2 o þ










---



##### 



ContentsBusiness Review and Forward-looking StatementsChief Executives Review 2Forward-looking Statements 5Business and Financial ReviewBusiness Overview 6Business Review  Summary 10Business Review  Personal Financial Services 18Business Review  Portfolio Business Unit 31Other Material Items 32Balance Sheet Business Review 34Risk Management 59Report of the DirectorsDirectors 74Directors Report 77Supervision and Regulation 86Financial StatementsIndependent Auditors Report to the Member of Abbey National plc 91Primary Financial Statements 92Accounting Policies 97Notes to the Financial Statements 109Selected Financial Data 195Shareholder InformationDividend and Share
Information 199Risk Factors 200Taxation for US
Investors 201Contact
Information 202Glossary and
Definitions 204Cross-reference
to Form 20-F 205Exhibit 1.1Exhibit 4.1Exhibit 7.1Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 14.1
  
 1




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##### Table of Contents



Business Review and Forward-looking Statements
 
 Chief Executives Review
 Overview
   stabilise Personal Financial Services
(PFS) trading revenues after a period of
decline
    
    PFS trading revenues were up 1%accelerate cost savings, with a cost
reduction in 2005 of £150m instead of the
£100m originally targeted
    
    cost reduction of £224m
    Key financial highlights:
 >
    
    statutory profit before tax of £596m (2004: £(21)m), with a profit after tax of £420m (2004: £(54)m);>
    
    statutory profit before tax for Personal Financial Services of £509m (2004: £(32)m);>
    
    Personal Financial Services trading profit before tax of £775m up 34% compared to £579m in 2004, benefiting from an
increase in revenues combined with lower costs resulting from the cost reduction programme;>
    
    trading income in Personal Financial Services was slightly ahead of 2004, and better than originally targeted at the
start of 2005. During the year trading income has benefited from increased fee income, partially offset by a modest
decline in spreads;>
    
    Personal Financial Services trading expenses were £224m lower than 2004, a reduction of 13%, well ahead of the
original targeted savings for 2005 of £100m;>
    
    a reduction in the Personal Financial Services trading cost: income ratio to 60.6% (2004: 69.9%);>
    
    provision charges in relation to Personal Financial Services lending (after adjusting for 2004 write backs) were
higher by £54m;>
    
    reorganisation and other charges, IFRS embedded value charges and rebasing and hedging variances of £266m (2004:£546m), including the cost of compensation following remediation of £70m relating to endowment misselling;>
    
    total retail customer loans of £99.3bn, up 4%, and retail deposits of £62.0bn, also up 4% compared to 2004; and>
    
    capital ratios decreased due to the impact of IFRS adjustments
applicable from 1 January 2005, partly offset by an increase in
net attributable profit. The tier 1 ratio decreased to 10.0% and equity tier 1 ratio to 6.6%, compared with
10.4% and 7.0% in 2004 respectively.
 2




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Business Review and Forward-looking Statements
 Chief Executives Review
 Strategic Outline
    >
    
    moving to a new operating model; and>
    
    delivering revenue growth in both existing and new markets.
 New operating model
       Revenue growth from new and existing markets
    Financial targets
  >
    
    revenue synergies of £150m by 2007; and>
    
    cost synergies of £300m by 2007.
  >
    
    revenue growth of 5  10% per annum over the next 3 years;>
    
    a cost: income ratio of around 45% by 2008; and>
    
    a return on regulatory tier 1 equity of 18% by 2008.
   3




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Business Review and Forward-looking Statements
 Chief Executives Review
    
 4




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Business review and forward-looking statements
 
 Forward-looking statements
  >
    
    projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital
structure or other financial items or ratios;>
    
    statements of plans, objectives or goals of Abbey or its management, including those related to products or services;>
    
    statements of future economic performance; and>
    
    statements of assumptions underlying such statements.
   >
    
    inflation, interest rate, exchange rate, market and monetary fluctuations;>
    
    the effect of, and changes to, regulation and government policy;>
    
    the effects of competition in the geographic and business areas in which Abbey conducts operations;>
    
    changes in consumer spending, saving and borrowing habits in the United Kingdom and in other countries in which Abbey
conducts operations;>
    
    the effects of changes in laws, regulations, taxation or accounting standards or practices;>
    
    the ability to increase market share and control expenses;>
    
    the timely development of and acceptance of new products and services of Abbey and the perceived overall value of these
products and services by users;>
    
    acquisitions and disposals;>
    
    technological changes;>
    
    the possibility of foreign exchange controls, expropriation, nationalisation or confiscation of assets in countries in
which Abbey conducts operations; and>
    
    Abbeys success at managing the risks of the foregoing.
  5




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##### Table of Contents



Business and Financial Review
 
 Business Overview
  General
   Summary history of Abbey National plc
  Corporate purpose and strategy
   Executive Responsibility
    >
    
    Retail Banking- responsible for all direct sales (branches,
telephone, internet banking) and intermediary channels. Also
responsible for marketing, including product design, branding and
advertising. Graeme Hardie, joined Abbey and was appointed to the
Board in February 2005 to head this division.>
    
    Insurance and Asset Management- responsible for the long-term
savings and general insurance business together with the asset
management activities of the Group. This division is headed by Javier
Maldonado, who was appointed on 9 February 2006.>
    
    Finance and Markets- comprises Abbey Financial Markets, Finance and
the Portfolio Business Unit, and is headed by Nathan Bostock. Abbey
Financial Markets provides treasury services to the Group, including
managing the Groups funding, liquidity and capital; providing risk
management services; as well as manufacturing retail structured
products.The support divisions consist of:>
    
    Human Resources- responsible for all human resources strategy and
personnel support. This division is headed by Paul Lomas.>
    
    Manufacturing- responsible for all information technology and
operations activity (including service centres). This division is
headed by Juan Olaizola.>
    
    Risk- responsible for ensuring that the Board and senior management
team of Abbey are provided with an appropriate risk policy and
control framework, and to report any material risk issues to the Risk
Committee and the Board. This division is headed by Ian Jenkins.
  6




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##### Table of Contents



Business and Financial Review
 Business Overview
 Competition
 Competitive environment and future trends
   Competition outlook
  Personal Financial Services
  Retail Banking
 Residential mortgages
    Savings
  Banking and Consumer Credit
   Abbey National International
  Cater Allen
  cahoot
  General Insurance
   7




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Business and Financial Review
 Business Overview
  Insurance and Asset Management
  >

    
    Protection. The traditional form of protection policy, known as term
insurance, provides a lump sum benefit payable on death within a
specified term. Policies are also available to provide protection
against critical illness and disability.>
    
    Investment and savings. Investment bonds, with-profit bonds,
structured products, unit trusts, Individual Savings Accounts and
endowment life insurance policies are included in this category.>
    
    Pensions. In the UK pensions are a tax-efficient way of saving to
provide benefits on retirement. This is a result of the tax
deductibility of contributions made and the generally tax-free growth
granted to pension funds.
    Sale of
Life Insurance Businesses
   James Hay
  Abbey Financial Markets
  Asset and Liability Management
     Abbey and its subsidiaries
    
    £
    196,094mAbbey National plc
    
    £
    131,182m
 pari passu
 Abbey National plc
    
    £
    7,310m
 8




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Business and Financial Review
 Business Overview
   Derivatives and Structured Products
  Short-Term Markets
  Group Infrastructure
  Portfolio Business Unit
  9




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Business and Financial Review
 
 Business Review  Summary
   Executive summary
  >
    
    Business review summary- this contains an explanation of the basis of Abbeys results and any potential changes to that basis in the future, a
summary income statement with commentary, a summary income statement analysed between Personal Financial Services and the Portfolio Business
Unit, and a summary of the nature of adjustments between our statutory basis of accounting and Abbeys management basis of accounting (known as
the trading basis);>
    
    Personal Financial Services- this contains a summary of the results, and commentary thereon, by income statement line item on a trading basis
for each segment. Additional detailed information is provided for certain segments such as the Retail Banking and Insurance and Asset
Management segments due to the significance of their impact on Abbeys results;>
    
    Portfolio Business Unit- this contains a summary of the results and commentary thereon on a management basis. Additional information is
provided on the assets and relevant provisions;>
    
    Other Material Items- this contains detailed information about the statutory to trading basis adjustments. It also contains details of the
differences between IFRS and US GAAP and the movements therein; and>
    
    Balance Sheet Review- this contains an analysis of Abbeys balance sheet as a whole, including:
 >
    
    Capital disclosures- this contains an analysis of Abbeys capital needs and availability;>
    
    Off-Balance Sheet disclosures- this contains a summary of Abbeys off-balance
sheet arrangements, their business purpose, and importance to Abbey; and>
    
    Liquidity disclosures- this contains an analysis of Abbeys sources and uses
of liquidity and recent cashflows.
 Basis of results presentation
  >
    
    Retail Banking;>
    
    Insurance and Asset Management;>
    
    Abbey Financial Markets;>
    
    Group Infrastructure; and>
    
    Portfolio Business Unit
  >
    
    Banking and Savings;>
    
    Investment and Protection;>
    
    Abbey Financial Markets;>
    
    General Insurance;>
    
    Group Infrastructure;>
    
    Wholesale Banking;>
    
    Motor Finance & Litigation Funding; and>
    
    Other.
  Critical factors affecting results
 Critical accounting policies and areas of significant management judgement
  10




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Business and Financial Review
 Business Review  Summary
   (a) Provisions for loans and advances
     (b) Valuation of financial instruments
      11




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##### Table of Contents



Business and Financial Review
 Business Review  Summary
   Assets
    
    Liabilities%
    
    %Fair value based on:Quoted market prices
    
    
    58
    
    
    
    36Internal models based on market prices
    
    
    42
    
    
    
    64Internal models based on information other than market data
    
    
    
    
    
    
    Total
    
    
    100
    
    
    
    100
 (c) Long-term assurance business
    Insurance contracts and participating contracts
       12




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Business and Financial Review
 Business Review  Summary
  (d) Impairment of goodwill
      (e) Provisions for misselling
     13




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##### Table of Contents



Business and Financial Review
 Business Review  Summary
 (f) Pensions
     Profit on disposal of Group undertakings
  Significant acquisitions and disposals
  Current and future accounting developments
  Transitional exemptions permitted by IFRS 1
  a)
    
    Business Combinations  the Group has applied IFRS 3 Business Combinations to business
combinations that occurred on or after 1 January 2004. Business combinations before that date
have not been restated. Under previous GAAP (UK GAAP), goodwill arising on acquisitions
after 1 October 1998 was capitalised and amortised over its estimated useful economic life.
Goodwill arising on acquisitions before 1 October 1998 was deducted from equity. Had this
exemption not been taken, the main effects would have been to recognise additional deferred
tax on fair value adjustments made at the date of acquisition and to recognise additional
intangible assets, with resulting adjustments to the carrying value of goodwill and retained
earnings at 1 January 2004.b)
    
    Cumulative foreign currency difference  The Group has brought forward a nil opening balance
on the cumulative foreign currency translation adjustment arising from the retranslation of
foreign operations, which is shown as a separate item in shareholders equity at the date of
transition in accordance with IAS 21 The Effects of changes in Foreign Exchange Rates. Had
this exemption not been taken, the resulting retrospective application of IAS 21 would
 14




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##### Table of Contents



Business and Financial Review
 Business Review  Summary
 have resulted in a reallocation between retained earnings and other reserves at 1 January 2004 but
would have had no impact on total equity.c)
    
    Implementation of IAS 32, IAS 39 and IFRS 4 (incorporating the adoption of FRS 27 Life
Assurance)  As allowed by IFRS 1, the Group has not restated its 2004 consolidated income
statements and balance sheets to comply with IAS 32, IAS 39 and IFRS 4.d)
    
    The Group has decided to early adopt IFRS 7 Financial Instruments: Disclosures and has
taken advantage of the exemption therein from presenting certain comparative information.e)
    
    The Group has also decided to early adopt the amendment to IAS 19 Employee Benefits-
Actuarial Gains and Losses Group Plans and Disclosures and has, therefore, recognised in
equity at 1 January 2004 all cumulative actuarial gains and losses on post-employment benefit
plans. Recognising certain actuarial gains and losses under the alternative corridor
approach would have reduced liabilities and increased retained earnings at 1 January 2004.
Abbey has not elected to adopt a corridor approach going forward under IAS 19 Employee
Benefits.f)
    
    The Group has adopted IFRS 5 Non current assets held for sale and Discontinued Operations
prospectively from 1 January 2005 and has elected not to restate comparatives. Had this
exemption not been taken, the retrospective application of IFRS 5 would have resulted in
disclosures of an allocation of the profit for the year ended 31 December 2004 between
continuing operations and discontinued operations.
 Group summary
 Summarised consolidated statutory income statement and selected ratios
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mNet interest income
    
    
    1,207
    
    
    
    1,463Non-interest income
    
    
    1,533
    
    
    
    1,382Total operating income
    
    
    2,740
    
    
    
    2,845Administrative expenses
    
    
    (1,724
    )
    
    
    (2,221
    )Depreciation and amortisation
    
    
    (199
    )
    
    
    (547
    )Provision for bad and doubtful debts
    
    
    (218
    )
    
    
    55Provisions for other liabilities and charges
    
    
    (3
    )
    
    
    (233
    )Amounts written off fixed asset investments
    
    
    
    
    
    
    80Profit/(loss) on ordinary activities before tax
    
    
    596
    
    
    
    (21
    )Tax on profit/(loss) on ordinary activities
    
    
    (176
    )
    
    
    (33
    )Profit/(loss) on ordinary activities after tax
    
    
    420
    
    
    
    (54
    )Tier 1 capital ratio
    
    
    10.0
    %
    
    
    10.4
    %Equity Tier 1 capital ratio
    
    
    6.6
    %
    
    
    7.0
    %Closing risk weighted assets (£m)
    
    
    55,972
    
    
    
    56,171
 2005 compared to 2004
  >
    
    net interest income of £1,207m (2004: £1,463m) fell due to a
reduction of £99m in Portfolio Business Unit reflecting lower level
of interest earning asset, the non-recurrence of £50m of gains
relating to the close-out of hedges, and a 6 basis point fall in the
retail banking spread.>
    
    non-interest income of £1,533m (2004: £1,382m), up 11% as a result of
improved fee performance in relation to mortgages, banking and
unsecured personal lending. In addition, reduced losses on disposal
of Portfolio Business Unit loans and securities contributed
positively.>
    
    administrative expenses of £1,724m (2004: £2,221m) were down 22%.
Personal Financial Services expenses fell £439m to £1,686m largely
reflecting the benefits of the cost reduction programme and higher
costs in 2004 associated with the sale of Abbey National plc to Banco
Santander Central Hispano, S.A. including costs realised post
acquisition. Portfolio Business Unit expenses fell due to the reduced
size of operations.>
    
    Depreciation and amortisation of £199m (2004: £547m) was down 64%.
2004 included a charge of £147m in connection with an impairment of
goodwill in relation to Scottish Provident Limited distribution
channels and depreciation on operating lease assets of £123m
(2004: £184m), down 33% reflecting the sale of leasing companies in the
Portfolio Business Unit through the year.>
    
    a credit provision charge in relation to bad and doubtful debts of
£218m (2004: £55m release). The 2004 release included a release of
general provisions of £136m together with the release of £60m of
Scottish Provident Limited contingent loans not repeated in 2005.
Other movements in the credit provision charge include an increase in
mortgage provisions of £12m. The remaining increase relates to
unsecured lending, reflecting some modest credit quality
deterioration together with seasoning of the asset.>
    
    provisions for other liabilities
and charges decreased to £3m (2004: £233m). 2004 included a charge of £154m related to endowment
misselling. Remediation costs relating to misselling of £70m in 2005
were also charged to administrative expenses.>
    
    amounts written off fixed asset
investments were nil in 2005 (2004: £80m release). The release reflected the disposal of Portfolio
Business Unit assets for amounts in excess of their written down
value.
 15




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Business and Financial Review
 Business Review  Summary
 Summarised consolidated statutory income statement analysed between Personal Financial
Services and the Portfolio Business Unit
 31 December 2005
    
    
    31 December 2004PFS
    
    
    PBU
    
    
    Total
    
    
    PFS
    
    
    PBU
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,243
    
    
    
    (36
    )
    
    
    1,207
    
    
    
    1,400
    
    
    
    63
    
    
    
    1,463Non-interest income
    
    
    1,247
    
    
    
    286
    
    
    
    1,533
    
    
    
    1,224
    
    
    
    158
    
    
    
    1,382Total operating income
    
    
    2,490
    
    
    
    250
    
    
    
    2,740
    
    
    
    2,624
    
    
    
    221
    
    
    
    2,845Administrative expenses
    
    
    (1,686
    )
    
    
    (38
    )
    
    
    (1,724
    )
    
    
    (2,125
    )
    
    
    (96
    )
    
    
    (2,221
    )Depreciation and amortisation
    
    
    (76
    )
    
    
    (123
    )
    
    
    (199
    )
    
    
    (363
    )
    
    
    (184
    )
    
    
    (547
    )Provision for bad and
doubtful debts
    
    
    (208
    )
    
    
    (10
    )
    
    
    (218
    )
    
    
    65
    
    
    
    (10
    )
    
    
    55Provisions for other
liabilities and charges
    
    
    (11
    )
    
    
    8
    
    
    
    (3
    )
    
    
    (233
    )
    
    
    
    
    
    
    (233
    )Amounts written off fixed
asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    80Profit/(loss) on ordinary
activities before tax
    
    
    509
    
    
    
    87
    
    
    
    596
    
    
    
    (32
    )
    
    
    11
    
    
    
    (21
    )
 Adjustments between the statutory basis and the trading basis
   >
    
    IFRS embedded value charges and rebasing These are unpredictable as
they depend on both equity and debt market movements which do not
affect the underlying performance of what is a very long-term
business. The short-term market movements remain a very important
factor in the management of the business but these are managed
separately with a more risk-based focus.>
    
    Reorganisation and other costs Comprise implementation costs in
relation to the strategic change and cost reduction process.
Management needs to understand the underlying drivers of the cost
base that will remain after the exercise is complete, and does not
want this view to be clouded by the costs of the exercise, which are
managed independently.>
    
    Intangible asset charges These charges can vary significantly year
on year, and hence can materially affect the profit or loss for that
year. As a result, Abbey reviews these charges separately to avoid
clouding the presentation of underlying results.>
    
    Hedging variances As a consequence of the introduction of IFRS, the
balance sheet and income statement are subject to volatility
particularly from the accounting for elements of derivatives deemed
under IFRS rules to be ineffective as hedges. Where appropriate,
such volatility is separately identified to enable management to view
the underlying performance of the business.
 >
    
    Proforma IFRS adjustments Due to certain IFRS standards only being
applicable from 1 January 2005, the 2004 statutory results only
include the impact of IFRS which are required to be applied
retrospectively in the preparation of the 2005 results. As a result,
management reviews the 2004 results on a proforma basis,
incorporating the impact of those prospective IFRS where it can be
determined what the impact would have been if the accounting changes
had been effective in 2004. The impact includes the treatment of
interest income and fees and the reclassification of preference
shares from shareholders equity to debt, but excludes the effect of
accounting for derivatives under IAS 39 as no estimate of their
effect can be made.>
    
    One-off statutory IFRS adjustments The conversion to IFRS resulted
in the recognition of certain one off items including impairment
charges. These items have been deducted from the results to allow
management to understand the underlying performance of the business.
 16




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Business and Financial Review
 Business Review  Summary
   >
    
    IFRS embedded value charges and rebasing,>
    
    Reorganisation costs,>
    
    Intangible asset charges,>
    
    Hedging variances,>
    
    Proforma IFRS adjustments, and>
    
    One-off statutory IFRS adjustments.
  17




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##### Table of Contents



Business and Financial Review
 
 Business Review  Personal Financial Services
 Personal Financial Services profit before tax by segment
 Insurance
    
    
    AbbeyRetail
    
    
    and Asset
    
    
    Financial
    
    
    GroupBanking
    
    
    Management
    
    
    Markets
    
    
    Infrastructure
    
    
    Total31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,400
    
    
    
    55
    
    
    
    1
    
    
    
    (213
    )
    
    
    1,243Non-interest income
    
    
    561
    
    
    
    267
    
    
    
    252
    
    
    
    197
    
    
    
    1,277Depreciation of operating lease assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total trading income
    
    
    1,961
    
    
    
    322
    
    
    
    253
    
    
    
    (16
    )
    
    
    2,520Total trading expenses
    
    
    (1,050
    )
    
    
    (193
    )
    
    
    (105
    )
    
    
    (178
    )
    
    
    (1,526
    )Provision for bad and doubtful debts
    
    
    (208
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (208
    )Provisions for other liabilities and charges
    
    
    (10
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )Amounts written off fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trading profit before tax
    
    
    693
    
    
    
    128
    
    
    
    148
    
    
    
    (194
    )
    
    
    775Adjust for:- IFRS embedded value charges and rebasing
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )- Reorganisation expenses
    
    
    (197
    )
    
    
    (17
    )
    
    
    (14
    )
    
    
    (5
    )
    
    
    (233
    )- Intangible asset charges
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (3
    )- Hedging Variances
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    (18
    )Adjust for:- One-off statutory IAS adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    - Eliminating IAS proforma adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Profit/(loss) before tax
    
    
    499
    
    
    
    96
    
    
    
    134
    
    
    
    (220
    )
    
    
    509
 Insurance
    
    
    AbbeyRetail
    
    
    and Asset
    
    
    Financial
    
    
    GroupBanking
    
    
    Management
    
    
    Markets
    
    
    Infrastructure
    
    
    Total31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,432
    
    
    
    72
    
    
    
    (2
    )
    
    
    (198
    )
    
    
    1,304Non-interest income
    
    
    477
    
    
    
    279
    
    
    
    291
    
    
    
    151
    
    
    
    1,198Depreciation of operating lease assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total trading income
    
    
    1,909
    
    
    
    351
    
    
    
    289
    
    
    
    (47
    )
    
    
    2,502Total trading expenses
    
    
    (1,153
    )
    
    
    (262
    )
    
    
    (109
    )
    
    
    (226
    )
    
    
    (1,750
    )Provision for bad and doubtful debts
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Provisions for other liabilities and charges
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (153
    )Amounts written off fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trading profit before tax
    
    
    581
    
    
    
    89
    
    
    
    180
    
    
    
    (271
    )
    
    
    579Adjust for:- IFRS embedded value charges and rebasing
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    21- Reorganisation expenses
    
    
    (199
    )
    
    
    (57
    )
    
    
    (24
    )
    
    
    (267
    )
    
    
    (547
    )- Intangible asset charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )- Hedging Variances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Adjust for:- One-off statutory IAS adjustments
    
    
    (62
    )
    
    
    (32
    )
    
    
    (11
    )
    
    
    (134
    )
    
    
    (239
    )- Eliminating IAS proforma adjustments
    
    
    80
    
    
    
    (3
    )
    
    
    
    
    
    
    97
    
    
    
    174Profit/(loss) before tax
    
    
    400
    
    
    
    18
    
    
    
    145
    
    
    
    (595
    )
    
    
    (32
    )
 2005 compared to 2004>
    
    Personal Financial Services trading profit before tax of
£775m was up 34% on 2004 (2004: £579m), largely due to
increased revenues combined with savings from the cost
reduction programme.>
    
    Retail Banking trading profit before tax increased by 19% to
£693m (2004: £581m). Included in the 2004 results were £92m
of non-recurring revenue benefits. After adjusting for these
items, the improvement was largely driven by increased fee
income and the benefit of significant cost savings.>
    
    Insurance and Asset Management trading profit before tax
increased to £128m (2004: £89m). The main reason for the
movement is the large decrease in costs, a result of the
cost reduction programme, partially offset by the impact of
continued lapses.>
    
    Abbey Financial Markets trading profit before tax of £148m
was down 18%, largely due to £65m of non-recurring revenue
items in 2004, being partially offset by favourable market
conditions and strong trading volumes, particularly in the
second half of the year;>
    
    Group Infrastructure trading loss before tax of £194m
decreased by £77m (2004: loss of £271m) due largely to the
reduction in costs resulting from the cost reduction
programme.
 18




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services
  Personal Financial Services business flows
 31 December
    
    
    31 December2005
    
    
    2004Retail BankingMortgages:Gross mortgage lending
    
    
    £27.6bn
    
    
    
    £25.0bnCapital repayments
    
    
    £24.6bn
    
    
    
    £21.9bnNet mortgage lending
    
    
    £3.0bn
    
    
    
    £3.1bnMortgage stock
    
    
    £93.9bn
    
    
    
    £90.9bnOf which: Abbey retail
    
    
    £89.9bn
    
    
    
    £87.5bn Housing Association
    
    
    £4.0bn
    
    
    
    £3.4bnMarket share  gross mortgage lending
    
    
    9.6
    %
    
    
    8.6
    %Market share  capital repayments
    
    
    12.5
    %
    
    
    11.5
    %Market share  net mortgage lending
    
    
    3.3
    %
    
    
    3.1
    %Market share  mortgage stock
    
    
    9.7
    %
    
    
    10.4
    %Retail deposits:Total net deposit flows
    
    
    £2.6bn
    
    
    
    £1.3bnOf which: Abbey retail
    
    
    £1.6bn
    
    
    
    £0.3bn Other
    
    
    £1.0bn
    
    
    
    £1.0bnDeposit stock
    
    
    £62.0bn
    
    
    
    £59.4bnOf which: Abbey retail
    
    
    £51.3bn
    
    
    
    £49.7bn Other
    
    
    £10.7bn
    
    
    
    £9.7bnBanking:Bank account openings: Abbey retail
    
    
    358,931
    
    
    
    334,950 Other
    
    
    26,949
    
    
    
    42,630385,880
    
    
    
    377,580Bank account liability: Abbey retail
    
    
    £4.8bn
    
    
    
    £4.5bn Other
    
    
    £3.2bn
    
    
    
    £3.2bn£8.0bn
    
    
    
    £7.7bnCredit card openings: Abbey retail
    
    
    210,912
    
    
    
    185,481 Other
    
    
    6,115
    
    
    
    13,247217,027
    
    
    
    198,728Credit card stock: Abbey retail
    
    
    1,178,205
    
    
    
    1,048,718 Other
    
    
    134,824
    
    
    
    139,6341,313,029
    
    
    
    1,188,352Gross unsecured personal loan lending: Abbey retail
    
    
    £1.3bn
    
    
    
    £1.1bn Other
    
    
    £0.8bn
    
    
    
    £1.1bn£2.1bn
    
    
    
    £2.2bnUnsecured lending asset
 Abbey retail
    
    
    £2.3bn
    
    
    
    £2.0bn Other
    
    
    £1.5bn
    
    
    
    £1.4bn£3.8bn
    
    
    
    £3.4bn*SME account openings (gross)
    
    
    36,918
    
    
    
    30,949*SME account stock
    
    
    195,579
    
    
    
    159,752*SME account liability
    
    
    £4.0bn
    
    
    
    £3.7bn
 19




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services
 31 December
    
    31 December2005
    
    2004Insurance and Asset Management
Investment:New business premiums: Investments
    
    
    £1,010m
    
    
    £479mNew business premiums: Pensions
    
    
    £250m
    
    
    £292mTotal life assurance new business premiums
    
    
    £1,260m
    
    
    £771mInscape
    
    
    £324m
    
    
    £250mTotal investment new business premiums
    
    
    £1,584m
    
    
    £1,021mBranch and Direct  annualised equivalent
    
    
    £94m
    
    
    £70mIntermediary  annualised equivalent
    
    
    £64m
    
    
    £49mTotal life assurance annualised equivalent
    
    
    £158m
    
    
    £119mProtection:Branch and Direct
    
    
    £18m
    
    
    £19mIntermediary
    
    
    £64m
    
    
    £78mTotal protection annualised equivalent
    
    
    £82m
    
    
    £97mFunds under management  life assurance
    
    
    £27bn
    
    
    £26bnGeneral InsuranceNew policy sales
    
    
    314,821
    
    
    377,523Policies in force
    
    
    1,472,954
    
    
    1,672,606
 *
    
    Small and Medium Enterprise.
 2005 compared to 2004
 Retail Banking
 Mortgages
  Retail Deposits
  Banking
    General Insurance
  Insurance and Asset Management
 Investment
   Protection
  20




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services
 Personal Financial Services trading income
 Personal Financial Services trading income by segment by business
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mRetail Banking
    
    
    1,961
    
    
    
    1,909Insurance and Asset Management
    
    
    322
    
    
    
    351Abbey Financial Markets
    
    
    253
    
    
    
    289Group Infrastructure
    
    
    (16
    )
    
    
    (47
    )Total trading income
    
    
    2,520
    
    
    
    2,502Adjust for: IFRS embedded value charges and rebasing
    
    
    (12
    )
    
    
    (27
    ) Reorganisation expenses  life assurance
    
    
    
    
    
    
    (20
    ) Hedging variances
    
    
    (18
    )
    
    
     Eliminating IAS proforma adjustments
    
    
    
    
    
    
    169PFS total operating income
    
    
    2,490
    
    
    
    2,624
 2005 compared to 2004
     Personal Financial Services net interest income and spread
 Personal Financial Services net interest income by segment
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mRetail Banking
    
    
    1,400
    
    
    
    1,432Insurance and Asset Management
    
    
    55
    
    
    
    72Abbey Financial Markets
    
    
    1
    
    
    
    (2
    )Group Infrastructure
    
    
    (213
    )
    
    
    (198
    )Net interest income
    
    
    1,243
    
    
    
    1,304
 2005 compared to 2004
  Personal Financial Services Banking spread
 31 December
    
    
    31 December2005
    
    
    2004Net interest income (£m)
    
    
    1,400
    
    
    
    1,432PFS Banking spread
    
    
    1.45
    %
    
    
    1.51
    %PFS Average asset spread
    
    
    0.71
    %
    
    
    0.74
    %PFS Average liability spread
    
    
    0.74
    %
    
    
    0.77
    %
 (1)
    
    Retail Banking net interest income includes income associated with the Housing Association
asset, however the Personal Financial Services Banking spread excludes Social Housing.(2)
    
    Average spread is defined as interest received (mortgage, unsecured personal loans and
overdraft interest less suspended interest) over average interest earning assets, less
interest payable (savings, in-credit bank accounts) over interest bearing liabilities
(including an element of wholesale funding).(3)
    
    Asset and liability spreads are calculated using the third party interest payments (such as
mortgage interest receivable or savings interest payable) net of relevant hedging compared to
an internal transfer price of average base rate plus 15 bps.
  21




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services
 31 December
    
    
    31 December2005
    
    
    2004Mortgage asset mix(1)
    
    £bn
    
    
    £bnIncentive periodIncentive standard variable rate linked
    
    
    12
    
    
    
    14Incentive base rate linked
    
    
    23
    
    
    
    27Fixed
    
    
    24
    
    
    
    19Tied in
    
    
    
    
    
    
    59
    
    
    
    60Free-to-goStandard variable rate linked
    
    
    14
    
    
    
    13Base-rate linked
    
    
    7
    
    
    
    6Flexible
    
    
    9
    
    
    
    6Other
    
    
    1
    
    
    
    231
    
    
    
    27Total mortgage asset
    
    
    90
    
    
    
    87
 (1)
    
    Quoted mortgage asset excludes £4.0bn (2004: £3.4bn) of Housing Association lending,
consistent with the methodology used to calculate the Abbey retail spread.
 2005 compared to 2004
   31 December
    
    
    31 December2005
    
    
    2004Liability mix
    
    £bn
    
    
    £bnBank accounts
    
    
    4.8
    
    
    
    4.5Remote access
    
    
    11.2
    
    
    
    11.0Tax and bonds
    
    
    15.0
    
    
    
    15.1Branch-based deposits
    
    
    16.1
    
    
    
    15.3Total Abbey branded household liability(1)
    
    
    47.1
    
    
    
    45.9Other subsidiaries (1)
    
    
    14.9
    
    
    
    13.5Total PFS liability
    
    
    62.0
    
    
    
    59.4
 (1)
    
    The split is different to that in the Personal Financial Services business flows section
due to the treatment of Abbey Business.
 2005 compared to 2004
    22




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services
 Trading non-interest income
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mMortgages:Administration, survey and legal fees
    
    
    68
    
    
    
    50Other
    
    
    8
    
    
    
    3976
    
    
    
    89Savings:
    
    
    38
    
    
    
    31Banking credit card and UPL fees:Banking fees
    
    
    263
    
    
    
    192Credit card fees
    
    
    18
    
    
    
    17Unsecured Personal Lending (UPL) fees
    
    
    52
    
    
    
    34333
    
    
    
    243General Insurance:Building and contents
    
    
    85
    
    
    
    91Motor
    
    
    3
    
    
    
    6Creditor
    
    
    25
    
    
    
    21Other
    
    
    1
    
    
    
    (4
    )114
    
    
    
    114Retail Banking
    
    
    561
    
    
    
    477Insurance and Asset Management
    
    
    267
    
    
    
    279Abbey Financial Markets
    
    
    252
    
    
    
    291Group Infrastructure
    
    
    197
    
    
    
    151PFS trading non-interest income
    
    
    1,277
    
    
    
    1,198
 2005 compared to 2004
        Insurance and Asset Management Income
 31 December 2005Retail Life
    
    
    Intermediary
    
    
    Total£m
    
    
    £m
    
    
    £mNew business contribution
    
    
    12
    
    
    
    26
    
    
    
    38Contribution from existing business: expected return
    
    
    34
    
    
    
    166
    
    
    
    200 experience variances, changes in assumptions and expense
loadings
    
    
    46
    
    
    
    72
    
    
    
    118Increase in value of long-term assurance businesses
    
    
    92
    
    
    
    264
    
    
    
    356Non-embedded value earnings:ANUTM and ANPIM contribution(1)
    
    
    43
    
    
    
    
    
    
    
    43Other income (including interest income)
    
    
    22
    
    
    
    82
    
    
    
    104Capital charge
    
    
    (28
    )
    
    
    (153
    )
    
    
    (181
    )Trading income
    
    
    129
    
    
    
    193
    
    
    
    322Operating expenses
    
    
    (39
    )
    
    
    (155
    )
    
    
    (194
    )Trading profit before tax(3)
    
    
    90
    
    
    
    38
    
    
    
    128Adjust for:- IFRS embedded value charges and rebasing
    
    
    (7
    )
    
    
    (5
    )
    
    
    (12
    )- Reorganisation expenses and others
    
    
    (3
    )
    
    
    (17
    )
    
    
    (20
    )Profit/(loss) before tax
    
    
    80
    
    
    
    16
    
    
    
    96New business margin (%) (2)
    
    
    26
    %
    
    
    22
    %
    
    
    23
    %
 23




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services
 31 December 2004Retail Life
    
    
    Intermediary
    
    
    Total£m
    
    
    £m
    
    
    £mNew business contribution
    
    
    14
    
    
    
    31
    
    
    
    45Contribution from existing business: expected return
    
    
    37
    
    
    
    169
    
    
    
    206 experience variances, changes in assumptions and expense
loadings
    
    
    20
    
    
    
    63
    
    
    
    83Increase in value of long-term assurance businesses
    
    
    71
    
    
    
    263
    
    
    
    334Other:ANUTM and ANPIM Contribution (1)
    
    
    38
    
    
    
    
    
    
    
    38Other income (including interest income)
    
    
    15
    
    
    
    99
    
    
    
    114Capital Charge
    
    
    (21
    )
    
    
    (114
    )
    
    
    (135
    )Trading income
    
    
    103
    
    
    
    248
    
    
    
    351Operating expenses
    
    
    (43
    )
    
    
    (219
    )
    
    
    (262
    )Trading earnings from PFS life assurance businesses(3)
    
    
    60
    
    
    
    29
    
    
    
    89Adjust for:- IFRS embedded value charges and rebasing
    
    
    (5
    )
    
    
    26
    
    
    
    21- Reorganisation expenses
    
    
    (7
    )
    
    
    (50
    )
    
    
    (57
    )- One-off statutory IAS adjustments
    
    
    
    
    
    
    (32
    )
    
    
    (32
    )- Eliminating IAS proforma adjustments
    
    
    (1
    )
    
    
    (2
    )
    
    
    (3
    )Profit/(loss) before tax
    
    
    47
    
    
    
    (29
    )
    
    
    18New business margin (%)(2)
    
    
    40
    %
    
    
    25
    %
    
    
    28
    %
 (1)
    
    ANUTM stands for Abbey National Unit Trust Managers Limited and ANPIM represents Abbey
National PEP and ISA Managers Limited.(2)
    
    New business margin is calculated as new business contribution, divided by related annualised
equivalent premiums for Life contracts.(3)
    
    The above tables include James Hay and Inscape (i.e. represents Insurance and Asset
Management Income rather than just Life Assurance).
  2005 compared to 2004   New business contribution
  Expected return
  Abbey National Unit Trust Managers Limited (ANUTM) and Abbey National PEP and ISA Managers
Limiteds (ANPIM) contribution
  Other Income (including interest income)
  Capital charge
  Operating expenses
  24




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##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services
 Experience variances, changes in assumptions and expense loadings
  31 December 2005
    
    
    31 December 2004Retail Life
    
    
    Intermediary
    
    
    Total
    
    
    Retail Life
    
    
    Intermediary
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mMortality and morbidity experience
    
    
    1
    
    
    
    7
    
    
    
    8
    
    
    
    3
    
    
    
    13
    
    
    
    16Lapse experience
    
    
    
    
    
    
    (49
    )
    
    
    (49
    )
    
    
    (1
    )
    
    
    (37
    )
    
    
    (38
    )Expense loadings
    
    
    23
    
    
    
    127
    
    
    
    150
    
    
    
    21
    
    
    
    141
    
    
    
    162Changes to reserving and modelling
methodology
    
    
    22
    
    
    
    (13
    )
    
    
    9
    
    
    
    (3
    )
    
    
    (54
    )
    
    
    (57
    )Total experience and assumption
changes variance
    
    
    46
    
    
    
    72
    
    
    
    118
    
    
    
    20
    
    
    
    63
    
    
    
    83
      IFRS embedded value charges and rebasing
   Life assurance new business premiums (1)
 31 December 2005Retail Life
    
    
    Intermediary
    
    
    Total£m
    
    
    £m
    
    
    £mSinglePension
    
    
    24
    
    
    
    204
    
    
    
    228Life and investments: ISA and unit trusts
    
    
    536
    
    
    
    
    
    
    
    536 Life and other bonds
    
    
    151
    
    
    
    309
    
    
    
    460711
    
    
    
    513
    
    
    
    1,224AnnualPension
    
    
    10
    
    
    
    12
    
    
    
    22Life and investments: ISA and unit trusts
    
    
    13
    
    
    
    
    
    
    
    13 Life and other bonds
    
    
    
    
    
    
    1
    
    
    
    1 Term assurance and other
protection
    
    
    18
    
    
    
    64
    
    
    
    8241
    
    
    
    77
    
    
    
    118Total new business premiums
    
    
    752
    
    
    
    590
    
    
    
    1,342Annualised equivalent (2)
    
    
    94
    
    
    
    64
    
    
    
    158New business margin (3)
    
    
    26
    %
    
    
    22
    %
    
    
    23
    %
 (1)
    
    Excludes sales through James Hay and Inscape.(2)
    
    Calculated as 10% of single premium new business premiums, plus annual new business premiums.(3)
    
    New business margin is calculated as new business contribution to IFRS embedded value,
divided by related annualised premiums for life contracts.
 25




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##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services
 31 December 2004Retail Life
    
    
    Intermediary
    
    
    Total£m
    
    
    £m
    
    
    £mSinglePension
    
    
    17
    
    
    
    243
    
    
    
    260Life and investments: ISA and unit trusts
    
    
    409
    
    
    
    
    
    
    
    409 Life and other bonds
    
    
    4
    
    
    
    48
    
    
    
    52430
    
    
    
    291
    
    
    
    721AnnualPension
    
    
    13
    
    
    
    19
    
    
    
    32Life and investments: ISA and unit trusts
    
    
    14
    
    
    
    
    
    
    
    14 Life and other bonds
    
    
    
    
    
    
    1
    
    
    
    1 Term assurance and other
protection
    
    
    19
    
    
    
    78
    
    
    
    9746
    
    
    
    98
    
    
    
    144Total new business premiums
    
    
    476
    
    
    
    389
    
    
    
    865Annualised equivalent (2)
    
    
    69
    
    
    
    49
    
    
    
    119New business margin (3)
    
    
    40
    %
    
    
    25
    %
    
    
    28
    %
 (1)
    
    Excludes sales through James Hay and Inscape.(2)
    
    Calculated as 10% of single premium new business premiums, plus annual new business premiums.(3)
    
    New business margin is calculated as new business contribution to IFRS embedded value,
divided by related annualised equivalent premiums for life contracts.
 2005 compared to 2004
   >
    
    Retail Life new business totalled £752m (2004:
£476m), up 58%. This was driven by increases in
single premium structured Individual Savings
Account sales and investment bonds.>
    
    New business premiums in Intermediary of £590m
were 51% higher than 2004, predominantly due to
increased sales of SPILA Flexible Select and
Choice plan.
 Assets under management
  31 December 2005Retail Life
    
    
    Intermediary(1)
    
    
    Total£bn
    
    
    £bn
    
    
    £bnClosed with-profit funds
    
    
    
    
    
    
    12.2
    
    
    
    12.2Ongoing businesses
    
    
    3.4
    
    
    
    11.3
    
    
    
    14.7Total
    
    
    3.4
    
    
    
    23.5
    
    
    
    26.9
 (1)
    
    Intermediary includes Scottish Mutual Assurance plc, Scottish Provident Ltd, Scottish
Provident International Ltd and Scottish Mutual International plc.(2)
    
    The above excludes James Hay and Inscape.
 31 December 2004Retail Life
    
    
    Intermediary (1)
    
    
    Total£bn
    
    
    £bn
    
    
    £bnClosed with-profits fund
    
    
    
    
    
    
    13.2
    
    
    
    13.2Ongoing businesses
    
    
    4.7
    
    
    
    8.3
    
    
    
    13.0Total
    
    
    4.7
    
    
    
    21.5
    
    
    
    26.2
 Note: The funds under management disclosed in the table above were largely outsourced in 2004.
  26




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##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services
 Personal
Financial Services trading expenses
 Personal Financial Services trading expenses by segment by business
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mRetail Banking
    
    
    1,050
    
    
    
    1,153Insurance and Asset Management
    
    
    193
    
    
    
    262Abbey Financial Markets
    
    
    105
    
    
    
    109Group Infrastructure
    
    
    178
    
    
    
    226Total trading expenses
    
    
    1,526
    
    
    
    1,750Adjust for: Reorganisation expenses
    
    
    233
    
    
    
    479 Intangible asset charges
    
    
    3
    
    
    
    20 IAS statutory and proforma adjustments
    
    
    
    
    
    
    239PFS expenses
    
    
    1,762
    
    
    
    2,488
 2005 compared to 2004
    Personal Financial Services trading expenses by type
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mSalaries and other compensation payments
    
    
    693
    
    
    
    718Social security costs
    
    
    58
    
    
    
    64Pension costs
    
    
    91
    
    
    
    84Salaries and other staff costs
    
    
    842
    
    
    
    866Bank, legal and professional expenses
    
    
    49
    
    
    
    76Advertising and marketing
    
    
    65
    
    
    
    109Bank, legal, marketing and professional expenses
    
    
    114
    
    
    
    185Software, computer and administration expenses
    
    
    320
    
    
    
    421Premises and equipment depreciation
    
    
    67
    
    
    
    92Other property and equipment expenses
    
    
    183
    
    
    
    186PFS trading expenses
    
    
    1,526
    
    
    
    1,750
 2005 compared to 2004
  >
    
    Salaries and other compensation
benefits are down on 2004 due to a
reduction of 4000 roles throughout the
year. A corresponding reduction in
Social Security costs has been driven
by these lower staffing levels;>
    
    Bank, legal, and professional expenses
of £49m were down 35% on 2004, this is
due to tighter cost control on
discretionary spend and greater
reductions through Procurement
negotiations;>
    
    Advertising and marketing spend was
£44m lower (2004: £109m) due to a
significant reduction in advertising
spend, greater procurement activity and
increased costs in 2004 due to
rebranding;>
    
    Computer and administration expenses of
£320m (2004: £421m) were lower due to
aggressive renegotiation or
cancellation of contracts, along with a
reduction in software purchases and
descoping software maintenance
contracts;>
    
    Premises and equipment depreciation
expenses of £67m decreased by 27%
(2004: £92m), due to asset write-offs
and run-off more than offsetting
increased capital investment;>
    
    Other property and equipment expenses
fell 2% to £183m (2004: £186m), a
result of a reduction in property
running costs due to site closures and
rationalisation, offset by increased
utilities charges due to market rate
increases;
 27




---



##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services
 
 Personal Financial Services trading provisions  Personal Financial Services trading provisions by type
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mMortgages
    
    
    8
    
    
    
    (139
    )Unsecured personal loans
    
    
    116
    
    
    
    73Credit cards
    
    
    9
    
    
    
    7Banking
    
    
    64
    
    
    
    66Other
    
    
    11
    
    
    
    13PFS provisions for bad and doubtful debts
    
    
    208
    
    
    
    20Provisions for other liabilities and charges
    
    
    11
    
    
    
    153Amounts written off fixed-asset investments
    
    
    
    
    
    
    Total PFS trading provisions
    
    
    219
    
    
    
    173Adjust for:- IFRS embedded value charges and rebasing
    
    
    
    
    
    
    48- Reorganisation expenses(1)
    
    
    
    
    
    
    (48
    )- Eliminating IAS proforma adjustments
    
    
    
    
    
    
    (5
    )PFS provisions
    
    
    219
    
    
    
    168
 (1)
    
    Includes empty premises provisions arising from the review of site locations and certain
asset write-downs.
 2005 compared to 2004
    Total Personal Financial Services non-performing loans
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mTotal non-performing loans (NPLs)
    
    
    746
    
    
    
    604Total loans and advances to customers
    
    
    99,226
    
    
    
    95,751Total provisions
    
    
    269
    
    
    
    243NPLs as a % of loans and advances
    
    
    0.75
    %
    
    
    0.63
    %Provisions as a % of NPLs
    
    
    36.06
    %
    
    
    40.23
    %
 2005 compared to 2004
   28




---



##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services
 Personal Financial Services mortgage arrears, properties in possession and lending mix  Mortgage arrears
 31 December 2005
    
    
    31 December 2004CML(1)
    
    
    
    
    
    
    
    
    
    
    CML (1)Number of
    
    
    % of total
    
    
    Industry
    
    
    Number of
    
    
    % of total
    
    
    IndustryCases
    
    cases (000)
    
    
    mortgages
    
    
    average %
    
    
    cases (000)
    
    
    mortgages
    
    
    average %1  2 months arrears
    
    
    22.5
    
    
    
    1.85
    
    
    
    1.48
    
    
    
    24.6
    
    
    
    1.88
    
    
    
    n/a3  5 months arrears
    
    
    5.5
    
    
    
    0.45
    
    
    
    0.52
    
    
    
    5.9
    
    
    
    0.45
    
    
    
    0.476  11 months arrears
    
    
    2.4
    
    
    
    0.20
    
    
    
    0.28
    
    
    
    1.8
    
    
    
    0.14
    
    
    
    0.2312 months + arrears
    
    
    0.4
    
    
    
    0.03
    
    
    
    0.12
    
    
    
    0.3
    
    
    
    0.02
    
    
    
    0.1031 December 2005
    
    
    31 December 2004% of total
    
    
    
    
    
    
    
    
    
    
    % of totalValue of arrears(2)
    
    
    
    
    £m
    
    
    mortgages
    
    
    
    
    
    £m
    
    
    mortgages1  2 months arrears
    
    
    
    
    
    
    16.4
    
    
    
    0.02
    
    
    
    
    
    
    
    16.1
    
    
    
    0.023  5 months arrears
    
    
    
    
    
    
    10.4
    
    
    
    0.01
    
    
    
    
    
    
    
    9.6
    
    
    
    0.016  11 months arrears
    
    
    
    
    
    
    8.3
    
    
    
    0.01
    
    
    
    
    
    
    
    5.2
    
    
    
    0.0112 months + arrears
    
    
    
    
    
    
    2.8
    
    
    
    
    
    
    
    
    
    
    
    2.7
    
    
    
    Total arrears
    
    
    
    
    
    
    37.9
    
    
    
    0.04
    
    
    
    
    
    
    
    33.6
    
    
    
    0.04Balance sheet provisions
    
    
    
    
    
    
    58.1
    
    
    
    
    
    
    
    
    
    
    
    53.1Coverage (times)
    
    
    
    
    
    
    1.5
    
    
    
    
    
    
    
    
    
    
    
    1.6
 Mortgage properties in possession
 31 December 2005
    
    
    31 December 2004CML(1)
    
    
    
    
    
    
    
    
    
    
    CML (1)Number of
    
    
    
    
    
    
    Industry
    
    
    Number of
    
    
    
    
    
    
    IndustryCases
    
    cases (000)
    
    
    % of total
    
    
    average %
    
    
    cases
    
    
    % of total
    
    
    average %No. of repossessions
    
    
    1,214
    
    
    
    0.10
    
    
    
    0.09
    
    
    
    987
    
    
    
    0.08
    
    
    
    0.05No. of sales
    
    
    1,055
    
    
    
    0.09
    
    
    
    0.07
    
    
    
    1,024
    
    
    
    0.08
    
    
    
    0.05Stock
    
    
    447
    
    
    
    0.04
    
    
    
    0.04
    
    
    
    288
    
    
    
    0.02
    
    
    
    0.02
 (1)
    
    The abbreviation CML stands for Council of Mortgage Lenders.(2)
    
    This represents the amount of payments outstanding rather than the total amount of loans in
arrears
 2005 compared to 2004
    Mortgage new business credit quality
 31 December
    
    
    31 December2005
    
    
    2004Loan-to-value analysis:New business> 90%
    
    
    4
    %
    
    
    6
    %75%  90%
    
    
    29
    %
    
    
    32
    %< 75%
    
    
    67
    %
    
    
    62
    %Average (at inception)
    
    
    60
    %
    
    
    61
    %Average loan-to-value of stock (indexed)
    
    
    45
    %
    
    
    45
    %New business profile:First-time buyers
    
    
    14
    %
    
    
    19
    %Home movers
    
    
    37
    %
    
    
    41
    %Remortgagers
    
    
    49
    %
    
    
    40
    %Average earnings multiple
    
    
    2.9
    
    
    
    2.7
  >
    
    The average loan-to-value of new business has remained broadly constant in 2005 at 60%, despite remortgage business
reducing as a proportion of Abbeys new business.>
    
    The proportion of new business written with a high loan-to-value (greater than 90%) has decreased in 2005 to only 4%.>
    
    Income multiples have increased in line with the market, given the continued increase in house prices. A review of income
multiples has resulted in tighter guidelines for riskier segments of business.>
    
    For niche markets such as Buy-to-Let, Abbey is under-represented and has not significantly increased its exposure.>
    
    The proportion of remortgage business taking further equity release has remained unchanged for the last 18 months.
 29




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##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services
 Personal Financial Services banking and unsecured personal loan arrears
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mTotal banking and unsecured personal loan arrears(1,2)
    
    
    126
    
    
    
    121Total banking and unsecured personal loan asset
    
    
    3,749
    
    
    
    3,288Banking and unsecured personal loan arrearsas a % of asset
    
    
    3.4
    %
    
    
    3.7
    %
 (1)
    
    Banking arrears are defined as customers whose borrowings exceed their overdraft by over
£100.(2)
    
    Unsecured personal loan arrears are defined as the balances of accounts that are three or
more monthly instalments in arrears.
 2005 compared to 2004
  Personal Financial Services provisions for doubtful debts analysis  balance sheet
 31 December 2005
    
    
    31 December 2004Provisions balance
    
    
    Balance as % of
    
    
    Provisions balance
    
    
    Balance as % of£m
    
    
    loan asset
    
    
    £m
    
    
    loan assetMortgages
    
    
    58
    
    
    
    0.1
    
    
    
    53
    
    
    
    0.1Personal banking
    
    
    45
    
    
    
    12.1
    
    
    
    39
    
    
    
    11.5Unsecured personal loans
    
    
    89
    
    
    
    4.5
    
    
    
    73
    
    
    
    4.4Abbey Business
    
    
    4
    
    
    
    0.3
    
    
    
    2
    
    
    
    0.2cahoot
    
    
    73
    
    
    
    5.3
    
    
    
    74
    
    
    
    5.7Retail Banking
    
    
    269
    
    
    
    0.3
    
    
    
    241
    
    
    
    0.3Insurance and Asset Management
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Group Infrastructure
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total PFS
    
    
    269
    
    
    
    0.3
    
    
    
    241
    
    
    
    0.3
   Personal Financial Services provisions for doubtful debts analysis  balance sheet reconciliation
 Mortgages
    
    
    Unsecured
    
    
    Total£m
    
    
    £m
    
    
    £mAt 1 January 2005
    
    
    53
    
    
    
    188
    
    
    
    241Transfer (to)/from P&L account
    
    
    7
    
    
    
    201
    
    
    
    208Recoveries
    
    
    2
    
    
    
    27
    
    
    
    29Income adjustment
    
    
    1
    
    
    
    16
    
    
    
    17Irrecoverable amounts written off
    
    
    (5
    )
    
    
    (221
    )
    
    
    (226
    )At 31 December 2005
    
    
    58
    
    
    
    211
    
    
    
    269
 30




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##### Table of Contents



Business and Financial Review
 
 Business Review  Portfolio Business Unit (PBU)
 Portfolio Business Unit trading profit on ordinary activities before tax
 31 December 2005
    
    
    31 December 2004£m
    
    
    £mNet interest income
    
    
    (36
    )
    
    
    73Non-interest income
    
    
    286
    
    
    
    158Total trading income
    
    
    250
    
    
    
    231Total trading expenses
    
    
    (38
    )
    
    
    (96
    )Depreciation and impairment on operating lease assets
    
    
    (123
    )
    
    
    (184
    )Provision for bad and doubtful debts
    
    
    (10
    )
    
    
    (10
    )Provisions for other liabilities and charges
    
    
    8
    
    
    
    Amounts written off fixed asset investments
    
    
    
    
    
    
    80Trading profit on ordinary activities before tax
    
    
    87
    
    
    
    21- Eliminating IAS proforma adjustments
    
    
    
    
    
    
    (10
    )Profit/(loss) before tax
    
    
    87
    
    
    
    11
 2005 compared to 2004
  >
    
    Net interest income decreased by £109m to £(36)m (2004: £73m) due to lower average asset balances. Net interest income
includes interest expense on the funding of operating lease assets, whereas operating lease income is included in
non-interest income. As a result of this, and the lower average asset balances, net interest income is negative in 2005.>
    
    Non-interest income increased £128m to £286m (2004: £158m), reflecting lower absolute levels of asset disposals and
related losses.>
    
    Depreciation on operating lease assets fell £61m to £123m (2004: £184m), due to continued disposals of operating lease
businesses.>
    
    Trading operating expenses fell to £38m (2004: £96m) due to reduced size of operations.>
    
    Provision for bad and doubtful debts were in line with 2004.>
    
    Amounts written off fixed asset investments were nil with 2004 being a credit of £80m, representing disposals of assets in
excess of written down values.
  Portfolio Business Unit assets and risk-weighted assets
 At 31 December 2005
    
    
    At 31 December 2004(1)Assets
    
    
    Risk-weighted assets
    
    
    Assets
    
    
    Risk-weighted assets£bn
    
    
    £bn
    
    
    £bn
    
    
    £bnTotal
    
    
    2.5
    
    
    
    2.5
    
    
    
    4.7
    
    
    
    3.9
 (1)
    
    The table excludes the shareholder net assets of the international life assurance
businesses of £208m since they do not have a risk-weighted asset equivalent.
  31




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##### Table of Contents



Business and Financial Review
 
 Other Material Items
 Impact of IFRS embedded value charges and rebasing
 31 December 2005
    
    
    31 December 2004Retail
    
    
    
    
    
    
    
    
    
    
    RetailLife
    
    
    Intermediary
    
    
    Total
    
    
    Life
    
    
    Intermediary
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mInvestment assumptions and variances
    
    
    (7
    )
    
    
    (5
    )
    
    
    (12
    )
    
    
    (5
    )
    
    
    (12
    )
    
    
    (17
    )Other one-off adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    38Total IFRS embedded value charges and
rebasing
    
    
    (7
    )
    
    
    (5
    )
    
    
    (12
    )
    
    
    (5
    )
    
    
    26
    
    
    
    21
 Investment assumptions and variances
  Other one-off adjustments
  Reorganisation and other
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mCost reduction programme
    
    
    (158
    )
    
    
    (441
    )Asset write-downs
    
    
    (5
    )
    
    
    (106
    )Misselling remediation cost
    
    
    (70
    )
    
    
    (233
    )
    
    
    (547
    )
  Hedging variances
 31 December
    
    
    31 December2005
    
    
    2004£m
    
    
    £mHedging variances
    
    
    (18
    )
    
    
    
  IFRS to US GAAP reconciliation
  2005 compared to 2004
  >
    
    In 2005, a charge was recognised in the income statement under US
GAAP reflecting impairment in the value of goodwill in the Insurance
and Asset Management segment. This impairment was recognised due to
expected lower future profitability given higher lapse rates in 2005,
coupled with projected lower volumes of new business being written at
lower margins in a competitive market. No
impairment was recognised for IFRS purposes due to the lower level of
goodwill held under IFRS.>
    
    In 2005, profits representing movements in the fair values of
securities that are classified as fair value through profit and loss
under IFRS were reversed for US GAAP purposes. Under US GAAP, these
securities are classified as available for sale, with movements in
their fair values accounted for in other comprehensive income. Prior
to 1 January 2005, under IFRS these securities were accounted for at
cost, subject to impairment, so there is no equivalent income
statement adjustment in 2004, the relevant IFRS being prospective
from 1 January 2005.
 32




---



##### Table of Contents



Business and Financial Review
 Other
Material Items
 
 >
    
    In 2005, investment properties held at market value under IFRS, and
amortised cost under US GAAP, were sold. The sales proceeds
significantly exceeded the amortised cost. As a result, the 2005
income statement adjustment reflects the increased profit recognised
under US GAAP, which was effectively recognised as market value
movements in prior periods under IFRS. Predominantly, this gain flows
to the policyholder bonus fund, resulting in a corresponding increase
in policy liabilities.>
    
    In 2005, there was no significant income statement adjustment
relating to derivatives because under US GAAP, and IFRS from 1
January 2005, all derivatives are marked to market through the income
statement. In 2004, the adjustment primarily reflects the
marking to market of non-trading derivatives for US GAAP purposes
that were accrual accounted under IFRS, the relevant IFRS being
prospective from 1 January 2005.>
    
    In 2005, the debt securities in issue income statement adjustment
for US GAAP reflects the reversal of movements in the fair value of
debt securities in issue that qualify for the fair value option under
IFRS, but do not qualify under the US GAAP fair value option. Prior
to 1 January 2005, a fair value option did not exist under either
IFRS or US GAAP, so there is no equivalent income statement
adjustment for this in 2004. In addition, the US GAAP adjustment in
2005 reflects the absence of claiming hedge accounting under US GAAP
and the consequent reversal of the hedge accounting claimed under
IFRS, as well as the reversal of the IFRS transition adjustment
under IFRS 1 for items that qualified as hedges prior to 1 January
2005 but which did not meet the requirements of IAS 39 applicable
from 1 January 2005.>
    
    In 2005, a credit was recognised in the income statement under US
GAAP reflecting the removal of the preference share dividends which
are accounted for as interest expense in the income statement under
IFRS, the relevant IFRS being prospective from 1 January 2005, but
which are excluded from the income statement and accounted for as an
appropriation of profit in reserves under US GAAP. In addition, the
gains and losses recognised under IFRS on the retranslation of
foreign currency denominated preference shares were reversed because
under US GAAP those preference shares are not retranslated. In 2004,
under IFRS, the preference share dividends were accounted for as an
appropriation of profit and the foreign currency denominated
preference shares were not retranslated. These treatments were
consistent with US GAAP, so there was no adjustment in 2004.
 Legal proceedings
  Material contracts
  Audit fees
  33




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##### Table of Contents



Business and Financial Review
 
 Balance
Sheet Business Review
  Deposits
  Average: year ended 31 December2005
    
    
    2004£m
    
    
    £mDeposits by banksUK
    
    
    26,084
    
    
    
    30,036Non-UK
    
    
    677
    
    
    
    688Total
    
    
    26,761
    
    
    
    30,724Customers accounts (all interest bearing)UK
    
    
    63,999
    
    
    
    58,404Non-UK
    
    
    6,080
    
    
    
    5,301Total
    
    
    70,079
    
    
    
    63,705
 Customers accounts  by type
 Average: year ended 31 December2005
    
    
    2004£m
    
    
    £mUKRetail demand deposits
    
    
    52,083
    
    
    
    40,760Retail time deposits
    
    
    9,076
    
    
    
    12,177Wholesale deposits
    
    
    2,840
    
    
    
    5,46763,999
    
    
    
    58,404Non-UKRetail demand deposits
    
    
    1,092
    
    
    
    1,152Retail time deposits
    
    
    4,875
    
    
    
    4,149Wholesale deposits
    
    
    113
    
    
    
    6,080
    
    
    
    5,301Total
    
    
    70,079
    
    
    
    63,705
  Average: yearended 31December2003£mDeposits by banksUK
    
    
    7,144Non-UK
    
    
    1,761Total
    
    
    8,905Customers accounts (all interest bearing)UK
    
    
    63,154Non-UK
    
    
    5,501Total
    
    
    68,655
  Average: yearended 31December2003£mUKRetail demand deposits
    
    
    42,477Retail time deposits
    
    
    12,620Wholesale deposits
    
    
    8,05763,154Non-UKRetail demand deposits
    
    
    1,260Retail time deposits
    
    
    4,083Wholesale deposits
    
    
    1585,501Total
    
    
    68,655
  34




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  Demand Deposits
  Time Deposits
  Wholesale Deposits
  Short-term borrowings
  Deposits by banks
 Year ended 31 December2005
    
    
    2004£m
    
    
    £mYear-end balance (1)
    
    
    27,478
    
    
    
    18,412Average balance
    
    
    26,761
    
    
    
    30,724Maximum balance
    
    
    35,872
    
    
    
    25,530%
    
    
    
    %Average interest rate during year(2)
    
    
    
    
    
    
    Year-end interest rate (2)
    
    
    
    
    
    
    
 (1)
    
    The year-end deposits by banks balance include non-interest bearing items in the course
of transmission of £248m (2004: £161m).(2)
    
    Abbey policy is to mark to market the majority of its deposits by banks balances including
interest and is recorded in net trading income banking rather than net interest income,
therefore it has not been possible to calculate either the average interest rate during the
year or year end interest rate.
   Year ended 31December2003£mYear-end balance (1)
    
    
    1,178Average balance
    
    
    8,905Maximum balance
    
    
    10,979%Average interest rate during year
    
    
    2.78Year-end interest rate (2)
    
    
    2.83
 (1)
    
    The year-end deposits by banks balance includes non-interest bearing items in the course
of transmission of £204m.(2)
    
    Year-end interest rates are calculated on the basis of the interest earned in the year
relative to the year-end balance, and are therefore not representative of actual interest
rates.
  35




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Commercial Paper
 Year ended 31 December2005
    
    
    2004£m
    
    
    £mYear-end balance
    
    
    6,009
    
    
    
    1,656Average balance
    
    
    2,891
    
    
    
    2,086Maximum balance
    
    
    6,009
    
    
    
    3,367%
    
    
    
    %Average
interest rate during year
(1)
    
    
    
    
    
    
    Year-end interest rate(1)
    
    
    
    
    
    
    
 (1)
    
    Abbey policy is to mark to market its commercial paper balances including interest paid on
commercial paper and is recorded in net trading income banking rather than net interest
income, therefore it has not been possible to calculate either the Average interest rate
during the year or the year-end interest rate.
  Year ended 31December2003£mYear-end balance
    
    
    1,298Average balance
    
    
    4,199Maximum balance
    
    
    7,300%Average interest rate during year
    
    
    1.60Year-end interest rate(1)
    
    
    5.16
 (1)
    
    Interest rates are calculated on the basis of the interest earned in the year relative to
the year-end balance and are therefore not representative of actual interest rates.
  Negotiable certificates of deposit
 Year ended 31 December2005
    
    
    2004£m
    
    
    £mYear-end balance
    
    
    5,282
    
    
    
    7,073Average balance (1)
    
    
    5,727
    
    
    
    8,496Maximum balance
    
    
    6,670
    
    
    
    9,901%
    
    
    
    %Average interest rate during year(2)
    
    
    
    
    
    
    Year-end interest rate(2)
    
    
    
    
    
    
    
 (1)
    
    Average balances for 2005 and 2004 are based upon daily data for Abbey National Treasury
Services plc and its subsidiaries and monthly data for all other operations.(2)
    
    Abbey policy is to mark to market its negotiable balances including interest paid on
negotiable certificate of deposits and is recorded in net trading income banking rather than
net interest income, therefore it has not been possible to calculate either the Average
interest rate during the year or the year-end interest rate.
  Year ended 31December2003£mYear-end balance
    
    
    8,211Average balance (1)
    
    
    13,996Maximum balance
    
    
    22,429%Average interest rate during year
    
    
    2.17Year-end interest rate(2)
    
    
    3.70
 (1)
    
    Average balances for 2003 are based upon daily data for Abbey National Treasury Services
plc and its subsidiaries and monthly data for all other operations.(2)
    
    Year-end interest rates are calculated on the basis of the interest earned in the year
relative to the year-end balance and are therefore not representative of actual interest
rates.
 36




---



##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Certificates of deposits and certain time deposits
  In more thanthree months
    
    
    In more thanbut not more
    
    
    six months butNot more than
    
    
    than six
    
    
    not more than
    
    
    In more than athree months
    
    
    months
    
    
    one year
    
    
    year
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCertificates of deposit:UK
    
    
    1,485
    
    
    
    397
    
    
    
    1,346
    
    
    
    202
    
    
    
    3,430Non-UK
    
    
    1,690
    
    
    
    104
    
    
    
    29
    
    
    
    29
    
    
    
    1,852Wholesale time deposits:UK
    
    
    2,406
    
    
    
    203
    
    
    
    112
    
    
    
    1,103
    
    
    
    3,824Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    5,581
    
    
    
    704
    
    
    
    1,487
    
    
    
    1,334
    
    
    
    9,106
  Securities
  37




---



##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 2005
    
    
    2004Net asset
    
    
    Market
    
    
    Net asset
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £mTrading portfolioDebt securities:UK government
    
    
    2,700
    
    
    
    2,700
    
    
    
    7,492
    
    
    
    7,492US treasury and other US government agencies and corporations
    
    
    22
    
    
    
    22
    
    
    
    
    
    
    
    Other public sector securities
    
    
    350
    
    
    
    350
    
    
    
    2,887
    
    
    
    2,886Bank and building society certificates of deposit
    
    
    18,647
    
    
    
    18,647
    
    
    
    12,683
    
    
    
    12,683Other issuers:Floating rate notes
    
    
    463
    
    
    
    463
    
    
    
    224
    
    
    
    224Mortgage-backed securities
    
    
    350
    
    
    
    350
    
    
    
    240
    
    
    
    240Other asset-backed securities
    
    
    4,626
    
    
    
    4,626
    
    
    
    495
    
    
    
    495Other
    
    
    4,396
    
    
    
    4,396
    
    
    
    12,317
    
    
    
    12,317Ordinary shares and similar securities
    
    
    1,539
    
    
    
    1,539
    
    
    
    10,762
    
    
    
    10,762Sub Total
    
    
    33,093
    
    
    
    33,093
    
    
    
    47,100
    
    
    
    47,099Investment securitiesDebt securities:UK government
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    US treasury and other US government agencies and corporations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other public sector securities
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    28Bank and building society certificates of deposit
    
    
    
    
    
    
    
    
    
    
    317
    
    
    
    317Other issuers:Floating rate notes
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    27Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    42Other asset-backed securities
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    310Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Ordinary shares and similar securities
    
    
    13
    
    
    
    13
    
    
    
    30
    
    
    
    32Sub Total
    
    
    13
    
    
    
    13
    
    
    
    702
    
    
    
    756Fair value through profit and lossDebt securities:UK government
    
    
    2,794
    
    
    
    2,794
    
    
    
    
    
    
    
    US treasury and other US government agencies and corporations
    
    
    100
    
    
    
    100
    
    
    
    
    
    
    
    Other public sector securities
    
    
    417
    
    
    
    417
    
    
    
    
    
    
    
    Bank and building society certificates of deposit
    
    
    841
    
    
    
    841
    
    
    
    
    
    
    
    Other issuers:Floating rate notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other asset-backed securities
    
    
    343
    
    
    
    343
    
    
    
    
    
    
    
    Other
    
    
    8,387
    
    
    
    8,387
    
    
    
    
    
    
    
    Ordinary shares and similar securities
    
    
    11,670
    
    
    
    11,670
    
    
    
    
    
    
    
    Sub Total
    
    
    24,552
    
    
    
    24,552
    
    
    
    
    
    
    
    Total
    
    
    57,658
    
    
    
    57,658
    
    
    
    47,802
    
    
    
    47,855
 38




---



##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  2003Net asset
    
    
    Marketvalue
    
    
    value (1)£m
    
    
    £mInvestment securitiesDebt securities:UK government
    
    
    125
    
    
    
    125US treasury and other US government agencies and corporations
    
    
    
    
    
    
    Other public sector securities
    
    
    28
    
    
    
    28Bank and building society certificates of deposit
    
    
    204
    
    
    
    204Other issuers:Floating rate notes
    
    
    330
    
    
    
    381Mortgage-backed securities
    
    
    36
    
    
    
    37Other asset-backed securities
    
    
    535
    
    
    
    483Other
    
    
    495
    
    
    
    583Ordinary shares and similar securities
    
    
    394
    
    
    
    394Sub Total
    
    
    2,147
    
    
    
    2,235Other securitiesDebt securities:UK government
    
    
    547
    
    
    
    547Other public sector securities
    
    
    3,827
    
    
    
    3,827Bank and building society certificates of deposit
    
    
    15,811
    
    
    
    15,811Other issuers:Floating rate notes
    
    
    244
    
    
    
    244Mortgage-backed securities
    
    
    608
    
    
    
    608Other asset-backed securities
    
    
    614
    
    
    
    614Other
    
    
    6,924
    
    
    
    6,924Ordinary shares and similar securities
    
    
    1,239
    
    
    
    1,239Sub Total
    
    
    29,814
    
    
    
    29,814Total
    
    
    31,961
    
    
    
    32,049
 (1)
    
    There are hedges in place in respect of certain securities where the rise or fall in
their market value will be offset by a substantially equivalent reduction or increase in the
value of the hedges.
 UK government securities
  US treasury and other US government agencies and corporations
  Other public sector securities
  Bank and building society certificates of deposit
  Other issuers: floating-rate notes
  Other issuers: mortgage-backed securities
  Other Issuers: other asset-backed securities
  39




---



##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Other issuers: other securities
   Book value
    
    
    Market value£m
    
    
    £mRoyal Bank of Scotland Group plc
    
    
    3,230
    
    
    
    3,233HBOS plc
    
    
    3,121
    
    
    
    3,132Lloyds TSB Group plc
    
    
    2,707
    
    
    
    2,717Barclays Bank plc
    
    
    1,847
    
    
    
    1,848Nordea Bank AB
    
    
    1,000
    
    
    
    1,000Unicredito Italiano SPA
    
    
    863
    
    
    
    865Government of Germany
    
    
    823
    
    
    
    885Nationwide Building Society
    
    
    617
    
    
    
    617Societe Generale
    
    
    611
    
    
    
    613Banco Bilbao Vizcaya Argentaria
    
    
    602
    
    
    
    602Republic of Italy
    
    
    503
    
    
    
    510Bank of Ireland
    
    
    500
    
    
    
    501HSBC Holdings plc
    
    
    486
    
    
    
    486Kingdom of Spain
    
    
    431
    
    
    
    442Credit Suisse Group
    
    
    429
    
    
    
    430Republic of Austria
    
    
    425
    
    
    
    441BNP Paribas
    
    
    407
    
    
    
    409UK Government
    
    
    403
    
    
    
    457
  Loans and advances to banks
   Year ended 31 December2005
    
    
    2004£m
    
    
    £mUK
    
    
    8,060
    
    
    
    11,081Non-UK
    
    
    1,036
    
    
    
    670Total
    
    
    9,096
    
    
    
    11,751
  Year ended 31 December2003
    
    
    2002
    
    
    2001£m
    
    
    £m
    
    
    £mUK
    
    
    6,219
    
    
    
    6,465
    
    
    
    9,288Non-UK
    
    
    936
    
    
    
    135
    
    
    
    586Total
    
    
    7,155
    
    
    
    6,600
    
    
    
    9,874
  In more than
    
    
    In more thanthree months
    
    
    one year butIn not more
    
    
    but not more
    
    
    not moreon
    
    
    than three
    
    
    than one
    
    
    than five
    
    
    In more thandemand
    
    
    months
    
    
    year
    
    
    years
    
    
    five years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUK
    
    
    2,072
    
    
    
    3,930
    
    
    
    2,057
    
    
    
    1
    
    
    
    
    
    
    
    8,060Non-UK
    
    
    47
    
    
    
    752
    
    
    
    236
    
    
    
    1
    
    
    
    
    
    
    
    1,036Total
    
    
    2,119
    
    
    
    4,682
    
    
    
    2,293
    
    
    
    2
    
    
    
    
    
    
    
    9,096
 40




---



##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Fixed rate
    
    
    Variable rate
    
    
    Total£m
    
    
    £m
    
    
    £mInterest-bearing loans and advances to banks:UK
    
    
    3,755
    
    
    
    4,113
    
    
    
    7,868Non-UK
    
    
    78
    
    
    
    958
    
    
    
    1,0363,833
    
    
    
    5,071
    
    
    
    8,904Items in the course of collection (non-interest bearing):UK
    
    
    n/a
    
    
    
    n/a
    
    
    
    192Non-UK
    
    
    n/a
    
    
    
    n/a
    
    
    
    Total
    
    
    3,833
    
    
    
    5,071
    
    
    
    9,096
 Loans and Advances to Customers
   Year
ended 31 December2005
    
    
    2004£m
    
    
    £mUKAdvances secured on residential properties
    
    
    94,330
    
    
    
    91,164Purchase and resale agreements
    
    
    4,789
    
    
    
    4,520Other secured advances
    
    
    1,882
    
    
    
    1,793Corporate advances
    
    
    334
    
    
    
    1,030Unsecured personal advances
    
    
    3,845
    
    
    
    3,517Finance lease debtors
    
    
    3
    
    
    
    1,108105,183
    
    
    
    103,132Non-UKAdvances secured on residential properties
    
    
    26
    
    
    
    14Purchase and resale agreements
    
    
    13,152
    
    
    
    6,737Other secured advances
    
    
    
    
    
    
    Unsecured personal advances
    
    
    31
    
    
    
    Finance lease debtors
    
    
    
    
    
    
    13,209
    
    
    
    6,751Total
    
    
    118,392
    
    
    
    109,883
  Year
ended 31 December2003
    
    
    2002
    
    
    2001£m
    
    
    £m
    
    
    £mUKAdvances secured on residential properties
    
    
    73,481
    
    
    
    65,777
    
    
    
    60,738Purchase and resale agreements
    
    
    2,958
    
    
    
    742
    
    
    
    2,704Other secured advances
    
    
    2,938
    
    
    
    4,645
    
    
    
    3,920Corporate advances
    
    
    3,762
    
    
    
    9,071
    
    
    
    9,119Unsecured personal advances
    
    
    3,228
    
    
    
    5,162
    
    
    
    4,833Finance lease debtors
    
    
    2,558
    
    
    
    3,429
    
    
    
    4,67188,925
    
    
    
    88,826
    
    
    
    85,985Non-UKAdvances secured on residential properties
    
    
    1,745
    
    
    
    3,186
    
    
    
    2,091Purchase and resale agreements
    
    
    6,414
    
    
    
    2,358
    
    
    
    1,507Other secured advances
    
    
    33
    
    
    
    106
    
    
    
    48Unsecured personal advances
    
    
    145
    
    
    
    123
    
    
    
    119Finance lease debtors
    
    
    15
    
    
    
    18
    
    
    
    678,352
    
    
    
    5,791
    
    
    
    3,832Total
    
    
    97,277
    
    
    
    94,617
    
    
    
    89,817
   41




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 In more than
    
    
    In more thanIn not more
    
    
    three months
    
    
    one year butOn
    
    
    than three
    
    
    but not more
    
    
    not more than
    
    
    In more thandemand
    
    
    months
    
    
    than one year
    
    
    five years
    
    
    five years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUKAdvances secured on
residential properties
    
    
    1,199
    
    
    
    1,362
    
    
    
    1,968
    
    
    
    10,730
    
    
    
    79,071
    
    
    
    94,330Purchase and resale agreements
    
    
    
    
    
    
    4,789
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,789Other secured advances
    
    
    229
    
    
    
    2
    
    
    
    2
    
    
    
    15
    
    
    
    1,634
    
    
    
    1,882Corporate advances
    
    
    
    
    
    
    67
    
    
    
    8
    
    
    
    169
    
    
    
    90
    
    
    
    334Unsecured personal advances
    
    
    974
    
    
    
    165
    
    
    
    633
    
    
    
    1,802
    
    
    
    271
    
    
    
    3,845Finance lease debtors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    2
    
    
    
    3Total UK
    
    
    2,402
    
    
    
    6,385
    
    
    
    2,611
    
    
    
    12,717
    
    
    
    81,068
    
    
    
    105,183Non-UKAdvances secured on
residential properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    24
    
    
    
    26Purchase and resale agreements
    
    
    12,655
    
    
    
    497
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,152Other secured advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unsecured advances
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31Finance lease debtors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-UK
    
    
    12,655
    
    
    
    528
    
    
    
    
    
    
    
    2
    
    
    
    24
    
    
    
    13,209Total
    
    
    15,057
    
    
    
    6,913
    
    
    
    2,611
    
    
    
    12,719
    
    
    
    81,092
    
    
    
    118,392
  Fixed rate
    
    
    Variable rate
    
    
    Total£m
    
    
    £m
    
    
    £mUK
    
    
    33,420
    
    
    
    71,763
    
    
    
    105,183Non-UK
    
    
    
    
    
    
    13,209
    
    
    
    13,20933,420
    
    
    
    84,972
    
    
    
    118,392
  Provisions on loans and advances to customers
   >
    
    Observed provision an observed provision is established for all
past due loans after a specified period of repayment default where it
is likely that some of the capital will not be repaid or recovered
through enforcement of any applicable security. The length of the
default period depends on the nature of the advance and is generally
no more than three months. Once a loan misses a payment (breach of
contractual terms) an assessment of the likelihood of collecting the
principal and overdue payments is made. This assessment is generally
made using statistical techniques developed on previous experience
and on management judgement of economic conditions. These techniques
estimate the propensity of loans to go to write off and as a separate
exercise, the loss incurred on written off debt is monitored. For
advances secured on residential property the propensity of loans to
reach repossession is determined, with repossessed properties
assessed on an individual basis through the use of external
valuation, anticipated disposal costs and the current exposure.>
    
    Incurred but not yet observed provision an incurred but not yet
observed provision is made against loans, which have not missed a
payment but are known from past experience to have deteriorated since
the initial decision to lend was made. Based on historical evidence,
the number of accounts likely to default in the future as a result of
events present at the balance sheet date are identified through use
of statistical techniques. From 1 January 2005, these statistical techniques were expanded and enhanced. In
particular, further detailed examination is now performed on the losses that
emerge over a defined period of time after the reporting date called the
emergence period. This period is determined to ensure that only those accounts
which have a credit deterioration at the reporting date are captured and
excludes accounts which will suffer credit deterioration after the reporting
period. The emergence period is three months for unsecured lending and twelve
months for secured lending. The provision methodology outlined for observed
provisions is then applied to accounts identified as impaired in the performing
portfolios.>
    
    Amounts written off Unsecured loans are written off
when all internal avenues of collecting the debt have
failed and the debt is passed onto external
collection agencies. On secured loans, the write off
takes place on ultimate
 42




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 realisation of collateral value, or from claiming on any mortgage indemnity guarantee or other
insurance. All write offs are on a case by case basis, taking account of the exposure at the
date of write off, after accounting for the value from any collateral or insurance held
against the loan. The write-off policy is regularly reviewed to assist in determining the
adequacy of provisions.
   Analysis of end-of-year provisions on loans and advances to customers
 2005
    
    
    2004£m
    
    
    £mObserved provisionAdvances secured on residential properties  UK
    
    
    21
    
    
    
    9Other secured advances  UK
    
    
    126
    
    
    
    148Unsecured personal advances  UK
    
    
    158
    
    
    
    133Corporate advances  UK
    
    
    
    
    
    
    67Total observed provisions
    
    
    305
    
    
    
    357Incurred but not yet observed provisionAdvances secured on residential properties  UK
    
    
    35
    
    
    
    58Other secured advances  UK
    
    
    
    
    
    
    3Unsecured personal advances  UK
    
    
    54
    
    
    
    35Corporate advances  UK
    
    
    
    
    
    
    14Total incurred but not yet observed provisions
    
    
    89
    
    
    
    110Total provisions
    
    
    394
    
    
    
    467RatiosProvisions at the year end as a percentage of year-end loans and advances to customers:
    
    
    %
    
    
    
    %Advances secured on residential properties  UK
    
    
    0.06
    
    
    
    0.07Other secured advances  UK
    
    
    6.69
    
    
    
    5.22Unsecured personal advances  UK
    
    
    5.46
    
    
    
    4.57Corporate advances  UK
    
    
    
    
    
    
    9.22Advances secured on residential properties  non-UK
    
    
    
    
    
    
    0.75Total loans and advances to customers
    
    
    0.41
    
    
    
    0.43Amounts written off (net of recoveries) (1)
    
    
    0.31
    
    
    
    0.35Percent of loans in each category to total loans:Advances secured on residential properties  UK
    
    
    93.96
    
    
    
    82.97Purchase and resale agreements  UK
    
    
    
    
    
    
    4.11Other secured advances  UK
    
    
    1.97
    
    
    
    2.64Corporate advances  UK
    
    
    
    
    
    
    0.80Unsecured personal advances  UK
    
    
    4.04
    
    
    
    3.34Advances secured on residential properties  non-UK
    
    
    0.03
    
    
    
    0.01Purchase and resale agreements  non-UK
    
    
    
    
    
    
    6.13
 (1)
    
    Amounts written off (net of recoveries) ratio as a percentage of average loans and advances
to customers excluding finance leases.
 43




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  2003
    
    
    2002
    
    
    2001£m
    
    
    £m
    
    
    £mSpecificAdvances secured on residential properties  UK
    
    
    8
    
    
    
    24
    
    
    
    46Other secured advances  UK
    
    
    36
    
    
    
    42
    
    
    
    45Unsecured personal advances  UK
    
    
    171
    
    
    
    124
    
    
    
    152Corporate advances  UK
    
    
    161
    
    
    
    204
    
    
    
    Advances secured on residential properties  non-UK
    
    
    17
    
    
    
    26
    
    
    
    16Other secured advances  non-UK
    
    
    26
    
    
    
    34
    
    
    
    27Unsecured personal advances  non-UK
    
    
    4
    
    
    
    4
    
    
    
    4Total specific provisions
    
    
    423
    
    
    
    458
    
    
    
    290GeneralAdvances secured on residential properties  UK
    
    
    165
    
    
    
    165
    
    
    
    145Other secured advances  UK
    
    
    58
    
    
    
    19
    
    
    
    18Unsecured personal advances  UK
    
    
    32
    
    
    
    32
    
    
    
    35Corporate advances  UK
    
    
    173
    
    
    
    56
    
    
    
    Advances secured on residential properties  non-UK
    
    
    12
    
    
    
    9
    
    
    
    5Other secured advances  non-UK
    
    
    2
    
    
    
    4
    
    
    
    4Unsecured personal advances  non-UK
    
    
    
    
    
    
    3
    
    
    
    1Total general provisions
    
    
    442
    
    
    
    288
    
    
    
    208Total provisions
    
    
    865
    
    
    
    746
    
    
    
    498Ratios
    
    
    %
    
    
    
    %
    
    
    
    %Provisions at the year end as a percentage of
year-end loans and advances to customersAdvances secured on residential properties  UK
    
    
    0.24
    
    
    
    0.29
    
    
    
    0.31Other secured advances  UK
    
    
    3.28
    
    
    
    1.30
    
    
    
    1.61Unsecured personal advances  UK
    
    
    6.20
    
    
    
    3.02
    
    
    
    3.87Corporate advances  UK
    
    
    13.83
    
    
    
    2.97
    
    
    
    Advances secured on residential properties  non-UK
    
    
    1.70
    
    
    
    1.10
    
    
    
    1.00Other secured advances  non-UK
    
    
    68.29
    
    
    
    80.85
    
    
    
    64.58Unsecured personal advances  non-UK
    
    
    2.76
    
    
    
    5.69
    
    
    
    4.20Total loans and advances to customers
    
    
    0.93
    
    
    
    0.82
    
    
    
    0.59Amounts written off (net of recoveries) (1)
    
    
    0.40
    
    
    
    0.33
    
    
    
    0.37Percent of loans in each category to total loansAdvances secured on residential properties  UK
    
    
    76.62
    
    
    
    69.76
    
    
    
    67.62Purchase and resale agreements  UK
    
    
    3.08
    
    
    
    0.79
    
    
    
    3.01Other secured advances  UK
    
    
    3.05
    
    
    
    4.99
    
    
    
    4.36Corporate advances  UK
    
    
    2.51
    
    
    
    9.27
    
    
    
    10.15Unsecured personal advances  UK
    
    
    3.40
    
    
    
    5.47
    
    
    
    5.38Finance lease debtors  UK
    
    
    2.67
    
    
    
    3.64
    
    
    
    5.20Advances secured on residential properties  non-UK
    
    
    1.78
    
    
    
    3.38
    
    
    
    2.33Purchase and resale agreements  non-UK
    
    
    6.68
    
    
    
    2.50
    
    
    
    1.70Other secured advances  non-UK
    
    
    0.04
    
    
    
    0.05
    
    
    
    0.05Unsecured advances  non-UK
    
    
    0.15
    
    
    
    0.13
    
    
    
    0.13Finance lease debtors  non-UK
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.07
 44




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Movements in provisions for bad and doubtful debts
 2005
    
    
    2004£m
    
    
    £mProvisions at 31 December
    
    
    467
    
    
    
    IFRS reclassifications
    
    
    (40
    )
    
    
    Provisions at the 1 January
    
    
    427
    
    
    
    865Disposal of subsidiary undertakings
    
    
    
    
    
    
    (70
    )427
    
    
    
    795Amounts written offAdvances secured on residential properties  UK
    
    
    (8
    )
    
    
    (2
    )Other secured advances  UK
    
    
    (42
    )
    
    
    (39
    )Unsecured personal advances  UK
    
    
    (275
    )
    
    
    (136
    )Corporate advances  UK
    
    
    
    
    
    
    (164
    )(325
    )
    
    
    (341
    )Advances secured on residential properties  non-UK
    
    
    
    
    
    
    (2
    )Other secured advances  non-UK
    
    
    
    
    
    
    (2
    )Total amounts written off
    
    
    (325
    )
    
    
    (345
    )RecoveriesAdvances secured on residential properties  UK
    
    
    3
    
    
    
    16Other secured advances  UK
    
    
    7
    
    
    
    8Unsecured personal advances  UK
    
    
    27
    
    
    
    2837
    
    
    
    52Advances secured on residential properties  non-UK
    
    
    
    
    
    
    Other secured advances  non-UK
    
    
    
    
    
    
    Total amount recovered
    
    
    37
    
    
    
    52Observed provisions charged against profitAdvances secured on residential properties  UK
    
    
    12
    
    
    
    (13
    )Other secured advances  UK
    
    
    11
    
    
    
    147Unsecured personal advances  UK
    
    
    221
    
    
    
    70Corporate advances  UK
    
    
    
    
    
    
    71244
    
    
    
    275Advances secured on residential properties  non-UK
    
    
    (3
    )
    
    
    (1
    )Other secured advances  non-UK
    
    
    
    
    
    
    Unsecured personal advances  non-UK
    
    
    
    
    
    
    1Total observed provisions charged against profit
    
    
    241
    
    
    
    275Incurred but not yet observed provisions charged against profit
    
    
    14
    
    
    
    (310
    )Exchange and other adjustments
    
    
    
    
    
    
    Provisions at the end of the year
    
    
    394
    
    
    
    467
  45




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  2003
    
    
    2002
    
    
    2001£m
    
    
    £m
    
    
    £mProvisions at the beginning of the year
    
    
    746
    
    
    
    498
    
    
    
    527Acquisition of subsidiary undertakings
    
    
    
    
    
    
    8
    
    
    
    Disposal of subsidiary undertakings
    
    
    (94
    )
    
    
    (1
    )
    
    
    652
    
    
    
    505
    
    
    
    527Amounts written offAdvances secured on residential properties  UK
    
    
    (16
    )
    
    
    (27
    )
    
    
    (41
    )Other secured advances  UK
    
    
    (45
    )
    
    
    (33
    )
    
    
    (49
    )Unsecured personal advances  UK
    
    
    (148
    )
    
    
    (335
    )
    
    
    (296
    )Corporate advances  UK
    
    
    (80
    )
    
    
    
    
    
    
    (289
    )
    
    
    (395
    )
    
    
    (386
    )Advances secured on residential properties  non-UK
    
    
    (10
    )
    
    
    
    
    
    
    (1
    )Other secured advances  non-UK
    
    
    (10
    )
    
    
    
    
    
    
    (5
    )Unsecured personal advances  non-UK
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Total amounts written off
    
    
    (309
    )
    
    
    (396
    )
    
    
    (393
    )RecoveriesAdvances secured on residential properties  UK
    
    
    4
    
    
    
    4
    
    
    
    9Other secured advances  UK
    
    
    
    
    
    
    3
    
    
    
    8Unsecured personal advances  UK
    
    
    38
    
    
    
    89
    
    
    
    8542
    
    
    
    96
    
    
    
    102Advances secured on residential properties  non-UK
    
    
    
    
    
    
    5
    
    
    
    Other secured advances  non-UK
    
    
    
    
    
    
    6
    
    
    
    Total amount recovered
    
    
    42
    
    
    
    107
    
    
    
    102Specific provisions charged against profitAdvances secured on residential properties  UK
    
    
    5
    
    
    
    1
    
    
    
    27Other secured advances  UK
    
    
    52
    
    
    
    25
    
    
    
    29Unsecured personal advances  UK
    
    
    205
    
    
    
    219
    
    
    
    193Corporate advances  UK
    
    
    36
    
    
    
    207
    
    
    
    298
    
    
    
    452
    
    
    
    249Advances secured on residential properties  non-UK
    
    
    4
    
    
    
    2
    
    
    
    6Other secured advances  non-UK
    
    
    
    
    
    
    (1
    )
    
    
    (8
    )Unsecured personal advances  non-UK
    
    
    
    
    
    
    1
    
    
    
    1Total specific provisions charged against profit
    
    
    302
    
    
    
    454
    
    
    
    248General provisions charged against profit
    
    
    172
    
    
    
    60
    
    
    
    15Exchange and other adjustments
    
    
    6
    
    
    
    16
    
    
    
    (1
    )Provisions at the end of the year
    
    
    865
    
    
    
    746
    
    
    
    498
 Potential credit risk elements in loans and advances
  Group non-performing loans and advances
 2005
    
    
    2004£m
    
    
    £mAccruing loans and advances on which specific provision madeUK
    
    
    314
    
    
    
    297Non-UK
    
    
    
    
    
    
    314
    
    
    
    297Accruing loans and advances 90 days overdue on which no specific provision madeUK
    
    
    568
    
    
    
    844Non-UK
    
    
    
    
    
    
    568
    
    
    
    844Total non-performing loans and advances:UK
    
    
    882
    
    
    
    1,141Non-UK
    
    
    
    
    
    
    882
    
    
    
    1,141Non-performing loans and advances as a percentage of loans and advances to
customers excluding finance leases
    
    
    0.75
    %
    
    
    1.04
    %Provision as a percentage of total non-performing loans and advances
    
    
    44.67
    %
    
    
    40.93
    %
  46




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
   2003
    
    
    2002
    
    
    2001£m
    
    
    £m
    
    
    £mAccruing loans and advances on which a proportion of interest
has been suspended and/or on which specific provision has been
made:UK
    
    
    1,531
    
    
    
    515
    
    
    
    717Non-UK
    
    
    101
    
    
    
    154
    
    
    
    1311,632
    
    
    
    669
    
    
    
    848Accruing loans and advances 90 days overdue on which no interest
has been suspended and on which no specific provision has been
made:UK
    
    
    1,110
    
    
    
    1,364
    
    
    
    898Non-UK
    
    
    4
    
    
    
    22
    
    
    
    191,114
    
    
    
    1,386
    
    
    
    917Non-accruing loans and advances:UK
    
    
    
    
    
    
    
    
    
    
    1Non-UK
    
    
    30
    
    
    
    22
    
    
    
    2730
    
    
    
    22
    
    
    
    28Total non-performing loans and advances:UK
    
    
    2,641
    
    
    
    1,879
    
    
    
    1,616Non-UK
    
    
    135
    
    
    
    198
    
    
    
    1772,776
    
    
    
    2,077
    
    
    
    1,793%
    
    
    
    %
    
    
    
    %Non-performing loans and advances as a percentage of loans and
advances to customers excluding finance leases
    
    
    3.25
    
    
    
    2.36
    
    
    
    2.22Provision as a percentage of total non-performing loans and advances
    
    
    31.15
    
    
    
    35.92
    
    
    
    27.77
 Potential problem loans and advances
    2005
    
    
    2004£m
    
    
    £m6 months to 12 months in arrears
    
    
    172
    
    
    
    10512 months or more in arrears
    
    
    26
    
    
    
    15Properties in possession
    
    
    44
    
    
    
    18
  2003
    
    
    2002
    
    
    2001£m
    
    
    £m
    
    
    £m6 months to 12 months in arrears
    
    
    62
    
    
    
    101
    
    
    
    11412 months or more in arrears
    
    
    44
    
    
    
    131
    
    
    
    111Properties in possession
    
    
    7
    
    
    
    9
    
    
    
    14
 Country risk exposure
  Cross border outstandings
  47




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  Cross border outstandings exceeding 1% of total assets
 Commercial,Banks and other
    
    
    
    
    
    
    industrial andAs % of total
    
    
    
    
    
    
    financial
    
    
    Governments and
    
    
    other privateassets
    
    
    Total
    
    
    institutions
    
    
    official institutions
    
    
    sector entities%
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2005:United States
    
    
    1.55
    
    
    
    3,200
    
    
    
    3,200
    
    
    
    
    
    
    
    At 31 December 2004:United States
    
    
    5.31
    (1)
    
    
    7,448
    
    
    
    7,412
    
    
    
    
    
    
    
    36
 (1)
    
    Total assets are total assets, as presented in the Consolidated Balance Sheet,
excluding long-term assurance fund assets and balances arising from off-balance sheet financial
instruments. On this basis, total assets amounted to £140.2bn at 31 December 2004.
  Commercial,Banks and other
    
    
    
    
    
    
    industrial andAs % of total
    
    
    
    
    
    
    financial
    
    
    Governments and
    
    
    other privateassets
    
    
    Total
    
    
    institutions
    
    
    official institutions
    
    
    sector entities%
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2003:United States
    
    
    3.09
    (2)
    
    
    4,533
    
    
    
    2,693
    
    
    
    25
    
    
    
    1,815Italy
    
    
    1.25
    (2)
    
    
    1,836
    
    
    
    376
    
    
    
    1,395
    
    
    
    65
 (2)
    
    Total assets are total assets, as presented in the Consolidated Balance Sheet,
excluding long-term assurance fund assets and balances arising from off-balance sheet financial
instruments. On this basis, total assets amounted to £146.6bn at 31 December 2003.
 Cross border outstandings between 0.75% and 1% of total assets
   Tangible fixed assets
 Year ended 31 December2005
    
    
    2004£m
    
    
    £mCapital expenditure
    
    
    190
    
    
    
    115
       48




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Capital management and resources
 Capital management and capital allocation
     Capital adequacy requirements
    Capital ratios
  49




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Group capital
 2005
    
    
    2004£m
    
    
    £mBalance sheet:Distributable reserves and shareholders funds
    
    
    3,853
    
    
    
    5,004Less: goodwill recognised
    
    
    (171
    )
    
    
    (1,069
    )Core equity Tier 1
    
    
    3,682
    
    
    
    3,935Tier 1 capital instruments
    
    
    1,932
    
    
    
    1,893Total Tier 1 capital
    
    
    5,614
    
    
    
    5,828Undated subordinated debt
    
    
    2,641
    
    
    
    2,604Dated subordinated debt
    
    
    2,620
    
    
    
    2,204Incurred but not observed provisions and other
    
    
    85
    
    
    
    177Total Tier 2 capital
    
    
    5,346
    
    
    
    4,985Less:PFS: investments in life assurance businesses
    
    
    (3,682
    )
    
    
    (3,789
    )PFS: investment in non-life assurance businesses
    
    
    (296
    )
    
    
    (68
    )Portfolio Business Unit
    
    
    
    
    
    
    (225
    )Total supervisory deductions
    
    
    (3,978
    )
    
    
    (4,082
    )Total regulatory capital
    
    
    6,982
    
    
    
    6,731Risk-weighted assets:Personal Financial Services
    
    
    53,434
    
    
    
    52,198Portfolio Business Unit
    
    
    2,538
    
    
    
    3,973Total Abbey risk-weighted assets
    
    
    55,972
    
    
    
    56,171Banking book
    
    
    50,108
    
    
    
    50,416Trading book
    
    
    5,864
    
    
    
    5,755Total Abbey risk-weighted assets
    
    
    55,972
    
    
    
    56,171Capital ratios:Risk asset ratio (%)
    
    
    12.5
    %
    
    
    12.0
    %Tier 1 ratio (%)
    
    
    10.0
    %
    
    
    10.4
    %Equity Tier 1 ratio (%)
    
    
    6.6
    %
    
    
    7.0
    %
 Balance sheet
      Risk-weighted assets (RWAs)
   Analysis of life assurance capital
 2005
    
    
    2004Value of long-term assurance business
    
    £m
    
    
    £mDiscounted value of future profits (net of tax)
    
    
    1,421
    
    
    
    1,540Net assets held by long-term assurance funds
    
    
    1,414
    
    
    
    1,428IFRS embedded value of the long-term assurance business
    
    
    2,835
    
    
    
    2,968Opening 2005 IFRS adjustment
    
    
    
    
    
    
    (166
    )Total value of long-term assurance business
    
    
    2,835
    
    
    
    2,802Other net assets of shareholder funds
    
    
    847
    
    
    
    805Subordinated debt
    
    
    
    
    
    
    200Total value of long-term assurance business
    
    
    3,682
    
    
    
    3,807
  50




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
     Movements in IFRS embedded value of the long-term assurance business
 £mOpening value at 1 January 2005
    
    
    2,802Transfers (to)/from shareholders funds
    
    
    Increase in value of the long-term assurance business before tax
    
    
    194Tax on increase in value of the long-term assurance business
    
    
    (54
    )Dividends paid to Abbey
    
    
    (40
    )Capital repatriated to Abbey
    
    
    (67
    )Closing value at 31 December 2005
    
    
    2,835
 Life assurance cashflows
 At 31 December
    
    
    At 31 December2005
    
    
    2004£m
    
    
    £mCapital injections made from Abbey
    
    
    
    
    
    
    5Dividends and interest paid to Abbey
    
    
    (51
    )
    
    
    (21
    )Capital repaid to Abbey
    
    
    (267
    )
    
    
    Net cashflows (to)/from Abbey
    
    
    (318
    )
    
    
    (16
    )
 Intercompany flows to and from Abbey incurred during the general course of business, such as
interest, centrally based IT services and sales commissions for branch-based products, are excluded
from the table above.
 Off-Balance Sheet Arrangements
  >
    
    It is normal in the UK to issue cheque guarantee cards to current
account customers holding chequebooks, as retailers do not generally
accept cheques without such form of guarantee. The guarantee is not
automatic but depends on the retailer having sight of the cheque
guarantee card at the time the purchase is made. The bank is liable
to honour these cheques even where the customer doesnt have
sufficient funds in his account. The banks guarantee liability is in
theory the number of cheques in issue multiplied by the amount
guaranteed per cheque, which can be between £50 and £100. In practice
most customers will only write cheques when they have funds in their
account to meet the cheque, and cheques are frequently presented
without the benefit of the cheque guarantee. On this basis management
have assessed the risk with respect to this guarantee as highly
remote and consider the risk of loss as part of the provisioning
requirement on bank accounts.>
    
    Standby letters of credit also represent the taking on of credit on
behalf of customers when actual funding is not required, normally
because a third party is not prepared to accept the credit risk of
Abbeys customer. These are also included in the normal credit
provisioning assessment alongside other forms of credit exposure.>
    
    Abbey, as is normal in such activity, gives representations,
indemnities and warranties on the sale of subsidiaries. The maximum
potential amount of any claims made against these is usually
significantly higher than actual settlements. Appropriate provision
is made with respect to managements best estimate of the likely
outcome, either at the time of sale, or subsequently if additional
information becomes available.
   Liquidity disclosures
   51




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  Analysis of cash flow movements
 Year ended 31 December2005
    
    
    2004£m
    
    
    £mNet cash (outflow)/inflow from operating activities
    
    
    (5,230
    )
    
    
    (4,831
    )Net cash (outflow) from investing activities
    
    
    2,036
    
    
    
    4,131Net cash inflow/(outflow) from financing activities
    
    
    96
    
    
    
    (1,497
    )Increase/(decrease) in cash and cash equivalents
    
    
    (3,098
    )
    
    
    (2,197
    )
 2005 compared to 2004
  Sources of liquidity
      Programme
    
    Outstanding at 31 December 2005

    
    Markets issued in:$15bn medium-term notes
    
    $9.5bn
    
    European$7bn medium-term notes
    
    $3.6bn
    
    United States$4bn commercial paper
    
    $0.3bn
    
    European$20bn commercial paper
    
    $9.5bn
    
    United States
 Uses of liquidity
  52




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Payments due by periodLess than
    
    
    1-3
    
    
    3-5
    
    
    More than 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsContractual obligations
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities in issue
    
    
    42,807
    
    
    
    17,157
    
    
    
    7,432
    
    
    
    4,674
    
    
    
    13,544Other borrowed funds
    
    
    2,244
    
    
    
    16
    
    
    
    303
    
    
    
    
    
    
    
    1,925Subordinated liabilities
    
    
    6,205
    
    
    
    105
    
    
    
    204
    
    
    
    309
    
    
    
    5,587Insurance and reinsurance liabilities
    
    
    21,501
    
    
    
    2,943
    
    
    
    2,144
    
    
    
    3,981
    
    
    
    12,433Investment contract liabilities
    
    
    3,306
    
    
    
    777
    
    
    
    377
    
    
    
    701
    
    
    
    1,451Retirement benefit obligations
    
    
    1,380
    
    
    
    34
    
    
    
    70
    
    
    
    74
    
    
    
    1,202Operating lease obligations
    
    
    1,426
    
    
    
    122
    
    
    
    236
    
    
    
    208
    
    
    
    860Purchase obligations
    
    
    115
    
    
    
    55
    
    
    
    58
    
    
    
    2
    
    
    
    Total
    
    
    78,984
    
    
    
    21,209
    
    
    
    10,824
    
    
    
    9,949
    
    
    
    37,002
   53




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 Average balance sheet (4, 5)
 2005
    
    
    2004Average
    
    
    
    
    
    
    
    Average
    
    
    
    Average
    
    
    
    
    
    Averagebalance
    
    
    Interest(1)
    
    
    rate
    
    
    balance
    
    
    Interest(1)
    
    
    rate£m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %AssetsLoans and advances to banksUK
    
    
    3,694
    
    
    
    170
    
    
    
    4.60
    %
    
    
    5,175
    
    
    
    243
    
    
    
    4.70
    %Non-UK
    
    
    76
    
    
    
    4
    
    
    
    5.25
    %
    
    
    
    
    
    
    
    
    
    
    Loans and advances to customers (2)UK
    
    
    97,251
    
    
    
    5,282
    
    
    
    5.43
    %
    
    
    97,459
    
    
    
    5,246
    
    
    
    5.38
    %Non-UK
    
    
    49
    
    
    
    2
    
    
    
    4.06
    %
    
    
    1,398
    
    
    
    59
    
    
    
    4.24
    %Debt securitiesUK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,255
    
    
    
    87
    
    
    
    2.66
    %Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total average interest-earning assets and
interest income  banking business
    
    
    101,070
    
    
    
    5,458
    
    
    
    5.40
    %
    
    
    107,287
    
    
    
    5,635
    
    
    
    5.25
    %Provision for loan losses
    
    
    (410
    )
    
    
    
    
    
    
    
    
    
    
    (792
    )
    
    
    
    
    
    
    Trading business
    
    
    53,154
    
    
    
    
    
    
    
    
    
    
    
    56,788
    
    
    
    
    
    
    
    Liabilities designated at fair value through
profit and loss
    
    
    27,612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-interest-earning assets:Long-term assurance fund assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,307
    
    
    
    
    
    
    
    Other
    
    
    19,146
    
    
    
    
    
    
    
    
    
    
    
    16,010
    
    
    
    
    
    
    
    Total average assets
    
    
    200,572
    
    
    
    
    
    
    
    
    
    
    
    206,600Non-UK assets as a percentage of total
    
    
    0.06
    %
    
    
    
    
    
    
    
    
    
    
    0.68
    %LiabilitiesDeposits by banksUK
    
    
    (1,070
    )
    
    
    (42
    )
    
    
    3.93
    %
    
    
    (7,340
    )
    
    
    (243
    )
    
    
    3.32
    %Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (697
    )
    
    
    (10
    )
    
    
    1.48
    %Customer accounts  retail demand deposits
(3)UK
    
    
    (52,083
    )
    
    
    (1,816
    )
    
    
    3.49
    %
    
    
    (40,761
    )
    
    
    (1,371
    )
    
    
    3.36
    %Non-UK
    
    
    (1,092
    )
    
    
    (25
    )
    
    
    2.29
    %
    
    
    (1,152
    )
    
    
    (27
    )
    
    
    2.37
    %Customer accounts  retail time deposits(3)UK
    
    
    (9,076
    )
    
    
    (355
    )
    
    
    3.91
    %
    
    
    (12,177
    )
    
    
    (456
    )
    
    
    3.75
    %Non-UK
    
    
    (4,875
    )
    
    
    (210
    )
    
    
    4.31
    %
    
    
    (4,149
    )
    
    
    (183
    )
    
    
    4.40
    %Customer accounts  wholesale deposits
(3)UK
    
    
    (2,840
    )
    
    
    (125
    )
    
    
    4.40
    %
    
    
    (5,467
    )
    
    
    (183
    )
    
    
    3.35
    %Non-UK
    
    
    (113
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Bonds and medium-term notesUK
    
    
    (23,847
    )
    
    
    (1,167
    )
    
    
    4.89
    %
    
    
    (24,165
    )
    
    
    (1,136
    )
    
    
    4.70
    %Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other debt securities in issueUK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,676
    )
    
    
    (148
    )
    
    
    2.61
    %Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,302
    )
    
    
    (101
    )
    
    
    1.91
    %Dated and undated loan capital and other
subordinated liabilitiesUK
    
    
    (8,868
    )
    
    
    (501
    )
    
    
    5.65
    %
    
    
    (6,544
    )
    
    
    (314
    )
    
    
    4.79
    %Non-UK
    
    
    (563
    )
    
    
    (35
    )
    
    
    6.21
    %
    
    
    
    
    
    
    
    
    
    
    Other interest-bearing liabilitiesUK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (1
    )
    
    
    5.87
    %Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total average interest-bearing liabilities
and interest expense banking
    
    
    (104,427
    )
    
    
    (4,276
    )
    
    
    4.09
    %
    
    
    (113,446
    )
    
    
    (4,173
    )
    
    
    3.68
    %
 54




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    
    Average
    
    
    
    
    
    Averagebalance
    
    
    Interest(1)
    
    
    rate
    
    
    balance
    
    
    Interest (1)
    
    
    rate£m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %Trading business
    
    
    (43,775
    )
    
    
    
    
    
    
    
    
    
    
    (44,129
    )
    
    
    
    
    
    
    Liabilities designated at fair
value through profit and loss
    
    
    (8,153
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-interest-bearing liabilities
Long-term assurance fund liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,307
    )
    
    
    
    
    
    
    Other
    
    
    (42,070
    )
    
    
    
    
    
    
    
    
    
    
    (17,117
    )
    
    
    
    
    
    
    Shareholders funds
    
    
    (2,147
    )
    
    
    
    
    
    
    
    
    
    
    (4,601
    )
    
    
    
    
    
    
    Total average liabilities,
shareholders funds
    
    
    (200,572
    )
    
    
    
    
    
    
    
    
    
    
    (206,600
    )
    
    
    
    
    
    
    Non-UK liabilities as a percentage
of total
    
    
    3.31
    %
    
    
    
    
    
    
    
    
    
    
    5.47
    %Interest income as a percentage of
average interest-earning assets
    
    
    
    
    
    
    
    
    
    
    5.40
    %
    
    
    
    
    
    
    
    
    
    
    5.25
    %Interest expense as a percentage of
average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    4.09
    %
    
    
    
    
    
    
    
    
    
    
    3.68
    %Interest spread
    
    
    
    
    
    
    
    
    
    
    1.31
    %
    
    
    
    
    
    
    
    
    
    
    1.57
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    1.17
    %
    
    
    
    
    
    
    
    
    
    
    1.36
    %
 (1)
    
    For the purpose of the average balance sheet, interest income and interest expense have
been stated after allocation of interest on instruments entered into for hedging purposes.(2)
    
    Loans and advances to customers includes non-performing loans. See analysis of end-of-year
provisions on loans and advances to customers and potential credit risk elements in loans
and advances above.(3)
    
    Demand deposits, time deposits and wholesale deposits are defined under Deposits above.(4)
    
    Abbey National Treasury Services plc prepares averages using average daily balances, whereas
the remainder of Abbey uses month end averages. These averages are representative of the
operations of Abbey.(5)
    
    The ratio of average interest-earning assets to interest-bearing liabilities for the year
ended 31 December 2005 was 96.78% (2004: 94.57%).
 55




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  2003Average
    
    
    
    
    
    Averagebalance
    
    
    Interest (1)
    
    
    rate£m
    
    
    £m
    
    
    %AssetsLoans and advances to banksUK
    
    
    3,685
    
    
    
    155
    
    
    
    4.21Non-UK
    
    
    289
    
    
    
    7
    
    
    
    2.42Loans and advances to customers (2)UK
    
    
    83,692
    
    
    
    4,373
    
    
    
    5.23Non-UK
    
    
    4,197
    
    
    
    174
    
    
    
    4.28Lease debtorsUK
    
    
    3,098
    
    
    
    140
    
    
    
    4.52Non-UK
    
    
    59
    
    
    
    2
    
    
    
    3.39Debt securitiesUK
    
    
    9,284
    
    
    
    324
    
    
    
    3.49Non-UK
    
    
    2,518
    
    
    
    69
    
    
    
    2.74Total average interest-earning assets and interest income  banking business
    
    
    106,822
    
    
    
    5,244
    
    
    
    4.91Provision for loan losses
    
    
    (773
    )
    
    
    
    
    
    
    Trading business
    
    
    40,883
    
    
    
    978
    
    
    
    Non-interest-earning assets:Long-term assurance fund assets
    
    
    29,757
    
    
    
    
    
    
    
    Other
    
    
    17,430
    
    
    
    
    
    
    
    Total average assets and interest income
    
    
    194,119
    
    
    
    
    
    
    
    Non-UK assets as a percentage of total
    
    
    9.70
    %
    
    
    
    
    
    
    LiabilitiesDeposits by banksUK
    
    
    (7,144
    )
    
    
    (244
    )
    
    
    3.42Non-UK
    
    
    (1,761
    )
    
    
    (24
    )
    
    
    1.36Customer accounts  retail demand deposits (3)UK
    
    
    (42,477
    )
    
    
    (1,061
    )
    
    
    2.50Non-UK
    
    
    (1,260
    )
    
    
    (28
    )
    
    
    2.22Customer accounts  retail time deposits(3)UK
    
    
    (12,620
    )
    
    
    (409
    )
    
    
    3.25Non-UK
    
    
    (4,083
    )
    
    
    (150
    )
    
    
    3.67Customer accounts  wholesale deposits (3)UK
    
    
    (8,057
    )
    
    
    (280
    )
    
    
    3.48Non-UK
    
    
    (158
    )
    
    
    (2
    )
    
    
    1.27Bonds and medium-term notesUK
    
    
    (14,002
    )
    
    
    (333
    )
    
    
    2.38Non-UK
    
    
    (395
    )
    
    
    (6
    )
    
    
    1.52Other debt securities in issueUK
    
    
    (6,551
    )
    
    
    (146
    )
    
    
    2.23Non-UK
    
    
    (11,963
    )
    
    
    (180
    )
    
    
    1.50Dated and undated loan capital and other subordinated liabilitiesUK
    
    
    (6,875
    )
    
    
    (311
    )
    
    
    4.52Non-UK
    
    
    (421
    )
    
    
    (7
    )
    
    
    1.66Other interest-bearing liabilitiesUK
    
    
    (19
    )
    
    
    (1
    )
    
    
    5.26Non-UK
    
    
    (2
    )
    
    
    
    
    
    
    3.25Total average interest-bearing liabilities and interest expense  banking
    
    
    (117,788
    )
    
    
    (3,182
    )
    
    
    2.70Trading business
    
    
    (24,269
    )
    
    
    
    
    
    
    Non-interest-bearing liabilities
    
    
    (13,999
    )
    
    
    
    
    
    
    Long-term assurance fund liabilities
    
    
    (31,763
    )
    
    
    
    
    
    
    Other
Shareholders funds
    
    
    (6,300
    )
    
    
    
    
    
    
    Total average liabilities, shareholders funds and interest expense
    
    
    (194,119
    )
    
    
    
    
    
    
    Non-UK liabilities as a percentage of total
    
    
    10.33
    %Interest income as a percentage of average interest-earning assets
    
    
    
    
    
    
    
    
    
    
    4.87Interest expense as a percentage of average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    2.79Interest spread
    
    
    
    
    
    
    
    
    
    
    2.21Net interest margin
    
    
    
    
    
    
    
    
    
    
    1.93
 56




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
  2003Interest spread
    
    
    1.94Net interest margin
    
    
    1.69
 (1)
    
    For the purpose of the average balance sheet, interest income and interest expense have
been stated after allocation of interest on instruments entered into for hedging purposes.(2)
    
    Loans and advances to customers includes non-performing loans. See analysis of end-of-year
provisions on loans and advances to customers and potential credit risk elements in loans
and advances above.(3)
    
    Demand deposits, time deposits and wholesale deposits are defined under Deposits above.(4)
    
    Abbey National Treasury Services prepares averages using average daily balances, whereas the
remainder of Abbey uses month end averages. These averages are representative of the
operations of Abbey.(5)
    
    The ratio of average interest-earning assets to interest-bearing liabilities for the year
ended 31 December 2003 was 90.68%.
 Interest rate sensitivity
    Changes in net interest income  volume and rate analysis
  57




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review
 2005/2004Total change
    
    
    Changes due to increase/(decrease):Volume
    
    
    RateInterest income
    
    £m
    
    
    £m
    
    
    £mLoans and advances to banksUK
    
    
    (73
    )
    
    
    (46
    )
    
    
    (27
    )Non-UK
    
    
    4
    
    
    
    5
    
    
    
    (1
    )Loans and advances to customersUK
    
    
    36
    
    
    
    (12
    )
    
    
    48Non-UK
    
    
    (57
    )
    
    
    (70
    )
    
    
    13Lease debtorsUK
    
    
    
    
    
    
    
    
    
    
    Non-UK
    
    
    
    
    
    
    
    
    
    
    Debt securitiesUK
    
    
    (87
    )
    
    
    (117
    )
    
    
    30Non-UK
    
    
    
    
    
    
    
    
    
    
    Trading assetsUK
    
    
    
    
    
    
    
    
    
    
    Non-UK
    
    
    
    
    
    
    
    
    
    
    Total interest incomeUK
    
    
    (124
    )
    
    
    (175
    )
    
    
    51Non-UK
    
    
    (53
    )
    
    
    (65
    )
    
    
    12(177
    )
    
    
    (240
    )
    
    
    63Interest expenseDeposits by banksUK
    
    
    (201
    )
    
    
    (208
    )
    
    
    7Non-UK
    
    
    (10
    )
    
    
    (10
    )
    
    
    Customer accounts  retail demand depositsUK
    
    
    445
    
    
    
    381
    
    
    
    64Non-UK
    
    
    (2
    )
    
    
    (1
    )
    
    
    (1
    )Customer accounts  retail time depositsUK
    
    
    (101
    )
    
    
    (116
    )
    
    
    15Non-UK
    
    
    27
    
    
    
    32
    
    
    
    (5
    )Customer accounts  wholesale depositsUK
    
    
    (58
    )
    
    
    (88
    )
    
    
    30Non-UK
    
    
    
    
    
    
    
    
    
    
    Bonds and medium-term notesUK
    
    
    31
    
    
    
    (15
    )
    
    
    46Non-UK
    
    
    
    
    
    
    
    
    
    
    Other debt securities in issueUK
    
    
    (148
    )
    
    
    (148
    )
    
    
    Non-UK
    
    
    (101
    )
    
    
    (101
    )
    
    
    Dated and undated loan capital and other subordinated liabilitiesUK
    
    
    187
    
    
    
    111
    
    
    
    76Non-UK
    
    
    35
    
    
    
    
    
    
    
    35Other interest-bearing liabilitiesUK
    
    
    (1
    )
    
    
    (1
    )
    
    
    Non-UK
    
    
    
    
    
    
    
    
    
    
    Trading liabilitiesUK
    
    
    
    
    
    
    
    
    
    
    Non-UK
    
    
    
    
    
    
    
    
    
    
    Total interest expenseUK
    
    
    154
    
    
    
    (84
    )
    
    
    238Non-UK
    
    
    (51
    )
    
    
    (80
    )
    
    
    29103
    
    
    
    (164
    )
    
    
    267Net interest income
    
    
    (280
    )
    
    
    (76
    )
    
    
    (204
    )
 58




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##### Table of Contents



Business and Financial Review
 
 Risk Management
  Introduction
  
   Board:
 Audit and Risk Committee:
 Asset and Liability Management Committee:
 Risk Committee:
 Chief Risk Officer:
 59




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##### Table of Contents



Business and Financial Review
 Risk
Management
 Financial Instruments
   Risk Management
   Risk Management in Retail Banking
 Credit risk
  Managing credit risk
  Secured lending.
      Mortgage credit quality
 31 December
    
    
    31 December2005
    
    
    2004Loan-to-value analysis:New business> 90%
    
    
    4
    %
    
    
    6
    %75% - 90%
    
    
    29
    %
    
    
    32
    %< 75%
    
    
    67
    %
    
    
    62
    %Average (at inception)
    
    
    60
    %
    
    
    61
    %Average loan-to-value of stock (indexed)
    
    
    45
    %
    
    
    45
    %New business profile:First-time buyers
    
    
    14
    %
    
    
    19
    %Home movers
    
    
    37
    %
    
    
    41
    %Remortgagers
    
    
    49
    %
    
    
    40
    %Average earnings multiple
    
    
    2.9
    
    
    
    2.7
  >
    
    The average loan-to-value of new business has remained broadly constant in 2005 at 60%. Remortgage business is
increasing as a proportion of Abbeys new business in line with the overall market.
 60




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##### Table of Contents



Business and Financial Review
 Risk Management
 >
    
    The proportion of new business written with a high loan-to-value (greater than 90%) has decreased slightly in 2005.>
    
    Income multiples have increased in line with the market, given the continued increase in house prices.
 Mortgage indemnity guarantee insurance and high loan-to-value fee.
   >
    
    For loans originated prior to 1993, the credit risk on the amount of
every mortgage advance over 75% of the valuation at origination is
fully insured with third party insurance companies. The expected
insurance recovery is factored into the provision for lending losses.>
    
    For loans originated between 1993 and 2001, Abbey obtained almost all
of its mortgage indemnity guarantee insurance from its insurance
subsidiary Carfax Insurance Limited (Carfax). Cover on all such
policies was commuted effective from 14 October 2005.
   Mortgage arrears and repossessions.
   Abbey
    
    
    CML(percentage of total mortgage loans by number)6 months to 11 months in arrears31 December 2004
    
    
    0.14
    
    
    
    0.2331 December 2005
    
    
    0.20
    
    
    
    0.2812 months or more in arrears31 December 2004
    
    
    0.02
    
    
    
    0.1031 December 2005
    
    
    0.03
    
    
    
    0.12Properties in possession31 December 2004
    
    
    0.02
    
    
    
    0.0231 December 2005
    
    
    0.04
    
    
    
    0.04
 Banking and Consumer Credit.
   cahoot.
 61




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##### Table of Contents



Business and Financial Review
 Risk Management
 Personal Financial Services banking and unsecured personal loan arrears
 31 December 2005
    
    
    31 December 2004£m
    
    
    £mTotal banking and unsecured personal loan arrears(1,2)
    
    
    126
    
    
    
    121Total banking and unsecured personal loan asset
    
    
    3,749
    
    
    
    3,288Banking and unsecured personal loan arrearsas a % of asset
    
    
    3.4
    %
    
    
    3.7
    %
 
 (1)
    
    Banking arrears are defined as customers whose borrowings exceed their overdraft by over
£100.(2)
    
    Unsecured personal loan and credit card arrears are defined as the balances of accounts that
are three or more months in arrears (> 4 installments). Abbey Business
   Retail Banking estimated exposure
  Year ended31
December2005£mLoans and Advances to customers
    
    
    95,230Financial assets designated at fair value
    
    
    790Other
    
    
    517Third party exposures
    
    
    96,537
   Market risk
    Short-term market risk
 Structural market risk
 62




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##### Table of Contents



Business and Financial Review
 Risk Management
  Non-trading market risks
    Managing non-trading risks
   >
    
    Net Interest Margin (NIM) sensitivity: the sensitivity of annual net
interest margin to an instantaneous and unexpected adverse 100 basis
point parallel shock to the yield curve.>
    
    Market Value of Equity (MVE) sensitivity: the potential change in
net present value of interest rate sensitive positions from an
instantaneous and unexpected adverse 100 basis point parallel shock
to the yield curve.
   31 December2005£mNet interest margin sensitivity (100bps adverse parallel shock)
    
    
    (63
    )Market value of equity sensitivity (100bps adverse parallel shock)
    
    
    (298
    )
     63




---



##### Table of Contents



Business and Financial Review
 Risk Management
 Exposure at 31
    
    
    
    
    
    
    
    
    
    
    Exposure for the year ended 31 DecemberDecemberActual exposure
    
    
    Average exposure
    
    
    Highest exposure
    
    
    Lowest exposure2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mGroup non-trading instrumentsShort-term market riskInterest rate risks
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.4
    
    
    
    0.6
    
    
    
    0.6
    
    
    
    1.6
    
    
    
    0.2
    
    
    
    Equity risks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    Foreign exchange risks
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.1Structural market riskInterest rate risks
    
    
    73.8
    
    
    
    8.5
    
    
    
    48.3
    
    
    
    12.9
    
    
    
    79.1
    
    
    
    16.0
    
    
    
    15.6
    
    
    
    8.5Equity risks
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.6
    
    
    
    0.6
    
    
    
    1.2
    
    
    
    0.2
    
    
    
    0.3Foreign exchange risks
    
    
    1.4
    
    
    
    2.9
    
    
    
    1.9
    
    
    
    3.1
    
    
    
    2.4
    
    
    
    3.7
    
    
    
    1.4
    
    
    
    2.6
  Derivatives
   Hedging derivatives
    64




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##### Table of Contents



Business and Financial Review
 Risk Management
 Activity
    
    Risk
    
    Type of hedgeManagement of the return on
variable rate assets financed by
shareholders funds and net
non-interest bearing liabilities.
    
    Reduced profitability due to falls in interest rates.
    
    Receive fixed interest rate swaps.Fixed rate lending and investments.
    
    Sensitivity to increases in interest rates.
    
    Pay fixed interest rate swaps.Fixed rate retail and wholesale funding.
    
    Sensitivity to falls in interest rates.
    
    Receive fixed interest rate swaps.Equity-linked retail funding.
    
    Sensitivity to increases in equity market indices.
    
    Receive equity swaps.Management of other net interest income
on retail activities.
    
    Sensitivity of income to changes in interest rates.
    
    Interest rate swapsProfits earned in foreign currency.
    
    Sensitivity to strengthening of sterling against other
currencies.
    
    Forward foreign exchange contracts.Investment in foreign currency assets.
    
    Sensitivity to strengthening of sterling against other
currencies.
    
    Cross-currency and foreign
exchange swaps.Issuance of products with embedded
equity options.
    
    Sensitivity to changes in underlying index and index
volatility causing option exercise.
    
    Interest rate swaps combined with
equity options.Lending, and issuance of, products with
embedded interest rate options.
    
    Sensitivity to changes in underlying rate and rate
volatility causing option exercise.
    
    Interest rate swaps plus caps/floors, and other matched
options.Investment in, and issuance of, bonds
with put/call features.
    
    Sensitivity to changes in rates causing option exercise.
    
    Interest rate swaps combined with swaptions (1)and other
matched options.Firm commitments (e.g. asset purchases,
issues arranged).
    
    Sensitivity to changes in rates between arranging a
transaction and completion.
    
    Hedges are arranged at the time of commitments if there is exposure
to rate movements.
 
 (1)
    
    A swaption is an option on a swap which gives the holder the right but not the obligation
to buy or sell a swap. Liquidity risk
  Operational risk
 Managing operational risk
     Risk Management in Abbey Financial Markets
 Credit risk
  Managing credit risk
  65




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##### Table of Contents



Business and Financial Review
 Risk Management
    Credit Risk Mitigation
 (i) Netting arrangements
  (ii) Collateralisation
   Year ended31 December2005£mAAA
    
    
    3,961AA
    
    
    22,568A
    
    
    8,774BBB
    
    
    2,437BB
    
    
    146B
    
    
    13Total
    
    
    37,899
   Year ended31 December2005£mTrading assets
    
    
    34,671Purchase and resell agreements
    
    
    23,578Derivatives
    
    
    12,212Other
    
    
    4,366Third party exposures
    
    
    74,827
 Market risk
   66




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##### Table of Contents



Business and Financial Review
 Risk Management
 Managing market risk
     Trading Activities
      Exposure at 31
    
    
    
    
    
    
    
    
    
    

Exposure for the year ended 31December
    
    


    
    
    
    
    
    


    
    
    DecemberActual exposure
    
    
    Average exposure
    
    
    Highest exposure
    
    
    Lowest exposure2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    

    2004£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    
    £m
    
    

    £mGroup trading instrumentsInterest rate risks (1)
    
    
    3.4
    
    
    
    4.8
    
    
    
    4.1
    
    
    
    4.3
    
    
    
    5.2
    
    
    
    7.1
    
    
    
    
    3.4
    
    

    2.8Equity risks
    
    
    2.7
    
    
    
    5.0
    
    
    
    3.5
    
    
    
    3.3
    
    
    
    5.2
    
    
    
    5.6
    
    
    
    
    2.0
    
    
    1.3Spread risk
    
    
    2.1
    
    
    
    1.5
    
    
    
    1.7
    
    
    
    1.8
    
    
    
    2.1
    
    
    
    2.4
    
    
    
    
    1.4
    
    
    1.1Other risks (2)
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    
    
    
    
    Correlation offsets (3)
    
    
    (1.6
    )
    
    
    (2.2
    )
    
    
    (1.8
    )
    
    
    (1.8
    )Total correlated one-day Value at Risk
    
    
    6.7
    
    
    
    9.4
    
    
    
    7.6
    
    
    
    7.8
    
    
    
    9.9
    
    
    
    10.5
    
    
    
    
    5.6
    
    

    4.8
 
 (1)
    
    Interest rate risks include property index risk.(2)
    
    Other risks include foreign exchange risk.(3)
    
    The highest and lowest exposure figures reported for each risk type did not necessarily occur
on the same day as the highest and lowest total correlated one-day Value-at-Risk.A corresponding correlation offset effect cannot be calculated and is therefore omitted from
the above table. Liquidity risk
   67




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##### Table of Contents



Business and Financial Review
 Risk Management
 Managing Liquidity risk
       >
    
    the Treasurer, Head of Asset and Liability Management, is responsible
for the rapid assessment of the implications of a sudden, unexpected
event on the day-to-day liquidity of Abbey, and for the decision to
activate the Liquidity Contingency Plan; and>
    
    the liquidity crisis management team, under the chairmanship of the
Treasurer, Head of Asset and Liability Management, is the
decision-making authority in the event of a liquidity crisis, and is
responsible for implementing the Liquidity Contingency Plan.
  Liquidity risk measurement
    Securitisation of Abbey assets
  68




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##### Table of Contents



Business and Financial Review
 Risk Management
  Maturities of financial liabilities
   GroupUp to 3
    
    
    3-12
    
    
    1-5
    
    
    Over 5Demand
    
    
    months
    
    
    months
    
    
    years
    
    
    years
    
    
    TotalAt 31
December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDeposits by banks
    
    
    845
    
    
    
    4,767
    
    
    
    3
    
    
    
    
    
    
    
    2
    
    
    
    5,617Customer accounts
    
    
    53,326
    
    
    
    9,205
    
    
    
    2,464
    
    
    
    546
    
    
    
    348
    
    
    
    65,889Derivative financial instruments
    
    
    
    
    
    
    177
    
    
    
    650
    
    
    
    3,804
    
    
    
    6,633
    
    
    
    11,264Trading liabilities
    
    
    1,257
    
    
    
    35,426
    
    
    
    4,998
    
    
    
    6,912
    
    
    
    4,071
    
    
    
    52,664Financial liabilities designated at fair value
    
    
    
    
    
    
    1,234
    
    
    
    2,449
    
    
    
    509
    
    
    
    3,756
    
    
    
    7,948Debt securities in issue
    
    
    74
    
    
    
    1,001
    
    
    
    2,272
    
    
    
    6,955
    
    
    
    10,974
    
    
    
    21,276Other borrowed funds
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    303
    
    
    
    1,925
    
    
    
    2,244Subordinated liabilities
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    381
    
    
    
    5,719
    
    
    
    6,205Investment contract liabilities
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    648
    
    
    
    2,472
    
    
    
    3,306Total financial liabilities
    
    
    55,502
    
    
    
    51,826
    
    
    
    13,127
    
    
    
    20,058
    
    
    
    35,900
    
    
    
    176,413
 CompanyUp to 3
    
    
    3-12
    
    
    1-5
    
    
    Over 5Demand
    
    
    months
    
    
    months
    
    
    years
    
    
    years
    
    
    TotalAt 31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDeposits by banks
    
    
    19,490
    
    
    
    3,921
    
    
    
    182
    
    
    
    24,672
    
    
    
    2
    
    
    
    48,267Customer accounts
    
    
    58,162
    
    
    
    6,373
    
    
    
    1,017
    
    
    
    2,047
    
    
    
    11,689
    
    
    
    79,288Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219
    
    
    
    404
    
    
    
    623Debt securities in issue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Other borrowed funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    303
    
    
    
    1,149
    
    
    
    1,452Subordinated liabilities
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    381
    
    
    
    5,991
    
    
    
    6,477Total financial liabilities
    
    
    77,652
    
    
    
    10,294
    
    
    
    1,304
    
    
    
    27,626
    
    
    
    19,235
    
    
    
    136,111
 Derivatives held for Trading Purposes
  >
    
    marketing derivatives to end users and hedging the resulting exposures efficiently and>
    
    the management of trading exposure reflected on the
Groups balance sheet.
  Credit Derivatives
   ProtectionPurchased
    
    
    Sold£m
    
    
    £mNotional amounts:Portfolio Business Unit protection
    
    
    3
    
    
    
    Trading activity(1)
    
    
    10,780
    
    
    
    7,881Total
    
    
    10,783
    
    
    
    7,881
 
 (1)
    
    This includes £487m (notional) of portfolio credit derivatives.  69




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##### Table of Contents



Business and Financial Review
 Risk Management
 Portfolio Business Unit protection activity
  Trading activity
   Risk Management in Insurance and Asset Management
 Management of insurance and financial risk
   Contracts are written into three sub fund types, the key risks of which are summarised as follows:
 (a) With-profits fund
     (b) Unit
linked fund
  (c) Non-profit fund
    Insurance risk
  >
    
    the occurrence of any event specifically insured against;>
    
    for long-term insurance business, adverse mortality, morbidity and persistency experience; and>
    
    expense overruns relative to pricing or provisioning assumptions.
  >
    
    fixed and guaranteed benefits for a fixed future premium;>
    
    the option to pay reduced or no future premiums;
 70




---



##### Table of Contents



Business and Financial Review
 Risk Management
 >
    
    the option to terminate the contract completely; and>
    
    the option to exercise a guaranteed annuity or cash option.
  >
    
    the use of actuarial models to calculate premiums and monitor claims patterns. Past
experience, as well as statistical methods, are used.>
    
    issued guidelines for concluding insurance contracts and assuming insurance risks. In
relation to life insurance, the group concentrates on risks such as mortality, disability,
illness and long-term care requirements.>
    
    reinsurance of a large portion of the annuity and protection business. Reassurance is also
used to limit the Groups exposure to large single claims. When selecting a reinsurer, the
group only considers those companies that provide high security. In order to assess this,
ratings information is used, both from the public domain or gathered through internal
investigations.>
    
    close monitoring of the management of assets and liabilities to attempt to match the expected
pattern of claim payments with the maturity dates of assets.>
    
    the use of underwriting with premium levels being set to reflect the calculated level of risk.>
    
    stress and scenario testing to monitor insurance risk as part of the Individual Capital
Assessment required under the FSA regulatory reporting regime. Each main category of
insurance risk is subject to a detailed experience analysis to ensure that all assumptions
are reasonable.
    Impact on pre tax
    
    
    Impact on pre taxprofit pre
    
    
    profit post
    
    
    Impact on equity
    
    
    Impact on equityAssumed
    
    reinsurance
    
    
    reinsurance
    
    
    pre reinsurance
    
    
    post reinsuranceAssumption
    
    increase/(reduction)
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mInterest rate and assets
    
    100 basis points increase in risk discount rate
    
    
    (96.8
    )
    
    
    (78.1
    )
    
    
    (82.9
    )
    
    
    (66.2
    )Interest rate and assets
    
    100 basis point increase in interest rate
    
    
    n/a
    
    
    
    21.6
    
    
    
    n/a
    
    
    
    17.7Expenses
    
    10% decrease in maintenance expenses
    
    
    47.5
    
    
    
    42.7
    
    
    
    36.3
    
    
    
    33.2Persistency
    
    10% proportionate decrease in lapse rates
    
    
    41.0
    
    
    
    39.9
    
    
    
    34.9
    
    
    
    34.0Mortality/morbidity  life assurance
    
    5% proportionate decrease in base
mortality and morbidity rates
    
    
    93.4
    
    
    
    26.3
    
    
    
    65.8
    
    
    
    22.9Mortality/morbidity   annuity business
    
    5% proportionate decrease in base
mortality and morbidity rates
    
    
    (27.8
    )
    
    
    (12.9
    )
    
    
    (19.1
    )
    
    
    (8.9
    )
    Liability valuePre reinsurance
    
    
    Post reinsurance£m
    
    
    £mProperty linked
    
    
    6,422
    
    
    
    6,402Annuity in payment
    
    
    1,088
    
    
    
    558Structured products
    
    
    219
    
    
    
    219Traditional life non profit
    
    
    2,755
    
    
    
    2,529Traditional pension non profit
    
    
    1,242
    
    
    
    745Unitised with profit
    
    
    7,664
    
    
    
    7,664Deposit administration
    
    
    149
    
    
    
    149Traditional life with profit
    
    
    2,359
    
    
    
    2,354Traditional pension with profit
    
    
    2,631
    
    
    
    2,631Other
    
    
    278
    
    
    
    264Total
    
    
    24,807
    
    
    
    23,515
 71




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##### Table of Contents



Business and Financial Review
 Risk Management
 Financial Instrument Risk
   Market Risk
  (a) Participating
insurance and investment contracts  written in the With-profits funds
   >
    
    equity prices;>
    
    interest rates and bond prices;>
    
    corporate bond spreads;>
    
    equity price volatility affecting the value of policy guarantees; and>
    
    bond volatilities affecting the value of guaranteed annuity options and other guarantees.
 (b) Non-linked
Insurance contracts  written in the Non-profit funds
   >
    
    variation in interest rates and bond prices; and>
    
    variation in corporate bond spreads.
 (c) Unit-linked
Insurance and non-participating investment contracts  written in the Non-profit
funds
              72




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##### Table of Contents



Business and Financial Review
 Risk Management
     Credit risk
   >
    
    direct holdings of credit debt (principally corporate bonds);>
    
    the impact of credit default on equity holdings; and>
    
    external reinsurance contracts.
   AAA
    
    
    AA
    
    
    A+
    
    
    A
    
    
    A-
    
    
    AA-
    
    
    BBB
    
    
    BB
    
    
    TotalAt 31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities
    
    
    5,930
    
    
    
    1,498
    
    
    
    45
    
    
    
    1,554
    
    
    
    
    
    
    
    231
    
    
    
    272
    
    
    
    2
    
    
    
    9,532Reinsurance asset
    
    
    
    
    
    
    295
    
    
    
    17
    
    
    
    309
    
    
    
    115
    
    
    
    557
    
    
    
    
    
    
    
    
    
    
    
    1,293Cash and balances with central banks
    
    
    58
    
    
    
    131
    
    
    
    113
    
    
    
    1,507
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    1,965
  Liquidity risk
     73




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##### Table of Contents



Report of the Directors
 
 Directors
 Board of Directors
 As at 31 December 2005
 Chairman
 Lord Burns
   Executive directors
Francisco Gómez-Roldán
 Chief Executive Officer
     Jorge Morán
 Chief Operating Officer
   Graeme Hardie
 Executive Director, Retail Banking
      Nathan Bostock
 Executive Director, Finance and Markets
   74




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##### Table of Contents



Report of the Directors
 Directors
 Non-Executive Directors
 Juan Rodríguez Inciarte
 Deputy Chairman
    Keith Woodley
 Senior Independent Non-Executive Director
  Jóse María Fuster
  José María Carballo
   António Horta-Osório
  Andrew Longhurst
     75




---



##### Table of Contents



Report of the Directors
 Directors
 New appointment post 31 December 2005
Non-Executive Director
 Rosemary Thorne
   Registered Office and Principal Office
       Auditors
 Deloitte & Touche LLP
    76




---



##### Table of Contents



Report of the Directors
 
 Directors Report
 Corporate Structure
    Principal activities and business review
  Results and dividends
  Directors
   Director
    
    Title
    
    Date of resignationMark Pain
    
    Executive Director, Customer Sales
    
    28 January 2005Angus Porter
    
    Executive Director, Customer Propositions
    
    25 February 2005Priscilla Vacassin
    
    Executive Director, Human Resources
    
    30 September 2005Tony Wyatt
    
    Executive Director, Manufacturing
    
    30 June 2005
 th
  Committees of the Board
  Audit and Risk Committee
   77




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##### Table of Contents



Report of the Directors
 Directors
Report
    Remuneration Committee
   Compensation for loss of office
   Directors remuneration
  2005£Salaries and fees
    
    
    7,055,710Performance-related payments
    
    
    4,509,040Other taxable benefits
    
    
    14,125Total remuneration excluding pension contributions
    
    
    11,578,875Pension contributions
    
    
    Compensation for loss of office
    
    
    771,661
  Medium Term Incentive Plan
   78




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##### Table of Contents



Report of the Directors
 Directors
Report
  Remuneration of Highest Paid Director
  Retirement Benefits
  Non-Executive Directors
  Directors interests and Related Party Transactions
    Third Party Indemnities
  Employee share ownership
   Pension funds
     79




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##### Table of Contents



Report of the Directors
 Directors
Report
   Market value of land and buildings
  Corporate social responsibility
     Employees
     At 31 December
    
    
    At 31 December2005
    
    
    2004Total employees*
    
    
    20,642
    
    
    
    24,361Total female employees
    
    
    13,102
    
    
    
    15,623Total male employees
    
    
    7,540
    
    
    
    8,738Total full-time employees
    
    
    16,884
    
    
    
    20,599Total part-time employees
    
    
    3,758
    
    
    
    3,762Total ethnic minority employees
    
    
    1,302
    
    
    
    1,655Employees aged 50 and under
    
    
    18,729
    
    
    
    22,195Employees aged over 50
    
    
    1,913
    
    
    
    2,166Employee turnover (%)
    
    
    22
    
    
    
    22Average days absent per employee
    
    
    7
    
    
    
    8Total number of staff grievances (at final stage)
    
    
    10
    
    
    
    7TrainingTotal number of training days
    
    
    154,276
    
    
    
    180,974Average number of training days per employee
    
    
    7
    
    
    
    7Average £ invested in training per employee
    
    
    527
    
    
    
    805Health and SafetyTotal number of reported accidents
    
    
    275
    
    
    
    319Total number of accidents reported to enforcing authorities
    
    
    10
    
    
    
    20Total number of adjustments to workplaces**
    
    
    
    
    
    
    608Workplace adjustments for disabled employees**
    
    
    
    
    
    
    128
 *
    
    The total number of UK employees, at 31 December 2005, on a full-time equivalent basis.**
    
    These figures are no longer recorded centrally.
 80




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##### Table of Contents



Report of the Directors
 Directors Report
 Equality and diversity
   Disability
  Health and Safety
   Well-being
   Work-life balance
  Learning and Developing
   Performance development
   Total Reward
  81




---



##### Table of Contents



Report of the Directors
 Directors Report
   Communication
   Working in partnership
    Offshoring
  Customers
     Financial inclusion
   Complaints management
  82




---



##### Table of Contents



Report of the Directors
 Directors Report
  Social housing
  Suppliers
   Environment
    Community
      Donations
  Volunteering
   83




---



##### Table of Contents



Report of the Directors
 Directors Report
 Code of ethics
          Political contributions
  Policy and Practice on Payment of Creditors
  Going concern
  Auditors
  Disclosure controls and procedures  (Sarbanes-Oxley Act 2002)
   84




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##### Table of Contents



Statement of directors responsibilities
   >
    
    properly select and apply accounting policies;>
    
    present information, including accounting policies, in a manner that
provides relevant, reliable, comparable and understandable
information;>
    
    provide additional disclosures when compliance with the specific
requirements in International Financial Reporting Standards is
insufficient to enable users to understand the impact of particular
transactions, other events and conditions on the entitys financial
position and financial performance; and
 >
    
    prepare the accounts on a going concern basis unless, having assessed
the ability of the company to continue as a going concern, management
either intends to liquidate the entity or to cease trading, or have
no realistic alternative but to do so.
   85




---



##### Table of Contents



Report of the Directors
 
 Supervision and Regulation
 European Union Directives
 General
  Prudential supervision and capital adequacy
        UK regulations
General
  86




---



##### Table of Contents



Report of the Directors
 Supervision and Regulation
               Financial Services Authority conduct of business rules
   The Financial Services Compensation Scheme
  Deposits:
 Investments:
 Mortgage advice and arranging:
 Long-term insurance (pensions and life assurances) firms:
 General insurance firms:
 General insurance advice and arranging:
 87




---



##### Table of Contents



Report of the Directors
 Supervision and Regulation
 Data protection
  Other main relevant legislation
 The Consumer Credit Act 1974
 The Consumer Credit Act 2006
 The Unfair Terms in Consumer Contracts Regulations 1999
  Current and future developments
 Payment Systems
   Pensions A Day
  Treating Customers Fairly
   Helping Consumers Achieve a Fair Deal
   European Union developments
   88




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##### Table of Contents



Report of the Directors
 Supervision and Regulation
 Markets in Financial Instruments Directive (MiFID)
    Directive on Payments Services
  Credit Agreements for Consumers Directive
 
 Unfair Commercial Practices Directive
  Transparency Directive
  Third Money Laundering Directive
 
 89




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##### Table of Contents



Financial Statements
 
 Contents to Financial Statements
 Financial StatementsIndependent Auditors Report
    
    
    91Consolidated Income Statement for the years ended 31 December 2005 and 2004
    
    
    92Consolidated Balance Sheet as at 31 December 2005 and 2004
    
    
    93Consolidated Statement of Recognised Income and Expense for the years ended 31 December 2005 and 2004
    
    
    94Consolidated Cash Flow Statement for the years ended 31 December 2005 and 2004
    
    
    94Company Balance Sheet as at 31 December 2005 and 2004
    
    
    95Accounting Policies
    
    
    97Notes to the Financial Statements
    
    
    109Selected Financial Data
    
    
    195
 90




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##### Table of Contents



Financial Statements
 
 Report of Independent Registered Public Accounting Firm
 To the Board of directors and shareholder of Abbey National plc
     -s- Deloitte & Touche LLP 
 91




---



##### Table of Contents



Financial Statements
 
 Consolidated Income Statement
  2005
    
    
    2004Notes
    
    
    £m
    
    
    £mInterest and similar income
    
    
    2
    
    
    
    5,457
    
    
    
    5,637Interest expense and similar charges
    
    
    2
    
    
    
    (4,250
    )
    
    
    (4,174
    )Net interest income
    
    
    
    
    
    
    1,207
    
    
    
    1,463Fee and commission income
    
    
    3
    
    
    
    759
    
    
    
    653Fee and commission expense
    
    
    3
    
    
    
    (107
    )
    
    
    (115
    )Net fee and commission income
    
    
    
    
    
    
    652
    
    
    
    538Dividend income
    
    
    4
    
    
    
    1
    
    
    
    1Net earned life assurance premiums
    
    
    
    
    
    
    1,224
    
    
    
    750Net trading income
    
    
    5
    
    
    
    3,124
    
    
    
    846Other operating income
    
    
    6
    
    
    
    215
    
    
    
    341Total operating income
    
    
    
    
    
    
    6,423
    
    
    
    3,939Net life assurance claims incurred and movement in policyholder liabilities
    
    
    
    
    
    
    (3,683
    )
    
    
    (1,094
    )Total income net of insurance claims
    
    
    
    
    
    
    2,740
    
    
    
    2,845Administration expenses
    
    
    7
    
    
    
    (1,724
    )
    
    
    (2,221
    )Depreciation and amortisation
    
    
    8
    
    
    
    (199
    )
    
    
    (547
    )Total operating expenses
    
    
    
    
    
    
    (1,923
    )
    
    
    (2,768
    )Impairment (losses)/recoveries on loans and advances
    
    
    10
    
    
    
    (218
    )
    
    
    55Impairment recoveries on fixed asset investments
    
    
    
    
    
    
    
    
    
    
    80Provisions for other liabilities and charges
    
    
    
    
    
    
    (3
    )
    
    
    (233
    )Operating profit/(loss)
    
    
    
    
    
    
    596
    
    
    
    (21
    )Share of profit of associates
    
    
    
    
    
    
    
    
    
    
    Profit/(loss) before tax
    
    
    
    
    
    
    596
    
    
    
    (21
    )Taxation expense
    
    
    11
    
    
    
    (176
    )
    
    
    (33
    )Profit/(loss) for the year
    
    
    
    
    
    
    420
    
    
    
    (54
    )Attributable to:Equity holders of the company
    
    
    
    
    
    
    420
    
    
    
    (54
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
  92




---



##### Table of Contents



Financial Statements
 
 Consolidated Balance Sheet
  2005
    
    
    2004Notes
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    13
    
    
    
    991
    
    
    
    454Trading assets
    
    
    14
    
    
    
    58,231
    
    
    
    Derivative financial instruments
    
    
    15
    
    
    
    11,855
    
    
    
    2,377Financial assets designated at fair value
    
    
    16
    
    
    
    30,597
    
    
    
    Loans and advances to banks
    
    
    17
    
    
    
    444
    
    
    
    11,751Loans and advances to customers
    
    
    18
    
    
    
    95,467
    
    
    
    109,416Debt securities
    
    
    19
    
    
    
    
    
    
    
    37,010Equity securities and other variable yield securities
    
    
    20
    
    
    
    
    
    
    
    10,792Available for sale securities
    
    
    22
    
    
    
    13
    
    
    
    Investment in associated undertakings
    
    
    24
    
    
    
    24
    
    
    
    25Intangible assets
    
    
    25
    
    
    
    171
    
    
    
    175Value of in force business
    
    
    26
    
    
    
    1,721
    
    
    
    1,844Property, plant and equipment
    
    
    27
    
    
    
    314
    
    
    
    262Operating lease assets
    
    
    28
    
    
    
    2,172
    
    
    
    2,275Investment property
    
    
    29
    
    
    
    
    
    
    
    1,228Current tax assets
    
    
    
    
    
    
    235
    
    
    
    242Deferred tax assets
    
    
    30
    
    
    
    796
    
    
    
    501Other assets
    
    
    31
    
    
    
    4,003
    
    
    
    6,381Total assets
    
    
    
    
    
    
    207,034
    
    
    
    184,733Deposits by banks
    
    
    32
    
    
    
    5,617
    
    
    
    18,412Customer accounts
    
    
    33
    
    
    
    65,889
    
    
    
    78,660Derivative financial instruments
    
    
    15
    
    
    
    11,264
    
    
    
    3,665Trading liabilities
    
    
    34
    
    
    
    52,664
    
    
    
    Financial liabilities designated at fair value
    
    
    35
    
    
    
    7,948
    
    
    
    Debt securities in issue
    
    
    36
    
    
    
    21,276
    
    
    
    37,067Other borrowed funds
    
    
    37
    
    
    
    2,244
    
    
    
    722Subordinated liabilities
    
    
    38
    
    
    
    6,205
    
    
    
    5,484Insurance and reinsurance liabilities
    
    
    39
    
    
    
    21,501
    
    
    
    24,923Macro hedge of interest rate risk
    
    
    
    
    
    
    13
    
    
    
    Other liabilities
    
    
    40
    
    
    
    3,190
    
    
    
    8,844Investment contract liabilities
    
    
    41
    
    
    
    3,306
    
    
    
    Other provisions
    
    
    42
    
    
    
    253
    
    
    
    302Current tax liabilities
    
    
    
    
    
    
    288
    
    
    
    161Deferred tax liabilities
    
    
    30
    
    
    
    886
    
    
    
    1,064Retirement benefit obligations
    
    
    43
    
    
    
    1,380
    
    
    
    1,197Minority
interests  non-equity
    
    
    
    
    
    
    
    
    
    
    512Total liabilities
    
    
    
    
    
    
    203,924
    
    
    
    181,013Share capital
    
    
    45
    
    
    
    148
    
    
    
    473Share premium account
    
    
    45
    
    
    
    1,857
    
    
    
    2,164Retained earnings
    
    
    46
    
    
    
    1,105
    
    
    
    1,083Total shareholders equity
    
    
    
    
    
    
    3,110
    
    
    
    3,720Total liabilities and equity
    
    
    
    
    
    
    207,034
    
    
    
    184,733
  93




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##### Table of Contents



Financial Statements
 
 Consolidated Statement of Recognised Income and Expense
  2005
    
    
    2004Notes
    
    
    £m
    
    
    £mExchange differences on translation of foreign operations
    
    
    
    
    
    
    3
    
    
    
    (2
    )Actuarial gains and losses on defined benefit pension plans
    
    
    
    
    
    
    (154
    )
    
    
    (70
    )Tax on items taken directly to equity
    
    
    
    
    
    
    46
    
    
    
    21Net loss recognised directly in equity
    
    
    
    
    
    
    (105
    )
    
    
    (51
    )Profit/ (loss) for the period
    
    
    
    
    
    
    420
    
    
    
    (54
    )Total recognised income and expense for the period
    
    
    
    
    
    
    315
    
    
    
    (105
    )Effect of changes in accounting policyIFRS transition adjustments at 1 January 2005:Retained earnings
    
    
    54
    
    
    
    (293
    )
    
    
    22
    
    
    
    (105
    )Attributable to:Equity holders of the parent
    
    
    
    
    
    
    22
    
    
    
    (105
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    (105
    )
 
 Consolidated Cash Flow Statement
  2005
    
    
    2004Notes
    
    
    £m
    
    
    £mNet cash flow from/(used in) operating activitiesProfit before tax
    
    
    
    
    
    
    596
    
    
    
    (21
    )Adjustments for:Non cash items included in net profit
    
    
    
    
    
    
    92
    
    
    
    (180
    )Change in operating assets
    
    
    
    
    
    
    (10,056
    )
    
    
    (677
    )Change in operating liabilities
    
    
    
    
    
    
    4,270
    
    
    
    (3,941
    )Income taxes paid
    
    
    
    
    
    
    (132
    )
    
    
    (12
    )Net cash flow from/(used in) operating activities
    
    
    47
    
    
    
    (5,230
    )
    
    
    (4,831
    )Cash flows from/(used in) investing activitiesDisposal of subsidiaries, net of cash disposed
    
    
    
    
    
    
    845
    
    
    
    3,180Purchase of tangible and intangible fixed assets
    
    
    
    
    
    
    (329
    )
    
    
    (155
    )Proceeds from tangible and intangible fixed assets
    
    
    
    
    
    
    190
    
    
    
    240Proceeds from sale of investment properties
    
    
    
    
    
    
    1,332
    
    
    
    72Purchase of non-dealing securities
    
    
    
    
    
    
    (2
    )
    
    
    (2,237
    )Proceeds from sale and redemption of non-dealing securities
    
    
    
    
    
    
    
    
    
    
    3,031Net cash flow from/(used in) investing activities
    
    
    
    
    
    
    2,036
    
    
    
    4,131Cash flows from/(used in) financing activitiesIssue of ordinary share capital
    
    
    
    
    
    
    
    
    
    
    13Issue of loan capital
    
    
    
    
    
    
    554
    
    
    
    Repayment of loan capital
    
    
    
    
    
    
    (458
    )
    
    
    (813
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    (697
    )Net cash flows from/(used in) financing activities
    
    
    
    
    
    
    96
    
    
    
    (1,497
    )Net increase/(decrease) in cash and cash equivalents
    
    
    
    
    
    
    (3,098
    )
    
    
    (2,197
    )Cash and cash equivalents at beginning of the period
    
    
    
    
    
    
    11,259
    
    
    
    14,089Effects of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    80
    
    
    
    (633
    )Cash and cash equivalents at the end of the period
    
    
    
    
    
    
    8,241
    
    
    
    11,259
  94




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##### Table of Contents



Financial Statements
 
 Company Balance Sheet
  2005
    
    
    2004Notes
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    13
    
    
    
    370
    
    
    
    443Derivative financial instruments
    
    
    15
    
    
    
    1,227
    
    
    
    Financial assets designated at fair value
    
    
    16
    
    
    
    790
    
    
    
    Loans and advances to banks
    
    
    17
    
    
    
    33,009
    
    
    
    23,605Loans and advances to customers
    
    
    18
    
    
    
    95,230
    
    
    
    79,860Available for sale securities
    
    
    22
    
    
    
    272
    
    
    
    Debt securities
    
    
    19
    
    
    
    
    
    
    
    405Equity securities and other variable yield securities
    
    
    20
    
    
    
    
    
    
    
    1Investment in associated undertakings
    
    
    24
    
    
    
    24
    
    
    
    19Investment in subsidiary undertakings
    
    
    23
    
    
    
    8,690
    
    
    
    8,250Property, plant and equipment
    
    
    27
    
    
    
    298
    
    
    
    231Current tax asset
    
    
    
    
    
    
    235
    
    
    
    242Deferred tax assets
    
    
    30
    
    
    
    702
    
    
    
    494Other assets
    
    
    31
    
    
    
    553
    
    
    
    1,505Total assets
    
    
    
    
    
    
    141,400
    
    
    
    115,055Deposits by banks
    
    
    32
    
    
    
    48,267
    
    
    
    35,697Customer accounts
    
    
    33
    
    
    
    79,288
    
    
    
    65,910Derivative financial instruments
    
    
    15
    
    
    
    623
    
    
    
    Debt securities in issue
    
    
    36
    
    
    
    4
    
    
    
    4Other borrowed funds
    
    
    37
    
    
    
    1,452
    
    
    
    722Subordinated liabilities
    
    
    38
    
    
    
    6,477
    
    
    
    5,674Macro hedge of interest rate risk
    
    
    
    
    
    
    13
    
    
    
    Other liabilities
    
    
    40
    
    
    
    814
    
    
    
    2,407Other provisions
    
    
    42
    
    
    
    202
    
    
    
    237Current tax liabilities
    
    
    
    
    
    
    112
    
    
    
    57Retirement benefit obligations
    
    
    43
    
    
    
    1,240
    
    
    
    1,060Total liabilities
    
    
    
    
    
    
    138,492
    
    
    
    111,768Share capital
    
    
    45
    
    
    
    148
    
    
    
    473Share premium account
    
    
    45
    
    
    
    1,857
    
    
    
    2,164Retained earnings
    
    
    46
    
    
    
    903
    
    
    
    650Total shareholders equity
    
    
    
    
    
    
    2,908
    
    
    
    3,287Total liabilities and equity
    
    
    
    
    
    
    141,400
    
    
    
    115,055
  95




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##### Table of Contents



Financial Statements
 Company Statement of Recognised Income and Expense
  2005
    
    
    2004Notes
    
    
    £m
    
    
    £mActuarial gains and losses on defined benefit pension plans
    
    
    
    
    
    
    (152
    )
    
    
    (49
    )Tax on items taken directly to equity
    
    
    
    
    
    
    46
    
    
    
    15Net loss recognised directly in equity
    
    
    
    
    
    
    (106
    )
    
    
    (34
    )Profit/ (loss) for the period
    
    
    
    
    
    
    691
    
    
    
    (284
    )Total recognised income and expense for the period
    
    
    
    
    
    
    585
    
    
    
    (318
    )Effect of changes in accounting policyIFRS transition adjustments at 1 January 2005:Retained earnings
    
    
    54
    
    
    
    (332
    )
    
    
    253
    
    
    
    (318
    )Attributable to:Equity holders of the parent
    
    
    
    
    
    
    253
    
    
    
    (318
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    253
    
    
    
    (318
    )
 Company Cash Flow Statement
  2005
    
    
    2004Notes
    
    
    £m
    
    
    £mNet cash flow from/(used in) operating activitiesProfit before tax
    
    
    
    
    
    
    699
    
    
    
    (490
    )Adjustments for:Non cash items included in net profit
    
    
    
    
    
    
    (121
    )
    
    
    34Change in operating assets
    
    
    
    
    
    
    (7,715
    )
    
    
    (4,388
    )Change in operating liabilities
    
    
    
    
    
    
    1,315
    
    
    
    9,399Income taxes paid
    
    
    
    
    
    
    (8
    )
    
    
    2Net cash flow from/(used in) operating activities
    
    
    47
    
    
    
    (5,830
    )
    
    
    4,557Cash flows from/(used in) investing activitiesDisposal of subsidiaries, net of cash disposed
    
    
    
    
    
    
    
    
    
    
    875Purchase of tangible and intangible fixed assets
    
    
    
    
    
    
    (185
    )
    
    
    (83
    )Proceeds from tangible and intangible fixed assets
    
    
    
    
    
    
    56
    
    
    
    52Purchase of non-dealing securities
    
    
    
    
    
    
    (3
    )
    
    
    Proceeds from sale and redemption of non-dealing securities
    
    
    
    
    
    
    178
    
    
    
    152Net cash flow from/(used in) investing activities
    
    
    
    
    
    
    46
    
    
    
    996Cash flows from/(used in) financing activitiesIssue of ordinary share capital
    
    
    
    
    
    
    
    
    
    
    8Issue of preference share capital
    
    
    
    
    
    
    
    
    
    
    2Issue of loan capital
    
    
    
    
    
    
    554
    
    
    
    (571
    )Repayment of loan capital
    
    
    
    
    
    
    (458
    )
    
    
    (301
    )Dividends paid
    
    
    
    
    
    
    
    
    
    
    (699
    )Net cash flows from/(used in) financing activities
    
    
    
    
    
    
    96
    
    
    
    (1,561
    )Net increase/(decrease) in cash and cash equivalents
    
    
    
    
    
    
    (5,688
    )
    
    
    3,992Cash and cash equivalents at beginning of the period
    
    
    
    
    
    
    (9,518
    )
    
    
    (13,346
    )Effects of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    122
    
    
    
    (164
    )Cash and cash equivalents at the end of the period
    
    
    
    
    
    
    (15,084
    )
    
    
    (9,518
    )
  96




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##### Table of Contents



Financial Statements
 
 Accounting Policies
 International Financial Reporting Standards
  a)
    
    Business Combinations  the Group has applied IFRS 3 Business Combinations to business
combinations that occurred on or after 1 January 2004. Business combinations before that date
have not been restated. Under previous GAAP (UK GAAP), goodwill arising on acquisitions
after 1 October 1998 was capitalised and amortised over its estimated useful economic life.
Goodwill arising on acquisitions before 1 October 1998 was deducted from equity.
 b)
    
    Cumulative foreign currency difference  The Group has brought forward a nil opening balance
on the cumulative foreign currency translation adjustment arising from the retranslation of
foreign operations, which is shown as a separate item in shareholders equity at the date of
transition in accordance with IAS 21 The Effects of changes in Foreign Exchange Rates.
 c)
    
    Implementation of IAS 32, IAS 39 and IFRS 4 (incorporating the adoption of FRS 27 Life
Assurance)  As allowed by IFRS 1, the Group has not restated its 2004 consolidated income
statements and balance sheets from UK GAAP to comply with IAS 32, IAS 39 and IFRS 4.
 d)
    
    The Group has decided to early adopt IFRS 7 Financial Instruments: Disclosures and the
related amendments to IAS 1 Presentation to Financial Statements and has taken advantage of
the exemption therein from presenting certain comparative information. Disclosures required by
IFRS 7 relating to the nature and extent of risks arising from financial instruments may be
found in the Risk Management section of the Business and Financial Review on pages 59 to 73,
which form part of these financial statements.
 e)
    
    The Group has also decided to early adopt the amendment to IAS 19 Employee Benefits-
Actuarial Gains and Losses Group Plans and Disclosures
 f)
    
    The Group has adopted IFRS 5 Non-current assets held for sale and Discontinued Operations
prospectively from 1 January 2005 and has elected not to restate comparatives.
  Consolidation
         97




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##### Table of Contents



Financial Statements
 Accounting Policies
 Foreign currency translation
    Revenue recognition
        Pensions and other post retirement benefits
     98




---



##### Table of Contents



Financial Statements
 Accounting Policies
  Share based payments
  Goodwill and other intangible assets
   Property, plant and equipment
    Owner-occupied properties
    
    Not exceeding 40 yearsOffice fixtures and equipment
    
    3 to 8 yearsComputer software
    
    3 to 5 years
 Financial assets
     99




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##### Table of Contents



Financial Statements
 Accounting Policies
        Offsetting financial assets and liabilities
  Sale and repurchase agreements (Including stock lending and borrowing)
   Derivative financial instruments
    Hedge accounting
   100




---



##### Table of Contents



Financial Statements
 Accounting Policies
   Securitisation transactions
   Impairment of financial assets
              101




---



##### Table of Contents



Financial Statements
 Accounting Policies
   Impairment of non-financial assets
   Investment property
  Leases
     Insurance
     102




---



##### Table of Contents



103




---



##### Table of Contents



Financial Statements
 Accounting Policies
                   Income taxes, including deferred income taxes
    104




---



##### Table of Contents



Financial Statements
 Accounting Policies
     Cash and cash equivalents
  Financial liabilities
      Borrowings
   Share capital
   Provisions
     105




---



##### Table of Contents



Financial Statements
 Accounting Policies
 Dividends
  Critical accounting policies and areas of significant management judgement
    (a) Provisions for loans and advances
     (b) Valuation of financial instruments
      106




---



##### Table of Contents



Financial Statements
 Accounting Policies
 Assets
    
    
    Liabilities%
    
    
    %Fair value based on:Quoted market prices
    
    
    58
    
    
    
    36Internal models based on market prices
    
    
    42
    
    
    
    64Internal models based on information other than market data
    
    
    
    
    
    
    Total
    
    
    100
    
    
    
    100
 (c) Long-term assurance business
    Insurance contracts and participating contracts
        (d) Impairment of goodwill
  107




---



##### Table of Contents



Financial Statements
 Accounting Policies
     (e) Provisions for misselling
     (f) Pensions
     108




---



##### Table of Contents



Financial Statements
 
 Notes to the Financial Statements
 1.
Business segments
  >
    
    Retail Banking>
    
    Insurance and Asset Management>
    
    Abbey Financial Markets>
    
    Group Infrastructure>
    
    Portfolio Business Unit
     a) By class of business
 Insurance
    
    
    Abbey
    
    
    Group
    
    
    PortfolioRetail
    
    
    and Asset
    
    
    Financial
    
    
    Infra-
    
    
    BusinessBanking
    
    
    Management
    
    
    Markets
    
    
    structure
    
    
    Unit
    
    
    Total
    
    
    Intercompany
    
    
    Group Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2005Interest and similarincome
    
    
    8,718
    
    
    
    103
    
    
    
    4,069
    
    
    
    1,810
    
    
    
    211
    
    
    
    14,911
    
    
    
    (9,454
    )
    
    
    5,457Interest expense andsimilar charges
    
    
    (7,318
    )
    
    
    (48
    )
    
    
    (4,068
    )
    
    
    (2,023
    )
    
    
    (247
    )
    
    
    (13,704
    )
    
    
    9,454
    
    
    
    (4,250
    )Net interest income
    
    
    1,400
    
    
    
    55
    
    
    
    1
    
    
    
    (213
    )
    
    
    (36
    )
    
    
    1,207
    
    
    
    
    
    
    
    1,207Non-interest income
    
    
    564
    
    
    
    255
    
    
    
    252
    
    
    
    176
    
    
    
    286
    
    
    
    1,533
    
    
    
    
    
    
    
    1,533Total
income net
of insurance
claims
    
    
    1,964
    
    
    
    310
    
    
    
    253
    
    
    
    (37
    )
    
    
    250
    
    
    
    2,740
    
    
    
    
    
    
    
    2,740Administration expenses
    
    
    (1,180
    )
    
    
    (208
    )
    
    
    (115
    )
    
    
    (183
    )
    
    
    (38
    )
    
    
    (1,724
    )
    
    
    
    
    
    
    (1,724
    )Depreciation and
amortisation
    
    
    (67
    )
    
    
    (5
    )
    
    
    (4
    )
    
    
    
    
    
    
    (123
    )
    
    
    (199
    )
    
    
    
    
    
    
    (199
    )Total
operating
expenses
    
    
    (1,247
    )
    
    
    (213
    )
    
    
    (119
    )
    
    
    (183
    )
    
    
    (161
    )
    
    
    (1,923
    )
    
    
    
    
    
    
    (1,923
    )Impairment losses on
loans and advances
    
    
    (208
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (218
    )
    
    
    
    
    
    
    (218
    )Provisions for other
liabilities and charges
    
    
    (10
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Profit/(loss) before
tax
    
    
    499
    
    
    
    96
    
    
    
    134
    
    
    
    (220
    )
    
    
    87
    
    
    
    596
    
    
    
    
    
    
    
    596Balance SheetAssetsSegmental assets
    
    
    98,695
    
    
    
    28,872
    
    
    
    76,463
    
    
    
    488
    
    
    
    2,492
    
    
    
    207,010Investments in associates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    24Consolidated total assets
    
    
    98,695
    
    
    
    28,872
    
    
    
    76,463
    
    
    
    512
    
    
    
    2,492
    
    
    
    207,034LiabilitiesSegment liabilities
    
    
    84,798
    
    
    
    27,219
    
    
    
    83,310
    
    
    
    7,832
    
    
    
    765
    
    
    
    203,924Consolidated total
liabilities
    
    
    84,798
    
    
    
    27,219
    
    
    
    83,310
    
    
    
    7,832
    
    
    
    765
    
    
    
    203,924The average number of
staff employed by the
Group during the year
was as follows:
    
    
    16,692
    
    
    
    2,651
    
    
    
    519
    
    
    
    2,285
    
    
    
    250
    
    
    
    22,397
 109




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Insurance
    
    
    AbbeyRetail
    
    
    and Asset
    
    
    Financial
    
    
    Group
    
    
    PortfolioBanking
    
    
    Management
    
    
    Markets
    
    
    Infrastructure
    
    
    Business Unit
    
    
    TotalIntercompany revenue
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2005Net interest income
    
    
    (809
    )
    
    
    32
    
    
    
    691
    
    
    
    105
    
    
    
    (19
    )
    
    
    Non-interest income
    
    
    18
    
    
    
    (17
    )
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    Total
income
net of
insurance claims
    
    
    (791
    )
    
    
    15
    
    
    
    691
    
    
    
    104
    
    
    
    (19
    )
    
    
    Insurance
    
    
    AbbeyRetail
    
    
    and Asset
    
    
    Financial
    
    
    Group
    
    
    PortfolioBanking
    
    
    Management
    
    
    Markets
    
    
    Infrastructure
    
    
    Business Unit
    
    
    TotalThird party revenue
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2005Net interest income
    
    
    2,209
    
    
    
    23
    
    
    
    (690
    )
    
    
    (318
    )
    
    
    (17
    )
    
    
    1,207Non-interest income
    
    
    546
    
    
    
    272
    
    
    
    252
    
    
    
    177
    
    
    
    286
    
    
    
    1,533Total
income net
of
insurance
claims
    
    
    2,755
    
    
    
    295
    
    
    
    (438
    )
    
    
    (141
    )
    
    
    269
    
    
    
    2,740
 Insurance
    
    
    Abbey
    
    
    Group
    
    
    PortfolioRetail
    
    
    and Asset
    
    
    Financial
    
    
    Infra-
    
    
    Business
    
    
    
    
    
    
    Inter-Banking
    
    
    Management
    
    
    Markets
    
    
    structure
    
    
    Unit
    
    
    Total
    
    
    company
    
    
    Group Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Interest and similar
income
    
    
    7,038
    
    
    
    108
    
    
    
    1,059
    
    
    
    560
    
    
    
    814
    
    
    
    9,579
    
    
    
    (3,942
    )
    
    
    5,637Interest expense and
similar charges
    
    
    (5,607
    )
    
    
    (36
    )
    
    
    (1,061
    )
    
    
    (661
    )
    
    
    (751
    )
    
    
    (8,116
    )
    
    
    3,942
    
    
    
    (4,174
    )Net interest income
    
    
    1,431
    
    
    
    72
    
    
    
    (2
    )
    
    
    (101
    )
    
    
    63
    
    
    
    1,463
    
    
    
    
    
    
    
    1,463Non-interest income
    
    
    553
    
    
    
    250
    
    
    
    291
    
    
    
    130
    
    
    
    158
    
    
    
    1,382
    
    
    
    
    
    
    
    1,382Total
income net
of insurance
claims
    
    
    1,984
    
    
    
    322
    
    
    
    289
    
    
    
    29
    
    
    
    221
    
    
    
    2,845
    
    
    
    
    
    
    
    2,845Administration expenses
    
    
    (1,276
    )
    
    
    (307
    )
    
    
    (130
    )
    
    
    (412
    )
    
    
    (96
    )
    
    
    (2,221
    )
    
    
    
    
    
    
    (2,221
    )Depreciation and
amortisation
    
    
    (138
    )
    
    
    (45
    )
    
    
    (14
    )
    
    
    (166
    )
    
    
    (184
    )
    
    
    (547
    )
    
    
    
    
    
    
    (547
    )Total
operating
expenses
    
    
    (1,414
    )
    
    
    (352
    )
    
    
    (144
    )
    
    
    (578
    )
    
    
    (280
    )
    
    
    (2,768
    )
    
    
    
    
    
    
    (2,768
    )Impairment losses on
loans and advances
    
    
    (15
    )
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    55
    
    
    
    
    
    
    
    55Provisions for other
liabilities and charges
    
    
    (155
    )
    
    
    (32
    )
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    (233
    )
    
    
    
    
    
    
    (233
    )Impairment
recoveries/(losses) on
fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    80
    
    
    
    
    
    
    
    80Profit/(
loss) before
tax
    
    
    400
    
    
    
    18
    
    
    
    145
    
    
    
    (595
    )
    
    
    11
    
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Balance SheetAssetsSegmental assets
    
    
    95,602
    
    
    
    28,138
    
    
    
    50,020
    
    
    
    6,248
    
    
    
    4,700
    
    
    
    184,708
    
    
    
    
    
    
    
    184,708Investments in associates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    25Consolidated total assets
    
    
    95,602
    
    
    
    28,138
    
    
    
    50,020
    
    
    
    6,273
    
    
    
    4,700
    
    
    
    184,733
    
    
    
    
    
    
    
    184,733LiabilitiesSegment liabilities
    
    
    94,058
    
    
    
    26,473
    
    
    
    49,733
    
    
    
    6,277
    
    
    
    4,472
    
    
    
    181,013
    
    
    
    
    
    
    
    181,013Consolidated total
liabilities
    
    
    94,058
    
    
    
    26,473
    
    
    
    49,733
    
    
    
    804
    
    
    
    4,472
    
    
    
    181,013
    
    
    
    
    
    
    
    181,013The average number of
staff employed by the
Group during the year
was as follows:
    
    
    18,156
    
    
    
    3,984
    
    
    
    503
    
    
    
    2,102
    
    
    
    526
    
    
    
    25,271
  110




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Insurance
    
    
    AbbeyRetail
    
    
    and Asset
    
    
    Financial
    
    
    Group
    
    
    PortfolioBanking
    
    
    Management
    
    
    Markets
    
    
    Infrastructure
    
    
    Business Unit
    
    
    TotalIntercompany revenue
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Net interest income
    
    
    (646
    )
    
    
    23
    
    
    
    (920
    )
    
    
    157
    
    
    
    1,386
    
    
    
    Non-interest income
    
    
    37
    
    
    
    (31
    )
    
    
    (5
    )
    
    
    3
    
    
    
    (4
    )
    
    
    Total
income
net of
insurance
claims
    
    
    (609
    )
    
    
    (8
    )
    
    
    (925
    )
    
    
    160
    
    
    
    1,382
    
    
    
    Insurance
    
    
    AbbeyRetail
    
    
    and Asset
    
    
    Financial
    
    
    Group
    
    
    PortfolioBanking
    
    
    Management
    
    
    Markets
    
    
    Infrastructure
    
    
    Business Unit
    
    
    TotalThird party
revenue
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Net interest income
    
    
    2,133
    
    
    
    49
    
    
    
    941
    
    
    
    (334
    )
    
    
    (1,326
    )
    
    
    1,463Non-interest income
    
    
    516
    
    
    
    314
    
    
    
    296
    
    
    
    92
    
    
    
    164
    
    
    
    1,382Total income net of
insurance claims
    
    
    2,649
    
    
    
    363
    
    
    
    1,237
    
    
    
    (242
    )
    
    
    (1,162
    )
    
    
    2,845
 b) By geographical region
 2005
    
    
    2004£m
    
    
    £mTotal IncomeUnited Kingdom
    
    
    2,706
    
    
    
    2,803Europe
    
    
    18
    
    
    
    45United States
    
    
    16
    
    
    
    (3
    )Other
    
    
    
    
    
    
    2,740
    
    
    
    2,845Profit before taxUnited Kingdom
    
    
    575
    
    
    
    (22
    )Europe
    
    
    17
    
    
    
    7United States
    
    
    4
    
    
    
    (6
    )Other
    
    
    
    
    
    
    596
    
    
    
    (21
    )Profit after taxUnited Kingdom
    
    
    405
    
    
    
    (54
    )Europe
    
    
    12
    
    
    
    3United States
    
    
    3
    
    
    
    (3
    )Other
    
    
    
    
    
    
    420
    
    
    
    (54
    )Carrying amount of segment assetsUnited Kingdom
    
    
    191,970
    
    
    
    175,113Europe
    
    
    25
    
    
    
    United States
    
    
    15,038
    
    
    
    9,620Other
    
    
    1
    
    
    
    207,034
    
    
    
    184,733
 c) Other segmental disclosures on a management basis
    >
    
    IFRS embedded value charges and rebasing These are unpredictable as they
depend on both equity and debt market movements which do not affect the
underlying performance of what is a very long-term business. The short-term
market movements remain a very important factor in the management of the
business but these are managed separately with a more risk-based focus.>
    
    Reorganisation and other costs Comprise implementation costs in relation to
the strategic change and cost reduction process. Management needs to understand
the underlying drivers of the cost base that will remain after
 111




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 the exercise is
complete, and does not want this view to be clouded by the costs of the
exercise, which are managed independently.>
    
    Intangible asset charges These charges can vary significantly year on year,
and hence can materially affect the profit or loss for that year. As a result
Abbey reviews these charges separately to avoid clouding the presentation of
underlying results.>
    
    Hedging variances As a consequence of the introduction of IFRS, the balance
sheet and income statement are subject to volatility particularly from the
accounting for elements of derivatives deemed under IFRS rules to be ineffective
as hedges. Where appropriate, such volatility is separately identified to
enable management to view the underlying performance of the business.>
    
    Proforma IFRS adjustments Due to certain IFRS standards only being applicable
from 1 January 2005, the 2004 statutory results only include the impact of IFRS
which are required to be applied retrospectively in the preparation of the 2005
results. As a result, management reviews the 2004 results on a proforma basis,
incorporating the impact of those prospective IFRS where it can be determined
what the impact would have been if the accounting changes had been effective in
2004. The impact includes the treatment of interest income and fees and the
reclassification of preference shares from shareholders equity to debt, but
excludes the effect of accounting for derivatives under IAS 39 as no estimate of
their effect can be made.>
    
    One-off statutory IFRS adjustments The conversion to IFRS resulted in the
recognition of certain one off items including impairment charges. These items
have been deducted from the results to allow management to understand the
underlying performance of the business.
  >
    
    IFRS embedded value charges and rebasing,>
    
    Reorganisation costs and other,>
    
    Intangible asset charges,>
    
    Hedging variances,>
    
    Proforma IFRS adjustments, and>
    
    One-off statutory IFRS adjustments.
   Insurance and
    
    
    Abbey
    
    
    Group
    
    
    PortfolioRetail
    
    
    Asset
    
    
    Financial
    
    
    Infra-
    
    
    BusinessBanking
    
    
    Management
    
    
    Markets
    
    
    structure
    
    
    Unit
    
    
    Total
    
    
    Adjustments
    
    
    Group Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2005Interest income
    
    
    8,718
    
    
    
    103
    
    
    
    4,069
    
    
    
    1,810
    
    
    
    211
    
    
    
    14,911
    
    
    
    (9,454
    )
    
    
    5,457Interest expense
    
    
    (7,318
    )
    
    
    (48
    )
    
    
    (4,068
    )
    
    
    (2,023
    )
    
    
    (247
    )
    
    
    (13,704
    )
    
    
    9,454
    
    
    
    (4,250
    )Net interest income
    
    
    1,400
    
    
    
    55
    
    
    
    1
    
    
    
    (213
    )
    
    
    (36
    )
    
    
    1,207
    
    
    
    
    
    
    
    1,207Non-interest income
    
    
    561
    
    
    
    267
    
    
    
    252
    
    
    
    197
    
    
    
    286
    
    
    
    1,563
    
    
    
    (30
    )
    
    
    1,533Total trading income
    
    
    1,961
    
    
    
    322
    
    
    
    253
    
    
    
    (16
    )
    
    
    250
    
    
    
    2,770
    
    
    
    (30
    )
    
    
    2,740Administrative and
other expenses
    
    
    (985
    )
    
    
    (191
    )
    
    
    (104
    )
    
    
    (178
    )
    
    
    (38
    )
    
    
    (1,496
    )
    
    
    (228
    )
    
    
    (1,724
    )Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    (65
    )
    
    
    (2
    )
    
    
    (1
    )
    
    
    
    
    
    
    (123
    )
    
    
    (191
    )
    
    
    (8
    )
    
    
    (199
    )Total trading expenses
    
    
    (1,050
    )
    
    
    (193
    )
    
    
    (105
    )
    
    
    (178
    )
    
    
    (161
    )
    
    
    (1,687
    )
    
    
    (236
    )
    
    
    (1,923
    )Provisions for bad and
doubtful debts
    
    
    (208
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (218
    )
    
    
    
    
    
    
    (218
    )Provisions for other
liabilities and charges
    
    
    (10
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Amounts written off
fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trading profit/(loss)
before taxation
    
    
    693
    
    
    
    128
    
    
    
    148
    
    
    
    (194
    )
    
    
    87
    
    
    
    862
    
    
    
    (266
    )
    
    
    596Adjust for:IFRS embedded value
charges and rebasing
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Reorganisation expenses
    
    
    (197
    )
    
    
    (17
    )
    
    
    (14
    )
    
    
    (5
    )
    
    
    
    
    
    
    (233
    )Intangible asset charges
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Hedging variances
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (18
    )Profit/(loss) before
taxation
    
    
    499
    
    
    
    96
    
    
    
    134
    
    
    
    (220
    )
    
    
    87
    
    
    
    596
 112




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Provision
    
    
    Provision
    
    
    Admininstr-
    
    
    Profit/Non-
    
    
    
    
    
    
    
    
    
    
    for bad and
    
    
    for
    
    
    ation and
    
    
    (loss)interest
    
    
    Net interest
    
    
    
    
    
    
    doubtful
    
    
    contingent
    
    
    other
    
    
    beforeincome
    
    
    income
    
    
    Depreciation
    
    
    debts
    
    
    liabilities
    
    
    expenses
    
    
    taxationAdjustments comprise:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2005IFRS embedded value
charges and rebasing
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Reorganisation expenses
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (228
    )
    
    
    (233
    )Intangible asset charges
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Hedging variances
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )(30
    )
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (228
    )
    
    
    (266
    )
 Insurance
    
    
    Abbey
    
    
    
    
    
    
    PortfolioRetail
    
    
    and Asset
    
    
    Financial
    
    
    Group Infra-
    
    
    BusinessBanking
    
    
    Management
    
    
    Markets
    
    
    structure
    
    
    Unit
    
    
    Total
    
    
    Adjustments
    
    
    Group Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Interest income
    
    
    7,039
    
    
    
    108
    
    
    
    1,059
    
    
    
    463
    
    
    
    824
    
    
    
    9,493
    
    
    
    (3,856
    )
    
    
    5,637Interest expense
    
    
    (5,607
    )
    
    
    (36
    )
    
    
    (1,061
    )
    
    
    (661
    )
    
    
    (751
    )
    
    
    (8,116
    )
    
    
    3,942
    
    
    
    (4,174
    )Net interest income
    
    
    1,432
    
    
    
    72
    
    
    
    (2
    )
    
    
    (198
    )
    
    
    73
    
    
    
    1,377
    
    
    
    86
    
    
    
    1,463Non-interest income
    
    
    477
    
    
    
    279
    
    
    
    291
    
    
    
    151
    
    
    
    158
    
    
    
    1,356
    
    
    
    26
    
    
    
    1,382Total trading income
    
    
    1,909
    
    
    
    351
    
    
    
    289
    
    
    
    (47
    )
    
    
    231
    
    
    
    2,733
    
    
    
    112
    
    
    
    2,845Administrative and other
expenses
    
    
    (1,089
    )
    
    
    (249
    )
    
    
    (108
    )
    
    
    (192
    )
    
    
    (96
    )
    
    
    (1,734
    )
    
    
    (487
    )
    
    
    (2,221
    )Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    (64
    )
    
    
    (13
    )
    
    
    (1
    )
    
    
    (34
    )
    
    
    (184
    )
    
    
    (296
    )
    
    
    (251
    )
    
    
    (547
    )Total trading expenses
    
    
    (1,153
    )
    
    
    (262
    )
    
    
    (109
    )
    
    
    (226
    )
    
    
    (280
    )
    
    
    (2,030
    )
    
    
    (738
    )
    
    
    (2,768
    )Provisions for bad and
doubtful debts
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (30
    )
    
    
    85
    
    
    
    55Provisions for other
liabilities and charges
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    (153
    )
    
    
    (80
    )
    
    
    (233
    )Amounts written off
fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    80
    
    
    
    
    
    
    
    80Trading profit/(loss)
before taxation
    
    
    581
    
    
    
    89
    
    
    
    180
    
    
    
    (271
    )
    
    
    21
    
    
    
    600
    
    
    
    (621
    )
    
    
    (21
    )Adjust for:IFRS embedded value
charges and rebasing
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Reorganisation expenses
    
    
    (199
    )
    
    
    (57
    )
    
    
    (24
    )
    
    
    (267
    )
    
    
    
    
    
    
    (547
    )Intangible asset charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )Proforma IFRS adjustments
    
    
    80
    
    
    
    (3
    )
    
    
    
    
    
    
    97
    
    
    
    (10
    )
    
    
    164One-off IFRS adjustments
    
    
    (62
    )
    
    
    (32
    )
    
    
    (11
    )
    
    
    (134
    )
    
    
    
    
    
    
    (239
    )Profit/(loss) before
taxation
    
    
    400
    
    
    
    18
    
    
    
    145
    
    
    
    (595
    )
    
    
    11
    
    
    
    (21
    )
 Provision forNon-
    
    
    
    
    
    
    
    
    
    
    bad and
    
    
    Provision for
    
    
    Administrat-
    
    
    Profit/(loss)interest
    
    
    Net Interest
    
    
    
    
    
    
    doubtful
    
    
    contingent
    
    
    ion and other
    
    
    beforeincome
    
    
    income
    
    
    Depreciation
    
    
    debts
    
    
    liabilities
    
    
    expenses
    
    
    taxationAdjustments comprise:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004IFRS embedded value
charges and rebasing
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    (32
    )
    
    
    
    
    
    
    21Reorganisation expenses
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (479
    )
    
    
    (547
    )Intangible asset charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Proforma IFRS adjustments
    
    
    73
    
    
    
    86
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    164One-off IFRS adjustments
    
    
    
    
    
    
    
    
    
    
    (251
    )
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    (239
    )26
    
    
    
    86
    
    
    
    (251
    )
    
    
    85
    
    
    
    (80
    )
    
    
    (487
    )
    
    
    (621
    )
 113




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 2. Net interest income
 Group2005
    
    
    2004£m
    
    
    £mInterest and similar income:Loans and advances to banks
    
    
    109
    
    
    
    129Loans and advances to customers
    
    
    5,284
    
    
    
    5,217Other interest earning financial assets
    
    
    64
    
    
    
    291Total interest and similar income
    
    
    5,457
    
    
    
    5,637Interest and similar charges:Deposits by banks
    
    
    9
    
    
    
    47Deposits by customers
    
    
    2,562
    
    
    
    2,090Debt securities in issue and other borrowed funds
    
    
    1,175
    
    
    
    1,258Other interest bearing financial liabilities
    
    
    504
    
    
    
    779Total interest and similar charges
    
    
    4,250
    
    
    
    4,174Net interest income
    
    
    1,207
    
    
    
    1,463
 3. Net fee and commission income
 Group2005
    
    
    2004£m
    
    
    £mFee and commission income:Insurance
    
    
    176
    
    
    
    156Banking fees
    
    
    465
    
    
    
    221Fund management fees
    
    
    112
    
    
    
    89Residential property
    
    
    
    
    
    
    183Other fees
    
    
    6
    
    
    
    4Total fee and commission income
    
    
    759
    
    
    
    653Fee and commission expense:Introducer fees
    
    
    
    
    
    
    51Other fees paid
    
    
    107
    
    
    
    64Total fee and commission expense
    
    
    107
    
    
    
    115Net fee and commission income
    
    
    652
    
    
    
    538
 4. Dividend income
 Group2005
    
    
    2004£m
    
    
    £mDividend income
    
    
    1
    
    
    
    1
 5. Net trading income
 Group2005
    
    
    2004£m
    
    
    £mSecurities
    
    
    100
    
    
    
    83Interest rate, equity and credit derivatives
    
    
    152
    
    
    
    185Net trading income  Banking
    
    
    252
    
    
    
    268Net trading income  Life Assurance
    
    
    2,872
    
    
    
    578Total net trading income
    
    
    3,124
    
    
    
    846
 6. Other operating income
 Group2005
    
    
    2004£m
    
    
    £mProfit/(loss) on sale of investment securities
    
    
    
    
    
    
    (168
    )Profit/(loss) on sale of subsidiary undertakings
    
    
    62
    
    
    
    46Profit/(loss) on sale of fixed assets
    
    
    4
    
    
    
    (34
    )Income from operating lease assets
    
    
    231
    
    
    
    311Net foreign exchange gains/(losses)
    
    
    
    
    
    
    (9
    )Income on other financial assets and liabilities designated at fair value
    
    
    109
    
    
    
    Loss on derivatives managed in conjunction with financial assets and liabilities designated at fair value
    
    
    (112
    )
    
    
    Other
    
    
    (79
    )
    
    
    195215
    
    
    
    341
 114




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 7. Administration expenses
 Group2005
    
    
    2004£m
    
    
    £mStaff costs:Wages and salaries
    
    
    648
    
    
    
    838Social security costs
    
    
    59
    
    
    
    70Pensions costs:- defined contribution plans
    
    
    4
    
    
    
    4- defined benefit plans
    
    
    99
    
    
    
    116Other personnel costs
    
    
    98
    
    
    
    (9
    )908
    
    
    
    1,019Property and equipment expenses
    
    
    202
    
    
    
    199Information technology expenses
    
    
    131
    
    
    
    152Other administrative expenses
    
    
    483
    
    
    
    8511,724
    
    
    
    2,221
 8. Depreciation and amortisation
 Group2005
    
    
    2004£m
    
    
    £mDepreciation of property, plant and equipment excluding operating lease assets
    
    
    72
    
    
    
    149Depreciation on operating lease assets
    
    
    123
    
    
    
    160Amortisation and impairment of intangible fixed assets
    
    
    4
    
    
    
    154Impairment of property, plant and equipment
    
    
    
    
    
    
    62Impairment of operating lease assets
    
    
    
    
    
    
    22199
    
    
    
    547
 9. Audit and other services
  Group2005
    
    
    2004£m
    
    
    £mAudit services- statutory audit
    
    
    3.8
    
    
    
    4.1- audit related regulatory reporting
    
    
    1.9
    
    
    
    2.15.7
    
    
    
    6.2Further assurance services
    
    
    0.7
    
    
    
    1.9Tax services- compliance services
    
    
    
    
    
    
    0.1- advisory services
    
    
    
    
    
    
    0.7
    
    
    
    2.0Other services- other services
    
    
    (0.2
    )
    
    
    1.16.2
    
    
    
    9.3% Non-Audit: Audit Services
    
    
    8.8
    
    
    
    50.0
        115




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 10. Impairment losses/(recoveries) on loans and advances
 Group2005
    
    
    2004£m
    
    
    £mLoans and advances to customers
    
    
    218
    
    
    
    (55
    )218
    
    
    
    (55
    )
 11. Taxation expense
 Group2005
    
    
    2004£m
    
    
    £mCurrent tax:UK corporation tax on profit of the year
    
    
    210
    
    
    
    81Adjustments in respect of prior periods
    
    
    (22
    )
    
    
    8Total current tax
    
    
    188
    
    
    
    89Deferred tax (Note 30)Current year
    
    
    (19
    )
    
    
    (46
    )Adjustments in respect of prior periods
    
    
    7
    
    
    
    (10
    )Total deferred tax
    
    
    (12
    )
    
    
    (56
    )Tax on profit for the year
    
    
    176
    
    
    
    33
   Group2005
    
    
    2004£m
    
    
    £mProfit before tax
    
    
    596
    
    
    
    (21
    )Tax calculated at a tax rate of 30% (2004: 30%)
    
    
    179
    
    
    
    (6
    )Effect of non-allowable provisions and other non-equalised items
    
    
    89
    
    
    
    32Underlying tax relief on overseas dividends
    
    
    (51
    )
    
    
    Non-taxable dividend income
    
    
    (20
    )
    
    
    Amortisation and impairment of goodwill
    
    
    (1
    )
    
    
    4Effect of non-UK profits and losses
    
    
    (5
    )
    
    
    5Adjustment to prior year provisions
    
    
    (15
    )
    
    
    (2
    )Income tax expense
    
    
    176
    
    
    
    33
  12. Profit/(loss) on ordinary activities after tax
  13. Cash and balances with central banks
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mCash in hand
    
    
    361
    
    
    
    446
    
    
    
    362
    
    
    
    435Other money market placements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balances with central banks
    
    
    630
    
    
    
    8
    
    
    
    8
    
    
    
    8991
    
    
    
    454
    
    
    
    370
    
    
    
    443
 116




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 14. Trading assets
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mLoans and advances to banks
    
    
    7,013
    
    
    
    
    
    
    
    
    
    
    
    Loans and advances to customers
    
    
    18,125
    
    
    
    
    
    
    
    
    
    
    
    Debt securities
    
    
    31,554
    
    
    
    
    
    
    
    
    
    
    
    Equity securities
    
    
    1,539
    
    
    
    
    
    
    
    
    
    
    
    58,231
    
    
    
    
    
    
    
    
    
    
    
    
  Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mIssued by public bodies:Government securities
    
    
    2,722
    
    
    
    
    
    
    
    
    
    
    
    Other public sector securities
    
    
    350
    
    
    
    
    
    
    
    
    
    
    
    3,072
    
    
    
    
    
    
    
    
    
    
    
    Issued by other issuers:Bank and building society certificates of deposit
    
    
    18,647
    
    
    
    
    
    
    
    
    
    
    
    18,647
    
    
    
    
    
    
    
    
    
    
    
    Other debt securities
    
    
    9,835
    
    
    
    
    
    
    
    
    
    
    
    31,554
    
    
    
    
    
    
    
    
    
    
    
    
  Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities:- Listed UK
    
    
    1,075
    
    
    
    
    
    
    
    
    
    
    
    - Listed elsewhere
    
    
    7,171
    
    
    
    
    
    
    
    
    
    
    
    - Unlisted
    
    
    23,308
    
    
    
    
    
    
    
    
    
    
    
    31,554
    
    
    
    
    
    
    
    
    
    
    
    Equity securities:- Listed UK
    
    
    1,093
    
    
    
    
    
    
    
    
    
    
    
    - Listed elsewhere
    
    
    446
    
    
    
    
    
    
    
    
    
    
    
    1,539
    
    
    
    
    
    
    
    
    
    
    
    
 15. Derivative financial instruments
 Derivatives held for trading purposes
     Hedging Derivatives
   117




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Activity
    
    Risk
    
    Types of HedgeManagement of the return on variable rate assets
financed by shareholders funds and net
non-interest bearing liabilities.
    
    Reduced profitability due to falls in interest rates.
    
    Receive fixed interest rate
swaps.Fixed rate lending and investments.
    
    Sensitivity to increases in interest rates.
    
    Pay fixed interest rate swaps.Fixed rate retail and wholesale funding.
    
    Sensitivity to falls in interest rates.
    
    Receive fixed interest rate
swaps.Equity-linked retail funding.
    
    Sensitivity to increases in equity market indices.
    
    Receive equity swaps.Management of other net interest income on retail
activities.
    
    Sensitivity of income to changes in interest rates.
    
    Interest rate swapsProfits earned in foreign currency.
    
    Sensitivity to strengthening of sterling against
other currencies.
    
    Forward foreign exchange
contracts.Investment in foreign currency assets.
    
    Sensitivity to strengthening of sterling against
other currencies.
    
    Cross-currency and foreign
exchange swaps.Issuance of products with embedded equity options.
    
    Sensitivity to changes in underlying index and index
volatility causing option exercise.
    
    Interest rate swaps combined
with equity options.Lending, and issuance of, products with embedded
interest rate options.
    
    Sensitivity to changes in underlying rate and rate
volatility causing option exercise.
    
    Interest rate swaps plus caps/floors, and other
matched options.Investment in, and issuance of, bonds with
put/call features.
    
    Sensitivity to changes in rates causing option
exercise.
    
    Interest rate swaps combined with swaptions and other
matched options.Firm commitments (e.g. asset purchases, issues
arranged).
    
    Sensitivity to changes in rates between arranging a
transaction and completion.
    
    Hedges are arranged at the
time of commitments if there
is exposure to rate
movements.Management of the return on variable rate assets
financed by shareholders funds and net
non-interest bearing liabilities.
    
    Reduced profitability due to falls in interest rates.
    
    Receive fixed interest rate
swaps.
    GroupContract/ notional
    
    
    Fair value
    
    
    Fair valueamount
    
    
    assets
    
    
    liabilities2005 Derivatives held for trading
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross currency swaps
    
    
    14,777
    
    
    
    119
    
    
    
    252Forward exchange swaps and forwards
    
    
    1,132
    
    
    
    5
    
    
    
    1215,909
    
    
    
    124
    
    
    
    264Interest rate contracts:Interest rate swaps
    
    
    400,418
    
    
    
    9,273
    
    
    
    9,187Caps, floors and swaptions
    
    
    41,016
    
    
    
    796
    
    
    
    755Futures (exchange traded)
    
    
    1,314
    
    
    
    197
    
    
    
    1Forward rate agreements
    
    
    511
    
    
    
    
    
    
    
    443,259
    
    
    
    10,266
    
    
    
    9,943Equity and credit contracts:Equity index and similar products
    
    
    8,748
    
    
    
    475
    
    
    
    786Equity index options (exchange traded)
    
    
    3,937
    
    
    
    141
    
    
    
    Credit default swaps and similar products
    
    
    21,283
    
    
    
    108
    
    
    
    9933,968
    
    
    
    724
    
    
    
    885Sub total derivative assets / liabilities held for trading
    
    
    493,136
    
    
    
    11,114
    
    
    
    11,092Effect of netting
    
    
    
    
    
    
    
    
    
    
    Total derivative assets / liabilities held for trading
    
    
    493,136
    
    
    
    11,114
    
    
    
    11,092
 118




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 GroupContract/ notional
    
    
    Fair value
    
    
    Fair valueamount
    
    
    assets
    
    
    liabilities2005 Derivatives held for fair value hedging purposes
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross currency swaps
    
    
    12,376
    
    
    
    528
    
    
    
    15812,376
    
    
    
    528
    
    
    
    158Interest rate contracts:Interest rate swaps
    
    
    9,422
    
    
    
    213
    
    
    
    149,422
    
    
    
    213
    
    
    
    14Sub total derivative assets / (liabilities) held for
fair value hedging purposes
    
    
    21,798
    
    
    
    741
    
    
    
    172Total recognised derivative assets / (liabilities)
    
    
    514,934
    
    
    
    11,855
    
    
    
    11,264
 CompanyContract/ notional
    
    
    Fair value
    
    
    Fair valueamount
    
    
    assets
    
    
    liabilities2005 Derivatives held for trading purposes
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross currency swaps
    
    
    522
    
    
    
    332
    
    
    
    2522
    
    
    
    332
    
    
    
    2Interest rate contracts:Interest rate swaps
    
    
    32,447
    
    
    
    437
    
    
    
    454Caps, floors and swaptions
    
    
    523
    
    
    
    3
    
    
    
    132,970
    
    
    
    440
    
    
    
    455Equity and credit contracts:Equity index and similar products
    
    
    334
    
    
    
    71
    
    
    
    163334
    
    
    
    71
    
    
    
    163Sub total derivative assets / (liabilities) held
for fair value hedging purposes
    
    
    33,826
    
    
    
    843
    
    
    
    620Total recognised derivative assets / (liabilities)
    
    
    33,826
    
    
    
    843
    
    
    
    620
 CompanyContract/ notional
    
    
    Fair value
    
    
    Fair valueamount
    
    
    assets
    
    
    liabilities2005 Derivatives held for fair value hedging purposes
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross currency swaps
    
    
    1,658
    
    
    
    181
    
    
    
    1,658
    
    
    
    181
    
    
    
    Interest rate contracts:Interest rate swaps
    
    
    7,128
    
    
    
    203
    
    
    
    37,128
    
    
    
    203
    
    
    
    3Sub total derivative assets / (liabilities) held for
fair value hedging purposes
    
    
    8,786
    
    
    
    384
    
    
    
    3Total recognised derivative assets / (liabilities)
    
    
    42,612
    
    
    
    1,227
    
    
    
    623
 GroupContract/ notional
    
    
    Fair value
    
    
    Fair valueamount
    
    
    assets
    
    
    liabilities2004 Derivatives held for trading
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross currency swaps
    
    
    8,817
    
    
    
    194
    
    
    
    393Forward exchange swaps and forwards
    
    
    3,533
    
    
    
    13
    
    
    
    16412,350
    
    
    
    207
    
    
    
    557Interest rate contracts:Interest rate swaps
    
    
    377,931
    
    
    
    8,855
    
    
    
    8,694Caps, floors and swaptions
    
    
    54,074
    
    
    
    824
    
    
    
    765Futures (exchange traded)
    
    
    1,069
    
    
    
    
    
    
    
    Forward rate agreements
    
    
    2,290
    
    
    
    
    
    
    
    435,364
    
    
    
    9,679
    
    
    
    9,459Equity and credit contracts:Equity index and similar products
    
    
    15,696
    
    
    
    581
    
    
    
    1,750Equity index options (exchange traded)
    
    
    3,487
    
    
    
    128
    
    
    
    127Credit default swaps and similar products
    
    
    17,156
    
    
    
    90
    
    
    
    8036,339
    
    
    
    799
    
    
    
    1,957Sub total derivative assets / (liabilities) held for trading
    
    
    484,053
    
    
    
    10,685
    
    
    
    11,973Effect of netting
    
    
    
    
    
    
    (8,308
    )
    
    
    (8,308
    )Total derivative assets / (liabilities) held for trading
    
    
    484,053
    
    
    
    2,377
    
    
    
    3,665
 119




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 GroupContract/ notional
    
    
    Fair value
    
    
    Fair valueamount
    
    
    assets
    
    
    liabilities2004 Derivatives held for non-trading purposes
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross currency swaps
    
    
    23,311
    
    
    
    761
    
    
    
    1,440Forward exchange swaps and forwards
    
    
    1,194
    
    
    
    7
    
    
    
    24,505
    
    
    
    768
    
    
    
    1,440Interest rate contracts:Interest rate swaps
    
    
    49,143
    
    
    
    1,136
    
    
    
    376Caps, floors and swaptions
    
    
    1,707
    
    
    
    6
    
    
    
    150,850
    
    
    
    1,142
    
    
    
    377Equity and credit contracts:Equity index and similar products
    
    
    256
    
    
    
    
    
    
    
    140Credit default swaps and similar products
    
    
    418
    
    
    
    18
    
    
    
    50674
    
    
    
    18
    
    
    
    190Sub total derivative assets / (liabilities) held
for fair value hedging purposes
    
    
    76,029
    
    
    
    1,928
    
    
    
    2,007Total recognised derivative assets / (liabilities)
    
    
    560,082
    
    
    
    4,305
    
    
    
    5,672
  CompanyContract/ notional
    
    
    Fair value
    
    
    Fair valueamount
    
    
    assets
    
    
    liabilities2004 Derivatives held for non-trading purposes
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross currency swaps
    
    
    1,407
    
    
    
    
    
    
    
    671,407
    
    
    
    
    
    
    
    67Interest rate contracts:Interest rate swaps
    
    
    45,675
    
    
    
    568
    
    
    
    9945,675
    
    
    
    568
    
    
    
    99Equity and credit contracts:Equity index and similar products
    
    
    334
    
    
    
    
    
    
    
    140334
    
    
    
    
    
    
    
    140Sub total derivative assets / (liabilities) held
for fair value hedging purposes
    
    
    47,416
    
    
    
    568
    
    
    
    306Total recognised assets / (liabilities)
    
    
    47,416
    
    
    
    568
    
    
    
    306
 Gains or losses arising from fair value hedges
 Group
    
    
    Company2005
    
    
    2005£m
    
    
    £mGains/(losses):On hedging instruments
    
    
    20
    
    
    
    41On the hedged items attributable to hedged risk
    
    
    (38
    )
    
    
    (49
    )(18
    )
    
    
    (8
    )
  GroupContract or
    
    
    
    
    
    
    Contract orunderlying
    
    
    Replacement
    
    
    underlying
    
    
    Replacementprincipal
    
    
    cost
    
    
    principal
    
    
    cost2005
    
    
    2005
    
    
    2004
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mHedging/ Non-trading derivatives maturing:In not more than one year
    
    
    4,702
    
    
    
    19
    
    
    
    26,673
    
    
    
    286In more than one year but not more than five years
    
    
    7,880
    
    
    
    236
    
    
    
    38,727
    
    
    
    912In more than five years
    
    
    9,216
    
    
    
    486
    
    
    
    10,629
    
    
    
    73021,798
    
    
    
    741
    
    
    
    76,029
    
    
    
    1,928
 120




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 CompanyContract or
    
    
    
    
    
    
    Contract orunderlying
    
    
    Replacement
    
    
    underlying
    
    
    Replacementprincipal
    
    
    cost
    
    
    principal
    
    
    cost2005
    
    
    2005
    
    
    2004
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mHedging/ Non-trading derivatives maturing:In not more than one year
    
    
    534
    
    
    
    19
    
    
    
    9,204
    
    
    
    In more than one year but not more than five years
    
    
    5,210
    
    
    
    77
    
    
    
    18,207
    
    
    
    568In more than five years
    
    
    3,042
    
    
    
    288
    
    
    
    20,005
    
    
    
    8,786
    
    
    
    384
    
    
    
    47,416
    
    
    
    568
  GroupContract or
    
    
    
    
    
    
    Contract orunderlying
    
    
    Replacement
    
    
    underlying
    
    
    Replacementprincipal
    
    
    cost
    
    
    principal
    
    
    cost2005
    
    
    2005
    
    
    2004
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mTrading derivatives maturing (before netting):In not more than one year
    
    
    107,679
    
    
    
    655
    
    
    
    80,237
    
    
    
    820In more than one year but not more than five years
    
    
    208,560
    
    
    
    3,285
    
    
    
    222,234
    
    
    
    3,470In more than five years
    
    
    171,646
    
    
    
    6,836
    
    
    
    177,026
    
    
    
    6,267487,885
    
    
    
    10,776
    
    
    
    479,497
    
    
    
    10,557
 CompanyContract or
    
    
    
    
    
    
    Contract orunderlying
    
    
    Replacement
    
    
    underlying
    
    
    Replacementprincipal
    
    
    cost
    
    
    principal
    
    
    cost2005
    
    
    2005
    
    
    2004
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mTrading derivatives maturing (before netting):In not more than one year
    
    
    306
    
    
    
    15
    
    
    
    
    
    
    
    In more than one year but not more than five years
    
    
    14,498
    
    
    
    142
    
    
    
    
    
    
    
    In more than five years
    
    
    19,022
    
    
    
    686
    
    
    
    
    
    
    
    33,826
    
    
    
    843
    
    
    
    
    
    
    
    
 Unrecognised gains and losses on financial assets and financial liabilities resulting from
hedge accounting
  Group20042004
    
    
    2004
    
    
    Net gainsGains
    
    
    Losses
    
    
    (losses)£m
    
    
    £m
    
    
    £mGains and losses expected to be recognised:In one year or less
    
    
    209
    
    
    
    (89
    )
    
    
    120After one year
    
    
    1,328
    
    
    
    (1,732
    )
    
    
    (404
    )1,537
    
    
    
    (1,821
    )
    
    
    (284
    )
  16. Financial assets designated at fair value
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mLoans and advances to banks
    
    
    1,639
    
    
    
    
    
    
    
    
    
    
    
    Loans and advances to customers
    
    
    4,406
    
    
    
    
    
    
    
    790
    
    
    
    Debt securities
    
    
    12,882
    
    
    
    
    
    
    
    
    
    
    
    Equity securities
    
    
    11,670
    
    
    
    
    
    
    
    
    
    
    
    30,597
    
    
    
    
    
    
    
    790
    
    
    
    
 121




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  (a)
    
    Loans and advances to customers, representing loans secured on residential lending to housing
associations. These would otherwise have been measured at amortised cost with the associated
derivatives used to economically hedge the risk held for trading and measured at fair value
through profit or loss.
 (b)
    
    Debt and equity securities held by the Life Assurance businesses to back the actuarial
liabilities of those businesses. These would otherwise have been classified as available for
sale and measured at fair value through equity with the associated liabilities classified as
and measured at amortised cost.
   Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mIssued by public bodies:Government securities
    
    
    2,894
    
    
    
    
    
    
    
    
    
    
    
    Other public sector securities
    
    
    417
    
    
    
    
    
    
    
    
    
    
    
    3,311
    
    
    
    
    
    
    
    
    
    
    
    Issued by other issuers:Bank and building society certificates of deposit
    
    
    841
    
    
    
    
    
    
    
    
    
    
    
    841
    
    
    
    
    
    
    
    
    
    
    
    Other debt securities
    
    
    8,730
    
    
    
    
    
    
    
    
    
    
    
    12,882
    
    
    
    
    
    
    
    
    
    
    
    
  Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities:- Listed UK
    
    
    9,065
    
    
    
    
    
    
    
    
    
    
    
    - Listed elsewhere
    
    
    2,860
    
    
    
    
    
    
    
    
    
    
    
    - Unlisted
    
    
    957
    
    
    
    
    
    
    
    
    
    
    
    12,882
    
    
    
    
    
    
    
    
    
    
    
    Equity securities:- Listed UK
    
    
    10,918
    
    
    
    
    
    
    
    
    
    
    
    - Listed elsewhere
    
    
    668
    
    
    
    
    
    
    
    
    
    
    
    - Unlisted
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    11,670
    
    
    
    
    
    
    
    
    
    
    
    
 17. Loans and advances to banks
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mPlacements with other banks
    
    
    444
    
    
    
    5,354
    
    
    
    293
    
    
    
    224Amounts due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    32,716
    
    
    
    23,381Purchase and resale agreements
    
    
    
    
    
    
    6,397
    
    
    
    
    
    
    
    Total
    
    
    444
    
    
    
    11,751
    
    
    
    33,009
    
    
    
    23,605
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mRepayable:On demand
    
    
    109
    
    
    
    4,424
    
    
    
    7,673
    
    
    
    209In not more than 3 months
    
    
    334
    
    
    
    7,263
    
    
    
    284
    
    
    
    85In more than 3 months but not more than 1 year
    
    
    1
    
    
    
    63
    
    
    
    
    
    
    
    322In more than 1 year but not more than 5 years
    
    
    
    
    
    
    1
    
    
    
    25,000
    
    
    
    20,740In more than 5 years
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    2,249444
    
    
    
    11,751
    
    
    
    33,009
    
    
    
    23,605
 122




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mFixed rate
    
    
    32
    
    
    
    7,854
    
    
    
    25,056
    
    
    
    20,136Variable rate
    
    
    220
    
    
    
    3,790
    
    
    
    7,767
    
    
    
    3,375Non-interest bearing
    
    
    192
    
    
    
    107
    
    
    
    186
    
    
    
    94444
    
    
    
    11,751
    
    
    
    33,009
    
    
    
    23,605
 18. Loans and advances to customers
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mAdvances secured on residential properties
    
    
    90,098
    
    
    
    91,178
    
    
    
    90,072
    
    
    
    75,175Corporate loans
    
    
    
    
    
    
    880
    
    
    
    
    
    
    
    Purchase and resale agreement
    
    
    
    
    
    
    11,257
    
    
    
    
    
    
    
    Finance leases
    
    
    3
    
    
    
    1,108
    
    
    
    3
    
    
    
    3Other secured advances
    
    
    1,884
    
    
    
    1,793
    
    
    
    1,659
    
    
    
    1,090Other unsecured advances
    
    
    3,876
    
    
    
    3,667
    
    
    
    3,763
    
    
    
    3,391Amounts due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    186
    
    
    
    434Loans and advances to customers
    
    
    95,861
    
    
    
    109,883
    
    
    
    95,683
    
    
    
    80,093Less: loan loss allowances
    
    
    394
    
    
    
    467
    
    
    
    453
    
    
    
    233Loans and advances to customers, net of loan loss allowances
    
    
    95,467
    
    
    
    109,416
    
    
    
    95,230
    
    
    
    79,860
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mRepayable:On demand
    
    
    2,398
    
    
    
    9,433
    
    
    
    2,355
    
    
    
    1,859In no more than 3 months
    
    
    149
    
    
    
    6,315
    
    
    
    132
    
    
    
    706In more than 3 months but not more than a year
    
    
    2,216
    
    
    
    2,721
    
    
    
    2,171
    
    
    
    1,930In more than 1 year but not more than 5 years
    
    
    12,005
    
    
    
    12,798
    
    
    
    11,956
    
    
    
    10,273In more than 5 years
    
    
    79,093
    
    
    
    78,616
    
    
    
    79,069
    
    
    
    65,325Loans and advances to customers
    
    
    95,861
    
    
    
    109,883
    
    
    
    95,683
    
    
    
    80,093Less: loan loss allowances
    
    
    394
    
    
    
    467
    
    
    
    453
    
    
    
    233Loans and advances to customers, net of loan loss allowances
    
    
    95,467
    
    
    
    109,416
    
    
    
    95,230
    
    
    
    79,860
  Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mFixed rate
    
    
    26,644
    
    
    
    35,242
    
    
    
    26,513
    
    
    
    18,449Variable rate
    
    
    69,217
    
    
    
    74,641
    
    
    
    69,170
    
    
    
    61,644Less: loan loss allowances
    
    
    394
    
    
    
    467
    
    
    
    453
    
    
    
    23395,467
    
    
    
    109,416
    
    
    
    95,230
    
    
    
    79,860
   Other
    
    
    OtherLoans secured on
    
    
    Corporate
    
    
    Finance
    
    
    secured
    
    
    unsecuredresidential property
    
    
    loans
    
    
    leases
    
    
    advances
    
    
    advances
    
    
    TotalGroup
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAs at 31 December 2004
    
    
    67
    
    
    
    81
    
    
    
    
    
    
    
    151
    
    
    
    168
    
    
    
    467IFRS reclassifications
    
    
    (15
    )
    
    
    (81
    )
    
    
    3
    
    
    
    (4
    )
    
    
    57
    
    
    
    (40
    )As at 1 January 2005
    
    
    52
    
    
    
    
    
    
    
    3
    
    
    
    147
    
    
    
    225
    
    
    
    427Charge to the income statement for the period
    
    
    9
    
    
    
    
    
    
    
    (1
    )
    
    
    12
    
    
    
    235
    
    
    
    255Write offs
    
    
    (5
    )
    
    
    
    
    
    
    1
    
    
    
    (36
    )
    
    
    (248
    )
    
    
    (288
    )At 31 December 2005
    
    
    56
    
    
    
    
    
    
    
    3
    
    
    
    123
    
    
    
    212
    
    
    
    394As at 1 January 2004
    
    
    202
    
    
    
    333
    
    
    
    
    
    
    
    124
    
    
    
    206
    
    
    
    865Disposal of subsidiary undertakings
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (4
    )
    
    
    (70
    )Charge to the income statement for the period
    
    
    (119
    )
    
    
    (88
    )
    
    
    
    
    
    
    98
    
    
    
    74
    
    
    
    (35
    )Write offs
    
    
    12
    
    
    
    (164
    )
    
    
    
    
    
    
    (33
    )
    
    
    (108
    )
    
    
    (293
    )At 31 December 2004
    
    
    67
    
    
    
    81
    
    
    
    
    
    
    
    151
    
    
    
    168
    
    
    
    467
  123




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Amounts
    
    
    
    
    
    
    Other
    
    
    OtherLoans secured on
    
    
    due from
    
    
    Finance
    
    
    secured
    
    
    unsecuredresidential property
    
    
    subsidiaries
    
    
    leases
    
    
    advances
    
    
    advances
    
    
    TotalCompany
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAs at 31 December 2004
    
    
    61
    
    
    
    183
    
    
    
    
    
    
    
    7
    
    
    
    165
    
    
    
    416IFRS reclassifications
    
    
    (18
    )
    
    
    
    
    
    
    3
    
    
    
    (2
    )
    
    
    58
    
    
    
    41As at 1 January 2005
    
    
    43
    
    
    
    183
    
    
    
    3
    
    
    
    5
    
    
    
    223
    
    
    
    457Charge to the income statement for the period
    
    
    11
    
    
    
    3
    
    
    
    (1
    )
    
    
    2
    
    
    
    227
    
    
    
    242Write offs
    
    
    (6
    )
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    (240
    )
    
    
    (246
    )At 31 December 2005
    
    
    48
    
    
    
    186
    
    
    
    3
    
    
    
    6
    
    
    
    210
    
    
    
    453As at 1 January 2004
    
    
    147
    
    
    
    88
    
    
    
    
    
    
    
    11
    
    
    
    119
    
    
    
    365Disposal of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )Charge to the income statement for the period
    
    
    (102
    )
    
    
    97
    
    
    
    
    
    
    
    7
    
    
    
    163
    
    
    
    165Write offs
    
    
    16
    
    
    
    (2
    )
    
    
    
    
    
    
    (8
    )
    
    
    (117
    )
    
    
    (111
    )At 31 December 2004
    
    
    61
    
    
    
    183
    
    
    
    
    
    
    
    7
    
    
    
    165
    
    
    
    416
  Group
    
    
    
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mGross investment in finance leases, receivable:No later than 3 months
    
    
    1
    
    
    
    64
    
    
    
    1
    
    
    
    Later than 3 months and no later than 1 year
    
    
    1
    
    
    
    21
    
    
    
    1
    
    
    
    Later than 1 year and no later than 5 years
    
    
    1
    
    
    
    145
    
    
    
    1
    
    
    
    3Later than 5 years
    
    
    
    
    
    
    1,753
    
    
    
    
    
    
    
    3
    
    
    
    1,983
    
    
    
    3
    
    
    
    3Unearned future finance income on finance leases
    
    
    
    
    
    
    (875
    )
    
    
    
    
    
    
    Less: Provisions allowance for impairment
    
    
    3
    
    
    
    
    
    
    
    3
    
    
    
    Net investment in finance leases
    
    
    
    
    
    
    1,108
    
    
    
    
    
    
    
    3The net investment in finance leases may be analysed as follows:No later than 3 months
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    Later than 3 months and no later than 1 year
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    Later than 1 year and no later than 5 years
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    3Later than 5 years
    
    
    
    
    
    
    979
    
    
    
    
    
    
    
    
    
    
    
    1,108
    
    
    
    
    
    
    
    3
 19. Debt securities
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004Investment securities
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mIssued by public bodies:Other public sector securities
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    28
    
    
    
    28
    
    
    
    
    
    
    
    28Issued by other issuers:Bank and building society certificates of deposit
    
    
    
    
    
    
    317
    
    
    
    
    
    
    
    Other debt securities
    
    
    
    
    
    
    361
    
    
    
    
    
    
    
    377
    
    
    
    678
    
    
    
    
    
    
    
    377Less: provisions
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    Sub-total  Non-trading book
    
    
    
    
    
    
    672
    
    
    
    
    
    
    
    405Other securitiesIssued by public bodies:Government securities
    
    
    
    
    
    
    7,492
    
    
    
    
    
    
    
    Other public sector securities
    
    
    
    
    
    
    2,887
    
    
    
    
    
    
    
    
    
    
    
    10,379
    
    
    
    
    
    
    
    Issued by other issuers:Bank and building society certificates of deposit
    
    
    
    
    
    
    12,683
    
    
    
    
    
    
    
    Other debt securities
    
    
    
    
    
    
    13,276
    
    
    
    
    
    
    
    
    
    
    
    25,959
    
    
    
    
    
    
    
    Sub-total  Trading book
    
    
    
    
    
    
    36,338
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    37,010
    
    
    
    
    
    
    
    405
  124




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004Investment securities
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mListed in the UK
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    Listed or registered elsewhere
    
    
    
    
    
    
    255
    
    
    
    
    
    
    
    Unlisted
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    405Sub-total  Non-trading book
    
    
    
    
    
    
    672
    
    
    
    
    
    
    
    405Other securitiesListed in the UK
    
    
    
    
    
    
    14,144
    
    
    
    
    
    
    
    Listed or registered elsewhere
    
    
    
    
    
    
    7,646
    
    
    
    
    
    
    
    Unlisted
    
    
    
    
    
    
    14,548
    
    
    
    
    
    
    
    Sub-total  Trading book
    
    
    
    
    
    
    36,338
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    37,010
    
    
    
    
    
    
    
    405Book value of debt securities analysed by maturity:
Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDue within 1 year
    
    
    
    
    
    
    19,029
    
    
    
    
    
    
    
    28Due in more than 1 year but not more than 5 years
    
    
    
    
    
    
    6,892
    
    
    
    
    
    
    
    Due in more than 5 years but not more than 10 years
    
    
    
    
    
    
    10,112
    
    
    
    
    
    
    
    Due in more than 10 years
    
    
    
    
    
    
    1,011
    
    
    
    
    
    
    
    377Less: provisions
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    37,010
    
    
    
    
    
    
    
    405The movement on debt securities held for investment purposes
was as follows:GroupCost
    
    
    Provisions
    
    
    Net book value£m
    
    
    £m
    
    
    £mAt 1 January 2004
    




    
    1,931
    
    
    
    (178
    )
    
    
    1,753Exchange adjustments
    




    
    (148
    )
    
    
    
    
    
    
    (148
    )Additions
    




    
    1,476
    
    
    
    
    
    
    
    1,476Disposals
    




    
    (1,331
    )
    
    
    93
    
    
    
    (1,238
    )Redemptions and maturities
    




    
    (1,239
    )
    
    
    
    
    
    
    (1,239
    )Transfers to other securities (net)
    




    
    
    
    
    
    (16
    )
    
    
    (16
    )Transfer from profit and loss account
    




    
    
    
    
    
    67
    
    
    
    67Net of amortisation of discounts (premiums)
    




    
    17
    
    
    
    
    
    
    
    17At 31 December 2004
    




    
    706
    
    
    
    (34
    )
    
    
    672
 CompanyCost
    
    
    Provisions
    
    
    Net book value£m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    480
    
    
    
    
    
    
    
    480Exchange Adjustments
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Disposals
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )At 31 December 2004
    
    
    405
    
    
    
    
    
    
    
    405
   20. Equity shares and other similar interests
 Group
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mListed in the UK
    
    
    
    
    
    
    8,451
    
    
    
    
    
    
    
    Listed elsewhere
    
    
    
    
    
    
    2,287
    
    
    
    
    
    
    
    Unlisted
    
    
    
    
    
    
    54
    
    
    
    
    
    
    
    1
    
    
    
    10,792
    
    
    
    
    
    
    
    1Banking business
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    1Trading business
    
    
    
    
    
    
    10,762
    
    
    
    
    
    
    
    
    
    
    
    10,792
    
    
    
    
    
    
    
    1
  125




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 21. Securitisation of assets
      Gross assetssecuritised
    
    
    Non- recourse financeSecuritisation company
    
    Closing date of securitisation
    
    
    £m
    
    
    £mHolmes Financing (No.1) plc
    
    26 July 2000
    
    
    904
    
    
    
    904Holmes Financing (No.2) plc
    
    29 November 2000
    
    
    628
    
    
    
    753Holmes Financing (No.3) plc
    
    23 May 2001
    
    
    546
    
    
    
    546Holmes Financing (No.4) plc
    
    5 July 2001
    
    
    1,836
    
    
    
    1,836Holmes Financing (No.5) plc
    
    8 November 2001
    
    
    955
    
    
    
    955Holmes Financing (No.6) plc
    
    7 November 2002
    
    
    2,077
    
    
    
    2,077Holmes Financing (No.7) plc
    
    26 March 2003
    
    
    1,079
    
    
    
    1,882Holmes
Financing (No.8) plc
    
    1 April 2004
    
    
    2,890
    
    
    
    2,890Holmes
Financing (No.9) plc
    
    8 December 2005
    
    
    3,797
    
    
    
    3,797Retained interest in Holmes Trustees Limited
    
    
    
    
    
    
    13,979
    
    
    
    28,691
    
    
    
    15,640
     Income statement for the year ended 31 December
 Group
    
    
    
    
    
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    22
    
    
    
    15
    
    
    
    
    
    
    
    Other operating income
    
    
    (50
    )
    
    
    (9
    )
    
    
    
    
    
    
    Administrative expenses
    
    
    (2
    )
    
    
    (1
    )
    
    
    
    
    
    
    Impairment losses on loans and advances
    
    
    (3
    )
    
    
    19
    
    
    
    
    
    
    
    Taxation expense
    
    
    9
    
    
    
    (3
    )
    
    
    
    
    
    
    Profit/(loss) for the financial period
    
    
    (24
    )
    
    
    21
    
    
    
    
    
    
    
    
 126




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Balance sheet as at 31 December
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDerivative financial instruments
    
    
    321
    
    
    
    
    
    
    
    
    
    
    
    Loans and advances to banks
    
    
    928
    
    
    
    2,986
    
    
    
    
    
    
    
    Loans and advances to customers
    
    
    15,042
    
    
    
    13,241
    
    
    
    
    
    
    
    Other assets
    
    
    8
    
    
    
    24
    
    
    
    
    
    
    
    Total assets
    
    
    16,299
    
    
    
    16,251
    
    
    
    
    
    
    
    Deposits by banks
    
    
    206
    
    
    
    540
    
    
    
    
    
    
    
    Derivative financial instruments
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    Debt securities in issue
    
    
    15,950
    
    
    
    15,681
    
    
    
    
    
    
    
    Other liabilities
    
    
    2
    
    
    
    32
    
    
    
    
    
    
    
    Profit and loss account
    
    
    (17
    )
    
    
    (2
    )
    
    
    
    
    
    
    Total liabilities
    
    
    16,299
    
    
    
    16,251
    
    
    
    
    
    
    
    
 
 22. Available for sale securities
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    Equity securities
    
    
    13
    
    
    
    
    
    
    
    2
    
    
    
    13
    
    
    
    
    
    
    
    272
    
    
    
    
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDue in more than 10 years
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mOther debt securities
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities:- Unlisted
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    Equity securities:- Listed UK
    
    
    12
    
    
    
    
    
    
    
    1
    
    
    
    - Unlisted
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    13
    
    
    
    
    
    
    
    2
    
    
    
    
 127




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
   Group
    
    
    CompanyTotal
    
    
    Total£m
    
    
    £mAt 1 January 2005
    
    
    11
    
    
    
    379Exchange differences on monetary assets
    
    
    
    
    
    
    (9
    )Additions
    
    
    2
    
    
    
    Disposals (sale and redemption)
    
    
    
    
    
    
    (100
    )At 31 December 2005
    
    
    13
    
    
    
    270
 23. Investment in subsidiary undertakings
 2005
    
    
    2004Net book value
    
    
    Net book value£m
    
    
    £mSubsidiary undertakings:Banks
    
    
    2,974
    
    
    
    2,486Others
    
    
    5,716
    
    
    
    5,7648,690
    
    
    
    8,250
  Cost
    
    
    Impairment
    
    
    Company£m
    
    
    £m
    
    
    £mAt 1 January 2005
    
    
    9,962
    
    
    
    (1,712
    )
    
    
    8,250Additions
    
    
    1
    
    
    
    (34
    )
    
    
    (33
    )Disposals
    
    
    (68
    )
    
    
    
    
    
    
    (68
    )Write-back of impairments
    
    
    
    
    
    
    541
    
    
    
    541At 31 December 2005
    
    
    9,895
    
    
    
    (1,205
    )
    
    
    8,690
      ConsiderationDate
    
    Company/Business disposed of
    
    £m15 Mar 2005
    
    Life Online
    
    
    8422 Mar 2005
    
    Abbey National December Leasing (4) Limited
    
    
    18830 Mar 2005
    
    Abbey National December Leasing (7) Limited
    
    
    1306 Jun 2005
    
    Abbey National June Leasing (4) Limited
    
    
    3831 Aug 2005
    
    Agecroft Properties (No. 2) Limited
    
    
    4230 Sep 2005
    
    Abbey National September Leasing (5) Limited
    
    
    44401 Dec 2005
    
    Abbey National December Leasing (1) Limited
    
    
    36
  128




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Country of IncorporationPrincipal subsidiary
    
    Nature of business
    
    % Interest held
    
    or registrationAbbey National Treasury Services plc
    
    Treasury operations
    
    
    100
    %
    
    England & WalesAbbey National Unit Trust Managers Ltd*
    
    Unit trust management
    
    
    100
    %
    
    ScotlandAbbey National International Ltd*
    
    Personal finance
    
    
    100
    %
    
    JerseyCater Allen International Ltd*
    
    Securities financing
    
    
    100
    %
    
    England & WalesScottish Mutual Investment Managers Ltd*
    
    Investment managers
    
    
    100
    %
    
    ScotlandAbbey National Life plc
    
    Insurance
    
    
    100
    %
    
    England & WalesAbbey National PEP and ISA Managers Ltd*
    
    PEP and ISA management
    
    
    100
    %
    
    ScotlandScottish Mutual Assurance plc*
    
    Insurance
    
    
    100
    %
    
    ScotlandScottish Provident Ltd*
    
    Insurance
    
    
    100
    %
    
    ScotlandScottish Mutual Pension Funds Investment Ltd*
    
    Investment
    
    
    100
    %
    
    ScotlandAbbey National North America LLC*
    
    Funding
    
    
    100
    %
    
    United StatesAbbey National Securities Inc*
    
    Securities financing
    
    
    100
    %
    
    United StatesPorterbrook Leasing Company Limited
    
    Leasing
    
    
    100
    %
    
    England & Wales
 *
    
    Held indirectly through subsidiary companies.
  24. Investment in associated undertakings
  Group
    
    
    Company2005
    
    
    2005£m
    
    
    £mAt 1 January 2005
    
    
    25
    
    
    
    19Additional investment
    
    
    5
    
    
    
    5Share of results
    
    
    (2
    )
    
    
    Share of tax
    
    
    (1
    )
    
    
    Dividends received
    
    
    (3
    )
    
    
    At 31 December 2005
    
    
    24
    
    
    
    24
  Country of
    
    
    Assets
    
    
    Liabilities
    
    
    Income
    
    
    ExpenseName and nature of business
    
    incorporation
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    % interest heldPSA Finance plc, Personal finance
    
    England and Wales
    
    
    44
    
    
    
    (3
    )
    
    
    (4
    )
    
    
    6
    
    
    
    50.0Santander Consumer Finance(UK) plc
    
    England and Wales
    
    
    48
    
    
    
    (41
    )
    
    
    (3
    )
    
    
    7
    
    
    
    49.9
  25. Intangible assets
 a) Goodwill
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mCostAt 1 January
    
    
    776
    
    
    
    782
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    At 31 December
    
    
    776
    
    
    
    776
    
    
    
    
    
    
    
    Accumulated impairmentAt 1 January
    
    
    640
    
    
    
    635
    
    
    
    
    
    
    
    Impairment losses
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    Disposals
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    At 31 December
    
    
    640
    
    
    
    640
    
    
    
    
    
    
    
    Net book value
    
    
    136
    
    
    
    136
    
    
    
    
    
    
    
    
 Impairment review of Goodwill
  129




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
   GoodwillSignificant
    
    
    
    
    
    2005
    
    
    2004
    
    
    Basis of
    
    
    Key
    
    
    DiscountBusiness Division
    
    Cash Generating Unit
    
    
    £m
    
    
    £m
    
    
    valuation
    
    
    assumptions
    
    
    rate
    
    
    Growth rateRetail Banking
    
    Cater Allen Private
    
    
    90
    
    
    
    90
    
    
    Value in use:
    
    3 year plan
    
    
    6.6
    %
    
    
    2.3
    %Banking
    
    
    
    
    
    
    
    
    
    cash flowInsurance and Asset
    
    Insurance and
    
    
    46
    
    
    
    46

    
    
    Value in use:
    
    2006 Budget
    
    
    7.0
    %
    
    
    5.0
    %Management
    
    Asset Management
    
    
    
    
    
    
    
    
    
    cash flow
  b) Other intangibles
 GroupTrademarks
    
    
    Distribution channels
    
    
    Total£m
    
    
    £m
    
    
    £mCostAt 1 January 2005
    
    
    24
    
    
    
    235
    
    
    
    259At 31 December 2005
    
    
    24
    
    
    
    235
    
    
    
    259Accumulated amortisation / impairmentAt 1 January 2005
    
    
    4
    
    
    
    216
    
    
    
    220Charge for the year
    
    
    1
    
    
    
    3
    
    
    
    4At 31 December 2005
    
    
    5
    
    
    
    219
    
    
    
    224Net book value
    
    
    19
    
    
    
    16
    
    
    
    35
 GroupTrademarks
    
    
    Distribution channels
    
    
    Total£m
    
    
    £m
    
    
    £mCostAt 1 January 2004
    
    
    24
    
    
    
    235
    
    
    
    259At 31 December 2004
    
    
    24
    
    
    
    235
    
    
    
    259Accumulated amortisation / impairmentAt 1 January 2004
    
    
    3
    
    
    
    70
    
    
    
    73Amortisation charge for the year
    
    
    1
    
    
    
    11
    
    
    
    12Impairment losses
    
    
    
    
    
    
    135
    
    
    
    135At 31 December 2004
    
    
    4
    
    
    
    216
    
    
    
    220Net book value
    
    
    20
    
    
    
    19
    
    
    
    39
  26. Value of in-force business
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mCostAt 1 January
    
    
    1,777
    
    
    
    1,467
    
    
    
    
    
    
    
    Changes in value of in-force business
    
    
    (56
    )
    
    
    377
    
    
    
    
    
    
    
    At 31 December
    
    
    1,721
    
    
    
    1,844
    
    
    
    
    
    
    
    
  130




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 27. Property, plant and equipment (excluding operating lease assets)
 GroupOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2005
    
    
    50
    
    
    
    1,018
    
    
    
    265
    
    
    
    1,333Additions
    
    
    14
    
    
    
    92
    
    
    
    84
    
    
    
    190Disposals
    
    
    (18
    )
    
    
    (67
    )
    
    
    (2
    )
    
    
    (87
    )At 31 December 2005
    
    
    46
    
    
    
    1,043
    
    
    
    347
    
    
    
    1,436Accumulated depreciation:At 1 January 2005
    
    
    10
    
    
    
    804
    
    
    
    257
    
    
    
    1,071Depreciation charge for the year
    
    
    3
    
    
    
    64
    
    
    
    5
    
    
    
    72Disposals
    
    
    (1
    )
    
    
    (18
    )
    
    
    (2
    )
    
    
    (21
    )At 31 December 2005
    
    
    12
    
    
    
    850
    
    
    
    260
    
    
    
    1,122Closing net book amount
    
    
    34
    
    
    
    193
    
    
    
    87
    
    
    
    314
 GroupOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2004
    
    
    101
    
    
    
    982
    
    
    
    357
    
    
    
    1,440Disposal of subsidiary undertakings (Note 23)
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Additions
    
    
    6
    
    
    
    84
    
    
    
    25
    
    
    
    115Disposals
    
    
    (7
    )
    
    
    (41
    )
    
    
    (117
    )
    
    
    (165
    )Transfers from (to) investment property
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (50
    )At 31 December 2004
    
    
    50
    
    
    
    1,018
    
    
    
    265
    
    
    
    1,333Accumulated depreciation:At 1 January 2004
    
    
    11
    
    
    
    748
    
    
    
    240
    
    
    
    999Disposal of subsidiary undertakings
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Depreciation charge for the year
    
    
    3
    
    
    
    78
    
    
    
    68
    
    
    
    149Impairment charge
    
    
    14
    
    
    
    
    
    
    
    48
    
    
    
    62Disposals
    
    
    (16
    )
    
    
    (16
    )
    
    
    (99
    )
    
    
    (131
    )Transfers to investment property
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )At 31 December 2004
    
    
    10
    
    
    
    804
    
    
    
    257
    
    
    
    1,071Closing net book amount
    
    
    40
    
    
    
    214
    
    
    
    8
    
    
    
    262
  ComputerOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2005
    
    
    31
    
    
    
    991
    
    
    
    115
    
    
    
    1,137Additions
    
    
    12
    
    
    
    89
    
    
    
    84
    
    
    
    185Disposals
    
    
    (5
    )
    
    
    (63
    )
    
    
    
    
    
    
    (68
    )At 31 December 2005
    
    
    38
    
    
    
    1,017
    
    
    
    199
    
    
    
    1,254Accumulated depreciation:At 1 January 2005
    
    
    7
    
    
    
    789
    
    
    
    110
    
    
    
    906Depreciation charge
    
    
    3
    
    
    
    60
    
    
    
    3
    
    
    
    66Disposals
    
    
    (1
    )
    
    
    (15
    )
    
    
    
    
    
    
    (16
    )At 31 December 2005
    
    
    9
    
    
    
    834
    
    
    
    113
    
    
    
    956Closing net book amount
    
    
    29
    
    
    
    183
    
    
    
    86
    
    
    
    298
 131




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 ComputerOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2004
    
    
    24
    
    
    
    945
    
    
    
    203
    
    
    
    1,172Additions
    
    
    9
    
    
    
    82
    
    
    
    23
    
    
    
    114Disposals
    
    
    (2
    )
    
    
    (36
    )
    
    
    (111
    )
    
    
    (149
    )At 31 December 2004
    
    
    31
    
    
    
    991
    
    
    
    115
    
    
    
    1,137Accumulated depreciation:At 1 January 2004
    
    
    4
    
    
    
    726
    
    
    
    139
    
    
    
    869Depreciation charge
    
    
    3
    
    
    
    75
    
    
    
    37
    
    
    
    115Impairment charge
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    29Disposals
    
    
    
    
    
    
    (12
    )
    
    
    (95
    )
    
    
    (107
    )At 31 December 2004
    
    
    7
    
    
    
    789
    
    
    
    110
    
    
    
    906Closing net book amount
    
    
    24
    
    
    
    202
    
    
    
    5
    
    
    
    231
   28. Operating lease assets
 Group2005
    
    
    2004£m
    
    
    £mCostAt 1 January
    
    
    3,275
    
    
    
    3,763Additions
    
    
    139
    
    
    
    316Disposals
    
    
    (162
    )
    
    
    (804
    )At 31 December
    
    
    3,252
    
    
    
    3,275Depreciation and impairmentAt 1 January
    
    
    1,000
    
    
    
    1,325Charge for the year
    
    
    123
    
    
    
    160Impairment charge
    
    
    
    
    
    
    22Disposals
    
    
    (43
    )
    
    
    (507
    )At 31 December
    
    
    1,080
    
    
    
    1,000Closing net book amount
    
    
    2,172
    
    
    
    2,275
  Group2005
    
    
    2004£m
    
    
    £mIn no more than 1 year
    
    
    253
    
    
    
    292In more than 1 year but no more than 5 years
    
    
    581
    
    
    
    735In more than 5 years
    
    
    286
    
    
    
    3661,120
    
    
    
    1,393Contingent rents recognised as income
    
    
    
    
    
    
    Capital expenditure which has been contracted, but not provided for in the financial statements
    
    
    81
    
    
    
    267
   132




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 29. Investment property
 Group£mFair ValueAt 1 January 2005
    
    
    1,228Net gain/(losses) from fair value adjustments
    
    
    (127
    )Disposals
    
    
    (1,101
    )At 31 December 2005
    
    
    At 1 January 2004
    
    
    1,345Additions
    
    
    35Capitalised expenditure on existing properties
    
    
    2Net gain from fair value adjustments
    
    
    96Disposals
    
    
    (241
    )Retrospective IFRS adjustment
    
    
    (9
    )At 31 December 2004
    
    
    1,228
  30. Deferred tax
   Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January
    
    
    (563
    )
    
    
    (844
    )
    
    
    494
    
    
    
    409Tax effect of adopting IAS 32, IAS 39 and IFRS 4
    
    
    136
    
    
    
    
    
    
    
    146
    
    
    
    Income statement charge
    
    
    12
    
    
    
    56
    
    
    
    17
    
    
    
    61Charged to equity
    
    
    46
    
    
    
    30
    
    
    
    45
    
    
    
    24Disposal of subsidiary undertaking
    
    
    279
    
    
    
    195
    
    
    
    
    
    
    
    At 31 December
    
    
    (90
    )
    
    
    (563
    )
    
    
    702
    
    
    
    494
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    3mDeferred tax liabilitiesAccelerated tax depreciation
    
    
    (489
    )
    
    
    (383
    )
    
    
    
    
    
    
    Capital allowances on finance lease receivables
    
    
    
    
    
    
    (335
    )
    
    
    
    
    
    
    Other temporary differences
    
    
    (397
    )
    
    
    (346
    )
    
    
    
    
    
    
    (886
    )
    
    
    (1,064
    )
    
    
    
    
    
    
    Deferred tax assetsPensions and other post retirement benefits
    
    
    414
    
    
    
    359
    
    
    
    372
    
    
    
    318Accelerated book depreciation
    
    
    35
    
    
    
    68
    
    
    
    24
    
    
    
    61IAS 32 & IAS 39 transitional adjustments spreading
    
    
    108
    
    
    
    
    
    
    
    146
    
    
    
    Other temporary differences
    
    
    150
    
    
    
    74
    
    
    
    71
    
    
    
    115Tax losses carried forward
    
    
    89
    
    
    
    
    
    
    
    89
    
    
    
    796
    
    
    
    501
    
    
    
    702
    
    
    
    494
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDeferred tax relating to pensions and other post retirement benefits
    
    
    398
    
    
    
    352
    
    
    
    363
    
    
    
    318
  133




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Group2005
    
    
    2004£m
    
    
    £mAccelerated tax depreciation
    
    
    (83
    )
    
    
    21Pensions and other post-retirement benefits
    
    
    7
    
    
    
    Allowances for loan losses
    
    
    
    
    
    
    (23
    )Other provisions
    
    
    (1
    )
    
    
    (1
    )Tax loss carry forwards
    
    
    89
    
    
    
    Other temporary differences
    
    
    
    
    
    
    5912
    
    
    
    56
  31. Other assets
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mTrade & other receivables
    
    
    1,749
    
    
    
    2,549
    
    
    
    404
    
    
    
    1,172Prepayments
    
    
    336
    
    
    
    389
    
    
    
    37
    
    
    
    146Accrued interest
    
    
    
    
    
    
    812
    
    
    
    
    
    
    
    187Accrued income
    
    
    9
    
    
    
    270
    
    
    
    
    
    
    
    Reinsurance assets
    
    
    1,292
    
    
    
    1,961
    
    
    
    
    
    
    
    Insurance assets and other receivables
    
    
    617
    
    
    
    186
    
    
    
    112
    
    
    
    Translation differences on foreign
exchange derivatives used for hedging
purposes
    
    
    
    
    
    
    214
    
    
    
    
    
    
    
    Total other assets
    
    
    4,003
    
    
    
    6,381
    
    
    
    553
    
    
    
    1,505
 32. Deposits by banks
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mItems in the course of transmission
    
    
    248
    
    
    
    161
    
    
    
    242
    
    
    
    161Sale and repurchase agreements
    
    
    
    
    
    
    6,592
    
    
    
    
    
    
    
    Other deposits
    
    
    5,369
    
    
    
    11,659
    
    
    
    48,025
    
    
    
    35,536Total deposits by banks
    
    
    5,617
    
    
    
    18,412
    
    
    
    48,267
    
    
    
    35,697Repayable:On demand
    
    
    845
    
    
    
    1,166
    
    
    
    19,490
    
    
    
    2In not more than 3 months
    
    
    4,767
    
    
    
    15,343
    
    
    
    3,921
    
    
    
    13,565In more than 3 months but not more than 1 year
    
    
    3
    
    
    
    874
    
    
    
    182
    
    
    
    639In more than 1 year but not more than 5 years
    
    
    
    
    
    
    316
    
    
    
    24,672
    
    
    
    20,342In more than 5 years
    
    
    2
    
    
    
    713
    
    
    
    2
    
    
    
    1,1495,617
    
    
    
    18,412
    
    
    
    48,267
    
    
    
    35,697
 33. Deposits by Customers
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mRetail deposits
    
    
    62,775
    
    
    
    61,697
    
    
    
    56,074
    
    
    
    52,919Sale and repurchase agreements
    
    
    
    
    
    
    7,843
    
    
    
    
    
    
    
    Amounts due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    22,125
    
    
    
    10,394Wholesale customer accounts
    
    
    3,114
    
    
    
    9,120
    
    
    
    1,089
    
    
    
    2,597Total deposits by customers
    
    
    65,889
    
    
    
    78,660
    
    
    
    79,288
    
    
    
    65,910Repayable:In no more than 3 months
    
    
    62,531
    
    
    
    73,849
    
    
    
    64,535
    
    
    
    65,174In more than 3 months but no more than 1 year
    
    
    2,464
    
    
    
    2,116
    
    
    
    1,017
    
    
    
    52In more than 1 year but no more than 5 years
    
    
    546
    
    
    
    1,097
    
    
    
    2,047
    
    
    
    54In more than 5 years
    
    
    348
    
    
    
    1,598
    
    
    
    11,689
    
    
    
    63065,889
    
    
    
    78,660
    
    
    
    79,288
    
    
    
    65,910
 
 134




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 34. Trading liabilities
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDeposits by banks
    
    
    21,861
    
    
    
    
    
    
    
    
    
    
    
    Deposits by customers
    
    
    9,591
    
    
    
    
    
    
    
    
    
    
    
    Short positions in securities
    
    
    7,629
    
    
    
    
    
    
    
    
    
    
    
    Debt securities in issue
    
    
    13,583
    
    
    
    
    
    
    
    
    
    
    
    Total trading liabilities
    
    
    52,664
    
    
    
    
    
    
    
    
    
    
    
    
 35. Other Financial liabilities at fair value through profit or loss
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities in issue
    
    
    7,948
    
    
    
    
    
    
    
    
    
    
    
    Total trading liabilities
    
    
    7,948
    
    
    
    
    
    
    
    
    
    
    
    
   36. Debt securities in issue
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mBonds and medium term notes
    
    
    21,252
    
    
    
    28,113
    
    
    
    
    
    
    
    Other Debt securities in issue
    
    
    24
    
    
    
    8,954
    
    
    
    4
    
    
    
    4Total Debt Securities in issue
    
    
    21,276
    
    
    
    37,067
    
    
    
    4
    
    
    
    4Repayable:In no more than 3 months
    
    
    1,075
    
    
    
    5,779
    
    
    
    
    
    
    
    In more than 3 months but no more than 1 year
    
    
    2,272
    
    
    
    6,250
    
    
    
    
    
    
    
    In more than 1 year but no more than 5 years
    
    
    6,955
    
    
    
    14,764
    
    
    
    4
    
    
    
    4In more than 5 years
    
    
    10,974
    
    
    
    10,274
    
    
    
    
    
    
    
    21,276
    
    
    
    37,067
    
    
    
    4
    
    
    
    4
 37. Other borrowed funds
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £m£300m Step Up Callable Perpetual Reserve Capital Instrument
    
    
    359
    
    
    
    298
    
    
    
    359
    
    
    
    298$500 Tier One Perpetual Subordinated Debt Instruments
    
    
    292
    
    
    
    250
    
    
    
    292
    
    
    
    250£175m Fixed/Floating Rate Tier One Preferred Income Capital
Securities
    
    
    182
    
    
    
    174
    
    
    
    182
    
    
    
    174$1,000m Non-Cumulative Trust Preferred Securities
    
    
    792
    
    
    
    
    
    
    
    
    
    
    
    £325m Sterling Preference shares
    
    
    342
    
    
    
    
    
    
    
    342
    
    
    
    $450m US Dollar Preference Shares
    
    
    277
    
    
    
    
    
    
    
    277
    
    
    
    Total other borrowed funds
    
    
    2,244
    
    
    
    722
    
    
    
    1,452
    
    
    
    722
 £300m Step-up Callable Perpetual Reserve Capital Instruments
   135




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 $500m Tier One Perpetual Subordinated Debt Securities
   £175m Fixed/Floating Rate Tier One Preferred Income
 Capital Securities
     pari passu
 $1,000m Non-Cumulative Trust Preferred Securities
     £325m Sterling Preference shares
 Size of shareholding
    
    Shareholders
    
    
    Preference shares of £1 each1-100
    
    
    2
    
    
    
    123101-1,000
    
    
    39
    
    
    
    28,3991,001+
    
    
    1,669
    
    
    
    324,971,4781,710
    
    
    
    325,000,000
 pari
passu
 136




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 pari passu
     US Dollar Preference Shares
 Size of shareholding
    
    Shareholders
    
    
    Preference shares of US$0.01 each1-100
    
    
    1
    
    
    
    25101-1,000
    
    
    26
    
    
    
    11,9851,001+
    
    
    4
    
    
    
    17,987,99031
    
    
    
    18,000,000
   pari passu pari
passu
    137




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 38. Subordinated Liabilities
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mDated subordinated liabilities:6.69% Subordinated bond 2005 (US $750m)
    
    
    
    
    
    
    388
    
    
    
    
    
    
    
    38810.75% Subordinated bond 2006
    
    
    105
    
    
    
    100
    
    
    
    105
    
    
    
    1005.00% Subordinated bond 2009 (511.3m)
    
    
    381
    
    
    
    360
    
    
    
    
    
    
    
    Subordinated floating rate notes 2009 (511.3m)
    
    
    
    
    
    
    
    
    
    
    381
    
    
    
    3594.625% Subordinated notes 2011 (500m)
    
    
    372
    
    
    
    352
    
    
    
    372
    
    
    
    35210.125% Subordinated guaranteed bond 2023
    
    
    232
    
    
    
    149
    
    
    
    
    
    
    
    11.50% Subordinated guaranteed bond 2017
    
    
    221
    
    
    
    149
    
    
    
    
    
    
    
    11.59% Subordinated loan stock 2017
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    14910.18% Subordinated loan stock 2023
    
    
    
    
    
    
    
    
    
    
    150
    
    
    
    1497.57% Subordinated notes 2029 (US $1,000m)
    
    
    606
    
    
    
    512
    
    
    
    606
    
    
    
    5126.50% Subordinated notes 2030
    
    
    154
    
    
    
    149
    
    
    
    154
    
    
    
    1498.9% Subordinated notes 2030 (US $1,000m)
    
    
    
    
    
    
    
    
    
    
    792
    
    
    
    5157.25% Subordinated notes 2021
    
    
    200
    
    
    
    200
    
    
    
    
    
    
    
    5.25% Subordinated notes 2015
    
    
    210
    
    
    
    
    
    
    
    210
    
    
    
    Subordinated floating rate EURIB notes 2015
    
    
    344
    
    
    
    
    
    
    
    344
    
    
    
    Callable capped subordinated floating rate notes 2012 (US $50m)
    
    
    29
    
    
    
    26
    
    
    
    29
    
    
    
    26Callable subordinated floating rate notes 2012 (US $50m)
    
    
    29
    
    
    
    26
    
    
    
    29
    
    
    
    26Callable subordinated floating rate notes 2012 (500m)
    
    
    343
    
    
    
    352
    
    
    
    343
    
    
    
    3523,226
    
    
    
    2,763
    
    
    
    3,665
    
    
    
    3,077
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mUndated subordinated liabilities:10.0625% Exchangeable subordinated capital securities
    
    
    204
    
    
    
    200
    
    
    
    204
    
    
    
    2007.35% Perpetual subordinated reset capital securities (US $500m)
    
    
    299
    
    
    
    258
    
    
    
    299
    
    
    
    2586.70% Perpetual subordinated reset capital securities (US $500m)
    
    
    299
    
    
    
    258
    
    
    
    299
    
    
    
    2586.00% Step-down Perpetual callable subordinated notes (100m)
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    705.56% Subordinated guaranteed notes (YEN 15,000m)
    
    
    119
    
    
    
    76
    
    
    
    97
    
    
    
    765.50% Subordinated guaranteed notes (YEN 5,000m)
    
    
    39
    
    
    
    25
    
    
    
    32
    
    
    
    25Fixed/Floating rate subordinated notes (YEN 5,000m)
    
    
    37
    
    
    
    25
    
    
    
    31
    
    
    
    257.50% 10 Year step-up perpetual subordinated notes
    
    
    350
    
    
    
    322
    
    
    
    350
    
    
    
    3227.50% 15 Year step-up perpetual subordinated notes
    
    
    458
    
    
    
    425
    
    
    
    458
    
    
    
    4257.38% 20 Year step-up perpetual subordinated notes
    
    
    201
    
    
    
    173
    
    
    
    201
    
    
    
    1737.13% 30 Year step-up perpetual subordinated notes
    
    
    302
    
    
    
    279
    
    
    
    302
    
    
    
    2797.13% Fixed to floating rate perpetual subordinated notes (400m)
    
    
    300
    
    
    
    281
    
    
    
    300
    
    
    
    2817.25% Perpetual callable subordinated notes (US $400m)
    
    
    239
    
    
    
    205
    
    
    
    239
    
    
    
    2058.75% Subordinated guaranteed bonds
    
    
    132
    
    
    
    124
    
    
    
    
    
    
    
    2,979
    
    
    
    2,721
    
    
    
    2,812
    
    
    
    2,5976,205
    
    
    
    5,484
    
    
    
    6,477
    
    
    
    5,674
           138




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
         Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mIn no more than 3 months
    
    
    
    
    
    
    388
    
    
    
    
    
    
    
    388In more than 3 months but no more than 1 year
    
    
    105
    
    
    
    100
    
    
    
    105
    
    
    
    100In more than 1 year but no more than 5 years
    
    
    381
    
    
    
    360
    
    
    
    381
    
    
    
    360In more than 5 years
    
    
    2,496
    
    
    
    2,039
    
    
    
    3,183
    
    
    
    2,229Undated
    
    
    3,223
    
    
    
    2,597
    
    
    
    2,808
    
    
    
    2,5976,205
    
    
    
    5,484
    
    
    
    6,477
    
    
    
    5,674
 39. Insurance contracts and reinsurance liabilities
 a) Insurance contract liabilities
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mNon-participating insurance contract liabilities
    
    
    9,577
    
    
    
    9,197
    
    
    
    
    
    
    
    Participating insurance and investment contract
liabilities (including unallocated surplus)
    
    
    11,924
    
    
    
    15,726
    
    
    
    
    
    
    
    Total
non-participating insurance contracts and
participating contracts, gross
    
    
    21,501
    
    
    
    24,923
    
    
    
    
    
    
    
    Recoverable from reinsurers:Non-participating insurance contract liabilities
    
    
    1,289
    
    
    
    1,956
    
    
    
    
    
    
    
    Participating insurance contract liabilities
    
    
    3
    
    
    
    5
    
    
    
    
    
    
    
    Total reinsurers share of insurance liabilities
    
    
    1,292
    
    
    
    1,961
    
    
    
    
    
    
    
    Non-participating insurance contract liabilities
    
    
    8,288
    
    
    
    7,241
    
    
    
    
    
    
    
    Participating insurance and investment contract
liabilities (including unallocated surplus)
    
    
    11,921
    
    
    
    15,721
    
    
    
    
    
    
    
    Total non-participating insurance contracts and
participating contracts, net
    
    
    20,209
    
    
    
    22,962
    
    
    
    
    
    
    
    
  Participating
    
    
    
    
    
    
    
    
    
    
    Non-participatinginsurance and
    
    
    
    
    
    
    
    
    
    
    investmentInsurance
    
    
    investment
    
    
    Non-participating
    
    
    
    
    
    
    contractsliabilities
    
    
    contracts
    
    
    insurance contracts
    
    
    Total
    
    
    (see Note 41)
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAs at 31 December 2004
    
    
    24,404
    
    
    
    
    
    
    
    519
    
    
    
    24,923
    
    
    
    
    
    
    
    24,923Change in accounting
policy IFRS 4/FRS 27
    
    
    (21,191
    )
    
    
    12,513
    
    
    
    8,678
    
    
    
    
    
    
    
    
    
    
    
    Change in accounting
policy IAS 39
    
    
    (3,213
    )
    
    
    
    
    
    
    
    
    
    
    (3,213
    )
    
    
    3,213
    
    
    
    As at 1 January 2005
    
    
    
    
    
    
    12,513
    
    
    
    9,197
    
    
    
    21,710
    
    
    
    3,213
    
    
    
    24,923Movement in year
    
    
    
    
    
    
    (589
    )
    
    
    380
    
    
    
    (209
    )
    
    
    93
    
    
    
    (116
    )As at 31 December 2005
    
    
    
    
    
    
    11,924
    
    
    
    9,577
    
    
    
    21,501
    
    
    
    3,306
    
    
    
    24,807
  139




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  b) Participating insurance and investment contracts
 Measurement of participating contracts
  £mWith profits benefits reserves
    
    
    10,440Future cost of contractual guarantees
    
    
    745Future cost of financial options
    
    
    302Other liabilities
    
    
    64Total realistic liabilities (excluding unallocated surplus)
    
    
    11,551
    Options & Guarantees
      Measurement of participating investment contracts
    Process used to decide assumptions
  >
    
    Economic Assumptions>
    
    Persistency Rates>
    
    Expenses>
    
    Mortality>
    
    Take-up rates of guarantees and options
     140




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
         Change in assumptions
  c) Non participating insurance contracts
 Measurement of contracts
  >
    
    Economic Assumptions>
    
    Mortality and morbidity>
    
    Expenses
         Process used to decide assumptions
  Change in assumptions
  141




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Analysis of available capital
 SPL
    
    
    
    
    
    
    
    
    
    
    Life share-SMA
    
    
    With profits
    
    
    UK Non-profits
    
    
    Overseas life
    
    
    holders
    
    
    Total LifeWith profits fund
    
    
    Fund
    
    
    fund
    
    
    assurance
    
    
    Funds
    
    
    Business31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mShareholders funds outside fund
    
    
    
    
    
    
    
    
    
    
    1,337
    
    
    
    84
    
    
    
    1,165
    
    
    
    2,586Shareholders funds held in fund
    
    
    
    
    
    
    
    
    
    
    1,346
    
    
    
    79
    
    
    
    1
    
    
    
    1,426Total shareholders funds
    
    
    
    
    
    
    
    
    
    
    2,683
    
    
    
    163
    
    
    
    1,166
    
    
    
    4,012Adjustments onto regulatory basis:FFA(1)
    
    
    184
    
    
    
    253
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    456Adjustments to assets
    
    
    (4
    )
    
    
    (1
    )
    
    
    (1,314
    )
    
    
    (84
    )
    
    
    (282
    )
    
    
    (1,685
    )Other qualifying capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loan capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Restriction on loan capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total available capital resources
    
    
    180
    
    
    
    252
    
    
    
    1,369
    
    
    
    98
    
    
    
    884
    
    
    
    2,783
 (1)
    
    The fund for future appropriations represents the excess assets over liabilities in the
with-profit funds calculated on a statutory basis.(2)
    
    The above analysis excludes non-underwriting companies and consolidation adjustments(3)
    
    The capital resources shown above are not readily transferable to other Group companies
 SPL
    
    
    
    
    
    
    
    
    
    
    Life share-SMA
    
    
    With profits
    
    
    UK Non-profits
    
    
    Overseas life
    
    
    holders
    
    
    Total LifeWith profits fund
    
    
    Fund
    
    
    fund
    
    
    assurance
    
    
    Funds
    
    
    Business31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mShareholders funds outside fund
    
    
    
    
    
    
    
    
    
    
    1,381
    
    
    
    111
    
    
    
    1,128
    
    
    
    2,620Shareholders funds held in fund
    
    
    
    
    
    
    
    
    
    
    1,380
    
    
    
    50
    
    
    
    
    
    
    
    1,430Total shareholders funds
    
    
    
    
    
    
    
    
    
    
    2,761
    
    
    
    161
    
    
    
    1,128
    
    
    
    4,050Adjustments onto regulatory basis:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    FFA(1)
    
    
    86
    
    
    
    224
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    329Adjustments to assets
    
    
    (10
    )
    
    
    
    
    
    
    (1,412
    )
    
    
    (111
    )
    
    
    (234
    )
    
    
    (1,767
    )Other qualifying capital
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Loan capital
    
    
    
    
    
    
    124
    
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    324Restriction on loan capital
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )Total available capital resources
    
    
    76
    
    
    
    282
    
    
    
    1,674
    
    
    
    69
    
    
    
    894
    
    
    
    2,995
 SPL
    
    
    
    
    
    
    
    
    
    
    Life share-SMA
    
    
    With profits
    
    
    UK Non-profits
    
    
    Overseas life
    
    
    holders
    
    
    Total LifeWith profits fund
    
    
    Fund
    
    
    fund
    
    
    assurance
    
    
    Funds
    
    
    Business£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m31 December 2004
available capital resources
    
    
    76
    
    
    
    282
    
    
    
    1,674
    
    
    
    69
    
    
    
    894
    
    
    
    2,995Changes in assumptions
    
    
    (77
    )
    
    
    11
    
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Changes in management policy
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Changes in regulatory
requirements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    New business and other factors
    
    
    181
    
    
    
    (41
    )
    
    
    (365
    )
    
    
    29
    
    
    
    (10
    )
    
    
    (206
    )31 December 2005 available
capital resources
    
    
    180
    
    
    
    252
    
    
    
    1,369
    
    
    
    98
    
    
    
    884
    
    
    
    2,783
 Regulatory Capital Requirements
   142




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
   Capital sensitivity
  Capital management policies
   Capital independence
  Intra-group capital arrangements
    40. Other liabilities
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mTrade and other payables
    
    
    1,128
    
    
    
    3,439
    
    
    
    814
    
    
    
    1,308Accrued interest
    
    
    
    
    
    
    1,579
    
    
    
    
    
    
    
    886Deferred income
    
    
    145
    
    
    
    158
    
    
    
    
    
    
    
    14Reinsurance & insurance
    
    
    1,917
    
    
    
    617
    
    
    
    
    
    
    
    Short positions in government debt securities and equity shares
    
    
    
    
    
    
    2,715
    
    
    
    
    
    
    
    Translation differences on foreign exchange derivatives used
for hedging purposes
    
    
    
    
    
    
    336
    
    
    
    
    
    
    
    1993,190
    
    
    
    8,844
    
    
    
    814
    
    
    
    2,407
 41. Investment contract liabilities
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mInvestment contracts (without DPF)
    
    
    3,306
    
    
    
    
    
    
    
    
    
    
    
    
    143




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in accounting policy IAS 39
    
    
    3,213
    
    
    
    
    
    
    
    
    
    
    
    At 1 January 2005
    
    
    3,213
    
    
    
    
    
    
    
    
    
    
    
    Premiums received
    
    
    419
    
    
    
    
    
    
    
    
    
    
    
    Claims paid
    
    
    (400
    )
    
    
    
    
    
    
    
    
    
    
    Change in investment contract benefits
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    Sterling reserves
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    3,306
    
    
    
    
    
    
    
    
    
    
    
    
  42. Provisions
 GroupOtherMisselling (1)
    
    
    provisions (2)
    
    
    Total£m
    
    
    £m
    
    
    £mAt 1 January 2005
    
    
    186
    
    
    
    116
    
    
    
    302Additional provisions
    
    
    12
    
    
    
    15
    
    
    
    27Provisions released
    
    
    (2
    )
    
    
    (22
    )
    
    
    (24
    )Used during the year
    
    
    (4
    )
    
    
    (48
    )
    
    
    (52
    )At 31 December 2005
    
    
    192
    
    
    
    61
    
    
    
    253
 OtherMisselling (1)
    
    
    provisions (2)
    
    
    Total£m
    
    
    £m
    
    
    £mAnalysis of total provisions:Provisions to be settled within 12 months
    
    
    191
    
    
    
    60
    
    
    
    251Provisions to be settled in more than 12 months
    
    
    1
    
    
    
    1
    
    
    
    2192
    
    
    
    61
    
    
    
    253
 CompanyOtherMisselling (1)
    
    
    provisions (2)
    
    
    Total£m
    
    
    £m
    
    
    £mAt 1 January 2005
    
    
    185
    
    
    
    52
    
    
    
    237Additional provisions
    
    
    10
    
    
    
    
    
    
    
    10Provisions released
    
    
    (2
    )
    
    
    (8
    )
    
    
    (10
    )Used during the year
    
    
    (3
    )
    
    
    (32
    )
    
    
    (35
    )At 31 December 2005
    
    
    190
    
    
    
    12
    
    
    
    202
 OtherMisselling (1)
    
    
    provisions (2)
    
    
    Total£m
    
    
    £m
    
    
    £mAnalysis of total provisions:Provisions to be settled within 12 months
    
    
    190
    
    
    
    12
    
    
    
    202Provisions to be settled in more than 12 months
    
    
    
    
    
    
    
    
    
    
    190
    
    
    
    12
    
    
    
    202
  (1) Misselling provision
  (2) Other provisions
  144




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 43. Retirement benefit obligations
 Defined Contribution Pension schemes
   Defined Benefit Pension schemes
    Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mPension benefits
    
    
    160
    
    
    
    183
    
    
    
    142
    
    
    
    169
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mPension schemes
    
    
    (1,380
    )
    
    
    (1,197
    )
    
    
    (1,240
    )
    
    
    (1,060
    )
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mPresent value of defined benefit obligation
    
    
    (4,354
    )
    
    
    (3,686
    )
    
    
    (3,822
    )
    
    
    (3,229
    )Fair value of plan assets
    
    
    2,974
    
    
    
    2,489
    
    
    
    2,582
    
    
    
    2,169Unfunded benefit obligation
    
    
    (1,380
    )
    
    
    (1,197
    )
    
    
    (1,240
    )
    
    
    (1,060
    )Net liability in the balance sheet
    
    
    (1,380
    )
    
    
    (1,197
    )
    
    
    (1,240
    )
    
    
    (1,060
    )
   Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mCurrent service cost
    
    
    102
    
    
    
    121
    
    
    
    85
    
    
    
    108Past service cost
    
    
    21
    
    
    
    24
    
    
    
    18
    
    
    
    21(Gain)/ loss on settlements or curtailments
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    2Expected return on pension scheme assets
    
    
    (163
    )
    
    
    (140
    )
    
    
    (136
    )
    
    
    (123
    )Interest cost
    
    
    200
    
    
    
    182
    
    
    
    175
    
    
    
    161Total included in staff costs
    
    
    160
    
    
    
    183
    
    
    
    142
    
    
    
    169
  145




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mMovement in the defined benefit obligation during the year:Balance at 1 January
    
    
    3,686
    
    
    
    3,301
    
    
    
    3,229
    
    
    
    2,899Current service cost
    
    
    102
    
    
    
    121
    
    
    
    85
    
    
    
    108Interest cost
    
    
    200
    
    
    
    182
    
    
    
    175
    
    
    
    161Employee contributions
    
    
    12
    
    
    
    14
    
    
    
    12
    
    
    
    13Past service cost
    
    
    21
    
    
    
    24
    
    
    
    18
    
    
    
    21Actuarial loss
    
    
    436
    
    
    
    164
    
    
    
    387
    
    
    
    133Experience loss on scheme liabilities
    
    
    
    
    
    
    13
    
    
    
    7
    
    
    
    10Actual benefit payments
    
    
    (103
    )
    
    
    (88
    )
    
    
    (91
    )
    
    
    (78
    )Settlement/curtailment
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (38
    )Balance at 31 December
    
    
    4,354
    
    
    
    3,686
    
    
    
    3,822
    
    
    
    3,229
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mMovement in the present value of
fair value of scheme assets during
the year:Balance at 1 January
    
    
    2,489
    
    
    
    2,200
    
    
    
    2,169
    
    
    
    1,917Expected return on scheme assets
    
    
    163
    
    
    
    140
    
    
    
    136
    
    
    
    123Actuarial gain/(loss) on scheme assets
    
    
    282
    
    
    
    107
    
    
    
    242
    
    
    
    94Company contributions paid (regular)
    
    
    110
    
    
    
    132
    
    
    
    96
    
    
    
    119Company contributions paid (special)
    
    
    21
    
    
    
    24
    
    
    
    18
    
    
    
    21Employee contributions
    
    
    12
    
    
    
    14
    
    
    
    12
    
    
    
    13Settlements
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    (40
    )Benefits
    
    
    (103
    )
    
    
    (88
    )
    
    
    (91
    )
    
    
    (78
    )Balance at 31 December
    
    
    2,974
    
    
    
    2,489
    
    
    
    2,582
    
    
    
    2,169
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mAmounts recognised in the statement of
recognised income and expense for the periodExperience gain / (loss) on scheme liabilities
    
    
    
    
    
    
    13
    
    
    
    7
    
    
    
    10% of Defined benefit obligation at end of period
    
    
    0.0
    %
    
    
    0.3
    %
    
    
    0.0
    %
    
    
    0.3
    %Actuarial loss on scheme liabilities
    
    
    436
    
    
    
    164
    
    
    
    387
    
    
    
    133Actuarial gain on scheme assets
    
    
    (282
    )
    
    
    (107
    )
    
    
    (242
    )
    
    
    (94
    )% of scheme assets at end of period
    
    
    9.5
    %
    
    
    4.3
    %
    
    
    9.0
    %
    
    
    4.3
    %Total amount recognised in statement of
recognised income and expense for the period
    
    
    154
    
    
    
    70
    
    
    
    152
    
    
    
    49
  2005
    
    
    2004
    
    
    2003Nominal per
    
    
    Nominal per
    
    
    Nominal perannum
    
    
    annum
    
    
    annum%
    
    
    %
    
    
    %To determine benefit obligations:Discount rate for scheme liabilities
    
    
    4.85
    
    
    
    5.4
    
    
    
    5.5General salary increase
    
    
    4.3
    
    
    
    4.3
    
    
    
    4.2General price inflation
    
    
    2.8
    
    
    
    2.8
    
    
    
    2.7Expected rate of pension increase
    
    
    2.8
    
    
    
    2.8
    
    
    
    4.2Expected rate of return on plan assets
    
    
    6.5
    
    
    
    6.3
    
    
    
    6.5To determine net period benefit cost:Discount rate
    
    
    5.4
    
    
    
    5.5
    
    
    
    5.75Expected rate of pension increase
    
    
    2.8
    
    
    
    2.7
    
    
    
    2.4Expected rate of return on plan assets
    
    
    6.5
    
    
    
    6.25
    
    
    
    6.5
  146




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  >
    
    To maintain a portfolio of suitable assets of appropriate liquidity
which will generate income and capital growth to meet, together with
new contributions from members and the employers, the cost of current
and future benefits which the Fund provides, as set out in the Trust
Deed and Rules.>
    
    To limit the risk of the assets failing to meet the liabilities, over
the long-term and on a shorter-term basis as required by prevailing
legislation.>
    
    To minimise the long-term costs of the Fund by maximising the return
on the assets whilst having regard to the objectives shown above.
    2005
    
    
    2004
    
    
    2003%
    
    
    %
    
    
    %UK equities
    
    
    26
    
    
    
    26
    
    
    
    26Overseas equities
    
    
    25
    
    
    
    25
    
    
    
    26Corporate Bonds
    
    
    26
    
    
    
    25
    
    
    
    26Govt Fixed Interest
    
    
    12
    
    
    
    12
    
    
    
    12Govt Index Linked
    
    
    10
    
    
    
    10
    
    
    
    9Others
    
    
    1
    
    
    
    2
    
    
    
    1100
    
    
    
    100
    
    
    
    100
  Year ended 31 December:
    
    £m2006
    
    
    1112007
    
    
    1202008
    
    
    1292009
    
    
    1392010
    
    
    149Five years ended 31 December 2015
    
    
    936
 44. Contingent liabilities and commitments
   Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mGuarantees given by Abbey National plc to subsidiaries
    
    
    
    
    
    
    
    
    
    
    94,328
    
    
    
    72,764Guarantees given to third parties
    
    
    172
    
    
    
    756
    
    
    
    
    
    
    
    Mortgage assets granted
    
    
    
    
    
    
    328
    
    
    
    
    
    
    
    Formal standby facilities, credit lines and other commitments: Original term to maturity of one year or less
    
    
    1,779
    
    
    
    1,739
    
    
    
    1,769
    
    
    
    1,733 Original term to maturity of more than one year
    
    
    1,100
    
    
    
    1,110
    
    
    
    
    
    
    
    3,051
    
    
    
    3,933
    
    
    
    96,097
    
    
    
    74,497
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mOther contingent liabilities
    
    
    83
    
    
    
    124
    
    
    
    9
    
    
    
    883
    
    
    
    124
    
    
    
    9
    
    
    
    8
  147




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
   Obligations under stock borrowing and lending agreements
  Other off-balance sheet commitments
  Operating lease commitments
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mRental commitments under operating leases expiring:No later than 1 year
    
    
    122
    
    
    
    130
    
    
    
    106
    
    
    
    109Later than 1 year but no later than 5 years
    
    
    444
    
    
    
    448
    
    
    
    384
    
    
    
    392Later than 5 years
    
    
    860
    
    
    
    922
    
    
    
    786
    
    
    
    8411,426
    
    
    
    1,500
    
    
    
    1,276
    
    
    
    1,342
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mYear ended 31 December:2005
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    1092006
    
    
    122
    
    
    
    122
    
    
    
    106
    
    
    
    1082007
    
    
    118
    
    
    
    119
    
    
    
    104
    
    
    
    1052008
    
    
    118
    
    
    
    107
    
    
    
    104
    
    
    
    932009
    
    
    103
    
    
    
    100
    
    
    
    88
    
    
    
    862010
    
    
    105
    
    
    
    n/a
    
    
    
    88
    
    
    
    n/aTotal thereafter
    
    
    860
    
    
    
    922
    
    
    
    786
    
    
    
    841
 Group2005
    
    
    2004£m
    
    
    £mGroup rental expense comprises:In respect of minimum rentals
    
    
    109
    
    
    
    117Less: sub-lease rentals
    
    
    
    
    
    
    (3
    )109
    
    
    
    114
  45. Share capital
 Group2005
    
    
    2004Ordinary Share capital
    
    £m
    
    
    £mBalance at 1 January
    
    
    148
    
    
    
    146Issue of share capital
    
    
    
    
    
    
    2Balance at 31 December
    
    
    148
    
    
    
    148
 Ordinary
    
    
    Preference
    
    
    Preference
    
    
    Preferenceshares of 10
    
    
    shares of £1
    
    
    shares of
    
    
    shares ofpence each
    
    
    each
    
    
    US$0.01 each
    
    
    0.01 each
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAuthorised share capitalAt 31 December 2004
    
    
    175
    
    
    
    1,000
    
    
    
    6
    
    
    
    6
    
    
    
    1,187At 31 December 2005
    
    
    175
    
    
    
    1,000
    
    
    
    6
    
    
    
    6
    
    
    
    1,187Issued and fully paid share capital
At 31 December 2004
    
    
    148
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    473At 31 December 2005
    
    
    148
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    473
 148




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Group2005
    
    
    2004Ordinary Share premium
    
    £m
    
    
    £mBalance at 1 January
    
    
    1,857
    
    
    
    2,059Issue of share capital
    
    
    
    
    
    
    105Balance at 31 December
    
    
    1,857
    
    
    
    2,164
 Ordinary
    
    
    Preference
    
    
    Preference
    
    
    Preferenceshares of 10
    
    
    shares of £1
    
    
    shares of
    
    
    shares ofpence each
    
    
    each
    
    
    US$0.01
    
    
    0.01 each
    
    
    Total£m
    
    
    £m
    
    
    each £m
    
    
    £m
    
    
    £mShare premium account
At 1 January 2004
    
    
    1,752
    
    
    
    10
    
    
    
    297
    
    
    
    
    
    
    
    2,059Shares issued
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Amortisation of issue costs
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Transfers from profit and loss account
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )At 31 December 2004
    
    
    1,857
    
    
    
    10
    
    
    
    297
    
    
    
    
    
    
    
    2,164At 1 January 2005
    
    
    1,857
    
    
    
    10
    
    
    
    297
    
    
    
    
    
    
    
    2,164Reclassification to other borrowed funds on transition to IFRS
    
    
    
    
    
    
    (10
    )
    
    
    (297
    )
    
    
    
    
    
    
    (307
    )At 31 December 2005
    
    
    1,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,857
  46. Retained Earnings
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December (UK GAAP)
    
    
    
    
    
    
    2,801
    
    
    
    
    
    
    
    2,305Retrospective IFRS Adjustments
    
    
    
    
    
    
    (708
    )
    
    
    
    
    
    
    (438
    )Restated 31 December (IFRS)
    
    
    1,083
    
    
    
    2,093
    
    
    
    650
    
    
    
    1,867Prospective IFRS adjustments
    
    
    (293
    )
    
    
    
    
    
    
    (332
    )
    
    
    Restated 1 January (IFRS)
    
    
    790
    
    
    
    2,093
    
    
    
    318
    
    
    
    1,867Profit/(loss) for the period
    
    
    420
    
    
    
    (54
    )
    
    
    691
    
    
    
    (284
    )Post tax actuarial movement on defined benefit pension schemes
    
    
    (108
    )
    
    
    (49
    )
    
    
    (106
    )
    
    
    (34
    )Exchange differences on translation of foreign operations
    
    
    3
    
    
    
    (2
    )
    
    
    
    
    
    
    Equity dividends
    
    
    
    
    
    
    (874
    )
    
    
    
    
    
    
    (874
    )Stock option expensing
    
    
    
    
    
    
    (21
    )
    
    
    
    
    
    
    (21
    )Other movements
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    (4
    )At 31 December
    
    
    1,105
    
    
    
    1,083
    
    
    
    903
    
    
    
    650
  Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mOrdinary shares (equity):2003 Final
    
    
    
    
    
    
    244
    
    
    
    
    
    
    
    2442004 Interim
    
    
    
    
    
    
    122
    
    
    
    
    
    
    
    1222004 Special
    
    
    
    
    
    
    461
    
    
    
    
    
    
    
    461
    
    
    
    827
    
    
    
    
    
    
    
    827Preference shares (non-equity)
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    47Total dividends paid
    
    
    
    
    
    
    874
    
    
    
    
    
    
    
    874
 Group
    
    


    
    
    Company2005
    
    

2004
    
    
    2005
    
    

2004Pence per
    
    
    Pence per
    
    
    Pence per
    
    
    Pence pershare
    
    
    share
    
    
    share
    
    
    shareOrdinary shares (equity):2003 Final
    
    
    
    
    
    
    16.67
    
    
    
    
    
    
    
    16.672004 Interim
    
    
    
    
    
    
    8.33
    
    
    
    
    
    
    
    8.332004 Special
    
    
    
    
    
    
    31.00
    
    
    
    
    
    
    
    31.00Total
    
    
    
    
    
    
    56.00
    
    
    
    
    
    
    
    56.00
 149




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 47. Consolidated cash flow statement
 a) Reconciliation of profit/(loss) before tax to net cash inflow/(outflow) from operating
activities:
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mGroup operating profit/(loss)
    
    
    596
    
    
    
    (21
    )
    
    
    699
    
    
    
    (490
    )Non Cash items included in net profitDecrease/(increase) in prepayments and accrued income
    
    
    (306
    )
    
    
    157
    
    
    
    (203
    )
    
    
    (52
    )(Decrease)/increase in accruals and deferred income
    
    
    (220
    )
    
    
    588
    
    
    
    109
    
    
    
    508Depreciation and amortisation
    
    
    199
    
    
    
    252
    
    
    
    66
    
    
    
    (66
    )Profits on sale of subsidiary and associated undertakings
    
    
    (62
    )
    
    
    (46
    )
    
    
    
    
    
    
    Change in value of in-force Long Term Assurance Business
    
    
    56
    
    
    
    (452
    )
    
    
    
    
    
    
    Provisions for liabilities and charges
    
    
    3
    
    
    
    233
    
    
    
    
    
    
    
    170Provision for impairment
    
    
    218
    
    
    
    (38
    )
    
    
    (296
    )
    
    
    54Other non-cash items
    
    
    204
    
    
    
    (874
    )
    
    
    203
    
    
    
    (580
    )688
    
    
    
    (201
    )
    
    
    578
    
    
    
    (456
    )Changes in operating assets and liabilitiesNet decrease/(increase) in trading assets
    
    
    (5,651
    )
    
    
    
    
    
    
    
    
    
    
    Movement in fair value of derivatives
    
    
    (2,006
    )
    
    
    (1,821
    )
    
    
    (347
    )
    
    
    Net decrease/(increase) in financial assets designated at fair value
    
    
    (2,859
    )
    
    
    
    
    
    
    (79
    )
    
    
    Net decrease/(increase) in loans and advances to banks and customers
    
    
    (2,260
    )
    
    
    (653
    )
    
    
    (8,232
    )
    
    
    (4,472
    )Net decrease/(increase) in debt securities, treasury bills and other
eligible bills
    
    
    
    
    
    
    1,451
    
    
    
    
    
    
    
    Net decrease/(increase) in other assets
    
    
    2,653
    
    
    
    346
    
    
    
    943
    
    
    
    84Net decrease/(increase) in deferred acquisition costs
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    Net (decrease)/increase in deposits by banks and customer accounts
    
    
    (6,258
    )
    
    
    850
    
    
    
    2,894
    
    
    
    9,212Net (decrease)/increase in trading liabilities
    
    
    13,509
    
    
    
    
    
    
    
    
    
    
    
    Net (decrease)/increase in financial liabilities designated at fair value
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    Net (decrease)/increase in insurance contract liabilities
    
    
    (231
    )
    
    
    (1,279
    )
    
    
    
    
    
    
    Net (decrease)/increase in investment contract liabilities
    
    
    93
    
    
    
    
    
    
    
    
    
    
    
    Net (decrease)/increase in debt issued
    
    
    1,145
    
    
    
    (1,414
    )
    
    
    1
    
    
    
    Net (decrease)/increase in other liabilities
    
    
    (4,009
    )
    
    
    (2,098
    )
    
    
    (1,580
    )
    
    
    187Net cash flow from / (Used in) operating activities before tax
    
    
    (5,098
    )
    
    
    (4,819
    )
    
    
    (5,822
    )
    
    
    4,555Income tax paid
    
    
    (132
    )
    
    
    (12
    )
    
    
    (8
    )
    
    
    2Net cash flow from / (used in) operating activities
    
    
    (5,230
    )
    
    
    (4,831
    )
    
    
    (5,830
    )
    
    
    4,557
 b) Analysis of the balances of cash and cash equivalents in the balance sheet
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mCash and balances with central banks
    
    
    991
    
    
    
    454
    
    
    
    370
    
    
    
    443Debt securities
    
    
    16,117
    
    
    
    12,215
    
    
    
    
    
    
    
    Net trading other cash equivalents
    
    
    (5,175
    )
    
    
    3,282
    
    
    
    
    
    
    
    Net non trading other cash equivalents
    
    
    (3,692
    )
    
    
    (4,692
    )
    
    
    (15,454
    )
    
    
    (9,961
    )Cash and cash equivalents at the end of the year
    
    
    8,241
    
    
    
    11,259
    
    
    
    (15,084
    )
    
    
    (9,518
    )
 150




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 c) Sale of subsidiaries, associates undertakings and businesses
 Group
    
    Company2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mNet asset disposed of:Loans and advances to banks
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    Loans and advances to customers
    
    
    1,092
    
    
    
    3,772
    
    
    
    
    
    
    
    Investment securities
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Tangible fixed assets
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    Other assets
    
    
    20
    
    
    
    36
    
    
    
    
    
    
    
    Prepayments and accrued income
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    Deposits by banks
    
    
    
    
    
    
    (386
    )
    
    
    
    
    
    
    Other liabilities
    
    
    (329
    )
    
    
    (107
    )
    
    
    
    
    
    
    Accruals and deferred income
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    Provisions for liabilities and charges
    
    
    
    
    
    
    (194
    )
    
    
    
    
    
    
    Goodwill disposed off
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Goodwill written back
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Profit on disposal
    
    
    62
    
    
    
    46
    
    
    
    
    
    
    
    845
    
    
    
    3,180
    
    
    
    
    
    
    
    Satisfied by:Cash
    
    
    845
    
    
    
    3,180
    
    
    
    
    
    
    
    
 48. Collateral pledged and received
        49. Share-based compensation
   151




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
   2005
    
    
    2004Risk free interest rate
    
    
    4.5%-4.6
    %
    
    
    4.4%-4.6
    %Dividend growth, based solely upon average growth since 1989
    
    
    10
    %
    
    
    10
    %Volatility of underlying shares based upon historical volatility over five years
    
    16.96%-17.58
    %
    

    18.0%-21.54
    %Expected lives of options granted under:Employee Sharesave scheme*
    
    3,5 & 7 years
    
    
    3,5 & 7 yearsExecutive Share Option scheme
    
    10 years
    
    
    10 yearsEmployee Share Option scheme
    
    10 years
    
    
    10 yearsMedium term incentive plan
    
    3 years
    
    
    3 years
 * For three, five and seven year schemes respectively.
   Executive Share Option scheme
    
    
    Employee Sharesave scheme
    
    
    Employee Share Option schemeWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    exercise price
    
    
    Number of
    
    
    exercise price
    
    
    Number of
    
    
    exercise priceoptions
    
    
    (£)
    
    
    options
    
    
    (£)
    
    
    options
    
    
    (£)2005Options outstanding at the
beginning of the year
    
    
    358,844
    
    
    
    4.16
    
    
    
    17,260,173
    
    
    
    3.56
    
    
    
    56,550
    
    
    
    5.91Options granted during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised during the year
    
    
    (89,305
    )
    
    
    4.43
    
    
    
    (1,677,361
    )
    
    
    4.45
    
    
    
    (2,550
    )
    
    
    5.91Options forfeited during the year
    
    
    
    
    
    
    
    
    
    
    (1,774,550
    )
    
    
    4.07
    
    
    
    
    
    
    
    Options expired during the year
    
    
    
    
    
    
    
    
    
    
    (9,120
    )
    
    
    7.69
    
    
    
    
    
    
    
    Options outstanding at the end
of the year
    
    
    269,539
    
    
    
    4.08
    
    
    
    13,799,142
    
    
    
    3.38
    
    
    
    54,000
    
    
    
    5.91Options exercisable at the end
of the year
    
    
    269,539
    
    
    
    4.08
    
    
    
    2,834
    
    
    
    7.17
    
    
    
    54,000
    
    
    
    5.91The weighted-average grant-date
fair value of options granted
during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004Options outstanding at the
beginning of the year
    
    
    15,180,932
    
    
    
    6.27
    
    
    
    28,328,589
    
    
    
    3.61
    
    
    
    8,909,143
    
    
    
    11.07Options granted during the year
    
    
    2,039,702
    
    
    
    4.61
    
    
    
    3,877,757
    
    
    
    3.98
    
    
    
    
    
    
    
    Options exercised during the year
    
    
    (4,360,768
    )
    
    
    3.93
    
    
    
    (1,767,758
    )
    
    
    3.51
    
    
    
    (10,350
    )
    
    
    5.91Options forfeited during the year
    
    
    (12,501,022
    )
    
    
    6.88
    
    
    
    (13,175,058
    )
    
    
    3.79
    
    
    
    (1,666,643
    )
    
    
    10.28Options expired during the year
    
    
    
    
    
    
    
    
    
    
    (3,357
    )
    
    
    7.65
    
    
    
    (7,175,600
    )
    
    
    11.25Options outstanding at the end
of the year
    
    
    358,844
    
    
    
    4.16
    
    
    
    17,260,173
    
    
    
    3.56
    
    
    
    56,550
    
    
    
    5.91Options exercisable at the end
of the year
    
    
    358,844
    
    
    
    4.16
    
    
    
    
    
    
    
    
    
    
    
    56,550
    
    
    
    5.91The weighted-average grant-date
fair value of options granted
during the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 152




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Executive share option scheme
    
    
    
    
    
    Options outstanding
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber out-
    
    
    remaining
    
    
    average
    
    
    Number
    
    
    averagestanding at
    
    
    contractual life
    
    
    exercise price
    
    
    exercisable at
    
    
    exercise priceRange of exercise prices
    
    31/12/2005
    
    
    (years)
    
    
    (£)
    
    
    31/12/2005
    
    
    (£)Between £3 and £4
    
    
    154,338
    
    
    
    7
    
    
    
    3.73
    
    
    
    154,338
    
    
    
    3.73Between £4 and £5
    
    
    115,201
    
    
    
    8
    
    
    
    4.54
    
    
    
    115,201
    
    
    
    4.54
  Employee share option scheme
    
    
    
    
    
    Options outstanding
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber out-
    
    
    remaining
    
    
    average
    
    
    Number
    
    
    averagestanding at
    
    
    contractual life
    
    
    exercise price
    
    
    exercisable at
    
    
    exercise priceRange of exercise prices
    
    31/12/2005
    
    
    (years)
    
    
    (£)
    
    
    31/12/2005
    
    
    (£)Between £5 and £6
    
    
    54,000
    
    
    
    1
    
    
    
    5.91
    
    
    
    54,000
    
    
    
    5.91
 Medium Term Incentive Plan
  WeightedNumber of
    
    
    averageoptions
    
    
    exerciseMedium term incentive plan
    
    granted
    
    
    price (£)2005Conditional awards outstanding at the beginning of the year
    
    
    
    
    
    
    Conditional awards granted during the year
    
    
    2,650,779
    
    
    
    7.25Conditional awards exercised during the year
    
    
    
    
    
    
    Conditional awards forfeited during the year
    
    
    132,284
    
    
    
    7.25Conditional awards expired during the year
    
    
    
    
    
    
    Conditional awards outstanding at the end of the year
    
    
    2,518,495
    
    
    
    7.34Conditional awards exercisable at the end of the year
    
    
    
    
    
    
    The weighted-average grant-date fair value of conditional awards granted during the year
    
    
    
    
    
    
    7.25
 50. Directors emoluments and interests
   AggregateamountNumber of
    
    
    outstandingpersons
    
    
    £000DirectorsLoans
    
    
    
    
    
    
    Quasi loans
    
    
    
    
    
    
    Credit transactions
    
    
    
    
    
    
    Other Key Management PersonnelLoans
    
    
    1
    
    
    
    215Quasi loans
    
    
    
    
    
    
    Credit transactions
    
    
    
    
    
    
    
 *
    
    Other Key Management Personnel are defined as the Executive Committee of Abbey and the Board
and Executive Committee of Abbey parent company, Banco Santander Central Hispano, S.A. who
served during 2005.
 153




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 51. Related party disclosures
 Transactions with Directors, Other Key Management Personnel and each of their connected persons
  Amounts in respect ofdirectors, Other KeyManagementNumber of directors and
    
    
    Personnel (1) and theirOther Key Management
    
    
    connected personsPersonnel(1)
    
    
    20052005
    
    
    £000Secured loans, unsecured loans and overdraftsLoans outstanding at 1 January
    
    
    1
    
    
    
    240Net movements in the year
    
    
    
    
    
    
    (25
    )Loans outstanding as at 31 December
    
    
    1
    
    
    
    215Deposit, bank and instant access accounts and investmentsDeposits, bank instant access accounts and investments at 1 January
    
    
    8
    
    
    
    2,080Net movements in the year
    
    
    4
    
    
    
    2,824Balances outstanding as at 31 December
    
    
    12
    
    
    
    4,904Life assurance policiesLife assurance policies at 1 January
    
    
    3
    
    
    
    50Net movements in the year
    
    
    3
    
    
    
    1,152Total sum insured/value of investment
    
    
    6
    
    
    
    1,202
 (1)
    
    Other Key Management Personnel are defined as the Executive Committee of Abbey and the
Board and Executive Committee of Abbeys parent company, Banco Santander Central Hispano,
S.A., who served during 2005.
 Amounts in respect ofdirectors, Other KeyManagementNumber of directors and
    
    
    Personnel (1) and theirOther Key Management
    
    
    connected personsPersonnel(1)
    
    
    20042004
    
    
    £000Secured loans, unsecured loans and overdraftsLoans outstanding at 1 January
    
    
    1
    
    
    
    14Net movement in the year
    
    
    
    
    
    
    226Loans outstanding as at 31 December
    
    
    1
    
    
    
    240Deposit, bank and instant access accounts and investmentsDeposits, bank instant access accounts, investments at 1 January
    
    
    9
    
    
    
    1,165Net movement in the year
    
    
    (1
    )
    
    
    915Balances outstanding as at 31 December
    
    
    8
    
    
    
    2,080Life assurance policiesLife assurance policies at 1 January
    
    
    2
    
    
    
    107Net movement in the year
    
    
    1
    
    
    
    (57
    )Total sum insured/value of investment
    
    
    3
    
    
    
    50
 (1)
    
    Other Key Management Personnel are defined as the Executive Committee of Abbey and the
Board and Executive Committee of Abbeys parent company, Banco Santander Central Hispano,
S.A., who served during 2005.
     Remuneration of Key Management Personnel
  154




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 2005
    
    
    2004*Key management compensation
    
    £
    
    
    £Short-term employee benefits
    
    
    14,700,960
    
    
    
    7,421,848Post employment benefits
    
    
    4,138,247
    
    
    
    424,747Other long term benefits
    
    
    
    
    
    
    Termination benefits
    
    
    771,661
    
    
    
    450,842Share-based payments
    
    
    984,105
    
    
    
    Total key management compensation
    
    
    20,594,973
    
    
    
    8,297,437
 *
    
    Key management compensation figures for 2004 are only in respect of Directors who served
during 2004 and do not include Other Key Management Personnel.
 Medium Term Incentive Plan
   Parent undertaking and controlling party
  Transactions with related parties
  Interest, fees and other
    
    
    Interest, fees and other
    
    
    Amounts owed by related
    
    
    Amounts owed to relatedincome received
    
    
    expense paid
    
    
    parties
    
    
    parties2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mParent company
    
    
    (16
    )
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    (2,025
    )
    
    
    Fellow subsidiaries
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (82
    )
    
    
    Associates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    
    
    
    
    148
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    (2,107
    )
    
    
    During the year, the company entered into the following transactions with related parties:Interest, fees and other
    
    
    Interest, fees and other
    
    
    Amounts owed by related
    
    
    Amounts owed to relatedincome received
    
    
    expense paid
    
    
    parties
    
    
    parties2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSubsidiaries
    
    
    (1,541
    )
    
    
    (956
    )
    
    
    3,442
    
    
    
    2,069
    
    
    
    34,361
    
    
    
    4,423
    
    
    
    (71,847
    )
    
    
    (26,850
    )Associates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (1,541
    )
    
    
    (956
    )
    
    
    3,442
    
    
    
    2,069
    
    
    
    34,362
    
    
    
    4,423
    
    
    
    (71,847
    )
    
    
    (26,850
    )
  52. Events after the balance sheet date
  53. Financial Instruments
  155




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 GroupFinancialliabilities atHeld for
    
    
    Designated
    
    
    Loans and
    
    
    Available-
    
    
    amortisedtrading
    
    
    at fair value
    
    
    Receivables
    
    
    for-sale
    
    
    cost
    
    
    Derivatives
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    
    
    
    
    
    
    
    
    991
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    991Trading assets
    
    
    58,231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,231Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,855
    
    
    
    11,855Financial
assets designated at fair value
    
    
    
    
    
    
    30,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30,597Loans and advances to banks
    
    
    
    
    
    
    
    
    
    
    444
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    444Loans and advances to customers
    
    
    
    
    
    
    
    
    
    
    95,467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,467Investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    13Total financial assets
    
    
    58,231
    
    
    
    30,597
    
    
    
    96,902
    
    
    
    13
    
    
    
    
    
    
    
    11,855
    
    
    
    197,598Total non financial assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,436Total assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,034LiabilitiesDeposits by banks
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,617
    
    
    
    
    
    
    
    5,617Customer accounts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,889
    
    
    
    
    
    
    
    65,889Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,264
    
    
    
    11,264Trading liabilities
    
    
    52,664
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,664Financial
liabilities designated at fair value
    
    
    
    
    
    
    7,948
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,948Debt securities in issue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,276
    
    
    
    
    
    
    
    21,276Other borrowed funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,244
    
    
    
    
    
    
    
    2,244Subordinated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,205
    
    
    
    
    
    
    
    6,205Investment contract liabilities
    
    
    
    
    
    
    3,306
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,306Total financial liabilities
    
    
    52,664
    
    
    
    11,254
    
    
    
    
    
    
    
    
    
    
    
    101,231
    
    
    
    11,264
    
    
    
    176,413Total non financial liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,511Total liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,924Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,110Total liabilities and equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207,034CompanyFinancialliabilities atDesignated
    
    
    Loans and
    
    
    Available-
    
    
    amortisedat fair value
    
    
    Receivables
    
    
    for-sale
    
    
    cost
    
    
    Derivatives
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    




    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Derivative financial instruments
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,227
    
    
    
    1,227Financial assets designated at fair value
    




    
    790
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    790Loans and advances to banks
    




    
    
    
    
    
    33,009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,009Loans and advances to customers
    




    
    
    
    
    
    95,230
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    95,230Investment securities
    




    
    
    
    
    
    
    
    
    
    272
    
    
    
    
    
    
    
    
    
    
    
    272Total financial assets
    




    
    790
    
    
    
    128,609
    
    
    
    272
    
    
    
    
    
    
    
    1,227
    
    
    
    130,898Total non financial assets
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,502Total assets
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,400LiabilitiesDeposits by banks
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    48,267
    
    
    
    
    
    
    
    48,267Customer accounts
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    79,288
    
    
    
    
    
    
    
    79,288Derivative financial instruments
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    623
    
    
    
    623Debt securities in issue
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Other borrowed funds
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    1,452
    
    
    
    
    
    
    
    1,452Subordinated liabilities
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    6,477
    
    
    
    
    
    
    
    6,477Total financial liabilities
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    135,488
    
    
    
    623
    
    
    
    136,111Total non financial liabilities
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,381Total liabilities
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,492Equity
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,908Total liabilities and equity
    




    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    141,400
 156




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  GroupCarrying
    
    
    
    
    
    
    Surplus/value
    
    
    Fair value
    
    
    (deficit)2005
    
    
    2005
    
    
    2005£m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    991
    
    
    
    991
    
    
    
    Loans and advances to banks
    
    
    444
    
    
    
    444
    
    
    
    Loans and advances to customers
    
    
    95,467
    
    
    
    95,871
    
    
    
    404LiabilitiesDeposits by banks
    
    
    5,617
    
    
    
    5,617
    
    
    
    Customer accounts
    
    
    65,889
    
    
    
    66,066
    
    
    
    (177
    )Debt securities in issue
    
    
    21,276
    
    
    
    20,591
    
    
    
    685Other borrowed funds
    
    
    2,244
    
    
    
    2,540
    
    
    
    (296
    )Subordinated liabilities
    
    
    6,205
    
    
    
    7,204
    
    
    
    (999
    )
 CompanyCarrying
    
    
    
    
    
    
    Surplus/value
    
    
    Fair value
    
    
    (deficit)2005
    
    
    2005
    
    
    2005£m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    370
    
    
    
    370
    
    
    
    Loans and advances to banks
    
    
    33,009
    
    
    
    33,009
    
    
    
    Loans and advances to customers
    
    
    95,230
    
    
    
    95,634
    
    
    
    404LiabilitiesDeposits by banks
    
    
    48,267
    
    
    
    48,267
    
    
    
    Customer accounts
    
    
    79,288
    
    
    
    79,464
    
    
    
    (176
    )Debt securities in issue
    
    
    4
    
    
    
    4
    
    
    
    Other borrowed funds
    
    
    1,452
    
    
    
    1,747
    
    
    
    (295
    )Subordinated liabilities
    
    
    6,477
    
    
    
    7,469
    
    
    
    (992
    )
 GroupCarrying
    
    
    
    
    
    
    Surplus/value
    
    
    Fair value
    
    
    (deficit)2004
    
    
    2004
    
    
    2004£m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    454
    
    
    
    454
    
    
    
    Loans and advances to banks
    
    
    3,068
    
    
    
    3,069
    
    
    
    1Loans and advances to customers
    
    
    96,951
    
    
    
    97,205
    
    
    
    254Non trading derivatives
    
    
    (50
    )
    
    
    (357
    )
    
    
    (307
    )Debt securities
    
    
    672
    
    
    
    724
    
    
    
    52Equity shares & other similar interests
    
    
    30
    
    
    
    32
    
    
    
    2LiabilitiesDeposits by banks
    
    
    8,578
    
    
    
    8,553
    
    
    
    25Customer accounts
    
    
    69,348
    
    
    
    69,540
    
    
    
    (192
    )Debt securities in issue
    
    
    37,067
    
    
    
    35,809
    
    
    
    1,258Other borrowed funds
    
    
    722
    
    
    
    805
    
    
    
    (83
    )Subordinated liabilities
    
    
    5,360
    
    
    
    5,656
    
    
    
    (296
    )Non trading derivatives
    
    
    (255
    )
    
    
    (278
    )
    
    
    23
  Fair value measurement
    157




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Fair value management
   Assets:
 Cash and balances at central banks/ Loans and advances to banks
  Loans and advances to customers
  a) Variable rate
  b) Fixed rate
  Liabilities:
 Deposits by banks
  Deposits by customers
  Debt securities in issue and subordinated liabilities
  Intra Group balances
  Financial Instruments disclosures under UK GAAP Standard FRS 13 Derivatives and Other
Financial Instruments: Disclosures
  Interest rate risk
   158




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Interest rate repricing gap at 31 December 2004
 In more
    
    
    In morethan 3
    
    
    than 6months
    
    
    monthsbut not
    
    
    but not
    
    
    In more than
    
    
    
    
    
    
    Non-Not more
    
    
    more
    
    
    more than
    
    
    1 year but
    
    
    In more
    
    
    interest
    
    
    Non-than 3
    
    
    than 6
    
    
    12
    
    
    not more
    
    
    than 5
    
    
    bearing
    
    
    Tradingmonths
    
    
    months
    
    
    months
    
    
    than 5 years
    
    
    years
    
    
    amounts
    
    
    Total
    
    
    Trading
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsTreasury and other eligible
bills
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,990
    
    
    
    1,990Cash and loans and advances to
banks(1)
    
    
    453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    967
    
    
    
    1,420
    
    
    
    9,182
    
    
    
    10,602Loans and advances to
customers(2)
    
    
    59,282
    
    
    
    1,982
    
    
    
    3,305
    
    
    
    12,903
    
    
    
    3,242
    
    
    
    1,138
    
    
    
    81,852
    
    
    
    11,357
    
    
    
    93,209Net investment in finance leases
    
    
    948
    
    
    
    46
    
    
    
    146
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    1,148
    
    
    
    
    
    
    
    1,148Securities and investments
    
    
    394
    
    
    
    173
    
    
    
    44
    
    
    
    40
    
    
    
    13
    
    
    
    38
    
    
    
    702
    
    
    
    23,157
    
    
    
    23,859Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,376
    
    
    
    9,376
    
    
    
    2,377
    
    
    
    11,753Assets of long-term assurance
funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,180
    
    
    
    27,180
    
    
    
    
    
    
    
    27,180Total assets
    
    
    61,077
    
    
    
    2,201
    
    
    
    3,495
    
    
    
    12,945
    
    
    
    3,257
    
    
    
    38,703
    
    
    
    121,678
    
    
    
    48,063
    
    
    
    169,741LiabilitiesDeposits by banks (1)
    
    
    (349
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    (510
    )
    
    
    (17,902
    )
    
    
    (18,412
    )Customer accounts
    
    
    (63,690
    )
    
    
    (1,084
    )
    
    
    (2,016
    )
    
    
    (2,541
    )
    
    
    (17
    )
    
    
    
    
    
    
    (69,348
    )
    
    
    (9,502
    )
    
    
    (78,850
    )Debt securities in issue
    
    
    (7,991
    )
    
    
    (1,003
    )
    
    
    (444
    )
    
    
    (3,332
    )
    
    
    (252
    )
    
    
    
    
    
    
    (13,022
    )
    
    
    (8,947
    )
    
    
    (21,969
    )Subordinated liabilities and
other long-term capital
instruments
    
    
    (405
    )
    
    
    
    
    
    
    (388
    )
    
    
    (1,528
    )
    
    
    (3,057
    )
    
    
    (704
    )
    
    
    (6,082
    )
    
    
    
    
    
    
    (6,082
    )Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,431
    )
    
    
    (5,431
    )
    
    
    (6,381
    )
    
    
    (11,812
    )Funding of trading book
    
    
    5,331
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,331
    
    
    
    (5,331
    )
    
    
    Liabilities of long-term
assurance funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,180
    )
    
    
    (27,180
    )
    
    
    
    
    
    
    (27,180
    )Minority
interests 
 non-equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (512
    )
    
    
    (512
    )
    
    
    
    
    
    
    (512
    )Shareholders
funds
 non-equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (632
    )
    
    
    (632
    )
    
    
    
    
    
    
    (632
    ) equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )
    
    
    (4,292
    )
    
    
    
    
    
    
    (4,292
    )Total liabilities
    
    
    (67,104
    )
    
    
    (2,087
    )
    
    
    (2,848
    )
    
    
    (7,401
    )
    
    
    (3,326
    )
    
    
    (38,912
    )
    
    
    (121,678
    )
    
    
    (48,063
    )
    
    
    (169,741
    )Off-balance sheet items(3)
    
    
    (5,295
    )
    
    
    1,730
    
    
    
    1,446
    
    
    
    (2,022
    )
    
    
    4,218
    
    
    
    (77
    )Interest rate repricing gap
    
    
    (11,322
    )
    
    
    1,844
    
    
    
    2,093
    
    
    
    3,522
    
    
    
    4,149
    
    
    
    (286
    )2004 Cumulative gap
    
    
    (11,322
    )
    
    
    (9,478
    )
    
    
    (7,385
    )
    
    
    (3,863
    )
    
    
    286
    
    
    
    
 
 (1)
    
    Non-interest bearing items within Loans and advances to banks and Deposits by banks include
items in the course of collection and items in the course of transmission, respectively. These
are short-term receipts and payments within the UK retail banking clearing system. The
remaining non-interest bearing item within Loans and advances to banks relates to the interest
free deposit maintained with the Bank of England.(2)
    
    Non-interest bearing items within Loans and advances to customers relate to non-accruing
lendings after deduction of associated provisions.(3)
    
    Off-balance sheet items are classified in the table above according to the interest terms
contained in the contracts.   Foreign exchange risk
  159




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
    Borrowings hedgingNet investments in
    
    
    net investment in
    
    
    Net structuraloperations
    
    
    overseas operations
    
    
    currency exposures2004
    
    
    2004
    
    
    2004£m
    
    
    £m
    
    
    £mEuro  Subsidiary
    
    
    
    
    
    
    
    
    
    
      Branches
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Other non-sterling amounts
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    2004  Net foreign currency monetary assets/(liabilities)Sterling
    
    
    US Dollar
    
    
    Euro
    
    
    Other
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSterling
    
    
    n/a
    
    
    
    527
    
    
    
    70
    
    
    
    32
    
    
    
    629Euro
    
    
    88
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    8888
    
    
    
    527
    
    
    
    70
    
    
    
    32
    
    
    
    717
  54. Explanation of transition to International Financial Reporting Standards
    160




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Reconciliation of profit attributable to shareholders under UK GAAP to profit attributable to
shareholders under IFRS for the 12 months to 31 December 2004
 Group2004£mProfit attributable to ShareholdersProfit before tax under UK GAAP
    
    
    273Employee benefits
    
    
    1Leasing
    
    
    (11
    )Software
    
    
    (109
    )Goodwill
    
    
    14Other intangible assets
    
    
    (147
    )New entities
    
    
    (1
    )Insurance business
    
    
    (45
    )Other
    
    
    4Profit before tax under IFRS
    
    
    (21
    )Taxation  UK GAAP
    
    
    (144
    )Taxation  IFRS adjustments
    
    
    111Profit attributable to shareholders under IFRS
    
    
    (54
    )
 Reconciliation of shareholders funds under UK GAAP to shareholders equity under IFRS at 1
January 2004 and 31 December 2004
 Group
    
    
    
    
    
    
    Company1 Jan.2004
    
    
    31 Dec 2004
    
    
    1 Jan.2004
    
    
    31 Dec 2004£m
    
    
    £m
    
    
    £m
    
    
    £mShareholders EquityShareholders equity as previously reported under UK GAAP
    
    
    5,331
    
    
    
    4,924
    
    
    
    4,836
    
    
    
    4,079Employee benefits
    
    
    (1,104
    )
    
    
    (1,202
    )
    
    
    (990
    )
    
    
    (1,089
    )Leasing
    
    
    (151
    )
    
    
    (162
    )
    
    
    (1
    )
    
    
    Software
    
    
    108
    
    
    
    (1
    )
    
    
    63
    
    
    
    5Goodwill
    
    
    
    
    
    
    14
    
    
    
    
    
    
    
    Other intangible assets
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    Dividends
    
    
    245
    
    
    
    
    
    
    
    245
    
    
    
    New entities
    
    
    10
    
    
    
    (3
    )
    
    
    
    
    
    
    Other
    
    
    (10
    )
    
    
    6
    
    
    
    (44
    )
    
    
    (42
    )Tax impact on the above adjustments
    
    
    285
    
    
    
    360
    
    
    
    288
    
    
    
    334Deferred taxation
    
    
    (90
    )
    
    
    (69
    )
    
    
    
    
    
    
    Total shareholders equity under IFRS
    
    
    4,624
    
    
    
    3,720
    
    
    
    4,397
    
    
    
    3,287
 Explanation of material adjustments to profit attributable to shareholders and shareholders
equity for 2004
 Insurance Business
  Securitisation
  Employee benefits
 a) Pensions
   b) Stock Option Expensing
  161




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
   Leasing
  Software Capitalisation
  Goodwill
  Intangible Assets
  Dividends
  New Entities
  Explanation of material adjustments to cash flow statement for 2004
    162




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Reconciliation of consolidated balance sheet at 31 December 2004
 Group
    
    
    
    
    
    
    
    
    
    
    CompanyEffect of
    
    
    
    
    
    
    
    
    
    
    Effect oftransition
    
    
    
    
    
    
    
    
    
    
    transitionUK GAAP
    
    
    to IFRS
    
    
    IFRS
    
    
    UK GAAP
    
    
    to IFRS
    
    
    IFRS£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mASSETSCash and balances at central banks
    
    
    454
    
    
    
    
    
    
    
    454
    
    
    
    443
    
    
    
    
    
    
    
    443Treasury bills and other eligible bills
    
    
    1,990
    
    
    
    (1,990
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Derivative financial instruments
    
    
    
    
    
    
    2,377
    
    
    
    2,377
    
    
    
    
    
    
    
    
    
    
    
    Loans and advances to banks
    
    
    10,148
    
    
    
    1,603
    
    
    
    11,751
    
    
    
    23,605
    
    
    
    
    
    
    
    23,605Loans and advances to customers
    
    
    93,209
    
    
    
    16,207
    
    
    
    109,416
    
    
    
    79,857
    
    
    
    3
    
    
    
    79,860Debt securities
    
    
    22,683
    
    
    
    14,327
    
    
    
    37,010
    
    
    
    405
    
    
    
    
    
    
    
    405Equity shares and other variable interest securities
    
    
    1,176
    
    
    
    9,616
    
    
    
    10,792
    
    
    
    1
    
    
    
    
    
    
    
    1Investment in associated undertakings
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    
    19
    
    
    
    
    
    
    
    19Net investment in finance leases
    
    
    1,148
    
    
    
    (1,148
    )
    
    
    
    
    
    
    3
    
    
    
    (3
    )
    
    
    Long-term assurance business
    
    
    2,968
    
    
    
    (2,968
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment in subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    8,250Intangible assets
    
    
    317
    
    
    
    (142
    )
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    Value of in-force business
    
    
    
    
    
    
    1,844
    
    
    
    1,844
    
    
    
    
    
    
    
    
    
    
    
    Property, plant and equipment
    
    
    246
    
    
    
    16
    
    
    
    262
    
    
    
    226
    
    
    
    5
    
    
    
    231Operating lease assets
    
    
    2,341
    
    
    
    (66
    )
    
    
    2,275
    
    
    
    
    
    
    
    
    
    
    
    Investment property
    
    
    
    
    
    
    1,228
    
    
    
    1,228
    
    
    
    
    
    
    
    
    
    
    
    Prepayments and accrued income
    
    
    1,195
    
    
    
    (1,195
    )
    
    
    
    
    
    
    379
    
    
    
    (379
    )
    
    
    Current tax asset
    
    
    
    
    
    
    242
    
    
    
    242
    
    
    
    
    
    
    
    242
    
    
    
    242Deferred tax assets
    
    
    
    
    
    
    501
    
    
    
    501
    
    
    
    160
    
    
    
    334
    
    
    
    494Other assets
    
    
    4,661
    
    
    
    1,720
    
    
    
    6,381
    
    
    
    1,126
    
    
    
    379
    
    
    
    1,505Assets of long-term assurance funds
    
    
    27,180
    
    
    
    (27,180
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    
    169,741
    
    
    
    14,992
    
    
    
    184,733
    
    
    
    114,474
    
    
    
    581
    
    
    
    115,055LIABILITIESDeposits by banks
    
    
    18,412
    
    
    
    
    
    
    
    18,412
    
    
    
    35,697
    
    
    
    
    
    
    
    35,697Customer accounts
    
    
    78,850
    
    
    
    (190
    )
    
    
    78,660
    
    
    
    65,910
    
    
    
    
    
    
    
    65,910Derivative financial instruments
    
    
    
    
    
    
    3,665
    
    
    
    3,665
    
    
    
    
    
    
    
    
    
    
    
    Debt securities in issue
    
    
    21,969
    
    
    
    15,098
    
    
    
    37,067
    
    
    
    4
    
    
    
    
    
    
    
    4Other borrowed funds
    
    
    
    
    
    
    722
    
    
    
    722
    
    
    
    
    
    
    
    722
    
    
    
    722Accruals and deferred income
    
    
    1,729
    
    
    
    (1,729
    )
    
    
    
    
    
    
    1,008
    
    
    
    (1,008
    )
    
    
    Subordinated liabilities
    
    
    5,360
    
    
    
    124
    
    
    
    5,484
    
    
    
    5,673
    
    
    
    1
    
    
    
    5,674Other long-term capital instruments
    
    
    722
    
    
    
    (722
    )
    
    
    
    
    
    
    722
    
    
    
    (722
    )
    
    
    Insurance and reinsurance liabilities
    
    
    
    
    
    
    24,923
    
    
    
    24,923
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    
    9,250
    
    
    
    (406
    )
    
    
    8,844
    
    
    
    1,188
    
    
    
    1,219
    
    
    
    2,407Liabilities of long-term assurance funds
    
    
    27,180
    
    
    
    (27,180
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other provisions
    
    
    258
    
    
    
    44
    
    
    
    302
    
    
    
    193
    
    
    
    44
    
    
    
    237Current tax liability
    
    
    
    
    
    
    161
    
    
    
    161
    
    
    
    
    
    
    
    57
    
    
    
    57Deferred tax liabilities
    
    
    551
    
    
    
    513
    
    
    
    1,064
    
    
    
    
    
    
    
    
    
    
    
    Retirement benefit obligations
    
    
    24
    
    
    
    1,173
    
    
    
    1,197
    
    
    
    
    
    
    
    1,060
    
    
    
    1,060Minority Interest  non-equity
    
    
    512
    
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    164,817
    
    
    
    16,196
    
    
    
    181,013
    
    
    
    110,395
    
    
    
    1,373
    
    
    
    111,768EQUITYCalled up share capital  ordinary shares
    
    
    148
    
    
    
    
    
    
    
    148
    
    
    
    148
    
    
    
    
    
    
    
    148Called up share capital  preference shares
    
    
    325
    
    
    
    
    
    
    
    325
    
    
    
    325
    
    
    
    
    
    
    
    325Share premium account
    
    
    2,164
    
    
    
    
    
    
    
    2,164
    
    
    
    2,164
    
    
    
    
    
    
    
    2,164Retained earnings
    
    
    2,287
    
    
    
    (1,204
    )
    
    
    1,083
    
    
    
    1,442
    
    
    
    (792
    )
    
    
    650Total shareholders equity
    
    
    4,924
    
    
    
    (1,204
    )
    
    
    3,720
    
    
    
    4,079
    
    
    
    (792
    )
    
    
    3,287Total equity and liabilities
    
    
    169,741
    
    
    
    14,992
    
    
    
    184,733
    
    
    
    114,474
    
    
    
    581
    
    
    
    115,055
 163




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Restated Group balance sheet at 31 December 2004
 GroupTotalInsur-
    
    
    
    
    
    
    Emplo-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    IFRSUK
    
    
    Reclassi-
    
    
    ance
    
    
    Securit-
    
    
    yee
    
    
    
    
    
    
    Soft-
    
    
    Good-
    
    
    Intang-
    
    
    New
    
    
    
    
    
    
    Adjust-GAAP
    
    
    fication
    
    
    Business
    
    
    isation
    
    
    benefits
    
    
    Leasing
    
    
    ware
    
    
    will
    
    
    ibles
    
    
    Entities
    
    
    Other
    
    
    ment
    
    
    IFRS£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCash and balances at
central banks
    
    
    454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    454Treasury bills and other
eligible bills
    
    
    1,990
    
    
    
    (1,990
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,990
    )
    
    
    Derivatives
    
    
    
    
    
    
    2,377
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,377
    
    
    
    2,377Loans and advances to banks
    
    
    10,148
    
    
    
    
    
    
    
    1,603
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,603
    
    
    
    11,751Loans and advances to
customers
    
    
    93,209
    
    
    
    1,148
    
    
    
    
    
    
    
    15,098
    
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    16,207
    
    
    
    109,416Debt securities
    
    
    22,683
    
    
    
    1,990
    
    
    
    11,335
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,002
    
    
    
    
    
    
    
    14,327
    
    
    
    37,010Equity shares and other
variable interest securities
    
    
    1,176
    
    
    
    
    
    
    
    10,232
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (616
    )
    
    
    
    
    
    
    9,616
    
    
    
    10,792Investment in associated
undertakings
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Net investment in finance
leases
    
    
    1,148
    
    
    
    (1,148
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,148
    )
    
    
    Long-term assurance business
    
    
    2,968
    
    
    
    
    
    
    
    (2,968
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,968
    )
    
    
    Intangible assets
    
    
    317
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    (147
    )
    
    
    
    
    
    
    
    
    
    
    (142
    )
    
    
    175Value of in-force business
    
    
    
    
    
    
    
    
    
    
    1,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,844
    
    
    
    1,844Property, plant and
equipment
    
    
    246
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    16
    
    
    
    262Operating lease assets
    
    
    2,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66
    )
    
    
    2,275Investment property
    
    
    
    
    
    
    
    
    
    
    1,237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    1,228
    
    
    
    1,228Prepayments and accrued
income
    
    
    1,195
    
    
    
    (1,195
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,195
    )
    
    
    Current tax asset
    
    
    
    
    
    
    242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    242Deferred tax assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    501
    
    
    
    501Other assets
    
    
    4,661
    
    
    
    (1,182
    )
    
    
    2,911
    
    
    
    
    
    
    
    
    
    
    
    (56
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    1,720
    
    
    
    6,381Assets of long-term
assurance funds
    
    
    27,180
    
    
    
    
    
    
    
    (27,180
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,180
    )
    
    
    Total assets
    
    
    169,741
    
    
    
    242
    
    
    
    (986
    )
    
    
    15,098
    
    
    
    
    
    
    
    (162
    )
    
    
    (1
    )
    
    
    14
    
    
    
    (147
    )
    
    
    434
    
    
    
    500
    
    
    
    14,992
    
    
    
    184,733LIABILITIESDeposits by banks
    
    
    18,412
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,412Customer accounts
    
    
    78,850
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190
    )
    
    
    
    
    
    
    (190
    )
    
    
    78,660Derivatives financial
instruments
    
    
    
    
    
    
    3,665
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,665
    
    
    
    3,665Debt securities in issue
    
    
    21,969
    
    
    
    
    
    
    
    
    
    
    
    15,098
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,098
    
    
    
    37,067Other borrowed funds
    
    
    
    
    
    
    722
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722
    
    
    
    722Accruals and deferred income
    
    
    1,729
    
    
    
    (1,729
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,729
    )
    
    
    Subordinated liabilities
    
    
    5,360
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    5,484Other long-term capital
instruments
    
    
    722
    
    
    
    (722
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (722
    )
    
    
    Insurance and reinsurance
liabilities
    
    
    
    
    
    
    
    
    
    
    24,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    523
    
    
    
    (4
    )
    
    
    24,923
    
    
    
    24,923Other liabilities
    
    
    9,250
    
    
    
    (1,855
    )
    
    
    1,318
    
    
    
    
    
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    (2
    )
    
    
    (406
    )
    
    
    8,844Liabilities of long-term
assurance funds
    
    
    27,180
    
    
    
    
    
    
    
    (27,180
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,180
    )
    
    
    Other provisions
    
    
    258
    
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    302Current tax liability
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161
    
    
    
    161Deferred tax liabilities
    
    
    551
    
    
    
    
    
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    209
    
    
    
    513
    
    
    
    1,064Retirement benefit
obligations
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,173
    
    
    
    1,197Minority Interest 
non-equity
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    512Total liabilities
    
    
    164,817
    
    
    
    242
    
    
    
    (986
    )
    
    
    15,098
    
    
    
    1,202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437
    
    
    
    203
    
    
    
    16,196
    
    
    
    181,013EQUITYCalled up share capital 
ordinary shares
    
    
    148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148Called up share capital 
preference shares
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    325Share premium account
    
    
    2,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,164Retained earnings
    
    
    2,287
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,202
    )
    
    
    (162
    )
    
    
    (1
    )
    
    
    14
    
    
    
    (147
    )
    
    
    (3
    )
    
    
    297
    
    
    
    (1,204
    )
    
    
    1,083Total shareholders equity
    
    
    4,924
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,202
    )
    
    
    (162
    )
    
    
    (1
    )
    
    
    14
    
    
    
    (147
    )
    
    
    (3
    )
    
    
    297
    
    
    
    (1,204
    )
    
    
    3,720Total equity and liabilities
    
    
    169,741
    
    
    
    242
    
    
    
    (986
    )
    
    
    15,098
    
    
    
    
    
    
    
    (162
    )
    
    
    (1
    )
    
    
    14
    
    
    
    (147
    )
    
    
    434
    
    
    
    500
    
    
    
    14,992
    
    
    
    184,733
 164




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Restated Company balance sheet at 31 December 2004
 CompanyEmployee
    
    
    
    
    
    
    
    
    
    
    Total IFRSUK GAAP
    
    
    Reclassification
    
    
    benefits
    
    
    Software
    
    
    Other
    
    
    Adjustment
    
    
    IFRS£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mASSETSCash and balances at central banks
    
    
    443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    443Loans and advances to banks
    
    
    23,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,605Loans and advances to customers
    
    
    79,857
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    79,860Debt securities
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    405Equity shares and other variable
interest securities
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Investment in associated
undertakings
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Net investment in finance leases
    
    
    3
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Investment in subsidiary
undertakings
    
    
    8,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,250Property, plant and equipment
    
    
    226
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5
    
    
    
    231Prepayments and accrued income
    
    
    379
    
    
    
    (379
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (379
    )
    
    
    Current tax asset
    
    
    
    
    
    
    242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    242Deferred tax assets
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    334
    
    
    
    334
    
    
    
    494Other assets
    
    
    1,126
    
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    1,505Total assets
    
    
    114,474
    
    
    
    242
    
    
    
    
    
    
    
    5
    
    
    
    334
    
    
    
    581
    
    
    
    115,055LIABILITIESDeposits by banks
    
    
    35,697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,697Customer accounts
    
    
    65,910
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,910Debt securities in issue
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Other borrowed funds
    
    
    
    
    
    
    722
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722
    
    
    
    722Accruals and deferred income
    
    
    1,008
    
    
    
    (1,008
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,008
    )
    
    
    Subordinated liabilities
    
    
    5,673
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    5,674Other long-term capital
instruments
    
    
    722
    
    
    
    (722
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (722
    )
    
    
    Other liabilities
    
    
    1,188
    
    
    
    1,193
    
    
    
    29
    
    
    
    
    
    
    
    (3
    )
    
    
    1,219
    
    
    
    2,407Other provisions
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44
    
    
    
    44
    
    
    
    237Current tax liability
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    57Retirement benefit obligations
    
    
    
    
    
    
    
    
    
    
    1,060
    
    
    
    
    
    
    
    
    
    
    
    1,060
    
    
    
    1,060Total liabilities
    
    
    110,395
    
    
    
    242
    
    
    
    1,089
    
    
    
    
    
    
    
    42
    
    
    
    1,373
    
    
    
    111,768EQUITYCalled up share capital 
ordinary shares
    
    
    148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148Called up share capital 
preference shares
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    325Share premium account
    
    
    2,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,164Retained earnings
    
    
    1,442
    
    
    
    
    
    
    
    (1,089
    )
    
    
    5
    
    
    
    292
    
    
    
    (792
    )
    
    
    650Total shareholders equity
    
    
    4,079
    
    
    
    
    
    
    
    (1,089
    )
    
    
    5
    
    
    
    292
    
    
    
    (792
    )
    
    
    3,287Total equity and liabilities
    
    
    114,474
    
    
    
    242
    
    
    
    
    
    
    
    5
    
    
    
    334
    
    
    
    581
    
    
    
    115,055
 165




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Reconciliation of the Group income statement for the year ended 31 December 2004
 GroupEffect of transitionUK GAAP
    
    
    to IFRS
    
    
    IFRS£m
    
    
    £m
    
    
    £mInterest and similar income
    
    
    4,925
    
    
    
    712
    
    
    
    5,637Interest expense and similar charges
    
    
    (3,395
    )
    
    
    (779
    )
    
    
    (4,174
    )Net Interest Income
    
    
    1,530
    
    
    
    (67
    )
    
    
    1,463Fees and commission income
    
    
    639
    
    
    
    14
    
    
    
    653Fee and commission expense
    
    
    (114
    )
    
    
    (1
    )
    
    
    (115
    )Net fee and commission income
    
    
    525
    
    
    
    13
    
    
    
    538Dividend income
    
    
    1
    
    
    
    
    
    
    
    1Net earned insurance premiums
    
    
    
    
    
    
    750
    
    
    
    750Net trading income
    
    
    
    
    
    
    846
    
    
    
    846Dealing profits
    
    
    268
    
    
    
    (268
    )
    
    
    Income from long-term assurance business
    
    
    76
    
    
    
    (76
    )
    
    
    Other operating income
    
    
    244
    
    
    
    97
    
    
    
    341Total operating income
    
    
    2,644
    
    
    
    1,295
    
    
    
    3,939Net insurance claims incurred and movement in policyholder liabilities
    
    
    
    
    
    
    (1,094
    )
    
    
    (1,094
    )Total income net of insurance claims
    
    
    2,644
    
    
    
    201
    
    
    
    2,845Administration expenses
    
    
    (2,053
    )
    
    
    (168
    )
    
    
    (2,221
    )Depreciation and amortisation
    
    
    (253
    )
    
    
    (294
    )
    
    
    (547
    )Total operating expenses
    
    
    (2,306
    )
    
    
    (462
    )
    
    
    (2,768
    )Impairment losses on loans and advances
    
    
    36
    
    
    
    19
    
    
    
    55Impairment recoveries/ (losses) on fixed asset investments
    
    
    80
    
    
    
    
    
    
    
    80Provisions for contingent liabilities and commitments
    
    
    (233
    )
    
    
    
    
    
    
    (233
    )Operating profit/(loss)
    
    
    221
    
    
    
    (242
    )
    
    
    (21
    )Share of profit of associates
    
    
    6
    
    
    
    (6
    )
    
    
    Profit on disposal of group undertakings
    
    
    46
    
    
    
    (46
    )
    
    
    Profit/(loss) before tax
    
    
    273
    
    
    
    (294
    )
    
    
    (21
    )Taxation expense
    
    
    (144
    )
    
    
    111
    
    
    
    (33
    )Profit/(loss) for the year
    
    
    129
    
    
    
    (183
    )
    
    
    (54
    )
 166




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Restated Group income statement for the year ended 31 December 2004
 Recla-
    
    
    Empl-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    Insur-
    
    
    
    
    
    
    
    
    
    
    Total IFRSssifica-
    
    
    oyee
    
    
    Leasi
    
    
    Soft-
    
    
    Good-
    
    
    Intang-
    
    
    New
    
    
    ance
    
    
    Securitis
    
    
    
    
    
    
    Adjust-UK GAAP
    
    
    tion
    
    
    benefits
    
    
    ng
    
    
    ware
    
    
    will
    
    
    ibles
    
    
    Entities
    
    
    Business
    
    
    -ation
    
    
    Other
    
    
    ment
    
    
    IFRS£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mInterest and similar
income
    
    
    4,925
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    717
    
    
    
    
    
    
    
    712
    
    
    
    5,637Interest expense and
similar charges
    
    
    (3,395
    )
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (736
    )
    
    
    
    
    
    
    (779
    )
    
    
    (4,174
    )Net Interest Income
    
    
    1,530
    
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (67
    )
    
    
    1,463Fees and commission
income
    
    
    639
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    14
    
    
    
    653Fee and commission
expense
    
    
    (114
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    (115
    )Net fee and commission
income
    
    
    525
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13
    
    
    
    538Dividend income
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net earned insurance
premiums
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    750
    
    
    
    750Net trading income 
banking
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    596
    
    
    
    
    
    
    
    
    
    
    
    846
    
    
    
    846Dealing profits
    
    
    268
    
    
    
    (268
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (268
    )
    
    
    Income from long-term
assurance business
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    Other operating income
    
    
    244
    
    
    
    52
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    19
    
    
    
    
    
    
    
    (1
    )
    
    
    97
    
    
    
    341Total operating income
    
    
    2,644
    
    
    
    52
    
    
    
    (43
    )
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    1,289
    
    
    
    (19
    )
    
    
    12
    
    
    
    1,295
    
    
    
    3,939Net insurance claims
incurred and movement in
policyholder liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    (1,111
    )
    
    
    
    
    
    
    
    
    
    
    (1,094
    )
    
    
    (1,094
    )Total income net of
insurance claims
    
    
    2,644
    
    
    
    52
    
    
    
    (43
    )
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    178
    
    
    
    (19
    )
    
    
    12
    
    
    
    201
    
    
    
    2,845Administration expenses
    
    
    (2,053
    )
    
    
    
    
    
    
    44
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    (223
    )
    
    
    
    
    
    
    4
    
    
    
    (168
    )
    
    
    (2,221
    )Depreciation and
amortisation
    
    
    (253
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    (118
    )
    
    
    14
    
    
    
    (147
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (294
    )
    
    
    (547
    )Total operating expenses
    
    
    (2,306
    )
    
    
    
    
    
    
    44
    
    
    
    (31
    )
    
    
    (109
    )
    
    
    14
    
    
    
    (147
    )
    
    
    (2
    )
    
    
    (223
    )
    
    
    
    
    
    
    (8
    )
    
    
    (462
    )
    
    
    (2,768
    )Impairment losses on
loans and advances
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    19
    
    
    
    55Impairment recoveries/
(losses) on fixed asset
investments
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Provisions for
contingent liabilities and
commitments
    
    
    (233
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (233
    )Operating profit
    
    
    221
    
    
    
    52
    
    
    
    1
    
    
    
    (11
    )
    
    
    (109
    )
    
    
    14
    
    
    
    (147
    )
    
    
    (1
    )
    
    
    (45
    )
    
    
    
    
    
    
    4
    
    
    
    (242
    )
    
    
    (21
    )Income for associated
undertakings
    
    
    6
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    Profit on disposal of
group undertakings
    
    
    46
    
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    Profit/(loss) before tax
    
    
    273
    
    
    
    
    
    
    
    1
    
    
    
    (11
    )
    
    
    (109
    )
    
    
    14
    
    
    
    (147
    )
    
    
    (1
    )
    
    
    (45
    )
    
    
    
    
    
    
    4
    
    
    
    (294
    )
    
    
    (21
    )Taxation expense
    
    
    (144
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45
    
    
    
    
    
    
    
    66
    
    
    
    111
    
    
    
    (33
    )Profit/(loss) for the
year
    
    
    129
    
    
    
    
    
    
    
    1
    
    
    
    (11
    )
    
    
    (109
    )
    
    
    14
    
    
    
    (147
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    (183
    )
    
    
    (54
    )
 Key impact analysis on the Opening Balance Sheet as at 1 January 2005
 Reconciliation of previously reported shareholder funds under UK GAAP to total shareholders
equity under IFRS at 1 January 2005
 Group
    
    
    CompanyAt 1 January
    
    
    At 1 January2005
    
    
    2005£m
    
    
    £mShareholders Equity
Shareholders equity as previously reported under UK GAAP
    
    
    4,924
    
    
    
    4,079Non IAS 32, IAS 39 and IFRS 4 adjustments
    
    
    (1,204
    )
    
    
    (792
    )Shareholders equity before IAS 32, IAS 39 and IFRS 4 adjustments
    
    
    3,720
    
    
    
    3,287De-recognition of liabilities
    
    
    (154
    )
    
    
    (154
    )Fees & Commissions
    
    
    (73
    )
    
    
    (113
    )Non-trading derivatives
    
    
    (288
    )
    
    
    (238
    )Fair value classification
    
    
    141
    
    
    
    16Preference shares reclassification to debt
    
    
    (570
    )
    
    
    (570
    )Life investment products
    
    
    (84
    )
    
    
    Other
    
    
    (34
    )
    
    
    (51
    )Deferred tax
    
    
    29
    
    
    
    Tax impact of the above items
    
    
    108
    
    
    
    146Total shareholders equity under IFRS
    
    
    2,795
    
    
    
    2,323
 167




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Explanation of material adjustments to shareholders equity at 1 January 2005
 Reclassifications
  Offsetting of financial assets and liabilities
  Derecognition of liabilities
  Fees and Commissions
  Non-trading derivatives
   Fair value classification
  Group
    
    
    CompanyUK GAAP
    
    
    IFRS
    
    
    UK GAAP
    
    
    IFRSCarrying value
    
    
    Fair value
    
    
    Carrying value
    
    
    Fair value£m
    
    
    £m
    
    
    £m
    
    
    £mFinancial Assets:Financial assets designated at fair value
    
    
    3,996
    
    
    
    4,306
    
    
    
    695
    
    
    
    711Available for sale securities
    
    
    11
    
    
    
    11
    
    
    
    379
    
    
    
    379Financial Liabilities:Financial Liabilities designated at fair value
    
    
    7,758
    
    
    
    7,927
    
    
    
    
    
    
    
    
 Preference share reclassification
  168




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Life investment products
  Reconciliation of consolidated balance sheet at 1 January 2005
 Group
    
    
    
    
    
    
    
    
    
    CompanyEffect of
    
    
    
    
    
    
    
    
    
    
    Effect ofadoption
    
    
    
    
    
    
    
    
    
    
    adoptionof IAS 32,
    
    
    
    
    
    
    
    
    
    
    of IAS 32,IFRSs
    
    
    IAS 39
    
    
    IFRSs
    
    
    IFRSs
    
    
    IAS 39
    
    
    IFRSs31 Dec
    
    
    and IFRS
    
    
    1 Jan
    
    
    31 Dec
    
    
    and IFRS
    
    
    1 Jan2004
    
    
    4
    
    
    2005
    
    
    2004
    
    
    4
    
    
    2005£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mASSETSCash and balances at central banks
    
    
    454
    
    
    
    
    
    
    
    454
    
    
    
    443
    
    
    
    
    
    
    
    443Trading assets
    
    
    
    
    
    
    45,001
    
    
    
    45,001
    
    
    
    
    
    
    
    
    
    
    
    Derivative financial instruments
    
    
    2,377
    
    
    
    7,761
    
    
    
    10,138
    
    
    
    
    
    
    
    257
    
    
    
    257Financial assets at fair value
    
    
    
    
    
    
    26,255
    
    
    
    26,255
    
    
    
    
    
    
    
    711
    
    
    
    711Loans and advances to banks
    
    
    11,751
    
    
    
    (6,440
    )
    
    
    5,311
    
    
    
    23,605
    
    
    
    
    
    
    
    23,605Loans and advances to customers
    
    
    109,416
    
    
    
    (15,026
    )
    
    
    94,390
    
    
    
    79,860
    
    
    
    12,194
    
    
    
    92,054Debt securities
    
    
    37,010
    
    
    
    (37,010
    )
    
    
    
    
    
    
    405
    
    
    
    (405
    )
    
    
    Equity shares and other variable interest securities
    
    
    10,792
    
    
    
    (10,792
    )
    
    
    
    
    
    
    1
    
    
    
    (1
    )
    
    
    Available for sale securities
    
    
    
    
    
    
    11
    
    
    
    11
    
    
    
    
    
    
    
    379
    
    
    
    379Investment in associated undertakings
    
    
    25
    
    
    
    
    
    
    
    25
    
    
    
    19
    
    
    
    
    
    
    
    19Investment in subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    8,250Intangible assets
    
    
    175
    
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    Value of in-force business
    
    
    1,844
    
    
    
    (67
    )
    
    
    1,777
    
    
    
    
    
    
    
    
    
    
    
    Property, plant and equipment
    
    
    262
    
    
    
    
    
    
    
    262
    
    
    
    231
    
    
    
    
    
    
    
    231Operating lease assets
    
    
    2,275
    
    
    
    
    
    
    
    2,275
    
    
    
    
    
    
    
    
    
    
    
    Investment property
    
    
    1,228
    
    
    
    
    
    
    
    1,228
    
    
    
    
    
    
    
    
    
    
    
    Current tax asset
    
    
    242
    
    
    
    
    
    
    
    242
    
    
    
    242
    
    
    
    
    
    
    
    242Deferred tax assets
    
    
    501
    
    
    
    29
    
    
    
    530
    
    
    
    494
    
    
    
    146
    
    
    
    640Macro hedge of interest rate risk
    
    
    
    
    
    
    10
    
    
    
    10
    
    
    
    
    
    
    
    10
    
    
    
    10Other assets
    
    
    6,381
    
    
    
    179
    
    
    
    6,560
    
    
    
    1,505
    
    
    
    (157
    )
    
    
    1,348Total assets
    
    
    184,733
    
    
    
    9,911
    
    
    
    194,644
    
    
    
    115,055
    
    
    
    13,134
    
    
    
    128,189LIABILITIESDeposits by banks
    
    
    18,412
    
    
    
    (7,314
    )
    
    
    11,098
    
    
    
    35,697
    
    
    
    40
    
    
    
    35,737Customer accounts
    
    
    78,660
    
    
    
    (7,566
    )
    
    
    71,094
    
    
    
    65,910
    
    
    
    13,016
    
    
    
    78,926Derivative financial instruments and other trading liabilities
    
    
    3,665
    
    
    
    7,888
    
    
    
    11,553
    
    
    
    
    
    
    
    
    
    
    
    Trading liabilities
    
    
    
    
    
    
    27,021
    
    
    
    27,021
    
    
    
    
    
    
    
    
    
    
    
    Financial liabilities designated at fair value
    
    
    
    
    
    
    7,927
    
    
    
    7,927
    
    
    
    
    
    
    
    
    
    
    
    Debt securities in issue
    
    
    37,067
    
    
    
    (16,645
    )
    
    
    20,422
    
    
    
    4
    
    
    
    (1
    )
    
    
    3Other borrowed funds
    
    
    722
    
    
    
    1,082
    
    
    
    1,804
    
    
    
    722
    
    
    
    570
    
    
    
    1,292Subordinated liabilities
    
    
    5,484
    
    
    
    617
    
    
    
    6,101
    
    
    
    5,674
    
    
    
    485
    
    
    
    6,159Insurance and reinsurance liabilities
    
    
    24,923
    
    
    
    (3,213
    )
    
    
    21,710
    
    
    
    
    
    
    
    
    
    
    
    Other liabilities
    
    
    8,844
    
    
    
    (1,536
    )
    
    
    7,308
    
    
    
    2,407
    
    
    
    (12
    )
    
    
    2,395Investment contract liabilities
    
    
    
    
    
    
    3,213
    
    
    
    3,213
    
    
    
    
    
    
    
    
    
    
    
    Other provisions
    
    
    302
    
    
    
    (19
    )
    
    
    283
    
    
    
    237
    
    
    
    
    
    
    
    237Current tax liability
    
    
    161
    
    
    
    
    
    
    
    161
    
    
    
    57
    
    
    
    
    
    
    
    57Deferred tax liabilities
    
    
    1,064
    
    
    
    (107
    )
    
    
    957
    
    
    
    
    
    
    
    
    
    
    
    Retirement benefit obligations
    
    
    1,197
    
    
    
    
    
    
    
    1,197
    
    
    
    1,060
    
    
    
    
    
    
    
    1,060Minority Interest  Non Equity
    
    
    512
    
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total liabilities
    
    
    181,013
    
    
    
    10,836
    
    
    
    191,849
    
    
    
    111,768
    
    
    
    14,098
    
    
    
    125,866EQUITYCalled up share capital  ordinary shares
    
    
    148
    
    
    
    
    
    
    
    148
    
    
    
    148
    
    
    
    
    
    
    
    148Called up share capital  preference shares
    
    
    325
    
    
    
    (325
    )
    
    
    
    
    
    
    325
    
    
    
    (325
    )
    
    
    Share premium account
    
    
    2,164
    
    
    
    (307
    )
    
    
    1,857
    
    
    
    2,164
    
    
    
    (307
    )
    
    
    1,857Retained earnings
    
    
    1,083
    
    
    
    (293
    )
    
    
    790
    
    
    
    650
    
    
    
    (332
    )
    
    
    318Total shareholders equity
    
    
    3,720
    
    
    
    (925
    )
    
    
    2,795
    
    
    
    3,287
    
    
    
    (964
    )
    
    
    2,323Total equity and liabilities
    
    
    184,733
    
    
    
    9,911
    
    
    
    194,644
    
    
    
    115,055
    
    
    
    13,134
    
    
    
    128,189
 169




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Restated Group balance sheet at 1 January 2005
 GroupIFRS
    
    
    
    
    
    
    
    
    
    
    De-
    
    
    Fees &
    
    
    
    
    
    
    
    
    
    
    
    
    Life
    
    
    
    
    
    
    
    
    
    
    IFRS31 December
    
    
    Reclassifi-
    
    
    Derivative
    
    
    recognition
    
    
    Commiss-
    
    
    Non-trading
    
    
    Fair value
    
    
    Preference
    
    
    Investment
    
    
    
    
    
    
    Total IFRS
    
    
    1 January2004
    
    
    cations
    
    
    Offsetting
    
    
    of Liabilities
    
    
    ions
    
    
    derivatives
    
    
    classification
    
    
    Shares
    
    
    products
    
    
    Other
    
    
    Adjustments
    
    
    2005£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash and balances at central
banks
    
    
    454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    454Trading Assets
    
    
    
    
    
    
    43,179
    
    
    
    1,728
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,001
    
    
    
    45,001Derivative financial
instruments
    
    
    2,377
    
    
    
    
    
    
    
    7,659
    
    
    
    
    
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    7,761
    
    
    
    10,138Financial Assets
designated at fair value
    
    
    
    
    
    
    21,954
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,306
    
    
    
    
    
    
    
    (5
    )
    
    
    
    
    
    
    26,255
    
    
    
    26,255Loans and advances to
banks
    
    
    11,751
    
    
    
    (6,397
    )
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,440
    )
    
    
    5,311Loans and advances to
customers
    
    
    109,416
    
    
    
    (11,257
    )
    
    
    
    
    
    
    
    
    
    
    (54
    )
    
    
    12
    
    
    
    (3,711
    )
    
    
    
    
    
    
    
    
    
    
    (16
    )
    
    
    (15,026
    )
    
    
    94,390Debt securities
    
    
    37,010
    
    
    
    (36,687
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (296
    )
    
    
    
    
    
    
    
    
    
    
    (27
    )
    
    
    (37,010
    )
    
    
    Equity shares and other
variable interest securities
    
    
    10,792
    
    
    
    (10,792
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,792
    )
    
    
    Available for sale
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Investments in
associated undertakings
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Intangible assets
    
    
    175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175Value of in force
business
    
    
    1,844
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (67
    )
    
    
    
    
    
    
    (67
    )
    
    
    1,777Property plant and
equipment
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262Operating lease assets
    
    
    2,275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,275Investment property
    
    
    1,228
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,228Current tax asset
    
    
    242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242Deferred tax assets
    
    
    501
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29
    
    
    
    29
    
    
    
    530Macro hedge of interest rate
risk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Other assets
    
    
    6,381
    
    
    
    
    
    
    
    557
    
    
    
    
    
    
    
    (141
    )
    
    
    (249
    )
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    (2
    )
    
    
    179
    
    
    
    6,560Total assets
    
    
    184,733
    
    
    
    
    
    
    
    9,866
    
    
    
    
    
    
    
    (195
    )
    
    
    40
    
    
    
    310
    
    
    
    
    
    
    
    (58
    )
    
    
    (52
    )
    
    
    9,911
    
    
    
    194,644LiabilitiesDeposits by banks
    
    
    18,412
    
    
    
    (6,592
    )
    
    
    (757
    )
    
    
    
    
    
    
    (10
    )
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (7,314
    )
    
    
    11,098Customer accounts
    
    
    78,660
    
    
    
    (7,843
    )
    
    
    214
    
    
    
    68
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (7,566
    )
    
    
    71,094Derivative financial
instruments
    
    
    3,665
    
    
    
    
    
    
    
    7,498
    
    
    
    
    
    
    
    
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,888
    
    
    
    11,553Trading liabilities
    
    
    
    
    
    
    25,415
    
    
    
    1,606
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,021
    
    
    
    27,021Financial liabilities
designated at fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,927
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,927
    
    
    
    7,927Debt securities in issue
    
    
    37,067
    
    
    
    (8,265
    )
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    (610
    )
    
    
    (7,758
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,645
    )
    
    
    20,422Other Borrowed Funds
    
    
    722
    
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    
    
    
    
    1,082
    
    
    
    1,804Subordinated liabilities
    
    
    5,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    610
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    617
    
    
    
    6,101Insurance and
reinsurance liabilities
    
    
    24,923
    
    
    
    (3,213
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,213
    )
    
    
    21,710Other liabilities
    
    
    8,844
    
    
    
    (2,715
    )
    
    
    1,305
    
    
    
    86
    
    
    
    (100
    )
    
    
    (102
    )
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    (36
    )
    
    
    (1,536
    )
    
    
    7,308Investment contract
liabilities
    
    
    
    
    
    
    3,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,213
    
    
    
    3,213Other provisions
    
    
    302
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19
    )
    
    
    (19
    )
    
    
    283Current tax liability
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    161Deferred tax liabilities
    
    
    1,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (107
    )
    
    
    (107
    )
    
    
    957Retirement benefit
obligations
    
    
    1,197
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,197Minority interests 
non equity
    
    
    512
    
    
    
    (512
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (512
    )
    
    
    Total liabilities
    
    
    181,013
    
    
    
    
    
    
    
    9,866
    
    
    
    154
    
    
    
    (122
    )
    
    
    328
    
    
    
    169
    
    
    
    570
    
    
    
    26
    
    
    
    (155
    )
    
    
    10,836
    
    
    
    191,849Called up share capital
 ordinary shares
    
    
    148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148Called up share capital
 preference shares
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    Share premium account
    
    
    2,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    1,857Retained earnings
    
    
    1,083
    
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    (73
    )
    
    
    (288
    )
    
    
    141
    
    
    
    62
    
    
    
    (84
    )
    
    
    103
    
    
    
    (293
    )
    
    
    790Total shareholders
equity
    
    
    3,720
    
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    (73
    )
    
    
    (288
    )
    
    
    141
    
    
    
    (570
    )
    
    
    (84
    )
    
    
    103
    
    
    
    (925
    )
    
    
    2,795Total liabilities and
equity
    
    
    184,733
    
    
    
    
    
    
    
    9,866
    
    
    
    
    
    
    
    (195
    )
    
    
    40
    
    
    
    310
    
    
    
    
    
    
    
    (58
    )
    
    
    (52
    )
    
    
    9,911
    
    
    
    194,644
 170




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Restated Company balance Sheet at 1 January 2005
 CompanyIFRSIFRS
    
    
    
    
    
    
    Derecog-
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total IFRS
    
    
    131 December
    
    
    Reclassi-
    
    
    nition of
    
    
    Fees &
    
    
    Non-trading
    
    
    Fair value
    
    
    Preference
    
    
    
    
    
    
    Adjust-
    
    
    January2004
    
    
    fications
    
    
    Liabilities
    
    
    Commissions
    
    
    derivatives
    
    
    classification
    
    
    Shares
    
    
    Other
    
    
    ments
    
    
    2005£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash and balances at central
banks
    
    
    443
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    443Derivative financial
instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    257Financial Assets designated
at fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    711
    
    
    
    
    
    
    
    
    
    
    
    711
    
    
    
    711Loans and advances to banks
    
    
    23,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,605Loans and advances to
customers
    
    
    79,860
    
    
    
    12,948
    
    
    
    
    
    
    
    (52
    )
    
    
    13
    
    
    
    (695
    )
    
    
    
    
    
    
    (20
    )
    
    
    12,194
    
    
    
    92,054Debt securities
    
    
    405
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (378
    )
    
    
    
    
    
    
    (27
    )
    
    
    (405
    )
    
    
    Investments in associated
undertakings
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Equity shares and other
variable interest securities
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    Available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    
    
    
    
    379
    
    
    
    379Investment in subsidiary
undertakings
    
    
    8,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,250Property plant and equipment
    
    
    231
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    231Current tax asset
    
    
    242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242Deferred tax assets
    
    
    494
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146
    
    
    
    146
    
    
    
    640Macro hedge of interest rate
risk
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10Other assets
    
    
    1,505
    
    
    
    
    
    
    
    
    
    
    
    (119
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    (157
    )
    
    
    1,348Total assets
    
    
    115,055
    
    
    
    12,948
    
    
    
    
    
    
    
    (171
    )
    
    
    280
    
    
    
    16
    
    
    
    
    
    
    
    61
    
    
    
    13,134
    
    
    
    128,189LiabilitiesDeposits by banks
    
    
    35,697
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40
    
    
    
    35,737Customer accounts
    
    
    65,910
    
    
    
    12,948
    
    
    
    68
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,016
    
    
    
    78,926Debt securities in issue
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    3Other Borrowed Funds
    
    
    722
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    570
    
    
    
    
    
    
    
    570
    
    
    
    1,292Subordinated liabilities
    
    
    5,674
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    478
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    485
    
    
    
    6,159Other liabilities
    
    
    2,407
    
    
    
    
    
    
    
    86
    
    
    
    (58
    )
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (41
    )
    
    
    (12
    )
    
    
    2,395Other provisions
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237Current tax liability
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Retirement benefit
obligations
    
    
    1,060
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,060Total liabilities
    
    
    111,768
    
    
    
    12,948
    
    
    
    154
    
    
    
    (58
    )
    
    
    518
    
    
    
    
    
    
    
    570
    
    
    
    (34
    )
    
    
    14,098
    
    
    
    125,866Called up share capital 
ordinary shares
    
    
    148
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148Called up share capital 
preference shares
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (325
    )
    
    
    
    
    
    
    (325
    )
    
    
    Share premium account
    
    
    2,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (307
    )
    
    
    
    
    
    
    (307
    )
    
    
    1,857Retained earnings
    
    
    650
    
    
    
    
    
    
    
    (154
    )
    
    
    (113
    )
    
    
    (238
    )
    
    
    16
    
    
    
    62
    
    
    
    95
    
    
    
    (332
    )
    
    
    318Total shareholders equity
    
    
    3,287
    
    
    
    
    
    
    
    (154
    )
    
    
    (113
    )
    
    
    (238
    )
    
    
    16
    
    
    
    (570
    )
    
    
    95
    
    
    
    (964
    )
    
    
    2,323Total liabilities and equity
    
    
    115,055
    
    
    
    12,948
    
    
    
    
    
    
    
    (171
    )
    
    
    280
    
    
    
    16
    
    
    
    
    
    
    
    61
    
    
    
    13,134
    
    
    
    128,189
 171




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 55. Differences between IFRS and US GAAP
  Goodwill
 IFRS
 US GAAP
 Other intangible assets
 IFRS
 US GAAP
 Pension costs
 IFRS
 US GAAP
 Long-term assurance business
 IFRS
   
 US GAAP
 172




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Revenue Recognition
 IFRS
 US GAAP
 Deferred acquisition costs
 IFRS
 US GAAP
 Policyholder liabilities
 IFRS Liabilities  life insurance contracts or participating investment contracts, which are not
unit linked
   Liabilities  life insurance contracts or participating investment contracts, which are unit
linked
  Liabilities  investment contracts which are unit linked
  173




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 US GAAP
 Participating or with-profits business
    IFRS
 US GAAP
 Guaranteed
Annuity Options
  IFRS
 US GAAP
 Financial instruments
 IFRS
 (a) Financial assets at fair value through profit and loss
  (b) Loans and receivables
  (c) Available for sale
   174




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  US GAAP
   Loan origination fees and costs
 IFRS
 US GAAP
 Securitised assets
 IFRS
 US GAAP
 175




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Designation of financial assets at fair value through profit and loss
 IFRS
 US GAAP.
 Derivatives
 IFRS
  US GAAP
 Debt securities in issue
 IFRS
  US GAAP
  176




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Consolidation
 IFRS
 US GAAP
 Investment property
 IFRS
 US GAAP
 Preference shares
 IFRS
 US GAAP
 Derecognition of liabilities
 IFRS
 US GAAP
 56. Current developments in US GAAP
 SFAS 155: Accounting for Certain Hybrid Financial Instrumentsan amendment of SFAS 133 and
SFAS140
  >
    
    Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation
 >
    
    Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133
 >
    
    Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring
bifurcation
 >
    
    Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives
 >
    
    Amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative financial instrument.
  SOP 03-3: Accounting for Certain Loans or Debt Securities Acquired in a Transfer
  177




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
   57. Future developments in US GAAP
 SFAS 123R: Share-Based Payment
  SFAS 153: Exchanges of Nonmonetary Assets  an amendment of APB 29
  SFAS 154: Accounting Changes and Error Corrections  a replacement of APB 20 and SFAS 3
  SFAS 156: Accounting for Servicing of Financial Assets  an amendment of SFAS 140
  SOP 05-1: Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With
Modifications or Exchanges of Insurance Contracts
  178




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  SFAS 133 Implementation Issue No. B38, Embedded Derivatives: Evaluation of Net Settlement With
Respect to the Settlement of a Debt Instrument Through Exercise of an Embedded Put Option or Call
Option
  SFAS 133 Implementation Issue No. B39, Embedded Derivatives: Application of Paragraph 13(b) to Call
Options That Are Exercisable Only by the Debtor
  179




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 58. US GAAP reconciliation
  2005
    
    
    2004Income
statement
    
    £m
    
    
    £mProfit/(loss) for the year  IFRS
    
    
    420
    
    
    
    (54
    )US GAAP adjustments:Goodwill
    
    
    (533
    )
    
    
    (9
    )Other intangible assets
    
    
    (14
    )
    
    
    (15
    )Pensions cost
    
    
    (78
    )
    
    
    (79
    )Securities and investments
    
    
    (66
    )
    
    
    Securitised assets
    
    
    50
    
    
    
    30Derivatives
    
    
    
    
    
    
    54Gain on sale of investment property
    
    
    286
    
    
    
    27Value of business acquired
    
    
    (82
    )
    
    
    5Deferred acquisition costs
    
    
    (78
    )
    
    
    (69
    )Deferred income reserve
    
    
    4
    
    
    
    (4
    )Insurance claims and policyholder liabilities
    
    
    20
    
    
    
    195Loan origination fees and costs
    
    
    54
    
    
    
    12Debt securities in issue
    
    
    180
    
    
    
    Preference shares
    
    
    88
    
    
    
    Consolidation
    
    
    
    
    
    
    (49
    )Derecognition of assets and liabilities
    
    
    
    
    
    
    (41
    )Other
    
    
    4
    
    
    
    (16
    )Tax effect of the above adjustments
    
    
    (2
    )
    
    
    (7
    )Net income/(loss)  US GAAP
    
    
    253
    
    
    
    (20
    )
 2005
    
    
    2004Shareholders
equity
    
    £m
    
    
    £mShareholders equity  IFRS
    
    
    3,110
    
    
    
    3,720US GAAP adjustments:Goodwill
    
    
    326
    
    
    
    859Other intangible assets
    
    
    36
    
    
    
    50Pensions cost
    
    
    603
    
    
    
    590Securities and investments
    
    
    (162
    )
    
    
    52Securitised assets
    
    
    331
    
    
    
    368Derivatives
    
    
    
    
    
    
    338Value of in-force business
    
    
    (1,301
    )
    
    
    (1,360
    )Deferred acquisition costs
    
    
    774
    
    
    
    885Policy liabilities
    
    
    95
    
    
    
    (185
    )Loan origination fees and costs
    
    
    187
    
    
    
    70Debt securities in issue
    
    
    734
    
    
    
    (132
    )Preference shares
    
    
    612
    
    
    
    Derecognition of assets and liabilities
    
    
    
    
    
    
    (148
    )Other
    
    
    21
    
    
    
    1Tax effect of the above adjustments
    
    
    (406
    )
    
    
    (265
    )Shareholders equity  US GAAP
    
    
    4,960
    
    
    
    4,843
  59. Further note disclosures on differences between IFRS and US GAAP, and certain additional
US disclosures
 a) Goodwill and other intangible assets
   Insurance andRetail
    
    
    Asset
    
    
    Portfolio Business
    
    
    
    
    
    
    GroupBanking
    
    
    Management
    
    
    Unit
    
    
    Other
    
    
    TotalGoodwill
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCarrying value at 1 January 2005
    
    
    254
    
    
    
    672
    
    
    
    69
    
    
    
    
    
    
    
    995Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Impairments
    
    
    
    
    
    
    (533
    )
    
    
    
    
    
    
    
    
    
    
    (533
    )Carrying value at 31 December 2005
    
    
    254
    
    
    
    139
    
    
    
    69
    
    
    
    
    
    
    
    462Total capitalised per IFRS
    
    
    90
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    136US GAAP adjustment to shareholders equity
    
    
    164
    
    
    
    93
    
    
    
    69
    
    
    
    
    
    
    
    326
 180




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Insurance andRetail
    
    
    Asset
    
    
    Portfolio Business
    
    
    
    
    
    
    GroupBanking
    
    
    Management
    
    
    Unit
    
    
    Other
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCarrying value at 1 January 2004
    
    
    261
    
    
    
    674
    
    
    
    70
    
    
    
    9
    
    
    
    1,014Disposals
    
    
    (7
    )
    
    
    (2
    )
    
    
    
    
    
    
    (9
    )
    
    
    (18
    )Other movements
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Carrying value at 31 December 2004
    
    
    254
    
    
    
    672
    
    
    
    69
    
    
    
    
    
    
    
    995Total capitalised per IFRS
    
    
    90
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    136US GAAP adjustment to shareholders equity
    
    
    164
    
    
    
    626
    
    
    
    69
    
    
    
    
    
    
    
    859
   2005
    
    
    2004Core
deposit intangibles
    
    £m
    
    
    £mCostAt 1 January and 31 December
    
    
    416
    
    
    
    416Accumulated amortisation/impairmentAt 1 January
    
    
    366
    
    
    
    351Charge for the year
    
    
    14
    
    
    
    15At 31 December
    
    
    380
    
    
    
    366Net book valueTotal capitalised per US GAAP
    
    
    36
    
    
    
    50Total capitalised per IFRS
    
    
    
    
    
    
    US GAAP adjustment to shareholders equity
    
    
    36
    
    
    
    50
  2005
    
    
    2004Value of
business acquired
    
    £m
    
    
    £mAt 1 January
    
    
    461
    
    
    
    538Amortisation
    
    
    (70
    )
    
    
    (77
    )At 31 December
    
    
    391
    
    
    
    461
   Year ended 31 December:
    
    £m2006
    
    
    622007
    
    
    572008
    
    
    462009
    
    
    342010
    
    
    30
 b) Investment properties
 Year ended 31 December2005
    
    
    2004£m
    
    
    £mCost or valuationAt 1 January
    
    
    1,164
    
    
    
    1,309Additions
    
    
    
    
    
    
    78Disposals
    
    
    (1,164
    )
    
    
    (223
    )At 31 December
    
    
    
    
    
    
    1,164AmortisationAt 1 January
    
    
    154
    
    
    
    111Disposals
    
    
    (186
    )
    
    
    (30
    )Charge for the year
    
    
    32
    
    
    
    73At 31 December
    
    
    
    
    
    
    154Net book value
    
    
    
    
    
    
    1,010
 181




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  c) Pension costs
   Year ended 31 December2005
    
    
    2004£m
    
    
    £mService cost
    
    
    105
    
    
    
    124Interest cost
    
    
    200
    
    
    
    182Expected return on assets
    
    
    (149
    )
    
    
    (140
    )Contractual termination benefits
    
    
    21
    
    
    
    24Recognised (gain)/loss
    
    
    61
    
    
    
    52Recognised prior service cost
    
    
    
    
    
    
    1Net periodic pension cost
    
    
    238
    
    
    
    243
  2005
    
    
    2004£m
    
    
    £mBenefit obligation at 1 January
    
    
    3,730
    
    
    
    3,357Service cost
    
    
    105
    
    
    
    124Interest cost
    
    
    200
    
    
    
    182Members contributions
    
    
    12
    
    
    
    14Business transfer
    
    
    
    
    
    
    Contractual termination benefits
    
    
    21
    
    
    
    24Settlements and curtailments
    
    
    
    
    
    
    (44
    )Actuarial loss
    
    
    439
    
    
    
    161Benefits paid
    
    
    (103
    )
    
    
    (88
    )Benefit obligation at 31 December
    
    
    4,404
    
    
    
    3,730
  Year ended 31 December2005
    
    
    2004£m
    
    
    £mFair value of plan assets at beginning of year
    
    
    2,489
    
    
    
    2,204Expected return on plan assets
    
    
    149
    
    
    
    140Actuarial gain
    
    
    303
    
    
    
    103Settlements
    
    
    
    
    
    
    (40
    )Employer contributions
    
    
    131
    
    
    
    156Employee contributions
    
    
    12
    
    
    
    14Benefits paid
    
    
    (103
    )
    
    
    (88
    )Fair value of plan assets at end of year
    
    
    2,981
    
    
    
    2,489
  Year ended 31 December2005
    
    
    2004£m
    
    
    £mFunded status
    
    
    (1,423
    )
    
    
    (1,241
    )Unrecognised prior service cost
    
    
    1
    
    
    
    1Unrecognised loss
    
    
    1,009
    
    
    
    934Accrued liabilities
    
    
    (413
    )
    
    
    (306
    )
  182




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 d) Taxes
  2005
    
    
    2004£m
    
    
    £mDeferred tax assets:Pensions and other postretirement benefits
    
    
    233
    
    
    
    182Provisions and short-term temporary differences
    
    
    320
    
    
    
    179Excess of capital allowances over depreciation
    
    
    35
    
    
    
    68Tax losses carried forward
    
    
    89
    
    
    
    Valuation allowance
    
    
    
    
    
    
    (41
    )677
    
    
    
    388Deferred tax liabilities:Accelerated tax depreciation
    
    
    (489
    )
    
    
    (718
    )Provisions and short-term temporary differences
    
    
    (684
    )
    
    
    (498
    )(1,173
    )
    
    
    (1,216
    )Net deferred tax liabilities
    
    
    (496
    )
    
    
    (828
    )
  e) Securities and investments
 (i)
    
    Under US GAAP, SFAS 115 requires certain disclosures relating to investments in debt
securities, and equity securities that have readily determinable fair values at 31 December
2005 and 2004. The following table provides an analysis of the balance sheet totals under US
GAAP:
 At 31 December2005
    
    
    2004£m
    
    
    £mTrading securities
    
    
    60,444
    
    
    
    42,157Available for sale securities (ii)
    
    
    742
    
    
    
    1,12261,186
    
    
    
    43,279
  (ii)
    
    Available for sale securities
 Gross unrealised
    
    
    Gross unrealisedAmortised cost
    
    
    gains
    
    
    losses
    
    
    Fair value£m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2005Equity securities
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    13Asset backed and corporate debt securities
    
    
    287
    
    
    
    63
    
    
    
    (3
    )
    
    
    347Mortgage backed securities other than
those issued or backed by US government
agencies
    
    
    281
    
    
    
    58
    
    
    
    
    
    
    
    339Other debt securities
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    43624
    
    
    
    121
    
    
    
    (3
    )
    
    
    742
 Gross unrealised
    
    
    Gross unrealisedAmortised cost
    
    
    gains
    
    
    losses
    
    
    Fair value£m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004Equity securities
    
    
    30
    
    
    
    2
    
    
    
    
    
    
    
    32Asset backed and corporate debt securities
    
    
    282
    
    
    
    51
    
    
    
    (2
    )
    
    
    331Mortgage backed securities other than
those issued or backed by US government
agencies
    
    
    261
    
    
    
    152
    
    
    
    (6
    )
    
    
    407Other debt securities
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    352925
    
    
    
    205
    
    
    
    (8
    )
    
    
    1,122
  In more than 1
    
    
    In more than 5year but not
    
    
    years but notNot more than 1
    
    
    more than 5
    
    
    more than 10
    
    
    In more than 10year
    
    
    years
    
    
    years
    
    
    years
    
    
    TotalMaturity analysis
 fair value
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2005
    
    
    128
    
    
    
    266
    
    
    
    25
    
    
    
    323
    
    
    
    742At 31 December 2004
    
    
    335
    
    
    
    410
    
    
    
    41
    
    
    
    336
    
    
    
    1,122
 183




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Less than 12 months
    
    
    
    

12 months or more
    TotalUnrealised
    
    
    
    
    
    
    Unrealised
    
    
    
    
    
    
    UnrealisedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    lossesAt 31
December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAsset backed and corporate debt securities
    
    
    124
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    3Mortgage backed securities other than those
issued or backed by US government agencies
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total temporarily impaired securities
    
    
    124
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    3
 Less than 12 months
    
    
    
    

12 months or more
    TotalUnrealised
    
    
    
    
    
    
    Unrealised
    
    
    
    
    
    
    UnrealisedFair value
    
    
    losses
    
    
    Fair value
    
    
    losses
    
    
    Fair value
    
    
    lossesAt 31
December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAsset backed and corporate debt securities
    
    
    6
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2Mortgage backed securities other than those
issued or backed by US government agencies
    
    
    41
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    6Total temporarily impaired securities
    
    
    47
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    8
  (iii)
    
    Sales of available for sale securities during the years ended 31 December 2005 and 2004.
 2005
    
    
    2004£m
    
    
    £mGross proceeds from sales
    
    
    334
    
    
    
    2,040Gross realised losses on sales
    
    
    
    
    
    
    154Gross realised gains on sales
    
    
    
    
    
    
    (60
    )Amortised cost of sales
    
    
    334
    
    
    
    2,134
  (iv)
    
    There were no realised gains and losses on transfers from available for sale securities
during the years ended 31 December 2005 and 2004.(v)
    
    Net trading gains of £1,270m (2004: loss of £213m) were included in income relating to
trading securities still held at the year-end.
 f) Consolidation of variable interest entities
   g) Securitised assets
  184




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Mortgage asset securitisations
 2005
    
    
    2004£m
    
    
    £mValue of interest only strip at inception (1)
    
    
    281
    
    
    
    221Increase/(decrease) in value of interest only strip
    
    
    58
    
    
    
    145Value of interest only strip at 31 December (1)
    
    
    339
    
    
    
    366
 
 (1)
    
    The valuation of the interest only strip asset is based on a key assumption of a discount
rate of 8.4% (2004:11.3%)  Holmes Financing(No. 1 to No. 9) plc£mReceipts
    
    
    3,797Payments
    
    
    (4,374
    )Net cash flows
    
    
    (577
    )
  Sensitivity analysis
  £m10% adverse change in discount rate
    
    
    (7
    )20% adverse change in discount rate
    
    
    (13
    )
   Mortgages securitised in2005
    
    
    2004%
    
    
    %At 31 December 2005
    
    
    0.01
    
    
    
    0.01At 31 December 2004
    
    
    
    
    
    
    0.01
 h) Presentation of the consolidated income statement
  i) Presentation of the consolidated balance sheet
  185




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  j) Stock borrowing and lending against non-cash collateral
  k) Collateralised loans and secured borrowings
     l) Derivatives and hedging activities
   Equity index-linked deposits
  Capital at Risk:
 Capital Guaranteed:
   186




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 m) Loan impairment
     n) Financial guarantees
  Maximum potential amount of future paymentsAs of 31 DecemberLess than 1
    
    
    1 to 3
    
    
    3 to 5
    
    
    After 5
    
    
    No stated2005
    
    
    2004
    
    
    year
    
    
    years
    
    
    years
    
    
    years
    
    
    maturity£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mGuarantees:(1)Stand-by letters of credit
    
    
    172
    
    
    
    355
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    121
    
    
    
    Warranties and indemnities on sale of subsidiaries
    
    
    2,794
    
    
    
    2,303
    
    
    
    416
    
    
    
    781
    
    
    
    655
    
    
    
    352
    
    
    
    5902,966
    
    
    
    2,658
    
    
    
    416
    
    
    
    832
    
    
    
    655
    
    
    
    473
    
    
    
    590
 
 (1)
    
    In addition, Abbey guarantees the cheques of some of its customers up to a certain limit,
typically £50-100. The maximum potential amount of future payments in relation to guaranteed
cheques has been estimated as £4,079m (2004: £3,981m). These guarantees have no stated
maturity. Bank account facilities to which guaranteed cheques relate are regularly assessed
based on customers behaviour, and amended where necessary. Prior notice of changes is given
to customers.    187




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  o) Fair value option
  p) Discontinued operations
   Year ended 31 December2005
    
    
    2004£m
    
    
    £mProfit from discontinued operations including profit on disposal of £64m (2004: £15m)
    
    
    77
    
    
    
    69Taxation expense
    
    
    (24
    )
    
    
    (35
    )Profit on discontinued operations
    
    
    53
    
    
    
    34
  Sale of Life Insurance Businesses
      2005£mDue from banks
    
    
    2,335Derivative financial instruments
    
    
    1,253Trading securities
    
    
    24,982Value of business acquired
    
    
    391Other assets
    
    
    2,581Goodwill and intangibles
    
    
    174Total assets
    
    
    31,716
 188




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 2005£mDue to other banks
    
    
    (1,120
    )Derivative financial instruments
    
    
    (135
    )Insurance and reinsurance liabilities
    
    
    (23,114
    )Other liabilities
    
    
    (3,845
    )Total liabilities
    
    
    (28,214
    )
 q) Deferred acquisition costs
  Year ended 31 December2005
    
    
    2004£m
    
    
    £mAt 1 January
    
    
    884
    
    
    
    1,026Additions
    
    
    77
    
    
    
    85Amortisation
    
    
    (139
    )
    
    
    (227
    )At 31 December
    
    
    822
    
    
    
    884
  Year ended 31 December
    
    £m2006
    
    
    802007
    
    
    702008
    
    
    622009
    
    
    552010
    
    
    49
 r) Policy liabilities
  Year ended 31 December2005
    
    
    2004£m
    
    
    £mAt 1 January
    
    
    (21,841
    )
    
    
    (23,429
    )(Increase)decrease in the period
    
    
    (201
    )
    
    
    1,588At 31 December
    
    
    (22,042
    )
    
    
    (21,841
    )As described in Note 55, under US GAAP, policyholder liabilities are split between SFAS 60 products and SFAS 97 products.
The total liabilities here are shown net of reinsurance. Details of the split are as follows:Year ended 31 December2005
    
    
    2004£m
    
    
    £mSFAS 60 liabilities
    
    
    (4,613
    )
    
    
    (4,575
    )SFAS 97 liabilities
    
    

(16,438
    )
    
    
    (17,330
    )Total
    
    
    (21,051
    )
    
    
    (21,905
    )Reinsurance
    
    

1,072
    
    
    
    914Policyholder liabilities net of reassurance
    
    
    (19,979
    )
    
    
    (20,991
    )Policyholder bonus fund
    
    
    (2,063
    )
    
    
    (850
    )Total
    
    
    (22,042
    )
    
    
    (21,841
    )The economic assumptions used in determining policy
liabilities were:2005
    
    
    2004Return on equities
    
    
    6.5
    %
    
    
    7.0
    %Return on gilts
    
    
    4.0
    %
    
    
    4.5
    %Return on corporates
    
    
    4.5
    %
    
    
    5.0
    %Inflation (indexation)
    
    
    2.75
    %
    
    
    2.75
    %Inflation (expenses)
    
    
    3.75
    %
    
    
    3.75
    %
  189




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 60. Significant concentrations of credit risk
   61. Consolidating financial information
   IFRS income statements
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    748
    
    
    
    156
    
    
    
    298
    
    
    
    5
    
    
    
    1,207Fee, commission and other income
    
    
    1,162
    
    
    
    240
    
    
    
    769
    
    
    
    (638
    )
    
    
    1,533Total income net of insurance claims
    
    
    1,910
    
    
    
    396
    
    
    
    1,067
    
    
    
    (633
    )
    
    
    2,740Administration expenses
    
    
    (1,441
    )
    
    
    (128
    )
    
    
    (173
    )
    
    
    18
    
    
    
    (1,724
    )Depreciation and amortisation
    
    
    (66
    )
    
    
    (3
    )
    
    
    (130
    )
    
    
    
    
    
    
    (199
    )Impairment and provisions
    
    
    296
    
    
    
    
    
    
    
    (233
    )
    
    
    (284
    )
    
    
    (221
    )Profit/(loss) before tax
    
    
    699
    
    
    
    265
    
    
    
    531
    
    
    
    (899
    )
    
    
    596Taxation expense
    
    
    (8
    )
    
    
    (89
    )
    
    
    (69
    )
    
    
    (10
    )
    
    
    (176
    )Profit/(loss) for the year
    
    
    691
    
    
    
    176
    
    
    
    462
    
    
    
    (909
    )
    
    
    420
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    907
    
    
    
    272
    
    
    
    268
    
    
    
    16
    
    
    
    1,463Fee, commission and other income
    
    
    613
    
    
    
    
    
    
    
    1,160
    
    
    
    (391
    )
    
    
    1,382Total income net of insurance claims
    
    
    1,520
    
    
    
    272
    
    
    
    1,428
    
    
    
    (375
    )
    
    
    2,845Administration expenses
    
    
    (1,691
    )
    
    
    (126
    )
    
    
    (617
    )
    
    
    213
    
    
    
    (2,221
    )Depreciation and amortisation
    
    
    (142
    )
    
    
    (2
    )
    
    
    (403
    )
    
    
    
    
    
    
    (547
    )Impairment and provisions
    
    
    (177
    )
    
    
    160
    
    
    
    (3
    )
    
    
    (78
    )
    
    
    (98
    )Profit/(loss) before tax
    
    
    (490
    )
    
    
    304
    
    
    
    405
    
    
    
    (240
    )
    
    
    (21
    )Taxation expense
    
    
    206
    
    
    
    (107
    )
    
    
    140
    
    
    
    (272
    )
    
    
    (33
    )Profit/(loss) for the year
    
    
    (284
    )
    
    
    197
    
    
    
    545
    
    
    
    (512
    )
    
    
    (54
    )
 190




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 IFRS balance sheets
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedAt 31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCash and balances at central banks
    
    
    370
    
    
    
    
    
    
    
    1
    
    
    
    620
    
    
    
    991Trading assets
    
    
    
    
    
    
    17,613
    
    
    
    40,633
    
    
    
    (15
    )
    
    
    58,231Derivative financial instruments
    
    
    1,227
    
    
    
    12,422
    
    
    
    1,793
    
    
    
    (3,587
    )
    
    
    11,855Financial assets designated at fair value
    
    
    790
    
    
    
    3,810
    
    
    
    25,584
    
    
    
    413
    
    
    
    30,597Loans and advances to banks
    
    
    33,009
    
    
    
    49,556
    
    
    
    42,582
    
    
    
    (124,703
    )
    
    
    444Loans and advances to customers
    
    
    95,230
    
    
    
    17,545
    
    
    
    18,542
    
    
    
    (35,850
    )
    
    
    95,467Securities and investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Available for sale securities
    
    
    272
    
    
    
    52
    
    
    
    2,159
    
    
    
    (2,470
    )
    
    
    13Investment in subsidiary undertakings
    
    
    8,690
    
    
    
    2,641
    
    
    
    8,596
    
    
    
    (19,927
    )
    
    
    Intangible assets
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    171Value of in force business
    
    
    
    
    
    
    
    
    
    
    1,721
    
    
    
    
    
    
    
    1,721Property, plant and equipment
    
    
    298
    
    
    
    5
    
    
    
    11
    
    
    
    
    
    
    
    314Operating lease assets
    
    
    
    
    
    
    
    
    
    
    2,172
    
    
    
    
    
    
    
    2,172Investment property
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    (3
    )
    
    
    Other assets
    
    
    1,514
    
    
    
    680
    
    
    
    5,118
    
    
    
    (2,254
    )
    
    
    5,058Total assets
    
    
    141,400
    
    
    
    104,324
    
    
    
    149,086
    
    
    
    (187,776
    )
    
    
    207,034Deposits by banks
    
    
    48,267
    
    
    
    43,366
    
    
    
    24,122
    
    
    
    (110,138
    )
    
    
    5,617Customer accounts
    
    
    79,288
    
    
    
    9,287
    
    
    
    27,805
    
    
    
    (50,491
    )
    
    
    65,889Derivative financial instruments
    
    
    623
    
    
    
    13,483
    
    
    
    745
    
    
    
    (3,587
    )
    
    
    11,264Trading liabilities
    
    
    
    
    
    
    19,485
    
    
    
    33,220
    
    
    
    (41
    )
    
    
    52,664Financial liabilities designated at fair value
    
    
    
    
    
    
    8,308
    
    
    
    
    
    
    
    (360
    )
    
    
    7,948Debt securities in issue
    
    
    4
    
    
    
    7,206
    
    
    
    14,066
    
    
    
    
    
    
    
    21,276Other borrowed funds
    
    
    1,452
    
    
    
    
    
    
    
    1,347
    
    
    
    (555
    )
    
    
    2,244Subordinated liabilities
    
    
    6,477
    
    
    
    269
    
    
    
    1,215
    
    
    
    (1,756
    )
    
    
    6,205Insurance and reinsurance liabilities
    
    
    
    
    
    
    
    
    
    
    22,090
    
    
    
    (589
    )
    
    
    21,501Investment contract liabilities
    
    
    
    
    
    
    
    
    
    
    3,730
    
    
    
    (424
    )
    
    
    3,306Retirement benefit obligations
    
    
    1,240
    
    
    
    
    
    
    
    140
    
    
    
    
    
    
    
    1,380Other liabilities
    
    
    1,141
    
    
    
    365
    
    
    
    3,178
    
    
    
    (54
    )
    
    
    4,630Total liabilities
    
    
    138,492
    
    
    
    101,769
    
    
    
    131,658
    
    
    
    (167,995
    )
    
    
    203,924Total shareholders equity
    
    
    2,908
    
    
    
    2,555
    
    
    
    17,428
    
    
    
    (19,781
    )
    
    
    3,110Total liabilities and equity
    
    
    141,400
    
    
    
    104,324
    
    
    
    149,086
    
    
    
    (187,776
    )
    
    
    207,034
 191




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedAt 31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCash and balances at central banks
    
    
    443
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    454Trading assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Derivative financial instruments
    
    
    
    
    
    
    2,330
    
    
    
    47
    
    
    
    
    
    
    
    2,377Financial assets designated at fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loans and advances to banks
    
    
    23,605
    
    
    
    52,448
    
    
    
    7,810
    
    
    
    (72,112
    )
    
    
    11,751Loans and advances to customers
    
    
    79,860
    
    
    
    3,593
    
    
    
    41,561
    
    
    
    (15,598
    )
    
    
    109,416Securities and investments
    
    
    406
    
    
    
    12,730
    
    
    
    35,915
    
    
    
    (1,249
    )
    
    
    47,802Available for sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment in subsidiary undertakings
    
    
    8,250
    
    
    
    2,041
    
    
    
    5,305
    
    
    
    (15,596
    )
    
    
    Intangible assets
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    
    
    
    
    175Value of in force business
    
    
    
    
    
    
    
    
    
    
    1,844
    
    
    
    
    
    
    
    1,844Property, plant and equipment
    
    
    231
    
    
    
    6
    
    
    
    152
    
    
    
    (127
    )
    
    
    262Operating lease assets
    
    
    
    
    
    
    
    
    
    
    2,275
    
    
    
    
    
    
    
    2,275Investment property
    
    
    
    
    
    
    
    
    
    
    1,228
    
    
    
    
    
    
    
    1,228Other assets
    
    
    2,260
    
    
    
    1,172
    
    
    
    1,057
    
    
    
    2,660
    
    
    
    7,149Total assets
    
    
    115,055
    
    
    
    74,320
    
    
    
    97,380
    
    
    
    (102,022
    )
    
    
    184,733Deposits by banks
    
    
    35,697
    
    
    
    35,268
    
    
    
    1,800
    
    
    
    (54,353
    )
    
    
    18,412Customer accounts
    
    
    65,910
    
    
    
    11,385
    
    
    
    19,913
    
    
    
    (18,548
    )
    
    
    78,660Derivative financial instruments
    
    
    
    
    
    
    3,599
    
    
    
    66
    
    
    
    
    
    
    
    3,665Trading liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Financial liabilities designated at fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Debt securities in issue
    
    
    4
    
    
    
    19,779
    
    
    
    32,382
    
    
    
    (15,098
    )
    
    
    37,067Other borrowed funds
    
    
    722
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722Subordinated liabilities
    
    
    5,674
    
    
    
    278
    
    
    
    776
    
    
    
    (1,244
    )
    
    
    5,484Insurance and reinsurance liabilities
    
    
    
    
    
    
    
    
    
    
    24,923
    
    
    
    
    
    
    
    24,923Investment contract liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Retirement benefit obligations
    
    
    1,060
    
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    1,197Other liabilities
    
    
    2,701
    
    
    
    1,682
    
    
    
    6,133
    
    
    
    (145
    )
    
    
    10,371Total liabilities
    
    
    111,768
    
    
    
    71,991
    
    
    
    86,130
    
    
    
    (89,388
    )
    
    
    180,501Minority interests  non equity
    
    
    
    
    
    
    
    
    
    
    518
    
    
    
    (6
    )
    
    
    512Total shareholders equity
    
    
    3,287
    
    
    
    2,329
    
    
    
    10,732
    
    
    
    (12,628
    )
    
    
    3,720Total liabilities and equity
    
    
    115,055
    
    
    
    74,320
    
    
    
    97,380
    
    
    
    (102,022
    )
    
    
    184,733
 IFRS Cash flow statements
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet cash flow from/ (used in) operating activities
    
    
    (5,830
    )
    
    
    (17,044
    )
    
    
    17,644
    
    
    
    
    
    
    
    (5,230
    )Net cash flow from/ (used in) investing activities
    
    
    46
    
    
    
    243
    
    
    
    1,747
    
    
    
    
    
    
    
    2,036Net cash flow from/ (used in) financing activities
    
    
    96
    
    
    
    (38
    )
    
    
    38
    
    
    
    
    
    
    
    96Net increase/ (decrease) in cash and cash equivalents
    
    
    (5,688
    )
    
    
    (16,839
    )
    
    
    19,429
    
    
    
    
    
    
    
    (3,098
    )Cash and cash equivalents at the beginning of the
period
    
    
    (9,518
    )
    
    
    26,392
    
    
    
    (5,615
    )
    
    
    
    
    
    
    11,259Effects of exchange rate changes on cash and cash
equivalent
    
    
    122
    
    
    
    
    
    
    
    (42
    )
    
    
    
    
    
    
    80Cash and cash equivalents at the end of the period
    
    
    (15,084
    )
    
    
    9,553
    
    
    
    13,772
    
    
    
    
    
    
    
    8,241
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet cash flow from/ (used in) operating activities
    
    
    4,557
    
    
    
    18,135
    
    
    
    (27,523
    )
    
    
    
    
    
    
    (4,831
    )Net cash flow from/ (used in) investing activities
    
    
    996
    
    
    
    149
    
    
    
    2,986
    
    
    
    
    
    
    
    4,131Net cash flow from/ (used in) financing activities
    
    
    (1,561
    )
    
    
    (32
    )
    
    
    96
    
    
    
    
    
    
    
    (1,497
    )Net increase/ (decrease) in cash and cash equivalents
    
    
    3,992
    
    
    
    18,252
    
    
    
    (24,441
    )
    
    
    
    
    
    
    (2,197
    )Cash and cash equivalents at the beginning of the
period
    
    
    (13,346
    )
    
    
    8,140
    
    
    
    19,295
    
    
    
    
    
    
    
    14,089Effects of exchange rate changes on cash and cash
equivalents
    
    
    (164
    )
    
    
    
    
    
    
    (469
    )
    
    
    
    
    
    
    (633
    )Cash and cash equivalents at the end of the period
    
    
    (9,518
    )
    
    
    26,392
    
    
    
    (5,615
    )
    
    
    
    
    
    
    11,259
 192




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 US GAAP reconciliations
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mIncome statementProfit/(loss) for the year  IFRS
    
    
    691
    
    
    
    176
    
    
    
    462
    
    
    
    (909
    )
    
    
    420US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (533
    )
    
    
    (533
    )Other intangible assets
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (14
    )Pensions cost
    
    
    (57
    )
    
    
    (2
    )
    
    
    (19
    )
    
    
    
    
    
    
    (78
    )Securities and investments
    
    
    (16
    )
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    (66
    )Securitised assets
    
    
    60
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    50Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of investment property
    
    
    
    
    
    
    
    
    
    
    286
    
    
    
    
    
    
    
    286Value of business acquired
    
    
    
    
    
    
    
    
    
    
    (82
    )
    
    
    
    
    
    
    (82
    )Deferred acquisition costs
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    (78
    )Deferred income reserve
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Insurance claims and policy holder liabilities
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Loan origination fees and costs
    
    
    56
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    54Debt securities in issue
    
    
    397
    
    
    
    (217
    )
    
    
    
    
    
    
    
    
    
    
    180Preference shares
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Consolidation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Derecognition of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    (6
    )
    
    
    3
    
    
    
    7
    
    
    
    
    
    
    
    4Tax effect of the above adjustments
    
    
    (130
    )
    
    
    80
    
    
    
    48
    
    
    
    
    
    
    
    (2
    )Net (loss)/income  US GAAP
    
    
    1,083
    
    
    
    (10
    )
    
    
    632
    
    
    
    (1,452
    )
    
    
    253Shareholders equityShareholders equity IFRS
    
    
    2,908
    
    
    
    2,555
    
    
    
    17,428
    
    
    
    (19,781
    )
    
    
    3,110US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    326
    
    
    
    326Other intangible assets
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    
    
    
    
    36Pensions cost
    
    
    443
    
    
    
    14
    
    
    
    146
    
    
    
    
    
    
    
    603Securities and investments
    
    
    (16
    )
    
    
    (146
    )
    
    
    
    
    
    
    
    
    
    
    (162
    )Securitised assets
    
    
    339
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    331Derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of in force business
    
    
    
    
    
    
    
    
    
    
    (1,301
    )
    
    
    
    
    
    
    (1,301
    )Deferred acquisition costs
    
    
    
    
    
    
    
    
    
    
    774
    
    
    
    
    
    
    
    774Policy liabilities
    
    
    
    
    
    
    
    
    
    
    95
    
    
    
    
    
    
    
    95Loan origination fees and costs
    
    
    187
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187Debt securities in issue
    
    
    785
    
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    734Preference shares
    
    
    612
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    612Derecognition of liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    8
    
    
    
    (1
    )
    
    
    14
    
    
    
    
    
    
    
    21Tax effect of the above adjustments
    
    
    (524
    )
    
    
    55
    
    
    
    63
    
    
    
    
    
    
    
    (406
    )Shareholders equity  US GAAP
    
    
    4,742
    
    
    
    2,426
    
    
    
    17,255
    
    
    
    (19,463
    )
    
    
    4,960
 193




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 US GAAP reconciliations
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mIncome
statementProfit/(loss) for the year  IFRS
    
    
    (284
    )
    
    
    197
    
    
    
    545
    
    
    
    (512
    )
    
    
    (54
    )US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Other intangible assets
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    
    
    
    
    (15
    )Pensions cost
    
    
    (65
    )
    
    
    (2
    )
    
    
    (12
    )
    
    
    
    
    
    
    (79
    )Securities and investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Securitised assets
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Derivatives
    
    
    (261
    )
    
    
    297
    
    
    
    18
    
    
    
    
    
    
    
    54Gain on sale of investment property
    
    
    
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    27Value of business acquired
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    5Deferred acquisition costs
    
    
    
    
    
    
    
    
    
    
    (69
    )
    
    
    
    
    
    
    (69
    )Deferred income reserve
    
    
    
    
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Insurance claims and policy holder liabilities
    
    
    
    
    
    
    
    
    
    
    195
    
    
    
    
    
    
    
    195Loan origination fees and costs
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Debt securities in issue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidation
    
    
    (49
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (49
    )Derecognition of liabilities
    
    
    (9
    )
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    (41
    )Other
    
    
    24
    
    
    
    (5
    )
    
    
    (35
    )
    
    
    
    
    
    
    (16
    )Tax effect of the above adjustments
    
    
    (81
    )
    
    
    87
    
    
    
    (13
    )
    
    
    
    
    
    
    (7
    )Net (loss)/income  US GAAP
    
    
    (683
    )
    
    
    574
    
    
    
    610
    
    
    
    (521
    )
    
    
    (20
    )
 Abbey NationalTreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mShareholders equityShareholders equity IFRS
    
    
    3,287
    
    
    
    2,329
    
    
    
    10,732
    
    
    
    (12,628
    )
    
    
    3,720US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    859
    
    
    
    859Other intangible assets
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    50Pensions cost
    
    
    482
    
    
    
    14
    
    
    
    94
    
    
    
    
    
    
    
    590Securities and investments
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Securitised assets
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    368Derivatives
    
    
    121
    
    
    
    216
    
    
    
    1
    
    
    
    
    
    
    
    338Value of in force business
    
    
    
    
    
    
    
    
    
    
    (1,360
    )
    
    
    
    
    
    
    (1,360
    )Deferred acquisition costs
    
    
    
    
    
    
    
    
    
    
    885
    
    
    
    
    
    
    
    885Policy liabilities
    
    
    
    
    
    
    
    
    
    
    (185
    )
    
    
    
    
    
    
    (185
    )Loan origination fees and costs
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Debt securities in issue
    
    
    
    
    
    
    (132
    )
    
    
    
    
    
    
    
    
    
    
    (132
    )Preference shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Derecognition of liabilities
    
    
    (154
    )
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    (148
    )Other
    
    
    (3
    )
    
    
    1
    
    
    
    3
    
    
    
    
    
    
    
    1Tax effect of the above adjustments
    
    
    (265
    )
    
    
    (45
    )
    
    
    45
    
    
    
    
    
    
    
    (265
    )Shareholders equity  US GAAP
    
    
    3,906
    
    
    
    2,435
    
    
    
    10,271
    
    
    
    (11,769
    )
    
    
    4,843
 194




---



##### Table of Contents



Financial Statements
 
 Selected financial data
  Income Statements
 2005(1)
    
    
    2005(2)
    
    
    2004$m
    
    
    £m
    
    
    £mNet interest income
    
    
    2,076
    
    
    
    1,207
    
    
    
    1,463Net fee and commission income
    
    
    1,121
    
    
    
    652
    
    
    
    538Dividend income
    
    
    2
    
    
    
    1
    
    
    
    1Net earned insurance premiums
    
    
    2,105
    
    
    
    1,224
    
    
    
    750Net trading income  (Banking and Life Assurance)
    
    
    5,373
    
    
    
    3,124
    
    
    
    846Other operating income
    
    
    370
    
    
    
    215
    
    
    
    341Total operating income
    
    
    11,047
    
    
    
    6,423
    
    
    
    3,939Net insurance claims incurred and movement in policyholder liabilities
    
    
    (6,335
    )
    
    
    (3,683
    )
    
    
    (1,094
    )Total income net of insurance claims
    
    
    4,712
    
    
    
    2,740
    
    
    
    2,845Administration expenses
    
    
    (2,965
    )
    
    
    (1,724
    )
    
    
    (2,221
    )Depreciation and amortisation
    
    
    (342
    )
    
    
    (199
    )
    
    
    (547
    )Total operating expenses
    
    
    (3,307
    )
    
    
    (1,923
    )
    
    
    (2,768
    )Impairment losses on loans and advances
    
    
    (375
    )
    
    
    (218
    )
    
    
    55Impairment recoveries / (losses) on fixed asset investments
    
    
    
    
    
    
    
    
    
    
    80Provisions for contingent liabilities and commitments
    
    
    (5
    )
    
    
    (3
    )
    
    
    (233
    )Profit/(loss) before tax
    
    
    1,025
    
    
    
    596
    
    
    
    (21
    )Taxation expense
    
    
    (303
    )
    
    
    (176
    )
    
    
    (33
    )Profit/(loss) for the year
    
    
    722
    
    
    
    420
    
    
    
    (54
    )
 2005(1)
    
    
    2005(3)
    
    
    2004(4)
    
    
    2003
    
    
    2002
    
    
    2001$m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSelected US GAAP income statement dataProfit/(loss) from continuing operations
    
    
    344
    
    
    
    200
    
    
    
    (54
    )
    
    
    278
    
    
    
    (685
    )
    
    
    1,485Net income/(loss)
    
    
    435
    
    
    
    253
    
    
    
    (20
    )
    
    
    (123
    )
    
    
    (1,407
    )
    
    
    930
 1.
    
    Amounts stated in dollars have been translated from sterling at the rate of £1.00  $1.72,
the noon buying rate on 31 December 2005.2.
    
    Abbey, in line with all listed entities in the European Union, was required to adopt
International Financial Reporting Standards (IFRS) in preparing its consolidated financial
statements for the year ended 31 December 2005. Up to 31 December 2004, the Group prepared
its financial statements in accordance with UK Generally Accepted Accounting Principles (UK
GAAP). Key standards IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39
Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts have
been applied prospectively from 1 January 2005. All other standards are required to be applied
retrospectively.3.
    
    Abbey early adopted SFAS 155 on 1 January 2005. Under SFAS 155, financial assets and
financial liabilities may be measured at fair value through the income statement where they
contain substantive embedded derivatives that would otherwise require bifurcation under SFAS
133. Prior to 1 January 2005, such an option did not exist. Abbey early adopted the fair
value option provided under SFAS 155 principally for selected debt securities in issue in
order to achieve greater consistency with the accounting requirements of the fair value option
under IAS 39.4.
    
    In 2004, Abbey adopted FIN 46R Consolidation of Variable Interest Entities which changed
the method of determining whether certain entities, including securitisation entities, should
be included in Abbeys consolidated financial statements. The application of FIN 46R did not
have any effect on Abbeys profit/(loss) from continuing operations or net profit/(loss).
 195




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##### Table of Contents



Financial Statements
 Selected financial data
 Balance sheets
 2005(1)
    
    
    2005(2)
    
    
    2004Notes
    
    
    $m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    13
    
    
    
    1,705
    
    
    
    991
    
    
    
    454Trading assets
    
    
    14
    
    
    
    100,157
    
    
    
    58,231
    
    
    
    Derivative financial instruments
    
    
    15
    
    
    
    20,391
    
    
    
    11,855
    
    
    
    2,377Financial assets designated at fair value
    
    
    16
    
    
    
    52,627
    
    
    
    30,597
    
    
    
    Loans and advances to banks
    
    
    17
    
    
    
    764
    
    
    
    444
    
    
    
    11,751Loans and advances to customers
    
    
    18
    
    
    
    164,203
    
    
    
    95,467
    
    
    
    109,416Debt securities
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    37,010Equity securities and other variable yield securities
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    10,792Available for sale securities
    
    
    22
    
    
    
    22
    
    
    
    13
    
    
    
    Investment in associated undertakings
    
    
    24
    
    
    
    41
    
    
    
    24
    
    
    
    25Intangible assets
    
    
    25
    
    
    
    294
    
    
    
    171
    
    
    
    175Value of in-force business
    
    
    26
    
    
    
    2,960
    
    
    
    1,721
    
    
    
    1,844Property, plant and equipment
    
    
    27
    
    
    
    540
    
    
    
    314
    
    
    
    262Operating lease assets
    
    
    28
    
    
    
    3,736
    
    
    
    2,172
    
    
    
    2,275Investment property
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    1,228Current tax assets
    
    
    
    
    
    
    404
    
    
    
    235
    
    
    
    242Deferred tax assets
    
    
    30
    
    
    
    1,369
    
    
    
    796
    
    
    
    501Other assets
    
    
    31
    
    
    
    6,885
    
    
    
    4,003
    
    
    
    6,381Total assets
    
    
    
    
    
    
    356,098
    
    
    
    207,034
    
    
    
    184,733Deposits by banks
    
    
    32
    
    
    
    9,661
    
    
    
    5,617
    
    
    
    18,412Customer accounts
    
    
    33
    
    
    
    113,329
    
    
    
    65,889
    
    
    
    78,660Derivative financial instruments
    
    
    15
    
    
    
    19,374
    
    
    
    11,264
    
    
    
    3,665Trading liabilities
    
    
    34
    
    
    
    90,582
    
    
    
    52,664
    
    
    
    Financial liabilities designated at fair value
    
    
    35
    
    
    
    13,670
    
    
    
    7,948
    
    
    
    Debt securities in issue
    
    
    36
    
    
    
    36,595
    
    
    
    21,276
    
    
    
    37,067Other borrowed funds
    
    
    37
    
    
    
    3,860
    
    
    
    2,244
    
    
    
    722Subordinated liabilities
    
    
    38
    
    
    
    10,673
    
    
    
    6,205
    
    
    
    5,484Insurance and reinsurance liabilities
    
    
    39
    
    
    
    36,982
    
    
    
    21,501
    
    
    
    24,923Macro hedge of interest rate risk
    
    
    
    
    
    
    22
    
    
    
    13
    
    
    
    Other liabilities
    
    
    40
    
    
    
    5,487
    
    
    
    3,190
    
    
    
    8,844Investment contract liabilities
    
    
    41
    
    
    
    5,686
    
    
    
    3,306
    
    
    
    Other provisions
    
    
    42
    
    
    
    435
    
    
    
    253
    
    
    
    302Current tax liabilities
    
    
    
    
    
    
    495
    
    
    
    288
    
    
    
    161Deferred tax liabilities
    
    
    30
    
    
    
    1,524
    
    
    
    886
    
    
    
    1,064Retirement benefit obligations
    
    
    43
    
    
    
    2,374
    
    
    
    1,380
    
    
    
    1,197Minority interests  non-equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    512Total liabilities
    
    
    
    
    
    
    350,749
    
    
    
    203,924
    
    
    
    181,013Share capital
    
    
    45
    
    
    
    254
    
    
    
    148
    
    
    
    473Share premium account
    
    
    45
    
    
    
    3,194
    
    
    
    1,857
    
    
    
    2,164Retained earnings
    
    
    46
    
    
    
    1,901
    
    
    
    1,105
    
    
    
    1,083Total shareholders equity
    
    
    
    
    
    
    5,349
    
    
    
    3,110
    
    
    
    3,720Total liabilities and equity
    
    
    
    
    
    
    356,098
    
    
    
    207,034
    
    
    
    184,733
 2005(1)
    
    
    2005(3)
    
    
    2004(4)
    
    
    2003
    
    
    2002
    
    
    2001$m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSelected US GAAP balance sheet dataShareholders funds
    
    
    8,531
    
    
    
    4,960
    
    
    
    4,843
    
    
    
    5,629
    
    
    
    5,889
    
    
    
    8,059Total assets
    
    
    393,723
    
    
    
    228,909
    
    
    
    186,265
    
    
    
    197,836
    
    
    
    187,869
    
    
    
    188,193
 1.
    
    Amounts stated in dollars have been translated from sterling at the rate of £1.00  $1.72,
the noon buying rate on 31 December 2005.2.
    
    Abbey, in line with all listed entities in the European Union, was required to adopt
International Financial Reporting Standards (IFRS) in preparing its consolidated financial
statements for the year ended 31 December 2005. Up to 31 December 2004, the Group prepared
its financial statements in accordance with UK Generally Accepted Accounting Principles (UK
GAAP). Key standards IAS 32 Financial Instruments:
Disclosure and Presentation, IAS 39 Financial Instruments: Recognition and Measurement and IFRS 4
Insurance Contracts have been applied prospectively from 1 January 2005. All other standards
are required to be applied retrospectively.3.
    
    Abbey early adopted SFAS 155 on 1 January 2005. Under SFAS 155, financial assets and
financial liabilities may be measured at fair value through the income statement where they
contain substantive embedded derivatives that would otherwise require bifurcation under SFAS
133. Prior to 1 January 2005, such an option did not exist. Abbey early adopted the fair
value option provided under SFAS 155 principally for selected debt securities in issue in
order to achieve greater consistency with the accounting requirements of the fair value option
under IAS 39.4.
    
    In 2004, Abbey adopted FIN 46R Consolidation of Variable Interest Entities which changed
the method of determining whether certain entities, including securitisation entities, should
be included in Abbeys consolidated financial statements. The application of FIN 46R had no
effect on Abbeys net assets and did not have a significant effect on Abbeys total assets.
 196




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##### Table of Contents





Financial Statements


Selected financial data


Selected statistical information


2005(9)
    
    
    2004%
    
    
    %Selected IFRS financial statisticsProfitability ratios:Return on average total assets(1, 9)
    
    
    0.21
    
    
    
    (0.03
    )Return on average ordinary shareholders funds (2)
    
    
    19.56
    
    
    
    (1.17
    )Return on average risk weighted assets (3)
    
    
    0.75
    
    
    
    (0.09
    )Net interest margin (4, 9)
    
    
    1.19
    
    
    
    1.36Cost: income ratio (5)
    
    
    70.18
    
    
    
    97.29Capital ratios:Average ordinary shareholders funds as a percentage of average total assets (9)
    
    
    1.07
    
    
    
    2.23Risk asset ratios:Total
    
    
    12.5
    
    
    
    12.0Tier 1
    
    
    10.0
    
    
    
    10.4Credit
quality data:
(6)Non-performing loans as a percentage of loans and advances to customers excluding finance leases (6, 7)
    
    
    0.92
    
    
    
    1.04Provisions as a percentage of loans and advances to customers excluding finance leases (6)
    
    
    0.41
    
    
    
    0.43Provisions as a percentage of non-performing loans (6, 7)
    
    
    44.67
    
    
    
    40.93Provisions charge for bad and doubtful debts as a percentage of average loans and advances to customers excluding
finance leases (6)
    
    
    0.22
    
    
    
    (0.06
    )Ratio of earnings to fixed charges: (8)Excluding interest on retail deposits
    
    
    135.31
    
    
    
    98.99Including interest on retail deposits
    
    
    114.02
    
    
    
    99.50


2005(10)
    
    
    2004(11)
    
    
    2003
    
    
    2002
    
    
    2001%
    
    
    %
    
    
    %
    
    
    %
    
    
    %Selected US GAAP financial statisticsReturn on average total assets (1)
    
    
    0.12
    
    
    
    (0.01
    )
    
    
    (0.06
    )
    
    
    (0.75
    )
    
    
    0.51Return on average equity shareholders funds (2)
    
    
    5.16
    
    
    
    (0.38
    )
    
    
    (2.14
    )
    
    
    (20.17
    )
    
    
    11.85Dividends as a percentage of net income
    
    
    20.16
    
    
    
    (4,375.00
    )
    
    
    (233.33
    )
    
    
    (56.50
    )
    
    
    77.10Average equity shareholders funds as a percentage of
average total assets
    
    
    2.36
    
    
    
    2.73
    
    
    
    2.99
    
    
    
    3.71
    
    
    
    4.29Number
    
    
    Number
    
    
    Number
    
    
    Number
    
    
     NumberRatio of earnings to fixed charges: (8)Excluding interest on retail deposits
    
    
    1.26
    
    
    
   1.01
    
    
    
   0.92
    
    
    
   0.67
    
    
    
   1.28Including interest on retail deposits
    
    
     1.10
    
    
    
   1.00
    
    
    
   0.95
    
    
    
   0.77
    
    
    
   1.20


1.
    
    Profit after tax divided by average total assets.2.
    
    Profit after tax divided by average equity shareholders funds.3.
    
    Profit after tax divided by average risk weighted assets.4.
    
    Net interest margin represents net interest income as a percentage of average
interest-earning assets.5.
    
    Cost: income ratio equals operating expenses excluding depreciation on operating lease assets
divided by total operating income less depreciation on operating lease assets.6.
    
    All credit quality data is calculated using period-end balances, except for provisions for
bad and doubtful debts as a percentage of average loans and advances to customers, excluding
assets held under purchase and resale agreements.7.
    
    The non-performing loans used in these statistics are calculated in accordance with
conventional US definitions. Abbey generally holds a first mortgage over the properties
securing the UK residential mortgage loans. The value of the security will in many cases
completely cover the value of the loan and the arrears and in the remainder will considerably
reduce the size of the loss incurred.8.
    
    For the purpose of calculating the ratios of earnings to fixed charges, Earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest payable, which
includes the amortisation of discounts and premiums on debt securities in issue and interest
payable on finance lease obligations.9.
    
    Abbey, in line with all listed entities in the European Union, was required to adopt
International Financial Reporting Standards (IFRS) in preparing its consolidated financial
statements for the year ended 31 December 2005. Up to 31 December 2004, the Group prepared
its financial statements in accordance with UK Generally Accepted Accounting Principles (UK
GAAP). Key standards IAS 32 Financial Instruments: Disclosure and Presentation, IAS 39
Financial Instruments: Recognition and Measurement and IFRS 4 Insurance Contracts have
been applied prospectively from 1 January 2005. All other standards are required to be applied
retrospectively.10.
    
    Abbey early adopted SFAS 155 on 1 January 2005. Under SFAS 155, financial assets and
financial liabilities may be measured at fair value through the income statement where they
contain substantive embedded derivatives that would otherwise require bifurcation under SFAS
133. Prior to
1 January 2005, such an option did not exist. Abbey early adopted the fair value option
provided under SFAS 155 principally for selected debt securities in issue in order to achieve
greater consistency with the accounting requirements of the fair value option under IAS 39.11.
    
    In 2004, Abbey adopted FIN 46R Consolidation of Variable Interest Entities which changed
the method of determining whether certain entities, including securitisation entities, should
be included in Abbeys consolidated financial statements. The application of FIN 46R had no
effect on Abbeys net assets and profit after tax and did not have a significant effect on
Abbeys total assets.


197



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##### Table of Contents



Financial Statements
 Selected financial data
 Exchange rates
  High
    
    
    Low
    
    
    Average (1)
    
    
    Period endCalendar period
    
    $Rate
    
    
    $Rate
    
    
    $Rate
    
    
    $RateYears ended 31 December:2005
    
    
    1.93
    
    
    
    1.72
    
    
    
    1.81
    
    
    
    1.722004
    
    
    1.95
    
    
    
    1.75
    
    
    
    1.84
    
    
    
    1.782003
    
    
    1.78
    
    
    
    1.55
    
    
    
    1.64
    
    
    
    1.782002
    
    
    1.61
    
    
    
    1.41
    
    
    
    1.51
    
    
    
    1.612001
    
    
    1.50
    
    
    
    1.37
    
    
    
    1.44
    
    
    
    1.45Months ended:June 2006 (2)
    
    
    1.88
    
    
    
    1.83
    
    
    
    1.85
    
    
    
    1.83May 2006
    
    
    1.89
    
    
    
    1.83
    
    
    
    1.87
    
    
    
    1.89April 2006
    
    
    1.82
    
    
    
    1.74
    
    
    
    1.77
    
    
    
    1.82March 2006
    
    
    1.74
    
    
    
    1.75
    
    
    
    1.74
    
    
    
    1.74February 2006
    
    
    1.78
    
    
    
    1.73
    
    
    
    1.75
    
    
    
    1.75January 2006
    
    
    1.79
    
    
    
    1.74
    
    
    
    1.77
    
    
    
    1.78December 2005
    
    
    1.77
    
    
    
    1.72
    
    
    
    1.75
    
    
    
    1.72November 2005
    
    
    1.78
    
    
    
    1.71
    
    
    
    1.73
    
    
    
    1.73October 2005
    
    
    1.79
    
    
    
    1.75
    
    
    
    1.77
    
    
    
    1.78
 (1)
    
    The average of the noon buying rates on the last business day of each month during the
relevant period.(2)
    
    With respect to June 2006, for the period from June 1
to June 22.
 198




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##### Table of Contents



Shareholder Information
 
 Dividends on dollar-denominated preference shares
  Dollar-denominated preference shares and American Depository Shares
   Major shareholders
  Exchange controls
  199




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##### Table of Contents



Shareholder Information
 
 Risk Factors
  Risks concerning borrower credit quality and general economic conditions are inherent in Abbeys
business
  Market risks associated with fluctuations in interest rates, foreign exchange rates, bond and
equity prices and other market factors are inherent in Abbeys business
      Operational risks are inherent in Abbeys business
  Abbeys businesses are subject to substantial legislation, regulatory and governmental oversight
   Risks associated with strategic decisions regarding organic growth, the competitive environment and
potential acquisitions and disposals
  Abbeys insurance businesses are subject to inherent risks regarding claims provisions
  200




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##### Table of Contents



Shareholder Information
 
 Taxation for US Investors
   United Kingdom taxation on dividends
  United States taxation on dividends
   United Kingdom taxation on capital gains
  >
    
    an individual who is neither resident nor ordinarily resident in the United Kingdom; or>
    
    a company which is not resident in the United Kingdom;
   United States taxation of dispositions
  United Kingdom inheritance tax
  >
    
    domiciled for the purposes of the convention in the United States; and>
    
    is not for the purposes of the convention a national of the United Kingdom;
  >
    
    the individuals death; or>
    
    on a gift of the shares during the individuals lifetime.
  201




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##### Table of Contents



Shareholder Information
 
 Contact Information
 Abbey National plc registered and principal office and investor relations department
 
 Santander shareholder department
 Phone numbers
 
 Documents on display
  Corporate Governance
  Memorandum and Articles of Association
      th
     202




---



##### Table of Contents



Contact Information
   >
    
    divide among the members in kind the whole or any part of the assets
of Abbey (whether they shall consist of property of the same kind or
not) and, for that purpose, set such values as he deems fair upon any
property to be divided and determine how the division shall be
carried out as between the members or different classes of members;
or>
    
    vest the whole or any part of the assets in trustees upon such trusts
for the benefit of the contributories as the liquidator, with the
like sanction, shall think fit but no member shall be compelled to
accept any shares or other assets upon which there is any liability.
        >
    
    divide among the members the whole or any part of the assets of Abbey
(whether they shall consist of property of the same kind or not)
and, for that purpose, set such values as he deems fair upon any
property to be divided and determine how the division shall be
carried out as between the members or different classes of members;
or>
    
    vest the whole or any part of the assets in trustees upon such trusts
for the benefit of the contributories as the liquidator, with the
like sanction, shall think fit but no member shall be compelled to
accept any shares or other assets upon which there is any liability.
          203




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##### Table of Contents



Glossary and Definitions
 
 Terms used
    
    US equivalent or brief description of meaningAccounts
    
    Financial statementsAllotted
    
    IssuedAttributable profit
    
    Net incomeBalance sheet
    
    Statement of financial positionBills
    
    NotesCalled up share capital
    
    Ordinary shares or common stock and preferred stock, issued and fully paidCapital allowances
    
    Tax depreciation allowancesCombined Code
    
    UK-derived principles of good corporate governance and code of best practiceCreditors
    
    PayablesCurrent account
    
    Checking accountDealing
    
    TradingDebtors
    
    ReceivablesDeferred tax
    
    Deferred income taxDepreciation
    
    Write-down of tangible fixed assets over their estimated useful livesFees and commissions payable
    
    Fees and commissions expenseFees and commissions receivable
    
    Fees and commissions incomeFinance lease
    
    Capital leaseFreehold
    
    Ownership with absolute rights in perpetuityInterest payable
    
    Interest expenseInterest receivable
    
    Interest incomeLoans and advances
    
    LendingsLoan capital
    
    Long-term debtLong-term assurance fund
    
    Long-term insurance fundMembers
    
    ShareholdersMemorandum
and Articles of Association
    
    BylawsNet asset value
    
    Book valueNominal value
    
    Par valueOne-off
    
    Non-recurringOrdinary shares
    
    Common stockOverdraft
    
    A line of credit established through a customers current account andcontractually repayable on demandPreference shares
    
    Preferred stockPremises
    
    Real estateProfit
    
    IncomeProvisions
    
    AllowancesShare capital
    
    Ordinary shares, or common stock, and preferred stockShareholders funds
    
    Stockholders equityShare premium account
    
    Additional paid-in capitalShares in issue
    
    Shares outstandingTangible fixed assets
    
    Property, plant and equipmentUndistributable reserves
    
    Restricted surplusWrite-offs
    
    Charge-offs
 204




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##### Table of Contents



Cross-reference to Form 20-F
 
 Part I1
    
    Identity of Directors, Senior Management and Advisers
    
    
    *2
    
    Offer Statistics and Expected Timetable
    
    
    *3
    
    Key InformationSelected Financial Data
    
    
    195Capitalisation and Indebtedness
    
    
    *Reasons for the Offer and use of Proceeds
    
    
    *Exchange Rates
    
    
    198Risk Factors
    
    
    2004
    
    Information on the CompanyHistory and Development of the Company
    
    
    6Business Overview
    
    
    6Supervision and Regulation
    
    
    86Organisational Structure
    
    
    65
    
    Operating and Financial Review and ProspectsOperating Results
    
    
    10Liquidity and Capital Resources
    
    
    49Research and Development, Patents and Licenses, etc
    
    
    Not applicableTrend Information
    
    
    10Off- Balance Sheet Arrangements
    
    
    51Contractual Obligations
    
    
    536
    
    Directors, Senior Management and EmployeesDirectors
    
    
    74Compensation
    
    
    78Board Practices
    
    
    77Employees
    
    
    80Share Ownership
    
    
    797
    
    Major Shareholders and Related Party TransactionsMajor Shareholders
    
    
    199Related Party Transactions
    
    
    79Interests of Experts and Counsel
    
    
    *8
    
    Financial InformationConsolidated Statements and Other Financial Information
    
    
    92Significant Changes
    
    
    109
    
    The Offer and ListingOffer Listing and Details
    
    
    *Plan of Distribution
    
    
    *Selling shareholders
    
    
    *Share Price History
    
    
    201Trading Markets
    
    
    *Dilution
    
    
    *Expenses of the Issue
    
    
    *10
    
    Additional InformationShare Capital
    
    
    *Memorandum and Articles of Association
    
    
    202Material Contracts
    
    
    33Exchange Controls
    
    
    199Taxation
    
    
    201Dividends and Paying Agents
    
    
    *Statements by Experts
    
    
    *Documents on Display
    
    
    202Subsidiary Information
    
    
    Not applicable11
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    5912
    
    Description of Securities Other Than Equity SecuritiesDebt Securities
    
    
    *Warrants and Rights
    
    
    *Other Securities
    
    
    *American Depositary Shares
    
    
    *Part II13
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    Not applicable14
    
    Material Modifications to the Rights
    
    
    Not applicable15
    
    Controls and ProceduresDisclosure Controls and Procedures
    
    
    84Managements Annual Report on Internal Control over Financial Reporting
    
    
    Not
applicableAttestation Report of the Registered Public Accounting Firm
    
    
    Not applicableChanges in Internal Control Over Financial Reporting
    
    
    8416
    
    Internal Control over Financial ReportingAudit Committee Financial Expert
    
    
    78
 205




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##### Table of Contents



Cross-reference to Form 20-F
 Code of Ethics
    
    
    84Principal Accountant Fees and Services
    
    
    115Exemptions from the Listing Standards for Audit Committees
    
    
    *Part III17
    
    Financial Statements
    
    
    Not applicable18
    
    Financial Statements
    
    
    9219
    
    Exhibits
    
    
    Filed with the SEC
 *
    
    Not required for an Annual Report.
 206




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##### Table of Contents



SIGNATURE
   By
    
    /s/ Francisco Gómez-RoldánFrancisco Gómez-Roldán




---



##### Table of Contents



EXHIBIT INDEX
   1
    .1
    
    Memorandum and Articles of
    Association of Abbey National plc4
    .1
    
    Sale and Purchase Agreement between
    Abbey National plc, Resolution Life Limited and Resolution plc
    dated 7 June 20067
    .1
    
    Statement of ratio of earnings to
    fixed charges**8
    .1
    
    List of Subsidiaries of Abbey
    National plc12
    .1
    
    CEO Certificate pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200212
    .2
    
    CFO Certificate pursuant to
    Section 302 of the Sarbanes-Oxley Act of 200213
    .1
    
    Certificate pursuant to
    Section 906 of the Sarbanes-Oxley Act of 200214
    .1
    
    Consent of Deloitte &
    Touche LLP** 
  *
    Documents concerning Abbey National plc referred to within the
    Annual Report on
    Form 20-F 2005 may
    be inspected at Abbey National House, 2 Triton Square,
    Regents Place, London NW1 3AN, the principal executive
    offices and registered address of Abbey National plc.  **
    Incorporated by reference in the Registration Statement on
    Form F-3
    (No. 333-13146).