##### 

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, 2006                                                       
|          
|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)


Securities registered or to be registered pursuant to
Section 12(b) of the Act.


|                                                                  |  |                                          
|----------------------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                               |  | Name of Each Exchange on Which Registered
|                                                                  |  |                                          
|7.375% Perpetual Subordinated
    Capital Securities
    (ANBPRC) |  | New York Stock Exchange                  






Securities registered or to be registered pursuant to
Section 12(g) of the Act. None


Securities registered or to be registered pursuant to
Section 15(d) of the Act. None




|                                                                     |  |            
|-------------------------------------------------------------------- |  | -----------
|103/8%
    Non-cumulative Preference Shares of nominal value £1 each |  | 200,000,000
|85/8%
    Non-cumulative Preference Shares of nominal value £1 each  |  | 125,000,000




þ o


o þ


þ o


12b-2


o o þ


o þ


12b-2 o þ










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Contents

Business Review and Forward-looking
Statements

Chief Executives Review 2

Forward-looking Statements 4

Business and Financial Review

Business Overview 5

Business Review  Summary 9

Business Review  Personal
Financial Services 13

Business Review  Sold Life
Businesses 19

Business Review  Portfolio
Business Unit 20

Other Material Items 21

Balance Sheet Business Review 24

Risk Management 38

Report of the Directors

Directors 55

Directors Report 58

Supervision and Regulation 64

Financial Statements

Report of Independent Registered Public
Accounting Firm 67

Primary Financial Statements 68

Accounting Policies 73

Notes to the Financial Statements 86

Selected Financial Data 160

Shareholder Information

Shareholder Information 164

Risk Factors 165

Taxation for US Investors 166

Contact Information 167

Glossary and Definitions 169

Cross-reference to
Form 20-F
170

1



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##### 

Business Review and Forward-looking Statements





Chief Executives Review

Overview

Abbey National plc (Abbey) has made strong progress
in 2006. Weve accelerated revenue growth and have
continued to successfully reduce costs across the business, with
cumulative cost savings of almost £300m 
1 year ahead of target. Abbey is well on track to meet its
3-year plan targets.

Abbeys transformation to become a full service retail bank
made further progress during the year. We have been successful
in commencing the first phases of our premium banking service
and growing our business banking operation and, in the second
half of the year, we launched a new buy-to-let mortgage range in
line with our strategy to grow in higher margin segments. During
2007, Abbey also plans to launch its new credit card range in
the UK.

We continue to make operational improvements in terms of sales
productivity. A key part of this is the implementation of
Partenon, the core banking platform of the Banco Santander
Central Hispano S.A. group of companies (Santander),
which is expected to be in place by the end of 2007. During
2006, progress in Partenons implementation included the
introduction of the single customer database and the
commencement of the sales and service portals rollout.

Abbeys business performance has been strong and we have
more than doubled our market share of net mortgage lending
compared to 2005. The share of bank account openings has also
increased and bank account liability balances were 10% higher
than 2005. Across all product lines, the focus has been on
balancing growth with profitability and good margin management
whilst also maintaining a prudent approach to credit.

Finally, Abbey completed the sale of its life insurance
businesses to Resolution plc (Resolution), and the
sale of its asset management businesses to Santander, allowing a
greater focus on our core Retail Banking operations.

Key Financial Highlights



>
    statutory profit on continuing
    operations before tax of £428m (2005: £362m), with a
    profit after tax on continuing operations of £313m (2005:
    £254m);>
    statutory profit for the year
    (after tax and discontinued operations) fell from £420m to
    £68m with the loss on sale of the discontinued life
    insurance business of £264m in 2006 and a fall in profit
    from the discontinued life insurance business to £19m from
    £166m in 2005;>
    Personal Financial Services
    trading profit before tax (managements preferred profit
    measure, described in the Business Review  Summary on
    page 9) increased by £164m to £838m compared to
    £674m in 2005, with revenue growth and cost reduction
    resulting in operating jaws, which represent the difference
    between revenue and cost growth relative to the prior year, of
    10%. Cumulative savings since acquisition are now broadly in
    line with the £300m target, with almost 1 year
    remaining;>
    Personal Financial Services
    trading income was 5% higher, driven by all divisions, and was
    within the targeted range of between 5% and 10% for the first
    year of the 3-year plan covering 2006  2008. This
    represents a significant improvement in performance after a
    number of years of revenue decline and a flat performance in
    2005;>
    the Retail Banking division
    benefited from solid asset growth of 9% and stable retail
    spreads. The Financial Markets division continued to perform
    well, as did the businesses within the newly formed Wealth
    Management division;>
    a further reduction in Personal
    Financial Services trading expenses of 5% with headcount
    approximately 2,000 full time equivalents (FTE) lower than
    31 December 2005 (excluding the impact of the sale of the
    Life insurance businesses);>
    a reduction in the Personal
    Financial Services trading cost: income ratio from 61.3% in 2005
    to 55.5%; and Abbeys balance sheet remains strong and has
    been significantly de-risked with the sale of the life insurance
    businesses. Abbey has delivered solid growth in customer loans
    and advances, and during the year increased its coverage of non-
    performing loans. The credit quality of the mortgage book
    remains strong.In line with the sector, Abbeys overall results have been
impacted by increased credit provisions driven largely by
strengthening of the coverage ratio and the maturing of the
unsecured personal loan portfolio, with some deterioration in
credit quality in line with the market. Statutory profit before
tax on continuing operations remains impacted by on-going
restructuring charges. In addition, 2006 did not benefit from
the one-off gains relating to the run-down of the Portfolio
Business Unit posted in 2005.

Strategic Update

In 2006, Abbey has made considerable progress in its
transformation to become a full-service retail bank. In the
third quarter, Abbey completed the sale of its life insurance
businesses to Resolution. This was an important landmark and is
a significant step forward in Abbeys strategy. Through
this sale, we have significantly de-risked the balance sheet,
increased the focus on Abbeys core activities and formed a
strategic partnership with Resolution that will allow Abbey to
grow its investment new business. During the year Abbey also
made considerable progress on the two key components of our
strategic plan announced in 2005:



>
    moving to a new operating model
    to improve front line sales productivity and back office
    efficiency>
    delivering revenue growth in new
    and existing products.

2



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##### 

Business Review and Forward-looking Statements



Chief Executives
Reviewcontinued

In January 2007, Abbey held its first Convention in several
years. At this, Abbey clearly set and communicated its five key
values throughout the business:



>
    Service quality;>
    Efficiency;>
    Customer loyalty;>
    Teamwork; and>
    MeritocracyThese are the values that we expect every Abbey employee to
uphold in their day-to-day actions.

Operating Model

In the Retail Banking division we have increased the focus on
channel management with the responsibility for driving forward
the strategy being split between the direct and intermediary
channels. The focus for both channels has been to increase sales
productivity and Abbey have made good progress during 2006.
Within the branch network, for example, mortgage advisors
increased productivity, measured as the average number of
products sold by mortgage advisor, by 44%. At the same time the
Intermediary sales force improved the number of mortgages
applications per sales consultant by 19%.

The implementation of Partenon proceeded well during the year
with the completion of a programme of infrastructure renewal.
Abbey also commenced the rollout of several commercial tools,
including:



>
    branch, savings and channel
    Management Information Systems: giving improved information on
    performance by channel / product;>
    commercial and customer portals:
    providing an integrated vision of the customer (products and
    relationships) and improving sales productivity;>
    single customer database (BDP):
    providing a single view of the customer to the business;>
    selling and servicing portals:
    simplifying and improving sales processes; and>
    new corporate intranet: providing
    access to Santander information and new Partenon functionality.In 2007, the focus will be on the continued rollout of the
front-end and back-end applications, including credit cards,
mortgages, unsecured personal loans, banking, savings and
payments. This will enable front-line employees to better meet
customer needs and maximise sales opportunities.

Business Development

Abbeys performance for 2006 is in line with the targets
established in its 3-year plan covering 2006  2008
announced in the third quarter of 2005, of growing revenues
between 5% and 10%. In 2006 Abbey has benefited from a focus on
value whilst delivering strong asset growth and good margin
management.

After a number of years of revenue decline and a flat
performance in 2005, Abbey achieved Personal Financial Services
trading income growth of 5%. Personal Financial Services
non-interest income was well ahead of 2005, with Retail Banking
and Wealth Management also delivering good growth in net
interest income. Overall, retail spreads were stable relative to
2005 with a widening of liability spreads being partially offset
by competitive pressure impacting asset spreads in the latter
part of the year.

Retail lending balances were 9% ahead of 2005 driven by an
increase in mortgage and unsecured lending balances.
Abbeys share in net mortgage lending more than doubled in
2006 to 7%. This is considered to be in part driven by retention
initiatives put in place in 2006.

As was highlighted in 2005, Abbey needs to develop its mortgage
product range in order to capture growth in the expanding and
higher margin non-standard segments. Sales of flexible mortgages
were over 60% higher than 2005 and in the latter part of 2006,
the first-time buyer proposition was improved and a new
buy-to-let offering was launched.

Abbey remains committed to strengthening areas in which it was
under-represented such as current accounts, investments and
pensions. Bank account openings were boosted by the high
interest current account offer as well as changes to the
branch incentive schemes, with account openings up by 17% and
related liability balances up by 10%. Whilst active margin
management on negative margin deposit accounts resulted in
outflows, these were more than offset by strong acquisition in
profitable branch accounts, excellent growth in our Wealth
Management business and a 16% uplift in investment new business.
In total, retail banking deposits were up 2% on the previous
year.

Financial Markets continued to perform well with investment in
its sales and marketing teams delivering approximately
£1.0bn retail structured product sales during the year. In
Abbeys Wealth Management division, James Hay successfully
rebranded its self-invested personal pension (SIPP)
schemes and WRAP products, its retirement and portfolio
management products, resulting in improved sales performance.

Significant progress has been made in the establishment of a new
credit card business. Abbey has leveraged the global experience
and expertise of Santander in the development of its credit card
product that is expected to be launched in the first half of
2007.

3



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##### 

Business Review and Forward-looking Statements



Chief Executives
Reviewcontinued

Conclusion

We remain committed to the financial targets set out last year:



>
    cost synergies of £300m by
    2007;>
    revenue growth of between 5 and
    10% per annum from 2006  2008>
    a cost:income ratio of 45% by
    2008;>
    a return on regulatory tier 1
    equity of 18% by 2008.; andand we will further implement our qualitative goals of improving
service quality, efficiency, customer loyalty, teamwork and
meritocracy throughout Abbey.

2006 will also be remembered for the death of Francisco
Gómez-Roldán, Abbeys Chief Executive following
the acquisition by Santander. The current management team is
committed to the successful conclusion of the vision that he
set, to make Abbey the best retail bank in the UK.

We have made progress in 2006 in a highly competitive market.
With the dedication of our people, the competitiveness of our
products and the loyalty of our customers, together with the
continuing support of Santander, we are confident that we will
continue to progress throughout 2007, and achieve our goals for
the year.

(ANTONIO HORTA-OSORIO SIGNATURE)

António Horta-Osório

Chief Executive





Forward-looking Statements

Abbey may from time to time make written or oral forward-looking
statements. Examples of such forward-looking statements include,
but are not limited to:

>
    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.Words such as believes, anticipates,
expects, intends, aims,
plans, targets and similar expressions
are intended to identify forward-looking statements but are not
the exclusive means of identifying such statements.

By their very nature, forward-looking statements cannot be
objectively verified, are speculative and involve inherent risks
and uncertainties, both general and specific, and risks exist
that the predictions, forecasts, projections and other
forward-looking statements will not be achieved. Abbey cautions
readers that a number of important factors could cause actual
results to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in such
forward-looking statements made by Abbey or on Abbeys
behalf. Some of these factors are considered in detail in the
Risk Management section on page 38 and the Risk Factors section
on page 165 and may include:

>
    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.Abbey cautions that the foregoing list of important factors is
not exhaustive. When relying on forward-looking statements to
make decisions with respect to Abbey, investors and others
should carefully consider the foregoing factors and other
uncertainties and events. Such forward-looking statements speak
only as of the date on which they are made and are based on the
knowledge, information available and views taken on the date on
which they are made; such knowledge, information and views may
change at any time. Abbey does not undertake any obligation to
update or revise any forward-looking statement, whether as a
result of new information, future events or otherwise.

Written forward-looking statements may appear in documents filed
with the US Securities and Exchange Commission, including this
Annual Report, reports to shareholders and other communications.
The US Private Securities Litigation Reform Act of 1995 contains
a safe harbour for forward-looking statements on which Abbey
relies in making such disclosures.

4



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Business and Financial Review





Business Overview

This Business and Financial Review contains forward-looking
statements that involve inherent risks and uncertainties. Actual
results may differ materially from those contained in such
forward-looking statements. See Forward-looking
Statements on page 4.

General

Abbey and its subsidiaries (together, the Group)
operate primarily in the UK, under UK Law and Regulation and are
part of Santander. Abbey is a significant financial services
provider in the UK, being the second largest residential
mortgage lender and one of the largest savings brands, operating
across the full range of personal financial services.

The principal executive office and the registered office of
Abbey and Abbey National Treasury Services plc is Abbey National
House, 2 Triton Square, Regents Place, London NW1 3AN. The
telephone number of Abbey is +44 (0)870-607-6000. The designated
agent for service of process on Abbey in the United States is CT
Corporation System, with offices at 111 Eighth Avenue, New York,
NY 10011. Please see Business and Financial
Review  Tangible fixed assets for further
information regarding Abbeys properties.

Summary history

The Abbey National Building Society (the Society)
was formed in 1944 with the merger of two long-standing building
societies. In 1988, Abbey National plc was incorporated as a
bank and in 1989 the Society transferred business to Abbey
National plc as part of the conversion and listing on the London
Stock Exchange. In 2003, the brand name was shortened to Abbey
and this is the name used in this Annual Report and Accounts. A
list of Abbeys principal subsidiaries and their country of
incorporation can be found on page 104.

On 12 November 2004, Banco Santander Central Hispano, S.A.
completed the acquisition of the entire issued ordinary share
capital of Abbey, implemented by means of a scheme of
arrangement under Section 425 of the Companies Act 1985,
making Abbey a wholly-owned subsidiary of Santander. Santander
is one of the largest banks in the world by market
capitalisation. Founded in 1857, Santander has more than
60 million customers, over 10,000 offices and a presence in
over 40 countries.

Corporate purpose and strategy

Abbeys ultimate purpose and goal is to maximise value for
its shareholder, Santander, by focusing on offering full retail
banking services in the UK through its ongoing Personal
Financial Services operations. With the continuing support of
Santander, Abbey aims to be the best retail bank in the UK.

Executive Responsibility

Following the completion of the sale of Abbeys life
insurance businesses to Resolution during the third quarter of
2006, a new organisational structure was implemented with a
revised set of executive responsibilities. Abbeys
management structure is headed by António
Horta-Osório, Chief Executive, and consists of three
business divisions and five support divisions.

The business divisions consist of:

>
    Retail
    Banking
    offers residential mortgages, savings and banking and other
    personal financial products to customers throughout the United
    Kingdom. This division is headed by António
    Horta-Osório. Rod Bulmer is responsible for the direct
    channel, while Ricky Okey and Jon Goddard are responsible for
    the intermediary channel and e-commerce, respectively.>
    Wealth
    Management
    comprises primarily Abbeys self-invested pension plan
    business, Abbeys WRAP service and specialist banking
    services. This division is headed by Javier Maldonado.>
    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. This division is headed by Nathan Bostock.The support divisions consist of:

>
    Retail Products and
    Marketing
    responsible for integrating and gaining the maximum value from
    Abbeys products, marketing and brand communications to
    serve Abbeys customers better. Miguel Bragança was
    appointed to the Board in September 2006 to head this new
    division.>
    Human
    Resources
    responsible for all human resources strategy and personnel
    support. This division is headed by Nathan Bostock.>
    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. Juan Colombás and John
    Hennessy were appointed in September 2006 to this division as
    Chief Risk Officer, Retail and Chief Risk Officer, Wholesale,
    respectively.>
    Internal
    Audit
    responsible for supervising the compliance, effectiveness and
    efficiency of Abbeys internal control systems as well as
    the reliability and quality of accounting information. This
    division is headed by Jorge de la Vega.There are four further units  Strategy and Planning;
Legal, Secretariat, and Compliance; Communications (all of which
report directly to the Chief Executive); and Finance, which
includes Taxation (which reports directly to the Executive
Director, Finance, Markets and Human Resources).

5



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Business and Financial Review



Business Overviewcontinued

Competition

Competitive environment and future trends

Abbeys main competitors are established UK banks, building
societies and other financial services providers such as
insurance companies, supermarket chains and large retailers. The
market is competitive, driven largely by market incumbents.

Competition outlook

Management is confident of Abbeys strength and potential
to improve business performance despite the level of competition
and a slower rate of growth in some of its core personal
financial services markets.

Personal Financial Services

The overview of Personal Financial Services below reflects the
reporting structure in place during 2006 in accordance with
which the segmental information in the Business and
Financial Review  Personal Financial Services
section has been presented.

Retail Banking

Retail Banking consists of residential mortgages, savings,
banking and consumer credit, cahoot, general insurance, and
Abbey Business.

Residential mortgages

Abbey is the second largest provider of residential mortgages in
the UK measured by outstanding balances, providing mortgage
loans for house purchases as well as home improvement loans to
new and existing mortgage customers. Mortgage loans are offered
in two payment types. Repayment mortgages require both principal
and interest to be repaid in monthly instalments over the life
of the mortgage. Interest-only mortgages require monthly
interest payments and the repayment of principal at the end of
the mortgage term (which can be arranged via a number of
investment products including Individual Savings Accounts and
pension policies, or by the sale of the property).

Abbeys mortgage loans are usually secured by a first
mortgage over property and are typically available over a
25-year term, with no minimum term. Variable rate products
charge interest at variable rates determined at the discretion
of Abbey by reference to the general level of market interest
rates and competitive forces in the UK mortgage market. Fixed
rate products offer a predetermined interest rate, generally
fixed for between two and five years, after which they bear
interest at standard variable rates. A significant proportion of
new mortgage business is through trackers, which track the Bank
of England base rate normally with an incentive period for the
first two to five years, and flexible mortgages, allowing the
customer to vary their monthly payments, or take payment
holidays, within predetermined criteria. In line with the rest
of the UK market, a significant proportion of mortgages are
prepaid at the end of the fixed or incentive period.

Savings

Abbey provides a wide range of retail savings accounts,
including on-demand accounts, notice accounts, investment
accounts and Individual Savings Accounts. Interest rates on
savings in the UK are primarily set with reference to the
general level of market interest rates and the level of
competition for such funds.

Banking and Consumer Credit

Abbey offers a range of personal banking services including
current accounts, credit cards and unsecured personal loans.
Credit scoring is used for initial lending decisions on these
products and behavioural scoring is used for certain products
for further lending.

Abbeys principal credit card offering has been delivered
through its strategic alliance with MBNA Europe Bank Limited,
which is currently responsible for taking the credit risk and
managing the credit card base. In February 2006, Abbey announced
its intention to commence issuing credit cards through
Santanders global cards division rather than through MBNA
Europe Bank Limited. Abbey plans to launch its new credit card
range in the UK in the first half of 2007.

cahoot

cahoot is Abbeys separately branded, e-commerce retail
banking and financial services provider.

General Insurance

The range of non-life insurance products distributed by Abbey
includes property (buildings and contents) and payment
protection. Residential home insurance remains the primary type
of policy sold and is offered to customers through the branch
network, internet and over the telephone, as well as being sold
by mortgage intermediaries, often at the same time that a
mortgage is being taken out. The business model currently uses a
third party insurer to underwrite most property and payment
protection insurances.

Abbey Business

Abbey Business offers a range of banking services to small
businesses in the UK.

Wealth Management

Wealth Management consists of James Hay, Cater Allen, Abbey
International, and Abbey Sharedealing:

6



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##### 

Business and Financial Review



Business Overviewcontinued

James Hay

James Hay provides and offers administration services for
self-invested personal pension schemes and the WRAP portfolio
management product. James Hay was re-launched during 2006 with a
new brand and renewed focus. Its services are provided to end
customers mainly via Independent Financial Advisers and branded
financial service providers.

Cater Allen

Cater Allen provides a range of products to assist with the
finance requirements of individuals and businesses, under the
trading name Cater Allen Private Bank. The business attracts
clients by marketing to introducers, including Independent
Financial Advisers.

Abbey International

Abbey National International Limited uses the Abbey
International brand. Its office is in Jersey, with a focus on
attracting deposits by offering a range of savings accounts
denominated in sterling, US dollars and euro.

Abbey Sharedealing

Abbey Sharedealing provides a direct share trading service for
customers. Customers buy and sell shares on their account with
the help of the dealers at Abbey Sharedealing. No advice is
provided and all trades are on an execution only basis.

Asset Management

On 31 December 2006, Abbey sold its asset management
businesses to Santander Asset Management UK Holdings Limited, an
indirect subsidiary of Banco Santander Central Hispano S.A., for
a total cash consideration of £134m. The asset management
companies sold were Abbey National Asset Managers Limited, Abbey
National PEP & ISA Managers Limited, Abbey National Unit
Trust Managers Limited and Inscape Investments Limited.

Abbey National Asset Managers Limited provides portfolio
management services and is also the manager of the Abbey
National Multi-Manager open-ended investment company
(OEIC) product. Abbey National PEP & ISA
Managers Limited manages Personal Equity Plans and Individual
Savings Accounts. Abbey National Unit Trust Managers
Limited manages a range of Unit Trusts. Inscape Investments
Limited offers investment management in the form of tailored
portfolios.

Financial Markets

Financial Markets is structured into the following three
business areas:

Markets

Markets comprises the Derivatives and Structured Products, and
Short Term Financing areas.

Derivatives and Structured Products cover equity, fixed income,
residential property and credit derivative activities including
the manufacture of structured products sold to retail customers
both by Abbey and by other financial institutions.

Short Term Financing is responsible for managing Abbeys
operating liquidity. It runs Abbeys short-term funding and
liquidity management activities and the securities lending /
borrowing and repurchase agreement (repo)
businesses. It has retained a US office, to facilitate
Abbeys short-term multi-currency fundraising.

Asset and Liability Management

Asset and Liability Management is responsible for managing the
Groups structural liquidity. This includes Abbeys
capital management activities and medium and long-term funding,
including Abbeys structured covered bond and
securitisation programmes. It manages Abbey Retails
product and structural exposure to interest rates and, in that
role, is a link between the retail and other Financial Markets
areas. Asset and Liability Management recommends and helps to
implement Board, Asset and Liability Management Committee and
Risk Committee policies for all aspects of balance sheet
management  formulating guidance for, and monitoring,
the overall balance sheet shape, including maturity profile.

Abbey first registered with the Securities and Exchange
Commission in October 1994. Abbey National plc and Abbey
National Treasury Services plc have registered various shelf
facilities with the Securities and Exchange Commission, the most
recent being in February 2001, permitting preference shares and
debt securities, including medium-term notes and other
subordinated securities, to be issued from the date of
registration in an aggregate principal amount of $7.0bn.

Under the shelf facility registered with the Securities and
Exchange Commission, Abbey National Treasury Services plc may
issue senior debt securities, and Abbey National plc may issue
subordinated debt securities. Abbey acts as guarantor on a
senior basis on the debt securities issued by Abbey National
Treasury Services plc. Various other entities within the Group
may issue other subordinated securities under the shelf facility.

See also Sources of Liquidity in the Balance Sheet
Business Review on page 33.

Corporate

Corporate has started to offer a range of banking services to
mid-sized companies in the UK. Corporate also contains the
Social Housing and Porterbrook businesses and is responsible for
the final run down of the Motor Finance and Insurance Funding
Solutions businesses. Social Housing provides a variety of
funding solutions to registered UK Housing Associations.
Porterbrook is a train leasing business.

Group Infrastructure

Group Infrastructure consists of Central Services and Group
Capital (which contains the earnings on any surplus capital) and
the results of certain other businesses.

7



---



##### 

Business and Financial Review



Business Overviewcontinued

Sold Life Businesses

Abbey announced on 7 June 2006 that it had entered into an
agreement to sell its entire life insurance business to
Resolution for cash consideration of approximately £3.6bn.
The sale completed in the third quarter of 2006. The principal
life companies sold were Scottish Mutual Assurance plc, Scottish
Provident Limited and Abbey National Life plc, as well as the
two offshore life companies, Scottish Mutual International plc
and Scottish Provident International Life Assurance Limited.

Portfolio Business Unit

The Portfolio Business Unit comprised a number of businesses,
assets and portfolios that were inconsistent with Abbeys
future strategy, and were sold during 2004 and 2005 or
transferred to Corporate within Financial Markets. From the end
of 2005, no businesses within the Group are part of this segment.

8



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##### 

Business and Financial Review





Business Review  Summary

The results discussed below are not necessarily indicative of
Abbeys results in future periods. The following
information contains certain forward-looking statements. See
Forward-looking Statements on page 4. The following
discussion is based on and should be read in conjunction with
the Consolidated Financial Statements included elsewhere in this
Annual Report and Accounts. The Consolidated Financial
Statements are prepared in accordance with International
Financial Reporting Standards (IFRS), which vary in
certain significant respects from US GAAP. A discussion of these
differences can be found in the Other Material Items
section of the Business and Financial Review and a
reconciliation of certain IFRS amounts to US GAAP is included in
Notes 53 to 58 of the Consolidated Financial Statements.

Executive summary

Abbey has prepared this Business and Financial Review in a
manner consistent with the way management views Abbeys
business as a whole. As a result, Abbey presents the following
key sections to the Business and Financial Review:

>
    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, the Sold
    Life Businesses and the Portfolio Business Unit; a summary of
    the nature of adjustments between Abbeys statutory basis
    of accounting and Abbeys management basis of accounting
    (known as the trading basis); and a description of
    key performance indicators;>
    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 information is provided for the Retail
    Banking segment due to its significance to Abbeys results;>
    Sold Life
    Businesses
    this contains a summary of the results and commentary thereon on
    a trading basis of the life insurance businesses sold in 2006;>
    Portfolio Business
    Unit this
    contains a summary of the results and commentary thereon on a
    trading basis of the non-core businesses sold in 2005 and 2004;>
    Other Material
    Items this
    contains information about the statutory to trading basis
    adjustments. It also contains commentary on the differences
    between IFRS and US GAAP and the movements therein; and>
    Balance Sheet Business
    Review
    this contains an analysis of Abbeys balance sheet,
    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 cash flows.Basis of results presentation

In 2006, the reorganisation of Abbey following the sale of its
life insurance businesses resulted in a change in the way
Abbeys business is managed and reported. The discussions
in this Annual Report and Accounts reflect these new segments,
which are:

>
    Retail Banking;>
    Financial Markets;>
    Wealth Management;>
    Sold Life Businesses; and>
    Portfolio Business Unit.In this report, the Retail Banking, Wealth Management, Financial
Markets and Group Infrastructure segments are referred to as the
Personal Financial Services businesses. The analysis of our
results for 2005 and 2004 has also been presented on this basis.
Previously, our segment reporting structure was:

>
    Retail Banking;>
    Insurance and Asset Management;>
    Financial Markets;>
    Group Infrastructure; and>
    Portfolio Business Unit.The Insurance and Asset Management segment ceased to exist after
the sale of the life insurance businesses. The discontinued life
insurance businesses are presented in the Sold Life Businesses
segment. The remaining businesses of the Insurance and Asset
Management segment were transferred to the newly created Wealth
Management segment, together with Cater Allen, Abbey
International and Abbey Sharedealing, which were transferred
from Retail Banking. Subsequently, Abbeys asset management
businesses were sold. The ongoing businesses formerly included
in the Portfolio Business Unit, primarily Porterbrook, were
transferred to Financial Markets, and Abbeys Social
Housing business was transferred from Retail Banking to
Financial Markets.

Critical factors affecting results

Critical accounting policies and areas of significant
management judgement

The preparation of Abbeys Consolidated Financial
Statements requires management to make estimates and judgements
that affect the reported amount of assets and liabilities at the
date of the Consolidated Financial Statements and the reported
amount of income and expenses during the reporting period.
Management evaluates its estimates and judgements on an ongoing
basis. Management bases its estimates and judgements on
historical experience and on other factors that are believed to
be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.

Estimates and judgements that are considered important to the
portrayal of Abbeys financial condition including, where
applicable, quantifications of the effects of reasonably
possible ranges of such estimates and judgements are set out in
the Accounting Policies in the Consolidated Financial Statements.

9



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##### 

Business and Financial Review



Business Review 
Summarycontinued

Profit on disposal of Group undertakings

Profits / (losses) of £(223)m (2005: £62m) were
made on the disposal of Group undertakings during the year.

Significant acquisitions and disposals

The results for the year ended 31 December 2006 have been
materially impacted by the disposals of the Life insurance
businesses and the asset management businesses, as described in
the Business Review  Sold Life Businesses, and
Business Review  Other Material Items sections, and
Notes 12 and 24 to the Consolidated Financial Statements.
There were no significant acquisitions.

Current and future accounting developments under IFRS and US
GAAP

Details can be found in the Accounting Policies and
Notes 54 and 55 to the Consolidated Financial Statements.

Transitional exemptions permitted by IFRS 1

On initial adoption of IFRS in 2005, the Group applied certain
exemptions from the requirements of IFRS and from their
retrospective application as permitted by IFRS 1
First-time Adoption of International Financial Reporting
Standards. Details of these exemptions are set out in the
Accounting Policies in the Consolidated Financial Statements.

Group Summary

Summarised consolidated statutory income statement and
selected ratios

|                                                              |  |             |  |             |  |            
|------------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                              |  | 31 December |  | 31 December |  | 31 December
|                                                              |  | 2006        |  | 2005        |  | 2004       
|                                                              |  | £m          |  | £m          |  | £m         
|                                                             
|Net interest income                                           |  | 1,228       |  | 1,172       |  | 1,406      
|Non-interest income                                           |  | 1,242       |  | 1,183       |  | 1,124      
|                                                             
|Total operating income                                        |  | 2,470       |  | 2,355       |  | 2,530      
|Administrative expenses                                       |  | (1,420)     |  | (1,577)     |  | (2,013)    
|Depreciation and amortisation                                 |  | (215)       |  | (195)       |  | (355)      
|Impairment (losses) / recoveries on
    loans and advances    |  | (344)       |  | (218)       |  | (25)       
|Impairment recoveries on fixed
    asset investments          |  |            |  |            |  | 80         
|Provisions for other liabilities
    and charges              |  | (63)        |  | (3)         |  | (201)      
|                                                             
|Profit on continuing operations
    before tax                |  | 428         |  | 362         |  | 16         
|Tax on profit on continuing
    operations                    |  | (115)       |  | (108)       |  | 12         
|                                                             
|Profit for the year from
    continuing operations            |  | 313         |  | 254         |  | 28         
|(Loss) / profit for
    the year from discontinued operations |  | (245)       |  | 166         |  | (82)       
|                                                             
|Profit / (loss) for the
    year                              |  | 68          |  | 420         |  | (54)       
|                                                             
|                                                             
|                                                             
|Tier 1 capital ratio (%)                                      |  | 8.0%        |  | 10.0%       |  | 10.4%      
|Equity Tier 1 capital
    ratio (%)                           |  | 5.6%        |  | 6.6%        |  | 7.0%       
|Closing risk weighted assets                                  |  | 62,942      |  | 55,972      |  | 56,171     
|                                                             

2006 compared to 2005




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|> | Net interest income of
    £1,228m compared to £1,172m in 2005 increased by
    £56m. The increase relates in part to earnings on the
    proceeds from the sale of the life businesses in 2006. The
    remaining movement was largely due to higher Retail Banking
    income driven by growth in retail lending assets and stable
    retail spreads being offset by the reduction in income from
    asset financing operations and other businesses, which are being
    run-down.                                   
|> | Non-interest income of
    £1,242m compared to £1,183m in 2005 increased by
    £59m. The increase relates primarily to the uplift in
    revenues within Financial Markets due to the benefits of
    favourable market conditions and increased external business.                                                                                                                                                                                                                                                      
|> | Administrative expenses of
    £1,420m (2005: £1,577m) decreased by £157m. The
    reduction largely reflects the benefits of the cost reduction
    programme with the majority of the savings relating to
    employment costs driven by a headcount reduction of
    approximately 2,000 in 2006 (excluding the reduction reflecting
    the impact of the sale of the life insurance businesses). In
    addition, the 2005 administrative expenses included misselling
    costs of £70m.                            
|> | Depreciation and amortisation of
    £215m compared to £195m in 2005 increased by £20m
    due to the timing of asset additions in 2005.                                                                                                                                                                                                                                                                                                                                                                                  
|> | Impairment losses on loans and
    advances of £344m compared to £218m in 2005 increased
    by £126m. The growth was partly driven by strengthening of
    the coverage ratio and in part by the maturing nature of the
    unsecured personal loan portfolio, including portfolios that are
    no longer open to new business, with some deterioration in
    quality. The remaining increase was mainly due to
    mortgage-related charges increasing modestly from a very low
    base relative to the overall book.
|> | Provisions for other liabilities
    and charges of £63m compared to £3m in 2005 increased
    by £60m due to provisions for misselling remediation
    payments to customers.                                                                                                                                                                                                                                                                                                                                            



10



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##### 

Business and Financial Review



Business Review 
Summarycontinued

2005 compared to 2004

Profit on continuing operations before tax of £362m
increased from £16m in 2004. Material movements by line
include:

>
    Net interest income of
    £1,172m compared to £1,406m in 2004 decreased by
    £234m. The movement was largely due to a reduction in the
    Portfolio Business Unit reflecting a lower level of interest
    earning assets, the non-recurrence of gains relating to the
    close-out of hedges, and a 6 basis point fall in the Retail
    Banking spread.>
    Non-interest income of
    £1,183m compared to £1,124m in 2004 increased by
    £59m. In 2005, there was an improved fee performance in
    relation to mortgages, banking and unsecured personal lending,
    as well as reduced losses on disposal of Portfolio Business Unit
    loans and securities.>
    Administrative expenses of
    £1,577m compared to £2,013m in 2004 decreased by
    £436m. The expense reduction largely reflected the benefits
    of the cost reduction programme put in place after
    Santanders acquisition of Abbey in 2004. In addition, the
    2004 results included higher costs associated with the
    acquisition. Portfolio Business Unit expenses fell due to the
    reduced size of operations.>
    Depreciation and amortisation of
    £195m compared to £355m in 2004 decreased by
    £160m partly due to impairment losses on property, plant
    and equipment and operating lease assets of £57m included
    in the 2004 result. In addition, depreciation on operating lease
    assets of £123m (2004: £160m), decreased by £37m
    reflecting the run down of asset financing companies. The
    outstanding movement related largely to lower depreciation on
    property, plant and equipment as a result of asset write-offs
    made in 2004.>
    Impairment losses on loans and
    advances of £218m compared to £25m in 2004 increased
    by £193m. The 2004 charge included a reduction of general
    provisions of £136m. Other movements in the credit
    provision charge included an increase in mortgage provisions of
    £12m. The remaining increase related to unsecured lending,
    reflecting some modest credit quality deterioration together
    with seasoning of the asset.>
    Provisions for other liabilities
    and charges of £3m compared to £201m in 2004 decreased
    by £198m. 2004 included a charge of £154m related to
    product misselling. Costs relating to misselling of £70m in
    2005 were also charged to administrative expenses.>
    Amounts written off fixed asset
    investments were nil in 2005 compared to a release of £80m
    in 2004. The release reflected the disposal of Portfolio
    Business Unit assets for amounts in excess of their written down
    value.Profit/(loss) for the year from discontinued operations of
£166m (2004: £(82)m) improved by £248m. This was
partly due to the effect on income of the impact of improved
mortality and expense assumptions, the latter being due to the
benefits of the cost reduction programme. Operating expenses
were £66m lower than the previous year following the
successful implementation of Group wide cost reduction
initiatives. In addition, 2004 included an impairment charge of
£135m in the value of distribution channels due to the
expectation of reduced profitability in a competitive UK
protection market.

Summarised consolidated statutory income statement analysed
between Personal Financial Services, Sold Life Businesses and
the Portfolio Business Unit

|                                                              |  |                  |  |                  |  |                  |  |         |  |         |  |      |  |     |  |         |  |         |  |      |  |       |  |        
|------------------------------------------------------------- |  | ---------------- |  | ---------------- |  | ---------------- |  | ------- |  | ------- |  | ---- |  | --- |  | ------- |  | ------- |  | ---- |  | ----- |  | -------
|                                                              |  | 31 December 2006 |  | 31 December 2005 |  | 31 December 2004
|                                                             
|                                                              |  | Sold             |  |                  |  | Sold             |  |         |  | Sold    |  |     
|                                                              |  | PFS              |  | Life             |  | PBU              |  | Total   |  | PFS     |  | Life |  | PBU |  | Total   |  | PFS     |  | Life |  | PBU   |  | Total  
|                                                              |  | £m               |  | £m               |  | £m               |  | £m      |  | £m      |  | £m   |  | £m  |  | £m      |  | £m      |  | £m   |  | £m    |  | £m     
|                                                             
|Net interest income                                           |  | 1,228            |  |                 |  |                 |  | 1,228   |  | 1,166   |  |     |  | 6   |  | 1,172   |  | 1,353   |  |     |  | 53    |  | 1,406  
|Non-interest income                                           |  | 1,242            |  |                 |  |                 |  | 1,242   |  | 1,122   |  |     |  | 61  |  | 1,183   |  | 1,231   |  |     |  | (107) |  | 1,124  
|                                                             
|Total operating income                                        |  | 2,470            |  |                 |  |                 |  | 2,470   |  | 2,288   |  |     |  | 67  |  | 2,355   |  | 2,584   |  |     |  | (54)  |  | 2,530  
|Administrative expenses                                       |  | (1,420)          |  |                 |  |                 |  | (1,420) |  | (1,576) |  |     |  | (1) |  | (1,577) |  | (1,957) |  |     |  | (56)  |  | (2,013)
|Depreciation and amortisation                                 |  | (215)            |  |                 |  |                 |  | (215)   |  | (194)   |  |     |  | (1) |  | (195)   |  | (355)   |  |     |  |      |  | (355)  
|Impairment (losses) / recoveries on
    loans and advances    |  | (344)            |  |                 |  |                 |  | (344)   |  | (218)   |  |     |  |    |  | (218)   |  | (112)   |  |     |  | 87    |  | (25)   
|Impairment recoveries on fixed
    asset investments          |  |                 |  |                 |  |                 |  |        |  |        |  |     |  |    |  |        |  |        |  |     |  | 80    |  | 80     
|Provisions for other liabilities
    and charges              |  | (63)             |  |                 |  |                 |  | (63)    |  | (11)    |  |     |  | 8   |  | (3)     |  | (201)   |  |     |  |      |  | (201)  
|                                                             
|Profit / (loss) on
    continuing operations before tax       |  | 428              |  |                 |  |                 |  | 428     |  | 289     |  |     |  | 73  |  | 362     |  | (41)    |  |     |  | 57    |  | 16     
|Tax on profit / (loss) on
    continuing operations           |  | (115)            |  |                 |  |                 |  | (115)   |  | (106)   |  |     |  | (2) |  | (108)   |  | 49      |  |     |  | (37)  |  | 12     
|                                                             
|Profit / (loss) for the
    year from continuing operations   |  | 313              |  |                 |  |                 |  | 313     |  | 183     |  |     |  | 71  |  | 254     |  | 8       |  |     |  | 20    |  | 28     
|Profit / (loss) for the year
    from discontinued operations |  |                 |  | (245)            |  |                 |  | (245)   |  |        |  | 166  |  |    |  | 166     |  |        |  | (82) |  |      |  | (82)   
|                                                             
|Profit / (loss) for the
    year                              |  | 313              |  | (245)            |  |                 |  | 68      |  | 183     |  | 166  |  | 71  |  | 420     |  | 8       |  | (82) |  | 20    |  | (54)   
|                                                             

11



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##### 

Business and Financial Review



Business Review 
Summarycontinued

Adjustments between the statutory basis and the trading
basis

Abbeys Board reviews discrete financial information for
each of its segments that includes measures of operating results
and assets. The segments are managed primarily on the basis of
their results, which are measured on a trading
basis. The trading basis differs from the statutory basis as a
result of the application of various adjustments, as presented
below. Management considers that the trading basis provides the
most appropriate way of reviewing the performance of the
business. The adjustments arise principally in the ongoing
Personal Financial Services businesses. The adjustments are:

>
    Reorganisation and other
    costs
    Comprise implementation costs in relation to the strategic
    change and cost reduction process, as well as certain
    remediation expenses and credit provisions. Management needs to
    understand the underlying drivers of the cost base that will
    remain after these exercises are complete, and does not want
    this view to be clouded by these costs, which are managed
    independently.>
    Depreciation of operating
    lease
    assets The
    operating lease businesses are managed as financing businesses
    and, therefore, management needs to see the margin earned on the
    businesses. Residual value risk is separately managed. As a
    result the depreciation is netted against the related income.>
    Profit on sale of PFS
    subsidiaries
    The profit on the sale of the Asset Management businesses is
    excluded from the results to allow management to understand the
    underlying performance of the business.>
    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.>
    One-off statutory IFRS
    adjustments
    The conversion to IFRS resulted in the recognition of certain
    one-off items in 2004 including impairment charges. These items
    have been deducted from the results to allow management to
    understand 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.>
    Capital
    charges
    Comprise internal nominal charges for capital invested in the
    Groups businesses. Management implemented this charge to
    assess if capital is invested effectively.For a detailed explanation of these items, please refer to the
Other Material Items section of the Business and
Financial Review.

Key performance indicators

Key performance indicators relevant to the Group during the
years ended, and as at, 31 December 2006 and 2005 are set
out below. This information describes the key measures used by
management in assessing the success of the business against its
strategies and objectives.

|                              |  |      |  |         |  |        
|----------------------------- |  | ---- |  | ------- |  | -------
|                              |  |      |  |        
|Key performance indicator     |  | Note |  | 2006    |  | 2005   
|                             
|PFS trading revenues          |  | 1    |  | £2,452m |  | £2,334m
|PFS trading cost:income ratio |  | 2    |  | 55.5%   |  | 61.3%  
|Profit for the year           |  | 3    |  | £68m    |  | £420m  
|Retail Banking spread         |  | 4    |  | 1.46%   |  | 1.45%  
|Total number of employees     |  | 5    |  | 16,395  |  | 20,642 
|Mortgage market share         |  | 6    |  | 9.4%    |  | 9.7%   
|                             



|   |                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | PFS trading revenues comprise net interest income and
    non-interest income of the Personal Financial Services
    businesses. Discussion and analysis of this data is set out in
    the Business Review  Personal Financial Services on
    pages 16 and 17.                                                                                                                                      
|2. | The PFS trading cost:income ratio is defined as trading expenses
    divided by trading income of the Personal Financial Services
    businesses. Discussion and analysis of trading income and
    expenses is set out in the Business Review  Personal
    Financial Services on pages 16 to 18.                                                                                                    
|3. | Profit for the year is the statutory consolidated profit after
    tax for the year. Discussion and analysis of this data is set
    out in the Group Summary in this Business Review 
    Summary section on pages 10 and 11.                                                                                                                                                                        
|4. | Retail banking spread is defined as interest received (mortgage,
    unsecured personal loans and overdraft interest) divided by
    interest earning assets, less interest payable (savings,
    in-credit bank accounts) divided by interest bearing
    liabilities. Discussion and analysis of this data is set out in
    the Business Review  Personal Financial Services on
    pages 16 to 18.
|5. | Total number of employees is measured at the year-end and
    calculated on a full-time equivalent basis. Further information
    about employees on a segmental basis is contained in Note 1
    to the Consolidated Financial Statements.                                                                                                                                                            
|6. | Mortgage market share represents the value of the Groups
    mortgage asset as a percentage of the total value of mortgages
    in the UK market, and is measured at the year-end. Discussion
    and analysis of this data is set out in the Business
    Review  Personal Financial Services on page 15.                                                                                           

12



---



##### 

Business and Financial Review





Business Review  Personal Financial Services

Personal Financial Services profit before tax by segment

|                                                 |  |         |  |           |  |            |  |                |  |        
|------------------------------------------------ |  | ------- |  | --------- |  | ---------- |  | -------------- |  | -------
|                                                 |  | Retail  |  | Financial |  | Wealth     |  | Group          |  |        
|                                                 |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Total  
|31 December 2006                                 |  | £m      |  | £m        |  | £m         |  | £m             |  | £m     
|                                                
|Net interest income                              |  | 1,411   |  | (80)      |  | 75         |  | (70)           |  | 1,336  
|Noninterest income                              |  | 582     |  | 464       |  | 104        |  | (34)           |  | 1,116  
|                                                
|Total trading income                             |  | 1,993   |  | 384       |  | 179        |  | (104)          |  | 2,452  
|Total trading expenses                           |  | (1,002) |  | (157)     |  | (93)       |  | (109)          |  | (1,361)
|Impairment losses on loans and
    advances      |  | (273)   |  | 27        |  |           |  | (5)            |  | (251)  
|Provisions for other liabilities
    and charges |  |        |  |          |  | (2)        |  |               |  | (2)    
|                                                
|Trading profit before
    tax                    |  | 718     |  | 254       |  | 84         |  | (218)          |  | 838    
|Adjust for:                                      |  |         |  |           |  |            |  |                |  |        
| Reorganisation and other
    costs             |  | (132)   |  | (1)       |  | (6)        |  | (159)          |  | (298)  
| Profit on sale of PFS
    subsidiaries         |  |        |  |          |  |           |  | 41             |  | 41     
| Hedging variances                              |  | (8)     |  | 7         |  |           |  | (44)           |  | (45)   
| Capital charges                                |  | (21)    |  | 96        |  | 16         |  | (199)          |  | (108)  
|                                                
|Profit / (loss) before
    tax                   |  | 557     |  | 356       |  | 94         |  | (579)          |  | 428    
|                                                

|                                                 |  |         |  |           |  |            |  |                |  |        
|------------------------------------------------ |  | ------- |  | --------- |  | ---------- |  | -------------- |  | -------
|                                                 |  | Retail  |  | Financial |  | Wealth     |  | Group          |  |        
|                                                 |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Total  
|31 December 2005                                 |  | £m      |  | £m        |  | £m         |  | £m             |  | £m     
|                                                
|Net interest income                              |  | 1,329   |  | (24)      |  | 67         |  | (55)           |  | 1,317  
|Noninterest income                              |  | 547     |  | 358       |  | 96         |  | 16             |  | 1,017  
|                                                
|Total trading income                             |  | 1,876   |  | 334       |  | 163        |  | (39)           |  | 2,334  
|Total trading expenses                           |  | (1,106) |  | (148)     |  | (100)      |  | (77)           |  | (1,431)
|Impairment losses on loans and
    advances      |  | (207)   |  | (10)      |  | (1)        |  |               |  | (218)  
|Provisions for other liabilities
    and charges |  | 3       |  |          |  | (14)       |  |               |  | (11)   
|                                                
|Trading profit before
    tax                    |  | 566     |  | 176       |  | 48         |  | (116)          |  | 674    
|Adjust for:                                      |  |         |  |           |  |            |  |                |  |        
| Reorganisation and other
    costs             |  | (196)   |  | (14)      |  | (2)        |  | (4)            |  | (216)  
| Hedging variances                              |  | 3       |  |          |  |           |  | (21)           |  | (18)   
| Capital charges                                |  | (58)    |  | 114       |  | 13         |  | (220)          |  | (151)  
|                                                
|Profit / (loss) before
    tax                   |  | 315     |  | 276       |  | 59         |  | (361)          |  | 289    
|                                                

|                                                 |  |         |  |           |  |            |  |                |  |        
|------------------------------------------------ |  | ------- |  | --------- |  | ---------- |  | -------------- |  | -------
|                                                 |  | Retail  |  | Financial |  | Wealth     |  | Group          |  |        
|                                                 |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Total  
|31 December 2004                                 |  | £m      |  | £m        |  | £m         |  | £m             |  | £m     
|                                                
|Net interest income                              |  | 1,341   |  | 26        |  | 81         |  | (55)           |  | 1,393  
|Non-interest income                              |  | 427     |  | 360       |  | 79         |  | 62             |  | 928    
|                                                
|Total trading income                             |  | 1,768   |  | 386       |  | 160        |  | 7              |  | 2,321  
|Total trading expenses                           |  | (1,286) |  | (163)     |  | (126)      |  | (52)           |  | (1,627)
|Impairment losses on loans and
    advances      |  | (20)    |  | (22)      |  |           |  |               |  | (42)   
|Provisions for other liabilities
    and charges |  | (155)   |  |          |  |           |  | 2              |  | (153)  
|                                                
|Trading profit /
    (loss) before tax           |  | 307     |  | 201       |  | 34         |  | (43)           |  | 499    
|Adjust for:                                      |  |         |  |           |  |            |  |                |  |        
| Reorganisation and other
    costs             |  | (154)   |  | (75)      |  | (5)        |  | (269)          |  | (503)  
| One-off statutory IFRS
    adjustments         |  | (62)    |  | (10)      |  |           |  | (6)            |  | (78)   
| Proforma IFRS adjustments                      |  | 80      |  |          |  |           |  | 97             |  | 177    
| Capital charges                                |  | (83)    |  | 91        |  | 8          |  | (152)          |  | (136)  
|                                                
|Profit / (loss) before
    tax                   |  | 88      |  | 207       |  | 37         |  | (373)          |  | (41)   
|                                                

2006 compared to 2005


|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|> | Personal Financial Services
    trading profit before tax of £838m increased by £164m
    on the previous year (2005: £674m). Trading income was 5%
    higher, and was within the targeted range of 5%  10%
    for the first year of the
    3-year plan. This
    represents a significant improvement in performance after a
    number of years of revenue decline and a flat performance in
    2005. There was a further reduction in trading expenses of 5% in
    2006 with headcount approximately 2,000 full time equivalents
    lower than 31 December 2005 (excluding the impact of the
    sale of the life insurance businesses). Positive trading income
    and cost trends were offset by increased credit provisions
    driven largely by the maturing of the unsecured loan
    portfolio.
|> | Retail Banking trading profit
    before tax increased by £152m to £718m (2005:
    £566m) reflecting lower trading costs, due to the cost
    reduction programme, and higher trading income resulting from
    growth in customer loans, stable Retail spreads and increased
    volumes in mortgage, investments and bank accounts. Trading
    income and cost trends were offset by increased credit
    provisions. The growth was partly driven by strengthening of the
    coverage ratio and in part by the maturing nature of the
    unsecured personal loan portfolio with some deterioration in
    quality. Mortgage related charges also increased modestly from a
    very low base relative to the overall book.                                                                                
|> | Financial Markets trading profit
    before tax increased by £78m to £254m (2005:
    £176m). 2006 included a provision release of £27m
    primarily in relation to asset financing operations. The
    remaining movement was due to higher trading revenues in both
    Derivative and Structured Products and Short Term Financing
    businesses. This was partly offset by an increase in trading
    expenses of £9m and lower revenues following the run down
    of asset-financing operations and other businesses.                                                                                                                                                                                                                                                                                    

13



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##### 

Business and Financial Review



Business Review  Personal Financial
Servicescontinued



>
    Wealth Management trading profit
    before tax increased by £36m to £84m (2005:
    £48m). Trading income increased, driven by higher customer
    deposits in Cater Allen, improved margins in both Cater Allen
    and Abbey International and increased sales in the Asset
    Management businesses and James Hay. The remaining increase
    related primarily to a lower closed office charge made in 2006.>
    Group Infrastructure trading loss
    before tax increased by £102m to £218m (2005:
    £116m). Net interest income was adversely impacted by base
    rate changes on central funding in 2006, which were more than
    offset by benefits reported in Retail Banking and Wealth
    Management under the Groups transfer pricing arrangements.
    Non-interest income decreased largely due to mark-to-market
    losses. In addition, trading expenses increased due to
    additional unallocated central costs.2005 compared to 2004

>
    Personal Financial Services
    trading profit before tax of £674m was up £175m on the
    previous year (2004: £499m) largely due to a £196m
    decrease in trading expenses as a result of the cost reduction
    programme. The remaining movement was driven by higher credit
    provisions offset in part by a lower charge to misselling
    provisions.>
    Retail Banking trading profit
    before tax increased by £259m to £566m (2004:
    £307m). The improvement in 2005 was largely driven by
    improved fee income and the benefit of significant cost savings.>
    Financial Markets trading profit
    before tax of £176m decreased by £25m from the
    previous year (2004: £201m), largely due to non-recurring
    revenue items in 2004 of £65m. This was partially offset by
    significant cost savings, favourable market conditions and
    strong trading volumes, particularly in the second half of the
    year.>
    Wealth Management trading profit
    before tax increased by £14m to £48m (2004: £34m)
    primarily due to the benefit from the cost reduction programme
    partly offset by a provision charge related to closure of
    Abbeys Isle of Man office.>
    Group Infrastructure trading loss
    before tax increased by £73m to £116m (2004:
    £43m) due largely to higher trading expenses related to
    redundancy not borne directly by the divisions and lower
    non-interest income, impacted by the allocation of internal
    capital charges.Personal Financial Services business flows

Business flows relating to the Personal Financial Services
businesses are set out below. These flows are used by management
to assess the sales performance of Abbey, both absolutely and
relative to its peers, and to inform management of product
trends in the Personal Financial Services market.

|                                                        |  |             |  |             |  |            
|------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                        |  | 31 December |  | 31 December |  | 31 December
|                                                        |  | 2006        |  | 2005        |  | 2004       
|                                                       
|Mortgages:                                              |  |             |  |             |  |            
|Gross mortgage lending                                  |  | £32.6bn     |  | £27.6bn     |  | £25.0bn    
|Capital repayments                                      |  | £24.8bn     |  | £24.6bn     |  | £21.9bn    
|Net mortgage lending                                    |  | £7.8bn      |  | £3.0bn      |  | £3.1bn     
|Mortgage stock:                                         |  | £101.7bn    |  | £93.9bn     |  | £90.9bn    
| Abbey retail                                          |  | £96.7bn     |  | £89.9bn     |  | £87.5bn    
| Housing
    Association(1)                            |  | £5.0bn      |  | £4.0bn      |  | £3.4bn     
|Market share  gross
    mortgage
    lending(2)        |  | 9.4%        |  | 9.6%        |  | 8.6%       
|Market share  capital
    repayments(2)                |  | 10.5%       |  | 12.5%       |  | 11.5%      
|Market share  net
    mortgage
    lending(2)          |  | 7.0%        |  | 3.3%        |  | 3.1%       
|Market share  mortgage
    stock(2)                    |  | 9.4%        |  | 9.7%        |  | 10.4%      
|Retail deposits:                                        |  |             |  |             |  |            
|Total net deposit flows                                 |  | £0.9bn      |  | £2.6bn      |  | £1.3bn     
|Deposit stock                                           |  | £63.1bn     |  | £62.2bn     |  | £59.6bn    
|Investment and Pensions annual
    premium income:      |  |             |  |             |  |            
| Investments                                           |  | £786m       |  | £700m       |  | £427m      
| Pensions                                              |  | £37m        |  | £34m        |  | £30m       
|                                                       
|Total excluding
    Inscape                             |  | £823m       |  | £734m       |  | £457m      
| Inscape                                               |  | £401m       |  | £324m       |  | £250m      
|                                                       
|Total investment and pensions
    annual premium income |  | £1,224m     |  | £1,058m     |  | £707m      
|                                                       
|Banking:                                                |  |             |  |             |  |            
|Bank account openings (000s)                           |  | 453         |  | 386         |  | 378        
|Bank account liability                                  |  | £9.8bn      |  | £8.9bn      |  | £7.7bn     
|Gross unsecured personal loan
    lending:              |  |             |  |             |  |            
| Abbey retail                                          |  | £1.5bn      |  | £1.3bn      |  | £1.1bn     
| Other                                                 |  | £0.8bn      |  | £0.8bn      |  | £1.1bn     
|                                                       
|                                                        |  | £2.3bn      |  | £2.1bn      |  | £2.2bn     
|Unsecured lending
    asset(3):                         |  |             |  |             |  |            
| Abbey retail                                          |  | £2.7bn      |  | £2.3bn      |  | £2.0bn     
| Other                                                 |  | £1.4bn      |  | £1.4bn      |  | £1.4bn     
|                                                       
|                                                        |  | £4.1bn      |  | £3.7bn      |  | £3.4bn     
|Protection:                                             |  |             |  |             |  |            
|                                                       
|Branch and Direct                                       |  | £17m        |  | £18m        |  | £19m       
|Intermediary                                            |  | £54m        |  | £64m        |  | £78m       
|                                                       
|Total protection annual premium
    income              |  | £71m        |  | £82m        |  | £97m       
|                                                       

|    |                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Housing Association mortgages are classified within the
    Financial Markets segment.                                                   
|(2) | Market shares are estimated internally, based on information
    from the Bank of England and The Council of Mortgage Lenders
    (CML)
|(3) | Comprises unsecured personal loans, credit cards and overdrafts.                                                                         

14



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##### 

Business and Financial Review



Business Review  Personal Financial
Servicescontinued

2006 compared to 2005

Mortgages

Gross mortgage lending of £32.6bn (2005: £27.6bn),
around 18% higher, with an estimated market share of 9.4% (2005:
9.6%). During the year Abbey improved its service levels in
mortgages and developed its product range in order to capture
growth in the expanding and higher margin non-standard segments.
Abbey increased sales of Flexible mortgages (up over 60%) and,
in the latter part of the year, Abbey improved the first time
buyer proposition and launched a new buy-to-let offering.
Mortgage capital repayments of £24.8bn (2005: £24.6bn)
were modestly ahead of 2005, while the estimated share of
capital repayments fell to 10.5%, in part reflecting retention
initiatives, compared to 12.5% in 2005. Net mortgage lending of
£7.8bn (2005: £3.0bn) was up over 100% from the prior
year whilst continuing to balance growth and market share with a
focus on profitability.

Retail Deposits and Investments

Total net customer deposit flows of £0.9bn (2005:
£2.6bn) were lower than 2005 impacted by the re-pricing of
low / negative margin accounts that was put in place in the
second quarter of 2006. This again confirms our focus on
managing volume and profitability, and was in part offset by
increased investment sales up 16%. Abbey has maintained its
competitive position with attractive instant access branch and
internet accounts, with inflows of over £1.8bn in key
acquisition accounts. In terms of investment sales, Abbey had an
improved tax season and sales of Inscape were up 24%. More
recently Abbey has been increasing its sales capacity through
the recruitment of additional investment advisors.

Banking

Bank account openings of 453,000 (2005: 386,000) were up 17%.
This was an improvement on the uplift of 10% reported at the
half year, with switcher openings up by 114%. Performance has
benefited from the High Interest current account
offer and the grass is greener campaign in the
second half of 2006. In total, the volume of accounts increased
by 6%, with bank account liability balances up by 10% on 2005.

Unsecured Lending

Gross unsecured personal loan lending was 7% higher, with branch
lending up by 66% from a low base. Performance was boosted by
improved branch technology, and the latter part of the year saw
a marked improvement in the new business margins to ensure a
better profitability profile. As a result, Abbey branded
balances grew by 18% and as we move into 2007, our focus will be
increasingly on growing this business through our existing
customers.

Protection

Protection annual premium income sales were down in comparison
to 2005, in part reflecting the competitive market trends.

2005 compared to 2004

Mortgages

Gross mortgage lending of £27.6bn (2004: £25.0bn) was
10% ahead of 2004 with an uplift in all channels. This compared
to a 1% decline in the size of the market, resulting in a market
share estimated at 9.6% (2004: 8.6%). Capital repayments of
£24.6bn (2004: £21.9bn) were above natural share, as
expected, reflecting high levels of incentive period maturities.
Net lending of £3.0bn (2004: £3.1bn), was similar to
2004 and was equivalent to a 3.3% (2004: 3.1%) market share.

Retail Deposits and Investments

Deposit inflows of £2.6bn (2004: £1.3bn), with
profitable new branch-based acquisition account inflows more
than offsetting back-book attrition. Overall, retail deposits
balances of £62.2bn (2004: £59.6bn) were up 4% on
2004. Investment new business premiums were ahead of 2004,
benefiting from significant growth in sales of the Select
Offshore Bond, a strong tax year-end and the successful launch
of Guaranteed Growth Plan and Guaranteed Income Bond through
direct channels in the first half of the year.

Banking

In total, bank account openings were ahead of 2004s
performance, with a stronger uplift in terms of adult Abbey bank
accounts openings, up 14%. This was boosted by the Bank
and Save campaign in the fourth quarter, which also
contributed to an increase of switchers joining Abbey.

Unsecured Lending

Total gross unsecured personal loan lending was broadly in line
with 2004, although overall unsecured balances grew by 12%
reflecting strong performance in both 2004 and 2005. In
addition, Abbey branded gross lending was up 23%.

Protection

Sales of protection policies fell relative to 2004, albeit set
against a declining market.

15



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##### 

Business and Financial Review

Business Review  Personal Financial
Servicescontinued

Personal Financial Services trading net interest income by
segment

|                                    |  |             |  |             |  |            
|----------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                    |  | 31 December |  | 31 December |  | 31 December
|                                    |  | 2006        |  | 2005        |  | 2004       
|                                    |  | £m          |  | £m          |  | £m         
|                                   
|Retail Banking                      |  | 1,411       |  | 1,329       |  | 1,341      
|Financial Markets                   |  | (80)        |  | (24)        |  | 26         
|Wealth Management                   |  | 75          |  | 67          |  | 81         
|Group Infrastructure                |  | (70)        |  | (55)        |  | (55)       
|                                   
|PFS trading net interest
    income |  | 1,336       |  | 1,317       |  | 1,393      
|                                   
|Adjust for:                         |  |             |  |             |  |            
| Proforma IFRS adjustments         |  |            |  |            |  | 96         
| Capital charges                   |  | (108)       |  | (151)       |  | (136)      
|                                   
|PFS net interest
    income         |  | 1,228       |  | 1,166       |  | 1,353      
|                                   

2006 compared to 2005










2005 compared to 2004










Personal Financial Services trading non-interest income by
segment


|                                             |  |             |  |             |  |            
|-------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                             |  | 31 December |  | 31 December |  | 31 December
|                                             |  | 2006        |  | 2005        |  | 2004       
|                                             |  | £m          |  | £m          |  | £m         
|                                            
|Retail Banking                               |  | 582         |  | 547         |  | 427        
|Financial Markets                            |  | 464         |  | 358         |  | 360        
|Wealth Management                            |  | 104         |  | 96          |  | 79         
|Group Infrastructure                         |  | (34)        |  | 16          |  | 62         
|                                            
|PFS trading non-interest
    income          |  | 1,116       |  | 1,017       |  | 928        
|                                            
|Adjust for:                                  |  |             |  |             |  |            
| Reorganisation and other
    costs         |  |            |  |            |  | 45         
| Depreciation of operating
    lease assets |  | 130         |  | 123         |  | 182        
| Hedging variances                          |  | (45)        |  | (18)        |  |           
| Profit on sale of PFS
    subsidiaries     |  | 41          |  |            |  |           
| Proforma IFRS adjustments                  |  |            |  |            |  | 76         
|                                            
|PFS non-interest
    income                  |  | 1,242       |  | 1,122       |  | 1,231      
|                                            

2006 compared to 2005






16



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##### 

Business and Financial Review



Business Review  Personal Financial
Servicescontinued

Wealth Management non-interest income of £104m was modestly
ahead of the previous year (2005: £96m), due largely 
 to higher sales in the Asset Management businesses and James
Hay. Asset management sales benefited from the recruitment of
investment advisors during 2006, while rebranding of the SIPP
(self-invested personal pension schemes) and WRAP portfolio
management products helped lift sales in James Hay.

Group Infrastructure non-interest income decreased by £50m
to £(34)m (2005: £16m), largely due to net
mark-to-market losses.

2005 compared to 2004

Retail Banking trading non-interest income increased by
£120m to £547m (2004: £427m) primarily due to
higher banking fees. Banking related non-interest income growth
was driven by volume related increases, particularly in
unsecured personal loans and Abbey-branded credit cards, as well
as to changes to specific fee structures. In addition, mortgage
non-interest income was higher, reflecting volume growth and
changes to fee structures. Savings non-interest income also
increased largely due to an increase in commissions driven by
the higher level of investment sales made through the branch
network.

Financial Markets non-interest income was broadly unchanged at
£360m (2004: £358m). The 2004 result included a number
of specific risk management trades which generated income. The
remaining movement relates largely to a reduction in the size of
certain asset leasing and other businesses which are in the
process of being run down. These trends were partially offset by
increased trading volumes resulting from a favourable market
environment.

Wealth Management non-interest income increased by £17m to
£96m (2004: £79m) in part reflecting increased sales
volumes of SIPP and the increased focus on the WRAP product
within James Hay, along with increased sales in the Asset
Management businesses.

Group Infrastructure non-interest income decreased by £46m
to £16m (2004: £62m). The movement was impacted by
allocation of internal capital charges.

Personal Financial Services total trading expenses by
segment

|                                             |  |             |  |             |  |            
|-------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                             |  | 31 December |  | 31 December |  | 31 December
|                                             |  | 2006        |  | 2005        |  | 2004       
|                                             |  | £m          |  | £m          |  | £m         
|                                            
|Retail Banking                               |  | 1,002       |  | 1,106       |  | 1,286      
|Financial Markets                            |  | 157         |  | 148         |  | 163        
|Wealth Management                            |  | 93          |  | 100         |  | 126        
|Group Infrastructure                         |  | 109         |  | 77          |  | 52         
|                                            
|PFS total trading
    expenses               |  | 1,361       |  | 1,431       |  | 1,627      
|                                            
|Adjust for:                                  |  |             |  |             |  |            
| Reorganisation and other
    costs         |  | 144         |  | 216         |  | 425        
| Depreciation on operating
    lease assets |  | 130         |  | 123         |  | 182        
| One-off statutory IFRS
    adjustments     |  |            |  |            |  | 6          
| Proforma IFRS adjustments                  |  |            |  |            |  | 72         
|                                            
|PFS expenses                                 |  | 1,635       |  | 1,770       |  | 2,312      
|                                            

2006 compared to 2005










2005 compared to 2004










17



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##### 

Business and Financial Review



Business Review  Personal Financial
Servicescontinued

Personal Financial Services trading impairment losses on
loans and advances by segment

|                                                        |  |             |  |             |  |            
|------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                        |  | 31 December |  | 31 December |  | 31 December
|                                                        |  | 2006        |  | 2005        |  | 2004       
|                                                        |  | £m          |  | £m          |  | £m         
|                                                       
|Retail Banking                                          |  | 273         |  | 207         |  | 20         
|Financial Markets                                       |  | (27)        |  | 10          |  | 22         
|Wealth Management                                       |  |            |  | 1           |  |           
|Group Infrastructure                                    |  | 5           |  |            |  |           
|                                                       
|PFS trading impairment losses on
    loans and advances |  | 251         |  | 218         |  | 42         
|                                                       
|Adjust for:                                             |  |             |  |             |  |            
| Reorganisation and other
    costs                    |  | 93          |  |            |  | 75         
| Proforma IFRS adjustments                             |  |            |  |            |  | (5)        
|                                                       
|PFS impairment losses on loans
    and advances         |  | 344         |  | 218         |  | 112        
|                                                       

2006 compared to 2005




2005 compared to 2004




Personal Financial Services non-performing loans


|                                                                     |  |             |  |             |  |            
|-------------------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                                     |  | 31 December |  | 31 December |  | 31 December
|                                                                     |  | 2006        |  | 2005        |  | 2004       
|                                                                     |  | £m          |  | £m          |  | £m         
|                                                                    
|Total non-performing loans
    (NPLs)                              |  | 826         |  | 882         |  | 769        
|                                                                    
|Total loans and advances to
    customers (excluding trading assets) |  | 109,035     |  | 100,267     |  | 98,526     
|Total provisions                                                     |  | 536         |  | 394         |  | 391        
|NPLs as a % of loans and
    advances                                |  | 0.76%       |  | 0.88%       |  | 0.78%      
|                                                                    
|Provisions as a % of
    NPLs                                        |  | 64.89%      |  | 44.67%      |  | 50.84%     
|                                                                    





Personal Financial Services trading provisions for other
liabilities and charges by segment


|                                                             |  |             |  |             |  |            
|------------------------------------------------------------ |  | ----------- |  | ----------- |  | -----------
|                                                             |  | 31 December |  | 31 December |  | 31 December
|                                                             |  | 2006        |  | 2005        |  | 2004       
|                                                             |  | £m          |  | £m          |  | £m         
|                                                            
|Retail Banking                                               |  |            |  | (3)         |  | 155        
|Wealth Management                                            |  | 2           |  | 14          |  |           
|Group Infrastructure                                         |  |            |  |            |  | (2)        
|                                                            
|PFS trading provisions for other
    liabilities and charges |  | 2           |  | 11          |  | 153        
|                                                            
|Adjust for:                                                  |  |             |  |             |  |            
| Reorganisation and other
    costs                         |  | 61          |  |            |  | 48         
|                                                            
|PFS provisions for other
    liabilities and charges         |  | 63          |  | 11          |  | 201        
|                                                            

2006 compared to 2005




2005 compared to 2004




18



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##### 

Business and Financial Review





Business Review  Sold Life Businesses

Abbey announced on 7 June 2006 that it had entered into an
agreement to sell its entire life insurance business to
Resolution for cash consideration of approximately £3.6bn.
The sale completed in the third quarter of 2006. The principal
life companies sold were Scottish Mutual Assurance plc, Scottish
Provident Limited and Abbey National Life plc, as well as the
two offshore life companies, Scottish Mutual International plc
and Scottish Provident International Life Assurance Limited.

The life insurance business qualifies as discontinued
operations. The results, and loss on sale, of the discontinued
operations were as follows:

Sold Life Businesses summarised income statement

|                                                                 |  |             |  |             |  |            
|---------------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                                 |  | 31 December |  | 31 December |  | 31 December
|                                                                 |  | 2006        |  | 2005        |  | 2004       
|                                                                 |  | £m          |  | £m          |  | £m         
|                                                                
|Trading income                                                   |  | 128         |  | 231         |  | 181        
|Operating expenses                                               |  | (73)        |  | (151)       |  | (217)      
|Impairment losses on intangible
    assets                       |  | (69)        |  |            |  | (135)      
|                                                                
|Trading profit before
    tax                                    |  | (14)        |  | 80          |  | (171)      
|Adjust for:                                                      |  |             |  |             |  |            
| Capital charges                                                |  | 108         |  | 154         |  | 134        
|                                                                
|Profit / (loss) before
    tax                                   |  | 94          |  | 234         |  | (37)       
|Taxation expense                                                 |  | (75)        |  | (68)        |  | (45)       
|                                                                
|Profit / (loss) of
    discontinued operations                   |  | 19          |  | 166         |  | (82)       
|Loss on sale of discontinued
    operations before and after tax |  | (264)       |  |            |  |           
|                                                                
|Profit / (loss) for the
    year from discontinued operations    |  | (245)       |  | 166         |  | (82)       
|                                                                

Trading income


2006 compared to 2005




2005 compared to 2004




Operating expenses


2006 compared to 2005




2005 compared to 2004




Impairment losses on intangible assets


2006 compared to 2005




2005 compared to 2004




Loss on sale of discontinued operations




19



---



##### 

Business and Financial Review





Business Review  Portfolio Business Unit
(PBU)

The Portfolio Business Unit comprised a number of businesses,
assets and portfolios that were inconsistent with Abbeys
future strategy to focus on Personal Financial Services, and
were sold during 2004 and 2005. From the end of 2005, there were
no businesses, assets or portfolios remaining within this
segment.

Portfolio Business Unit trading profit on ordinary activities
before tax

|                                                           |  |             |  |             |  |            
|---------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                           |  | 31 December |  | 31 December |  | 31 December
|                                                           |  | 2006        |  | 2005        |  | 2004       
|                                                           |  | £m          |  | £m          |  | £m         
|                                                          
|Net interest income                                        |  |            |  | 9           |  | 61         
|Non-interest income                                        |  |            |  | 61          |  | (107)      
|                                                          
|Total trading income                                       |  |            |  | 70          |  | (46)       
|Total trading expenses                                     |  |            |  | (2)         |  | (56)       
|Impairment (losses) / recoveries on
    loans and advances |  |            |  |            |  | 87         
|Provisions for other liabilities
    and charges           |  |            |  | 8           |  |           
|Amounts written off fixed asset
    investments            |  |            |  |            |  | 80         
|                                                          
|Trading profit on ordinary
    activities before tax       |  |            |  | 76          |  | 65         
| Proforma IFRS adjustments                                |  |            |  |            |  | (10)       
| Capital charges                                          |  |            |  | (3)         |  | 2          
|                                                          
|Profit on continuing operations
    before tax             |  |            |  | 73          |  | 57         
|                                                          

2006 compared to 2005




2005 compared to 2004




|  |                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|> | Net interest income decreased by
    £52m to £9m (2004: £61m), due to the reduced size
    of operations.                                                                    
|> | Non-interest income increased by
    £168m to £61m (2004: £(107)m), reflecting lower
    absolute levels of asset disposals and related losses.                              
|> | Trading operating expenses
    decreased by £54m to £2m (2004: £56m) due to the
    reduced size of operations.                                                              
|> | Impairment (losses) / recoveries
    on loans and advances were nil in 2005 reflecting the disposal
    of the remaining assets within the Portfolio Business Unit.          
|> | Amounts written off fixed asset
    investments were nil in 2005, with 2004 being a credit of
    £80m representing disposals of assets in excess of written
    down values.

20



---



##### 

Business and Financial Review





Other Material Items

Adjustments between the statutory basis and the trading
basis

Abbeys Board reviews discrete financial information for
each of its segments that includes measures of operating results
and assets, as described in the Business Review 
Summary. Management considers that the trading basis provides
the most appropriate way of reviewing the performance of the
business. The adjustments arise principally in the ongoing
Personal Financial Services businesses. Where similar costs were
incurred in the Portfolio Business Unit businesses or the Sold
Life Businesses, management typically no longer adjusts their
results for previous periods for these items, as those
businesses have now been sold. However, due to the importance of
these adjustments, the consolidated amounts are presented below,
together with an analysis of the total amount into the
businesses in which they were incurred unless the entire amount
arose in the Personal Financial Services businesses. The trading
adjustments consist of:

Reorganisation and other costs

|                             |  |             |  |             |  |            
|---------------------------- |  | ----------- |  | ----------- |  | -----------
|                             |  | 31 December |  | 31 December |  | 31 December
|                             |  | 2006        |  | 2005        |  | 2004       
|                             |  | £m          |  | £m          |  | £m         
|                            
|Cost reduction programme     |  | (134)       |  | (158)       |  | (376)      
|Asset write-downs            |  | (18)        |  | (5)         |  | (106)      
|Credit provisions            |  | (93)        |  |            |  | (75)       
|Misselling remediation costs |  | (61)        |  | (70)        |  |           
|                            
|                             |  | (306)       |  | (233)       |  | (557)      
|                            



2006 compared to 2005




2005 compared to 2004




Hedging variances


| |  |             |  |             |  |            
| |  | ----------- |  | ----------- |  | -----------
| |  | 31 December |  | 31 December |  | 31 December
| |  | 2006        |  | 2005        |  | 2004       
| |  | £m          |  | £m          |  | £m         
|
| |  | (45)        |  | (18)        |  |           
|



2006 compared to 2005




2005 compared to 2004




Profit on sale of PFS subsidiaries


| |  |             |  |             |  |            
| |  | ----------- |  | ----------- |  | -----------
| |  | 31 December |  | 31 December |  | 31 December
| |  | 2006        |  | 2005        |  | 2004       
| |  | £m          |  | £m          |  | £m         
|
| |  | 41          |  |            |  |           
|



21



---



##### 

Business and Financial Review



Other Material Itemscontinued

Proforma IFRS adjustments

| |  |             |  |             |  |            
| |  | ----------- |  | ----------- |  | -----------
| |  | 31 December |  | 31 December |  | 31 December
| |  | 2006        |  | 2005        |  | 2004       
| |  | £m          |  | £m          |  | £m         
|
| |  |            |  |            |  | 164        
|



One-off statutory IFRS adjustments


| |  |             |  |             |  |            
| |  | ----------- |  | ----------- |  | -----------
| |  | 31 December |  | 31 December |  | 31 December
| |  | 2006        |  | 2005        |  | 2004       
| |  | £m          |  | £m          |  | £m         
|
| |  |            |  |            |  | (245)      
|



Capital charges




IFRS to US GAAP reconciliation




2006 compared to 2005




|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|> | In 2005, a charge was recognised
    in the Income Statement under US GAAP reflecting impairment in
    the value of goodwill in the Sold Life Businesses segment. No
    impairment was recognised for IFRS purposes due to the lower
    level of goodwill held under IFRS. In 2006, these businesses
    were sold.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|> | In 2006 under IFRS curtailment
    gains were recognised in income, while under US GAAP such gains
    were taken to equity. Additionally under US GAAP, actuarial
    gains and losses outside a certain range are recognised in the
    income statement in equal amounts over the remaining service
    lives of current employees, resulting in the recognition of
    higher actuarial losses and lower expected returns on assets in
    income under US GAAP in 2006 and 2005.                                                                                                                                                                                                                                                                                                      
|> | In 2006 and 2005, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|> | In 2006 and 2005, 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 were reversed for US GAAP purposes. In
    addition, the US GAAP adjustment 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 2006 and 2005, an adjustment
    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, but which are excluded from the Income Statement and
    accounted for as an appropriation of profit in reserves under US
    GAAP. In 2006, Abbey exercised its call option and redeemed its
    US dollar denominated preference shares, leaving only its
    sterling denominated preference shares outstanding. In 2005, the
    gains and losses recognised under IFRS on the retranslation of
    the US dollar denominated preference shares were reversed
    because under US GAAP those preference shares are not
    retranslated.

22



---



##### 

Business and Financial Review



Other Material Itemscontinued



>
    In 2006, the discontinued
    operations adjustment reflects the accounting differences
    between IFRS and US GAAP on the results of the Life insurance
    businesses up to the date of sale, as well as the adjustment to
    the loss on sale reflecting the difference in net assets of the
    Life insurance businesses at the date of disposal.2005 compared to 2004

Net income / (loss) under US GAAP was £253m in 2005,
£167m lower than the IFRS profit for the year of
£420m. In 2004, the US GAAP net loss was £(20)m, lower
than the IFRS loss for the year of £(54)m. The principal
movements in the IFRS to US GAAP adjustments affecting net
income / (loss) were as follows:

>
    In 2005, a charge was recognised
    in the Income Statement under US GAAP reflecting impairment in
    the value of goodwill in the Sold Life Businesses 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.>
    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 US dollar 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.>
    In 2005 and 2004, the
    discontinued operations adjustment reflects the accounting
    differences between IFRS and US GAAP on the results of the life
    insurance businesses during the year. In addition, the
    adjustment for 2005 reflects the difference in accounting
    treatment in respect of investment properties held by the life
    insurance businesses. 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.Legal proceedings

Abbey and its subsidiaries are party to various legal
proceedings in the ordinary course of business, the ultimate
resolution of which is not expected to have a material adverse
effect on the financial position or the results of operations of
Abbey.

Material contracts

Abbey and its subsidiaries are party to various contracts in the
ordinary course of business. For the three years ended
31 December 2006, there have been no material contracts
entered into outside the ordinary course of business, except for
the contract described below.

Abbey announced on 7 June 2006 that it had entered into an
agreement to sell its entire life insurance business to
Resolution for cash consideration of approximately £3.6bn.
The sale completed in the third quarter of 2006. The principal
life companies sold were Scottish Mutual Assurance plc, Scottish
Provident Limited and Abbey National Life plc, as well as the
two offshore life companies, Scottish Mutual International plc
and Scottish Provident International Life Assurance Limited. See
Note 12 to the Consolidated Financial Statements.

Audit fees

See Note 8 of the Consolidated Financial Statements.

23



---



##### 

Business and Financial Review





Balance Sheet Business Review

Throughout this section, reference to UK and non-UK refer to the
location of the office where the transaction is recorded.

Deposits

The following tables set forth the average balances of deposits
by location for each of the three years ended 31 December
2006.

|                                                 |  |                                 |  |        |  |       
|------------------------------------------------ |  | ------------------------------- |  | ------ |  | ------
|                                                 |  | Average: year ended 31 December
|                                                 |  |                                
|                                                 |  | 2006                            |  | 2005   |  | 2004  
|                                                 |  | £m                              |  | £m     |  | £m    
|                                                
|Deposits by banks                                |  |                                 |  |        |  |       
|UK                                               |  | 29,713                          |  | 26,084 |  | 21,079
|Non-UK                                           |  | 1,981                           |  | 677    |  | 688   
|                                                
|                                                 |  | 31,694                          |  | 26,761 |  | 21,767
|                                                
|Deposits by customers (all
    interest bearing) |  |                                 |  |        |  |       
|UK                                               |  | 62,452                          |  | 63,999 |  | 58,404
|Non-UK                                           |  | 4,226                           |  | 6,080  |  | 5,301 
|                                                
|                                                 |  | 66,678                          |  | 70,079 |  | 63,705
|                                                

Deposits by customers




|                       |  |                                 |  |        |  |       
|---------------------- |  | ------------------------------- |  | ------ |  | ------
|                       |  | Average: year ended 31 December
|                       |  |                                
|                       |  | 2006                            |  | 2005   |  | 2004  
|                       |  | £m                              |  | £m     |  | £m    
|                      
|UK                     |  |                                 |  |        |  |       
|Retail demand deposits |  | 54,529                          |  | 52,083 |  | 40,760
|Retail time deposits   |  | 6,089                           |  | 9,076  |  | 12,177
|Wholesale deposits     |  | 1,834                           |  | 2,840  |  | 5,467 
|                      
|                       |  | 62,452                          |  | 63,999 |  | 58,404
|                      
|Non-UK                 |  |                                 |  |        |  |       
|Retail demand deposits |  | 1,490                           |  | 1,092  |  | 1,152 
|Retail time deposits   |  | 1,144                           |  | 4,875  |  | 4,149 
|Wholesale deposits     |  | 1,592                           |  | 113    |  |      
|                      
|                       |  | 4,226                           |  | 6,080  |  | 5,301 
|                      
|                       |  | 66,678                          |  | 70,079 |  | 63,705
|                      



Demand deposits




Time deposits




Wholesale deposits




Short-term borrowings




24



---



##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

Deposits by banks

|                        |  |                        |  |        |  |       
|----------------------- |  | ---------------------- |  | ------ |  | ------
|                        |  | Year ended 31 December
|                        |  |                       
|                        |  | 2006                   |  | 2005   |  | 2004  
|                        |  | £m                     |  | £m     |  | £m    
|                       
|Year-end
    balance(1) |  | 36,755                 |  | 27,478 |  | 18,412
|Average balance         |  | 31,694                 |  | 26,761 |  | 21,767
|Maximum balance         |  | 37,485                 |  | 35,872 |  | 25,530
|                       

|    |                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The year-end deposits by banks balance includes non-interest
    bearing items in the course of transmission of £363m (2005:
    £248m, 2004: £161m).                                                                                                                                                                                                        
|(2) | Abbey policy is to mark-to-market the majority of its deposits
    by banks balances including interest. Mark to market movements
    are recorded in net trading income banking rather than net
    interest income. As a result, it has not been possible to
    calculate either an average interest rate during the year or a
    year-end interest rate.



Commercial paper


|                 |  |                        |  |       |  |      
|---------------- |  | ---------------------- |  | ----- |  | -----
|                 |  | Year ended 31 December
|                 |  |                       
|                 |  | 2006                   |  | 2005  |  | 2004 
|                 |  | £m                     |  | £m    |  | £m   
|                
|Year-end balance |  | 6,705                  |  | 6,009 |  | 1,656
|Average balance  |  | 6,344                  |  | 2,891 |  | 2,086
|Maximum balance  |  | 7,308                  |  | 6,009 |  | 3,367
|                

|    |                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Abbey policy is to mark-to-market the majority of its deposits
    by banks balances including interest. Mark to market movements
    are recorded in net trading income banking rather than net
    interest income. As a result, it has not been possible to
    calculate either an average interest rate during the year or a
    year-end interest rate.



Negotiable certificates of deposit


|                       |  |                        |  |       |  |      
|---------------------- |  | ---------------------- |  | ----- |  | -----
|                       |  | Year ended 31 December
|                       |  |                       
|                       |  | 2006                   |  | 2005  |  | 2004 
|                       |  | £m                     |  | £m    |  | £m   
|                      
|Year-end balance       |  | 10,832                 |  | 5,282 |  | 7,073
|Average
    balance(1) |  | 7,644                  |  | 5,727 |  | 8,496
|Maximum balance        |  | 10,832                 |  | 6,670 |  | 9,901
|                      

|    |                                                                                                                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Average balances for 2006, 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 the majority of its deposits
    by banks balances including interest. Mark to market movements
    are recorded in net trading income banking rather than net
    interest income. As a result, it has not been possible to
    calculate either an average interest rate during the year or a
    year end interest rate.

Certificates of deposit and certain time deposits




|                         |  |               |  |                     |  |                     |  |              |  |       
|------------------------ |  | ------------- |  | ------------------- |  | ------------------- |  | ------------ |  | ------
|                         |  |               |  | In more than three  |  | In more than six    |  |              |  |       
|                         |  | Not more than |  | months but not more |  | months but not more |  | In more than |  |       
|                         |  | three months  |  | than six months     |  | than one year       |  | one year     |  | Total 
|                         |  | £m            |  | £m                  |  | £m                  |  | £m           |  | £m    
|                        
|Certificates of deposit: |  |               |  |                     |  |                     |  |              |  |       
|UK                       |  | 2,768         |  | 772                 |  | 1,997               |  | 142          |  | 5,679 
|Non-UK                   |  | 2,952         |  | 958                 |  | 479                 |  | 764          |  | 5,153 
|Wholesale time deposits: |  |               |  |                     |  |                     |  |              |  |       
|UK                       |  | 2,170         |  | 413                 |  | 178                 |  | 1,057        |  | 3,818 
|Non-UK                   |  | 771           |  |                    |  | 28                  |  | 1            |  | 800   
|                        
|                         |  | 8,661         |  | 2,143               |  | 2,682               |  | 1,964        |  | 15,450
|                        



25



---



##### 

Business and Financial Review

Balance Sheet Business
Reviewcontinued

Securities

The following table sets out the book and market values of
securities at 31 December for each of the three years
indicated. For further information, see the Notes to the
Consolidated Financial Statements.

|                                                                  |  |              |  |              |  |           |  |       
|----------------------------------------------------------------- |  | ------------ |  | ------------ |  | --------- |  | ------
|                                                                  |  | 2006         |  | 2005         |  | 2004     
|                                                                  |  |             
|                                                                  |  | Net asset &  |  | Net asset &  |  | Net asset |  | Market
|                                                                  |  | market value |  | market value |  | value     |  | value 
|                                                                  |  | £m           |  | £m           |  | £m        |  | £m    
|                                                                 
|Trading portfolio                                                 |  |              |  |              |  |           |  |       
|Debt securities:                                                  |  |              |  |              |  |           |  |       
|UK government                                                     |  | 48           |  | 2,700        |  | 7,492     |  | 7,492 
|US treasury and other US government
    agencies and corporations |  |             |  | 22           |  |          |  |      
|Other public sector securities                                    |  | 2,415        |  | 350          |  | 2,887     |  | 2,887 
|Bank and building society
    certificates of deposit             |  | 10,839       |  | 18,647       |  | 12,683    |  | 12,683
|Other issuers:                                                    |  |              |  |              |  |           |  |       
|Floating rate notes                                               |  | 298          |  | 463          |  | 224       |  | 224   
|Mortgage-backed securities                                        |  | 75           |  | 350          |  | 240       |  | 240   
|Other asset-backed securities                                     |  | 1,584        |  | 4,626        |  | 495       |  | 495   
|Other                                                             |  | 14,551       |  | 4,396        |  | 12,317    |  | 12,317
|Ordinary shares and similar
    securities                        |  | 2,754        |  | 1,539        |  | 10,762    |  | 10,762
|                                                                 
|                                                                  |  | 32,564       |  | 33,093       |  | 47,100    |  | 47,100
|                                                                 
|Investment securities                                             |  |              |  |              |  |           |  |       
|Debt securities:                                                  |  |              |  |              |  |           |  |       
|Other public sector securities                                    |  |             |  |             |  | 28        |  | 28    
|Bank and building society
    certificates of deposit             |  |             |  |             |  | 317       |  | 317   
|Other issuers:                                                    |  |              |  |              |  |           |  |       
|Floating rate notes                                               |  |             |  |             |  | 32        |  | 27    
|Mortgage-backed securities                                        |  |             |  |             |  | 38        |  | 42    
|Other asset-backed securities                                     |  |             |  |             |  | 257       |  | 310   
|Other                                                             |  | 8            |  |             |  |          |  |      
|Ordinary shares and similar
    securities                        |  | 15           |  | 13           |  | 30        |  | 32    
|                                                                 
|                                                                  |  | 23           |  | 13           |  | 702       |  | 756   
|                                                                 
|Fair value through profit and
    loss                            |  |              |  |              |  |           |  |       
|Debt securities:                                                  |  |              |  |              |  |           |  |       
|UK government                                                     |  |             |  | 2,794        |  |          |  |      
|US treasury and other US government
    agencies and corporations |  |             |  | 100          |  |          |  |      
|Other public sector securities                                    |  |             |  | 417          |  |          |  |      
|Bank and building society
    certificates of deposit             |  | 15           |  | 841          |  |          |  |      
|Other issuers:                                                    |  |              |  |              |  |           |  |       
|Other asset-backed securities                                     |  | 3,006        |  | 343          |  |          |  |      
|Other                                                             |  | 302          |  | 8,387        |  |          |  |      
|Ordinary shares and similar
    securities                        |  |             |  | 11,670       |  |          |  |      
|                                                                 
|                                                                  |  | 3,323        |  | 24,552       |  |          |  |      
|                                                                 
|Total                                                             |  | 35,910       |  | 57,658       |  | 47,802    |  | 47,856
|                                                                 

UK government securities




US treasury and other US government agencies and
corporations




Other public sector securities




26



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

Bank and building society certificates of deposit

Bank and building society certificates of deposit are fixed-rate
securities with relatively short maturities. These are managed
within the overall position for the relevant book.

Other issuers: floating-rate notes

Floating-rate notes have simple risk profiles and are either
managed within the overall position for the relevant book, or
are hedged into one of the main currencies.

Other issuers: mortgage-backed securities

This category comprises US mortgage-backed securities (other
than Agency mortgage-backed securities) and European
mortgage-backed securities. The non-agency mortgage-backed
securities have similar characteristics to the agency
mortgage-backed securities discussed above and are managed along
with the agency mortgage-backed securities for market risk
purposes. European mortgage-backed securities have prepayment
risks but few have cap features.

Other issuers: other asset-backed securities

This category comprises a range of mostly floating-rate
asset-backed securities including home equity loans, commercial
mortgages, car dealer, lease and credit card debtors and student
loans. Some of the credit card debtors incorporate cap features.

Other issuers: other securities

This category comprised mainly synthetic floating-rate notes
(which are fixed-rate bonds packaged into floating-rate by means
of swaps tailored to provide a match to the characteristics of
the underlying bond), along with a number of structured
transactions which were hedged, as appropriate, either on an
individual basis or as part of the overall management of the
books. The synthetic floating-rate notes comprised bonds issued
by banks, financial institutions and corporations, the latter
being largely guaranteed by banks and financial institutions.

The following table sets forth the book and market values of
securities of individual counterparties where the aggregate
amount of those securities exceeded 10% of Abbeys
shareholders funds at 31 December 2006 as set out in
the Consolidated Balance Sheet on page 69.

|                                   |  |      
|---------------------------------- |  | -----
|                                   |  | £m   
|                                  
|Lloyds TSB Group plc               |  | 2,255
|HBOS plc                           |  | 1,957
|Hippototta No. 3 plc               |  | 1,459
|Hippototta No. 2 plc               |  | 1,265
|Barclays Bank plc                  |  | 1,161
|Nationwide Building Society        |  | 1,000
|Unicredito Italiano SPA            |  | 837  
|Nordea Bank AB                     |  | 700  
|Government of Germany              |  | 654  
|Fortis Bank NV/ SA                 |  | 517  
|ING Groep NV                       |  | 466  
|Credit Mutuel Centre est Europe    |  | 451  
|Banco Bilbao Vizcaya Argentaria    |  | 447  
|National Australia Bank Ltd        |  | 443  
|Kingdom of Spain                   |  | 430  
|Republic of Austria                |  | 428  
|Republic of Italy                  |  | 413  
|Bank of Ireland                    |  | 401  
|HSBC Holdings plc                  |  | 398  
|Danske Bank AS                     |  | 358  
|Societe Generale SA                |  | 328  
|Commonwealth Bank of Australia Ltd |  | 325  
|                                  

Loans and advances to banks




|       |  |                        |  |       |  |       
|------ |  | ---------------------- |  | ----- |  | ------
|       |  | Year ended 31 December
|       |  |                       
|       |  | 2006                   |  | 2005  |  | 2004  
|       |  | £m                     |  | £m    |  | £m    
|      
|UK     |  | 11,943                 |  | 8,060 |  | 11,081
|Non-UK |  | 93                     |  | 1,036 |  | 670   
|      
|       |  | 12,036                 |  | 9,096 |  | 11,751
|      

27



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

The table below for 2003 and 2002 contains information prepared
under UK GAAP, Abbeys previous primary GAAP, which is not
comparable to information prepared under IFRS.

|       |  |                        |  |      
|------ |  | ---------------------- |  | -----
|       |  | Year ended 31 December
|       |  |                       
|       |  | 2003                   |  | 2002 
|       |  | £m                     |  | £m   
|      
|UK     |  | 6,219                  |  | 6,465
|Non-UK |  | 936                    |  | 135  
|      
|       |  | 7,155                  |  | 6,600
|      



|       |  |        |  |             |  |               |  |              |  |           |  |       
|------ |  | ------ |  | ----------- |  | ------------- |  | ------------ |  | --------- |  | ------
|       |  |        |  |             |  |               |  | In more than |  |           |  |       
|       |  |        |  |             |  | In more than  |  | one year but |  |           |  |       
|       |  |        |  | In not more |  | three months  |  | not more     |  | In more   |  |       
|       |  | On     |  | than three  |  | but not more  |  | than five    |  | than five |  |       
|       |  | demand |  | months      |  | than one year |  | years        |  | years     |  | Total 
|       |  | £m     |  | £m          |  | £m            |  | £m           |  | £m        |  | £m    
|      
|UK     |  | 2,241  |  | 7,946       |  | 13            |  | 239          |  | 1,504     |  | 11,943
|Non-UK |  | 2      |  | 89          |  | 2             |  |             |  |          |  | 93    
|      
|       |  | 2,243  |  | 8,035       |  | 15            |  | 239          |  | 1,504     |  | 12,036
|      

|                                                              |  |            |  |               |  |       
|------------------------------------------------------------- |  | ---------- |  | ------------- |  | ------
|                                                              |  | Fixed rate |  | Variable rate |  | Total 
|                                                              |  | £m         |  | £m            |  | £m    
|                                                             
|Interest-bearing loans and advances
    to banks:             |  |            |  |               |  |       
|UK                                                            |  | 2,177      |  | 9,601         |  | 11,778
|Non-UK                                                        |  | 42         |  | 51            |  | 93    
|                                                             
|                                                              |  | 2,219      |  | 9,652         |  | 11,871
|Items in the course of collection
    (non-interest bearing): |  |            |  |               |  |       
|UK                                                            |  |           |  |              |  | 165   
|                                                             
|                                                              |  | 2,219      |  | 9,652         |  | 12,036
|                                                             

Loans and advances to customers




|                                               |  |                        |  |         |  |        
|---------------------------------------------- |  | ---------------------- |  | ------- |  | -------
|                                               |  | Year ended 31 December
|                                               |  |                       
|                                               |  | 2006                   |  | 2005    |  | 2004   
|                                               |  | £m                     |  | £m      |  | £m     
|                                              
|UK                                             |  |                        |  |         |  |        
|Advances secured on residential
    properties |  | 102,096                |  | 94,330  |  | 91,164 
|Purchase and resale agreements                 |  | 5,427                  |  | 4,789   |  | 4,520  
|Other secured advances                         |  | 2,305                  |  | 1,882   |  | 1,793  
|Corporate advances                             |  | 666                    |  | 334     |  | 1,030  
|Unsecured personal advances                    |  | 4,104                  |  | 3,845   |  | 3,517  
|Finance lease debtors                          |  | 1                      |  | 3       |  | 1,108  
|                                              
|                                               |  | 114,599                |  | 105,183 |  | 103,132
|                                              
|Non-UK                                         |  |                        |  |         |  |        
|Advances secured on residential
    properties |  | 19                     |  | 26      |  | 14     
|Purchase and resale agreements                 |  | 14,375                 |  | 13,152  |  | 6,737  
|Unsecured personal advances                    |  | 35                     |  | 31      |  |       
|                                              
|                                               |  | 14,429                 |  | 13,209  |  | 6,751  
|                                              
|Total                                          |  | 129,028                |  | 118,392 |  | 109,883
|                                              



|                                               |  |                        |  |       
|---------------------------------------------- |  | ---------------------- |  | ------
|                                               |  | Year ended 31 December
|                                               |  |                       
|                                               |  | 2003                   |  | 2002  
|                                               |  | £m                     |  | £m    
|                                              
|UK                                             |  |                        |  |       
|Advances secured on residential
    properties |  | 73,481                 |  | 65,777
|Purchase and resale agreements                 |  | 2,958                  |  | 742   
|Other secured advances                         |  | 2,938                  |  | 4,645 
|Corporate advances                             |  | 3,762                  |  | 9,071 
|Unsecured personal advances                    |  | 3,228                  |  | 5,162 
|Finance lease debtors                          |  | 2,558                  |  | 3,429 
|                                              
|                                               |  | 88,925                 |  | 88,826
|                                              

28



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

|                                               |  |                        |  |       
|---------------------------------------------- |  | ---------------------- |  | ------
|                                               |  | Year ended 31 December
|                                               |  |                       
|                                               |  | 2003                   |  | 2002  
|                                               |  | £m                     |  | £m    
|                                              
|Non-UK                                         |  |                        |  |       
|Advances secured on residential
    properties |  | 1,745                  |  | 3,186 
|Purchase and resale agreements                 |  | 6,414                  |  | 2,358 
|Other secured advances                         |  | 33                     |  | 106   
|Unsecured personal advances                    |  | 145                    |  | 123   
|Finance lease debtors                          |  | 15                     |  | 18    
|                                              
|                                               |  | 8,352                  |  | 5,791 
|                                              
|Total                                          |  | 97,277                 |  | 94,617
|                                              





|                                               |  |        |  |             |  |               |  |               |  |           |  |        
|---------------------------------------------- |  | ------ |  | ----------- |  | ------------- |  | ------------- |  | --------- |  | -------
|                                               |  |        |  |             |  | In more than  |  | In more than  |  |           |  |        
|                                               |  |        |  | In not more |  | three months  |  | one year but  |  | In more   |  |        
|                                               |  | On     |  | than three  |  | but not more  |  | not more than |  | than five |  |        
|                                               |  | demand |  | months      |  | than one year |  | five years    |  | years     |  | Total  
|                                               |  | £m     |  | £m          |  | £m            |  | £m            |  | £m        |  | £m     
|                                              
|UK                                             |  |        |  |             |  |               |  |               |  |           |  |        
|Advances secured on residential
    properties |  | 40     |  | 3,299       |  | 2,005         |  | 11,691        |  | 85,061    |  | 102,096
|Purchase and resale agreements                 |  | 4,153  |  | 1,274       |  |              |  |              |  |          |  | 5,427  
|Other secured advances                         |  | 2      |  | 46          |  | 17            |  | 67            |  | 2,173     |  | 2,305  
|Corporate advances                             |  | 18     |  | 388         |  | 156           |  | 2             |  | 102       |  | 666    
|Unsecured personal advances                    |  | 588    |  | 719         |  | 638           |  | 1,867         |  | 292       |  | 4,104  
|Finance lease debtors                          |  |       |  |            |  | 1             |  |              |  |          |  | 1      
|                                              
|Total UK                                       |  | 4,801  |  | 5,726       |  | 2,817         |  | 13,627        |  | 87,628    |  | 114,599
|                                              
|Non-UK                                         |  |        |  |             |  |               |  |               |  |           |  |        
|Advances secured on residential
    properties |  |       |  |            |  |              |  | 2             |  | 17        |  | 19     
|Purchase and resale agreements                 |  | 14,375 |  |            |  |              |  |              |  |          |  | 14,375 
|Unsecured personal advances                    |  |       |  | 35          |  |              |  |              |  |          |  | 35     
|                                              
|Total non-UK                                   |  | 14,375 |  | 35          |  |              |  | 2             |  | 17        |  | 14,429 
|                                              
|Total                                          |  | 19,176 |  | 5,761       |  | 2,817         |  | 13,629        |  | 87,645    |  | 129,028
|                                              



|       |  |        |  |          |  |        
|------ |  | ------ |  | -------- |  | -------
|       |  | Fixed  |  | Variable |  |        
|       |  | rate   |  | rate     |  | Total  
|       |  | £m     |  | £m       |  | £m     
|      
|UK     |  | 37,855 |  | 76,744   |  | 114,599
|Non-UK |  |       |  | 14,429   |  | 14,429 
|      
|       |  | 37,855 |  | 91,173   |  | 129,028
|      



Provisions on loans and advances to customers




Potential problem loans and advances






29



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

The categories of non-performing loans and advances, which are
statistically most likely to result in losses are cases from
6 months to 12 months in arrears and 12 months or
more in arrears. Losses on cases for which the property securing
the loan has been taken into possession are evaluated
individually with the amounts expected to be lost on realisation
of the security being established with a high degree of
certainty. The following table sets forth the values for each of
these categories included in the non-performing loans and
advances table above for each of the last five years.

|                                     |  |      |  |      |  |     
|------------------------------------ |  | ---- |  | ---- |  | ----
|                                     |  | 2006 |  | 2005 |  | 2004
|                                     |  | £m   |  | £m   |  | £m  
|                                    
|6 months to 12 months in
    arrears |  | 155  |  | 172  |  | 105 
|12 months or more in arrears         |  | 27   |  | 26   |  | 15  
|Properties in possession             |  | 42   |  | 44   |  | 18  
|                                    



|                                     |  |      |  |     
|------------------------------------ |  | ---- |  | ----
|                                     |  | 2003 |  | 2002
|                                     |  | £m   |  | £m  
|                                    
|6 months to 12 months in
    arrears |  | 62   |  | 101 
|12 months or more in arrears         |  | 44   |  | 131 
|Properties in possession             |  | 7    |  | 9   
|                                    

Potential credit risk elements in loans and advances




Country risk exposure




Cross border outstandings




Cross border outstandings exceeding 1% of total assets


|                         |  |          |  |       |  |                 |  |              |  |                
|------------------------ |  | -------- |  | ----- |  | --------------- |  | ------------ |  | ---------------
|                         |  |          |  |       |  |                 |  |              |  | Commercial,    
|                         |  | As %     |  |       |  | Banks and other |  | Governments  |  | industrial and 
|                         |  | of total |  |       |  | financial       |  | and official |  | other private  
|                         |  | assets   |  | Total |  | institutions    |  | institutions |  | sector entities
|                         |  | %        |  | £m    |  | £m              |  | £m           |  | £m             
|                        
|At 31 December
    2006: |  |          |  |       |  |                 |  |              |  |                
|United States            |  | 1.25     |  | 2,395 |  | 2,395           |  |             |  |               
|                        
|At 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.

Cross border outstandings between 0.75% and 1% of total
assets




Tangible fixed assets


|                    |  |                        |  |      |  |     
|------------------- |  | ---------------------- |  | ---- |  | ----
|                    |  | Year ended 31 December
|                    |  |                       
|                    |  | 2006                   |  | 2005 |  | 2004
|                    |  | £m                     |  | £m   |  | £m  
|                   
|Capital expenditure |  | 189                    |  | 190  |  | 115 
|                   



30



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

Abbey had 931 unique property interests at 31 December 2006
consisting of two freehold leases and 929 operating lease
interests, occupying a total floor space of 480,685 square
metres. The number of unique property interests owned by Abbey
is more than the number of individual properties as Abbey has
more than one interest in some properties. The majority of
Abbeys property interests are retail branches. Included in
the above total are 26 properties that were not occupied by
Abbey as at 31 December 2006. Of Abbeys individual
properties, 789 are located in the UK and six in Europe. There
are no material environmental issues associated with the use of
the above properties.

Abbey has four principal sites at Triton Square, London
(Abbeys headquarters and Treasury operations), Nelson
Street, Bradford, (the banking back office and Human Resources
functions) St. Vincent Street, Glasgow (Wealth Management
and the telephone distribution operations), and Grafton Gate
East, Milton Keynes (credit cards, debt management, Finance,
Compliance and Marketing). The main computer centre is Shenley
Wood House in Milton Keynes. These properties are held under
operating leases. The registered office of Abbey is located at
Abbey National House, 2 Triton Square, Regents Place,
London NW1 3AN.

Management believes its existing properties and those under
construction, in conjunction with the operating lease
arrangements in place with Mapeley Columbus Limited, are
adequate and suitable for its business as presently conducted
and to meet future business needs. All properties are adequately
maintained.

Capital management and resources

Capital management and capital allocation

Abbey adopts a centralised capital management approach, based on
an assessment of both regulatory requirements and the economic
capital impacts of our businesses. The various regulatory
minimum capital criteria are augmented by internally assigned
buffers. These ratios, buffers and restrictions, together with
the relevant costs of differing capital instruments and a
consideration of the various other capital management techniques
are used to shape the most cost-effective structure to fulfil
Abbeys capital needs.

Abbey manages its equity requirements in discussion with
Santander and has its own active debt management programme. To
support its debt issuance program, Abbey is rated on a
standalone basis. Abbey also manages the capital resources it
requires by actively managing and monitoring the risk it takes
in terms of volume of business, size of exposures to risk
categories and the use of risk mitigation techniques.

Abbeys capital allocation control process has two main
determinants: the capital volumes approved to business units
within the planning process, and the need to have access to a
capital buffer which is sufficient to cover the capital impact
of major contingent events or capital shocks.
Capital allocation decisions will be influenced by comparison of
returns earned on regulatory equity, conducted as part of
planning reviews under which capital levels for operating
divisions are approved or when additional capital requests are
received.

Capital adequacy

Capital adequacy and capital resources are monitored by Abbey on
the basis of the capital adequacy framework and techniques
developed by the Basel Committee on Banking Supervision (the
Basel Committee) in 1988 and subsequently
implemented in the UK and Spain. Abbey is directly regulated in
the UK by the Financial Services Authority and indirectly by the
Banco de España as Santanders home regulator.

The Basel Committee issued a revised capital adequacy framework
for assessing the capital required to cover all of a financial
institutions business risks in June 2004. In both the UK
and Spain these changes are being introduced on a gradual basis
from 1 January 2007 to 1 January 2008. This revised
capital adequacy framework includes a more risk-sensitive
methodology for the allocation of regulatory capital for credit
risk and introduced a capital adequacy requirement for
operational risk. The framework for the calculation of
regulatory capital and the international minimum risk asset
ratio of 8% will be unchanged. Management does not expect any
material adverse change to the business of Abbey to arise from
its adoption of the revised capital adequacy framework.

Capital ratios

The following capital ratios are calculated in accordance with
the Financial Services Authoritys interpretation of the
techniques specified by the Basel Committee in 1988. They
demonstrate that Abbeys capital ratio exceeds both the
Basel Committee minimum risk asset ratio of 8% and the Financial
Services Authoritys set minimum capital ratio for Abbey.
Abbey recognises the additional security inherent in Tier 1
capital, and so also presents a Tier 1 to risk-weighted
assets ratio (the Tier 1 ratio). An Equity
Tier 1 ratio (i.e. Tier 1 excluding preference shares)
is also presented.

Group capital

|                                                   |  |         |  |         |  |        
|-------------------------------------------------- |  | ------- |  | ------- |  | -------
|                                                   |  | 2006    |  | 2005    |  | 2004   
|                                                   |  | £m      |  | £m      |  | £m     
|                                                  
|Balance sheet:                                     |  |         |  |         |  |        
|Distributable reserves and
    shareholders funds |  | 3,612   |  | 3,853   |  | 5,004  
|Less: goodwill recognised                          |  | (90)    |  | (171)   |  | (1,069)
|                                                  
|Core equity Tier 1                                 |  | 3,522   |  | 3,682   |  | 3,935  
|Tier 1 capital instruments                         |  | 1,518   |  | 1,932   |  | 1,893  
|                                                  
|Total Tier 1
    capital                           |  | 5,040   |  | 5,614   |  | 5,828  
|                                                  
|Undated subordinated debt                          |  | 2,076   |  | 2,641   |  | 2,604  
|Dated subordinated debt                            |  | 2,423   |  | 2,620   |  | 2,204  
|Incurred but not observed
    provisions and other |  | 169     |  | 85      |  | 177    
|                                                  
|Total Tier 2
    capital                           |  | 4,668   |  | 5,346   |  | 4,985  
|Less: supervisory deductions                       |  | (1,806) |  | (3,978) |  | (4,082)
|                                                  
|Total regulatory
    capital                       |  | 7,902   |  | 6,982   |  | 6,731  
|                                                  

31



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

|                                     |  |        |  |        |  |       
|------------------------------------ |  | ------ |  | ------ |  | ------
|                                     |  | 2006   |  | 2005   |  | 2004  
|                                     |  | £m     |  | £m     |  | £m    
|                                    
|Risk-weighted assets:                |  |        |  |        |  |       
|Personal Financial Services          |  | 62,942 |  | 55,972 |  | 55,373
|Portfolio Business Unit              |  |       |  |       |  | 798   
|                                    
|Total Abbey risk-weighted
    assets |  | 62,942 |  | 55,972 |  | 56,171
|                                    
|Banking book                         |  | 56,853 |  | 50,108 |  | 50,416
|Trading book                         |  | 6,089  |  | 5,864  |  | 5,755 
|                                    
|Total Abbey risk-weighted
    assets |  | 62,942 |  | 55,972 |  | 56,171
|                                    
|                                    
|Capital ratios:                      |  |        |  |        |  |       
|                                    
|Risk asset ratio (%)                 |  | 12.6   |  | 12.5   |  | 12.0  
|Tier 1 ratio (%)                     |  | 8.0    |  | 10.0   |  | 10.4  
|Equity Tier 1 ratio (%)              |  | 5.6    |  | 6.6    |  | 7.0   
|                                    

Balance sheet




Risk-weighted assets (RWAs)




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. Under IFRS, the banks
    guarantee liability is in theory the number of cheques written
    and deposited with retailers multiplied by the amount guaranteed
    per cheque, which can be between £50 and £100. Under
    US GAAP, the banks guarantee liability is in theory the
    number of cheques in issue multiplied by the amount guaranteed
    per cheque. 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 and businesses. 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






32



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

Analysis of cash flow movements

|                                                        |  |                        |  |         |  |        
|------------------------------------------------------- |  | ---------------------- |  | ------- |  | -------
|                                                        |  | Year ended 31 December
|                                                        |  |                       
|                                                        |  | 2006                   |  | 2005    |  | 2004   
|                                                        |  | £m                     |  | £m      |  | £m     
|                                                       
|Net cash (outflow) from
    operating activities        |  | (13,086)               |  | (7,255) |  | (5,039)
|Net cash inflow from investing
    activities           |  | 12                     |  | 2,034   |  | 4,151  
|Net cash (outflow)/inflow from
    financing activities |  | 1,758                  |  | 1,426   |  | (1,497)
|                                                       
|Decrease in cash and cash
    equivalents               |  | (11,316)               |  | (3,795) |  | (2,385)
|                                                       

2006 compared to 2005








2005 compared to 2004




Sources of liquidity












|                        |  |                                 |  |                   
|----------------------- |  | ------------------------------- |  | ------------------
|Programme               |  | Outstanding at 31 December 2006 |  | Markets issued in:
|                       
|$15bn medium-term notes |  | $13.7bn                         |  | Europe            
|$7bn shelf programme    |  | $2.5bn                          |  | United States     
|$4bn commercial paper   |  | $1.8bn                          |  | Europe            
|$20bn commercial paper  |  | $11.4bn                         |  | United States     
|                       

Uses of liquidity




33



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

Contractual obligations

The amounts and maturities of contractual obligations in respect
of deposits by banks, deposits by customers, and guarantees are
described in Notes 30, 31 and 42 to the Consolidated
Financial Statements. Other contractual obligations are:

|                               |  |                        |  |           |  |       |  |       |  |            
|------------------------------ |  | ---------------------- |  | --------- |  | ----- |  | ----- |  | -----------
|                               |  | Payments due by period
|                               |  |                       
|                               |  |                        |  | Less than |  | 1-3   |  | 3-5   |  | More than 5
|                               |  | Total                  |  | 1 year    |  | years |  | years |  | years      
|                               |  | £m                     |  | £m        |  | £m    |  | £m    |  | £m         
|                              
|Debt securities in issue       |  | 48,915                 |  | 20,632    |  | 9,066 |  | 2,074 |  | 17,143     
|Other borrowed funds           |  | 1,655                  |  | 247       |  |      |  |      |  | 1,408      
|Subordinated liabilities       |  | 5,020                  |  |          |  | 362   |  | 349   |  | 4,309      
|Retirement benefit obligations |  | 1,034                  |  | 30        |  | 62    |  | 65    |  | 877        
|Operating lease obligations    |  | 1,245                  |  | 114       |  | 199   |  | 190   |  | 742        
|Purchase obligations           |  | 86                     |  | 61        |  | 25    |  |      |  |           
|                              
|Total                          |  | 57,955                 |  | 21,084    |  | 9,714 |  | 2,678 |  | 24,479     
|                              





Interest rate sensitivity






34



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

Changes in net interest income  volume and rate
analysis

The following table allocates changes in interest income,
interest expense and net interest income between changes in
volume and changes in rate for the years ended 31 December
2006, 2005 and 2004. Volume and rate variances have been
calculated on the movement in the average balances and the
change in the interest rates on average interest-earning assets
and average interest-bearing liabilities. The variance caused by
changes in both volume and rate has been allocated to rate
changes.

|                                                    |  |           |  |                        |  |        |  |                        |  |        |  |      
|--------------------------------------------------- |  | --------- |  | ---------------------- |  | ------ |  | ---------------------- |  | ------ |  | -----
|                                                    |  | 2006/2005 |  | 2005/2004             
|                                                    |  |          
|                                                    |  | Total     |  | Changes due to         |  | Total  |  | Changes due to        
|                                                    |  | change    |  | Increase / (decrease): |  | change |  | Increase / (decrease):
|                                                    |  |           |  |                        |  |        |  |                       
|                                                    |  |           |  | Volume                 |  | Rate   |  |                        |  | Volume |  | Rate 
|                                                    |  | £m        |  | £m                     |  | £m     |  | £m                     |  | £m     |  | £m   
|                                                   
|Interest income                                     |  |           |  |                        |  |        |  |                        |  |        |  |      
|Loans and advances to banks                         |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | (13)      |  | (59)                   |  | 46     |  | (73)                   |  | (46)   |  | (27) 
|Non-UK                                              |  | (2)       |  | (1)                    |  | (1)    |  | 4                      |  | 5      |  | (1)  
|Loans and advances to customers                     |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | 255       |  | 183                    |  | 72     |  | 33                     |  | (12)   |  | 45   
|Non-UK                                              |  |          |  |                       |  |       |  | (57)                   |  | (70)   |  | 13   
|Debt securities                                     |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  |          |  |                       |  |       |  | (87)                   |  | (117)  |  | 30   
|                                                   
|Total interest income                               |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | 242       |  | 124                    |  | 118    |  | (127)                  |  | (175)  |  | 48   
|Non-UK                                              |  | (2)       |  | (1)                    |  | (1)    |  | (53)                   |  | (65)   |  | 12   
|                                                   
|                                                    |  | 240       |  | 123                    |  | 117    |  | (180)                  |  | (240)  |  | 60   
|                                                   
|Interest expense                                    |  |           |  |                        |  |        |  |                        |  |        |  |      
|Deposits by banks                                   |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | 52        |  | 34                     |  | 18     |  | (201)                  |  | (208)  |  | 7    
|Non-UK                                              |  |          |  |                       |  |       |  | (10)                   |  | (10)   |  |     
|Deposits by customers 
    retail demand deposits  |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | 140       |  | 85                     |  | 55     |  | 418                    |  | 381    |  | 37   
|Non-UK                                              |  | 14        |  | 9                      |  | 5      |  | (2)                    |  | (1)    |  | (1)  
|Deposits by customers 
    retail time deposits    |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | (14)      |  | (117)                  |  | 103    |  | (101)                  |  | (116)  |  | 15   
|Non-UK                                              |  | (146)     |  | (161)                  |  | 15     |  | 27                     |  | 32     |  | (5)  
|Deposits by customers 
    wholesale deposits      |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | (47)      |  | (44)                   |  | (3)    |  | (58)                   |  | (88)   |  | 30   
|Non-UK                                              |  | 66        |  |                       |  | 66     |  |                       |  |       |  |     
|Bonds and medium-term notes                         |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | (160)     |  | (107)                  |  | (53)   |  | 31                     |  | (15)   |  | 46   
|Non-UK                                              |  | 262       |  |                       |  | 262    |  |                       |  |       |  |     
|Other debt securities in issue                      |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  |          |  |                       |  |       |  | (148)                  |  | (148)  |  |     
|Non-UK                                              |  |          |  |                       |  |       |  | (101)                  |  | (101)  |  |     
|Loan capital and other subordinated
    liabilities |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | (21)      |  | (92)                   |  | 71     |  | 186                    |  | 110    |  | 76   
|Non-UK                                              |  | 11        |  | 3                      |  | 8      |  | 35                     |  |       |  | 35   
|                                                   
|Total interest expense                              |  |           |  |                        |  |        |  |                        |  |        |  |      
|UK                                                  |  | (50)      |  | (241)                  |  | 191    |  | 127                    |  | (84)   |  | 211  
|Non-UK                                              |  | 207       |  | (149)                  |  | 356    |  | (51)                   |  | (80)   |  | 29   
|                                                   
|                                                    |  | 157       |  | (390)                  |  | 547    |  | 76                     |  | (164)  |  | 240  
|                                                   
|Net interest income                                 |  | 83        |  | 513                    |  | (430)  |  | (256)                  |  | (76)   |  | (180)
|                                                   

35



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

Average balance
sheet(3, 4)

|                                                                           |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|-------------------------------------------------------------------------- |  | --------- |  | -------- |  | ------- |  | --------- |  | -------- |  | ------- |  | --------- |  | -------- |  | -------
|                                                                           |  | 2006      |  | 2005     |  | 2004   
|                                                                           |  |          
|                                                                           |  | Average   |  |          |  | Average |  | Average   |  |          |  | Average |  | Average   |  |          |  | Average
|                                                                           |  | balance   |  | Interest |  | rate    |  | balance   |  | Interest |  | rate    |  | balance   |  | Interest |  | rate   
|                                                                           |  | £m        |  | £m       |  | %       |  | £m        |  | £m       |  | %       |  | £m        |  | £m       |  | %      
|                                                                          
|Assets                                                                     |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|Loans and advances to banks                                                |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | 2,416     |  | 157      |  | 6.50    |  | 3,694     |  | 170      |  | 4.60    |  | 5,175     |  | 243      |  | 4.70   
|Non-UK                                                                     |  | 53        |  | 2        |  | 3.77    |  | 76        |  | 4        |  | 5.25    |  |          |  |         |  |       
|Loans and advances to
    customers(1)                                     |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | 100,627   |  | 5,536    |  | 5.50    |  | 97,251    |  | 5,281    |  | 5.43    |  | 97,459    |  | 5,248    |  | 5.38   
|Non-UK                                                                     |  | 51        |  | 2        |  | 3.92    |  | 49        |  | 2        |  | 4.06    |  | 1,398     |  | 59       |  | 4.24   
|Debt securities
    UK                                                     |  | 1         |  |         |  | 0.00    |  |          |  |         |  |        |  | 3,255     |  | 87       |  | 2.66   
|                                                                          
|Total average interest-earning
    assets, interest income  banking       |  | 103,148   |  | 5,697    |  | 5.52    |  | 101,070   |  | 5,457    |  | 5.40    |  | 107,287   |  | 5,637    |  | 5.25   
|                                                                          
|Provision for loan losses                                                  |  | (431)     |  |         |  |        |  | (410)     |  |         |  |        |  | (792)     |  |         |  |       
|Trading business                                                           |  | 60,780    |  |         |  |        |  | 53,154    |  |         |  |        |  | 56,788    |  |         |  |       
|Assets designated at fair value
    through profit and loss                |  | 18,336    |  |         |  |        |  | 27,612    |  |         |  |        |  |          |  |         |  |       
|Non-interest-earning assets:                                               |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|Long-term Life fund assets                                                 |  |          |  |         |  |        |  |          |  |         |  |        |  | 27,307    |  |         |  |       
|Other                                                                      |  | 17,815    |  |         |  |        |  | 19,146    |  |         |  |        |  | 16,010    |  |         |  |       
|                                                                          
|Total average assets                                                       |  | 199,648   |  |          |  |         |  | 200,572   |  |          |  |         |  | 206,600   |  |          |  |        
|                                                                          
|Non-UK assets as a % of total                                              |  | 0.05%     |  |          |  |         |  | 0.06%     |  |          |  |         |  | 0.68%     |  |          |  |        
|                                                                          
|Liabilities                                                                |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|Deposits by banks                                                          |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | (1,938)   |  | (94)     |  | 4.85    |  | (1,070)   |  | (42)     |  | 3.93    |  | (7,340)   |  | (243)    |  | 3.32   
|Non-UK                                                                     |  |          |  |         |  |        |  |          |  |         |  |        |  | (697)     |  | (10)     |  | 1.48   
|Deposits by customers: retail
    demand(2)                                |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | (54,529)  |  | (1,930)  |  | 3.54    |  | (52,083)  |  | (1,790)  |  | 3.49    |  | (40,761)  |  | (1,372)  |  | 3.36   
|Non-UK                                                                     |  | (1,490)   |  | (39)     |  | 2.62    |  | (1,092)   |  | (25)     |  | 2.29    |  | (1,152)   |  | (27)     |  | 2.37   
|Deposits by customers: retail
    time(2)                                  |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | (6,089)   |  | (341)    |  | 5.60    |  | (9,076)   |  | (355)    |  | 3.91    |  | (12,177)  |  | (456)    |  | 3.75   
|Non-UK                                                                     |  | (1,144)   |  | (64)     |  | 5.59    |  | (4,875)   |  | (210)    |  | 4.31    |  | (4,149)   |  | (183)    |  | 4.40   
|Deposits by customers:
    wholesale(2)                                    |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | (1,834)   |  | (78)     |  | 4.25    |  | (2,840)   |  | (125)    |  | 4.40    |  | (5,467)   |  | (183)    |  | 3.35   
|Non-UK                                                                     |  | (1,592)   |  | (66)     |  | 4.15    |  | (113)     |  |         |  |        |  |          |  |         |  |       
|Bonds and medium-term notes                                                |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | (21,649)  |  | (1,007)  |  | 4.65    |  | (23,847)  |  | (1,167)  |  | 4.89    |  | (24,165)  |  | (1,136)  |  | 4.70   
|Non-UK                                                                     |  | (5,579)   |  | (262)    |  | 4.70    |  |          |  |         |  |        |  |          |  |         |  |       
|Other debt securities in issue                                             |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  |          |  |         |  |        |  |          |  |         |  |        |  | (5,676)   |  | (148)    |  | 2.61   
|Non-UK                                                                     |  |          |  |         |  |        |  |          |  |         |  |        |  | (5,302)   |  | (101)    |  | 1.91   
|Dated and undated loan capital and
    other subordinated liabilities      |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|UK                                                                         |  | (7,246)   |  | (480)    |  | 6.62    |  | (8,868)   |  | (501)    |  | 5.65    |  | (6,544)   |  | (314)    |  | 4.79   
|Non-UK                                                                     |  | (613)     |  | (46)     |  | 7.50    |  | (563)     |  | (35)     |  | 6.21    |  |          |  |         |  |       
|Other interest-bearing
    liabilities  UK                                |  |          |  |         |  |        |  |          |  |         |  |        |  | (16)      |  | (1)      |  | 5.87   
|                                                                          
|Total average interest-bearing
    liabilities, interest expense  banking |  | (103,703) |  | (4,407)  |  | 4.25    |  | (104,427) |  | (4,250)  |  | 4.09    |  | (113,446) |  | (4,174)  |  | 3.68   
|                                                                          
|Trading business                                                           |  | (56,062)  |  |         |  |        |  | (43,775)  |  |         |  |        |  | (44,129)  |  |         |  |       
|Liabilities designated at fair
    value through profit and loss           |  | (8,500)   |  |         |  |        |  | (8,153)   |  |         |  |        |  |          |  |         |  |       
|Non-interest-bearing liabilities:                                          |  |           |  |          |  |         |  |           |  |          |  |         |  |           |  |          |  |        
|Long term Life fund liabilities                                            |  |          |  |         |  |        |  |          |  |         |  |        |  | (27,307)  |  |         |  |       
|Other                                                                      |  | (28,292)  |  |         |  |        |  | (42,070)  |  |         |  |        |  | (17,117)  |  |         |  |       
|Shareholders funds                                                        |  | (3,091)   |  |         |  |        |  | (2,147)   |  |         |  |        |  | (4,601)   |  |         |  |       
|                                                                          
|Total average liabilities and
    shareholders funds                      |  | (199,648) |  |          |  |         |  | (200,572) |  |          |  |         |  | (206,600) |  |          |  |        
|                                                                          
|Non-UK liabilities as a % of total                                         |  | 5.22%     |  |          |  |         |  | 3.31%     |  |          |  |         |  | 5.47%     |  |          |  |        
|                                                                          

36



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##### 

Business and Financial Review



Balance Sheet Business
Reviewcontinued

|                                                                             |  |         |  |          |  |         |  |         |  |          |  |              |  |         |  |          |  |     
|---------------------------------------------------------------------------- |  | ------- |  | -------- |  | ------- |  | ------- |  | -------- |  | ------------ |  | ------- |  | -------- |  | ----
|                                                                             |  | 2006    |  | 2005     |  | 2004   
|                                                                             |  |        
|                                                                             |  | Average |  |          |  | Average |  | Average |  |          |  | Average      |  |         |  | Average 
|                                                                             |  | balance |  | Interest |  | rate    |  | balance |  | Interest |  | Average rate |  | balance |  | Interest |  | rate
|                                                                             |  | £m      |  | £m       |  | %       |  | £m      |  | £m       |  | %            |  | £m      |  | £m       |  | %   
|                                                                            
|Interest income as a percentage of
    average interest-earning assets       |  |        |  |         |  | 5.52    |  |        |  |         |  | 5.40         |  |        |  |         |  | 5.25
|Interest expense as a percentage of
    average interest-bearing liabilities |  |        |  |         |  | 4.25    |  |        |  |         |  | 4.09         |  |        |  |         |  | 3.68
|Interest spread                                                              |  |        |  |         |  | 1.27    |  |        |  |         |  | 1.31         |  |        |  |         |  | 1.57
|Net interest margin                                                          |  |        |  |         |  | 1.25    |  |        |  |         |  | 1.17         |  |        |  |         |  | 1.36
|                                                                            

|    |                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loans and advances to customers includes non-performing loans.
    See Analysis of end-of-year provisions on loans and
    advances to customers in the Risk Management section
    elsewhere in this Annual Report.
|(2) | Demand deposits, time deposits and wholesale deposits are
    defined under Deposits above.                                                                                                                         
|(3) | 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.
|(4) | The ratio of average interest-earning assets to interest-bearing
    liabilities for the year ended 31 December 2006 was 99.46%
    (2005: 96.78%, 2004: 94.57%).                                                     

37



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##### 

Business and Financial Review





Risk Management

The Risk Management report contains audited financial
information except where noted.

Introduction

Abbeys risk management focuses on the major areas of
credit risk, market risk, liquidity risk, insurance risk,
operational risk, financial crime and residual value risk.
Authority flows from the Abbey National plc Board of Directors
to the Chief Executive and from him to specific individuals.
Formal standing committees are maintained for effective
management or oversight. Their authority is derived from the
person they are intended to assist.

(FLOW CHART)

The diagram above shows the structure in operation in respect of
risk management and oversight. The main elements of risk
governance are as follows:

Board:this is the primary governing body. Its role is
largely determined by legal and regulatory responsibilities and
requirements. Its risk-control responsibilities include setting
risk appetite, approving the risk framework and reviewing risk
profile.

Audit and Risk Committee:this is a key Board committee.
Its risk-control responsibilities include reviewing the
effectiveness of risk controls and procedures including the
identification, assessment and reporting of risks and the
risk-governance structure and compliance with risk-control
policies and procedures. It is the duty of the committee to
review the effectiveness of the control mechanisms for the
management of risk. It is not the responsibility of the
committee to form a judgement about the acceptability or
appropriateness of these risks. This remains the responsibility
of the Board, and will be discharged through the Chief Executive.

Asset and Liability Management Committee:is established
under the authority of the Chief Executive, comprising selected
senior executives and supported by relevant experts. This
committee is responsible for all matters relating to the balance
sheet of the Group, specifically structural balance sheet risks,
capital structure, funding and liquidity.

Risk Committee:this is a management committee
established under the Chief Executives authority and
comprises senior executives and the Chief Risk Officers. The
committee will consult with the Chief Risk Officers and make
recommendations to ensure that the Companys risk matters
are suitably managed and understood. The committee will provide
any information requested by the Executive Committee that it
might require enabling it to appropriately discharge its
responsibilities. The Risk Committee also receives information
from, and is notified of, key decisions made by the Risk
Oversight Fora for the Retail Banking, Financial Markets
(consisting of Financial Markets Risk Oversight Forum and
Corporate Risk Oversight Forum) and Wealth Management
businesses. Risks associated with Abbeys life insurance
businesses were overseen by the Risk Committee until their sale
in 2006.

Chief Risk Officers:The Chief Risk Officers operate
under authority delegated by the Chief Executive. The Chief Risk
Officers are responsible for establishing and maintaining
comprehensive, accurate and effective risk reporting, and clear
systems of risks limits. They are also responsible for
highlighting to management all matters relevant to understanding
risks being taken and to setting risk appetite.

38



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##### 

Business and Financial Review



Risk Managementcontinued

Financial Instruments

By its nature the Groups activities are principally
related to the use of financial instruments including
derivatives. The Group aims to lend monies predominately to
retail borrowers at higher interest rates than fixed and
floating rates paid for various periods on deposits from
customers.

The Group trades in financial instruments to manage the
structural balance sheet exposures that arise from its banking
activities, in accordance with Risk policies and the Asset and
Liability Management Committees direction. The Group also
trades in financial instruments where it takes positions in
traded and over the counter instruments, including derivatives,
to take advantage of short-term market movements in the equity
and bond markets and in currency and interest rates.

Risk Management

The financial risks affecting the Group have been addressed
individually in the sections below. The risk exposure,
measurement information and management policies are presented
through the Groups main operating segments being Retail
Banking (including Group Infrastructure), Financial Markets, and
Wealth Management. In addition, summarised information is also
presented about the financial risks that faced the Life
insurance businesses that were sold in 2006.

The risk exposure and management information relating to the
Retail Banking segment principally represents the holding
company, Abbey. The other operating segments represent the rest
of the Abbey subsidiaries. In total the operating segments
present the risk exposure and management policies of the Group.

Significant concentrations of credit risk

During 2006, Abbeys significant exposures to credit risk
arose mainly in the residential mortgage portfolio and unsecured
personal lending in Retail Banking and in Financial Markets.
Residential mortgages, all of the assets of which are located in
the UK, represented 53% (2005: 46%, 2004: 45%) of total assets
at 31 December 2006. Although the Financial Markets
operation is based mainly in the UK, it has built up exposures
to various entities around the world and is therefore exposed to
concentrations of risk related to geographic area. At
31 December 2006, 31% of Financial Markets credit
exposures were to counterparties from the United States, and 42%
were to counterparties from the UK. The remaining exposures were
mainly to counterparties from Europe. Less than 5% of Financial
Markets exposures were to countries that are not members
of the Organisation for Economic Co-operation and Development
(OECD). Geographical exposures are governed by
country limits. These are set according to the classification of
the country (whether it is a developed OECD country or not), the
rating of the country, its Gross Domestic Product and
Abbeys capital base.

Risk Management in Retail Banking

Credit risk

Credit risk is the risk that counterparties will not meet their
financial obligations which may result in Abbey losing the
principal amount lent, the interest accrued and any unrealised
gains (less any security held). Credit risk occurs mainly in
Abbeys loan and investment assets, and in derivative
contracts.

Managing credit risk

This includes residential mortgages and secured lending,
personal and business banking, and cahoot.

Residential Mortgages and secured lending. Abbey lends on
many types of property but only after a credit risk assessment
of the borrower and an assessment of the property is undertaken.
The systems used to manage and monitor the quality of the
mortgage asset are reviewed regularly to ensure they perform as
expected.

Residential lending is subject to lending policy and lending
authority levels, which are used to structure lending decisions
to the same high standard across the retail network, a process
further improved by mortgage credit scoring, underwriter
accreditation and regular compliance reviews. Details concerning
the prospective borrower and the mortgage are subject to a
criteria-based decision-making process. Criteria for assessment
include credit references, loan-to-value ratio, borrower status
and the mortgage credit score. A responsible approach to lending
is taken to ensure borrowers do not borrow more than they can
afford. For low-risk applicants this may include the use of
self-certification of income.

The majority of loans provided by Abbey are secured on UK
properties. All properties must be permanent in construction;
mobile homes are not generally acceptable. Abbey can provide a
mortgage for the purchase of properties outside the UK where the
property is a second home and the loan is secured on the main
property located in the UK.

Prior to granting any first mortgage loan on a property, Abbey
has the property valued by an approved and qualified surveyor,
who is often an Abbey employee. The valuation is based on set
Abbey guidelines. Normally, in the case of additional lending,
when the total loan remains below 90% loan-to-value, the
original property value is subject to indexation and no further
survey is carried out. If the loan exceeds 90% loan-to-value, a
revaluation is carried out by a qualified surveyor.

The maximum loan-to-value ratio is usually no more than 97%
where the maximum loan is £250,000. Abbey typically charges
a fee to customers where the loan-to-value ratio is 90.1% or
higher. Higher loan to value ratios carry higher risk due to the
increased likelihood of loss if the customer defaults and the
property has to be taken into possession and sold.

39



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##### 

Business and Financial Review

Risk Managementcontinued

Mortgage credit quality

|                                             |  |             |  |             |  |            
|-------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                             |  | 31 December |  | 31 December |  | 31 December
|                                             |  | 2006        |  | 2005        |  | 2004       
|                                            
|Loan-to-value
    analysis:                  |  |             |  |             |  |            
|New business                                 |  |             |  |             |  |            
|>90%                                         |  | 4%          |  | 4%          |  | 6%         
|75%  90%                                    |  | 33%         |  | 29%         |  | 32%        
|<75%                                         |  | 63%         |  | 67%         |  | 62%        
|Average (at inception)                       |  | 61%         |  | 60%         |  | 61%        
|Average loan-to-value of stock
    (indexed) |  | 44%         |  | 45%         |  | 45%        
|New business profile:                        |  |             |  |             |  |            
|First-time buyers                            |  | 11%         |  | 14%         |  | 19%        
|Home movers                                  |  | 38%         |  | 37%         |  | 41%        
|Remortgagers                                 |  | 51%         |  | 49%         |  | 40%        
|                                            
|Average earnings multiple                    |  | 2.9         |  | 2.9         |  | 2.7        
|                                            



|  |                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------
|> | The average loan-to-value of new
    business has remained broadly level in 2006 at 61%.                          
|> | The average loan-to-value of
    existing business has improved slightly to 44%.                                  
|> | Remortgage business is increasing
    as a proportion of Abbeys new business in line with the
    overall market.
|> | The proportion of new business
    written with a high loan-to-value (greater than 90%) has
    remained low.     

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 captive subsidiary Carfax
    Insurance Limited (Carfax). Cover on all such
    policies was commuted effective from 14 October 2005. Risk
    arising from the commutation of these policies is borne by Abbey.





Mortgage arrears and repossessions.






Mortgage arrears


|                             |  |                 
|---------------------------- |  | ----------------
|                             |  | Abbey(1)(2)     
|                             |  |                 
|                             |  | (Percentage of  
|                             |  | total mortgage  
|                             |  | loans by number)
|                            
|31 to 60 days in
    arrears |  |                 
|31 December 2004             |  | 1.37            
|31 December 2005             |  | 1.33            
|31 December 2006             |  | 1.19            
|                            
|61 to 90 days in
    arrears |  |                 
|31 December 2004             |  | 0.51            
|31 December 2005             |  | 0.51            
|31 December 2006             |  | 0.50            
|                            

40



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##### 

Business and Financial Review

Risk Managementcontinued

|                                     |  |                                                |  |       
|------------------------------------ |  | ---------------------------------------------- |  | ------
|                                     |  | Abbey                                          |  | CML(2)
|                                     |  |                                               
|                                     |  | (Percentage of total mortgage loans by number)
|                                    
|3 months to 5 months
    in arrears  |  |                                                |  |       
|31 December 2004                     |  | 0.45                                           |  | 0.47  
|31 December 2005                     |  | 0.45                                           |  | 0.54  
|31 December 2006                     |  | 0.42                                           |  | 0.50  
|                                    
|6 months to 11 months
    in arrears |  |                                                |  |       
|31 December 2004                     |  | 0.14                                           |  | 0.23  
|31 December 2005                     |  | 0.20                                           |  | 0.28  
|31 December 2006                     |  | 0.17                                           |  | 0.27  
|                                    
|12 months or more in
    arrears     |  |                                                |  |       
|31 December 2004                     |  | 0.02                                           |  | 0.10  
|31 December 2005                     |  | 0.03                                           |  | 0.12  
|31 December 2006                     |  | 0.03                                           |  | 0.12  
|                                    

|    |                                                                                     
|--- | ------------------------------------------------------------------------------------
|(1) | Abbey data is not readily available for arrears less than
    31 days               
|(2) | Council of Mortgage Lenders data is not available for arrears
    less than 3 months

|                         |  |                                                |  |     
|------------------------ |  | ---------------------------------------------- |  | ----
|                         |  | Abbey                                          |  | CML 
|                         |  |                                               
|Properties in possession |  | (Percentage of total mortgage loans by number)
|                        
|31 December 2004         |  | 0.02                                           |  | 0.02
|31 December 2005         |  | 0.04                                           |  | 0.04
|31 December 2006         |  | 0.04                                           |  | 0.06
|                        

|                                                 |  |    |  | 
|------------------------------------------------ |  | -- |  | 
|Carrying amount of assets obtained as collateral |  | £m |  | 
|                                                 |  |   
|31 December 2004                                 |  | 19 |  | 
|31 December 2005                                 |  | 44 |  | 
|31 December 2006                                 |  | 43 |  | 
|                                                 |  |   



Restructured loans




Banking and Consumer Credit.






cahoot.


Personal Financial Services banking and unsecured personal
loan arrears


|                                                                |  |             |  |             |  |            
|--------------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                                |  | 31 December |  | 31 December |  | 31 December
|                                                                |  | 2006        |  | 2005        |  | 2004       
|                                                                |  | £m          |  | £m          |  | £m         
|                                                               
|Total banking and unsecured
    personal loan
    arrears(1,2)  |  | 167         |  | 126         |  | 121        
|Total banking and unsecured
    personal loan asset             |  | 3,936       |  | 3,749       |  | 3,288      
|Banking and unsecured personal loan
    arrears as a % of asset |  | 4.25%       |  | 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 instalments).



Abbey Business




41



---



##### 

Business and Financial Review



Risk Managementcontinued

Property Finance provides mortgages to borrowers on a wide
variety of mainly non-residential property. Agreed credit
assessment criteria includes, loan-to-value ratios, quality of
tenants, rental income coverage for repayments with stress
testing against interest rate movements. Concentration limits
per borrower and business sector are also employed to ensure a
balanced loan portfolio. The management of defaulting accounts
and the repossession and sale of properties is handled by a
dedicated function within the business.

Provisions on loans and advances to customers

Abbeys provisioning policy complies with IFRS. The charge
for provisions on loans and advances to customers adjusts the
balance sheet provisions to the level that management deems
adequate to absorb actual and inherent losses in Abbeys
loan portfolio from homogeneous portfolios of assets and
individually identified loans. A proportion of Abbeys
provisions on loans and advances to customers relate to loans
and advances secured either by a first charge on residential
property in the UK, or by other appropriate security depending
on the nature of the loan.

Abbeys provisioning policy is as follows. Further
information is set out in the Accounting Policies in the
Consolidated Financial Statements:



>
    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 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
    portfolios.>
    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 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.Security is realised in accordance with Abbeys internal
debt management programme. Contact is made with customers at an
early stage of arrears with counselling made available to
achieve a realistic and sustainable repayment arrangement.
Litigation and/or enforcement of security is usually carried out
only when the steps described above have been undertaken without
success.

As a result of the write-off policy, the provisions will be made
a significant time in advance of the related write-off on all
products. The exception to this rule is the discovery of fraud,
where the exposure is written off once full investigations have
been completed and the probability of recovery is minimal. The
time span between the discovery and write off will be a short
period and may not result in a provision being raised.

Analysis of end-of-year provisions on loans and advances to
customers

|                                                    |  |      |  |      |  |     
|--------------------------------------------------- |  | ---- |  | ---- |  | ----
|                                                    |  | 2006 |  | 2005 |  | 2004
|                                                    |  | £m   |  | £m   |  | £m  
|                                                   
|Observed provision                                  |  |      |  |      |  |     
|Advances secured on residential
    properties  UK |  | 45   |  | 21   |  | 9   
|Other secured advances 
    UK                     |  | 75   |  | 126  |  | 148 
|Unsecured personal
    advances  UK                |  | 242  |  | 158  |  | 133 
|Corporate advances  UK                             |  |     |  |     |  | 67  
|                                                   
|Total observed provisions                           |  | 362  |  | 305  |  | 357 
|                                                   
|Incurred but not yet observed
    provision         |  |      |  |      |  |     
|Advances secured on residential
    properties  UK |  | 60   |  | 35   |  | 58  
|Other secured advances 
    UK                     |  | 3    |  |     |  | 3   
|Unsecured personal
    advances  UK                |  | 111  |  | 54   |  | 35  
|Corporate advances  UK                             |  |     |  |     |  | 14  
|                                                   
|Total incurred but not yet observed
    provisions  |  | 174  |  | 89   |  | 110 
|                                                   
|Total provisions                                    |  | 536  |  | 394  |  | 467 
|                                                   

42



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##### 

Business and Financial Review

Risk Managementcontinued

The table below for 2003 and 2002 contains information prepared
under UK GAAP, Abbeys previous primary GAAP, which is not
comparable to information prepared under IFRS.

(The following table contains unaudited information).

|                                                        |  |      |  |     
|------------------------------------------------------- |  | ---- |  | ----
|                                                        |  | 2003 |  | 2002
|                                                        |  | £m   |  | £m  
|                                                       
|Specific                                                |  |      |  |     
|Advances secured on residential
    properties  UK     |  | 8    |  | 24  
|Other secured advances 
    UK                         |  | 36   |  | 42  
|Unsecured personal
    advances  UK                    |  | 171  |  | 124 
|Corporate advances  UK                                 |  | 161  |  | 204 
|Advances secured on residential
    properties  non-UK |  | 17   |  | 26  
|Other secured advances 
    non-UK                     |  | 26   |  | 34  
|Unsecured personal
    advances  non-UK                |  | 4    |  | 4   
|                                                       
|Total specific provisions                               |  | 423  |  | 458 
|                                                       
|General                                                 |  |      |  |     
|Advances secured on residential
    properties  UK     |  | 165  |  | 165 
|Other secured advances 
    UK                         |  | 58   |  | 19  
|Unsecured personal
    advances  UK                    |  | 32   |  | 32  
|Corporate advances  UK                                 |  | 173  |  | 56  
|Advances secured on residential
    properties  non-UK |  | 12   |  | 9   
|Other secured advances 
    non-UK                     |  | 2    |  | 4   
|Unsecured personal
    advances  non-UK                |  |     |  | 3   
|                                                       
|Total general provisions                                |  | 442  |  | 288 
|                                                       
|Total provisions                                        |  | 865  |  | 746 
|                                                       

Movements in provisions for impairment losses on loans and
advances


|                                                                                |  |       |  |       |  |      
|------------------------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                                                |  | 2006  |  | 2005  |  | 2004 
|                                                                                |  | £m    |  | £m    |  | £m   
|                                                                               
|Provisions at 31 December                                                       |  | 394   |  | 467   |  |     
|IFRS reclassifications                                                          |  |      |  | (40)  |  |     
|Provisions at the 1 January                                                     |  | 394   |  | 427   |  | 865  
|Disposal of subsidiary undertakings                                             |  |      |  |      |  | (70) 
|                                                                               
|                                                                                |  | 394   |  | 427   |  | 795  
|Amounts written off                                                             |  |       |  |       |  |      
|Advances secured on residential
    properties  UK                             |  | (11)  |  | (5)   |  | (2)  
|Other secured advances 
    UK                                                 |  | (27)  |  | (36)  |  | (39) 
|Unsecured personal
    advances  UK                                            |  | (205) |  | (247) |  | (136)
|Corporate advances  UK                                                         |  |      |  |      |  | (144)
|                                                                               
|                                                                                |  | (243) |  | (288) |  | (321)
|Advances secured on residential
    properties  non-UK                         |  |      |  |      |  | (2)  
|Other secured advances 
    non-UK                                             |  |      |  |      |  | (2)  
|                                                                               
|Total amounts written off                                                       |  | (243) |  | (288) |  | (325)
|                                                                               
|                                                                               
|Observed provisions charged
    against profit                                  |  |       |  |       |  |      
|Advances secured on residential
    properties  UK                             |  | 35    |  | 12    |  | 3    
|Other secured advances 
    UK                                                 |  | (25)  |  | 11    |  | 155  
|Unsecured personal
    advances  UK                                            |  | 289   |  | 221   |  | 98   
|Corporate advances  UK                                                         |  |      |  |      |  | 71   
|                                                                               
|                                                                                |  | 299   |  | 244   |  | 327  
|                                                                               
|Advances secured on residential
    properties  non-UK                         |  |      |  | (3)   |  | (1)  
|Unsecured personal
    advances  non-UK                                        |  |      |  |      |  | 1    
|                                                                               
|Total observed provisions charged
    against profit                            |  | 299   |  | 241   |  | 327  
|                                                                               
|Incurred but not yet observed
    provisions charged against profit             |  | 86    |  | 14    |  | (330)
|                                                                               
|Total provisions charged against
    profit (including discontinued operations) |  | 385   |  | 255   |  | (3)  
|                                                                               
|Provisions at the end of the year                                               |  | 536   |  | 394   |  | 467  
|                                                                               



Recoveries


|                                                    |  |      |  |      |  |     
|--------------------------------------------------- |  | ---- |  | ---- |  | ----
|                                                    |  | 2006 |  | 2005 |  | 2004
|                                                    |  | £m   |  | £m   |  | £m  
|                                                   
|Advances secured on residential
    properties  UK |  | 2    |  | 3    |  | 16  
|Other secured advances 
    UK                     |  | 7    |  | 7    |  | 8   
|Unsecured personal
    advances  UK                |  | 32   |  | 27   |  | 28  
|                                                   
|Total amount recovered                              |  | 41   |  | 37   |  | 52  
|                                                   

43



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##### 

Business and Financial Review

Risk Managementcontinued

The table below for 2003 and 2002 contains information prepared
under UK GAAP, Abbeys previous primary GAAP, which is not
comparable to information prepared under IFRS.

(The following table contains unaudited information).

|                                                        |  |       |  |      
|------------------------------------------------------- |  | ----- |  | -----
|                                                        |  | 2003  |  | 2002 
|                                                        |  | £m    |  | £m   
|                                                       
|Provisions at the beginning of the
    year             |  | 746   |  | 498  
|Acquisition of subsidiary
    undertakings              |  |      |  | 8    
|Disposal of subsidiary undertakings                     |  | (94)  |  | (1)  
|                                                       
|                                                        |  | 652   |  | 505  
|Amounts written off                                     |  |       |  |      
|Advances secured on residential
    properties  UK     |  | (16)  |  | (27) 
|Other secured advances 
    UK                         |  | (45)  |  | (33) 
|Unsecured personal
    advances  UK                    |  | (148) |  | (335)
|Corporate advances  UK                                 |  | (80)  |  |     
|                                                       
|                                                        |  | (289) |  | (395)
|Advances secured on residential
    properties  non-UK |  | (10)  |  |     
|Other secured advances 
    non-UK                     |  | (10)  |  |     
|Unsecured personal
    advances  non-UK                |  |      |  | (1)  
|                                                       
|Total amounts written off                               |  | (309) |  | (396)
|                                                       
|Recoveries                                              |  |       |  |      
|Advances secured on residential
    properties  UK     |  | 4     |  | 4    
|Other secured advances 
    UK                         |  |      |  | 3    
|Unsecured personal
    advances  UK                    |  | 38    |  | 89   
|                                                       
|                                                        |  | 42    |  | 96   
|                                                       
|Advances secured on residential
    properties  non-UK |  |      |  | 5    
|Other secured advances 
    non-UK                     |  |      |  | 6    
|                                                       
|Total amount recovered                                  |  | 42    |  | 107  
|                                                       
|Specific provisions charged
    against profit          |  |       |  |      
|Advances secured on residential
    properties  UK     |  | 5     |  | 1    
|Other secured advances 
    UK                         |  | 52    |  | 25   
|Unsecured personal
    advances  UK                    |  | 205   |  | 219  
|Corporate advances  UK                                 |  | 36    |  | 207  
|                                                       
|                                                        |  | 298   |  | 452  
|                                                       
|Advances secured on residential
    properties  non-UK |  | 4     |  | 2    
|Other secured advances 
    non-UK                     |  |      |  | (1)  
|Unsecured personal
    advances  non-UK                |  |      |  | 1    
|                                                       
|Total specific provisions
    charged against profit    |  | 302   |  | 454  
|                                                       
|General provisions charged
    against profit           |  | 172   |  | 60   
|                                                       
|Total provisions charged against
    profit             |  | 474   |  | 514  
|                                                       
|Exchange and other adjustments                          |  | 6     |  | 16   
|                                                       
|Provisions at the end of the year                       |  | 865   |  | 746  
|                                                       

Group non-performing loans and advances


|                                                                                                                    |  |      |  |      |  |      
|------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---- |  | -----
|                                                                                                                    |  | 2006 |  | 2005 |  | 2004 
|                                                                                                                    |  | £m   |  | £m   |  | £m   
|                                                                                                                   
|Accruing loans and advances on
    which specific provision made                                                    |  | 375  |  | 314  |  | 297  
|Accruing loans and advances
    90 days overdue on which no specific provision
    made  past due but not impaired |  | 451  |  | 568  |  | 844  
|                                                                                                                   
|Total non-performing loans and
    advances(1)                                                                      |  | 826  |  | 882  |  | 1,141
|                                                                                                                   

|                                                                                                |  |       |  |       |  |      
|----------------------------------------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                                                                |  | %     |  | %     |  | %    
|                                                                                               
|Non-performing loans and advances
    as a percentage of loans and advances to
    customers(2) |  | 0.64  |  | 0.74  |  | 1.04 
|Provision as a percentage of total
    non-performing loans and advances                        |  | 64.89 |  | 44.67 |  | 40.93
|                                                                                               









44



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Business and Financial Review



Risk Managementcontinued

The table below for 2003 and 2002 contains information prepared
under UK GAAP, Abbeys previous primary GAAP, which is not
comparable to information prepared under IFRS.

(The following table contains unaudited information).

|                                                                                                                                              |  |       |  |      
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | -----
|                                                                                                                                              |  | 2003  |  | 2002 
|                                                                                                                                              |  | £m    |  | £m   
|                                                                                                                                             
|Accruing 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  
|Non-UK                                                                                                                                        |  | 101   |  | 154  
|                                                                                                                                             
|                                                                                                                                              |  | 1,632 |  | 669  
|                                                                                                                                             
|Accruing 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
|Non-UK                                                                                                                                        |  | 4     |  | 22   
|                                                                                                                                             
|                                                                                                                                              |  | 1,114 |  | 1,386
|                                                                                                                                             
|Non-accruing loans and advances:                                                                                                              |  |       |  |      
|Non-UK                                                                                                                                        |  | 30    |  | 22   
|                                                                                                                                             
|                                                                                                                                              |  | 30    |  | 22   
|                                                                                                                                             
|Total non-performing loans and
    advances:                                                                                                  |  |       |  |      
|UK                                                                                                                                            |  | 2,641 |  | 1,879
|Non-UK                                                                                                                                        |  | 135   |  | 198  
|                                                                                                                                             
|                                                                                                                                              |  | 2,776 |  | 2,077
|                                                                                                                                             

|                                                                                                                      |  |       |  |      
|--------------------------------------------------------------------------------------------------------------------- |  | ----- |  | -----
|                                                                                                                      |  | %     |  | %    
|                                                                                                                     
|Non-performing loans and advances
    as a percentage of loans and advances to customers excluding
    finance leases |  | 3.25  |  | 2.36 
|Provision as a percentage of total
    non-performing loans and advances                                              |  | 31.15 |  | 35.92
|                                                                                                                     

Retail Banking estimated exposure




|                                              |  |         |  |       
|--------------------------------------------- |  | ------- |  | ------
|                                              |  | 2006    |  | 2005  
|                                              |  | £m      |  | £m    
|                                             
|Loans and advances to customers               |  | 103,249 |  | 95,230
|Financial assets designated at fair
    value |  | 66      |  | 790   
|Other                                         |  | 773     |  | 517   
|                                             
|Third party exposures                         |  | 104,088 |  | 96,537
|                                             



Market risk








Non-trading market risks




45



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Business and Financial Review

Risk Managementcontinued

The most significant market risk in the Retail Banking business
(including Group Infrastructure) is yield curve risk, which
arises from the timing mismatch in the repricing of fixed and
variable rate assets, liabilities and off-balance sheet 
 positions, as well as the investment of non-interest-bearing
liabilities in interest-bearing assets. Abbey is also exposed to
risks arising from features in retail products that give
customers the right to alter the expected cashflows of a
financial contract. This creates product launch risk, for
example where the customers may not take up the expected volume
of new fixed rate mortgages or other loans, and prepayment risk,
for example where customers may prepay loans before their
contractual maturity.

Abbey is able to mitigate yield curve risk by repricing
separately administered variable rate mortgages and variable
rate retail deposits, subject to competitive pressures. However,
to the extent that the volume of administered variable rate
assets and liabilities are not precisely matched, the balance
sheet is exposed to changes in the relationship between
administered rates and market rates. In addition, the structure
of customer deposit rates puts pressure on margins in a
sustained low interest rate environment.

Managing non-trading market risks

Most non-trading market risks are transferred from the
originating business to Financial Markets. Risks not transferred
are managed within a series of market risk mandates, which set
limits on the extent of market risk that may be retained. These
limits are defined in terms of nominal amounts, sensitivity,
earnings-at-risk or value-at-risk.

The Asset and Liability Management Committee is responsible for
managing Abbeys overall non-trading position. Natural
offsets are used as far as possible to mitigate yield curve
exposures but the overall balance sheet position is generally
managed using interest rate swaps that are transacted through
Financial Markets. The Treasurer is responsible for managing
risks in accordance with the Asset and Liability Management
Committees direction. Risks are managed within limits
approved either by the Chief Risk Officer, Wholesale or
Santanders Board Risk Committee. The key risk limits
relate to yield curve risk. They are:

>
    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 sensitivity of the net present value
    of interest rate sensitive positions from an instantaneous and
    unexpected adverse 100 basis point parallel shock to the yield
    curve.These two measures provide complementary views of potential
losses from interest rate movements. Market Value of Equity
sensitivity provides a long-term view covering the present value
of all future cashflows, whereas Net Interest Margin sensitivity
considers only the impact on net interest margin over the next
year. Calculation of these two measures requires modelling of
expected customer and other behaviours. These models are
regularly reviewed and backtested.

The following table shows the results of these measures as at
31 December 2006 and 2005:

|                                                                                 |  |       |  |      
|-------------------------------------------------------------------------------- |  | ----- |  | -----
|                                                                                 |  | 2006  |  | 2005 
|                                                                                 |  | £m    |  | £m   
|                                                                                
|Net interest margin sensitivity
    (100 basis points adverse parallel shock)    |  | (4)   |  | (63) 
|Market value of equity sensitivity
    (100 basis points adverse parallel shock) |  | (139) |  | (298)
|                                                                                



Derivatives








Derivatives held for risk management purposes








46



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Business and Financial Review



Risk Managementcontinued

|                                                                                                                                        |  |                                                                                                  |  |                                                                                                   
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------
|Activity                                                                                                                                |  | Risk                                                                                             |  | Type of hedge                                                                                     
|                                                                                                                                       
|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.                                                                
|                                                                                                                                       
|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 swaps.                                                                              
|                                                                                                                                       
|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.                                                         
|                                                                                                                                       
|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.
|                                                                                                                                       



Liquidity risk




Operational risk


Managing operational risk










Risk Management in Financial Markets


Credit risk




Managing credit risk




47



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Business and Financial Review



Risk Managementcontinued

Analysis of credit exposures and credit risk trends are provided
to the Financial Markets Risk Oversight Forum each month, and
key issues escalated to the Risk Committee as required. Large
Exposures (as defined by the Financial Services Authority) are
reported quarterly to the Risk Committee and the Financial
Services Authority.

Credit risk on derivative instruments is calculated using the
potential future mark-to-market exposure of the instruments at a
95% statistical confidence level and adding this value to the
current value. The resulting loan equivalent or
credit risk is then included against credit limits, along with
other non-derivative exposures.

In addition, there is a policy framework to enable the
collateralisation of derivative instruments including swaps. If
collateral is deemed necessary to reduce credit risk, the amount
and nature of the collateral is determined by managements
credit evaluation of the counterparty.

Credit Risk Mitigation

(i) Netting arrangements

The Group restricts its credit risk by entering into
transactions under industry standard agreements which facilitate
netting of transactions in the jurisdictions where netting
agreements are recognised and have legal force. The netting
arrangements do not generally result in an offset of balance
sheet assets and liabilities for accounting purposes, as
transactions are usually settled on a gross basis. However,
there is scope for the credit risk associated with favourable
contracts to be reduced by netting arrangements embodied in the
agreements to the extent that if an event of default occurs, all
amounts with the counterparty under the specific agreement can
be terminated and settled on a net basis. Derivatives,
repurchase and reverse repurchase transactions, stock borrowing
/ lending transactions and securities financing transactions are
governed by industry standard agreements that facilitate netting.

(ii) Collateralisation

The Group also mitigates its credit risk to counterparties with
which it transacts significant amounts of derivatives through
collateralisation, using industry standard collateral
agreements. Under these agreements, net derivative exposures
with counterparties are collateralised with cash, securities or
equities. Exposures and collateral are revalued daily and
collateral is adjusted accordingly to reflect
deficits/surpluses. Collateral taken must comply with Financial
Markets collateral parameters policy. This policy is
designed to control the quality and concentration risk of
collateral taken such that collateral held can be liquidated in
a realistic time frame when a counterparty defaults. Cash
collateral in respect of derivatives held at the year end was
£168.5m. Collateral obtained during the year in respect of
purchase and resale agreements (including securities financing)
is equal to at least 100% of the amount of the exposure.

Using the credit risk methodologies explained above, exposure
stands at £39,426m at 31 December 2006 (2005:
£37,899m). The table below analyses the net exposure by
credit rating of the issuer or counterparty:

|      |  |        |  |       
|----- |  | ------ |  | ------
|      |  | 2006   |  | 2005  
|      |  | £m     |  | £m    
|     
|AAA   |  | 7,417  |  | 3,961 
|AA    |  | 18,637 |  | 22,568
|A     |  | 11,023 |  | 8,774 
|BBB   |  | 2,230  |  | 2,437 
|BB    |  | 109    |  | 146   
|B     |  | 10     |  | 13    
|     
|Total |  | 39,426 |  | 37,899
|     





|                               |  |        |  |       
|------------------------------ |  | ------ |  | ------
|                               |  | 2006   |  | 2005  
|                               |  | £m     |  | £m    
|                              
|Trading assets                 |  | 35,751 |  | 34,671
|Purchase and resale agreements |  | 26,562 |  | 23,578
|Derivatives                    |  | 8,213  |  | 12,212
|Other                          |  | 12,809 |  | 4,366 
|                              
|Third party exposures          |  | 83,335 |  | 74,827
|                              

Market risk




48



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Business and Financial Review

Risk Managementcontinued

Managing market risk

Non-trading market risks arise in Cater Allen Private Bank,
First National Motor Finance and the Abbey National
International Group, as well as in Social Housing activities on
the Abbey National Treasury Services plc (ANTS)
balance sheet. These risks are managed within specific mandates
to ensure the risks remain immaterial. Within the ANTS group,
market risks also arise in Porterbrook and from capital markets
funding activities.

For trading activities the primary risk exposures for Financial
Markets are interest rate, equity, credit spread and residual
exposure to property indices. Interest Rate risks are managed
via interest rate swaps, futures and options (caps, floors and
swaptions). Equity risks are managed via equity stock, index
futures, options and structured equity derivatives.
Credit-spread risks are managed via credit derivatives (credit
default swaps, total return swaps). Property Index risk is
managed via insurance contracts and property derivatives.

To facilitate understanding and communication of different
risks, risk categories have been defined. Exposure to all market
risk factors is assigned to one of these categories. Abbey
considers two categories:

Short-term liquid market riskcovers activities where
exposures are subject to frequent change and could be closed out
over a short-time horizon. Most of the exposure is generated by
Financial Markets.

Structural market riskincludes exposures arising as a
result of the structure of portfolios of assets and liabilities,
or where the liquidity of the market is such that the exposure
could not be closed out over a short time horizon. The risk
exposure is generated by features inherent in either a product
or portfolio and normally presented over the life of the
portfolio or product. Such exposures are a result of the
decision to undertake specific business activities, can take a
number of different forms, and are generally managed over a
longer time horizon. Examples of structural market risk include
the exposures arising out of the uncertainty of business volumes
from the launch of fixed-rate and structured retail products, or
from the provision of hedging against such risks, structural
balance sheet exposures managed by the Asset and Liability
Management Committee and unexpected customer prepayments of
mortgages.

Financial Markets operates within a market risk framework
designed to ensure that it has the capability to manage risk in
a well-controlled manner. A comprehensive set of policies,
procedures and processes have been developed and implemented to
identify, measure, report, monitor and control risk across
Financial Markets.

For trading activities the standardised risk measure adopted is
Value at Risk calculated at a 95% confidence level over a
one-day time horizon. On a daily basis, market risk factor
sensitivities, Value at Risk measures and stress tests are
produced, reported and monitored against limits for each major
activity and at the aggregate Financial Markets level. These
limits are used to align risk appetite with the businesss
risk-taking activities and are reviewed on a regular basis.
Early identification and measurement of risks are important
elements of the risk management processes. Measurement of risks
can involve the use of complex quantitative methods and
mathematical principles to model and predict the changes in
instruments and portfolio valuation. These methods are essential
tools to understand the risk exposures.

Trading Activities

Trading activities are undertaken by Financial Markets only.
They are managed on a continuous basis, and are marked to market
on a daily basis.

Trading risk exposure arises only in the ANTS group. The
majority of trading risk exposure arises in ANTS, in Cater Allen
International Limited and Abbey National Securities Inc.

The following table shows the value at risk-based consolidated
exposures for the major risk classes as at 31 December
2006, together with the highest, lowest and average exposures
for the year. Exposures within each risk class reflect a range
of exposures associated with movements in that financial market.
For example, interest rate risks include the impact of absolute
rate movements, movements between interest rate bases and
movements in implied volatility on interest rate options. The
range of possible statistical modelling techniques and
assumptions mean these measures are not precise indicators of
expected future losses, but are estimates of the potential
change in the value of the portfolio over a specified time
horizon and within a given confidence interval.

From time to time, losses may exceed the amounts stated where
the movements in market rates fall outside the statistical
confidence interval used in the calculation of the value at risk
analysis. The 95% confidence interval, used as a standard across
Abbey, means that the theoretical loss at a risk factor level is
likely to be exceeded in one period in twenty. Abbey address
this risk by monitoring stress-testing measures across the
different business areas. For trading instruments the actual,
average, highest and lowest value at risk exposures shown below
are all calculated to a 95% level of confidence using a
simulation of actual one day market movements over a one year
period. The effect of historic correlations between risk factors
is additionally shown below. The use of a one-day time horizon
for all risks associated with trading instruments reflects the
horizon over which market movements will affect the measured
profit and loss of these activities.

The numbers below represent the potential change in market
values of trading instruments. Since trading instruments are
recorded at market value, these numbers also represent the
potential effect on income. Trading instruments are held only in
Financial Markets.

|                                           |  |                                |  |       |  |      
|------------------------------------------ |  | ------------------------------ |  | ----- |  | -----
|                                           |  | Actual Exposure at 31 December
|                                           |  |                               
|                                           |  | 2006                           |  | 2005  |  | 2004 
|                                           |  | £m                             |  | £m    |  | £m   
|                                          
|Group trading
    instruments              |  |                                |  |       |  |      
|Interest rate
    risks(1)                 |  | 2.9                            |  | 3.4   |  | 4.8  
|Equity risks                               |  | 2.9                            |  | 2.7   |  | 5.0  
|Spread risks                               |  | 0.7                            |  | 2.1   |  | 1.5  
|Other
    risks(2)                         |  | 0.5                            |  | 0.1   |  | 0.3  
|                                          
|Correlation
    offsets(3)                 |  | (1.6)                          |  | (1.6) |  | (2.2)
|                                          
|Total correlated one-day Value at
    Risk |  | 5.4                            |  | 6.7   |  | 9.4  
|                                          

49



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Business and Financial Review

Risk Managementcontinued

|                                           |  |                                         |  |                  |  |                 |  |      |  |      |  |      |  |      |  |      |  |     
|------------------------------------------ |  | --------------------------------------- |  | ---------------- |  | --------------- |  | ---- |  | ---- |  | ---- |  | ---- |  | ---- |  | ----
|                                           |  | Exposure for the year ended 31 December
|                                           |  |                                        
|                                           |  | Average exposure                        |  | Highest exposure |  | Lowest exposure
|                                           |  |                                        
|                                           |  | 2006                                    |  | 2005             |  | 2004            |  | 2006 |  | 2005 |  | 2004 |  | 2006 |  | 2005 |  | 2004
|                                           |  | £m                                      |  | £m               |  | £m              |  | £m   |  | £m   |  | £m   |  | £m   |  | £m   |  | £m  
|                                          
|Group trading
    instruments              |  |                                         |  |                  |  |                 |  |      |  |      |  |      |  |      |  |      |  |     
|Interest rate risks
    (1)                |  | 3.3                                     |  | 4.1              |  | 4.3             |  | 4.5  |  | 5.2  |  | 7.1  |  | 2.7  |  | 3.4  |  | 2.8 
|Equity risks                               |  | 2.7                                     |  | 3.5              |  | 3.3             |  | 3.9  |  | 5.2  |  | 5.6  |  | 2.0  |  | 2.0  |  | 1.3 
|Spread risks                               |  | 1.6                                     |  | 1.7              |  | 1.8             |  | 2.3  |  | 2.1  |  | 2.4  |  | 0.7  |  | 1.4  |  | 1.1 
|Other
    risks(2)                         |  | 0.4                                     |  | 0.1              |  | 0.2             |  | 0.8  |  | 0.4  |  | 0.4  |  | 0.1  |  |     |  |    
|                                          
|Correlation offsets
    (3)                |  | (1.7)                                   |  | (1.8)            |  | (1.8)           |  |     |  |     |  |     |  |     |  |     |  |    
|                                          
|Total correlated one-day Value at
    Risk |  | 6.3                                     |  | 7.6              |  | 7.8             |  | 7.4  |  | 9.9  |  | 10.5 |  | 5.1  |  | 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






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 Executive Director, Finance,
    Markets and Human Resources, is the decision-making authority in
    the event of a liquidity crisis, and is responsible for
    implementing the Liquidity Contingency Plan.

50



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##### 

Business and Financial Review

Risk Managementcontinued

The Liquidity Contingency Plan defines a framework for the
decision-making process under exceptional circumstances, and it
details the tools available to mitigate any such event. These
tools include procedures for realising marketable assets, for
entering into repo transactions with central banks, and for
securing retail deposits and managing wholesale funds. Even
though the Liquidity Contingency Plan focuses predominantly on
realising marketable assets to meet liabilities, in certain
situations additional funding  as well as
certificates of deposit, commercial paper and medium term
funding  may be sought, depending on the nature of
the crisis. The Liquidity Contingency Plan is reviewed and
revised on at least an annual basis.

Liquidity risk measurement

Abbey uses net cash flows as a key measure of liquidity risk as
they take into account contracted liabilities and contracted
assets that have a defined maturity date. Such current cash
outflows as well as expected future cash outflows are measured
over key benchmark time periods and unexpected cash outflows
arising from unexpected but plausible events, such as the
withdrawal of a percentage of retail deposits at any point in
time and the limited ability to renew wholesale deposits, are
met through new borrowing, additional sales in the repo market
and additional asset sales.

Liquid assets are normally measured at current market values,
discounted to reflect transaction costs. Liquid assets may take
time to liquidate, due to marketability issues and large
position sizes, and may decrease in market value in times of
adverse market movement. This expected liquidation time is
measured over key benchmark time periods under prudent
assumptions in relation to market conditions. The risk related
to uncertain assumptions about the behavioural characteristics
of assets and liabilities is also considered when measuring
liquidity risk.

The ratio of discounted liquid assets that will be available to
meet the cumulative liabilities falling due at key benchmark
time periods is the principal liquidity measure. The liquidity
ratio is subject to periodic stress testing based upon a range
of assumptions.

Securitisation of assets

Through our residential mortgage backed securitisation programme
we provide securitised mortgage products to a diverse investor
base. There is little liquidity risk related to asset
securitisations as the repayment of the securitised notes issued
is financed by the expected maturity or repayment of the
underlying securitised asset, which is recognised in the
Liquidity Risk Manual. It is likely that securitisations will
represent a greater proportion of our overall funding in 2007
and 2008 than in 2006.

Maturities of financial liabilities

The table below analyses the financial liabilities of the Group
into relevant maturity groupings based on the remaining period
at balance sheet date to the contractual maturity date. Deposits
by customers are largely made up of Retail Deposits. In
particular the Demand grouping includes current
accounts and other variable rate savings products. The Up
to 3 months grouping largely constitutes wholesale
funding of wholesale assets of a similar maturity.

|                                                   |  |        |  |         |  |        |  |        |  |        |  |        
|-------------------------------------------------- |  | ------ |  | ------- |  | ------ |  | ------ |  | ------ |  | -------
|                                                   |  | Group 
|                                                   |  |       
|At 31 December 2006                                |  | Demand |  | Up to 3 |  | 3-12   |  | 1-5    |  | Over 5 |  | Total  
|                                                   |  |        |  | months  |  | months |  | years  |  | years  |  |        
|                                                   |  | £m     |  | £m      |  | £m     |  | £m     |  | £m     |  | £m     
|                                                  
|Deposits by banks                                  |  | 102    |  | 6,554   |  |       |  |       |  |       |  | 6,656  
|Deposits by customers                              |  | 57,009 |  | 5,569   |  | 2,279  |  | 1,267  |  | 395    |  | 66,519 
|Derivative financial instruments                   |  | 182    |  | 146     |  | 587    |  | 3,720  |  | 14,213 |  | 18,848 
|Trading liabilities                                |  | 11,397 |  | 37,456  |  | 6,831  |  | 1,999  |  | 7      |  | 57,690 
|Financial liabilities designated at
    fair value |  | 45     |  | 511     |  | 2,348  |  | 4,538  |  | 887    |  | 8,329  
|Debt securities in issue                           |  |       |  | 5,707   |  | 828    |  | 5,840  |  | 16,703 |  | 29,078 
|Other borrowed funds                               |  |       |  |        |  | 255    |  |       |  | 1,335  |  | 1,590  
|Subordinated liabilities                           |  |       |  |        |  |       |  | 710    |  | 3,995  |  | 4,705  
|                                                  
|Total financial
    liabilities                    |  | 68,735 |  | 55,943  |  | 13,128 |  | 18,074 |  | 37,535 |  | 193,415
|                                                  

|                                 |  |         |  |         |  |        |  |        |  |        |  |        
|-------------------------------- |  | ------- |  | ------- |  | ------ |  | ------ |  | ------ |  | -------
|                                 |  | Company
|                                 |  |        
|At 31 December 2006              |  | Demand  |  | Up to 3 |  | 3-12   |  | 1-5    |  | Over 5 |  | Total  
|                                 |  |         |  | months  |  | months |  | years  |  | years  |  |        
|                                 |  | £m      |  | £m      |  | £m     |  | £m     |  | £m     |  | £m     
|                                
|Deposits by banks                |  | 36,374  |  | 376     |  | 272    |  | 20,385 |  | 3,716  |  | 61,123 
|Deposits by customers            |  | 55,765  |  | 3,944   |  | 1,617  |  | 4,060  |  | 14,718 |  | 80,104 
|Derivative financial instruments |  |        |  |        |  |       |  | 92     |  | 1,742  |  | 1,834  
|Debt securities in issue         |  |        |  |        |  | 4      |  |       |  |       |  | 4      
|Other borrowed funds             |  |        |  |        |  | 255    |  |       |  | 830    |  | 1,085  
|Subordinated liabilities         |  |        |  |        |  |       |  | 710    |  | 4,511  |  | 5,221  
|                                
|Total financial
    liabilities  |  | 92,139  |  | 4,320   |  | 2,148  |  | 25,247 |  | 25,517 |  | 149,371
|                                

51



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##### 

Business and Financial Review

Risk Managementcontinued

|                                                   |  |        |  |         |  |        |  |        |  |        |  |        
|-------------------------------------------------- |  | ------ |  | ------- |  | ------ |  | ------ |  | ------ |  | -------
|                                                   |  | Group 
|                                                   |  |       
|At 31 December 2005                                |  | Demand |  | Up to 3 |  | 3-12   |  | 1-5    |  | Over 5 |  | Total  
|                                                   |  |        |  | months  |  | months |  | years  |  | years  |  |        
|                                                   |  | £m     |  | £m      |  | £m     |  | £m     |  | £m     |  | £m     
|                                                  
|Deposits by banks                                  |  | 845    |  | 4,767   |  | 3      |  |       |  | 2      |  | 5,617  
|Deposits by customers                              |  | 48,243 |  | 14,288  |  | 2,464  |  | 546    |  | 348    |  | 65,889 
|Derivative financial instruments                   |  |       |  | 178     |  | 677    |  | 4,473  |  | 15,293 |  | 20,621 
|Trading liabilities                                |  | 1,257  |  | 35,738  |  | 5,205  |  | 8,129  |  | 5,307  |  | 55,636 
|Financial liabilities designated at
    fair value |  | 536    |  | 118     |  | 1,842  |  | 4,623  |  | 683    |  | 7,802  
|Debt securities in issue                           |  | 879    |  |        |  | 1,274  |  | 7,964  |  | 10,961 |  | 21,078 
|Other borrowed funds                               |  |       |  | 274     |  |       |  |       |  | 1,719  |  | 1,993  
|Subordinated liabilities                           |  |       |  |        |  | 101    |  | 368    |  | 5,374  |  | 5,843  
|Investment contract liabilities                    |  | 3,306  |  |        |  |       |  |       |  |       |  | 3,306  
|                                                  
|Total financial
    liabilities                    |  | 55,066 |  | 55,363  |  | 11,566 |  | 26,103 |  | 39,687 |  | 187,785
|                                                  

|                                 |  |         |  |         |  |        |  |        |  |        |  |        
|-------------------------------- |  | ------- |  | ------- |  | ------ |  | ------ |  | ------ |  | -------
|                                 |  | Company
|                                 |  |        
|At 31 December 2005              |  | Demand  |  | Up to 3 |  | 3-12   |  | 1-5    |  | Over 5 |  | Total  
|                                 |  |         |  | months  |  | months |  | years  |  | years  |  |        
|                                 |  | £m      |  | £m      |  | £m     |  | £m     |  | £m     |  | £m     
|                                
|Deposits by banks                |  | 22,813  |  | 270     |  | 182    |  | 25,000 |  | 2      |  | 48,267 
|Deposits by customers            |  | 59,079  |  | 5,456   |  | 1,017  |  | 2,047  |  | 11,689 |  | 79,288 
|Derivative financial instruments |  |        |  |        |  |       |  | 258    |  | 932    |  | 1,190  
|Debt securities in issue         |  |        |  |        |  |       |  | 4      |  |       |  | 4      
|Other borrowed funds             |  |        |  | 274     |  |       |  |       |  | 1,121  |  | 1,395  
|Subordinated liabilities         |  |        |  |        |  | 101    |  | 368    |  | 5,589  |  | 6,058  
|                                
|Total financial
    liabilities  |  | 81,892  |  | 6,000   |  | 1,300  |  | 27,677 |  | 19,333 |  | 136,202
|                                

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






Residual value risk






Risk Management in Wealth Management


Credit risk




52



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##### 

Business and Financial Review

Risk Managementcontinued

Cater Allen estimated exposure

The following table presents the amount that best represents
Cater Allens estimated maximum exposure to credit risk at
the reporting date without taking account of any collateral held
or other credit enhancements:

|                                |  |      |  |     
|------------------------------- |  | ---- |  | ----
|                                |  | 2006 |  | 2005
|                                |  | £m   |  | £m  
|                               
|Loans and advances to customers |  | 4.1  |  | 4.2 
|Other                           |  | 0.3  |  | 0.3 
|                               
|Third party exposures           |  | 4.4  |  | 4.5 
|                               

Abbey International




|  |                                                                                                                                                                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|> | adverse movements in interest
    rates where the interest paid to the depositor is higher that
    the market rate. The most significant market risk is yield curve
    risk. This yield curve risk mitigated by re-pricing variable
    rate deposits; and
|> | currency risk emanating from
    taking deposits in non-sterling currencies such as US dollars
    and euro. This is hedged through forward foreign exchange
    contracts and cross currency and foreign exchange swaps.                                   

James Hay




Abbey Sharedealing




Liquidity risk




Market risk






Managing market risk






Risk Management in the Sold Life Businesses




Management of insurance and financial risk






53



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##### 

Business and Financial Review

Risk Managementcontinued

Insurance risk

Insurance risk is the possibility under any one insurance
contract that the insured event occurs and the uncertainty of
the amount of the resulting claim. The Group controlled
insurance risk through prudent application of actuarial
modelling, reserving, underwriting and asset-liability
management processes. In addition, the exposure of the Sold Life
Businesses to movements in equity markets was limited by the use
of derivative backed hedges within the with profits funds. For
unit-linked contracts invested in equities, the investment risk
was borne entirely by the contract holders.

Financial Instrument Risk

The Sold Life Businesses were exposed to financial risk through
their financial assets, financial liabilities (investment
contracts and borrowings), reinsurance assets and insurance
liabilities. The key financial risk was that the proceeds from
their financial assets are not sufficient to fund the
obligations arising from its insurance and investment contracts
as they fell due. The most important components of this
financial risk were market risk, credit risk and liquidity risk,
as outlined below.

Market Risk

Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in
market prices and comprises three types of risk: interest rate
risk, price risk and currency risk. These risks impacted on the
Sold Life Businesses depending on the nature of the contracts.

The Sold Life Businesses managed market risk arising from
embedded guarantees through the use of derivative backed hedges.
Other methods the Sold Life Businesses used for mitigating
market risk included holding assets in the same currency
denomination as the liabilities of foreign subsidiaries and
asset-liability matching.

Credit risk

The Sold Life Businesses had exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in
full when due. They structured the levels of credit risk they
accepted by placing limits on their exposure to a single
counterparty, or groups of counterparties. Such risks were
monitored daily and were subject to frequent review.

Liquidity risk

The Sold Life Businesses managed liquidity risk through clearly
articulated Liquidity Risk Policy, Investment Guidelines and
Treasury Management Guidelines, requiring daily monitoring of
liquidity. The Liquidity Risk Policy had the objective of
ensuring low probability of loss due to liquidity risk events,
documentation of systems and controls for cost-efficient control
of liquidity risk.

54



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##### 

Report of the Directors





Directors

Board of Directors

As at 31 December 2006

Chairman

Lord Burns

Lord Burns (age 63) was appointed Joint Deputy Chairman on
1 December 2001 and Chairman on 1 February 2002. He is
also Chairman of Glas Cymru Cyfyngedig (Welsh Water), Chairman
of Marks and Spencer Group plc and a Non-Executive Director of
Pearson plc and Banco Santander Central Hispano, S.A. His
current professional roles include President of the Society of
Business Economists, Fellow of the London Business School,
Companion of the Institute of Management, President of the
National Institute of Economic and Social Research and Vice
President of the Royal Economic Society.

He was formerly Permanent Secretary to the Treasury and chaired
the Parliamentary Financial Services and Markets Bill Joint
Committee. Until recently, he was a Non-Executive Director of
British Land plc (2000-2005) and Legal & General Group plc
(1991-2001). He was Chairman of the National Lottery Commission
(2000-2001).

Executive directors

António Horta-Osório

Chief Executive

António Horta-Osório (age 43) was appointed Chief
Executive on 21 August 2006. He was a Non-Executive
Director of Abbey from 1 December 2004 until his
appointment as Chief Executive. He joined Abbey from Banco
Santander Totta in Portugal where he was Chief Executive
Officer. He is also Executive Vice President of Banco Santander
Central Hispano, S.A. and a member of its management committee
as well as Non-Executive Chairman of Banco Santander Totta. He
was previously Chief Executive Officer of Banco Santander Brasil.

António started his career at Citibank Portugal, where he
was head of Capital Markets and at the same time was an
assistant professor at the Universidade Católica
Portuguesa. He then worked for Goldman Sachs in New York and
London, focusing on corporate finance activities in Portugal
and, in 1993, joined Santander as Chief Executive Officer of
Banco Santander de Negócios Portugal. He is a graduate in
Management and Business Administration at Universidade
Católica Portuguesa, has an MBA from INSEAD, where he was
awarded the Henry Ford II Prize, and an AMP from Harvard
Business School.

Miguel Bragança

Executive Director, Retail Products and Marketing

Miguel Bragança (age 40) was appointed Executive Director,
Retail Products and Marketing on 26 September 2006. He is
responsible for product management, marketing communication and
customer relationship management. Miguel was previously a member
of the Board and Executive Committee of Banco Santander Totta in
Portugal, with responsibility for Finance, Products and
Marketing.

Miguel joined the Santander Group in 1993, participating in the
launch of Banco Santander de Negócios Portugal. Between
1996 and 2000, he was co-head of Santander Investment Brazil and
Vice-Chairman of the Board of Banco Santander Brazil. Miguel
started his career at Citibank Portugal in 1989, becoming a
Resident Vice-President. He is a graduate in Management and
Business Administration at Universidade Católica Portuguesa
and holds an MBA from INSEAD.

Nathan Bostock

Executive Director, Finance, Markets and Human Resources

Nathan Bostock (age 46) was appointed Executive Director,
Finance and Markets on 22 February 2005. This followed his
appointment to Abbeys Executive Committee in November
2004. His responsibilities include finance, treasury, Financial
Markets, and Corporate Banking. From 12 January 2007,
Nathan also took responsibility for Human Resources.

Nathan joined Abbey in November 2001 as Chief Operating Officer,
Abbey National Treasury Services plc, with responsibility for
finance, market risk and operations. Prior to joining Abbey,
Nathan spent nine years (1992-2001) with The Royal Bank of
Scotland plc where his roles included Director, Group Risk
Management and Chief Operating Officer, Treasury and Capital
Markets. Prior to joining The Royal Bank of Scotland plc, Nathan
was Head of Risk Analysis and Finance, Treasury and Interest
Rate Derivatives (Europe) for Chase Manhattan Bank (1988 to
1992). He joined Chase Manhattan Bank in 1986 having previously
worked for Coopers and Lybrand.

55



---



##### 

Report of the Directors

Directorscontinued

Non-Executive Directors

Juan Rodríguez Inciarte

Deputy Chairman

Juan Inciarte (age 54) was appointed Non-Executive Director on
1 December 2004. He joined Banco Santander Central Hispano,
S.A. in 1985. After holding various positions, he was appointed
to the Board of Directors in 1991, holding this office until
1999. He is currently Chief Executive of Santander Consumer
Finance, S.A. and Executive Vice President of Banco Santander
Central Hispano, S.A. In addition, he is a director of
Compañía Española de Petróleos, NIBC Bank
N.V., Banco Banif S.A., Vista Capital de Expansion S.A. and
director and member of the Executive Committee of Sovereign
Bancorp in the U.S.

For several years he served on the Board of Directors of First
Union Corporation (presently Wachovia) in the US, the Board of
Directors and Executive Committee of San Paolo  IMI
in Italy and the Boards of the Royal Bank of Scotland plc and
National Westminster Bank plc (from January 1998 until October
2004.) He is a member of the US-Spain Council and Fellow of The
Chartered Institute of Bankers in Scotland.

Keith Woodley

Keith Woodley (age 67) was appointed Non-Executive Director on
5 August 1996. He was made Senior Independent Non-Executive
Director in April 1999 and was Deputy Chairman from 6 April
1999 until November 2004. He is a former Non-Executive Director
of National and Provincial Building Society and a former partner
of Deloitte Haskins & Sells. A past President of the
Institute of Chartered Accountants in England and Wales, he is
currently Complaints Commissioner for the London Stock Exchange
and a Council Member and Treasurer of the University of Bath.

Jorge Morán

Jorge Morán (age 42) joined Abbey in December 2005
initially as Chief Operating Officer until 21 August 2006,
whereupon he became a Non-Executive Director. He is an Executive
Vice President of Banco Santander Central Hispano, S.A. and a
member of the groups management committee. He is head of
Santanders Insurance division.

Before joining Santander in 2002, he was Vice Chairman and Chief
Executive Officer of Morgan Stanley for Spain and Portugal
(2000 - 2002), where he was responsible for developing the
companys management strategy. Prior to this, he was also
responsible for managing Morgan Stanleys asset management
and distribution network (1992 - 2000). Before joining
Morgan Stanley, he was Director of Marketing at National
Westminster Bank plc and Head of Product Development at Citibank
España.

Jóse María Fuster

José María Fuster (age 48) was appointed Non-Executive
Director on 1 December 2004. He is currently Executive
Vice-President of Operations and Technology of Banesto and Chief
Information Officer for Santander. He joined Banco Español
de Crédito in 1998 and was appointed as Chief Information
Officer of Banco Santander Central Hispano, S.A. in 2003. He is
a director of ISBAN UK Limited. He started his professional
career in IBM and Arthur Andersen as a consultant. In the
financial services sector, he has worked for Citibank and
National Westminster Bank plc.

José María Carballo

José María Carballo (age 62) was appointed
Non-Executive Director on 1 December 2004. He is currently
Chairman of La Unión Resinera Española, Chairman of
Vista Desarrollo, Director of Vista Capital Expansion S.A.
S.G.E.C.R., Director of Santander Real Estate S.A. S.G.I.I.C.
and Director of Teleférico Pico del Teide S.A. He is also
Vice President and Honorary Treasurer of the Iberoamerican
Benevolent Society (UK).

Previously, he was Executive Vice President of Banco Santander
Central Hispano, S.A. from 1989 to 2001 and Chief Executive
Officer of Banco Santander de Negocios from 1989 to 1993. Until
1989 he was Executive Vice President responsible for Europe at
Banco Bilbao Vizcaya. He was also Executive Vice President of
Banco de Bilbao in New York until 1983.

Andrew Longhurst

Andrew Longhurst (age 67) was appointed Non-Executive Director
on 28 January 2005. He was Chief Executive Officer of
Cheltenham & Gloucester Building Society (1982-1997). In
1995 Cheltenham & Gloucester Building Society converted to a
public limited company and was acquired by Lloyds Bank plc.
Andrew joined the main board of Lloyds Bank plc and oversaw the
extension of Cheltenham & Gloucesters mortgage
operation into Lloyds Bank plc branches. In 1997 he was
appointed Director, Customer Finance of Lloyds TSB Bank plc,
having responsibility for the enlarged groups mortgage,
credit card and personal loan businesses and became Chairman of
Cheltenham & Gloucester.

In 1998, Andrew retired from full time executive employment and
joined the boards of The United Assurance Group Limited
(Chairman 1998-2000), Thames Water Limited (1998-2000) and
Hermes Focus Asset Management Limited (1998-present). He was
appointed Deputy Chairman of The Royal London Insurance Society
Limited (2000-2002) following its acquisition of United
Assurance Group Limited. He has also served as Chairman of the
Council of Mortgage Lenders (1994) and was a member of the
Department of Trade and Industrys taskforce on
deregulation of financial services (1993).

56



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##### 

Report of the Directors



Directorscontinued

Rosemary Thorne

Rosemary Thorne (age 55) was appointed Non-Executive Director on
1 July 2006. She is currently a Non-Executive Director of
Cadbury Schweppes plc. Previously, Rosemary was Group Financial
Controller of Grand Metropolitan Public Limited Company (prior
to its merger with Guinness plc to become Diageo plc) and then
spent almost eight years as the Group Finance Director of J
Sainsbury plc. Rosemary joined the board of Bradford &
Bingley in 1999 as Group Finance Director, initially working on
its demutualisation and flotation, resulting in a place in the
FTSE 100 in December 2000. Rosemary remained in this role for a
further five years. In January 2006, she then became Group
Finance Director of Ladbrokes plc, resigning in March 2007.

Rosemary is a member of the Financial Reporting Council and The
Hundred Group of Finance Directors Main Committee and was
previously a member of the Financial Reporting Review Panel. She
also sits on the Council of the University of Warwick and the
Royal College of Art.

Registered Office and Principal Office

Abbey National House

2 Triton Square

Regents Place

London

NW1 3AN

Abbey National plc is registered in England and Wales No 2294747.

Auditors

Deloitte & Touche LLP

Stonecutter Court

1 Stonecutter Street

London EC4A 4TR

57



---



##### 

Report of the Directors





Directors Report

Corporate Structure

Abbey is a wholly owned subsidiary of Banco Santander Central
Hispano, S.A. and the ordinary shares of Abbey are no longer
traded on the London Stock Exchange. As a result, there have
been no disclosures made to Abbey in accordance with sections
198 to 208 of the Companies Act 1985 (as amended)
(Companies Act 1985).

Banco Santander Central Hispano, S.A. is incorporated in Spain
and has its registered office at Paseo de Pereda 9-12,
Santander, Spain. Note 21 to the Consolidated Financial
Statements provides a list of the principal subsidiaries of
Abbey and the nature of each companys business as well as
details of overseas branches.

Abbey is subject to the listing rules of the UK Listing
Authority, a division of the Financial Services Authority,
because it has preference shares listed on the London Stock
Exchange. As it does not have listed ordinary shares, Abbey is
exempt from the requirement to make certain disclosures that are
normally part of the continuing obligations of listed companies
in the UK. This exemption applies, among other things, to
corporate governance and certain directors remuneration
disclosures.

Principal activities and business review

The principal activity of the Group continues to be the
provision of an extensive range of Personal Financial Services.
Abbey is authorised and regulated by the Financial Services
Authority. Abbey is required to set out in this report a fair
review of the development and performance of the business of the
Group during the year ended 31 December 2006 and of the
position of the Group at the end of the year. The information
that fulfils this requirement can be found in the Chief
Executives Review on pages 2 to 4. The Chief
Executives Review also contains a description of the
likely future developments for the Group. When reading the Chief
Executives Review, reference should also be made to the
Forward-looking Statements section on page 4.

Further information on the development and performance of the
business of the Group, both at a consolidated level and analysed
by division can be found in the following sections:

>
    An analysis of the Groups
    development and performance during the year is contained in the
    Business Review  Summary on pages 9 to 12.>
    A further detailed analysis of
    the Personal Financial Services division is contained in the
    Business Review  Personal Financial Services on
    pages 13 to 18.>
    A further detailed analysis of
    the Sold Life Businesses is contained in the Business
    Review  Sold Life Businesses on page 19.>
    A further detailed analysis of
    the Portfolio Business Unit is contained in the Business
    Review  Portfolio Business Unit on page 20.Further information on the position of the Group at the end
of the year can be found in the following sections:

>
    An analysis of the Personal
    Financial Services business flows is contained in the Business
    Review  Personal Financial Services on pages 14
    and 15.>
    The Balance Sheet Business Review
    can be found on pages 24 to 37, including a review of
    capital management and resources on pages 31 and 32,
    details of capital expenditure on pages 30 and 31, off
    balance sheet arrangements on page 32, liquidity on
    pages 32 and 33, and contractual obligations on
    page 34.>
    The Groups key performance
    indicators are described in the Business Review 
    Summary on page 12.Abbey is also required to describe the principal risks and
uncertainties facing the Group. Financial risks are described in
the Risk Management Report for each segment of the business by
type of risk on pages 38 to 54, and material risk factors
are described in the Risk Factors section on page 165.

Results and dividends

The results of the Group are discussed in the Principal
activities and business review above. The Directors do not
recommend the payment of a final dividend (2005: nil). An
interim dividend of £207m for 2006 was declared on
27 June 2006 on Abbeys ordinary shares in issue. This
dividend was paid on 28 November 2006.

Directors

The members of the Board at 31 December 2006 are named on
pages 55 to 57. For each Director, the date of appointment
is shown. As at 31 December 2006, the Board comprised a
Chairman, three Executive Directors including the Chief
Executive, and seven Non-Executive Directors. As at the date of
publication of this report, the composition of the Board remains
unchanged. The roles of Chairman and Chief Executive are
separated and clearly defined. The Chairman is primarily
responsible for the working of the Board and the Chief Executive
for the running of the business and implementation of Board
strategy and policy. During 2006, the following directors
resigned:

|                       |  |                                    |  |                    
|---------------------- |  | ---------------------------------- |  | -------------------
|Director               |  | Title                              |  | Date of resignation
|                      
|Francisco Gómez-Roldán |  | Chief Executive                    |  | 29 July 2006       
|Jorge Morán            |  | Chief Operating Officer            |  | 21 August 2006     
|Graeme Hardie          |  | Executive Director, Retail Banking |  | 26 September 2006  
|                      



58



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##### 

Report of the Directors



Directors Reportcontinued

Non-Executive Directors have been appointed for an indefinite
term (other than Keith Woodley and Rosemary Thorne,
who have both been appointed for a three year term after
which their appointments may be extended upon mutual agreement).
In accordance with the Companys Articles of
Association, all of the directors shall retire from office and
face re-election at every Annual General Meeting. The
Companys Articles of Association also require that a
Director must retire at the first Annual General Meeting after
their 70th birthday.

When they were appointed, the appointments of António
Horta-Osório, Miguel Bragança, Juan Rodríguez
Inciarte, Jorge Morán, Jóse María Fuster and
José María Carballo were all proposed by Banco
Santander Central Hispano, S.A., the parent company of Abbey.

Abbey may pay an Executive Director instead of allowing them to
work during their notice period. Executive Directors
service contracts do not provide for specific benefits on
termination of employment.

Committees of the Board

The Board maintains two standing committees, both of which
operate within written terms of reference. They are the Audit
and Risk Committee and the Remuneration Committee.

Audit and Risk Committee

Membership of the Audit and Risk Committee is restricted to
Non-Executive Directors. The Audit and Risk Committees
primary tasks are to review the scope of external and internal
audit, to receive reports from the external auditors, (currently
Deloitte & Touche LLP) and the Chief Internal Auditor, and
to review the preliminary results, interim information, annual
financial statements and any other significant financial reports
before they are presented to the Board, focusing in particular
on accounting policies, compliance and areas of management
judgement and estimates. The Committees scope also
includes risk management and oversight and the review of the
procedures in place for employees to raise concerns about
possible wrongdoing in financial reporting and other matters.
For a further discussion of the risk  control
responsibilities of the Audit and Risk Committee, see the Risk
Management section of the Business and Financial Review on
page 38. The Audit and Risk Committee more generally acts
as a forum for discussion of internal control issues and
contributes to the Boards review of the effectiveness of
the Companys internal control and risk management systems
and processes. The Audit and Risk Committee also conducts a
review of the remit and reports of the Abbey and Santander
internal audit functions, as well as their effectiveness,
authority, resources and standing within Abbey and
managements response to their findings and
recommendations. Abbeys relationship with the external
auditors and the experience and qualifications of the external
auditors are monitored by the Audit and Risk Committee and
external auditors audit plans and audit findings are
reviewed by the Committee. A framework for ensuring auditor
independence has been adopted which defines unacceptable
non-audit assignments, pre-approval of acceptable non-audit
assignments and procedures for approval of other non-audit
assignments. The Committee may make any recommendations to the
Board as it sees fit and the Chairman of the Committee reports
formally to the Board after each meeting.

The Chairperson, Rosemary Thorne has over 15 years of
experience as Finance Director of FTSE 100 companies and is a
member of the Financial Reporting Council and The Hundred Group
of Finance Directors Main Committee. She was previously a member
of the Financial Reporting Review Panel. The Board has
determined that Rosemary Thorne has the necessary qualifications
and experience to qualify as an audit committee financial expert
as defined for the purposes of the US Sarbanes-Oxley Act of 2002
and the Board considers that she is independent in accordance
with Section 303A.02 of the New York Stock Exchange
Corporate Governance Rules.

The other members of the Audit and Risk Committee are Juan
Rodríguez Inciarte, José María Carballo and Keith
Woodley. Pursuant to SEC
Rule 10A-3(c)(2),
which provides a general exemption from the requirement to have
an audit committee for subsidiaries that are listed on a
national securities exchange or market where the parent
satisfies the requirement of SEC
Rule 10A-3, Abbey
is exempt from the requirements of SEC
Rule 10A-3.
According to SEC
Rule 10A-3(c)(2),
additional listings of an issuers securities are exempt
from the audit committee requirements if the issuer is already
subject to them as a result of listing any class of securities
on any market subject to SEC Rule 10A-3. This exemption
extends to listings of non-equity securities by a direct or
indirect subsidiary that is consolidated or at least 50%
beneficially owned by a parent company, if the parent is subject
to the requirements as a result of the listing of a class of its
equity securities. Consequently, as applied to the current
shareholding structure of Abbey, (as the wholly-owned subsidiary
of Banco Santander Central Hispano, S.A.), Abbey is exempt from
the audit committee requirements of SEC Rule 10A-3 since:
(i) Abbey is a wholly-owned subsidiary of Banco Santander
Central Hispano, S.A., (ii) Banco Santander Central
Hispano, S.A., has equity securities listed on the NYSE and is
therefore subject to SEC Rule 10A-3, and (iii) Abbey
does not have any equity securities listed on the NYSE or any
other US national securities exchange.

Remuneration Committee

Membership of the Remuneration Committee consists of at least
three Non-Executive Directors. The Committee is responsible for
oversight of the remuneration of senior management within Abbey
and its aim is to ensure that these arrangements support the
business objectives of Abbey. The Committee is charged with
oversight of the remuneration, performance targets and
performance bonus payments for Executive Directors and members
of the Executive Committee. All of these are subject to overall
approval by the Santander Appointments and Remuneration
Committee following approval and recommendation by the
Remuneration Committee.

The Chairman of the Remuneration Committee is José
María Carballo and the other members are Juan
Rodríguez Inciarte and Andrew Longhurst.

59



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##### 

Report of the Directors



Directors Reportcontinued

Directors remuneration

The aggregate remuneration received by the Directors of Abbey in
2006 was:

|                                                       |  |           
|------------------------------------------------------ |  | ----------
|                                                       |  | £         
|                                                      
|Salaries and fees                                      |  | 4,222,630 
|Performance-related payments                           |  | 6,735,039 
|Other taxable benefits                                 |  | 8,066     
|Total remuneration excluding
    pension contributions |  | 10,965,735
|Pension contributions                                  |  |          
|Compensation for loss of office                        |  |          
|                                                      



Medium-Term Incentive Plan




Remuneration of Highest Paid Director




Retirement Benefits




Non-Executive Directors




Directors interests and Related Party Transactions










Third Party Indemnities




60



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##### 

Report of the Directors



Directors Reportcontinued

Financial Instruments

The financial risk management objectives and policies of the
Group; the policy for hedging each major type of forecasted
transaction for which hedge accounting is used; and the exposure
of the Group to price risk, credit risk, liquidity risk and
cash-flow risk are outlined in the Risk Management Report on
pages 38 to 54.

Pension Funds

The assets of the main pension schemes are held separately from
those of Abbey and are under the control of the trustees of each
scheme. Three of the Abbey pension schemes have a common
corporate trustee which, at 31 December 2006, had eight
directors, comprising six Abbey appointed directors and two
member-nominated directors (with a vacancy for one
member-nominated director).

The National and Provincial Pension Fund has a different
corporate trustee, the Board of which at 31 December 2006
comprised three Company appointed directors, and three
member-elected directors.

With effect from 1 September 2006 Abbey National plc became
the Principal Employer of the Scottish defined benefit schemes,
replacing Scottish Mutual Assurance plc and Scottish Provident
Limited, the shares in which were sold as part of the sale of
Abbeys Life insurance businesses.

As at 31 December 2006 the Scottish Mutual Assurance plc
Staff Pension Scheme had four trustees, of whom three are
selected by Abbey (two of whom are members) and one trustee is
elected by the members. There were vacancies for one Abbey
appointed trustee and one member-elected trustee.

In the case of the Scottish Provident Institution Staff Pension
Fund, as at 31 December 2006 there were seven trustees, of
whom four (one of whom is a member) are selected by Abbey and
the remaining three are elected by active members from their
number. There was a vacancy for one Abbey appointed trustee.

Asset management of the schemes is delegated to a number of fund
managers and the trustees receive independent professional
advice on the performance of the managers.

Legal advice to the trustees of the various schemes is provided
by external firms of solicitors. The audits of the pension
schemes are separate from that of Abbey. The audits of the
Amalgamated, Associated Bodies, Group and the National and
Provincial Pension schemes are undertaken by Grant Thornton UK
LLP. The audits of the Scottish Mutual Assurance plc Staff
Pension Scheme and the Scottish Provident Institution Staff
Pension Fund are undertaken by KPMG LLP. Further information is
provided in Note 41 to the Consolidated Financial
Statements.

Market Value of Land and Buildings

On the basis of a periodic review process, the estimated
aggregate market value of the Company and its subsidiaries
land and buildings was not significantly different from the
fixed asset net book value of £41m, as disclosed in
Note 25 to the Financial Statements. It is considered that,
except where specific provisions have been made, the land and
buildings have a value in use to the Group that exceeds the
estimated market value, and the net book value is not impaired.

Disability

Abbey has processes in place to help recruit, develop and retain
employees with disabilities. Abbey has a partnership agreement
with the Employment Service Disability Service to provide access
to work for people with disabilities. This aims to make sure
that new and existing staff get the necessary aids and equipment
to enable them to work effectively. Abbey is proud to use the
Employment Service Positive about Disabled People
symbol.

Employee Involvement

Employee share ownership

In recognition of the Banco Santander Central Hispano, S.A.
acquisition of Abbey, all employees were given 100 free shares
in Banco Santander Central Hispano, S.A. on 15 February
2005. These shares were granted using an Inland Revenue approved
Share Incentive Plan (SIP). The free shares will be
held in trust on the employees behalf for a minimum of
three years.

In January 2006, Abbey introduced a Partnership Shares scheme,
which also operates under the SIP umbrella. Employees will be
able to invest up to a maximum of £1,500 of pre-tax salary
in Banco Santander Central Hispano, S.A. shares per tax year.
These shares will be held in trust on the employees behalf.

In January 2007, it was announced that it is intended that each
active employee of Santander in June 2007 will be given 100 free
shares in Banco Santander Central Hispano, S.A. to mark the
150th anniversary of Santander.

Communication

Abbey wants to involve and inform employees on matters that
affect them. We believe this is key to being successful and as
such effective communication is vital to everything Abbey does.
Abbey publishes a magazine every other month for employees, and
almost all employees have access to the company intranet. Abbey
also uses more traditional methods of communication, such as
team meetings. All these channels are designed to keep employees
fully informed of news and developments which may have an impact
on them, and also to keep them up to date on financial, economic
and other factors which affect the companys performance.
Its just as important to listen to the views of employees
and Abbey asks for their opinions on a range of issues through
regular departmental and company-wide opinion surveys.

61



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##### 

Report of the Directors

Directors Reportcontinued

Consultation

Abbey has over 25 years of trade union recognition through
a partnership agreement with Abbey National Group Union
(ANGU), the independent trade union that it
recognises to speak on behalf of Abbey employees. ANGU is
affiliated to the Trade Union Congress and operates from its own
offices in Hertfordshire. ANGU is involved in major initiatives,
and Abbey consults them on significant proposals within the
business. Consultation takes place at both national and local
levels. Abbey holds regular relationship management meetings to
make sure that communication is open and two-way.

Donations

The Abbey National Charitable Trust Limited supports
disadvantaged people throughout the UK. In 2006, Abbey made
total cash donations of £2,164,441 (2005: £1,556,947)
to a wide range of charities which predominantly support
projects addressing education, finance and regeneration issues.

Political contributions

No contributions were made for political purposes and no
political expenditure was incurred.

Suppliers

Abbey has cost management and procurement policies that
explicitly promote competitive tendering and dealing with
suppliers in a fair and open manner. Abbey does not operate a
single payment policy in respect of all classes of suppliers.
Payment terms vary depending on the supplier and the type of
spend, and the supplier is made aware of these before engagement.

Policy and practice on payment of creditors

It is Abbeys policy to ensure payments are made in
accordance with the terms and conditions agreed, except where
the supplier fails to comply with those terms and conditions.
Abbeys practice on payment of creditors has been
quantified under the terms of the Companies Act 1985
(Directors Report) (Statement of Payment Practice)
Regulations 1997. Based on the ratio of the aggregate amounts
owed to trade creditors at the end of the year to the aggregate
amounts invoiced by suppliers during the year at
31 December 2006, trade creditor days for Abbey were
30 days (2005: 25 days).

Code of ethics

Abbeys ethical policies are set out in How we do
business. This document, which was established in 1999,
and reviewed and updated by the Board in 2003, states that:

>
    Employees should raise concerns
    if they become aware that ethical policies and principles are
    not being followed;>
    Abbey values all employees as
    individuals and treats them as partners in the business;>
    Abbey treats customers fairly and
    delivers what it promises;>
    Abbey considers ethical and
    environmental concerns when investing Abbey assets;>
    Abbey is committed to adopting
    sound environmental management practices; and>
    Abbey expects suppliers to
    operate to high ethical standards.Abbeys ethical policies include ethical investment
guidelines which are an integral part of the risk management
processes for investment decision making. Procedures are also in
place for employees to follow if they feel that there has been a
breach of our ethical policies. How we do business
can be read in full on the website at
www.aboutabbey.com>General Information>Our
Policies>how we do business.

Abbey also complies with the applicable code of ethics
regulations of the United States Securities and Exchange
Commission arising from the Sarbanes-Oxley Act of 2002. Amongst
other things, the Sarbanes-Oxley Act aims to protect investors
by improving the accuracy and reliability of information that
companies disclose. It requires companies to disclose whether
they have a code of ethics that applies to the Chief Executive
and senior financial officers that promotes honest and ethical
conduct; full, fair, accurate, timely and understandable
disclosures; compliance with applicable governmental laws, rules
and regulations; prompt internal reporting of violations; and
accountability for adherence to such a code of ethics. Abbey
meets these requirements through How we do business,
our whistleblowing policy, the Financial Services
Authoritys Principles for Businesses, and the Financial
Services Authoritys Principles and Code of Practice for
Approved Persons (together, the Code of Ethics), with which the
Chief Executive and senior financial officers must comply. These
include requirements to manage conflicts of interest
appropriately and to disclose any information the Financial
Services Authority may want to know about. Abbey provides a copy
of its Code of Ethics to anyone, free of charge, on application
to the address shown on page 167.

Going concern

The Directors confirm that they are satisfied that Abbey and its
subsidiaries have adequate resources to continue in business for
the foreseeable future. For this reason, they continue to adopt
a going concern basis in preparing the financial statements.

Disclosure controls and procedures (Sarbanes-Oxley Act
2002)

In Abbeys annual report on
Form 20-F for the
2005 fiscal year, Abbey noted that the material weakness in its
internal control over financial reporting identified in 2004,
had not been fully remediated as at 31 December 2005 for
all of Abbeys subsidiaries. Abbeys life insurance
subsidiaries still had insufficient personnel in the corporate
accounting department with sufficient knowledge and experience
in US GAAP and Securities and Exchange Commission requirements.
During the third quarter of 2006, Abbey completed the sale of
its life insurance subsidiaries, including those subsidiaries
that had not yet completed the necessary remediation procedures
and therefore no material weakness exists as at 31 December
2006.

62



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##### 

Report of the Directors

Directors Reportcontinued

Abbey evaluated with the participation of Abbeys Chief
Executive and Chief Financial Officer, the effectiveness of
Abbeys disclosure controls and procedures as of
31 December 2006. There are inherent limitations to the
effectiveness of any system of disclosure controls and
procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control
objectives. Based upon Abbeys evaluation, the Chief
Executive and the Chief Financial Officer concluded that, as of
31 December 2006, Abbeys disclosure controls and
procedures were effective to provide reasonable assurance that
information required to be disclosed by Abbey in the reports
that Abbey files and submits under the Exchange Act is recorded,
processed, summarised and reported within the time periods
specified in the applicable rules and forms, and that it is
accumulated and communicated to Abbeys management,
including Abbeys Chief Executive and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
disclosure. There has been no change in Abbeys internal
control over financial reporting during Abbeys 2006 fiscal
year that has materially affected, or is reasonably likely to
materially affect Abbeys internal controls over financial
reporting.

Relevant Audit Information

Each of the directors as at the date of approval of this report
confirms that:

(1)
    So far as the director is aware, there is no relevant audit
    information of which the Companys auditors are unaware; and(2)
    The director has taken all steps that he/she ought to have taken
    as a director to make himself / herself aware of any relevant
    audit information and to establish that the Companys
    auditors are aware of that information.This confirmation is given and should be interpreted in
accordance with the provisions of Section 234ZA of the
Companies Act 1985.

Statement of Directors Responsibilities

The directors are responsible for preparing their Annual Report
and financial statements. The directors have chosen to prepare
accounts for the company in accordance with International
Financial Reporting Standards (IFRS). Company law
requires the directors to prepare such financial statements in
accordance with International Financial Reporting Standards, the
Companies Act 1985 and Article 4 of the International
Accounting Standards Regulation.

International Accounting Standard 1 requires that financial
statements present fairly for each financial year the
companys financial position, financial performance and
cash flows. This requires the faithful representation of the
effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for
assets, liabilities, income and expenses set out in the
International Accounting Standards Boards Framework
for the Preparation and Presentation of Financial
Statements. In virtually all circumstances, a fair
presentation will be achieved by compliance with all applicable
International Financial Reporting Standards. Directors are also
required to:

>
    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.The directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the company, for safeguarding the assets,
for taking reasonable steps for the prevention and detection of
fraud and other irregularities and for the preparation of a
directors report which comply with the requirements of the
Companies Act 1985. The Directors are responsible for the
maintenance and integrity of the Groups website.
Legislation in the United Kingdom governing the preparation and
dissemination of financial statements differs from legislation
in other jurisdictions.

Auditors

Deloitte & Touche LLP have expressed their willingness to
continue in office as auditors and a resolution to reappoint
them will be proposed at the forthcoming Annual General Meeting.

By order of the Board

(KAREN M FORTUNATO SIGNATURE)

Karen M Fortunato

Company Secretary and Head of Legal

15 March 2007

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

63



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##### 

Report of the Directors





Supervision and Regulation

As a firm authorised by the Financial Services Authority, Abbey
is subject to UK and EU financial services laws and regulations
which are discussed below. Recent significant regulatory
developments are also highlighted below.

UK

In the UK, the Financial Services Authority is the single
independent regulator for the regulation of deposit taking,
investment business, mortgages and insurance. The Financial
Services Authority was set-up by the Government and exercises
statutory powers under the Financial Services and Markets Act
2000 (FSMA).

Abbey, together with several of its subsidiaries, is authorised
by the Financial Services Authority to carry on a range of
regulated activities in the UK which principally include
mortgages, banking, insurance and investment business. The
Financial Services Authority must adhere to four regulatory
objects, as prescribed in FSMA, which set out the parameters of
regulation: market confidence; public awareness; the protection
of consumers; and the reduction of financial crime. Based on
these regulatory objectives, the Financial Services Authority
has formulated an extensive handbook of rules and guidance to
which authorised firms are subject. The Financial Services
Authority is in the process of making changes to the handbook
which move away from current prescriptive rules to a more
high-level principles-based approach to regulation for the
conduct of an authorised firms business.

Banks, insurance companies and other financial institutions in
the UK are subject to a compensation scheme, namely, the
Financial Services Compensation Scheme (the Scheme).
The Scheme covers claims made against authorised firms (or any
participating EEA firms) where they are unable, or likely to be
unable, to pay claims against them. In relation to deposits, the
Scheme provides cover for 100% of the first £2,000 of a
claim plus 90% of the next £33,000, with £31,700 being
the maximum amount payable. In respect of investments, the first
100% of the first £30,000 can be claimed plus 90% of the
next £20,000, with £48,000 being the maximum amount
payable. In relation to mortgage advice and arranging, the
Scheme will pay 100% of the first £30,000 and 90% of the
next £20,000, with £48,000 being the maximum amount
payable. In addition, the Scheme also extends (up to various
amounts) to certain long term and general insurance contracts,
including general insurance advice and arranging.

European Union

Abbey is directly affected by laws emanating from the European
Union, primarily through directives that must be implemented by
the UK as a Member State of the European Union. Although there
have been a series of financial services measures emanating from
the European Union, those that are likely to impact most on
Abbeys business in the foreseeable future are the Markets
in Financial Instruments Directive (MiFID) and the
Capital Requirements Directive (CRD). Firms are
required to implement MiFID by 1 November 2007. CRD, which
reforms the prudential regulation of credit institutions and
investment firms across the European Union, was implemented on
1 January 2007. Abbey has been at the fore of these
developments and is in line with the rest of the Financial
Services industry in preparing for implementation.

64



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##### 

Financial Statements

Contents to Financial Statements

|   |  |                                                                                                                    
|-- |  | -------------------------------------------------------------------------------------------------------------------
|   |  | Financial Statements                                                                                               
|67 |  | Report of Independent Registered
    Public Accounting Firm                                                        
|68 |  | Consolidated Income Statement for
    the years ended 31 December 2006, 2005 and 2004                              
|69 |  | Consolidated Balance Sheet as at
    31 December 2006 and 2005                                                     
|70 |  | Consolidated Statement of
    Recognised Income and Expense for the years ended
    31 December 2006, 2005 and 2004
|70 |  | Consolidated Cash Flow Statement
    for the years ended 31 December 2006, 2005 and 2004                           
|71 |  | Company Balance Sheet as at
    31 December 2006 and 2005                                                          
|72 |  | Company Statement of Recognised
    Income and Expense for the years ended 31 December 2006,
    2005 and 2004     
|72 |  | Company Cash Flow Statement for the
    years ended 31 December 2006, 2005 and 2004                                
|73 |  | Accounting Policies                                                                                                
|86 |  | Notes to the Financial Statements                                                                                  

65



---



##### 

[Intentionally left blank]

66



---



##### 

Financial Statements





Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of Abbey National
plc

We have audited the accompanying Consolidated Balance Sheets of
Abbey National plc, a wholly owned subsidiary of Banco Santander
Central Hispano, S.A., and its subsidiary undertakings
(together, the Abbey National Group) as at
31 December 2006 and 2005, and the related Consolidated
Statements of Income, Recognised Income and Expense, and Cash
Flow for each of the three years in the period ended
31 December 2006 and related notes, including the
information in pages 38 to 54 of the
Form 20-F. These
financial statements are the responsibility of the Abbey
National Group management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Abbey National Group is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. An audit includes
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Abbey National Groups internal
control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, such Consolidated Financial Statements present
fairly, in all material respects, the consolidated financial
position of the Abbey National Group as at 31 December 2006
and 2005, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended
31 December 2006, in conformity with International
Financial Reporting Standards (IFRS).

IFRS vary in certain significant respects from accounting
principles generally accepted in the United States of America.
Information relating to the nature and effect of such
differences is presented in Notes 53 to 58 to the
Consolidated Financial Statements.

DELOITTE LOGO

Deloitte & Touche LLP

Chartered Accountants and Registered Auditors

London, United Kingdom

15 March 2007

67



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##### 

Financial Statements

Consolidated Income Statement

For the years ended 31 December 2006, 2005 and 2004

|                                                             |  |       |  |         |  |         |  |        
|------------------------------------------------------------ |  | ----- |  | ------- |  | ------- |  | -------
|                                                             |  |       |  | 2006    |  | 2005    |  | 2004   
|                                                             |  | Notes |  | £m      |  | £m      |  | £m     
|                                                            
|Interest and similar income                                  |  | 2     |  | 5,644   |  | 5,419   |  | 5,580  
|Interest expense and similar charges                         |  | 2     |  | (4,416) |  | (4,247) |  | (4,174)
|                                                            
|Net interest income                                          |  |       |  | 1,228   |  | 1,172   |  | 1,406  
|                                                            
|Fee and commission income                                    |  | 3     |  | 789     |  | 751     |  | 640    
|Fee and commission expense                                   |  | 3     |  | (90)    |  | (107)   |  | (114)  
|                                                            
|Net fee and commission
    income                            |  |       |  | 699     |  | 644     |  | 526    
|Dividend income                                              |  |       |  | 1       |  | 1       |  | 1      
|Net trading income                                           |  | 4     |  | 408     |  | 471     |  | 267    
|Other operating income, net                                  |  | 5     |  | 134     |  | 67      |  | 330    
|                                                            
|Total operating income                                       |  |       |  | 2,470   |  | 2,355   |  | 2,530  
|                                                            
|Administration expenses                                      |  | 6     |  | (1,420) |  | (1,577) |  | (2,013)
|Depreciation and amortisation                                |  | 7     |  | (215)   |  | (195)   |  | (355)  
|                                                            
|Total operating
    expenses                                 |  |       |  | (1,635) |  | (1,772) |  | (2,368)
|Impairment losses on loans and
    advances                  |  | 9     |  | (344)   |  | (218)   |  | (25)   
|Amounts written off fixed asset
    investments              |  |       |  |        |  |        |  | 80     
|Provisions for other liabilities
    and charges             |  |       |  | (63)    |  | (3)     |  | (201)  
|                                                            
|Profit on continuing operations
    before tax               |  |       |  | 428     |  | 362     |  | 16     
|Tax on profit on continuing
    operations                   |  | 10    |  | (115)   |  | (108)   |  | 12     
|                                                            
|Profit for the year from
    continuing operations           |  |       |  | 313     |  | 254     |  | 28     
|                                                            
|(Loss)/ profit for the year from
    discontinued operations |  | 12    |  | (245)   |  | 166     |  | (82)   
|                                                            
|Profit/ (loss) for the
    year                              |  |       |  | 68      |  | 420     |  | (54)   
|                                                            
|Attributable to:                                             |  |       |  |         |  |         |  |        
|Equity holders of the parent                                 |  |       |  | 68      |  | 420     |  | (54)   
|                                                            



68



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##### 

Financial Statements

Consolidated Balance Sheet

As at 31 December 2006 and 2005

|                                                   |  |       |  |         |  |        
|-------------------------------------------------- |  | ----- |  | ------- |  | -------
|                                                   |  |       |  | 2006    |  | 2005   
|                                                   |  | Notes |  | £m      |  | £m     
|                                                  
|Assets                                             |  |       |  |         |  |        
|Cash and balances at central banks                 |  | 13    |  | 888     |  | 991    
|Trading assets                                     |  | 14    |  | 62,314  |  | 58,231 
|Derivative financial instruments                   |  | 15    |  | 8,336   |  | 11,855 
|Financial assets designated at fair
    value      |  | 16    |  | 8,713   |  | 30,597 
|Loans and advances to banks                        |  | 17    |  | 2,242   |  | 444    
|Loans and advances to customers                    |  | 18    |  | 103,146 |  | 95,467 
|Available for sale securities                      |  | 20    |  | 23      |  | 13     
|Investment in associated
    undertakings          |  | 22    |  | 22      |  | 24     
|Intangible assets                                  |  | 23    |  | 90      |  | 171    
|Value of in force business                         |  | 24    |  |        |  | 1,721  
|Property, plant and equipment                      |  | 25    |  | 415     |  | 314    
|Operating lease assets                             |  | 26    |  | 2,082   |  | 2,172  
|Current tax assets                                 |  |       |  | 223     |  | 235    
|Deferred tax assets                                |  | 28    |  | 804     |  | 796    
|Other assets                                       |  | 29    |  | 2,507   |  | 4,003  
|                                                  
|Total assets                                       |  |       |  | 191,805 |  | 207,034
|                                                  
|Liabilities                                        |  |       |  |         |  |        
|Deposits by banks                                  |  | 30    |  | 6,656   |  | 5,617  
|Deposits by customers                              |  | 31    |  | 66,519  |  | 65,889 
|Derivative financial instruments                   |  | 15    |  | 10,218  |  | 11,264 
|Trading liabilities                                |  | 32    |  | 57,604  |  | 52,664 
|Financial liabilities designated at
    fair value |  | 33    |  | 8,151   |  | 7,948  
|Debt securities in issue                           |  | 34    |  | 28,998  |  | 21,276 
|Other borrowed funds                               |  | 35    |  | 1,655   |  | 2,244  
|Subordinated liabilities                           |  | 36    |  | 5,020   |  | 6,205  
|Insurance and reinsurance
    liabilities          |  | 37    |  |        |  | 21,501 
|Macro hedge of interest rate risk                  |  |       |  | 174     |  | 13     
|Other liabilities                                  |  | 38    |  | 1,616   |  | 3,190  
|Investment contract liabilities                    |  | 39    |  |        |  | 3,306  
|Provisions                                         |  | 40    |  | 180     |  | 253    
|Current tax liabilities                            |  |       |  | 300     |  | 288    
|Deferred tax liabilities                           |  | 28    |  | 564     |  | 886    
|Retirement benefit obligations                     |  | 41    |  | 1,034   |  | 1,380  
|                                                  
|Total liabilities                                  |  |       |  | 188,689 |  | 203,924
|                                                  
|Equity                                             |  |       |  |         |  |        
|Share capital                                      |  | 43    |  | 148     |  | 148    
|Share premium account                              |  | 43    |  | 1,857   |  | 1,857  
|Retained earnings                                  |  | 44    |  | 1,111   |  | 1,105  
|                                                  
|Total shareholders
    equity                      |  |       |  | 3,116   |  | 3,110  
|                                                  
|Total liabilities and
    equity                   |  |       |  | 191,805 |  | 207,034
|                                                  












69



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##### 

Financial Statements

Consolidated Statement of Recognised Income and Expense

For the years ended 31 December 2006, 2005 and 2004

|                                                              |  |       |  |      |  |       |  |      
|------------------------------------------------------------- |  | ----- |  | ---- |  | ----- |  | -----
|                                                              |  |       |  | 2006 |  | 2005  |  | 2004 
|                                                              |  | Notes |  | £m   |  | £m    |  | £m   
|                                                             
|Exchange differences on translation
    of foreign operations |  |       |  | (9)  |  | 3     |  | (2)  
|Actuarial gains/(losses) on defined
    benefit pension plans |  | 41    |  | 219  |  | (154) |  | (70) 
|Gains on available for sale
    securities                    |  |       |  | 1    |  |      |  |     
|Tax on items taken directly to
    equity                     |  |       |  | (66) |  | 46    |  | 21   
|                                                             
|Net gain/(loss) recognised
    directly in equity             |  |       |  | 145  |  | (105) |  | (51) 
|Profit/(loss) for the year                                    |  |       |  | 68   |  | 420   |  | (54) 
|                                                             
|Total recognised income and
    expense for the year          |  |       |  | 213  |  | 315   |  | (105)
|                                                             
|Effect of changes in accounting
    policy                    |  |       |  |      |  |       |  |      
|IFRS transition adjustments at
    1 January 2005:            |  |       |  |      |  |       |  |      
|Retained earnings                                             |  |       |  |     |  | (293) |  |     
|                                                             
|                                                              |  |       |  | 213  |  | 22    |  | (105)
|                                                             
|Attributable to:                                              |  |       |  |      |  |       |  |      
|Equity holders of the parent                                  |  |       |  | 213  |  | 22    |  | (105)
|                                                             

Consolidated Cash Flow Statement




|                                                                  |  |       |  |          |  |          |  |        
|----------------------------------------------------------------- |  | ----- |  | -------- |  | -------- |  | -------
|                                                                  |  |       |  | 2006     |  | 2005     |  | 2004   
|                                                                  |  | Notes |  | £m       |  | £m       |  | £m     
|                                                                 
|Net cash flow used in operating
    activities                    |  |       |  |          |  |          |  |        
|Profit/(loss) for the year                                        |  |       |  | 68       |  | 420      |  | (54)   
|Adjustments for:                                                  |  |       |  |          |  |          |  |        
|Non cash items included in net
    profit                         |  |       |  | 1,125    |  | 273      |  | (147)  
|Change in operating assets                                        |  |       |  | (10,682) |  | (11,830) |  | 404    
|Change in operating liabilities                                   |  |       |  | (2,341)  |  | 3,934    |  | (4,597)
|Income taxes paid                                                 |  |       |  | (60)     |  | (132)    |  | (12)   
|Effects of exchange rate differences                              |  |       |  | (1,196)  |  | 80       |  | (633)  
|                                                                 
|Net cash flow used in operating
    activities                    |  | 45    |  | (13,086) |  | (7,255)  |  | (5,039)
|                                                                 
|Cash flows from/(used in)
    investing activities                |  |       |  |          |  |          |  |        
|Dividends received from associates                                |  |       |  | 3        |  | 3        |  | 20     
|Investment in associates                                          |  |       |  | (1)      |  | (5)      |  |       
|Disposal of subsidiaries, net of
    cash disposed                |  | 45    |  | 244      |  | 845      |  | 3,180  
|Purchase of tangible and intangible
    fixed assets              |  |       |  | (230)    |  | (329)    |  | (155)  
|Proceeds from sale of tangible and
    intangible fixed assets    |  |       |  | 5        |  | 190      |  | 240    
|Proceeds from sale of investment
    properties                   |  |       |  |         |  | 1,332    |  | 72     
|Purchase of non-dealing securities                                |  |       |  | (9)      |  | (2)      |  | (2,237)
|Proceeds from sale and redemption
    of non-dealing securities   |  |       |  |         |  |         |  | 3,031  
|                                                                 
|Net cash flow from investing
    activities                       |  |       |  | 12       |  | 2,034    |  | 4,151  
|                                                                 
|Cash flows from/(used in)
    financing activities                |  |       |  |          |  |          |  |        
|Issue of ordinary share capital                                   |  |       |  |         |  |         |  | 13     
|Issue of loan capital                                             |  |       |  | 10,778   |  | 4,351    |  | 3,368  
|Repayment of loan capital                                         |  |       |  | (8,813)  |  | (2,925)  |  | (4,181)
|Dividends paid                                                    |  |       |  | (207)    |  |         |  | (697)  
|                                                                 
|Net cash flows (used in)/from
    financing activities            |  |       |  | 1,758    |  | 1,426    |  | (1,497)
|                                                                 
|Net decrease in cash and cash
    equivalents                     |  |       |  | (11,316) |  | (3,795)  |  | (2,385)
|                                                                 
|Cash and cash equivalents at
    beginning of the year            |  |       |  | 8,241    |  | 11,259   |  | 14,089 
|Effects of exchange rate changes on
    cash and cash equivalents |  |       |  | (772)    |  | 777      |  | (445)  
|                                                                 
|Cash and cash equivalents at the
    end of the year              |  |       |  | (3,847)  |  | 8,241    |  | 11,259 
|                                                                 



70



---



##### 

Financial Statements

Company Balance Sheet

As at 31 December 2006 and 2005

|                                              |  |       |  |         |  |        
|--------------------------------------------- |  | ----- |  | ------- |  | -------
|                                              |  |       |  | 2006    |  | 2005   
|                                              |  | Notes |  | £m      |  | £m     
|                                             
|Assets                                        |  |       |  |         |  |        
|Cash and balances at central banks            |  | 13    |  | 888     |  | 370    
|Derivative financial instruments              |  | 15    |  | 646     |  | 1,227  
|Financial assets designated at fair
    value |  | 16    |  | 66      |  | 790    
|Loans and advances to banks                   |  | 17    |  | 41,711  |  | 33,009 
|Loans and advances to customers               |  | 18    |  | 103,249 |  | 95,230 
|Available for sale securities                 |  | 20    |  | 12      |  | 272    
|Investment in associated
    undertakings     |  | 22    |  | 25      |  | 24     
|Investment in subsidiary
    undertakings     |  | 21    |  | 4,926   |  | 8,690  
|Property, plant and equipment                 |  | 25    |  | 395     |  | 298    
|Current tax asset                             |  |       |  | 192     |  | 235    
|Deferred tax assets                           |  | 28    |  | 747     |  | 702    
|Other assets                                  |  | 29    |  | 744     |  | 553    
|                                             
|Total assets                                  |  |       |  | 153,601 |  | 141,400
|                                             
|                                             
|Liabilities                                   |  |       |  |         |  |        
|Deposits by banks                             |  | 30    |  | 61,123  |  | 48,267 
|Deposits by customers                         |  | 31    |  | 80,104  |  | 79,288 
|Derivative financial instruments              |  | 15    |  | 681     |  | 623    
|Debt securities in issue                      |  | 34    |  | 4       |  | 4      
|Other borrowed funds                          |  | 35    |  | 1,082   |  | 1,452  
|Subordinated liabilities                      |  | 36    |  | 5,563   |  | 6,477  
|Macro hedge of interest rate risk             |  |       |  | 6       |  | 13     
|Other liabilities                             |  | 38    |  | 1,027   |  | 814    
|Provisions                                    |  | 40    |  | 157     |  | 202    
|Current tax liabilities                       |  |       |  | 122     |  | 112    
|Retirement benefit obligations                |  | 41    |  | 1,033   |  | 1,240  
|                                             
|Total liabilities                             |  |       |  | 150,902 |  | 138,492
|                                             
|                                             
|Equity                                        |  |       |  |         |  |        
|Share capital                                 |  | 43    |  | 148     |  | 148    
|Share premium account                         |  | 43    |  | 1,857   |  | 1,857  
|Retained earnings                             |  | 44    |  | 694     |  | 903    
|                                             
|Total shareholders
    equity                 |  |       |  | 2,699   |  | 2,908  
|                                             
|Total liabilities and
    equity              |  |       |  | 153,601 |  | 141,400
|                                             












71



---



##### 

Financial Statements

Company Statement of Recognised Income and Expense

For the years ended 31 December 2006, 2005 and 2004

|                                                              |  |       |  |       |  |      
|------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                              |  | 2006  |  | 2005  |  | 2004 
|                                                              |  | £m    |  | £m    |  | £m   
|                                                             
|Actuarial gains/(losses) on defined
    benefit pension plans |  | 180   |  | (152) |  | (49) 
|Tax on items taken directly to
    equity                     |  | (54)  |  | 46    |  | 15   
|                                                             
|Net gain/(loss) recognised
    directly in equity             |  | 126   |  | (106) |  | (34) 
|Profit/(loss) for the year                                    |  | (128) |  | 691   |  | (284)
|                                                             
|Total recognised income and
    expense for the year          |  | (2)   |  | 585   |  | (318)
|Effect of changes in accounting
    policy                    |  |       |  |       |  |      
|IFRS transition adjustments at
    1 January 2005:            |  |       |  |       |  |      
|Retained earnings                                             |  |      |  | (332) |  |     
|                                                             
|                                                              |  | (2)   |  | 253   |  | (318)
|                                                             
|Attributable to:                                              |  |       |  |       |  |      
|Equity holders of the parent                                  |  | (2)   |  | 253   |  | (318)
|                                                             

Company Cash Flow Statement




|                                                                |  |       |  |          |  |          |  |         
|--------------------------------------------------------------- |  | ----- |  | -------- |  | -------- |  | --------
|                                                                |  |       |  | 2006     |  | 2005     |  | 2004    
|                                                                |  | Notes |  | £m       |  | £m       |  | £m      
|                                                               
|Net cash flow from/(used in)
    operating activities           |  |       |  |          |  |          |  |         
|Profit/(loss) for the year                                      |  |       |  | (128)    |  | 691      |  | (284)   
|Adjustments for:                                                |  |       |  |          |  |          |  |         
|Non cash items included in net
    profit                       |  |       |  | 251      |  | (108)    |  | (172)   
|Change in operating assets                                      |  |       |  | (19,604) |  | (7,715)  |  | (4,388) 
|Change in operating liabilities                                 |  |       |  | 336      |  | 1,315    |  | 9,399   
|Income taxes (paid)/received                                    |  |       |  | 56       |  | (8)      |  | 2       
|Effects of exchange rate differences                            |  |       |  | (108)    |  | 122      |  | (164)   
|                                                               
|Net cash flow from/(used in)
    operating activities           |  | 45    |  | (19,197) |  | (5,703)  |  | 4,393   
|                                                               
|Cash flows from/(used) in
    investing activities              |  |       |  |          |  |          |  |         
|Acquisition of subsidiaries, net of
    cash acquired           |  |       |  | (54)     |  |         |  |        
|Investment in associates                                        |  |       |  | (1)      |  | (5)      |  |        
|Disposal of subsidiaries, net of
    cash disposed              |  |       |  | 3,751    |  |         |  | 875     
|Pre-acquisition dividends                                       |  |       |  | 197      |  |         |  |        
|Purchase of tangible and intangible
    fixed assets            |  |       |  | (179)    |  | (185)    |  | (83)    
|Proceeds from sale of tangible and
    intangible fixed assets  |  |       |  | 3        |  | 56       |  | 52      
|Purchase of non-dealing securities                              |  |       |  | (9)      |  | (3)      |  |        
|Proceeds from sale and redemption
    of non-dealing securities |  |       |  | 269      |  | 178      |  | 152     
|                                                               
|Net cash flow from investing
    activities                     |  |       |  | 3,977    |  | 41       |  | 996     
|                                                               
|Cash flows from/(used in)
    financing activities              |  |       |  |          |  |          |  |         
|Issue of ordinary share capital                                 |  |       |  |         |  |         |  | 8       
|Issue of preference share capital                               |  |       |  |         |  |         |  | 2       
|Issue of loan capital                                           |  |       |  |         |  | 554      |  |        
|Repayment of loan capital                                       |  |       |  | (1,032)  |  | (458)    |  | (872)   
|Dividends paid                                                  |  |       |  | (207)    |  |         |  | (699)   
|                                                               
|Net cash flows from/(used in)
    financing activities          |  |       |  | (1,239)  |  | 96       |  | (1,561) 
|                                                               
|Net increase/(decrease) in cash
    and cash equivalents        |  |       |  | (16,459) |  | (5,566)  |  | 3,828   
|                                                               
|Cash and cash equivalents at
    beginning of the year          |  |       |  | (15,084) |  | (9,518)  |  | (13,346)
|                                                               
|Cash and cash equivalents at the
    end of the year            |  |       |  | (31,543) |  | (15,084) |  | (9,518) 
|                                                               



72



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##### 

Financial Statements





Accounting Policies

International Financial Reporting Standards

The Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards
(IFRS) as approved by the International Accounting
Standards Board (IASB), interpretations issued by
the International Financial Reporting Interpretations Committee
of the IASB that, under European Regulations, are effective or
available for early adoption at the Groups first reporting
date under IFRS. The Group, in addition to complying with its
legal obligation to comply with IFRS as adopted for use in the
European Union, has also complied with IFRS as issued by the
IASB. The date of transition to IFRS for the Group and the date
of its opening IFRS balance sheet was 1 January 2004. On
initial adoption of IFRS, the Group applied the following
exemptions from the requirements of IFRS and from their
retrospective application as permitted by IFRS 1
First-time Adoption of International Financial Reporting
Standards (IFRS 1):

a)
    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.b)
    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.c)
    The Group decided to early adopt IFRS 7 Financial
    Instruments: Disclosure for the year ended
    31 December 2005 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 38 to 54 which form part of these
    Financial Statements.d)
    The Group has adopted IFRS 5 Non-current assets held
    for sale and Discontinued Operations prospectively from
    1 January 2005.Recent Developments

In 2006, the Group adopted the following revised IFRS:

a)
    The amendments to IAS 21 The Effect of Changes in
    Foreign Exchange Rates relating to Net Investment in a
    Foreign Operation. The Groups accounting policy for
    foreign currency translation can be found on page 74.b)
    The amendments to IAS 39 Financial Instruments:
    Recognition and Measurement and IFRS 4
    Insurance Contracts relating to Financial Guarantee
    Contracts. The Groups accounting policy can be found on
    page 82.The adoption of these amendments did not have a material impact
on the Groups profit or loss for the year or financial
position at the
year-end.

Future Developments

The Group has not yet adopted the following new or revised IFRS
or Interpretations, which have been issued but which are not yet
applicable to the Group:

a)
    IAS 1 Presentation of Financial
    Statements  On 18 August 2005, the IASB
    issued an amendment to IAS 1 which requires certain
    disclosures to be made regarding the entitys objectives,
    policies and processes for managing capital. Abbey does not
    expect the adoption of the amendment to IAS 1 to have a
    material impact on its Financial Statements. The amendment to
    IAS 1 is effective for periods beginning on or after
    1 January 2007.b)
    IFRS 8 Operating Segments  On
    30 November 2006, the IASB issued IFRS 8 which
    requires segmental analysis reported by an entity to be based on
    information used by management. The Group currently discloses
    this information in Note 1c on pages 89 to 91.
    IFRS 8 is effective for periods beginning on or after
    1 January 2009.c)
    IFRIC 8 Scope of IFRS 2  On
    12 January 2006, IFRIC issued Interpretation 8.
    IFRIC 8 gives guidance to entities that have share-based
    transactions that are settled by the receipt or acquisition of
    goods or services. IFRIC 8 requires that measurement of
    identifiable goods or services that are part of a share-based
    payment should be measured at the fair value of those goods or
    services in accordance with IFRS 2. Where goods or services
    are unidentifiable, measurement should be the difference between
    the fair value of the share-based payment and fair value of any
    identifiable goods or services. Abbey does not expect the
    adoption of IFRIC 8 to have a material impact on the
    Groups profit or loss or financial position. IFRIC 8
    is effective for periods beginning on or after 1 May 2006.d)
    IFRIC 9 Reassessment of Embedded
    Derivatives  On 1 March 2006, IFRIC issued
    Interpretation 9 which gives guidance on whether an entity
    should reassess whether an embedded derivative needs to be
    separated from the host contract after the initial hybrid is
    recognised. IFRIC 9 determines that reassessment is
    prohibited, unless there is a change in the terms of the
    contract that significantly modifies the cash flows that
    otherwise would be required under the contract, in which case
    reassessment is required. Abbey does not expect the adoption of
    IFRIC 9 to have a material impact on the Groups
    profit or loss or financial position. IFRIC 9 is effective for
    periods beginning on or after 1 June 2006.e)
    IFRIC 10 Interim Financial Reporting and
    Impairment  On 13 July 2006 IFRIC issued
    IFRIC 10 which requires that an entity recognising an
    impairment loss in an interim period should not reverse that
    loss if it would have been avoided on measuring the impairment
    in a future period. Abbey does not expect the adoption of IFRIC
    10 to have a material impact on the Groups profit or loss
    or financial position. IFRIC 10 is effective for periods
    beginning on or after 1 November 2006.f)
    IFRIC 11 IFRS 2  Group and Treasury Share
    Transactions  On 30 November 2006 IFRIC
    issued IFRIC 11 which requires that treasury share
    transactions are treated as equity- settled, and share-based
    payments involving equity instruments of the parent should be
    treated as cash-settled. This is consistent with the
    Groups current practice therefore Abbey does not expect
    the adoption of IFRIC 11 to have a material impact on the
    Groups profit or loss or financial position. IFRIC 11
    is effective for periods beginning on or after 1 March 2007.

73



---



##### 

Financial Statements



Accounting Policiescontinued

Basis of preparation

The Financial Statements have been prepared under the historical
cost convention, as modified by the revaluation of available for
sale financial assets, financial assets and financial
liabilities held at fair value through profit or loss and all
derivative contracts.

Consolidation

a) Subsidiaries

Subsidiaries, which are those companies and other entities
(including Special Purpose Entities) over which the Group,
directly or indirectly, has power to govern the financial and
operating policies, are consolidated. The existence and effect
of potential voting rights that are presently exercisable or
presently convertible are considered when assessing whether the
Group controls another entity. The Company recognises
investments in subsidiaries at cost less impairment.

Subsidiaries are consolidated from the date on which control is
transferred to the Group and are no longer consolidated from the
date that control ceases. The purchase method of accounting is
used to account for the acquisition of subsidiaries. The cost of
an acquisition is measured at the fair value of the assets given
up, shares issued or liabilities undertaken at the date of
acquisition, plus directly attributable acquisition costs. The
excess of the cost of acquisition over the fair value of the
tangible and intangible net assets of the subsidiary acquired is
recorded as goodwill. Intercompany transactions, balances and
unrealised gains on transactions between group companies are
eliminated; unrealised losses are also eliminated unless the
cost cannot be recovered.

The accounting reference date of the Company and its subsidiary
undertakings is 31 December, with the exception of those
leasing, investment, insurance and funding companies which,
because of commercial considerations, have various accounting
reference dates. The Financial Statements of these subsidiaries
have been consolidated on the basis of interim Financial
Statements for the period to 31 December.

b) Associates

Investments in associates are accounted for by the equity method
of accounting and are initially recognised at cost. Under this
method, the Groups share of the post-acquisition profits
or losses of associates is recognised in the income statement,
and its share of post-acquisition movements in reserves is
recognised in reserves. The cumulative post-acquisition
movements are adjusted against the cost of the investment. The
Company recognises investments in associates at cost less
impairment.

Associates are entities in which the Group has between 20% and
50% of the voting rights, or over which the Group has
significant influence, but which it does not control. The
existence and effect of potential voting rights that are
presently exercisable or presently convertible are considered
when assessing whether the Group has significant influence over
another entity.

Unrealised gains on transactions between the Group and its
associates are eliminated to the extent of the Groups
interest in the associates; unrealised losses are also
eliminated unless the transaction provides evidence of an
impairment of the asset transferred. The Groups investment
in associates includes goodwill on acquisition. When the
Groups share of losses in an associate equals or exceeds
its interest in the associate the Group does not recognise
further losses unless the Group has incurred obligations or made
payments on behalf of the associates.

Foreign currency translation

Items included in the Financial Statements of each entity of the
Group are measured using the currency that best reflects the
economic substance of the underlying events and circumstances
relevant to that entity (the functional currency).
The Consolidated Financial Statements are presented in Pounds
Sterling, which is the functional currency of the parent.

Income statements and cash flows of foreign entities are
translated into the Groups reporting currency at average
exchange rates for the year and their balance sheets are
translated at the exchange rates ruling on 31 December. Exchange
differences arising from the translation of the net investment
in foreign entities are taken to shareholders equity. When
a foreign entity is sold, such exchange differences are
recognised in the income statement as part of the gain or loss
on sale.

Foreign currency transactions are translated into the functional
currency at the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from
the settlement of such transactions and from the translation of
monetary assets and liabilities denominated in foreign
currencies are recognised in the income statement.

Revenue recognition

(a) Interest Income and Expense

Interest income on financial assets that are classified as loans
and receivables or available for sale, and interest expense on
financial liabilities other than those at fair value through
profit and loss is determined using the effective interest
method. The effective interest rate is the rate that discounts
the estimated future cash payments or receipts over the expected
life of the instrument or, when appropriate, a shorter period,
to the net carrying amount of the financial asset or financial
liability. When calculating the effective interest rate, the
future cash flows are estimated after considering all the
contractual terms of the instrument but not future credit
losses. The calculation includes all amounts paid or received by
the Group that are an integral part of the overall return,
direct incremental transaction costs related to the acquisition,
issue or disposal of the financial instrument and all other
premiums or discounts.

Interest income on assets classified as loans and receivables or
available for sale, interest expense on liabilities classified
at amortised cost and interest income and expense on hedging
derivatives are recognised in interest income and interest
expense in the income statement.

74



---



##### 

Financial Statements



Accounting Policiescontinued

(b) Fee and commissions income

Fees and commissions that are not an integral part of the
effective interest rate are recognised when the service has been
provided. For the asset management operations, fee and
commission income consists principally of investment management
fees, distribution fees from mutual funds, commission revenue
from the sale of mutual fund shares and transfer agent fees for
shareholder record keeping. Revenue from investment management
fees, distribution fees and transfer agent fees is recognised as
earned when the service has been provided.

Portfolio and other management advisory and service fees are
recognised based on the applicable service contracts. Asset
management fees related to investment funds are recognised
rateably over the period the service is provided. The same
principle is applied for wealth management, financial planning
and custody services that are continuously provided over an
extended period of time.

(c) Financial assets and liabilities held at fair value
through profit or loss

Financial assets and liabilities held for trading, and financial
assets and financial liabilities designated as fair value
through profit or loss are recorded at fair value. Changes in
fair value of trading assets and liabilities including trading
derivatives are recognised in the income statement as net
trading income together with dividends and interest receivable
and payable. Changes in fair value of assets and liabilities
designated as fair value through profit or loss are recognised
in other operating income together with dividends, interest
receivable and payable and fair value movements in derivatives
managed in conjunction with these assets and liabilities.
Changes in fair value of derivatives in a hedging relationship
are recognised in other operating income.

Pensions and other post retirement benefits

Group companies have various pension schemes. The schemes are
generally funded through payments to insurance companies or
trustee-administered funds as determined by periodic actuarial
calculations. A defined benefit plan is a pension plan that
defines an amount of pension benefit to be provided, usually as
a function of one or more factors such as age, years of service
or compensation. A defined contribution plan is a pension plan
under which the Group pays fixed contributions as they fall due
into a separate entity (a fund) and will have no legal or
constructive obligations to pay further contributions if the
fund does not hold sufficient assets to pay all employees
benefits relating to employee service in the current and prior
periods.

The liability recognised in respect of defined benefit pension
plans is the present value of the defined benefit obligation at
the balance sheet date, less the fair value of plan assets. The
defined benefit obligation is calculated annually by independent
actuaries using the projected unit credit method. Full actuarial
valuations of the Groups principal defined benefit schemes
are carried out every year. The present value of the defined
benefit obligation is determined by the estimated future cash
outflows using interest rates of high quality corporate bonds,
which have terms to maturity approximating the terms of the
related liability.

The Groups consolidated income statement includes the
current service cost of providing pension benefits, the expected
return on schemes assets net of expected administration
costs, and the interest cost on the schemes liabilities.
Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are taken directly to
reserves and recognised in the statement of recognised income
and expense. Past-service costs are charged immediately to the
income statement, unless the changes are conditional on the
employees remaining in service for a specified period of time,
known as the vesting period. In this case, the past-service
costs are amortised on a straight-line basis over the average
period until the benefits become vested.

For defined contribution plans, the Group pays contributions to
publicly or privately administered pension insurance plans on a
mandatory, contractual or voluntary basis. Once the
contributions have been paid, the Group has no further payment
obligations. The regular contributions constitute net periodic
costs for the year in which they are due and as such are
included in staff costs. Curtailment gains and losses on sold
businesses that meet the definition of discontinued operations
are included in operating expenses in profit or loss for the
year from discontinued operations.

Share-based payments

The Group engages in cash settled share-based payment
transactions in respect of services received from certain of its
employees. Shares of the Groups parent, Banco Santander
Central Hispano, S.A. are purchased in the open market to
satisfy share options as they vest. Prior to the acquisition of
Abbey by Banco Santander Central Hispano, S.A., share options
were satisfied by issue of new Abbey shares. These options were
accounted for as equity settled share-based payments. The fair
value of the services received is measured by reference to the
fair value of the shares or share options initially on the date
of the grant and then subsequently at each reporting date. The
cost of the employee services received in respect of the shares
or share options granted is recognised in the income statement
within administrative expenses, over the period that the
services are received, which is the vesting period. A liability
equal to the portion of the goods or services received is
recognised at the current fair value determined at each balance
sheet date for cash-settled, share-based payments. The fair
value of the options granted is determined using an option
pricing model, which takes into account the exercise price of
the option, the current share price, the risk free interest
rate, the expected volatility of the Banco Santander Central
Hispano, S.A. share price over the life of the option, the
dividend growth rate and other relevant factors. Except for
those that include terms related to market conditions, vesting
conditions included in the terms of the grant are not taken into
account in estimating fair value.

Non-market vesting conditions are taken into account by
adjusting the number of shares or share options included in the
measurement of the cost of employee service so that ultimately,
the amount recognised in the income statement reflects the
number of vested shares or share options.

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Accounting Policiescontinued

For equity settled share-based payments, where vesting
conditions are related to market conditions, the charges for the
services received are recognised regardless of whether or not
the market-related vesting conditions are met, provided that the
non-market vesting conditions are met.

Goodwill and other intangible assets

Goodwill represents the excess of the cost of an acquisition
over the fair value of the Groups share of the net
identifiable assets of the acquired subsidiary/associate at the
date of acquisition. Goodwill on the acquisition of subsidiaries
is included in intangible assets. Goodwill on
acquisitions of associates is included in investment in
associates. Goodwill is tested annually for impairment and
carried at cost less accumulated impairment losses. Gains and
losses on the disposal of an entity include the carrying amount
of goodwill relating to the entity sold.

Other intangible assets are recognised if they arise from
contracted or other legal rights or if they are capable of being
separated or divided from the Group and sold, transferred,
licensed, rented or exchanged. The value of such intangible
assets is amortised on a straight-line basis over the useful
economic life of the assets in question, which ranges from 12 to
20 years. Other intangible assets are reviewed annually for
indicators of impairment and tested for impairment where
indicators are present.

Property, plant and equipment

Property, plant and equipment includes owner-occupied
properties, office fixtures and equipment and computer software.
Property, plant and equipment are carried at cost less
accumulated depreciation and accumulated impairment losses.
Items of property, plant and equipment are reviewed for
indications of impairment at each reporting date. Gains and
losses on disposal of property, plant and equipment are
determined by reference to their carrying amount and are taken
into account in determining profit on continuing operations
before tax reported as other operating income. Repairs and
renewals are charged to the income statement when the
expenditure is incurred.

Software development costs are capitalised when they are
associated with identifiable and unique software products that
are expected to provide future economic benefits and the cost of
these products can be measured reliably. Internally developed
software meeting these criteria and externally purchased
software are classified in property, plant and equipment on the
balance sheet. Costs associated with maintaining software
programmes are expensed as incurred. Classes of property, plant
and equipment are depreciated on a straight-line basis over
their useful life as follows:

|                              |  |                       
|----------------------------- |  | ----------------------
|                             
|Owner-occupied properties     |  | Not exceeding 50 years
|Office fixtures and equipment |  | 3 to 10 years         
|Computer software             |  | 3 to 5 years          
|                             

Financial assets














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Accounting Policiescontinued

(c) Available for sale

Available for sale investments are non-derivative financial
investments that are designated as available for sale and are
not categorised into any of the other categories described. They
are initially recognised at fair value including direct and
incremental transaction costs. They are subsequently held at
fair value.

Gains and losses arising from changes in fair value are included
as a separate component of equity until sale when the cumulative
gain or loss is transferred to the income statement. Interest is
determined using the effective interest method. Income on
investments in equity shares and other similar interests is
recognised in the income statement as and when dividends are
declared and interest is accrued. Impairment losses and foreign
exchange translation differences on monetary items are
recognised in the income statement. The investments are
derecognised when the rights to receive cash flows have expired
or the Group has transferred substantially all the risks and
rewards of ownership.

(d) Held to maturity

Held to maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturity that an
entity has the positive intention and ability to hold to
maturity. Abbey does not hold any held to maturity financial
assets.

Regular way purchases of financial assets classified as loans
and receivables are recognised on settlement date; all other
regular way purchases are recognised on trade date. The assets
are derecognised when the rights to receive cash flows have
expired or the Group has transferred substantially all the risks
and rewards of ownership.

Offsetting financial assets and liabilities

Financial assets and liabilities including derivatives are
offset and the net amount reported in the balance sheet when
there is a legally enforceable right to set off the recognised
amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.

Sale and repurchase agreements (including stock lending and
borrowing)

Securities sold subject to a linked repurchase agreement
(repos) are retained in the Financial Statements as
trading assets and the counterparty liability is included in
amounts Deposits by banks or Deposits by
customers as appropriate. Securities purchased under
agreements to resell (reverse repos) are recorded as
Loans and advances to banks or Loans and
advances to customers as appropriate. The difference
between the sale and repurchase price is treated as trading
income in the income statement. Securities lent to
counterparties that are collateralised by cash are also retained
in the balance sheet. Securities borrowing and lending
transactions collateralised with other securities are not
recognised in the balance sheet.

Derivative financial instruments

Transactions are undertaken in derivative financial instruments
(derivatives), which include interest rate, cross
currency, equity, residential property and other index-related
swaps, forwards, caps, floors, swaptions, as well as credit
default and total return swaps, equity index contracts and
exchange traded interest rate futures and equity index options.
Derivatives are contracts or agreements whose value is derived
from one or more underlying indices or asset values inherent in
the contract or agreement, which require no or little initial
net investment and are settled at a future date.

Derivatives are initially recognised at fair value on the date
on which a derivative contract is entered into and are
subsequently remeasured at their fair value. Fair values are
obtained from quoted market prices in active markets, including
recent market transactions, and valuation techniques, including
discounted cash flow models and option pricing models as
appropriate. All derivatives are carried as assets when fair
value is positive and as liabilities when fair value is negative.

Certain derivatives embedded in other financial instruments,
such as the conversion option in a convertible bond, are treated
as separate derivatives when their economic characteristics and
risks are not closely related to those of the host contract and
the hybrid contract is not carried at fair value through profit
or loss. These embedded derivatives are measured at fair value
with changes in fair value recognised in the income statement.

Hedge accounting

The Group designates certain derivatives as hedging instruments
of the fair value of recognised assets or liabilities or firm
commitments (fair value hedge) provided certain criteria are met.

At the time a financial instrument is designated as a hedge, the
Group formally documents the relationship between the hedging
instrument(s) and hedged item(s). Documentation includes its
risk management objectives and its strategy in undertaking the
hedge transaction, together with the methods that will be used
to assess the effectiveness of the hedging relationship.
Accordingly, the Group formally assesses, both at the inception
of the hedge and on an ongoing basis, whether the hedging
derivatives have been and will be highly effective
in offsetting changes in the fair value of the hedged items. A
hedge is normally regarded as highly effective if, at inception
and throughout its life, the Group can expect, and actual
results indicate, that changes in the fair value of the hedged
items are effectively offset by changes in the fair value of the
hedging instrument, and actual results are within a range of 80%
to 125%. The Group discontinues hedge accounting when it is
determined that: a derivative is not, or has ceased to be,
highly effective as a hedge; when the derivative expires, or is
sold, terminated, or exercised; or when the hedged item matures
or is sold or repaid.

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Accounting Policiescontinued

The hedge adjustment is classified in the balance sheet in the
same category as the hedged item, unless it relates to a macro
hedging relationship where the hedge adjustment is recognised as
a macro hedge on the face of the balance sheet.

Changes in the fair value of the hedged risk and hedged item are
recognised in other operating income. Hedge ineffectiveness
represents the amount by which the changes in the fair value of
the hedging derivative differ from changes in the fair value of
the hedged item. Such gains and losses are recorded in current
period earnings in other operating income. Gains and losses on
components of a hedging derivative that are excluded from
assessing hedge effectiveness are included in net trading income.

Securitisation transactions

The Group has entered into certain arrangements where
undertakings have issued mortgage-backed securities or have
entered into funding arrangements with lenders in order to
finance specific loans and advances to customers. As the Group
has retained substantially all the risks and rewards, all such
financial instruments continue to be held on the Group balance
sheet, and a liability recognised for the proceeds of the
funding transaction.

Impairment of financial assets

At each balance sheet date the Group assesses whether, as a
result of one or more events occurring after initial
recognition, there is objective evidence that a financial asset
or group of financial assets classified as available for sale or
loans and receivables have become impaired. Evidence of
impairment may include indications that the borrower or group of
borrowers have defaulted, are experiencing significant financial
difficulty, or the debt has been restructured to reduce the
burden to the borrower.

(a) Financial assets carried at amortised cost

Impairment losses are assessed individually for the financial
assets that are individually significant and individually or
collectively for assets that are not individually significant.
Balance sheet provisions are maintained at the level that
management deems sufficient to absorb probable incurred losses
in Abbeys loan portfolio from homogeneous portfolios of
assets and individually identified loans.

A provision for observed losses is established for all past due
loans after a specified period of repayment default where it is
probable that some of the capital will not be repaid or
recovered through enforcement of any applicable security. 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 based on historic experience. These
determinations are supplemented by various formulaic
calculations and the application of management judgement.

For individually assessed assets, the Group measures the amount
of the loss as the difference between the carrying amount of the
asset or group of assets and the present value of the estimated
future cash flows from the asset or group of assets discounted
at the original effective interest rate of the asset.

In making collective assessment for impairment, financial assets
are assessed for each portfolio segmented by similar risk
characteristics. For each risk segment, future cash flows from
these portfolios are estimated through the use of historical
loss experience. The historical loss experience is adjusted for
current observable data, to reflect the effects of current
conditions not affecting the period of historical experience,
based on observable data. The loss is discounted at the
effective interest rate, except where portfolios meet the
criteria for short-term receivables. The unwind of the discount
over time is reported through interest receivable within the
income statement, with the provision reserves on the balance
sheet increasing.

Loans that are part of a homogeneous pool of similar loans are
placed on default status based on the number of months in
arrears, which is determined through the number of missed
payments or the number of months in collection. Loans that are
not part of a homogeneous pool of similar loans are analysed
based on the number of months in arrears on a case-by-case basis
and are placed on default status when the probability of default
is likely.

Generally, the length of time before an asset is placed on
default status for provisioning is when one payment is missed.
However, for assessing the level of non-performing asset
repayment default depends on the nature of the collateral that
secures the advances. On advances secured by residential or
commercial property, the default period is three months. For
advances secured by consumer goods such as cars or computers,
the default period is less than three months, the exact period
being dependent on the particular type of loan in this category.

On unsecured advances, such as personal term loans, the default
period is generally four missed payments (three months in
arrears). Exceptions to the general rule exist with respect to
revolving facilities, such as bank overdrafts, which are placed
on default upon a breach of the contractual terms governing the
applicable account, and on credit card accounts where the
default period is three months.

A provision for inherent losses is made for loan losses that
have been incurred but have not been separately identified at
the balance sheet date because the loan is not yet past due. An
example of this situation is where a borrower is experiencing
financial difficulties at the reporting date, e.g. due to loss
of employment, although the borrower has not yet missed a
payment. In these circumstances, an impairment loss had been
incurred at the reporting date. The provision for inherent
losses is determined on a portfolio basis based on
managements best estimate of the current position based on
past experience adjusted by current trends. These statistical
techniques involve the following (i) estimation of a period
of time called the emergence period, which is discussed below,
(ii) assessment of the number of accounts that go into
arrears over the emergence period, and (iii) application of
the provision methodology outlined for observed provisions to
these accounts identified as impaired as a result of this
exercise. Accounts that suffered credit deterioration after the
reporting date are accordingly excluded from the statistical
analysis.

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Accounting Policiescontinued

The emergence period

This is the period which Abbeys statistical analysis shows
to be the period in which losses, that had been incurred but
have not been separately identified at the balance sheet date,
become evident as the loans turn into past due. Based on
Abbeys statistical analysis at 31 December 2006, the
emergence period was three months for unsecured lending and
twelve months for secured lending. The longer emergence period
for secured lending reflects the fact that a customer is more
likely to default on unsecured debt before defaulting on secured
lending. The factors considered in determining the length of the
emergence period for unsecured lending are recent changes in
customers debit/credit payment profiles and credit scores.
The factors considered for secured lending are the frequency and
duration of exceptions from adherence to the contractual payment
schedule.

Once a financial asset or a group of financial assets has been
written down as a result of an impairment loss, subsequent
interest income continues to be recognised on an effective
interest rate basis, though on the asset value after provisions
have been deducted.

Impairment losses are recognised in the income statement and the
carrying amount of the financial asset or group of financial
assets is reduced by establishing an allowance for impairment
losses. If in a subsequent period the amount of the impairment
loss reduces and the reduction can be ascribed to an event after
the impairment was recognised, the previously recognised loss is
reversed by adjusting the allowance.

A write-off is made when all collection procedures have been
completed and is charged against previously established
provisions for impairment.

(b) Available for sale financial assets

The Group assesses at each balance sheet date whether there is
objective evidence that a financial asset or a group of
financial assets is impaired. In assessing whether assets are
impaired, a significant or prolonged decline in the fair value
of the security below its cost is considered evidence. The
cumulative loss is measured as the difference between the
acquisition cost and the current fair value, less any impairment
loss previously reported in the income statement and is removed
from equity and recognised in the income statement.

If in a subsequent period, the fair value of a debt instrument
classified as available for sale increases and the increase is
due to an event occurring after the impairment loss was
recognised in the income statement (with objective evidence to
support this), the impairment loss is reversed through the
income statement.

Impairment of non-financial assets

At each balance sheet date, or more frequently when events or
changes in circumstances dictate, property plant and equipment
and intangible assets are assessed for indicators of impairment.
If indications are present, these assets are subject to an
impairment review. Goodwill is subject to an impairment review
as at the balance sheet date each year. The impairment review
comprises a comparison of the carrying amount of the asset with
its recoverable amount: the higher of the assets or the
cash-generating units fair value less costs to sell and
its value in use. Net selling price is calculated by reference
to the amount at which the asset could be disposed of in a
binding sale agreement in an arms length transaction
evidenced by an active market or recent transactions for similar
assets. Value in use is calculated by discounting the expected
future cash flows obtainable as a result of the assets
continued use, including those resulting from its ultimate
disposal, at a market based discount rate on a pre tax basis.

The carrying values of fixed assets and goodwill are written
down by the amount of any impairment and the loss is recognised
in the income statement in the period in which it occurs. A
previously recognised impairment loss relating to a fixed asset
may be reversed in part or in full when a change in
circumstances leads to a change in the estimates used to
determine the fixed assets recoverable amount. The
carrying amount of the fixed asset will only be increased up to
the amount that would have been had the original impairment not
been recognised. Impairment losses on goodwill are not reversed.
For conducting impairment reviews, cash generating units are the
lowest level at which management monitors the return on
investment on assets.

Investment property

Property held for long-term rental yields and capital
appreciation within the long-term assurance funds is classified
as investment property. Investment property is stated at fair
value, which is determined annually as the open market value.
These valuations are reviewed annually by an independent
valuation expert. Changes in fair values are recorded in the
income statement.

Leases

The Group as lessor  Operating lease assets are
recorded at deemed cost and depreciated over the life of the
asset after taking into account anticipated residual values.
Operating lease rental income and depreciation is recognised on
a straight-line basis over the life of the asset.

The Group as lessee  The Group enters into operating
leases for the rental of equipment or real estate. Payments made
under such leases are charged to the income statement on a
straight-line basis over the period of the lease. When an
operating lease is terminated before the lease period has
expired, any payment to be made to the lessor by way of penalty
is recognised as an expense in the period in which termination
takes place.

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Accounting Policiescontinued

If the lease agreement transfers the risk and rewards of the
asset, the lease is recorded as a finance lease and the related
asset is capitalised. At inception, the asset is recorded at the
lower of the present value of the minimum lease payments or fair
value and depreciated over the estimated useful life. The
corresponding rental obligations are recorded as borrowings. The
aggregate benefit of incentives, if any, is recognised as a
reduction of rental expense over the lease term on a
straight-line basis.

Insurance

During 2006, the Company sold its entire life insurance
business, as described in Note 12. The following insurance
accounting policies related to those businesses.

(a) Insurance and investment contract classification

The Group enters into insurance contracts and investment
contracts.

Insurance contracts are those contracts which transfer
significant insurance risk. Investment contracts are those
contracts which carry no significant insurance risk.

A number of insurance and investment contracts contain a
Discretionary Participation Feature (DPF) which
entitles the holder to receive, as a supplement to guaranteed
benefits, additional benefits or bonuses that are likely to be a
significant portion of the total contractual benefits and whose
amount or timing is contractually at the discretion of the Group
and based on the performance of specified assets. Contracts
containing a discretionary participation feature are also
referred to as participating or with-profits contracts.

For insurance and participating investment contracts, the group
continues to use the embedded value basis of accounting used by
banking groups, modified, as necessary to comply with the
requirements of IFRS (IFRS embedded value).
Investment contracts that are non-participating are accounted
for as financial instruments.

(b) Insurance and participating investment contracts

The majority of the life insurance contracts issued by the Group
are long-term life insurance contracts. The Group also issues
life assurance contracts to protect customers from the
consequence of events (such as death, critical illness or
disability) that would affect the ability of the customer or
their dependants to maintain their current level of income.
Guaranteed benefits paid on occurrence of the specified
insurance event are either fixed or linked to the extent of the
economic loss suffered by the policyholder.

Premiums received in respect of life insurance and participating
investment contracts are recognised as revenue when due and
shown before deduction of commission. Reassurance premiums are
charged when they become payable.

Death claims are recognised on receipt of notifications.
Maturities and annuity payments are recorded when contractually
due. Surrenders are recorded on the earlier of the date paid or
date the policy benefit (or part thereof) ceases to be included
within the insurance and participating contract liabilities.
Claims on participating business include bonuses payable. Claims
payable include costs of settlement. Reinsurance recoveries are
credited to match the relevant gross amounts.

Insurance and participating investment contract liabilities

Value of in-force life insurance business

The Group recognises as an asset the value of in-force life
insurance business in respect of life insurance contracts and
participating investment contracts. The asset, which represents
the present value of future profits (PVFP) expected
to arise from these contracts, is determined by projecting the
future surpluses and other net cash flows arising from life
insurance contract and participating investment contract
business written by the balance sheet date. The PVFP is
determined using appropriate economic and actuarial assumptions
excluding future investment margins, and is discounted at a rate
which reflects the Groups overall risk premium
attributable to this business. The asset in the consolidated
balance sheet and movements in the asset in the income statement
are determined and shown on a gross of tax basis.

Liabilities are calculated as follows:

Liabilities  non-participating insurance contracts
which are not unit linked:

A liability for contractual benefits that are expected to be
incurred in the future is recorded when the premium is
recognised. The liabilities of the Groups non-profit life
funds are calculated by estimating the future cash flows over
the duration of the in-force policies and discounting them back
to the valuation date allowing for probabilities of insured
event occurrence. The liability will vary with movements in
interest rates and with the cost of life insurance and annuity
benefits which reflect changes in mortality rates. Assumptions
are made in respect of all material factors affecting future
cash flows, including future interest rates, mortality and
costs. For conventional life and pensions business, the gross
premium valuation method has been used.

Liabilities  non-participating insurance contracts
which are unit linked:

Allocated premiums in respect of unit linked contacts that are
either life insurance contracts or participating investment
contracts are recognised as liabilities. These liabilities are
increased or reduced by the change in the relevant unit prices
over the period and include any amounts necessary to compensate
the Group for services to be performed over future periods. They
are reduced by policy administration fees, mortality charges,
surrender charges and any withdrawals. The mortality charges
deducted in each period from the policyholders as a group are
considered adequate to cover the total death benefit claims that
are expected to occur over the term of the contracts.

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Financial Statements



Accounting Policiescontinued

Liabilities  participating insurance and investment
contracts:

Liabilities of the Groups with-profits fund, including
guarantees and options embedded within products written by that
fund, are stated at their realistic values in accordance with
the Financial Services Authoritys Realistic Capital
regime. The measurement of insurance liabilities is calculated
using stochastic methods and therefore reflects both the
intrinsic and time value of guarantees and options embedded
within products. Economic assumptions are calibrated to observed
current market prices.

Unallocated surplus liability

The Group has an obligation to pay policyholders a specified
portion of all interest and realisable gains and losses arising
from the assets backing participating contracts. Any amounts not
yet determined as being due to policyholders are recognised as a
liability, which is shown separately from other liabilities.

Liability adequacy test

At each balance sheet date liability adequacy tests are
performed to ensure the adequacy of insurance and participating
investment contract liabilities. In performing these tests
current best estimates of future contractual cash flows and
claims handling and administration expenses, as well as
investment income from the assets backing such liabilities are
used. Any deficiency is immediately charged to the income
statement to establish an appropriate provision against these
potential losses.

Embedded derivatives

Embedded derivative features contained within insurance
contracts are accounted for at fair value and unrealised gains
and losses arising on the embedded derivatives are reported in
income. Where the risks and characteristics of embedded
derivatives are not closely related to those of the host
contract and the host contract is not carried at fair value the
embedded derivatives are accounted for separately.

Reinsurance

The Group cedes reinsurance in the normal course of business.
Amounts recoverable from reinsurers are estimated in a manner
consistent with the amounts associated with the reinsured
policies and in accordance with the reinsurance contract.
Premiums ceded and benefits reimbursed are presented on the
consolidated balance sheet on a gross basis.

The Group regularly assesses its long-term reinsurance assets
for impairment. A reinsurance asset is impaired if there is
objective evidence that the Group may not receive all amounts
due to it under the terms of the contract and that event has a
reliably measurable impact on the amounts that the Group will
receive from the reinsurer.

Insurance contracts and business combinations

For insurance contracts acquired in business combinations and
portfolio transfers, intangible assets are recognised and are
the capitalised value of the future profits that are expected to
emerge for the benefit of the shareholders from the acquired
business or portfolio transfer. The capitalised value is the
actuarially determined fair value of the business calculated
using a risk adjusted discount rate and the appropriate
assumptions for mortality, morbidity, persistency, expenses and
investment return.

Receivables and payables related to insurance and participating
investment contracts

Receivables and payables are recognised when due. These include
amounts due to and from agents, brokers and insurance contract
holders.

(c) Non-participating investment contracts

All of the Groups non-participating investment contracts
are unit linked. These contracts are accounted for as financial
liabilities whose value is contractually linked to the fair
values of financial assets within the Groups unitised
investment funds. The value of the unit linked financial
liabilities is determined using current unit prices multiplied
by the number of units attributed to the contract holders at the
balance sheet date. Their value is never less than the amount
payable on surrender, discounted for the required notice period
where applicable.

Premiums and claims

Premiums which are invested on behalf of non-participating
investment contract holders and related claims are excluded from
the income statement, with all movements in the contract holder
liability and related assets recorded in the balance sheet.

Fee income

Revenue in relation to investment management and other related
services provided in respect on non-participating investment
contracts is recognised in the accounting period in which the
services are rendered. These services comprise an indeterminate
number of acts over the life of individual contracts. For
practical purposes, the Group recognises these fees on a
straight-line basis over the estimated life of the contract.

Deferred acquisition costs

Directly incremental commissions that vary with and are related
to either securing new or renewing existing non-participating
investment contracts are capitalised as an intangible asset.
This asset is subsequently amortised over the period of the
provision of investment management services and is reviewed for
impairment in circumstances where its carrying amount may not be
recoverable. If the asset is greater than the recoverable amount
it is written down immediately. All other costs are recognised
as expenses when incurred.

81



---



##### 

Financial Statements



Accounting Policiescontinued

Income taxes, including deferred income taxes

The tax expense represents the sum of the income tax currently
payable and deferred income tax.

Income tax payable on profits, based on the applicable tax law
in each jurisdiction, is recognised as an expense in the period
in which profits arise. Taxable profit differs from net profit
as reported in the income statement because it excludes items of
income or expense that are taxable or deductible in other years
and it further excludes items that are never taxable or
deductible. The liability for current tax is calculated using
tax rates that have been enacted or substantively enacted by the
balance sheet date. The tax effects of income tax losses
available to carry forward are recognised as an asset when it is
probable that future taxable profits will be available against
which tax losses can be utilised.

Deferred income tax is provided in full, using the liability
method, on temporary differences arising between the tax bases
of assets and liabilities and their carrying amounts in the
Financial Statements. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred
tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and
liabilities are not recognised if the temporary difference
arises from the initial recognition of other assets (other than
in a business combination) and liabilities in a transaction that
affects neither the tax profit nor the accounting profit.

Deferred tax is calculated at the tax rates that are expected to
apply in the period when the liability is settled or the asset
is realised. Deferred tax is charged or credited in the income
statement, except when it relates to items charged or credited
directly to equity, in which case the deferred tax is also dealt
with in equity.

Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries except where
the Group is able to control reversal of the temporary
difference and it is probable that it will not reverse.

The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profits will be
available to allow all or part of the asset to be recovered.

Deferred and current tax assets and liabilities are only offset
when they arise in the same tax reporting group and where there
is both the legal right and the intention to settle on a net
basis or to realise the asset and settle the liability
simultaneously.

Cash and cash equivalents

For the purposes of the cash flow statement, cash and cash
equivalents comprise balances with less than three months
maturity from the date of acquisition, including cash and
non-restricted balances with central banks, treasury bills and
other eligible bills, net loans and advances to banks, net
securities financing amounts and short-term investments in
securities.

Financial liabilities

Financial liabilities are initially recognised when the Group
becomes contractually bound to the transfer of economic benefits
in the future. Financial liabilities are classified as fair
value through profit or loss if they are either held for trading
or otherwise designated at fair value through profit or loss on
initial recognition. A financial liability is classified as held
for trading if it is a derivative or it is incurred principally
for the purpose of selling or being unwound in the near term, or
forms part of a portfolio of financial instruments that are
managed together and for which there is evidence of short-term
profit taking.

In certain circumstances financial liabilities other than those
that are held for trading are designated at fair value through
profit or loss where this results in more relevant information
because it significantly reduces a measurement inconsistency
that would otherwise arise from measuring assets and liabilities
or recognising the gains or losses on them on a different basis,
or where a financial liability contains one or more embedded
derivatives which are not closely related to the host contract.
These liabilities are initially recognised at fair value and
transactions costs are taken directly to the income statement.
Gains and losses arising from changes in fair value are included
directly in the income statement.

All other financial liabilities are initially recognised at fair
value net of transaction costs incurred. They are subsequently
stated at amortised cost and the redemption value recognised in
the income statement over the period of the liability using the
effective interest method.

Financial guarantee contracts

The Group accounts for guarantees that meet the definition of a
financial guarantee contract at fair value on initial
recognition. In subsequent periods, these guarantees are
measured at the higher of the initial fair value less cumulative
amortisation and the amount that would be recognised as a
provision under IAS 37 as described in the Accounting Policies
on page 78.

Borrowings

Borrowings are recognised initially at fair value, being the
proceeds (fair value of consideration received) net of
transaction costs incurred. Borrowings are subsequently stated
at amortised cost or fair value dependent on designation at
initial recognition.

Preference shares, which carry a contractual obligation to pay
mandatory minimum dividends, are classified as other financial
liabilities and are presented in other borrowed funds. The
dividends on these preference shares are recognised in the
income statement as interest expense on an amortised cost basis
using the effective interest method.

82



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##### 

Financial Statements



Accounting Policiescontinued

Share capital

Incremental external costs directly attributable to the issue of
new shares are deducted from equity net of any related income
taxes.

Provisions

Provisions are recognised for present obligations arising as
consequences of past events where it is more likely than not
that a transfer of economic benefits will be necessary to settle
the obligation, and it can be reliably estimated.

When a leasehold property ceases to be used in the business,
provision is made where the unavoidable costs of the future
obligations relating to the lease are expected to exceed
anticipated rental income. The net costs are discounted using
market rates of interest to reflect the long-term nature of the
cash flows.

Provision is made for the anticipated cost of restructuring,
including redundancy costs, when an obligation exists. An
obligation exists when the Group has a detailed formal plan for
restructuring a business, and has raised valid expectations in
those affected by the restructuring and has started to implement
the plan or announce its main features.

Contingent liabilities are possible obligations whose existence
will be confirmed only by certain future events or present
obligations where the transfer of economic benefit is uncertain
or cannot be reliably measured. Contingent liabilities are not
recognised but are disclosed unless they are remote.

Dividends

Dividends on ordinary shares are recognised in equity in the
period in which they are proposed.

Critical accounting policies and areas of significant
management judgement

The preparation of the Groups Consolidated Financial
Statements requires management to make estimates and judgements
that affect the reported amount of assets and liabilities at the
date of the Financial Statements and the reported amount of
income and expenses during the reporting period. Management
evaluates its estimates and judgements on an ongoing basis.
Management bases its estimates and judgements on historical
experience and on various other factors that are believed to be
reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
The following estimates and judgements are considered important
to the portrayal of the Groups financial condition.

(a) Provisions for loans and advances

The Group estimates provisions for loans and advances with the
objective of maintaining balance sheet provisions at the level
believed by management to be sufficient to absorb actual losses
(observed provisions) and inherent losses
(incurred but not yet observed provisions) in the
Groups loan portfolio from homogeneous portfolios of
assets and individually identified loans in connection with
loans and advances to banks and loans and advances to customers.
The calculation of provisions on impaired loans and advances is
based on the likelihood of the asset being written off (or
repossessed in the case of mortgage loans) and the estimated
loss on such a write-off. These assessments are made using
statistical techniques based on historic experience. These
determinations are supplemented by various formulaic
calculations and the application of management judgement.

The Group considers accounting estimates related to provisions
for loans and advances critical accounting estimates
because: (i) they are highly susceptible to change from
period to period as the assumptions about future default rates
and valuation of potential losses relating to impaired loans and
advances are based on recent performance experience, and
(ii) any significant difference between the Groups
estimated losses (as reflected in the provisions) and actual
losses will require the Group to take provisions which, if
significantly different, could have a material impact on its
future income statement and its balance sheet. The Groups
assumptions about estimated losses are based on past
performance, past customer behaviour, the credit quality of
recent underwritten business and general economic conditions,
which are not necessarily an indication of future losses.

Provisions for loans and advances, less amounts released and
recoveries of amounts written off in previous years, are charged
to the line item Impairment losses on loans and
advances in the income statement. The provisions are
deducted from the Loans and advances to banks and
the Loans and advances to customers line items on
the balance sheet. If the Group believes that additions to the
provisions for such credit losses are required, then the Group
records additional provisions for credit losses, which would be
treated as a charge in the line item Impairment losses on
loans and advances in the income statement.

The Consolidated Financial Statements for the year ended
31 December 2006 include a provision charge for loans and
advances in the Retail Banking segment for an amount equal to
£273m. This provision increased reflecting higher default
rates in the unsecured portfolios and increased reserving on the
secured portfolio as a result of the interest rate rises. In
calculating the provisions within the Retail Banking segment, a
range of outcomes was calculated based principally on
managements conclusions regarding the current economic
outlook relative to historic experience. Had management used
different assumptions regarding the current economic outlook, a
larger or smaller provision for loans and advances would have
resulted in the Retail Banking segment that could have had a
material impact on the Groups reported profit on
continuing operations before tax in 2006. Specifically, if
managements conclusions as to the current economic outlook
were different, but within the range of what management deemed
to be reasonably possible economic outlooks, the provision
charge for loans and advances in the Retail Banking segment
could have decreased in 2006 from an actual provision charge of
£273m (2005: £207m; 2004: £15m) by up to
£52m (2005: £32m; 2004: £15m), with a potential
corresponding increase in the Groups profit before tax on
continuing operations in 2006 of up to 12% (2005: 9%; 2004:
94%), or increased by up to £6m (2005: £45m; 2004:
£87m), with a potential corresponding decrease in the
Groups profit before tax on continuing operations in 2006
of up to 1% (2005: 12%; 2004: 544%).

83



---



##### 

Financial Statements



Accounting Policiescontinued

The actual provision charge of £273m (2005: £207m;
2004: £15m) in 2006 was based on what management estimated
to be the most probable economic outlook within the range of
reasonably possible assumptions.

(b) Valuation of financial instruments

Financial instruments that are classified at fair value through
profit and loss (including those held for trading purposes) or
available for sale, and all derivatives, are stated at fair
value. The fair value of such financial instruments is the
estimated amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a
forced or liquidation sale. If a quoted market price is
available for an instrument, the fair value is calculated based
on the market price. When valuation parameters are not
observable in the market or cannot be derived from observable
market prices, as is the case with certain over-the-counter
derivatives, the fair value is derived through analysis of other
observable market data appropriate for each product and pricing
models which use a mathematical methodology based on accepted
financial theories. Depending on the product type and its
components, the fair value of over-the-counter derivatives is
modelled using one or a combination of pricing models that are
widely accepted in the financial services industry. Pricing
models take into account the contract terms of the securities as
well as market-based valuation parameters, such as interest
rates, volatility, exchange rates and the credit rating of the
counterparty. Where market-based valuation parameters are not
directly observable, management will make a judgement as to its
best estimate of that parameter in order to determine a
reasonable reflection of how the market would be expected to
price the instrument. In exercising this judgement, a variety of
tools are used including proxy observable data, historical data,
and extrapolation techniques. The best evidence of the fair
value of a financial instrument at initial recognition is the
transaction price unless the instrument is evidenced by
comparison with other observable current market transactions in
the same instrument or based on a valuation technique whose
variables include only data from observable markets. Any
difference between the transaction price and the value based on
a valuation technique is not recognised in profit or loss on
initial recognition. Subsequent gains or losses are only
recognised to the extent that it arises from a change in a
factor that market participants would consider in setting a
price.

The Group considers that the accounting estimate related to
valuation of trading securities and derivatives where quoted
market prices are not available is a critical accounting
estimate because: (i) it is highly susceptible to
change from period to period because it requires management to
make assumptions about interest rates, volatility, exchange
rates, the credit rating of the counterparty, valuation
adjustments and specific features of the transactions and
(ii) the impact that recognising a change in the valuations
would have on the assets reported on its balance sheet as well
as its net profit/(loss) could be material.

Changes in the valuation of trading securities and derivatives
where quoted market prices are not available are accounted for
in the line item Net trading income and Other
operating income in the income statement and the
Trading assets, Financial assets designated at
fair value, Trading liabilities,
Financial liabilities designated at fair value and
Derivative financial instruments line items in the
Groups balance sheet.

Had management used different assumptions regarding the interest
rates, volatility, exchange rates, the credit rating of the
counterparty, and valuation adjustments, a larger or smaller
change in the valuation of trading securities and derivatives
where quoted market prices are not available would have resulted
that could have had a material impact on the Groups
reported profit on continuing operations before tax in 2006. Due
to the individual nature of these contracts, the Group does not
believe it is appropriate to apply a global adjustment to
managements estimates, as it would not give a meaningful
sensitivity.

The table below summarises the Groups trading portfolios
and other assets and liabilities held at fair value by valuation
methodology at 31 December 2006:

|                                                                |  |        |  |            
|--------------------------------------------------------------- |  | ------ |  | -----------
|                                                                |  | Assets |  | Liabilities
|Fair value based on:                                            |  | %      |  | %          
|                                                               
|Quoted market prices                                            |  | 45     |  | 24         
|Internal models based on market
    prices                      |  | 55     |  | 76         
|Internal models based on
    information other than market data |  |       |  |           
|                                                               
|Total                                                           |  | 100    |  | 100        
|                                                               

(c) Provisions for misselling








84



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##### 

Financial Statements



Accounting Policiescontinued

The Consolidated Financial Statements for the year ended
31 December 2006 include a provision charge for misselling
in the Retail Banking segment for an amount equal to £63m
(2005: £10m). In addition, in 2005 claims settled of
£70m were charged to administrative expenses. The balance
sheet provision decreased from £253m in 2005 to £180m
in 2006 reflecting settlement of claims relating to endowments.
In calculating the misselling provision within the Retail
Banking segment, managements best estimate of the
provision was calculated based on conclusions regarding the
number of claims that will be received, of those, the number
that will be upheld, and the estimated average settlement per
case. Had management used different assumptions regarding these
factors, a larger or smaller provision for misselling would have
resulted in the Retail Banking segment that could have had a
material impact on the Groups reported profit on
continuing operations before tax in 2006. Specifically, if
managements conclusions as to the number of claims that
will be received, of those, the number that will be upheld, and
the estimated average settlement per case were different, but
within the range of what management deemed to be reasonably
possible, the provision charge for misselling (excluding bank
charges) in the Retail Banking segment could have decreased in
2006 by up to £7m (2005: £21m), with a potential
corresponding increase in the Groups profit on continuing
operations before tax in 2006 of up to 2% (2005: 6%), or
increased by up to £40m (2005: £65m), with a potential
corresponding decrease in the Groups profit on continuing
operations before tax in 2006 of up to 9% (2005: 18%). The
actual charge in 2006 was based on what management estimated to
be the most probable number of claims that will be received, of
those, the number that will be upheld, and the estimated average
settlement per case within the range of reasonably possible
outcomes. With respect to the reimbursement of bank charges, the
legal and regulatory position is evolving and is currently
unclear. As a result, management are not able to quantify
reliably a meaningful sensitivity or range of possible outcomes.

(d) Pensions

The Group operates a number of defined benefit pension schemes
as described in Note 41 to the Consolidated Financial
Statements. The assets of the schemes are measured at their fair
values at the balance sheet date. The liabilities of the schemes
are estimated by projecting forward the growth in current
accrued pension benefits to reflect inflation and salary growth
to the date of pension payment, discounted to present value
using the interest rate applicable to high-quality corporate
bonds of the same currency and term as the scheme liabilities.
Any surplus or deficit of scheme assets over liabilities is
recognised in the balance sheet as an asset (surplus) or
liability (deficit). An asset is only recognised to the extent
that the surplus can be recovered through reduced contributions
in the future or through refunds from the scheme. In determining
the value of scheme liabilities, assumptions are made by
management as to price inflation, discount rates, pensions
increases, earnings growth and mortality.

The Group considers accounting estimates related to pension
provisions critical accounting estimates because:
(i) they are highly susceptible to change from period to
period, and (ii) any significant difference between the
Groups estimates of the scheme liabilities and actual
liabilities could significantly alter the amount of the surplus
or deficit recognised in the balance sheet and the pension cost
charged to the income statement. The Groups assumptions
about price inflation, discount rates, pensions increases,
earnings growth and mortality are based on past experience and
current economic trends, which are not necessarily an indication
of future experience.

Pension costs are charged to the line item Administration
expenses in the income statement. The provision is
included in the Retirement benefit obligations line
item in the balance sheet. If the Group believes that increases
to the pensions cost are required, then the Group records
additional costs that would be treated as a charge in the line
item Administration expenses in the income statement.

The Consolidated Financial Statements for the year ended
31 December 2006 include current year service costs for an
amount equal to £92m and a pension scheme deficit of
£1,034m. The current year service cost of £92m (2005:
£102m) and pension scheme deficit of £1,034m (2005:
£1,380m) were reduced, reflecting reductions in scheme
membership, salary reviews and changes in discount rates. In
calculating the current year service cost and deficit, a range
of outcomes was calculated based principally on
managements estimates regarding price inflation, discount
rates, pensions increases, earnings growth and mortality. Had
management used different assumptions regarding price inflation,
discount rate, pensions increases, earnings growth and
mortality, a larger or smaller charge for pension costs would
have resulted that could have had a material impact on the
Groups reported profit on continuing operations before tax
in 2006. Specifically, if managements conclusions as to
price inflation, discount rates, pensions increases, earnings
growth and mortality were different, but within the range of
what management deemed to be reasonably possible conclusions,
the charge for pension costs could have decreased in 2006 from
an actual pension charge of £92m (2005: £102m, 2004:
£121m) by up to £8m (2005: £5m, 2004: £5m),
with a potential corresponding increase in the Groups
profit on continuing operations before tax in 2006 of up to 2%
(2005: 1%, 2004: 31%), or increased by up to £11m (2005
£23m, 2004: £29m), with a potential corresponding
decrease in the Groups profit on continuing operations
before tax in 2005 of up to 3% (2005: 5%, 2004: 181%). The
actual current year service pension charge of £92m (2005:
£102m, 2004: £121m) in 2006 was based on what
management estimated to be the most probable price inflation,
discount rates, pensions increases, earnings growth and
mortality within the range of reasonably possible price
inflation, discount rates, pensions increases, earnings growth
and mortality. In addition, if managements conclusions as
to price inflation, discount rates, pensions increases, earnings
growth and mortality were different, but within the range of
what management deemed to be reasonably possible conclusions,
the value of the deficit at the year end could have decreased in
2006 from an actual of £1,034m (2005: £1,380m, 2004:
£1,240m) by up to £717m (2005: £740m, 2004:
£650m), or increased by up to £297m (2005 £305m,
2004: £268m).

85



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##### 

Financial Statements





Notes to the Financial Statements

1. Business segments

The principal activity of the Group is financial services. In
2006, the reorganisation of the Group following the sale of the
life insurance businesses resulted in a change in the way the
Groups business is managed and reported. The following
disclosures reflect these new segments, which are:

>
    Retail Banking>
    Financial Markets>
    Wealth Management>
    Group Infrastructure>
    Sold Life Businesses>
    Portfolio Business UnitThe segmental analysis for 2005 and 2004 has also been presented
on this basis. In 2005, the segment reporting structure
previously presented was Retail Banking; Insurance and Asset
Management; Financial Markets; Group Infrastructure; and
Portfolio Business Unit. In 2006, the Insurance and Asset
Management segment ceased to exist after the sale of the life
insurance businesses. The discontinued life insurance businesses
are presented in the Sold Life Businesses segment. The remaining
businesses of the Insurance and Asset Management segment were
transferred to the newly created Wealth Management segment,
together with Cater Allen, Abbey International and Abbey
Sharedealing, which were transferred from Retail Banking.
Subsequently, the asset management businesses were sold. The
ongoing businesses formerly included in the Portfolio Business
Unit were transferred to Financial Markets, and the Social
Housing business was transferred from Retail Banking to
Financial Markets.

Abbeys segments are strategic business units that offer
different products and services. They are managed separately
because each business requires different technology and
marketing strategies. Abbey has six segments. Retail Banking
offers a range of personal banking, savings and mortgage
products and services. Wealth Management offers self-invested
pension plans, WRAP products and specialist banking services.
Financial Markets manages Abbeys liquidity, supports its
funding and capital management activities, and provides risk
management services to third parties and Abbeys other
businesses. Group Infrastructure comprises Central Services,
Group Capital (which contains the earnings on the difference
between Abbeys statutory capital and the target regulatory
capital allocated to segments) and the results of certain other
businesses. The Sold Life Businesses offered a range of
investment products such as pensions, investment bonds,
with-profits bonds, structured products, unit trusts, and
endowment life insurance policies, as well as a range of
protection products such as term life insurance, critical
illness cover and disability cover. The Portfolio Business Unit
comprised a number of businesses, assets and portfolios that
were inconsistent with Abbeys future strategy, and were
sold during 2004 and 2005. From the end of 2005, no businesses
within the Group are part of this segment.

Transactions between the business segments are on normal
commercial terms and conditions. The accounting policies of the
segments are the same as those described in the summary of
significant accounting policies. Funds are ordinarily
reallocated between segments, resulting in funding cost
transfers disclosed in operating income. Interest charged for
these funds is based on the Groups cost of capital.

Segment assets and liabilities comprise operating assets and
liabilities, being the majority of the balance sheet. Internal
charges and transfer pricing adjustments have been reflected in
the performance of each business. Revenue sharing agreements are
used to allocate external customer revenues to a business
segment on a reasonable basis.

a) By class of business

|                                                          |  |         |  |           |  |            |  |           |  |            |  |           |  |          |  |         |  |        
|--------------------------------------------------------- |  | ------- |  | --------- |  | ---------- |  | --------- |  | ---------- |  | --------- |  | -------- |  | ------- |  | -------
|                                                          |  |         |  |           |  |            |  | Group     |  | Sold       |  | Portfolio |  |          |  |         |  |        
|                                                          |  | Retail  |  | Financial |  | Wealth     |  | Infra-    |  | Life       |  | Business  |  |          |  | Inter-  |  | Group  
|                                                          |  | Banking |  | Markets   |  | Management |  | structure |  | Businesses |  | Unit      |  | Total    |  | company |  | Total  
|2006                                                      |  | £m      |  | £m        |  | £m         |  | £m        |  | £m         |  | £m        |  | £m       |  | £m      |  | £m     
|                                                         
|Interest and similar income                               |  | 6,426   |  | 2,489     |  | 455        |  | 2,235     |  |           |  |          |  | 11,605   |  | (5,961) |  | 5,644  
|Interest expense and
    similar charges                  |  | (5,036) |  | (2,473)   |  | (364)      |  | (2,504)   |  |           |  |          |  | (10,377) |  | 5,961   |  | (4,416)
|                                                         
|Net interest income                                       |  | 1,390   |  | 16        |  | 91         |  | (269)     |  |           |  |          |  | 1,228    |  |        |  | 1,228  
|Non-interest income                                       |  | 574     |  | 601       |  | 104        |  | (37)      |  |           |  |          |  | 1,242    |  |        |  | 1,242  
|                                                         
|Total operating income                                    |  | 1,964   |  | 617       |  | 195        |  | (306)     |  |           |  |          |  | 2,470    |  |        |  | 2,470  
|                                                         
|Administration expenses                                   |  | (1,058) |  | (160)     |  | (96)       |  | (106)     |  |           |  |          |  | (1,420)  |  |        |  | (1,420)
|Depreciation and amortisation                             |  | (76)    |  | (133)     |  | (3)        |  | (3)       |  |           |  |          |  | (215)    |  |        |  | (215)  
|                                                         
|Total operating
    expenses                              |  | (1,134) |  | (293)     |  | (99)       |  | (109)     |  |           |  |          |  | (1,635)  |  |        |  | (1,635)
|                                                         
|Impairment (losses) /recoveries on
    loans and advances |  | (273)   |  | 32        |  |           |  | (103)     |  |           |  |          |  | (344)    |  |        |  | (344)  
|Provisions for other liabilities
    and charges          |  |        |  |          |  | (2)        |  | (61)      |  |           |  |          |  | (63)     |  |        |  | (63)   
|                                                         
|Profit/(loss) on continuing
    operations before tax     |  | 557     |  | 356       |  | 94         |  | (579)     |  |           |  |          |  | 428      |  |        |  | 428    
|                                                         
|Loss from discontinued
    operations after tax           |  |        |  |          |  |           |  |          |  | (245)      |  |          |  | (245)    |  |        |  | (245)  
|                                                         

86



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##### 

Financial Statements



Notes to the Financial
Statementscontinued

|                                        |  |         |  |           |  |            |  |           |  |            |  |           |  |         |  |         |  |        
|--------------------------------------- |  | ------- |  | --------- |  | ---------- |  | --------- |  | ---------- |  | --------- |  | ------- |  | ------- |  | -------
|                                        |  |         |  |           |  |            |  | Group     |  | Sold       |  | Portfolio |  |         |  |         |  |        
|                                        |  | Retail  |  | Financial |  | Wealth     |  | Infra-    |  | Life       |  | Business  |  |         |  | Inter-  |  | Group  
|                                        |  | Banking |  | Markets   |  | Management |  | structure |  | Businesses |  | Unit      |  | Total   |  | company |  | Total  
|2006                                    |  | £m      |  | £m        |  | £m         |  | £m        |  | £m         |  | £m        |  | £m      |  | £m      |  | £m     
|                                       
|Balance Sheet                           |  |         |  |           |  |            |  |           |  |            |  |           |  |         |  |         |  |        
|Total assets                            |  | 105,193 |  | 83,659    |  | 270        |  | 2,683     |  |           |  |          |  | 191,805 |  |        |  | 191,805
|Capital expenditure incurred            |  | 178     |  | 7         |  | 4          |  |          |  |           |  |          |  | 189     |  |        |  | 189    
|Total liabilities                       |  | 78,051  |  | 95,374    |  | 8,517      |  | 6,747     |  |           |  |          |  | 188,689 |  |        |  | 188,689
|                                       
|Average number of staff in the
    year |  | 15,077  |  | 598       |  | 1,309      |  | 356       |  | 1,917      |  |          |  | 19,257  |  |        |  | 19,257 
|                                       



|                    |  |         |  |           |  |            |  |                |  |            |  |           |  |      
|------------------- |  | ------- |  | --------- |  | ---------- |  | -------------- |  | ---------- |  | --------- |  | -----
|                    |  |         |  |           |  |            |  |                |  | Sold       |  | Portfolio |  |      
|                    |  | Retail  |  | Financial |  | Wealth     |  | Group          |  | Life       |  | Business  |  |      
|Intercompany        |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Businesses |  | Unit      |  | Total
|revenue             |  | £m      |  | £m        |  | £m         |  | £m             |  | £m         |  | £m        |  | £m   
|                   
|Net interest income |  | (1,234) |  | 695       |  | 445        |  | 94             |  |           |  |          |  |     
|Non-interest income |  | 19      |  |          |  | (21)       |  | 2              |  |           |  |          |  |     
|                   
|Total income        |  | (1,215) |  | 695       |  | 424        |  | 96             |  |           |  |          |  |     
|                   

|                    |  |         |  |           |  |            |  |                |  |            |  |           |  |      
|------------------- |  | ------- |  | --------- |  | ---------- |  | -------------- |  | ---------- |  | --------- |  | -----
|                    |  |         |  |           |  |            |  |                |  | Sold       |  | Portfolio |  |      
|                    |  | Retail  |  | Financial |  | Wealth     |  | Group          |  | Life       |  | Business  |  |      
|Third party         |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Businesses |  | Unit      |  | Total
|revenue             |  | £m      |  | £m        |  | £m         |  | £m             |  | £m         |  | £m        |  | £m   
|                   
|Net interest income |  | 2,624   |  | (679)     |  | (354)      |  | (363)          |  |           |  |          |  | 1,228
|Non-interest income |  | 555     |  | 601       |  | 125        |  | (39)           |  |           |  |          |  | 1,242
|                   
|Total income        |  | 3,179   |  | (78)      |  | (229)      |  | (402)          |  |           |  |          |  | 2,470
|                   

|                                                      |  |         |  |           |  |            |  |           |  |            |  |           |  |          |  |         |  |        
|----------------------------------------------------- |  | ------- |  | --------- |  | ---------- |  | --------- |  | ---------- |  | --------- |  | -------- |  | ------- |  | -------
|                                                      |  |         |  |           |  |            |  | Group     |  | Sold       |  | Portfolio |  |          |  |         |  |        
|                                                      |  | Retail  |  | Financial |  | Wealth     |  | Infra-    |  | Life       |  | Business  |  |          |  | Inter-  |  | Group  
|                                                      |  | Banking |  | Markets   |  | Management |  | structure |  | Businesses |  | Unit      |  | Total    |  | company |  | Total  
|2005                                                  |  | £m      |  | £m        |  | £m         |  | £m        |  | £m         |  | £m        |  | £m       |  | £m      |  | £m     
|                                                     
|Interest and similar income                           |  | 6,788   |  | 2,757     |  | 484        |  | 1,598     |  |           |  | 17        |  | 11,644   |  | (6,225) |  | 5,419  
|Interest expense and
    similar charges              |  | (5,517) |  | (2,667)   |  | (404)      |  | (1,873)   |  |           |  | (11)      |  | (10,472) |  | 6,225   |  | (4,247)
|                                                     
|Net interest income                                   |  | 1,271   |  | 90        |  | 80         |  | (275)     |  |           |  | 6         |  | 1,172    |  |        |  | 1,172  
|Non-interest income                                   |  | 550     |  | 481       |  | 96         |  | (5)       |  |           |  | 61        |  | 1,183    |  |        |  | 1,183  
|                                                     
|Total operating income                                |  | 1,821   |  | 571       |  | 176        |  | (280)     |  |           |  | 67        |  | 2,355    |  |        |  | 2,355  
|                                                     
|Administration expenses                               |  | (1,236) |  | (160)     |  | (99)       |  | (81)      |  |           |  | (1)       |  | (1,577)  |  |        |  | (1,577)
|Depreciation and amortisation                         |  | (66)    |  | (125)     |  | (3)        |  |          |  |           |  | (1)       |  | (195)    |  |        |  | (195)  
|                                                     
|Total operating
    expenses                          |  | (1,302) |  | (285)     |  | (102)      |  | (81)      |  |           |  | (2)       |  | (1,772)  |  |        |  | (1,772)
|                                                     
|Impairment losses on loans and
    advances           |  | (207)   |  | (10)      |  | (1)        |  |          |  |           |  |          |  | (218)    |  |        |  | (218)  
|Provisions for other liabilities
    and charges      |  | 3       |  |          |  | (14)       |  |          |  |           |  | 8         |  | (3)      |  |        |  | (3)    
|                                                     
|Profit/(loss) on continuing
    operations before tax |  | 315     |  | 276       |  | 59         |  | (361)     |  |           |  | 73        |  | 362      |  |        |  | 362    
|                                                     
|Profit from discontinued
    operations after tax     |  |        |  |          |  |           |  |          |  | 166        |  |          |  | 166      |  |        |  | 166    
|                                                     
|Balance Sheet                                         |  |         |  |           |  |            |  |           |  |            |  |           |  |          |  |         |  |        
|Total assets                                          |  | 94,272  |  | 83,188    |  | 222        |  | 629       |  | 28,699     |  | 24        |  | 207,034  |  |        |  | 207,034
|Capital expenditure incurred                          |  | 185     |  | 143       |  |           |  |          |  | 1          |  |          |  | 329      |  |        |  | 329    
|Total liabilities                                     |  | 75,521  |  | 83,973    |  | 9,369      |  | 7,818     |  | 27,165     |  | 78        |  | 203,924  |  |        |  | 203,924
|                                                     
|Average number of staff in the
    year               |  | 15,538  |  | 713       |  | 1,179      |  | 2,712     |  | 2,255      |  |          |  | 22,397   |  |        |  | 22,397 
|                                                     

87



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Included in the 2005 segmental operating income is an element of
intercompany revenue. An analysis showing intercompany revenue
and third party revenue by segment is shown below.

|                    |  |         |  |           |  |            |  |                |  |            |  |           |  |      
|------------------- |  | ------- |  | --------- |  | ---------- |  | -------------- |  | ---------- |  | --------- |  | -----
|                    |  |         |  |           |  |            |  |                |  | Sold       |  | Portfolio |  |      
|                    |  | Retail  |  | Financial |  | Wealth     |  | Group          |  | Life       |  | Business  |  |      
|Intercompany        |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Businesses |  | Unit      |  | Total
|revenue             |  | £m      |  | £m        |  | £m         |  | £m             |  | £m         |  | £m        |  | £m   
|                   
|Net interest income |  | (1,246) |  | 598       |  | 472        |  | 101            |  |           |  | 75        |  |     
|Non-interest income |  | 15      |  |          |  | (14)       |  | (1)            |  |           |  |          |  |     
|                   
|Total income        |  | (1,231) |  | 598       |  | 458        |  | 100            |  |           |  | 75        |  |     
|                   

|                    |  |         |  |           |  |            |  |                |  |            |  |           |  |      
|------------------- |  | ------- |  | --------- |  | ---------- |  | -------------- |  | ---------- |  | --------- |  | -----
|                    |  |         |  |           |  |            |  |                |  | Sold       |  | Portfolio |  |      
|                    |  | Retail  |  | Financial |  | Wealth     |  | Group          |  | Life       |  | Business  |  |      
|Third party         |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Businesses |  | Unit      |  | Total
|revenue             |  | £m      |  | £m        |  | £m         |  | £m             |  | £m         |  | £m        |  | £m   
|                   
|Net interest income |  | 2,517   |  | (508)     |  | (392)      |  | (376)          |  |           |  | (69)      |  | 1,172
|Non-interest income |  | 535     |  | 481       |  | 110        |  | (4)            |  |           |  | 61        |  | 1,183
|                   
|Total income        |  | 3,052   |  | (27)      |  | (282)      |  | (380)          |  |           |  | (8)       |  | 2,355
|                   

|                                                        |  |         |  |           |  |            |  |           |  |            |  |           |  |         |  |         |  |            
|------------------------------------------------------- |  | ------- |  | --------- |  | ---------- |  | --------- |  | ---------- |  | --------- |  | ------- |  | ------- |  | -----------
|                                                        |  |         |  |           |  |            |  | Group     |  | Sold       |  | Portfolio |  |         |  |         |  |            
|                                                        |  | Retail  |  | Financial |  | Wealth     |  | Infra-    |  | Life       |  | Business  |  |         |  | Inter-  |  |            
|                                                        |  | Banking |  | Markets   |  | Management |  | structure |  | Businesses |  | Unit      |  | Total   |  | company |  | Group Total
|2004                                                    |  | £m      |  | £m        |  | £m         |  | £m        |  | £m         |  | £m        |  | £m      |  | £m      |  | £m         
|                                                       
|Interest and similar income                             |  | 5,777   |  | 1,537     |  | 431        |  | 399       |  |           |  | 619       |  | 8,763   |  | (3,183) |  | 5,580      
|Interest expense and similar charges                    |  | (4,519) |  | (1,420)   |  | (342)      |  | (510)     |  |           |  | (566)     |  | (7,357) |  | 3,183   |  | (4,174)    
|                                                       
|Net interest income                                     |  | 1,258   |  | 117       |  | 89         |  | (111)     |  |           |  | 53        |  | 1,406   |  |        |  | 1,406      
|Non-interest income                                     |  | 545     |  | 566       |  | 79         |  | 41        |  |           |  | (107)     |  | 1,124   |  |        |  | 1,124      
|                                                       
|Total operating income                                  |  | 1,803   |  | 683       |  | 168        |  | (70)      |  |           |  | (54)      |  | 2,530   |  |        |  | 2,530      
|                                                       
|Administration expenses                                 |  | (1,409) |  | (181)     |  | (128)      |  | (239)     |  |           |  | (56)      |  | (2,013) |  |        |  | (2,013)    
|Depreciation and amortisation                           |  | (136)   |  | (198)     |  | (3)        |  | (18)      |  |           |  |          |  | (355)   |  |        |  | (355)      
|                                                       
|Total operating
    expenses                            |  | (1,545) |  | (379)     |  | (131)      |  | (257)     |  |           |  | (56)      |  | (2,368) |  |        |  | (2,368)    
|                                                       
|Impairment losses on loans and
    advances             |  | (15)    |  | (97)      |  |           |  |          |  |           |  | 87        |  | (25)    |  |        |  | (25)       
|Provisions for other liabilities
    and charges        |  | (155)   |  |          |  |           |  | (46)      |  |           |  |          |  | (201)   |  |        |  | (201)      
|Impairment recoveries on fixed
    asset investments    |  |        |  |          |  |           |  |          |  |           |  | 80        |  | 80      |  |        |  | 80         
|                                                       
|Profit / (loss) on continuing
    operations before tax |  | 88      |  | 207       |  | 37         |  | (373)     |  |           |  | 57        |  | 16      |  |        |  | 16         
|                                                       
|Loss from discontinued
    operations after tax         |  |        |  |          |  |           |  |          |  | (82)       |  |          |  | (82)    |  |        |  | (82)       
|                                                       
|Balance Sheet                                           |  |         |  |           |  |            |  |           |  |            |  |           |  |         |  |         |  |            
|Total assets                                            |  | 94,457  |  | 48,303    |  | 255        |  | 6,273     |  | 28,053     |  | 7,392     |  | 184,733 |  |        |  | 184,733    
|Capital expenditure incurred                            |  | 113     |  |          |  |           |  |          |  | 2          |  | 314       |  | 429     |  |        |  | 429        
|Total liabilities                                       |  | 84,748  |  | 51,386    |  | 9,159      |  | 6,277     |  | 26,435     |  | 3,008     |  | 181,013 |  |        |  | 181,013    
|                                                       
|Average number of staff in the
    year                 |  | 17,737  |  | 1,029     |  | 1,297      |  | 2,102     |  | 3,106      |  |          |  | 25,271  |  |        |  | 25,271     
|                                                       



|                    |  |         |  |           |  |            |  |                |  |            |  |           |  |      
|------------------- |  | ------- |  | --------- |  | ---------- |  | -------------- |  | ---------- |  | --------- |  | -----
|                    |  |         |  |           |  |            |  |                |  | Sold       |  | Portfolio |  |      
|                    |  | Retail  |  | Financial |  | Wealth     |  | Group          |  | Life       |  | Business  |  |      
|Intercompany        |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Businesses |  | Unit      |  | Total
|revenue             |  | £m      |  | £m        |  | £m         |  | £m             |  | £m         |  | £m        |  | £m   
|                   
|Net interest income |  | (1,095) |  | (988)     |  | 418        |  | 151            |  |           |  | 1,514     |  |     
|Non-interest income |  | 21      |  | (7)       |  | (15)       |  | 3              |  |           |  | (2)       |  |     
|                   
|Total income        |  | (1,074) |  | (995)     |  | 403        |  | 154            |  |           |  | 1,512     |  |     
|                   

|                    |  |         |  |           |  |            |  |                |  |            |  |           |  |      
|------------------- |  | ------- |  | --------- |  | ---------- |  | -------------- |  | ---------- |  | --------- |  | -----
|                    |  |         |  |           |  |            |  |                |  | Sold       |  | Portfolio |  |      
|                    |  | Retail  |  | Financial |  | Wealth     |  | Group          |  | Life       |  | Business  |  |      
|Third party         |  | Banking |  | Markets   |  | Management |  | Infrastructure |  | Businesses |  | Unit      |  | Total
|revenue             |  | £m      |  | £m        |  | £m         |  | £m             |  | £m         |  | £m        |  | £m   
|                   
|Net interest income |  | 2,353   |  | 1,105     |  | (329)      |  | (262)          |  |           |  | (1,461)   |  | 1,406
|Non-interest income |  | 524     |  | 573       |  | 94         |  | 38             |  |           |  | (105)     |  | 1,124
|                   
|Total income        |  | 2,877   |  | 1,678     |  | (235)      |  | (224)          |  |           |  | (1,566)   |  | 2,530
|                   

88



---



##### 

Financial Statements



Notes to the Financial
Statementscontinued

b) By geographical region

|                                                 |  |         |  |         |  |        
|------------------------------------------------ |  | ------- |  | ------- |  | -------
|                                                 |  | 2006    |  | 2005    |  | 2004   
|                                                 |  | £m      |  | £m      |  | £m     
|                                                
|Total Income                                     |  |         |  |         |  |        
|United Kingdom                                   |  | 2,370   |  | 2,352   |  | 2,488  
|Europe                                           |  | 88      |  | (13)    |  | 45     
|United States                                    |  | 12      |  | 16      |  | (3)    
|                                                
|                                                 |  | 2,470   |  | 2,355   |  | 2,530  
|                                                
|Profit from continuing
    operations before tax |  |         |  |         |  |        
|United Kingdom                                   |  | 376     |  | 357     |  | 15     
|Europe                                           |  | 47      |  | 1       |  | 7      
|United States                                    |  | 5       |  | 4       |  | (6)    
|                                                
|                                                 |  | 428     |  | 362     |  | 16     
|                                                
|Profit after tax                                 |  |         |  |         |  |        
|United Kingdom                                   |  | 7       |  | 405     |  | (54)   
|Europe                                           |  | 59      |  | 12      |  | 3      
|United States                                    |  | 2       |  | 3       |  | (3)    
|                                                
|                                                 |  | 68      |  | 420     |  | (54)   
|                                                
|Carrying amount of segment
    assets            |  |         |  |         |  |        
|United Kingdom                                   |  | 174,846 |  | 191,971 |  | 175,113
|Europe                                           |  | 134     |  | 25      |  |       
|United States                                    |  | 16,825  |  | 15,038  |  | 9,620  
|                                                
|                                                 |  | 191,805 |  | 207,034 |  | 184,733
|                                                

c) Other segmental disclosures on a management basis






|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|> | Reorganisation and other
    costs
    Comprise implementation costs in relation to the strategic
    change and cost reduction process, as well as certain
    remediation expenses and credit provisions. Management needs to
    understand the underlying drivers of the cost base that will
    remain after these exercises are complete, and does not want
    this view to be clouded by these costs, which are managed
    independently.                                                                                                                                                                                                                                                                                                                                                               
|> | Depreciation of operating
    lease
    assets The
    operating lease businesses are managed as financing businesses
    and, therefore, management needs to see the margin earned on the
    businesses. Residual value risk is separately managed. As a
    result the depreciation is netted against the related income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|> | Profit on sale of PFS
    subsidiaries
    The profit on the sale of the asset management businesses is
    excluded from the results to allow management to understand the
    underlying performance of the business.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|> | 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.                                                                                                                                                                                                                                                                                                                                                                                              
|> | One-off statutory IFRS
    adjustments
    The conversion to IFRS resulted in the recognition of certain
    one-off items in 2004 including impairment charges. These items
    have been deducted from the results to allow management to
    understand 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.
|> | Capital
    charges
    Comprise internal nominal charges for capital invested in the
    Groups businesses. Management implemented this charge to
    assess if capital is invested effectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



89



---



##### 

Financial Statements



Notes to the Financial
Statementscontinued

|                                                             |  |         |  |           |  |            |  |           |  |            |  |           |  |          |  |             |  |        
|------------------------------------------------------------ |  | ------- |  | --------- |  | ---------- |  | --------- |  | ---------- |  | --------- |  | -------- |  | ----------- |  | -------
|                                                             |  |         |  |           |  |            |  | Group     |  | Sold       |  | Portfolio |  |          |  |             |  |        
|                                                             |  | Retail  |  | Financial |  | Wealth     |  | Infra-    |  | Life       |  | Business  |  |          |  |             |  | Group  
|                                                             |  | Banking |  | Markets   |  | Management |  | structure |  | Businesses |  | Unit      |  | Total    |  | Adjustments |  | Total  
|2006                                                         |  | £m      |  | £m        |  | £m         |  | £m        |  | £m         |  | £m        |  | £m       |  | £m          |  | £m     
|                                                            
|Interest income                                              |  | 6,447   |  | 2,393     |  | 439        |  | 2,434     |  |           |  |          |  | 11,713   |  | (6,069)     |  | 5,644  
|Interest expense                                             |  | (5,036) |  | (2,473)   |  | (364)      |  | (2,504)   |  |           |  |          |  | (10,377) |  | 5,961       |  | (4,416)
|                                                            
|Net interest income                                          |  | 1,411   |  | (80)      |  | 75         |  | (70)      |  |           |  |          |  | 1,336    |  | (108)       |  | 1,228  
|Non-interest income                                          |  | 582     |  | 464       |  | 104        |  | (34)      |  |           |  |          |  | 1,116    |  | 126         |  | 1,242  
|                                                            
|Total trading income                                         |  | 1,993   |  | 384       |  | 179        |  | (104)     |  |           |  |          |  | 2,452    |  | 18          |  | 2,470  
|                                                            
|Administration expenses                                      |  | (940)   |  | (156)     |  | (90)       |  | (106)     |  |           |  |          |  | (1,292)  |  | (128)       |  | (1,420)
|Depreciation and amortisation                                |  | (62)    |  | (1)       |  | (3)        |  | (3)       |  |           |  |          |  | (69)     |  | (146)       |  | (215)  
|                                                            
|Total trading expenses                                       |  | (1,002) |  | (157)     |  | (93)       |  | (109)     |  |           |  |          |  | (1,361)  |  | (274)       |  | (1,635)
|                                                            
|Impairment losses on loans and
    advances                  |  | (273)   |  | 27        |  |           |  | (5)       |  |           |  |          |  | (251)    |  | (93)        |  | (344)  
|Provisions for other liabilities
    and charges             |  |        |  |          |  | (2)        |  |          |  |           |  |          |  | (2)      |  | (61)        |  | (63)   
|                                                            
|Trading profit/(loss) before
    taxation                    |  | 718     |  | 254       |  | 84         |  | (218)     |  |           |  |          |  | 838      |  | (410)       |  | 428    
|                                                            
|Adjust for:                                                  |  |         |  |           |  |            |  |           |  |            |  |           |  |          |  |             |  |        
|Reorganisation expenses                                      |  | (132)   |  | (1)       |  | (6)        |  | (159)     |  |           |  |          |  | (298)    |  |             |  |        
|Profit on sale of PFS subs                                   |  |        |  |          |  |           |  | 41        |  |           |  |          |  | 41       |  |             |  |        
|Hedging variances                                            |  | (8)     |  | 7         |  |           |  | (44)      |  |           |  |          |  | (45)     |  |             |  |        
|Capital charges                                              |  | (21)    |  | 96        |  | 16         |  | (199)     |  |           |  |          |  | (108)    |  |             |  |        
|                                                             |  |         |  |          
|Profit/(loss) from continuing
    operations before taxation |  | 557     |  | 356       |  | 94         |  | (579)     |  |           |  |          |  | 428      |  |             |  |        
|                                                             |  |         |  |          
|Loss from discontinued
    operations after tax              |  |        |  |          |  |           |  |          |  | (245)      |  |          |  | (245)    |  |             |  |        
|                                                             |  |         |  |          

|                                           |  |          |  |          |  |                |  |              |  |            |  |             |  |           
|------------------------------------------ |  | -------- |  | -------- |  | -------------- |  | ------------ |  | ---------- |  | ----------- |  | ----------
|                                           |  |          |  |          |  |                |  |              |  | Impairment |  | Provisions  |  | Profit on 
|                                           |  | Net      |  | Non-     |  |                |  | Depreciation |  | losses on  |  | for other   |  | continuing
|                                           |  | interest |  | interest |  | Administration |  | and          |  | loans and  |  | liabilities |  | ops before
|                                           |  | income   |  | income   |  | expenses       |  | amortisation |  | advances   |  | and charges |  | taxation  
|Adjustments comprise:                      |  | £m       |  | £m       |  | £m             |  | £m           |  | £m         |  | £m          |  | £m        
|                                          
|Reorganisation expenses                    |  |         |  |         |  | (128)          |  | (16)         |  | (93)       |  | (61)        |  | (298)     
|Depreciation on operating lease
    assets |  |         |  | 130      |  |               |  | (130)        |  |           |  |            |  |          
|Profit on sale of PFS subsidiaries         |  |         |  | 41       |  |               |  |             |  |           |  |            |  | 41        
|Hedging variances                          |  |         |  | (45)     |  |               |  |             |  |           |  |            |  | (45)      
|Capital charges                            |  | (108)    |  |         |  |               |  |             |  |           |  |            |  | (108)     
|                                          
|                                           |  | (108)    |  | 126      |  | (128)          |  | (146)        |  | (93)       |  | (61)        |  | (410)     
|                                          

|                                                             |  |         |  |           |  |            |  |           |  |            |  |           |  |          |  |             |  |        
|------------------------------------------------------------ |  | ------- |  | --------- |  | ---------- |  | --------- |  | ---------- |  | --------- |  | -------- |  | ----------- |  | -------
|                                                             |  |         |  |           |  |            |  | Group     |  | Sold       |  | Portfolio |  |          |  |             |  |        
|                                                             |  | Retail  |  | Financial |  | Wealth     |  | Infra-    |  | Life       |  | Business  |  |          |  |             |  | Group  
|                                                             |  | Banking |  | Markets   |  | Management |  | structure |  | Businesses |  | Unit      |  | Total    |  | Adjustments |  | Total  
|2005                                                         |  | £m      |  | £m        |  | £m         |  | £m        |  | £m         |  | £m        |  | £m       |  | £m          |  | £m     
|                                                            
|Interest income                                              |  | 6,846   |  | 2,643     |  | 471        |  | 1,822     |  |           |  | 20        |  | 11,802   |  | (6,383)     |  | 5,419  
|Interest expense                                             |  | (5,517) |  | (2,667)   |  | (404)      |  | (1,877)   |  |           |  | (11)      |  | (10,476) |  | 6,229       |  | (4,247)
|                                                            
|Net interest income                                          |  | 1,329   |  | (24)      |  | 67         |  | (55)      |  |           |  | 9         |  | 1,326    |  | (154)       |  | 1,172  
|Non-interest income                                          |  | 547     |  | 358       |  | 96         |  | 16        |  |           |  | 61        |  | 1,078    |  | 105         |  | 1,183  
|                                                            
|Total trading income                                         |  | 1,876   |  | 334       |  | 163        |  | (39)      |  |           |  | 70        |  | 2,404    |  | (49)        |  | 2,355  
|                                                            
|Administration expenses                                      |  | (1,043) |  | (148)     |  | (97)       |  | (77)      |  |           |  | (1)       |  | (1,366)  |  | (211)       |  | (1,577)
|Depreciation and amortisation                                |  | (63)    |  |          |  | (3)        |  |          |  |           |  | (1)       |  | (67)     |  | (128)       |  | (195)  
|                                                            
|Total trading expenses                                       |  | (1,106) |  | (148)     |  | (100)      |  | (77)      |  |           |  | (2)       |  | (1,433)  |  | (339)       |  | (1,772)
|                                                            
|Impairment losses on loans and
    advances                  |  | (207)   |  | (10)      |  | (1)        |  |          |  |           |  |          |  | (218)    |  |            |  | (218)  
|Provisions for other liabilities
    and charges             |  | 3       |  |          |  | (14)       |  |          |  |           |  | 8         |  | (3)      |  |            |  | (3)    
|                                                            
|Trading profit/(loss) before
    taxation                    |  | 566     |  | 176       |  | 48         |  | (116)     |  |           |  | 76        |  | 750      |  | (388)       |  | 362    
|                                                            
|Adjust for:                                                  |  |         |  |           |  |            |  |           |  |            |  |           |  |          |  |             |  |        
|Reorganisation expenses                                      |  | (196)   |  | (14)      |  | (2)        |  | (4)       |  |           |  |          |  | (216)    |  |             |  |        
|Hedging variances                                            |  | 3       |  |          |  |           |  | (21)      |  |           |  |          |  | (18)     |  |             |  |        
|Capital charges                                              |  | (58)    |  | 114       |  | 13         |  | (220)     |  |           |  | (3)       |  | (154)    |  |             |  |        
|                                                             |  |         |  |          
|Profit/(loss) from continuing
    operations before taxation |  | 315     |  | 276       |  | 59         |  | (361)     |  |           |  | 73        |  | 362      |  |             |  |        
|                                                             |  |         |  |          
|Profit from discontinued
    operations after tax            |  |        |  |          |  |           |  |          |  | 166        |  |          |  | 166      |  |             |  |        
|                                                             |  |         |  |          

90



---



##### 

Financial Statements



Notes to the Financial
Statementscontinued

|                                           |  |          |  |          |  |                |  |              |  |            |  |                 |  |           
|------------------------------------------ |  | -------- |  | -------- |  | -------------- |  | ------------ |  | ---------- |  | --------------- |  | ----------
|                                           |  |          |  |          |  |                |  |              |  | Impairment |  | Provisions      |  | Profit on 
|                                           |  | Net      |  | Non-     |  |                |  | Depreciation |  | losses on  |  | for other       |  | continuing
|                                           |  | interest |  | interest |  | Administration |  | and          |  | loans and  |  | liabilities and |  | ops before
|                                           |  | income   |  | income   |  | expenses       |  | amortisation |  | advances   |  | charges         |  | taxation  
|Adjustments comprise:                      |  | £m       |  | £m       |  | £m             |  | £m           |  | £m         |  | £m              |  | £m        
|                                          
|Reorganisation expenses                    |  |         |  |         |  | (211)          |  | (5)          |  |           |  |                |  | (216)     
|Depreciation on operating lease
    assets |  |         |  | 123      |  |               |  | (123)        |  |           |  |                |  |          
|Hedging variances                          |  |         |  | (18)     |  |               |  |             |  |           |  |                |  | (18)      
|Capital charges                            |  | (154)    |  |         |  |               |  |             |  |           |  |                |  | (154)     
|                                          
|                                           |  | (154)    |  | 105      |  | (211)          |  | (128)        |  |           |  |                |  | (388)     
|                                          

|                                                             |  |         |  |           |  |            |  |           |  |            |  |           |  |         |  |             |  |        
|------------------------------------------------------------ |  | ------- |  | --------- |  | ---------- |  | --------- |  | ---------- |  | --------- |  | ------- |  | ----------- |  | -------
|                                                             |  |         |  |           |  |            |  | Group     |  | Sold       |  | Portfolio |  |         |  |             |  |        
|                                                             |  | Retail  |  | Financial |  | Wealth     |  | Infra-    |  | Life       |  | Business  |  |         |  |             |  | Group  
|                                                             |  | Banking |  | Markets   |  | Management |  | structure |  | Businesses |  | Unit      |  | Total   |  | Adjustments |  | Total  
|2004                                                         |  | £m      |  | £m        |  | £m         |  | £m        |  | £m         |  | £m        |  | £m      |  | £m          |  | £m     
|                                                            
|Interest income                                              |  | 5,860   |  | 1,446     |  | 423        |  | 455       |  |           |  | 626       |  | 8,810   |  | (3,230)     |  | 5,580  
|Interest expense                                             |  | (4,519) |  | (1,420)   |  | (342)      |  | (510)     |  |           |  | (565)     |  | (7,356) |  | 3,182       |  | (4,174)
|                                                            
|Net interest income                                          |  | 1,341   |  | 26        |  | 81         |  | (55)      |  |           |  | 61        |  | 1,454   |  | (48)        |  | 1,406  
|Non-interest income                                          |  | 427     |  | 360       |  | 79         |  | 62        |  |           |  | (107)     |  | 821     |  | 303         |  | 1,124  
|                                                            
|Total trading income                                         |  | 1,768   |  | 386       |  | 160        |  | 7         |  |           |  | (46)      |  | 2,275   |  | 255         |  | 2,530  
|                                                            
|Administration expenses                                      |  | (1,224) |  | (161)     |  | (123)      |  | (18)      |  |           |  | (56)      |  | (1,582) |  | (431)       |  | (2,013)
|Depreciation and amortisation                                |  | (62)    |  | (2)       |  | (3)        |  | (34)      |  |           |  |          |  | (101)   |  | (254)       |  | (355)  
|                                                            
|Total trading expenses                                       |  | (1,286) |  | (163)     |  | (126)      |  | (52)      |  |           |  | (56)      |  | (1,683) |  | (685)       |  | (2,368)
|                                                            
|Impairment losses on loans and
    advances                  |  | (20)    |  | (22)      |  |           |  |          |  |           |  | 87        |  | 45      |  | (70)        |  | (25)   
|Provisions for other liabilities
    and charges             |  | (155)   |  |          |  |           |  | 2         |  |           |  |          |  | (153)   |  | (48)        |  | (201)  
|Amounts written off fixed asset
    investments              |  |        |  |          |  |           |  |          |  |           |  | 80        |  | 80      |  |            |  | 80     
|                                                            
|Trading profit / (loss)
    before taxation                  |  | 307     |  | 201       |  | 34         |  | (43)      |  |           |  | 65        |  | 564     |  | (548)       |  | 16     
|                                                            
|Adjust for:                                                  |  |         |  |           |  |            |  |           |  |            |  |           |  |         |  |             |  |        
|Reorganisation expenses                                      |  | (154)   |  | (75)      |  | (5)        |  | (269)     |  |           |  |          |  | (503)   |  |             |  |        
|Proforma IFRS adjusts                                        |  | 80      |  |          |  |           |  | 97        |  |           |  | (10)      |  | 167     |  |             |  |        
|One-off IFRS adjusts                                         |  | (62)    |  | (10)      |  |           |  | (6)       |  |           |  |          |  | (78)    |  |             |  |        
|Capital charges                                              |  | (83)    |  | 91        |  | 8          |  | (152)     |  |           |  | 2         |  | (134)   |  |             |  |        
|                                                             |  |         |  |          
|Profit/(loss) from continuing
    operations before taxation |  | 88      |  | 207       |  | 37         |  | (373)     |  |           |  | 57        |  | 16      |  |             |  |        
|                                                             |  |         |  |          
|Loss from discontinued
    operations after tax              |  |        |  |          |  |           |  |          |  | (82)       |  |          |  | (82)    |  |             |  |        
|                                                             |  |         |  |          

|                                           |  |          |  |          |  |                |  |              |  |            |  |             |  |           
|------------------------------------------ |  | -------- |  | -------- |  | -------------- |  | ------------ |  | ---------- |  | ----------- |  | ----------
|                                           |  |          |  |          |  |                |  |              |  | Impairment |  | Provisions  |  | Profit on 
|                                           |  | Net      |  | Non-     |  |                |  | Depreciation |  | losses on  |  | for other   |  | continuing
|                                           |  | Interest |  | interest |  | Administration |  | and          |  | loans and  |  | liabilities |  | ops before
|                                           |  | income   |  | income   |  | expenses       |  | amortisation |  | advances   |  | and charges |  | taxation  
|Adjustments comprise:                      |  | £m       |  | £m       |  | £m             |  | £m           |  | £m         |  | £m          |  | £m        
|                                          
|Reorganisation expenses                    |  |         |  | 45       |  | (425)          |  |             |  | (75)       |  | (48)        |  | (503)     
|Depreciation on operating lease
    assets |  |         |  | 182      |  |               |  | (182)        |  |           |  |            |  |          
|Proforma IFRS adjustments                  |  | 86       |  | 76       |  |               |  |             |  | 5          |  |            |  | 167       
|One-off IFRS adjustments                   |  |         |  |         |  | (6)            |  | (72)         |  |           |  |            |  | (78)      
|Capital charges                            |  | (134)    |  |         |  |               |  |             |  |           |  |            |  | (134)     
|                                          
|                                           |  | (48)     |  | 303      |  | (431)          |  | (254)        |  | (70)       |  | (48)        |  | (548)     
|                                          

2. Net interest income


|                                            |  |       |  |       |  |      
|------------------------------------------- |  | ----- |  | ----- |  | -----
|                                            |  | Group
|                                            |  |      
|                                            |  | 2006  |  | 2005  |  | 2004 
|Interest and similar income:                |  | £m    |  | £m    |  | £m   
|                                           
|Loans and advances to banks                 |  | 141   |  | 73    |  | 108  
|Loans and advances to customers             |  | 5,458 |  | 5,287 |  | 5,186
|Other interest earning financial
    assets |  | 45    |  | 59    |  | 286  
|                                           
|Total interest and similar
    income       |  | 5,644 |  | 5,419 |  | 5,580
|                                           

91



---



##### 

Financial Statements



Notes to the Financial
Statementscontinued

|                                                      |  |       |  |       |  |      
|----------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                      |  | Group
|                                                      |  |      
|                                                      |  | 2006  |  | 2005  |  | 2004 
|Interest expense and similar charges:                 |  | £m    |  | £m    |  | £m   
|                                                     
|Deposits by banks                                     |  | 101   |  | 9     |  | 46   
|Deposits by customers                                 |  | 2,514 |  | 2,578 |  | 2,108
|Debt securities in issue and other
    borrowed funds |  | 1,269 |  | 1,175 |  | 1,241
|Other interest bearing financial
    liabilities      |  | 532   |  | 485   |  | 779  
|                                                     
|Total interest expense and
    similar charges        |  | 4,416 |  | 4,247 |  | 4,174
|                                                     
|Net interest income                                   |  | 1,228 |  | 1,172 |  | 1,406
|                                                     

3. Net fee and commission income


|                                     |  |       |  |      |  |     
|------------------------------------ |  | ----- |  | ---- |  | ----
|                                     |  | Group
|                                     |  |      
|                                     |  | 2006  |  | 2005 |  | 2004
|                                     |  | £m    |  | £m   |  | £m  
|                                    
|Fee and commission
    income:       |  |       |  |      |  |     
|Insurance                            |  | 200   |  | 176  |  | 142 
|Banking fees                         |  | 473   |  | 467  |  | 225 
|Fund management fees                 |  | 116   |  | 108  |  | 88  
|Residential property                 |  |      |  |     |  | 185 
|                                    
|Total fee and commission
    income  |  | 789   |  | 751  |  | 640 
|                                    
|Fee and commission
    expense:      |  |       |  |      |  |     
|Introducer fees                      |  |      |  |     |  | 51  
|Other fees paid                      |  | 90    |  | 107  |  | 63  
|                                    
|Total fee and commission
    expense |  | 90    |  | 107  |  | 114 
|                                    
|Net fee and commission
    income    |  | 699   |  | 644  |  | 526 
|                                    

4. Net trading income


|                                                 |  |       |  |      |  |     
|------------------------------------------------ |  | ----- |  | ---- |  | ----
|                                                 |  | Group
|                                                 |  |      
|                                                 |  | 2006  |  | 2005 |  | 2004
|                                                 |  | £m    |  | £m   |  | £m  
|                                                
|Securities                                       |  | 191   |  | 219  |  | 83  
|Interest rate, equity and credit
    derivatives |  | 217   |  | 252  |  | 184 
|                                                
|                                                 |  | 408   |  | 471  |  | 267 
|                                                



5. Other operating income, net


|                                                                                                        |  |       |  |       |  |      
|------------------------------------------------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                                                                        |  | Group
|                                                                                                        |  |      
|                                                                                                        |  | 2006  |  | 2005  |  | 2004 
|                                                                                                        |  | £m    |  | £m    |  | £m   
|                                                                                                       
|Loss on sale of investment
    securities                                                               |  |      |  |      |  | (167)
|Profit on sale of subsidiary
    undertakings                                                           |  | 41    |  | 60    |  | 46   
|Profit/(loss) on sale of fixed
    assets                                                               |  | 1     |  | 4     |  | (34) 
|Income from operating lease assets                                                                      |  | 243   |  | 231   |  | 311  
|Income on assets held at fair value
    through profit or loss                                          |  | 188   |  | 241   |  |     
|Expense on liabilities held at fair
    value through profit or loss                                    |  | (261) |  | (318) |  |     
|Losses on derivatives managed with
    assets and liabilities held at fair value through profit or loss |  | (27)  |  | (100) |  |     
|Other                                                                                                   |  | (51)  |  | (51)  |  | 174  
|                                                                                                       
|                                                                                                        |  | 134   |  | 67    |  | 330  
|                                                                                                       

6. Administration expenses


|                                                 |  |       |  |       |  |      
|------------------------------------------------ |  | ----- |  | ----- |  | -----
|                                                 |  | Group
|                                                 |  |      
|                                                 |  | 2006  |  | 2005  |  | 2004 
|                                                 |  | £m    |  | £m    |  | £m   
|                                                
|Staff costs:                                     |  |       |  |       |  |      
|Wages and salaries                               |  | 550   |  | 610   |  | 778  
|Social security costs                            |  | 43    |  | 53    |  | 63   
|Pensions costs:  defined
    contribution plans |  | 4     |  | 4     |  | 4    
|
    defined benefit plans                      |  | 51    |  | 92    |  | 105  
|Other personnel costs                            |  | 118   |  | 97    |  | (26) 
|                                                
|                                                 |  | 766   |  | 856   |  | 924  
|Property, plant and equipment
    expenses       |  | 204   |  | 189   |  | 183  
|Information technology expenses                  |  | 157   |  | 100   |  | 113  
|Other administrative expenses                    |  | 293   |  | 432   |  | 793  
|                                                
|                                                 |  | 1,420 |  | 1,577 |  | 2,013
|                                                

92



---



##### 

Financial Statements



Notes to the Financial
Statementscontinued

7. Depreciation and amortisation

|                                                                                   |  |       |  |      |  |     
|---------------------------------------------------------------------------------- |  | ----- |  | ---- |  | ----
|                                                                                   |  | Group
|                                                                                   |  |      
|                                                                                   |  | 2006  |  | 2005 |  | 2004
|                                                                                   |  | £m    |  | £m   |  | £m  
|                                                                                  
|Depreciation of property, plant and
    equipment excluding operating lease assets |  | 85    |  | 72   |  | 132 
|Depreciation on operating lease
    assets                                         |  | 130   |  | 123  |  | 160 
|Amortisation and impairment of
    intangible fixed assets                         |  |      |  |     |  | 6   
|Impairment of property, plant and
    equipment                                    |  |      |  |     |  | 35  
|Impairment of operating lease assets                                               |  |      |  |     |  | 22  
|                                                                                  
|                                                                                   |  | 215   |  | 195  |  | 355 
|                                                                                  

8. Audit and other services




|                                                                                                                                      |                                              |       |     |      |     |      |    
|------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ----- | --- | ---- | --- | ---- | ---
|                                                                                                                                      |                                              | Group
|                                                                                                                                      |                                              |      
|                                                                                                                                      |                                              | 2006  |     | 2005 |     | 2004
|                                                                                                                                      |                                              | £m    |     | £m   |     | £m  
|                                                                                                                                     
|Audit fees:                                                                                                                           |                                              |       |     |      |     |     
|Fees payable to the Companys
    auditors for the audit of the Groups annual accounts                                               |                                              | 1.7   |     | 1.1  |     | 0.9 
|Fees payable to the Companys
    auditors and its associates for the audit of the Companys
    subsidiaries pursuant to legislation |                                              | 1.6   |     | 3.6  |     | 3.2 
|                                                                                                                                     
|Total audit fees                                                                                                                      |                                              | 3.3   |     | 4.7  |     | 4.1 
|                                                                                                                                     
|Non-audit fees:                                                                                                                       |                                              |       |     |      |     |     
|                                                                                                                                      |  Other services pursuant to
    legislation |       | 1.7 |      | 2.1 |      | 2.1
|                                                                                                                                      |  Tax services                               |       | 0.1 |      |    |      | 0.1
|                                                                                                                                      |  Other services                             |       | 1.7 |      | 0.6 |      | 3.0
|                                                                                                                                     
|Total non-audit fees                                                                                                                  |                                              | 3.5   |     | 2.7  |     | 5.2 
|                                                                                                                                     













9. Impairment losses/(recoveries) on loans and advances


|                                                  |  |       |  |      |  |     
|------------------------------------------------- |  | ----- |  | ---- |  | ----
|                                                  |  | Group
|                                                  |  |      
|                                                  |  | 2006  |  | 2005 |  | 2004
|                                                  |  | £m    |  | £m   |  | £m  
|                                                 
|Loans and advances to customers                   |  | 385   |  | 255  |  | 77  
|Recoveries of loans and advances to
    customers |  | (41)  |  | (37) |  | (52)
|                                                 
|                                                  |  | 344   |  | 218  |  | 25  
|                                                 

10. Taxation expense


|                                                                  |  |       |  |      |  |     
|----------------------------------------------------------------- |  | ----- |  | ---- |  | ----
|                                                                  |  | Group
|                                                                  |  |      
|                                                                  |  | 2006  |  | 2005 |  | 2004
|                                                                  |  | £m    |  | £m   |  | £m  
|                                                                 
|Current tax:                                                      |  |       |  |      |  |     
|UK corporation tax on profit/(loss)
    of the year               |  | 41    |  | 121  |  | (48)
|Adjustments and reclassifications
    in respect of prior periods |  | 120   |  | (1)  |  | 8   
|                                                                 
|Total current tax                                                 |  | 161   |  | 120  |  | (40)
|                                                                 

93



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                                  |  |       |  |      |  |     
|----------------------------------------------------------------- |  | ----- |  | ---- |  | ----
|                                                                  |  | Group
|                                                                  |  |      
|                                                                  |  | 2006  |  | 2005 |  | 2004
|                                                                  |  | £m    |  | £m   |  | £m  
|                                                                 
|Deferred tax:                                                     |  |       |  |      |  |     
|Current year                                                      |  | 82    |  | (20) |  | 38  
|Adjustments and reclassifications
    in respect of prior periods |  | (128) |  | 8    |  | (10)
|                                                                 
|Total deferred tax                                                |  | (46)  |  | (12) |  | 28  
|                                                                 
|Tax on profit / (loss) for
    the year                           |  | 115   |  | 108  |  | (12)
|                                                                 



|                                                                     |  |       |  |      |  |     
|-------------------------------------------------------------------- |  | ----- |  | ---- |  | ----
|                                                                     |  | Group
|                                                                     |  |      
|                                                                     |  | 2006  |  | 2005 |  | 2004
|                                                                     |  | £m    |  | £m   |  | £m  
|                                                                    
|Profit before tax                                                    |  | 428   |  | 362  |  | 16  
|                                                                    
|Tax calculated at a tax rate of 30%
    (2005: 30%, 2004: 30%)       |  | 128   |  | 109  |  | 5   
|Non taxable gain on sale of
    subsidiary undertakings              |  | (12)  |  | (7)  |  | (27)
|Non deductible preference dividends
    paid                         |  | 17    |  | 15   |  |    
|Effect of non-allowable provisions
    and other non-equalised items |  | (1)   |  | 44   |  | 6   
|Underlying tax relief on overseas
    dividends                      |  |      |  | (51) |  |    
|Non-taxable dividend income                                          |  | (5)   |  | (7)  |  |    
|Amortisation and impairment of
    goodwill                          |  |      |  | (1)  |  |    
|Effect of non-UK profits and losses                                  |  | (4)   |  | (1)  |  | 6   
|Adjustment to prior year provisions                                  |  | (8)   |  | 7    |  | (2) 
|                                                                    
|Income tax expense                                                   |  | 115   |  | 108  |  | (12)
|                                                                    



11. Profit / (loss) on ordinary activities after tax




12. Discontinued operations




|                                                                 |  |       |  |       |  |      
|---------------------------------------------------------------- |  | ----- |  | ----- |  | -----
|                                                                 |  | Group
|                                                                 |  |      
|                                                                 |  | 2006  |  | 2005  |  | 2004 
|                                                                 |  | £m    |  | £m    |  | £m   
|                                                                
|Total income net of insurance claims                             |  | 236   |  | 385   |  | 315  
|Total operating expenses                                         |  | (73)  |  | (151) |  | (217)
|Impairment losses on intangible
    assets                       |  | (69)  |  |      |  | (135)
|                                                                
|Profit / (loss) of
    discontinued operations before tax        |  | 94    |  | 234   |  | (37) 
|Taxation expense                                                 |  | (75)  |  | (68)  |  | (45) 
|                                                                
|Profit / (loss) of
    discontinued operations                   |  | 19    |  | 166   |  | (82) 
|                                                                
|Loss on sale of discontinued
    operations before and after tax |  | (264) |  |      |  |     
|                                                                
|(Loss) / profit for the year
    from discontinued operations    |  | (245) |  | 166   |  | (82) 
|                                                                

94



---



##### 

Financial Statements



Notes to the Financial
Statementscontinued

13. Cash and balances with central banks

|                            |  |       |  |         |  |      |  |     
|--------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                            |  | Group |  | Company
|                            |  |      
|                            |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                            |  | £m    |  | £m      |  | £m   |  | £m  
|                           
|Cash in hand                |  | 334   |  | 362     |  | 334  |  | 362 
|Balances with central banks |  | 554   |  | 629     |  | 554  |  | 8   
|                           
|                            |  | 888   |  | 991     |  | 888  |  | 370 
|                           

14. Trading assets


|                                |  |        |  |         |  |      |  |     
|------------------------------- |  | ------ |  | ------- |  | ---- |  | ----
|                                |  | Group  |  | Company
|                                |  |       
|                                |  | 2006   |  | 2005    |  | 2006 |  | 2005
|                                |  | £m     |  | £m      |  | £m   |  | £m  
|                               
|Loans and advances to banks     |  | 9,757  |  | 7,013   |  |     |  |    
|Loans and advances to customers |  | 19,993 |  | 18,125  |  |     |  |    
|Debt securities                 |  | 29,810 |  | 31,554  |  |     |  |    
|Equity securities               |  | 2,754  |  | 1,539   |  |     |  |    
|                               
|                                |  | 62,314 |  | 58,231  |  |     |  |    
|                               



|                         |                                                         |        |        |         |        |      |   |      |  
|------------------------ | ------------------------------------------------------- | ------ | ------ | ------- | ------ | ---- | - | ---- | -
|                         |                                                         | Group  |        | Company
|                         |                                                         |       
|                         |                                                         | 2006   |        | 2005    |        | 2006 |   | 2005
|                         |                                                         | £m     |        | £m      |        | £m   |   | £m  
|                        
|Issued by public bodies: |                                                         |        |        |         |        |      |   |     
|                         |  Government securities                                 |        | 2,463  |         | 2,722  |      |  |      | 
|                         |  Other public sector
    securities                    |        |       |         | 350    |      |  |      | 
|                        
|                         |                                                         | 2,463  |        | 3,072   |        |     |   |    
|Issued by other issuers: |                                                         |        |        |         |        |      |   |     
|                         |  Bank and building society
    certificates of deposit |        | 10,839 |         | 18,647 |      |  |      | 
|Other debt securities    |                                                         | 16,508 |        | 9,835   |        |     |   |    
|                        
|                         |                                                         | 29,810 |        | 31,554  |        |     |   |    
|                        



|                   |                    |        |        |         |        |      |   |      |  
|------------------ | ------------------ | ------ | ------ | ------- | ------ | ---- | - | ---- | -
|                   |                    | Group  |        | Company
|                   |                    |       
|                   |                    | 2006   |        | 2005    |        | 2006 |   | 2005
|                   |                    | £m     |        | £m      |        | £m   |   | £m  
|                  
|Debt securities:   |                    |        |        |         |        |      |   |     
|                   |  Listed UK        |        | 3,508  |         | 1,075  |      |  |      | 
|                   |  Listed elsewhere |        | 14,845 |         | 7,171  |      |  |      | 
|                   |  Unlisted         |        | 11,457 |         | 23,308 |      |  |      | 
|                  
|                   |                    | 29,810 |        | 31,554  |        |     |   |    
|                  
|Equity securities: |                    |        |        |         |        |      |   |     
|                   |  Listed UK        |        | 1,850  |         | 1,093  |      |  |      | 
|                   |  Listed elsewhere |        | 904    |         | 446    |      |  |      | 
|                  
|                   |                    | 2,754  |        | 1,539   |        |     |   |    
|                  

15. Derivative financial instruments




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.             



Derivatives held for risk management purposes




95



---



##### 

Financial Statements



Notes to the Financial
Statementscontinued

The table in the risk management report on page 47 summarises
activities undertaken by the Group, the related risks associated
with such activities and the types of derivatives used in
managing such risks. Such risks may also be managed using
natural offsets within other on-balance sheet instruments as
part of an integrated approach to risk management.

Derivative products which are combinations of more basic
derivatives (such as swaps with embedded option features), or
which have leverage features, may be used in circumstances where
the underlying position being hedged contains the same risk
features. In such cases, the derivative used will be structured
to match the risks of the underlying asset or liability.
Exposure to market risk on such contracts is therefore hedged.

The fair values of derivative instruments held both for trading
and hedging purposes are set out in the following tables. The
tables below show the contract or underlying principal amounts,
positive and negative fair values of derivatives analysed by
contract. Contract or notional amounts indicate the volume of
business outstanding at the balance date and do not represent
amounts of risk. The fair values represent the amount at which a
contract could be exchanged in an arms length transaction,
calculated at market rates at the balance sheet date.

Derivatives classified as held for trading or held for risk
management purposes that have not been designated as in a
hedging relationship are classified as derivatives held for
trading in the table below. Derivatives that have been
designated as in a hedging relationship are classified as
derivatives held for fair value hedging below.

|                                                             |  |                    |  |            |  |            
|------------------------------------------------------------ |  | ------------------ |  | ---------- |  | -----------
|                                                             |  | Group             
|                                                             |  |                   
|                                                             |  | Contract/ notional |  | Fair value |  | Fair value 
|2006                                                         |  | amount             |  | assets     |  | liabilities
|Derivatives held for trading                                 |  | £m                 |  | £m         |  | £m         
|                                                            
|Exchange rate contracts:                                     |  |                    |  |            |  |            
| Cross-currency swaps                                       |  | 11,745             |  | 182        |  | 372        
| Foreign exchange swaps and
    forwards                    |  | 3,620              |  | 1          |  | 88         
|                                                            
|                                                             |  | 15,365             |  | 183        |  | 460        
|                                                            
|Interest rate contracts:                                     |  |                    |  |            |  |            
| Interest rate swaps                                        |  | 366,812            |  | 5,125      |  | 5,712      
| Caps, floors and swaptions                                 |  | 42,244             |  | 628        |  | 555        
| Futures (exchange traded)                                  |  | 3,286              |  | 86         |  |           
| Forward rate agreements                                    |  | 68,250             |  | 19         |  | 20         
|                                                            
|                                                             |  | 480,592            |  | 5,858      |  | 6,287      
|                                                            
|Equity and credit contracts:                                 |  |                    |  |            |  |            
| Equity index and similar
    products                      |  | 23,262             |  | 1,026      |  | 2,337      
| Equity index options
    (exchange traded)                 |  | 5,282              |  | 438        |  | 220        
| Credit default swaps and
    similar products              |  | 23,906             |  | 104        |  | 81         
|                                                            
|                                                             |  | 52,450             |  | 1,568      |  | 2,638      
|                                                            
|Total derivative assets and
    liabilities held for trading |  | 548,407            |  | 7,609      |  | 9,385      
|                                                            

|                                                                        |  |                    |  |            |  |            
|----------------------------------------------------------------------- |  | ------------------ |  | ---------- |  | -----------
|                                                                        |  | Group             
|                                                                        |  |                   
|                                                                        |  | Contract/ notional |  | Fair value |  | Fair value 
|2006                                                                    |  | amount             |  | assets     |  | liabilities
|Derivatives held for fair value hedging                                 |  | £m                 |  | £m         |  | £m         
|                                                                       
|Exchange rate contracts:                                                |  |                    |  |            |  |            
| Cross-currency swaps                                                  |  | 14,720             |  | 102        |  | 833        
|Interest rate contracts:                                                |  |                    |  |            |  |            
| Interest rate swaps                                                   |  | 24,919             |  | 625        |  |           
|                                                                       
|Total derivative assets and
    liabilities held for fair value hedging |  | 39,639             |  | 727        |  | 833        
|                                                                       
|Total recognised derivative
    assets and liabilities                  |  | 588,046            |  | 8,336      |  | 10,218     
|                                                                       

|                                                             |  |                    |  |            |  |            
|------------------------------------------------------------ |  | ------------------ |  | ---------- |  | -----------
|                                                             |  | Company           
|                                                             |  |                   
|                                                             |  | Contract/ notional |  | Fair value |  | Fair value 
|2006                                                         |  | amount             |  | assets     |  | liabilities
|Derivatives held for trading                                 |  | £m                 |  | £m         |  | £m         
|                                                            
|Exchange rate contracts:                                     |  |                    |  |            |  |            
| Cross-currency swaps                                       |  | 829                |  | 22         |  | 36         
|Interest rate contracts:                                     |  |                    |  |            |  |            
| Interest rate swaps                                        |  | 41,535             |  | 190        |  | 130        
| Caps, floors and swaptions                                 |  | 253                |  | 1          |  | 4          
|                                                            
|                                                             |  | 41,788             |  | 191        |  | 134        
|                                                            
|Equity and credit contracts:                                 |  |                    |  |            |  |            
| Equity index and similar
    products                      |  | 577                |  | 66         |  | 181        
|                                                            
|Total derivative assets and
    liabilities held for trading |  | 43,194             |  | 279        |  | 351        
|                                                            

96



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                                        |  |                    |  |            |  |            
|----------------------------------------------------------------------- |  | ------------------ |  | ---------- |  | -----------
|                                                                        |  | Company           
|                                                                        |  |                   
|                                                                        |  | Contract/ notional |  | Fair value |  | Fair value 
|2006                                                                    |  | amount             |  | assets     |  | liabilities
|Derivatives held for fair value hedging                                 |  | £m                 |  | £m         |  | £m         
|                                                                       
|Exchange rate contracts:                                                |  |                    |  |            |  |            
| Cross-currency swaps                                                  |  | 1,398              |  | 210        |  | 24         
|Interest rate contracts:                                                |  |                    |  |            |  |            
| Interest rate swaps                                                   |  | 4,119              |  | 157        |  | 306        
|                                                                       
|Total derivative assets and
    liabilities held for fair value hedging |  | 5,517              |  | 367        |  | 330        
|                                                                       
|Total recognised derivative
    assets and liabilities                  |  | 48,711             |  | 646        |  | 681        
|                                                                       

|                                                             |  |                    |  |            |  |            
|------------------------------------------------------------ |  | ------------------ |  | ---------- |  | -----------
|                                                             |  | Group             
|                                                             |  |                   
|                                                             |  | Contract/ notional |  | Fair value |  | Fair value 
|2005                                                         |  | amount             |  | assets     |  | liabilities
|Derivatives held for trading                                 |  | £m                 |  | £m         |  | £m         
|                                                            
|Exchange rate contracts:                                     |  |                    |  |            |  |            
| Cross  currency
    swaps                                 |  | 14,777             |  | 119        |  | 252        
| Foreign exchange swaps and
    forwards                    |  | 1,132              |  | 5          |  | 12         
|                                                            
|                                                             |  | 15,909             |  | 124        |  | 264        
|                                                            
|Interest rate contracts:                                     |  |                    |  |            |  |            
| Interest rate swaps                                        |  | 400,418            |  | 9,273      |  | 9,187      
| Caps, floors and swaptions                                 |  | 41,016             |  | 796        |  | 755        
| Futures (exchange traded)                                  |  | 1,314              |  | 197        |  | 1          
| Forward rate agreements                                    |  | 511                |  |           |  |           
|                                                            
|                                                             |  | 443,259            |  | 10,266     |  | 9,943      
|                                                            
|Equity and credit contracts:                                 |  |                    |  |            |  |            
| Equity index and similar
    products                      |  | 8,748              |  | 475        |  | 786        
| Equity index options
    (exchange traded)                 |  | 3,937              |  | 141        |  |           
| Credit default swaps and
    similar products              |  | 21,283             |  | 108        |  | 99         
|                                                            
|                                                             |  | 33,968             |  | 724        |  | 885        
|                                                            
|Total derivative assets and
    liabilities held for trading |  | 493,136            |  | 11,114     |  | 11,092     
|                                                            

|                                                                        |  |                    |  |            |  |            
|----------------------------------------------------------------------- |  | ------------------ |  | ---------- |  | -----------
|                                                                        |  | Group             
|                                                                        |  |                   
|                                                                        |  | Contract/ notional |  | Fair value |  | Fair value 
|2005                                                                    |  | amount             |  | assets     |  | liabilities
|Derivatives held for fair value hedging                                 |  | £m                 |  | £m         |  | £m         
|                                                                       
|Exchange rate contracts:                                                |  |                    |  |            |  |            
| Cross  currency
    swaps                                            |  | 12,376             |  | 528        |  | 158        
|Interest rate contracts:                                                |  |                    |  |            |  |            
| Interest rate swaps                                                   |  | 9,422              |  | 213        |  | 14         
|                                                                       
|Total derivative assets and
    liabilities held for fair value hedging |  | 21,798             |  | 741        |  | 172        
|                                                                       
|Total recognised derivative
    assets and liabilities                  |  | 514,934            |  | 11,855     |  | 11,264     
|                                                                       

|                                                             |  |                    |  |            |  |            
|------------------------------------------------------------ |  | ------------------ |  | ---------- |  | -----------
|                                                             |  | Company           
|                                                             |  |                   
|                                                             |  | Contract/ notional |  | Fair value |  | Fair value 
|2005                                                         |  | amount             |  | assets     |  | liabilities
|Derivatives held for trading                                 |  | £m                 |  | £m         |  | £m         
|                                                            
|Exchange rate contracts:                                     |  |                    |  |            |  |            
| Cross  currency
    swaps                                 |  | 522                |  | 332        |  | 2          
|Interest rate contracts:                                     |  |                    |  |            |  |            
| Interest rate swaps                                        |  | 32,447             |  | 437        |  | 454        
| Caps, floors and swaptions                                 |  | 523                |  | 3          |  | 1          
|                                                            
|                                                             |  | 32,970             |  | 440        |  | 455        
|                                                            
|Equity and credit contracts:                                 |  |                    |  |            |  |            
| Equity index and similar
    products                      |  | 334                |  | 71         |  | 163        
|                                                            
|Total derivative assets and
    liabilities held for trading |  | 33,826             |  | 843        |  | 620        
|                                                            

|                                                                        |  |                    |  |            |  |            
|----------------------------------------------------------------------- |  | ------------------ |  | ---------- |  | -----------
|                                                                        |  | Company           
|                                                                        |  |                   
|                                                                        |  | Contract/ notional |  | Fair value |  | Fair value 
|2005                                                                    |  | amount             |  | assets     |  | liabilities
|Derivatives held for fair value hedging                                 |  | £m                 |  | £m         |  | £m         
|                                                                       
|Exchange rate contracts:                                                |  |                    |  |            |  |            
| Cross  currency
    swaps                                            |  | 1,658              |  | 181        |  |           
|Interest rate contracts:                                                |  |                    |  |            |  |            
| Interest rate swaps                                                   |  | 7,128              |  | 203        |  | 3          
|                                                                       
|Total derivative assets and
    liabilities held for fair value hedging |  | 8,786              |  | 384        |  | 3          
|                                                                       
|Total recognised derivative
    assets and liabilities                  |  | 42,612             |  | 1,227      |  | 623        
|                                                                       

97



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Gains or losses arising from fair value hedges

|                                                    |  |       |  |       |  |         |  |        
|--------------------------------------------------- |  | ----- |  | ----- |  | ------- |  | -------
|                                                    |  | Group |  | Group |  | Company |  | Company
|                                                    |  | 2006  |  | 2005  |  | 2006    |  | 2005   
|                                                    |  | £m    |  | £m    |  | £m      |  | £m     
|                                                   
|Gains/(losses):                                     |  |       |  |       |  |         |  |        
|On hedging instruments                              |  | (600) |  | 20    |  | (174)   |  | 41     
|On the hedged items attributable to
    hedged risk |  | 610   |  | (38)  |  | 182     |  | (49)   
|                                                   
|Hedge ineffectiveness                               |  | 10    |  | (18)  |  | 8       |  | (8)    
|                                                   



|                                                       |  |             |  |             |  |             |  |            
|------------------------------------------------------ |  | ----------- |  | ----------- |  | ----------- |  | -----------
|                                                       |  | Group      
|                                                       |  |            
|                                                       |  | Contract or |  |             |  | Contract or |  |            
|                                                       |  | underlying  |  | Replacement |  | underlying  |  | Replacement
|                                                       |  | principal   |  | cost        |  | principal   |  | cost       
|                                                       |  | 2006        |  | 2006        |  | 2005        |  | 2005       
|Fair value hedging derivatives maturing:               |  | £m          |  | £m          |  | £m          |  | £m         
|                                                      
|In not more than one year                              |  | 13,750      |  | 140         |  | 4,702       |  | 19         
|In more than one year but not more
    than five years |  | 20,861      |  | 134         |  | 7,880       |  | 236        
|In more than five years                                |  | 5,028       |  | 453         |  | 9,216       |  | 486        
|                                                      
|                                                       |  | 39,639      |  | 727         |  | 21,798      |  | 741        
|                                                      

|                                                       |  |             |  |            |  |             |  |            
|------------------------------------------------------ |  | ----------- |  | ---------- |  | ----------- |  | -----------
|                                                       |  | Company    
|                                                       |  |            
|                                                       |  | Contract or |  |            |  | Contract or |  |            
|                                                       |  | underlying  |  | Replacemen |  | underlying  |  | Replacement
|                                                       |  | principal   |  | cost       |  | principal   |  | cost       
|                                                       |  | 2006        |  | 2006       |  | 2005        |  | 2005       
|Fair value hedging derivatives maturing:               |  | £m          |  | £m         |  | £m          |  | £m         
|                                                      
|In not more than one year                              |  | 254         |  |           |  | 534         |  | 19         
|In more than one year but not more
    than five years |  | 1,727       |  | 66         |  | 5,210       |  | 77         
|In more than five years                                |  | 3,536       |  | 301        |  | 3,042       |  | 288        
|                                                      
|                                                       |  | 5,517       |  | 367        |  | 8,786       |  | 384        
|                                                      



|                                                       |  |             |  |             |  |             |  |            
|------------------------------------------------------ |  | ----------- |  | ----------- |  | ----------- |  | -----------
|                                                       |  | Group      
|                                                       |  |            
|                                                       |  | Contract or |  |             |  | Contract or |  |            
|                                                       |  | underlying  |  | Replacement |  | underlying  |  | Replacement
|                                                       |  | principal   |  | cost        |  | principal   |  | cost       
|                                                       |  | 2006        |  | 2006        |  | 2005        |  | 2005       
|Trading derivatives maturing (before netting):         |  | £m          |  | £m          |  | £m          |  | £m         
|                                                      
|In not more than one year                              |  | 161,929     |  | 1,596       |  | 112,930     |  | 993        
|In more than one year but not more
    than five years |  | 205,890     |  | 1,388       |  | 208,560     |  | 3,285      
|In more than five years                                |  | 180,588     |  | 4,625       |  | 171,646     |  | 6,836      
|                                                      
|                                                       |  | 548,407     |  | 7,609       |  | 493,136     |  | 11,114     
|                                                      

|                                                       |  |             |  |             |  |             |  |            
|------------------------------------------------------ |  | ----------- |  | ----------- |  | ----------- |  | -----------
|                                                       |  | Company    
|                                                       |  |            
|                                                       |  | Contract or |  |             |  | Contract or |  |            
|                                                       |  | underlying  |  | Replacement |  | underlying  |  | Replacement
|                                                       |  | principal   |  | cost        |  | principal   |  | cost       
|                                                       |  | 2006        |  | 2006        |  | 2005        |  | 2005       
|Trading derivatives maturing (before netting):         |  | £m          |  | £m          |  | £m          |  | £m         
|                                                      
|In not more than one year                              |  | 2,366       |  | 15          |  | 306         |  | 15         
|In more than one year but not more
    than five years |  | 16,393      |  | 92          |  | 14,498      |  | 142        
|In more than five years                                |  | 24,435      |  | 172         |  | 19,022      |  | 686        
|                                                      
|                                                       |  | 43,194      |  | 279         |  | 33,826      |  | 843        
|                                                      

16. Financial assets designated at fair value


|                                |  |       |  |         |  |      |  |     
|------------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                                |  | Group |  | Company
|                                |  |      
|                                |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                |  | £m    |  | £m      |  | £m   |  | £m  
|                               
|Loans and advances to banks     |  | 37    |  | 1,639   |  |     |  |    
|Loans and advances to customers |  | 5,353 |  | 4,406   |  | 66   |  | 790 
|Debt securities                 |  | 3,323 |  | 12,882  |  |     |  |    
|Equity securities               |  |      |  | 11,670  |  |     |  |    
|                               
|                                |  | 8,713 |  | 30,597  |  | 66   |  | 790 
|                               

98



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Financial assets are designated at fair value through profit or
loss where this results in more relevant information because it
significantly reduces a measurement inconsistency that would
otherwise arise from measuring the assets or liabilities or
recognising gains or losses on them on a different basis. The
following assets have been designated at fair value through
profit or loss:

(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 securities in issue representing holdings of asset-backed
    securities. They are managed, and their performance is
    evaluated, on a fair value basis in accordance with a documented
    investment strategy and information about them is provided
    internally on that basis to the Groups key management
    personnel. In 2005 the debt and equity securities were held by
    the life insurance 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.The maximum exposure to credit risk on the financial assets held
at fair value through profit or loss at the balance sheet date
was £8,091m (2005: £5,886m) for the Group and
£65m (2005: £760m) for the Company. The maximum
exposure was mitigated by the Group having a charge over the
residential properties in respect of lending to housing
associations. Of the movement in the fair value of the loans and
advances to banks an immaterial amount, both cumulatively and in
the period, was due to changes in credit spreads. This is due to
the loans and advances to banks being short-term cash deposits
and the loans and advances to customers being residential
lending to housing associations.

Debt securities can be analysed by type of issuer as follows:

|                                                        |  |       |  |         |  |      |  |     
|------------------------------------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                                                        |  | Group |  | Company
|                                                        |  |      
|                                                        |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                                        |  | £m    |  | £m      |  | £m   |  | £m  
|                                                       
|Issued 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 |  | 15    |  | 841     |  |     |  |    
|Other debt securities                                   |  | 3,308 |  | 8,730   |  |     |  |    
|                                                       
|                                                        |  | 3,323 |  | 12,882  |  |     |  |    
|                                                       



|                   |                    |       |       |         |        |      |   |      |  
|------------------ | ------------------ | ----- | ----- | ------- | ------ | ---- | - | ---- | -
|                   |                    | Group |       | Company
|                   |                    |      
|                   |                    | 2006  |       | 2005    |        | 2006 |   | 2005
|                   |                    | £m    |       | £m      |        | £m   |   | £m  
|                  
|Debt securities:   |                    |       |       |         |        |      |   |     
|                   |  Listed UK        |       |      |         | 9,065  |      |  |      | 
|                   |  Listed elsewhere |       | 2,725 |         | 2,860  |      |  |      | 
|                   |  Unlisted         |       | 598   |         | 957    |      |  |      | 
|                  
|                   |                    | 3,323 |       | 12,882  |        |     |   |    
|                  
|Equity securities: |                    |       |       |         |        |      |   |     
|                   |  Listed UK        |       |      |         | 10,918 |      |  |      | 
|                   |  Listed elsewhere |       |      |         | 668    |      |  |      | 
|                   |  Unlisted         |       |      |         | 84     |      |  |      | 
|                  
|                   |                    |      |       | 11,670  |        |     |   |    
|                  

17. Loans and advances to banks


|                              |  |       |  |         |  |        |  |       
|----------------------------- |  | ----- |  | ------- |  | ------ |  | ------
|                              |  | Group |  | Company
|                              |  |      
|                              |  | 2006  |  | 2005    |  | 2006   |  | 2005  
|                              |  | £m    |  | £m      |  | £m     |  | £m    
|                             
|Placements with other banks   |  | 728   |  | 444     |  | 295    |  | 293   
|Amounts due from parent       |  | 1,514 |  |        |  | 1,500  |  |      
|Amounts due from subsidiaries |  |      |  |        |  | 39,916 |  | 32,716
|                             
|                              |  | 2,242 |  | 444     |  | 41,711 |  | 33,009
|                             

|                                                   |  |       |  |         |  |        |  |       
|-------------------------------------------------- |  | ----- |  | ------- |  | ------ |  | ------
|                                                   |  | Group |  | Company
|                                                   |  |      
|                                                   |  | 2006  |  | 2005    |  | 2006   |  | 2005  
|Repayable:                                         |  | £m    |  | £m      |  | £m     |  | £m    
|                                                  
|On demand                                          |  | 294   |  | 109     |  | 1,210  |  | 7,673 
|In not more than 3 months                          |  | 194   |  | 334     |  | 3,109  |  | 284   
|In more than 3 months but not
    more than 1 year |  | 15    |  | 1       |  | 691    |  |      
|In more than 1 year but not
    more than 5 years  |  | 239   |  |        |  | 22,129 |  | 25,000
|In more than 5 years                               |  | 1,500 |  |        |  | 14,572 |  | 52    
|                                                  
|                                                   |  | 2,242 |  | 444     |  | 41,711 |  | 33,009
|                                                  

99



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The loans and advances to banks in the above table have the
following interest rate structures:

|                     |  |       |  |         |  |        |  |       
|-------------------- |  | ----- |  | ------- |  | ------ |  | ------
|                     |  | Group |  | Company
|                     |  |      
|                     |  | 2006  |  | 2005    |  | 2006   |  | 2005  
|                     |  | £m    |  | £m      |  | £m     |  | £m    
|                    
|Fixed rate           |  | 482   |  | 32      |  | 13,404 |  | 25,056
|Variable rate        |  | 1,595 |  | 220     |  | 28,154 |  | 7,767 
|Non-interest bearing |  | 165   |  | 192     |  | 153    |  | 186   
|                    
|                     |  | 2,242 |  | 444     |  | 41,711 |  | 33,009
|                    

18. Loans and advances to customers


|                                                                 |  |         |  |         |  |         |  |       
|---------------------------------------------------------------- |  | ------- |  | ------- |  | ------- |  | ------
|                                                                 |  | Group   |  | Company
|                                                                 |  |        
|                                                                 |  | 2006    |  | 2005    |  | 2006    |  | 2005  
|                                                                 |  | £m      |  | £m      |  | £m      |  | £m    
|                                                                
|Advances secured on residential
    properties                   |  | 96,918  |  | 90,098  |  | 96,899  |  | 90,072
|Corporate loans                                                  |  | 353     |  |        |  | 7       |  |      
|Finance leases                                                   |  | 1       |  | 3       |  | 1       |  | 3     
|Other secured advances                                           |  | 2,306   |  | 1,884   |  | 2,185   |  | 1,659 
|Other unsecured advances                                         |  | 4,104   |  | 3,876   |  | 4,103   |  | 3,763 
|Amounts due from subsidiaries                                    |  |        |  |        |  | 677     |  | 186   
|                                                                
|Loans and advances to
    customers                              |  | 103,682 |  | 95,861  |  | 103,872 |  | 95,683
|                                                                
|Less: loan loss allowances                                       |  | 536     |  | 394     |  | 623     |  | 453   
|                                                                
|Loans and advances to customers,
    net of loan loss allowances |  | 103,146 |  | 95,467  |  | 103,249 |  | 95,230
|                                                                

|                                                                 |  |         |  |         |  |         |  |       
|---------------------------------------------------------------- |  | ------- |  | ------- |  | ------- |  | ------
|                                                                 |  | Group   |  | Company
|                                                                 |  |        
|                                                                 |  | 2006    |  | 2005    |  | 2006    |  | 2005  
|                                                                 |  | £m      |  | £m      |  | £m      |  | £m    
|                                                                
|Repayable:                                                       |  |         |  |         |  |         |  |       
|On demand                                                        |  | 635     |  | 2,398   |  | 1,219   |  | 2,355 
|In no more than 3 months                                         |  | 1,865   |  | 149     |  | 1,477   |  | 132   
|In more than 3 months but not
    more than a year               |  | 2,362   |  | 2,216   |  | 2,432   |  | 2,171 
|In more than 1 year but not
    more than 5 years                |  | 13,178  |  | 12,005  |  | 13,129  |  | 11,956
|In more than 5 years                                             |  | 85,642  |  | 79,093  |  | 85,615  |  | 79,069
|                                                                
|Loans and advances to
    customers                              |  | 103,682 |  | 95,861  |  | 103,872 |  | 95,683
|                                                                
|Less: loan loss allowances                                       |  | 536     |  | 394     |  | 623     |  | 453   
|                                                                
|Loans and advances to customers,
    net of loan loss allowances |  | 103,146 |  | 95,467  |  | 103,249 |  | 95,230
|                                                                



|                           |  |         |  |         |  |         |  |       
|-------------------------- |  | ------- |  | ------- |  | ------- |  | ------
|                           |  | Group   |  | Company
|                           |  |        
|                           |  | 2006    |  | 2005    |  | 2006    |  | 2005  
|                           |  | £m      |  | £m      |  | £m      |  | £m    
|                          
|Fixed rate                 |  | 35,398  |  | 26,644  |  | 35,141  |  | 26,513
|Variable rate              |  | 68,284  |  | 69,217  |  | 68,731  |  | 69,170
|Less: loan loss allowances |  | 536     |  | 394     |  | 623     |  | 453   
|                          
|                           |  | 103,146 |  | 95,467  |  | 103,249 |  | 95,230
|                          





|                                             |  |             |  |           |  |         |  |          |  |           |  |      
|-------------------------------------------- |  | ----------- |  | --------- |  | ------- |  | -------- |  | --------- |  | -----
|                                             |  | Loans       |  |           |  |         |  |          |  |           |  |      
|                                             |  | secured     |  |           |  |         |  |          |  |           |  |      
|                                             |  | on          |  |           |  |         |  | Other    |  | Other     |  |      
|                                             |  | residential |  | Corporate |  | Finance |  | secured  |  | unsecured |  |      
|                                             |  | property    |  | loans     |  | leases  |  | advances |  | advances  |  | Total
|Group                                        |  | £m          |  | £m        |  | £m      |  | £m       |  | £m        |  | £m   
|                                            
|As at 1 January 2006                         |  | 56          |  |          |  | 3       |  | 123      |  | 212       |  | 394  
|                                            
|Charge/(release) to the income
    statement |  | 60          |  |          |  |        |  | (22)     |  | 348       |  | 386  
|Write offs                                   |  | (11)        |  |          |  | (2)     |  | (25)     |  | (206)     |  | (244)
|                                            
|At 31 December 2006                          |  | 105         |  |          |  | 1       |  | 76       |  | 354       |  | 536  
|                                            
|                                            
|                                            
|As at 1 January 2005                         |  | 52          |  |          |  | 3       |  | 147      |  | 225       |  | 427  
|Charge/(release) to the income
    statement |  | 9           |  |          |  | (1)     |  | 12       |  | 235       |  | 255  
|Write offs                                   |  | (5)         |  |          |  | 1       |  | (36)     |  | (248)     |  | (288)
|                                            
|At 31 December 2005                          |  | 56          |  |          |  | 3       |  | 123      |  | 212       |  | 394  
|                                            

100



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                             |  |                |  |              |  |         |  |          |  |           |  |      
|-------------------------------------------- |  | -------------- |  | ------------ |  | ------- |  | -------- |  | --------- |  | -----
|                                             |  | Loans secured  |  | Amounts      |  |         |  | Other    |  | Other     |  |      
|                                             |  | on residential |  | due from     |  | Finance |  | secured  |  | unsecured |  |      
|                                             |  | property       |  | subsidiaries |  | leases  |  | advances |  | advances  |  | Total
|Company                                      |  | £m             |  | £m           |  | £m      |  | £m       |  | £m        |  | £m   
|                                            
|As at 1 January 2006                         |  | 48             |  | 186          |  | 3       |  | 6        |  | 210       |  | 453  
|Charge/(release) to the income
    statement |  | 60             |  | (25)         |  |        |  | 1        |  | 374       |  | 410  
|Write offs                                   |  | (3)            |  |             |  | (2)     |  | (3)      |  | (232)     |  | (240)
|                                            
|At 31 December 2006                          |  | 105            |  | 161          |  | 1       |  | 4        |  | 352       |  | 623  
|                                            
|As at 1 January 2005                         |  | 43             |  | 183          |  | 3       |  | 5        |  | 223       |  | 457  
|Charge/(release) to the income
    statement |  | 11             |  | 3            |  | (1)     |  | 2        |  | 227       |  | 242  
|Write offs                                   |  | (6)            |  |             |  | 1       |  | (1)      |  | (240)     |  | (246)
|                                            
|At 31 December 2005                          |  | 48             |  | 186          |  | 3       |  | 6        |  | 210       |  | 453  
|                                            





|                                                     |  |       |  |         |  |      |  |     
|---------------------------------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                                                     |  | Group |  | Company
|                                                     |  |      
|                                                     |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                                     |  | £m    |  | £m      |  | £m   |  | £m  
|                                                    
|Gross investment in finance leases:                  |  |       |  |         |  |      |  |     
|No later than 3 months                               |  |      |  | 1       |  |     |  | 1   
|Later than 3 months and no
    later than 1 year     |  | 1     |  | 1       |  | 1    |  | 1   
|Later than 1 year and no later
    than 5 years      |  |      |  | 1       |  |     |  | 1   
|                                                    
|                                                     |  | 1     |  | 3       |  | 1    |  | 3   
|Less:                                                |  |       |  |         |  |      |  |     
|Unearned future finance income on
    finance leases |  |      |  |        |  |     |  |    
|Provisions allowance for impairment                  |  | (1)   |  | (3)     |  | (1)  |  | (3) 
|                                                    
|Net investment in finance leases                     |  |      |  |        |  |     |  |    
|                                                    

19. Securitisation of assets










101



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The balances of assets securitised and non-recourse finance at
31 December 2006 were as follows:

|                                                   |  |                                |  |              |  |             
|-------------------------------------------------- |  | ------------------------------ |  | ------------ |  | ------------
|                                                   |  |                                |  | Gross assets |  | Non-recourse
|                                                   |  |                                |  | securitised  |  | finance     
|Securitisation company                             |  | Closing date of securitisation |  | £m           |  | £m          
|                                                  
|Holmes Financing (No. 1) plc                       |  | 26 July 2000                   |  | 904          |  | 904         
|Holmes Financing (No. 2) plc                       |  | 29 November 2000               |  | 334          |  | 334         
|Holmes Financing (No. 6) plc                       |  | 7 November 2002                |  | 1,797        |  | 2,077       
|Holmes Financing (No. 7) plc                       |  | 26 March 2003                  |  | 853          |  | 1,014       
|Holmes Financing (No. 8) plc                       |  | 1 April 2004                   |  | 2,003        |  | 2,890       
|Holmes Financing (No. 9) plc                       |  | 8 December 2005                |  | 2,779        |  | 2,779       
|Holmes Financing (No. 10) plc                      |  | 8 August 2006                  |  | 3,420        |  | 3,929       
|Holmes Master Issuer plc                           |  | 28 November 2006               |  | 3,063        |  | 3,460       
|Beneficial interest in Holmes
    Trustees Limited |  |                                |  | 13,986       |  |            
|                                                  
|                                                   |  |                                |  | 29,139       |  | 17,387      
|                                                  









Income statement for the year ended 31 December


|                                                         |  |                          |  |      |  |     
|-------------------------------------------------------- |  | ------------------------ |  | ---- |  | ----
|                                                         |  | Securitisation companies
|                                                         |  |                         
|                                                         |  | 2006                     |  | 2005 |  | 2004
|                                                         |  | £m                       |  | £m   |  | £m  
|                                                        
|Net interest income                                      |  | 21                       |  | 22   |  | 15  
|Other operating income                                   |  | 67                       |  | (50) |  | (9) 
|Administrative expenses                                  |  |                         |  | (2)  |  | (1) 
|Impairment (losses)/recoveries on
    loans and advances |  | (4)                      |  | (3)  |  | 19  
|Taxation expense                                         |  | (25)                     |  | 9    |  | (3) 
|                                                        
|Profit/(loss) for the year                               |  | 59                       |  | (24) |  | 21  
|                                                        

Balance sheet as at 31 December


|                                 |  |                          |  |       
|-------------------------------- |  | ------------------------ |  | ------
|                                 |  | Securitisation companies
|                                 |  |                         
|                                 |  | 2006                     |  | 2005  
|                                 |  | £m                       |  | £m    
|                                
|Derivative financial instruments |  | 169                      |  | 321   
|Loans and advances to banks      |  | 2,767                    |  | 928   
|Loans and advances to customers  |  | 15,189                   |  | 15,042
|Other assets                     |  | 3                        |  | 8     
|                                
|Total assets                     |  | 18,128                   |  | 16,299
|                                
|Deposits by banks                |  | 410                      |  | 206   
|Derivative financial instruments |  | 712                      |  | 158   
|Debt securities in issue         |  | 16,941                   |  | 15,950
|Other liabilities                |  | 23                       |  | 2     
|                                
|Total liabilities                |  | 18,086                   |  | 16,316
|Retained earnings                |  | 42                       |  | (17)  
|                                
|Total liabilities and equity     |  | 18,128                   |  | 16,299
|                                



20. Available for sale securities


|                  |  |       |  |         |  |      |  |     
|----------------- |  | ----- |  | ------- |  | ---- |  | ----
|                  |  | Group |  | Company
|                  |  |      
|                  |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                  |  | £m    |  | £m      |  | £m   |  | £m  
|                 
|Debt securities   |  | 8     |  |        |  | 8    |  | 270 
|Equity securities |  | 15    |  | 13      |  | 4    |  | 2   
|                 
|                  |  | 23    |  | 13      |  | 12   |  | 272 
|                 

102



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Maturities of debt securities:

|                                              |  |       |  |         |  |      |  |     
|--------------------------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                                              |  | Group |  | Company
|                                              |  |      
|                                              |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                              |  | £m    |  | £m      |  | £m   |  | £m  
|                                             
|Due in one year but not more than
    5 years |  | 8     |  |        |  | 8    |  |    
|Due in more than 10 years                     |  |      |  |        |  |     |  | 270 
|                                             
|                                              |  | 8     |  |        |  | 8    |  | 270 
|                                             





|                   |                    |       |    |         |    |      |   |      |  
|------------------ | ------------------ | ----- | -- | ------- | -- | ---- | - | ---- | -
|                   |                    | Group |    | Company
|                   |                    |      
|                   |                    | 2006  |    | 2005    |    | 2006 |   | 2005
|                   |                    | £m    |    | £m      |    | £m   |   | £m  
|                  
|Equity securities: |                    |       |    |         |    |      |   |     
|                   |  Listed UK        |       | 13 |         | 12 |      | 1 |      | 1
|                   |  Listed elsewhere |       | 1  |         |   |      | 2 |      | 
|                   |  Unlisted         |       | 1  |         | 1  |      | 1 |      | 1
|                  
|                   |                    | 15    |    | 13      |    | 4    |   | 2   
|                  





|                                |  |       |  |        
|------------------------------- |  | ----- |  | -------
|                                |  | Group |  | Company
|                                |  | £m    |  | £m     
|                               
|At 1 January 2006               |  | 13    |  | 272    
|Additions                       |  | 9     |  | 9      
|Disposals (sale and redemption) |  |      |  | (269)  
|Movement in fair value          |  | 1     |  |       
|                               
|At 31 December 2006             |  | 23    |  | 12     
|                               

|                                            |  |       |  |        
|------------------------------------------- |  | ----- |  | -------
|                                            |  | Group |  | Company
|                                            |  | £m    |  | £m     
|                                           
|At 1 January 2005                           |  | 11    |  | 379    
|Additions                                   |  | 2     |  |       
|Disposals (sale and redemption)             |  |      |  | (100)  
|Exchange differences on monetary
    assets |  |      |  | (7)    
|                                           
|At 31 December 2005                         |  | 13    |  | 272    
|                                           

21. Investment in subsidiary undertakings


|      |  |                |  |               
|----- |  | -------------- |  | --------------
|      |  | 2006           |  | 2005          
|      |  | Net book value |  | Net book value
|      |  | £m             |  | £m            
|     
|Banks |  | 2,974          |  | 2,974         
|Other |  | 1,952          |  | 5,716         
|     
|      |  | 4,926          |  | 8,690         
|     



|                          |  |         |  |            |  |               
|------------------------- |  | ------- |  | ---------- |  | --------------
|                          |  | Company
|                          |  |        
|                          |  | Cost    |  | Impairment |  | Net book value
|                          |  | £m      |  | £m         |  | £m            
|                         
|At 1 January 2006         |  | 9,895   |  | (1,205)    |  | 8,690         
|Additions                 |  | 54      |  | (2)        |  | 52            
|Disposals                 |  | (4,801) |  | 965        |  | (3,836)       
|Write-back of impairments |  |        |  | 20         |  | 20            
|                         
|At 31 December 2006       |  | 5,148   |  | (222)      |  | 4,926         
|                         

|                          |  |       |  |            |  |               
|------------------------- |  | ----- |  | ---------- |  | --------------
|                          |  | Cost  |  | Impairment |  | Net book value
|                          |  | £m    |  | £m         |  | £m            
|                         
|At 1 January 2005         |  | 9,962 |  | (1,712)    |  | 8,250         
|Additions                 |  | 1     |  | (34)       |  | (33)          
|Disposals                 |  | (68)  |  |           |  | (68)          
|Write-back of impairments |  |      |  | 541        |  | 541           
|                         
|At 31 December 2005       |  | 9,895 |  | (1,205)    |  | 8,690         
|                         

103



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The Company announced on 7 June 2006 that it had entered
into an agreement to sell its entire life insurance business to
Resolution for cash consideration of approximately £3.6bn.
The sale completed in the third quarter of 2006. The principal
life companies sold were Scottish Mutual Assurance plc, Scottish
Provident Limited and Abbey National Life plc, as well as the
two offshore life companies, Scottish Mutual International plc
and Scottish Provident International Life Assurance Limited.

On 31 December 2006, the Company sold its entire asset
management businesses to Santander Asset Management UK Holdings
Limited, an indirect subsidiary of Banco Santander Central
Hispano, S.A.. The asset management companies sold were Abbey
National Asset Managers Limited, Abbey National PEP & ISA
Managers Limited, Abbey National Unit Trust Managers
Limited and Inscape Investments Limited.

In 2005, Scottish Mutual Pensions Limited paid a £67m
dividend out of capital. As a result, Abbey National plcs
investment in Scottish Mutual Pensions Limited reduced by
£67m. Abbey National Independent Financial Consultants
Limited was dissolved during 2005 making up the remaining
£1m of disposals.

The write-back of impairments of shares in Group undertakings in
2005 included: Abbey National Treasury Services plc £492m,
Cater Tyndall Limited £23m, Scottish Mutual International
Holdings £18m, and Inscape Investments Limited £4m.
This was offset by impairment of shares in Group undertakings,
which include the following: Scottish Mutual Pensions Limited
£12m, Abbey National Business Equipment Leasing Limited
£10m, Key Investments Limited £2m, and Abbey National
Business Leasing (Holdings) Limited £2m. These impairments
are only in the Abbey National plc accounts and do not affect
the consolidated accounts.

Investments in subsidiaries are held at cost subject to
impairment. The following table details significant group
undertakings sold in the year and the consideration received.

|                                                            |  |   |  |                    
|----------------------------------------------------------- |  | - |  | -------------------
|Company disposed of                                         |  |   |  | Gross consideration
|                                                           
|Scottish Mutual Assurance plc                               |  | ) |  | £3.6bn             
|Scottish Provident Limited                                  |  | ) |  |                    
|Abbey National Life plc                                     |  | ) |  |                    
|Scottish Mutual International plc                           |  | ) |  |                    
|Scottish Provident International
    Life Assurance Limited |  | ) |  |                    
|                                                           
|Abbey National Asset Managers
    Limited                   |  |   |  | £10m               
|                                                           
|Abbey National PEP & ISA
    Managers Limited               |  |   |  | £71m               
|                                                           
|Abbey National Unit
    Trust Managers Limited              |  |   |  | £16m               
|                                                           
|Inscape Investments Limited                                 |  |   |  | £37m               
|                                                           



|                                          |  |                      |  |                 |  |                         
|----------------------------------------- |  | -------------------- |  | --------------- |  | ------------------------
|                                          |  |                      |  |                 |  | Country of incorporation
|Principal subsidiary                      |  | Nature of business   |  | % Interest held |  | or registration         
|                                         
|Abbey National Treasury Services plc      |  | Treasury operations  |  | 100%            |  | England & Wales         
|Abbey National International
    Limited* |  | Personal finance     |  | 100%            |  | Jersey                  
|Cater Allen International Limited*        |  | Securities financing |  | 100%            |  | England & Wales         
|Abbey National North America LLC*         |  | Funding              |  | 100%            |  | United States           
|Abbey National Securities Inc*            |  | Securities financing |  | 100%            |  | United States           
|Porterbrook Leasing Company Limited*      |  | Leasing              |  | 100%            |  | England & Wales         
|                                         

|  |                                              
|- | ---------------------------------------------
|* | Held indirectly through subsidiary companies.



22. Investment in associated undertakings




|                        |  |       |  |        
|----------------------- |  | ----- |  | -------
|                        |  | Group |  | Company
|                        |  |      
|                        |  | £m    |  | £m     
|                       
|At 1 January 2006       |  | 24    |  | 24     
|Additional investment   |  | 19    |  | 19     
|Capital reduction       |  | (18)  |  | (18)   
|Dividends received      |  | (3)   |  |       
|                       
|At 31 December
    2006 |  | 22    |  | 25     
|                       

104



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                      |  |       |  |        
|--------------------- |  | ----- |  | -------
|                      |  | Group |  | Company
|                      |  |      
|                      |  | 2005  |  | 2005   
|                      |  | £m    |  | £m     
|                     
|At 1 January 2005     |  | 25    |  | 19     
|Additional investment |  | 5     |  | 5      
|Share of results      |  | (2)   |  |       
|Share of tax          |  | (1)   |  |       
|Dividends received    |  | (3)   |  |       
|                     
|At 31 December 2005   |  | 24    |  | 24     
|                     



|                                                  |  |                   |  |        |  |             |  |        |  |         |  |           
|------------------------------------------------- |  | ----------------- |  | ------ |  | ----------- |  | ------ |  | ------- |  | ----------
|                                                  |  | Country of        |  | Assets |  | Liabilities |  | Income |  | Expense |  | % interest
|Name and nature of business                       |  | incorporation     |  | £m     |  | £m          |  | £m     |  | £m      |  | held      
|                                                 
|PSA Finance plc, personal finance                 |  | England and Wales |  | 7      |  | (3)         |  | (6)    |  | 2       |  | 50.0      
|Santander Consumer (UK) plc,
    consumer finance |  | England and Wales |  | 400    |  | (360)       |  | (28)   |  | 32      |  | 49.9      
|                                                 



|                                                  |  |                   |  |        |  |             |  |        |  |         |  |           
|------------------------------------------------- |  | ----------------- |  | ------ |  | ----------- |  | ------ |  | ------- |  | ----------
|                                                  |  | Country of        |  | Assets |  | Liabilities |  | Income |  | Expense |  | % interest
|Name and nature of business                       |  | incorporation     |  | £m     |  | £m          |  | £m     |  | £m      |  | held      
|                                                 
|PSA Finance plc, personal finance                 |  | England and Wales |  | 44     |  | (3)         |  | (4)    |  | 6       |  | 50.0      
|Santander Consumer (UK) plc,
    consumer finance |  | England and Wales |  | 48     |  | (41)        |  | (3)    |  | 7       |  | 49.9      
|                                                 



23. Intangible assets


a) Goodwill


|                       |  |       |  |         |  |      |  |     
|---------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                       |  | Group |  | Company
|                       |  |      
|                       |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                       |  | £m    |  | £m      |  | £m   |  | £m  
|                      
|Cost                   |  |       |  |         |  |      |  |     
|At 1 January           |  | 776   |  | 776     |  |     |  |    
|Disposals              |  | (664) |  |        |  |     |  |    
|                      
|At 31 December         |  | 112   |  | 776     |  |     |  |    
|                      
|Accumulated impairment |  |       |  |         |  |      |  |     
|At 1 January           |  | 640   |  | 640     |  |     |  |    
|Impairment losses      |  | 46    |  |        |  |     |  |    
|Disposals              |  | (664) |  |        |  |     |  |    
|                      
|At 31 December         |  | 22    |  | 640     |  |     |  |    
|                      
|Net book value         |  | 90    |  | 136     |  |     |  |    
|                      

Impairment of Goodwill






|                     |  |                          |  |          |  |      |  |      |  |                         |  |             |  |          |  |       
|-------------------- |  | ------------------------ |  | -------- |  | ---- |  | ---- |  | ----------------------- |  | ----------- |  | -------- |  | ------
|                     |  |                          |  | Goodwill |  |      |  |      |  |                         |  |            
|                     |  |                          |  |          |  |      |  |      |  |                         |  |            
|Significant          |  |                          |  | 2006     |  | 2005 |  | 2004 |  |                         |  | Key         |  | Discount |  | Growth
|Business Division    |  | Cash Generating Unit     |  | £m       |  | £m   |  | £m   |  | Basis of valuation      |  | assumptions |  | rate     |  | rate  
|                    
|Retail Banking       |  | Cater Allen Private Bank |  | 90       |  | 90   |  | 90   |  | Value in use: cash flow |  | 3 year plan |  | 6.6%     |  | 2.3%  
|Sold Life Businesses |  | Sold Life Businesses     |  |         |  | 46   |  | 46   |  | Value in use: cash flow |  | Budget      |  | 7.0%     |  | 5.0%  
|                    

105



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

b) Other intangibles

|                                          |  |            |  |                       |  |      
|----------------------------------------- |  | ---------- |  | --------------------- |  | -----
|                                          |  | Group     
|                                          |  |           
|                                          |  | Trademarks |  | Distribution channels |  | Total
|                                          |  | £m         |  | £m                    |  | £m   
|                                         
|Cost                                      |  |            |  |                       |  |      
|At 1 January 2006                         |  | 24         |  | 235                   |  | 259  
|Disposals                                 |  | (24)       |  | (235)                 |  | (259)
|                                         
|At 31 December 2006                       |  |           |  |                      |  |     
|                                         
|Accumulated amortisation /
    impairment |  |            |  |                       |  |      
|At 1 January 2006                         |  | 5          |  | 219                   |  | 224  
|Impairment losses                         |  | 18         |  | 15                    |  | 33   
|Charge for the year                       |  | 1          |  | 1                     |  | 2    
|Disposals                                 |  | (24)       |  | (235)                 |  | (259)
|                                         
|At 31 December 2006                       |  |           |  |                      |  |     
|                                         
|Net book value                            |  |           |  |                      |  |     
|                                         

|                                          |  |            |  |                       |  |      
|----------------------------------------- |  | ---------- |  | --------------------- |  | -----
|                                          |  | Group     
|                                          |  |           
|                                          |  | Trademarks |  | Distribution channels |  | Total
|                                          |  | £m         |  | £m                    |  | £m   
|                                         
|Cost                                      |  |            |  |                       |  |      
|At 1 January and
    31 December 2005     |  | 24         |  | 235                   |  | 259  
|                                         
|Accumulated amortisation /
    impairment |  |            |  |                       |  |      
|At 1 January 2005                         |  | 4          |  | 216                   |  | 220  
|Charge for the year                       |  | 1          |  | 3                     |  | 4    
|                                         
|At 31 December 2005                       |  | 5          |  | 219                   |  | 224  
|                                         
|Net book value                            |  | 19         |  | 16                    |  | 35   
|                                         



24. Value of in-force business


|                                          |  |         |  |         |  |      |  |     
|----------------------------------------- |  | ------- |  | ------- |  | ---- |  | ----
|                                          |  | Group   |  | Company
|                                          |  |        
|                                          |  | 2006    |  | 2005    |  | 2006 |  | 2005
|                                          |  | £m      |  | £m      |  | £m   |  | £m  
|                                         
|At 1 January                              |  | 1,721   |  | 1,777   |  |     |  |    
|Changes in value of in-force
    business |  | (96)    |  | (56)    |  |     |  |    
|Disposals                                 |  | (1,625) |  |        |  |     |  |    
|                                         
|At 31 December                            |  |        |  | 1,721   |  |     |  |    
|                                         

25. Property, plant and equipment (excluding operating lease
assets)


|                                 |  |                |  |                 |  |          |  |      
|-------------------------------- |  | -------------- |  | --------------- |  | -------- |  | -----
|                                 |  | Group         
|                                 |  |               
|                                 |  | Owner-occupied |  | Office fixtures |  | Computer |  |      
|                                 |  | properties     |  | and equipment   |  | software |  | Total
|                                 |  | £m             |  | £m              |  | £m       |  | £m   
|                                
|Cost:                            |  |                |  |                 |  |          |  |      
|At 1 January 2006                |  | 46             |  | 1,043           |  | 347      |  | 1,436
|Additions                        |  | 15             |  | 71              |  | 103      |  | 189  
|Disposals                        |  | (6)            |  | (682)           |  | (189)    |  | (877)
|                                
|At 31 December 2006              |  | 55             |  | 432             |  | 261      |  | 748  
|                                
|Accumulated
    depreciation:    |  |                |  |                 |  |          |  |      
|At 1 January 2006                |  | 12             |  | 850             |  | 260      |  | 1,122
|Depreciation charge for the year |  | 5              |  | 77              |  | 3        |  | 85   
|Disposals                        |  | (3)            |  | (682)           |  | (189)    |  | (874)
|                                
|At 31 December 2006              |  | 14             |  | 245             |  | 74       |  | 333  
|                                
|Net book value                   |  | 41             |  | 187             |  | 187      |  | 415  
|                                

106



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                 |  |                |  |                 |  |          |  |      
|-------------------------------- |  | -------------- |  | --------------- |  | -------- |  | -----
|                                 |  | Group         
|                                 |  |               
|                                 |  | Owner-occupied |  | Office fixtures |  | Computer |  |      
|                                 |  | properties     |  | and equipment   |  | software |  | Total
|                                 |  | £m             |  | £m              |  | £m       |  | £m   
|                                
|Cost:                            |  |                |  |                 |  |          |  |      
|At 1 January 2005                |  | 50             |  | 1,018           |  | 265      |  | 1,333
|Additions                        |  | 14             |  | 92              |  | 84       |  | 190  
|Disposals                        |  | (18)           |  | (67)            |  | (2)      |  | (87) 
|                                
|At 31 December 2005              |  | 46             |  | 1,043           |  | 347      |  | 1,436
|                                
|Accumulated
    depreciation:    |  |                |  |                 |  |          |  |      
|At 1 January 2005                |  | 10             |  | 804             |  | 257      |  | 1,071
|Depreciation charge for the year |  | 3              |  | 64              |  | 5        |  | 72   
|Disposals                        |  | (1)            |  | (18)            |  | (2)      |  | (21) 
|                                
|At 31 December 2005              |  | 12             |  | 850             |  | 260      |  | 1,122
|                                
|Net book value                   |  | 34             |  | 193             |  | 87       |  | 314  
|                                



|                              |  |                |  |                 |  |          |  |      
|----------------------------- |  | -------------- |  | --------------- |  | -------- |  | -----
|                              |  | Company       
|                              |  |               
|                              |  | Owner-occupied |  | Office fixtures |  | Computer |  |      
|                              |  | properties     |  | and equipment   |  | software |  | Total
|                              |  | £m             |  | £m              |  | £m       |  | £m   
|                             
|Cost:                         |  |                |  |                 |  |          |  |      
|At 1 January 2006             |  | 38             |  | 1,017           |  | 199      |  | 1,254
|Additions                     |  | 15             |  | 66              |  | 98       |  | 179  
|Disposals                     |  | (6)            |  | (677)           |  | (110)    |  | (793)
|                             
|At 31 December 2006           |  | 47             |  | 406             |  | 187      |  | 640  
|                             
|Accumulated
    depreciation: |  |                |  |                 |  |          |  |      
|At 1 January 2006             |  | 9              |  | 834             |  | 113      |  | 956  
|Depreciation charge           |  | 4              |  | 73              |  | 2        |  | 79   
|Disposals                     |  | (3)            |  | (677)           |  | (110)    |  | (790)
|                             
|At 31 December 2006           |  | 10             |  | 230             |  | 5        |  | 245  
|                             
|Net book value                |  | 37             |  | 176             |  | 182      |  | 395  
|                             

|                              |  |                |  |                 |  |          |  |      
|----------------------------- |  | -------------- |  | --------------- |  | -------- |  | -----
|                              |  | Company       
|                              |  |               
|                              |  | Owner-occupied |  | Office fixtures |  | Computer |  |      
|                              |  | properties     |  | and equipment   |  | software |  | Total
|                              |  | £m             |  | £m              |  | £m       |  | £m   
|                             
|Cost:                         |  |                |  |                 |  |          |  |      
|At 1 January 2005             |  | 31             |  | 991             |  | 115      |  | 1,137
|Additions                     |  | 12             |  | 89              |  | 84       |  | 185  
|Disposals                     |  | (5)            |  | (63)            |  |         |  | (68) 
|                             
|At 31 December 2005           |  | 38             |  | 1,017           |  | 199      |  | 1,254
|                             
|Accumulated
    depreciation: |  |                |  |                 |  |          |  |      
|At 1 January 2005             |  | 7              |  | 789             |  | 110      |  | 906  
|Depreciation charge           |  | 3              |  | 60              |  | 3        |  | 66   
|Disposals                     |  | (1)            |  | (15)            |  |         |  | (16) 
|                             
|At 31 December 2005           |  | 9              |  | 834             |  | 113      |  | 956  
|                             
|Net book value                |  | 29             |  | 183             |  | 86       |  | 298  
|                             



26. Operating lease assets


|                                |  |       |  |      
|------------------------------- |  | ----- |  | -----
|                                |  | Group
|                                |  |      
|                                |  | 2006  |  | 2005 
|                                |  | £m    |  | £m   
|                               
|Cost                            |  |       |  |      
|At 1 January                    |  | 3,252 |  | 3,275
|Additions                       |  | 41    |  | 139  
|Disposals                       |  | (18)  |  | (162)
|                               
|At 31 December                  |  | 3,275 |  | 3,252
|                               
|Depreciation and
    impairment |  |       |  |      
|At 1 January                    |  | 1,080 |  | 1,000
|Charge for the year             |  | 130   |  | 123  
|Disposals                       |  | (17)  |  | (43) 
|                               
|At 31 December                  |  | 1,193 |  | 1,080
|                               
|Net book value                  |  | 2,082 |  | 2,172
|                               

107



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Future minimum lease receipts under non-cancellable operating
leases are due over the following periods:

|                                                                                                    |  |       |  |      
|--------------------------------------------------------------------------------------------------- |  | ----- |  | -----
|                                                                                                    |  | Group
|                                                                                                    |  |      
|                                                                                                    |  | 2006  |  | 2005 
|                                                                                                    |  | £m    |  | £m   
|                                                                                                   
|In no more than 1 year                                                                              |  | 228   |  | 253  
|In more than 1 year but no
    more than 5 years                                                    |  | 636   |  | 581  
|In more than 5 years                                                                                |  | 338   |  | 286  
|                                                                                                   
|                                                                                                    |  | 1,202 |  | 1,120
|                                                                                                   
|Contingent rents recognised as
    income                                                           |  |      |  |     
|                                                                                                   
|Capital expenditure which has been
    contracted, but not provided for in the financial statements |  | 93    |  | 81   
|                                                                                                   



27. Investment property


|                                           |  |        
|------------------------------------------ |  | -------
|                                           |  | Group  
|                                           |  | £m     
|                                          
|At 1 January 2005                          |  | 1,228  
|Net losses from fair value
    adjustments |  | (127)  
|Disposals                                  |  | (1,101)
|                                          
|At 31 December 2005                        |  |       
|                                          



28. Deferred tax






|                                                     |  |       |  |         |  |      |  |     
|---------------------------------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                                                     |  | Group |  | Company
|                                                     |  |      
|                                                     |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                                     |  | £m    |  | £m      |  | £m   |  | £m  
|                                                    
|At 1 January                                         |  | (90)  |  | (563)   |  | 702  |  | 494 
|Tax effect of adopting IAS 32, IAS
    39 and IFRS 4 |  |      |  | 136     |  |     |  | 146 
|Income statement charge 
    continuing             |  | 46    |  | 12      |  | 109  |  | 17  
|Income statement charge 
    discontinued           |  | (56)  |  |        |  |     |  |    
|Charged to equity                                    |  | (66)  |  | 46      |  | (54) |  | 45  
|Disposal of subsidiary undertaking                   |  | 406   |  | 279     |  | (10) |  |    
|                                                    
|At 31 December                                       |  | 240   |  | (90)    |  | 747  |  | 702 
|                                                    



|                                                |  |       |  |         |  |      |  |     
|----------------------------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                                                |  | Group |  | Company
|                                                |  |      
|                                                |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                                |  | £m    |  | £m      |  | £m   |  | £m  
|                                               
|Deferred tax
    liabilities                    |  |       |  |         |  |      |  |     
|Accelerated tax depreciation                    |  | (483) |  | (489)   |  |     |  |    
|Other temporary differences                     |  | (81)  |  | (397)   |  |     |  |    
|                                               
|                                                |  | (564) |  | (886)   |  |     |  |    
|                                               
|Deferred tax assets                             |  |       |  |         |  |      |  |     
|Pensions and other post retirement
    benefits |  | 310   |  | 414     |  | 310  |  | 372 
|Accelerated book depreciation                   |  | 64    |  | 35      |  | 58   |  | 24  
|IAS 32 & IAS 39
    transitional adjustments    |  | 158   |  | 108     |  | 110  |  | 146 
|Other temporary differences                     |  | 78    |  | 150     |  | 75   |  | 71  
|Tax losses carried forward                      |  | 194   |  | 89      |  | 194  |  | 89  
|                                               
|                                                |  | 804   |  | 796     |  | 747  |  | 702 
|                                               



|                                                |  |       |  |         |  |      |  |      |  |      |  |     
|----------------------------------------------- |  | ----- |  | ------- |  | ---- |  | ---- |  | ---- |  | ----
|                                                |  | Group |  | Company
|                                                |  |      
|                                                |  | 2006  |  | 2005    |  | 2004 |  | 2006 |  | 2005 |  | 2004
|                                                |  | £m    |  | £m      |  | £m   |  | £m   |  | £m   |  | £m  
|                                               
|Pensions and other post retirement
    benefits |  | 309   |  | 398     |  | 352  |  | 309  |  | 363  |  | 318 
|                                               




108



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The benefit of the tax losses carried forward in Abbey National
plc may only be realised by utilisation against the future
taxable profits of the Company.

The deferred tax charge in the income statement comprises the
following temporary differences:

|                                                |  |       |  |      |  |     
|----------------------------------------------- |  | ----- |  | ---- |  | ----
|                                                |  | Group
|                                                |  |      
|                                                |  | 2006  |  | 2005 |  | 2004
|                                                |  | £m    |  | £m   |  | £m  
|                                               
|Accelerated tax depreciation                    |  | 36    |  | (83) |  | 21  
|Pensions and other post-retirement
    benefits |  | (27)  |  | 7    |  |    
|Allowances for loan losses                      |  |      |  |     |  | (23)
|Other provisions                                |  | (42)  |  | (1)  |  | (1) 
|Tax loss carry forwards                         |  | 105   |  | 89   |  |    
|Other temporary differences                     |  | (26)  |  |     |  | (25)
|                                               
|                                                |  | 46    |  | 12   |  | (28)
|                                               



29. Other assets


|                            |  |       |  |         |  |      |  |     
|--------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                            |  | Group |  | Company
|                            |  |      
|                            |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                            |  | £m    |  | £m      |  | £m   |  | £m  
|                           
|Trade and other receivables |  | 2,341 |  | 1,749   |  | 597  |  | 404 
|Prepayments                 |  | 46    |  | 336     |  | 41   |  | 37  
|Accrued income              |  | 14    |  | 8       |  |     |  |    
|Reinsurance assets          |  |      |  | 1,293   |  |     |  |    
|General insurance assets    |  | 106   |  | 617     |  | 106  |  | 112 
|                           
|                            |  | 2,507 |  | 4,003   |  | 744  |  | 553 
|                           

30. Deposits by banks


|                                                   |  |       |  |         |  |        |  |       
|-------------------------------------------------- |  | ----- |  | ------- |  | ------ |  | ------
|                                                   |  | Group |  | Company
|                                                   |  |      
|                                                   |  | 2006  |  | 2005    |  | 2006   |  | 2005  
|                                                   |  | £m    |  | £m      |  | £m     |  | £m    
|                                                  
|Items in the course of transmission                |  | 363   |  | 248     |  | 354    |  | 242   
|Sale and repurchase agreements                     |  | 251   |  |        |  |       |  |      
|Other deposits                                     |  | 6,042 |  | 5,369   |  | 60,769 |  | 48,025
|                                                  
|                                                   |  | 6,656 |  | 5,617   |  | 61,123 |  | 48,267
|                                                  
|Repayable:                                         |  |       |  |         |  |        |  |       
|On demand                                          |  | 102   |  | 845     |  | 36,374 |  | 22,813
|In not more than 3 months                          |  | 6,554 |  | 4,767   |  | 376    |  | 270   
|In more than 3 months but not
    more than 1 year |  |      |  | 3       |  | 273    |  | 182   
|In more than 1 year but not
    more than 5 years  |  |      |  |        |  | 20,385 |  | 25,000
|In more than 5 years                               |  |      |  | 2       |  | 3,715  |  | 2     
|                                                  
|                                                   |  | 6,656 |  | 5,617   |  | 61,123 |  | 48,267
|                                                  

31. Deposits by customers


|                                                  |  |        |  |         |  |        |  |       
|------------------------------------------------- |  | ------ |  | ------- |  | ------ |  | ------
|                                                  |  | Group  |  | Company
|                                                  |  |       
|                                                  |  | 2006   |  | 2005    |  | 2006   |  | 2005  
|                                                  |  | £m     |  | £m      |  | £m     |  | £m    
|                                                 
|Retail deposits                                   |  | 63,994 |  | 62,775  |  | 56,695 |  | 56,074
|Amounts due to subsidiaries                       |  |       |  |        |  | 21,968 |  | 22,125
|Wholesale deposits by customers                   |  | 2,525  |  | 3,114   |  | 1,441  |  | 1,089 
|                                                 
|                                                  |  | 66,519 |  | 65,889  |  | 80,104 |  | 79,288
|                                                 
|Repayable:                                        |  |        |  |         |  |        |  |       
|In no more than 3 months                          |  | 62,578 |  | 62,531  |  | 59,709 |  | 64,535
|In more than 3 months but no
    more than 1 year |  | 2,279  |  | 2,464   |  | 1,617  |  | 1,017 
|In more than 1 year but no
    more than 5 years  |  | 1,267  |  | 546     |  | 4,060  |  | 2,047 
|In more than 5 years                              |  | 395    |  | 348     |  | 14,718 |  | 11,689
|                                                 
|                                                  |  | 66,519 |  | 65,889  |  | 80,104 |  | 79,288
|                                                 



109



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

32. Trading liabilities

|                              |  |        |  |         |  |      |  |     
|----------------------------- |  | ------ |  | ------- |  | ---- |  | ----
|                              |  | Group  |  | Company
|                              |  |       
|                              |  | 2006   |  | 2005    |  | 2006 |  | 2005
|                              |  | £m     |  | £m      |  | £m   |  | £m  
|                             
|Deposits by banks             |  | 30,099 |  | 21,861  |  |     |  |    
|Deposits by customers         |  | 11,139 |  | 9,591   |  |     |  |    
|Short positions in securities |  | 4,600  |  | 7,629   |  |     |  |    
|Debt securities in issue      |  | 11,766 |  | 13,583  |  |     |  |    
|                             
|                              |  | 57,604 |  | 52,664  |  |     |  |    
|                             

33. Other financial liabilities at fair value through profit
or loss


|                         |  |       |  |         |  |      |  |     
|------------------------ |  | ----- |  | ------- |  | ---- |  | ----
|                         |  | Group |  | Company
|                         |  |      
|                         |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                         |  | £m    |  | £m      |  | £m   |  | £m  
|                        
|Debt securities in issue |  | 8,151 |  | 7,948   |  |     |  |    
|                        





34. Debt securities in issue


|                               |  |        |  |         |  |      |  |     
|------------------------------ |  | ------ |  | ------- |  | ---- |  | ----
|                               |  | Group  |  | Company
|                               |  |       
|                               |  | 2006   |  | 2005    |  | 2006 |  | 2005
|                               |  | £m     |  | £m      |  | £m   |  | £m  
|                              
|Bonds and medium term notes    |  | 23,149 |  | 21,252  |  |     |  |    
|Other debt securities in issue |  | 5,849  |  | 24      |  | 4    |  | 4   
|                              
|                               |  | 28,998 |  | 21,276  |  | 4    |  | 4   
|                              



|                 |  |               |  |           |  |        |  |        
|---------------- |  | ------------- |  | --------- |  | ------ |  | -------
|                 |  |               |  |           |  | Group  |  | Company
|                 |  |              
|                 |  | Interest Rate |  | Maturity  |  | 2006   |  | 2006   
|                 |  |               |  |           |  | £m     |  | £m     
|                
|Euro             |  | 0.00%  1.99% |  | 2007-2010 |  | 673    |  |       
|                 |  |               |  | 2011-2040 |  | 1,081  |  |       
|                 |  |              
|                 |  | 2.00%  3.99% |  | 2007-2010 |  | 674    |  |       
|                 |  |               |  | 2011-2019 |  | 1,356  |  |       
|                 |  |               |  | 2020-2029 |  | 503    |  |       
|                 |  |               |  | 2030-2040 |  | 542    |  |       
|                 |  |              
|                 |  | 5.00%  6.87% |  | 2007-2010 |  | 894    |  |       
|                 |  |               |  | 2020-2029 |  | 1,346  |  |       
|                 |  |               |  | 2030-2040 |  | 989    |  |       
|                
|US Dollar        |  | 0.00%  1.99% |  | 2007-2010 |  | 6,205  |  |       
|                 |  |              
|                 |  | 5.00%  6.87% |  | 2007-2010 |  | 1,165  |  |       
|                 |  |               |  | 2011-2019 |  | 2,662  |  |       
|                 |  |               |  | 2020-2029 |  | 1,000  |  |       
|                 |  |               |  | 2040      |  | 2,559  |  |       
|                
|Pounds Sterling  |  | 0.00%  4.99% |  | 2007-2019 |  | 753    |  | 4      
|                 |  |              
|                 |  | 5.00%  5.99% |  | 2007-2010 |  | 1,090  |  |       
|                 |  |               |  | 2011-2019 |  | 1,470  |  |       
|                 |  |               |  | 2020-2029 |  | 405    |  |       
|                 |  |               |  | 2030-2040 |  | 3,374  |  |       
|                
|                 |  | 6.00%  6.87% |  | 2007-2040 |  | 143    |  |       
|                
|Other currencies |  | 0.00%  5.99% |  | 2007-2010 |  | 114    |  |       
|                
|                 |  |               |  |           |  | 28,998 |  | 4      
|                

110



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

35. Other borrowed funds

|                                                                            |  |       |  |         |  |       |  |      
|--------------------------------------------------------------------------- |  | ----- |  | ------- |  | ----- |  | -----
|                                                                            |  | Group |  | Company
|                                                                            |  |      
|                                                                            |  | 2006  |  | 2005    |  | 2006  |  | 2005 
|                                                                            |  | £m    |  | £m      |  | £m    |  | £m   
|                                                                           
|£300m Step Up Callable
    Perpetual Reserve Capital Instruments            |  | 309   |  | 359     |  | 309   |  | 359  
|$500m Tier One Perpetual
    Subordinated Debt Instruments                  |  | 247   |  | 292     |  | 247   |  | 292  
|£175m Fixed/ Floating Rate
    Tier One Preferred Income Capital Securities |  | 182   |  | 182     |  | 182   |  | 182  
|$1,000m Non-Cumulative
    Trust Preferred Securities                       |  | 573   |  | 792     |  |      |  |     
|£325m Sterling Preference
    Shares                                        |  | 344   |  | 342     |  | 344   |  | 342  
|$450m US Dollar Preference Shares                                           |  |      |  | 277     |  |      |  | 277  
|                                                                           
|                                                                            |  | 1,655 |  | 2,244   |  | 1,082 |  | 1,452
|                                                                           

£300m Step-up Callable Perpetual Reserve Capital
Instruments






$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




111



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The trust preferred securities are not redeemable at the option
of the holders and the holders do not have any rights against
other Abbey Group companies. The partnership preferred
securities may be redeemed by the partnership, in whole or in
part, on 30 June 2030 and on each distribution payment date
thereafter. Redemption by the partnership of the partnership
preferred securities may also occur in the event of a tax or
regulatory change. Generally, holders of the preferred
securities will have no voting rights.

On a return of capital or on a distribution of assets on a
winding up of the partnership, holders of the partnership
preferred securities will be entitled to receive, for each
partnership preferred security, a liquidation preference of US
$1,000, together with any due and accrued distributions and any
additional amounts, out of the assets of the partnership
available for distribution.

The trust preferred securities, the partnership preferred
securities and the subordinated guarantees taken together will
not entitle the holders to receive more than they would have
been entitled to receive had they been the holders of directly
issued non-cumulative, non-voting preference shares of Abbey
National plc.

£325m Sterling Preference Shares

|                     |  |              |  |                             
|-------------------- |  | ------------ |  | ----------------------------
|Size of shareholding |  | Shareholders |  | Preference shares of £1 each
|                    
|1100                |  | 2            |  | 121                         
|1011,000            |  | 39           |  | 29,069                      
|1,001+               |  | 1,671        |  | 324,970,810                 
|                    
|                     |  | 1,712        |  | 325,000,000                 
|                    

5 8 3 8 pari passu pari passu








$450m US Dollar Preference Shares




pari passu pari
passu








112



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

36. Subordinated Liabilities

|                                                                    |  |       |  |         |  |       |  |      
|------------------------------------------------------------------- |  | ----- |  | ------- |  | ----- |  | -----
|                                                                    |  | Group |  | Company
|                                                                    |  |      
|                                                                    |  | 2006  |  | 2005    |  | 2006  |  | 2005 
|Dated subordinated liabilities:                                     |  | £m    |  | £m      |  | £m    |  | £m   
|                                                                   
|10.75% Subordinated bond 2006                                       |  |      |  | 105     |  |      |  | 105  
|5.00% Subordinated bond 2009
    (511.3m)                          |  | 362   |  | 381     |  | 362   |  | 381  
|4.625% Subordinated notes 2011
    (500m)                          |  | 349   |  | 372     |  | 349   |  | 372  
|10.125% Subordinated guaranteed
    bond 2023                       |  | 230   |  | 232     |  |      |  |     
|11.50% Subordinated guaranteed bond
    2017                        |  | 217   |  | 221     |  |      |  |     
|11.59% Subordinated loan stock 2017                                 |  |      |  |        |  | 213   |  | 150  
|10.18% Subordinated loan stock 2023                                 |  |      |  |        |  | 204   |  | 150  
|7.57% Subordinated notes 2029 (US
    $1,000m)                      |  | 578   |  | 606     |  | 578   |  | 606  
|6.50% Subordinated notes 2030                                       |  | 167   |  | 154     |  | 167   |  | 154  
|8.9% Subordinated notes 2030 (US
    $1,000m)                       |  |      |  |        |  | 573   |  | 792  
|7.25% Subordinated notes 2021                                       |  |      |  | 200     |  |      |  |     
|5.25% Subordinated notes 2015                                       |  | 203   |  | 210     |  | 203   |  | 210  
|Subordinated floating rate EURIB
    notes 2015                     |  | 338   |  | 344     |  | 338   |  | 344  
|Callable capped subordinated
    floating rate notes 2012 (US $50m) |  | 26    |  | 29      |  | 26    |  | 29   
|Callable subordinated floating rate
    notes 2012 (US $50m)        |  | 26    |  | 29      |  | 26    |  | 29   
|Callable subordinated floating rate
    notes 2012 (500m)          |  | 335   |  | 343     |  | 335   |  | 343  
|                                                                   
|                                                                    |  | 2,831 |  | 3,226   |  | 3,374 |  | 3,665
|                                                                   

|                                                                          |  |       |  |         |  |       |  |      
|------------------------------------------------------------------------- |  | ----- |  | ------- |  | ----- |  | -----
|                                                                          |  | Group |  | Company
|                                                                          |  |      
|                                                                          |  | 2006  |  | 2005    |  | 2006  |  | 2005 
|Undated subordinated liabilities:                                         |  | £m    |  | £m      |  | £m    |  | £m   
|                                                                         
|10.0625% Exchangeable subordinated
    capital securities                 |  | 204   |  | 204     |  | 204   |  | 204  
|7.35% Perpetual subordinated reset
    capital securities (US $500m)      |  |      |  | 299     |  |      |  | 299  
|6.70% Perpetual subordinated reset
    capital securities (US $500m)      |  | 258   |  | 299     |  | 258   |  | 299  
|5.56% Subordinated guaranteed notes
    (YEN 15,000m)                     |  | 81    |  | 119     |  | 81    |  | 97   
|5.50% Subordinated guaranteed notes
    (YEN 5,000m)                      |  | 27    |  | 39      |  | 27    |  | 32   
|Fixed/ Floating rate subordinated
    notes (YEN 5,000m)                  |  | 26    |  | 37      |  | 26    |  | 31   
|7.50% 10 Year step-up perpetual
    subordinated notes                    |  | 342   |  | 350     |  | 342   |  | 350  
|7.50% 15 Year step-up perpetual
    subordinated notes                    |  | 466   |  | 458     |  | 466   |  | 458  
|7.38% 20 Year step-up perpetual
    subordinated notes                    |  | 199   |  | 201     |  | 199   |  | 201  
|7.13% 30 Year step-up perpetual
    subordinated notes                    |  | 298   |  | 302     |  | 298   |  | 302  
|7.13% Fixed to floating rate
    perpetual subordinated notes
    (400m) |  | 288   |  | 300     |  | 288   |  | 300  
|7.25% Perpetual callable
    subordinated notes (US $400m)                |  |      |  | 239     |  |      |  | 239  
|8.75% Subordinated guaranteed bonds                                       |  |      |  | 132     |  |      |  |     
|                                                                         
|                                                                          |  | 2,189 |  | 2,979   |  | 2,189 |  | 2,812
|                                                                         
|Total subordinated
    liabilities                                        |  | 5,020 |  | 6,205   |  | 5,563 |  | 6,477
|                                                                         



























113



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The 8.75% Subordinated guaranteed bonds were redeemable at par,
at the option of Abbey, at any time on or after 13 May
2007. These bonds were sold along with the life insurance
businesses in 2006.

In common with other debt securities issued by Group companies,
the subordinated liabilities are redeemable in whole at the
option of Abbey, on any interest payment date, in the event of
certain tax changes affecting the treatment of payments of
interest on the subordinated liabilities in the UK, at their
principal amount together with any accrued interest.

Subordinated liabilities including convertible debt securities
in issue are repayable:

|                                                  |  |       |  |         |  |       |  |      
|------------------------------------------------- |  | ----- |  | ------- |  | ----- |  | -----
|                                                  |  | Group |  | Company
|                                                  |  |      
|                                                  |  | 2006  |  | 2005    |  | 2006  |  | 2005 
|                                                  |  | £m    |  | £m      |  | £m    |  | £m   
|                                                 
|In more than 3 months but no
    more than 1 year |  |      |  | 105     |  |      |  | 105  
|In more than 1 year but no
    more than 5 years  |  | 711   |  | 381     |  | 711   |  | 381  
|In more than 5 years                              |  | 2,120 |  | 2,740   |  | 2,663 |  | 3,179
|Undated                                           |  | 2,189 |  | 2,979   |  | 2,189 |  | 2,812
|                                                 
|                                                  |  | 5,020 |  | 6,205   |  | 5,563 |  | 6,477
|                                                 

37. Insurance contracts and reinsurance liabilities


a) Insurance contract liabilities


|                                                                                           |  |       |  |         |  |      |  |     
|------------------------------------------------------------------------------------------ |  | ----- |  | ------- |  | ---- |  | ----
|                                                                                           |  | Group |  | Company
|                                                                                           |  |      
|                                                                                           |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                                                                           |  | £m    |  | £m      |  | £m   |  | £m  
|                                                                                          
|Non-participating insurance
    contract liabilities                                       |  |      |  | 9,577   |  |     |  |    
|Participating insurance and
    investment contract liabilities (inc. unallocated surplus) |  |      |  | 11,924  |  |     |  |    
|                                                                                          
|Total non-participating
    insurance and participating contracts,
    gross               |  |      |  | 21,501  |  |     |  |    
|                                                                                          
|Recoverable from
    reinsurers:                                                           |  |       |  |         |  |      |  |     
|Non-participating insurance
    contract liabilities                                       |  |      |  | 1,289   |  |     |  |    
|Participating insurance contract
    liabilities                                           |  |      |  | 3       |  |     |  |    
|                                                                                          
|Total reinsurers share of
    insurance liabilities                                       |  |      |  | 1,292   |  |     |  |    
|                                                                                          
|Non-participating insurance
    contract liabilities                                       |  |      |  | 8,288   |  |     |  |    
|Participating insurance and
    investment contract liabilities (inc. unallocated surplus) |  |      |  | 11,921  |  |     |  |    
|                                                                                          
|Total non-participating
    insurance contracts and participating
    contracts, net       |  |      |  | 20,209  |  |     |  |    
|                                                                                          



|                           |  |             |  |               |  |               |  |          |  |               |  |         
|-------------------------- |  | ----------- |  | ------------- |  | ------------- |  | -------- |  | ------------- |  | --------
|                           |  |             |  |               |  |               |  |          |  | Non-          |  |         
|                           |  |             |  | Participating |  | Non-          |  |          |  | participating |  |         
|                           |  |             |  | insurance and |  | participating |  |          |  | investment    |  |         
|                           |  | Insurance   |  | investment    |  | insurance     |  |          |  | contracts     |  |         
|                           |  | liabilities |  | contracts     |  | contracts     |  | Total    |  | (See Note 39) |  | Total   
|                           |  | £m          |  | £m            |  | £m            |  | £m       |  | £m            |  | £m      
|                          
|As at 1 January 2006       |  |            |  | 11,924        |  | 9,577         |  | 21,501   |  | 3,306         |  | 24,807  
|Movement in year           |  |            |  | 689           |  | (2,543)       |  | (1,854)  |  | (53)          |  | (1,907) 
|Disposal of subsidiaries   |  |            |  | (12,613)      |  | (7,034)       |  | (19,647) |  | (3,253)       |  | (22,900)
|                          
|As at 31 December
    2006 |  |            |  |              |  |              |  |         |  |              |  |        
|                          

|                                |  |             |  |               |  |               |  |         |  |               |  |       
|------------------------------- |  | ----------- |  | ------------- |  | ------------- |  | ------- |  | ------------- |  | ------
|                                |  |             |  |               |  |               |  |         |  | Non-          |  |       
|                                |  |             |  | Participating |  | Non-          |  |         |  | participating |  |       
|                                |  |             |  | insurance and |  | participating |  |         |  | investment    |  |       
|                                |  | Insurance   |  | investment    |  | insurance     |  |         |  | contracts     |  |       
|                                |  | liabilities |  | contracts     |  | contracts     |  | Total   |  | (see Note 39) |  | Total 
|                                |  | £m          |  | £m            |  | £m            |  | £m      |  | £m            |  | £m    
|                               
|As at 31 December 2004          |  | 24,404      |  |              |  | 519           |  | 24,923  |  |              |  | 24,923
|Changes in accounting policies: |  |             |  |               |  |               |  |         |  |               |  |       
| IFRS 4/ FRS 27                |  | (21,191)    |  | 12,513        |  | 8,678         |  |        |  |              |  |      
| IAS 39                        |  | (3,213)     |  |              |  |              |  | (3,213) |  | 3,213         |  |      
|                               
|As at 1 January 2005            |  |            |  | 12,513        |  | 9,197         |  | 21,710  |  | 3,213         |  | 24,923
|Movement in year                |  |            |  | (589)         |  | 380           |  | (209)   |  | 93            |  | (116) 
|                               
|As at 31 December 2005          |  |            |  | 11,924        |  | 9,577         |  | 21,501  |  | 3,306         |  | 24,807
|                               





114



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

b) Participating insurance and investment contracts

Measurement of participating contracts

All participating contracts have been valued on a realistic
basis. Total realistic liabilities (excluding unallocated
surplus) consist of with-profits benefits reserves, the future
cost of contractual guarantees, the future cost of financial
options, and other liabilities.

With-profits benefits reserves are primarily calculated
retrospectively on the basis of the actual experience of the
fund. The cost of guarantees and financial options are
calculated using a stochastic simulation methodology, with the
model calibrated to the relevant financial markets as at the
relevant year-end.

The base value of guarantees is calculated using a stochastic
asset-liability model. The guarantee cost is derived for each
guarantee bearing policy by calculating the excess of the
guaranteed policyholder payout over the value of the assets
backing the policy on the guarantee exercise date and
discounting back.

Options are assumed to be taken up at a dynamic rate that
depends on how far in or out of the
money the option is under each economic scenario. Once the
option is exercised, it is valued as a guarantee.

Options and Guarantees

The guarantees within the with-profits funds fall into three
main categories: cash guarantees, guaranteed annuity options,
and guaranteed cash options.

For conventional with-profit business, cash guarantees
constitute the minimum amount payable at maturity (or other
specified date), for example in terms of guaranteed sums assured
and vested bonuses declared at the valuation date, excluding
discretionary terminal bonus.

For unitised with profit business, cash guarantees constitute
the minimum amount payable at specified future dates in terms of
the value of units allocated to the policy as at the valuation
date. Such units usually have a guaranteed minimum rate of
future accumulation (which may be zero, but can be higher for
some older classes of business) along with a guarantee that no
negative market value adjustment will be applied either on
maturity or, in the case of certain unitised with-profits bonds,
at a specified future date or range of dates exercisable at the
policyholders discretion. Any such guarantees applicable
to future contractual premiums are also included within the
calculation.

Guaranteed annuity options and guaranteed cash options represent
the right to convert contractual benefits denominated in terms
of cash into annuities and vice versa, at conversion rates
guaranteed in advance, usually at inception of the policy.

Outside the UK, with-profit funds to the extent of guarantees
and options included in the terms of in-force business will not,
in aggregate, have a material effect on the amount, timing or
uncertainty of the companys future cashflows.

Measurement of participating investment contracts

The Group cannot measure reliably the fair value of
participating investment contracts.

Participating investment contracts give investors in these
contracts the contractual right to receive supplemental
discretionary returns through participation in the surplus
arising in the with-profits fund. These supplemental
discretionary returns are subject to the discretion of the
Group. The Group has the discretion within the constraints of
the terms and conditions of the contract to allocate part of the
surplus to the contract holders and part to the Groups
shareholders.

It is impracticable to determine the fair value of such
instruments due to the lack of a reliable basis to measure such
supplemental discretionary returns.

Process used to decide assumptions

The assumptions that have the greatest effect on the measurement
of liabilities, including options and guarantees are:

>
    Economic Assumptions>
    Persistency Rates>
    Expenses>
    Mortality>
    Take-up rates of guarantees and
    optionsEconomic Assumptions

For the purposes of the determination of realistic assets and
liabilities, a proprietary Economic Scenario Generator package
that has been calibrated to market prices is used. For Financial
Services Authority regulatory basis liabilities, economic
assumptions are based on the prevailing market rates and current
asset mix of each fund and include margins for prudence.

Persistency Rates

The magnitude of policy lapses has a significant impact on the
cost of providing guarantees, particularly of unitised with
profit bond products with Market Value Adjustment (MVA). Lapses
are also important in the case of business with guaranteed
annuity and cash options where policyholders may choose to
transfer the policy away from the company before the guarantee
crystallises.

These rates are calculated using standard actuarial methodology,
on the basis of experienced rates, with adjustments as
appropriate where past experience does not capture the policy
features now in force, or the prevalent economic conditions.

Expenses

Expenses are based on future budgeted levels allowing for
inflation in future years.

115



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Mortality

As with persistency rates, these assumptions are calculated in
line with standard actuarial methodology, on the basis of past
experience adjusted for a best estimate of how the various
factors affecting the parameters may change in
future  for example, mortality improvements for
annuity business. Mortality assumptions, which are based on
standard industry published tables, are more stable than the
persistency rates.

Take-up Rates

The rate of take-up of future guarantees and options affects the
quantum and timing of guaranteed payments identified above. The
assumptions are determined by considering past experience and
taking into account how far the options are in and
out of the money, on the basis that the further the
option is in the money the greater the propensity
for it to be exercised by policyholders.

Change in assumptions

Expected future persistency rates of certain unitised
with-profit single premium bonds have increased with a
consequent reduction in the future cost of contractual
guarantees.

c) Non participating insurance contracts

Measurement of contracts

The assumptions that have the greatest effect on the measurement
of liabilities are:

>
    Economic Assumptions>
    Mortality and morbidity>
    ExpensesEconomic assumptions are based on the prevailing market rates
and current asset mix of each fund and include margins for
prudence.

Mortality and morbidity assumptions are calculated in line with
standard actuarial methodology, on the basis of past experience
adjusted for a best estimate of how the various factors
affecting the parameters may change in the future 
for example, mortality improvements for annuity business. A
margin for prudence is also added. A prudent assessment is made
of lapse and withdrawal rates in calculating the liabilities.
Withdrawals or cessation of premiums are assumed where this
would lead to an increase in the long-term business provision.

Expenses are based on future budgeted levels allowing for
inflation in future years and a margin for prudence. The level
of expenses included in the valuation is based on current year
expenses allowing for cost inflation.

Process used to decide assumptions

Assumptions are set by reference to publicly available market
data and then validating that the current assumptions continue
to reflect actual experience.

Change in assumptions

The principal changes to assumptions made since the previous
year are the change in interest assumptions reflecting changes
during 2005 in investment returns on assets supporting the
provisions and changes to mortality rates reflecting current
experience.

|                                     |  |              |  |              |  |                |  |               |  |               |  |           
|------------------------------------ |  | ------------ |  | ------------ |  | -------------- |  | ------------- |  | ------------- |  | ----------
|                                     |  | SMA with     |  | SPL with     |  | UK Non-profits |  | Overseas life |  | Life share-   |  | Total Life
|                                     |  | profits fund |  | profits fund |  | fund           |  | assurance     |  | holders funds |  | Business  
|31 December 2005                     |  | £m           |  | £m           |  | £m             |  | £m            |  | £m            |  | £m        
|                                    
|Shareholders funds outside
    fund |  |             |  |             |  | 1,337          |  | 84            |  | 1,165         |  | 2,586     
|Shareholders funds held in
    fund |  |             |  |             |  | 1,346          |  | 79            |  | 1             |  | 1,426     
|                                    
|Total shareholders funds            |  |             |  |             |  | 2,683          |  | 163           |  | 1,166         |  | 4,012     
|Adjustments onto regulatory basis:   |  |              |  |              |  |                |  |               |  |               |  |           
|FFA(1)                               |  | 184          |  | 253          |  |               |  | 19            |  |              |  | 456       
|Adjustments to assets                |  | (4)          |  | (1)          |  | (1,314)        |  | (84)          |  | (282)         |  | (1,685)   
|                                    
|Total available capital resources    |  | 180          |  | 252          |  | 1,369          |  | 98            |  | 884           |  | 2,783     
|                                    

|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The fund for future appropriations (FFA) 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                                                               

|                                                 |  |              |  |              |  |                |  |               |  |               |  |           
|------------------------------------------------ |  | ------------ |  | ------------ |  | -------------- |  | ------------- |  | ------------- |  | ----------
|                                                 |  | SMA with     |  | SPL with     |  | UK Non-profits |  | Overseas life |  | Life share-   |  | Total Life
|                                                 |  | profits fund |  | profits fund |  | fund           |  | assurance     |  | holders funds |  | Business  
|                                                 |  | £m           |  | £m           |  | £m             |  | £m            |  | £m            |  | £m        
|                                                
|31 December 2004 available
    capital resources |  | 76           |  | 282          |  | 1,674          |  | 69            |  | 894           |  | 2,995     
|Changes in assumptions                           |  | (77)         |  | 11           |  | 60             |  |              |  |              |  | (6)       
|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     
|                                                

116



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Regulatory capital requirements

Under the Financial Services Authority Integrated Prudential
Sourcebook, the capital requirements for life funds are
determined from the minimum of the Pillar 1 assessment (based
upon specific Financial Services Authority valuation rules) and
the Pillar 2 risk based capital assessment (based upon the
firms individual assessment of risk and controls). The
Pillar 1 assessment also introduces a twin peaks
approach for with-profit funds of greater than £500m. The
non-profit fund continues to use regulatory basis as in the
past. The twin peaks approach requires a comparison
of the minimum solvency and resilience requirements, determined
in accordance with Financial Services Authority valuation rules,
with the capital position calculated reflecting a realistic
value of the liabilities coupled with a risk capital margin.
Risk capital margin is determined from the most onerous stress
test, involving adverse market and credit shock and lapse
worsening happening simultaneously. It incorporates the actions
management would take in the event of such changes in the market
conditions.

The Pillar 2 framework requires a life insurance company to
self-assess the capital appropriate to its individual risk
profile as a component to the minimum capital requirement for
Pillar 1. This process to establish Pillar 2 capital is called
Individual Capital Assessment (ICA). This assessment
is open to challenge by the Financial Services Authority who may
issue Individual Capital Guidance (ICG) following
any review, and thereby require an increase in the level of
capital needed under Pillar 2.

The offshore companies Scottish Provident International Life
Assurance Limited and Scottish Mutual International Plc are
subject to regulations in the Isle of Man and Ireland
respectively, which are similar to the Financial Services
Authority statutory solvency requirements.

Amounts have been earmarked in the Scottish Provident Non-Profit
fund (£125m) and Scottish Mutual Non-Profit fund
(£250m) in respect of risks arising in the respective
with-profit funds as Risk Based Capital (RBC). These
RBC amounts will only be utilised after taking into account any
management actions deemed appropriate and are not expected to be
utilised on a realistic basis.

Capital sensitivity

The sensitivities of assets and liabilities to changes in market
conditions, key assumptions and other variables have been
carried out in the Peak 1 and Peak 2 capital assessment. There
has been shown to be sufficient capital under the stochastic
modelling exercise. For the Individual Capital Assessment
(ICA) the capital availability for each major life
entity was investigated. A range of scenario and stress tests
were carried out which when combined would constitute a 99.5%
over one year default test. Incorporating management actions
there is sufficient capital to withstand adverse scenarios.

Capital management policies

At 31 December 2005, there was sufficient available capital
to cover the Financial Services Authoritys capital
requirement. Most of the shareholder capital in Abbeys
life businesses was located in shareholders funds, which
were mainly held in cash and high-grade short-term debt
securities. Shareholders capital in the non-profit
business was invested in the same asset instruments as the
assets backing the liabilities. With respect to the with-profit
funds, management could take actions to prevent deterioration of
capital position should such circumstance arise, in accordance
with the disclosures made in the respective Principles and
Practices of Financial Management (PPFM) documents.

In 2004, Abbey entered into significant hedging arrangements to
manage exposure to the cost of options and guarantees in the
with-profit funds.

Capital independence

All life insurance legal entities within Abbey have been sold.

Intra-group capital arrangements

During 2005 a loan of £200m was made from the Scottish
Provident shareholders fund to the Abbey National Scottish
Mutual Assurance Holdings company, this loan is not due to be
repaid until 2030.

The other capital arrangements are internal reinsurance
arrangements in relation to the reinsurance of a large portion
of the Scottish Mutual International with-profit business and
all of the with-profit business of Abbey National Life into the
Scottish Mutual with-profit fund.

Disclosures required by IFRS 4 Insurance contracts
relating to the nature and extent of risks arising from
insurance contracts may be found in the Risk
Management section of the Business and Financial Review on
pages 38 to 54, which form part of these Consolidated Financial
Statements.

38. Other liabilities

|                          |  |       |  |         |  |       |  |     
|------------------------- |  | ----- |  | ------- |  | ----- |  | ----
|                          |  | Group |  | Company
|                          |  |      
|                          |  | 2006  |  | 2005    |  | 2006  |  | 2005
|                          |  | £m    |  | £m      |  | £m    |  | £m  
|                         
|Trade and other payables  |  | 1,521 |  | 1,128   |  | 1,016 |  | 814 
|Deferred income           |  | 95    |  | 145     |  | 11    |  |    
|Reinsurance and insurance |  |      |  | 1,917   |  |      |  |    
|                         
|                          |  | 1,616 |  | 3,190   |  | 1,027 |  | 814 
|                         

117



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

39. Investment contract liabilities

|                                                                        |  |       |  |         |  |      |  |     
|----------------------------------------------------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                                                                        |  | Group |  | Company
|                                                                        |  |      
|                                                                        |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                                                                        |  | £m    |  | £m      |  | £m   |  | £m  
|                                                                       
|Investment contracts (without
    discretionary participation features) |  |      |  | 3,306   |  |     |  |    
|                                                                       





|                                           |  |         |  |         |  |      |  |     
|------------------------------------------ |  | ------- |  | ------- |  | ---- |  | ----
|                                           |  | Group   |  | Company
|                                           |  |        
|                                           |  | 2006    |  | 2005    |  | 2006 |  | 2005
|                                           |  | £m      |  | £m      |  | £m   |  | £m  
|                                          
|At 31 December                             |  | 3,306   |  |        |  |     |  |    
|Change in accounting policy IAS 39         |  |        |  | 3,213   |  |     |  |    
|                                          
|At 1 January                               |  | 3,306   |  | 3,213   |  |     |  |    
|Premiums received                          |  | 216     |  | 419     |  |     |  |    
|Claims paid                                |  | (319)   |  | (400)   |  |     |  |    
|Change in investment contract
    benefits |  | 51      |  | 80      |  |     |  |    
|Sterling reserves                          |  | (1)     |  | (6)     |  |     |  |    
|Disposals                                  |  | (3,253) |  |        |  |     |  |    
|                                          
|                                           |  |        |  | 3,306   |  |     |  |    
|                                          



40. Provisions


|                      |  |            |  |       |  |      
|--------------------- |  | ---------- |  | ----- |  | -----
|                      |  | Group     
|                      |  |           
|                      |  | Misselling |  | Other |  | Total
|                      |  | £m         |  | £m    |  | £m   
|                     
|At 1 January 2006     |  | 192        |  | 61    |  | 253  
|Additional provisions |  | 61         |  | 3     |  | 64   
|Provisions released   |  |           |  | (1)   |  | (1)  
|Used during the year  |  | (100)      |  | (47)  |  | (147)
|Reclassifications     |  |           |  | 11    |  | 11   
|                     
|At 31 December 2006   |  | 153        |  | 27    |  | 180  
|                     

|                       |  |            |  |       |  |      
|---------------------- |  | ---------- |  | ----- |  | -----
|                       |  | Misselling |  | Other |  | Total
|                       |  | £m         |  | £m    |  | £m   
|                      
|To be settled:         |  |            |  |       |  |      
|Within 12 months       |  | 131        |  | 16    |  | 147  
|In more than 12 months |  | 22         |  | 11    |  | 33   
|                      
|                       |  | 153        |  | 27    |  | 180  
|                      

|                      |  |            |  |       |  |      
|--------------------- |  | ---------- |  | ----- |  | -----
|                      |  | Company   
|                      |  |           
|                      |  | Misselling |  | Other |  | Total
|                      |  | £m         |  | £m    |  | £m   
|                     
|At 1 January 2006     |  | 190        |  | 12    |  | 202  
|Additional provisions |  | 61         |  |      |  | 61   
|Used during the year  |  | (100)      |  | (6)   |  | (106)
|                     
|At 31 December 2006   |  | 151        |  | 6     |  | 157  
|                     

|                       |  |            |  |       |  |      
|---------------------- |  | ---------- |  | ----- |  | -----
|                       |  | Misselling |  | Other |  | Total
|                       |  | £m         |  | £m    |  | £m   
|                      
|To be settled:         |  |            |  |       |  |      
|Within 12 months       |  | 131        |  | 2     |  | 133  
|In more than 12 months |  | 20         |  | 4     |  | 24   
|                      
|                       |  | 151        |  | 6     |  | 157  
|                      

|                      |  |            |  |       |  |      
|--------------------- |  | ---------- |  | ----- |  | -----
|                      |  | Group     
|                      |  |           
|                      |  | Misselling |  | Other |  | Total
|                      |  | £m         |  | £m    |  | £m   
|                     
|At 1 January 2005     |  | 186        |  | 116   |  | 302  
|Additional provisions |  | 12         |  | 15    |  | 27   
|Provisions released   |  | (2)        |  | (22)  |  | (24) 
|Used during the year  |  | (4)        |  | (48)  |  | (52) 
|                     
|At 31 December 2005   |  | 192        |  | 61    |  | 253  
|                     

118



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                       |  |            |  |       |  |      
|---------------------- |  | ---------- |  | ----- |  | -----
|                       |  | Misselling |  | Other |  | Total
|                       |  | £m         |  | £m    |  | £m   
|                      
|To be settled:         |  |            |  |       |  |      
|Within 12 months       |  | 191        |  | 60    |  | 251  
|In more than 12 months |  | 1          |  | 1     |  | 2    
|                      
|                       |  | 192        |  | 61    |  | 253  
|                      

|                      |  |            |  |       |  |      
|--------------------- |  | ---------- |  | ----- |  | -----
|                      |  | Company   
|                      |  |           
|                      |  | Misselling |  | Other |  | Total
|                      |  | £m         |  | £m    |  | £m   
|                     
|At 1 January 2005     |  | 185        |  | 52    |  | 237  
|Additional provisions |  | 10         |  |      |  | 10   
|Provisions released   |  | (2)        |  | (8)   |  | (10) 
|Used during the year  |  | (3)        |  | (32)  |  | (35) 
|                     
|At 31 December 2005   |  | 190        |  | 12    |  | 202  
|                     

|                 |  |            |  |       |  |      
|---------------- |  | ---------- |  | ----- |  | -----
|                 |  | Misselling |  | Other |  | Total
|                 |  | £m         |  | £m    |  | £m   
|                
|To be settled:   |  |            |  |       |  |      
|Within 12 months |  | 190        |  | 12    |  | 202  
|                
|                 |  | 190        |  | 12    |  | 202  
|                







41. Retirement benefit obligations


Defined Contribution Pension schemes






Defined Benefit Pension schemes










|                                                |  |       |  |         |  |       |  |       |  |       |  |      
|----------------------------------------------- |  | ----- |  | ------- |  | ----- |  | ----- |  | ----- |  | -----
|                                                |  | Group |  | Company
|                                                |  |      
|                                                |  | 2006  |  | 2005    |  | 2004  |  | 2006  |  | 2005  |  | 2004 
|                                                |  | £m    |  | £m      |  | £m    |  | £m    |  | £m    |  | £m   
|                                               
|Current service cost                            |  | 92    |  | 102     |  | 121   |  | 76    |  | 85    |  | 108  
|Past service cost                               |  | 16    |  | 21      |  | 24    |  | 16    |  | 18    |  | 21   
|(Gain)/ loss on settlements or
    curtailments |  | (69)  |  |        |  | (4)   |  | (69)  |  |      |  | 2    
|Expected return on pension scheme
    assets    |  | (180) |  | (163)   |  | (140) |  | (168) |  | (136) |  | (123)
|Interest cost                                   |  | 211   |  | 200     |  | 182   |  | 197   |  | 175   |  | 161  
|                                               
|                                                |  | 70    |  | 160     |  | 183   |  | 52    |  | 142   |  | 169  
|                                               

119



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The net liability recognised in the balance sheet is determined
as follows:

|                                                |  |         |  |         |  |         |  |        
|----------------------------------------------- |  | ------- |  | ------- |  | ------- |  | -------
|                                                |  | Group   |  | Company
|                                                |  |        
|                                                |  | 2006    |  | 2005    |  | 2006    |  | 2005   
|                                                |  | £m      |  | £m      |  | £m      |  | £m     
|                                               
|Present value of defined benefit
    obligation |  | (4,264) |  | (4,354) |  | (4,241) |  | (3,822)
|Fair value of plan assets                       |  | 3,230   |  | 2,974   |  | 3,208   |  | 2,582  
|                                               
|Unfunded benefit obligation                     |  | (1,034) |  | (1,380) |  | (1,033) |  | (1,240)
|                                               



|                                          |  |         |  |         |  |         |  |        
|----------------------------------------- |  | ------- |  | ------- |  | ------- |  | -------
|                                          |  | Group   |  | Company
|                                          |  |        
|                                          |  | 2006    |  | 2005    |  | 2006    |  | 2005   
|                                          |  | £m      |  | £m      |  | £m      |  | £m     
|                                         
|Balance at 1 January                      |  | (4,354) |  | (3,686) |  | (3,822) |  | (3,229)
|Schemes transferred to Company            |  |        |  |        |  | (472)   |  |       
|Current service cost                      |  | (92)    |  | (102)   |  | (76)    |  | (85)   
|Interest cost                             |  | (211)   |  | (200)   |  | (197)   |  | (175)  
|Employee contributions                    |  | (9)     |  | (12)    |  | (9)     |  | (12)   
|Past service cost                         |  | (16)    |  | (21)    |  | (15)    |  | (18)   
|Actuarial gain/ (loss)                    |  | 228     |  | (436)   |  | 166     |  | (387)  
|Experience loss on scheme
    liabilities |  |        |  |        |  |        |  | (7)    
|Actual benefit payments                   |  | 121     |  | 103     |  | 115     |  | 91     
|Settlement/curtailment                    |  | 69      |  |        |  | 69      |  |       
|                                         
|Balance at 31 December                    |  | (4,264) |  | (4,354) |  | (4,241) |  | (3,822)
|                                         



|                                           |  |       |  |         |  |       |  |      
|------------------------------------------ |  | ----- |  | ------- |  | ----- |  | -----
|                                           |  | Group |  | Company
|                                           |  |      
|                                           |  | 2006  |  | 2005    |  | 2006  |  | 2005 
|                                           |  | £m    |  | £m      |  | £m    |  | £m   
|                                          
|Balance at 1 January                       |  | 2,974 |  | 2,489   |  | 2,582 |  | 2,169
|Schemes transferred to Company             |  |      |  |        |  | 374   |  |     
|Expected return on scheme assets           |  | 180   |  | 163     |  | 168   |  | 136  
|Actuarial gain/(loss) on scheme
    assets |  | (9)   |  | 282     |  |      |  | 242  
|Company contributions paid (regular)       |  | 181   |  | 110     |  | 174   |  | 96   
|Company contributions paid (special)       |  | 16    |  | 21      |  | 16    |  | 18   
|Employee contributions                     |  | 9     |  | 12      |  | 9     |  | 12   
|Actual benefit payments                    |  | (121) |  | (103)   |  | (115) |  | (91) 
|                                          
|Balance at 31 December                     |  | 3,230 |  | 2,974   |  | 3,208 |  | 2,582
|                                          



|                                                   |  |       |  |         |  |       |  |       |  |       |  |     
|-------------------------------------------------- |  | ----- |  | ------- |  | ----- |  | ----- |  | ----- |  | ----
|                                                   |  | Group |  | Company
|                                                   |  |      
|                                                   |  | 2006  |  | 2005    |  | 2004  |  | 2006  |  | 2005  |  | 2004
|                                                   |  | £m    |  | £m      |  | £m    |  | £m    |  | £m    |  | £m  
|                                                  
|Experience gain on scheme
    liabilities          |  |      |  |        |  | 13    |  |      |  | 7     |  | 10  
|% of defined benefit obligation at
    end of year |  | 0.0%  |  | 0.0%    |  | 0.3%  |  | 0.0%  |  | 0.0%  |  | 0.3%
|Actuarial gain/ (loss) on
    scheme liabilities   |  | (228) |  | 436     |  | 164   |  | (180) |  | 387   |  | 133 
|Actuarial gain/ (loss) on
    scheme assets        |  | 9     |  | (282)   |  | (107) |  |      |  | (242) |  | (94)
|% of scheme assets at end of year                  |  | 0.3%  |  | 9.5%    |  | 4.3%  |  | 0.0%  |  | 9.0%  |  | 4.3%
|                                                  
|                                                   |  | (219) |  | 154     |  | 70    |  | (180) |  | 152   |  | 49  
|                                                  







120



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The principal actuarial assumptions used for the Group and the
Company were as follows:

|                                             |  |             |  |             |  |            
|-------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                             |  |            
|                                             |  | 2006        |  | 2005        |  | 2004       
|                                             |  | Nominal per |  | Nominal per |  | Nominal per
|                                             |  | annum       |  | annum       |  | annum      
|                                             |  | %           |  | %           |  | %          
|                                            
|To determine benefit obligations:            |  |             |  |             |  |            
| Discount rate for scheme
    liabilities   |  | 5.20        |  | 4.85        |  | 5.4        
| General salary increase                    |  | 4.0         |  | 4.3         |  | 4.3        
| General price inflation                    |  | 3.0         |  | 2.8         |  | 2.8        
| Expected rate of pension
    increase      |  | 3.0         |  | 2.8         |  | 2.8        
| Expected rate of return on
    plan assets |  | 6.0         |  | 6.5         |  | 6.3        
|                                            
|To determine net periodic benefit
    cost:  |  |             |  |             |  |            
| Discount rate                              |  | 4.85        |  | 5.4         |  | 5.5        
| Expected rate of pension
    increase      |  | 2.8         |  | 2.8         |  | 2.7        
| Expected rate of return on
    plan assets |  | 6.0         |  | 6.5         |  | 6.25       
|                                            





|  |                                                                                                                                                                                                                                                                                                                                                 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|> | To maintain a portfolio of
    suitable assets of appropriate quality, suitability and
    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.                                                                                                                                                                                                  







|                    |  |      |  |     
|------------------- |  | ---- |  | ----
|                    |  | 2006 |  | 2005
|                    |  | %    |  | %   
|                   
|UK equities         |  | 25   |  | 26  
|Overseas equities   |  | 21   |  | 25  
|Corporate Bonds     |  | 27   |  | 26  
|Govt Fixed Interest |  | 13   |  | 12  
|Govt Index Linked   |  | 11   |  | 10  
|Others              |  | 3    |  | 1   
|                   
|                    |  | 100  |  | 100 
|                   



|                        |  |      
|----------------------- |  | -----
|Year ended 31 December: |  | £m   
|                       
|2007                    |  | 129  
|2008                    |  | 139  
|2009                    |  | 150  
|2010                    |  | 162  
|2011                    |  | 174  
|Five years ended 2016   |  | 1,095
|                       



121



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

42. Contingent liabilities and commitments

Abbey gives guarantees on behalf of customers. These guarantees
have been made in the normal course of business. A financial
guarantee represents an undertaking that the Group will meet a
customers obligation to third parties if the customer
fails to do so. The Group expects most of the guarantees it
provides to expire unused. Abbey adopted the amendment to
IAS 39 and IFRS 4 relating to financial guarantee
contracts from 1 January 2006. Financial guarantee
contracts are measured at the higher of amortised fair value and
any provision for a transfer of economic benefits when it is
more likely than not that an outflow will occur and it can be
reliably measured. Mortgage assets granted are to secure future
obligations to third parties who have provided security to the
leasing subsidiaries.

|                                                                                                     |  |       |  |         |  |         |  |       
|---------------------------------------------------------------------------------------------------- |  | ----- |  | ------- |  | ------- |  | ------
|                                                                                                     |  | Group |  | Company
|                                                                                                     |  |      
|                                                                                                     |  | 2006  |  | 2005    |  | 2006    |  | 2005  
|                                                                                                     |  | £m    |  | £m      |  | £m      |  | £m    
|                                                                                                    
|Guarantees given to subsidiaries                                                                     |  |      |  |        |  | 104,395 |  | 94,328
|Guarantees given to third parties                                                                    |  | 372   |  | 375     |  |        |  |      
|Formal standby facilities, credit
    lines and other commitments with original term to maturity of: |  |       |  |         |  |         |  |       
| One year or less                                                                                   |  | 1,797 |  | 1,779   |  | 1,792   |  | 1,769 
| More than one year                                                                                 |  | 1,923 |  | 1,100   |  |        |  |      
|                                                                                                    
|                                                                                                     |  | 4,092 |  | 3,254   |  | 106,187 |  | 96,097
|                                                                                                    

|                             |  |       |  |         |  |      |  |     
|---------------------------- |  | ----- |  | ------- |  | ---- |  | ----
|                             |  | Group |  | Company
|                             |  |      
|                             |  | 2006  |  | 2005    |  | 2006 |  | 2005
|                             |  | £m    |  | £m      |  | £m   |  | £m  
|                            
|Other contingent liabilities |  | 8     |  | 83      |  | 8    |  | 9   
|                            







Obligations under stock borrowing and lending agreements




Other off-balance sheet commitments




Operating lease commitments


|                                                    |  |       |  |        
|--------------------------------------------------- |  | ----- |  | -------
|                                                    |  | Group |  | Company
|                                                    |  |      
|                                                    |  | 2006  |  | 2006   
|Rental commitments under operating leases expiring: |  | £m    |  | £m     
|                                                   
| No later than 1 year                              |  | 114   |  | 106    
| Later than 1 year but
    no later than 5 years   |  | 389   |  | 363    
| Later than 5 years                                |  | 742   |  | 690    
|                                                   
|                                                    |  | 1,245 |  | 1,159  
|                                                   

1


|                        |  |       |  |        
|----------------------- |  | ----- |  | -------
|                        |  | Group |  | Company
|                        |  |      
|                        |  | 2006  |  | 2006   
|Year ended 31 December: |  | £m    |  | £m     
|                       
|2007                    |  | 114   |  | 106    
|2008                    |  | 106   |  | 100    
|2009                    |  | 93    |  | 87     
|2010                    |  | 94    |  | 87     
|2011                    |  | 96    |  | 89     
|Total thereafter        |  | 742   |  | 690    
|                       

|    |                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Under the terms of these leases Abbey has the opportunity to
    extend its occupation of properties by a minimum of three years
    subject to 12 months notice and lease renewal being
    available from external landlords during the term of the lease.
    At expiry Abbey has the option to reacquire the freehold of
    certain properties.

122



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                |  |       |  |      |  |     
|------------------------------- |  | ----- |  | ---- |  | ----
|                                |  | Group
|                                |  |      
|                                |  | 2006  |  | 2005 |  | 2004
|Group rental expense comprises: |  | £m    |  | £m   |  | £m  
|                               
|In respect of minimum rentals   |  | 105   |  | 109  |  | 117 
|Less: sub-lease rentals         |  |      |  |     |  | (3) 
|                               
|                                |  | 105   |  | 109  |  | 114 
|                               



43. Share capital


|                                         |  |       |  |     
|---------------------------------------- |  | ----- |  | ----
|                                         |  | Group
|                                         |  |      
|                                         |  | 2006  |  | 2005
|Ordinary share capital                   |  | £m    |  | £m  
|                                        
|Balance at 1 January and 31
    December |  | 148   |  | 148 
|                                        

|                                    |  |              |  |              |  |            |  |            |  |      
|----------------------------------- |  | ------------ |  | ------------ |  | ---------- |  | ---------- |  | -----
|                                    |  |              |  |              |  | Preference |  |            |  |      
|                                    |  | Ordinary     |  | Preference   |  | shares of  |  | Preference |  |      
|                                    |  | shares of 10 |  | shares of £1 |  | US$0.01    |  | shares of  |  |      
|                                    |  | pence each   |  | each         |  | each       |  | 0.01 each |  | Total
|                                    |  | £m           |  | £m           |  | £m         |  | £m         |  | £m   
|                                   
|Authorised share capital            |  |              |  |              |  |            |  |            |  |      
|At 31 December 2006 and
    2005    |  | 175          |  | 1,000        |  | 6          |  | 6          |  | 1,187
|                                   
|Issued and fully paid share capital |  |              |  |              |  |            |  |            |  |      
|At 31 December 2006 and
    2005    |  | 148          |  | 325          |  |           |  |           |  | 473  
|                                   

|                                         |  |       |  |      
|---------------------------------------- |  | ----- |  | -----
|                                         |  | Group
|                                         |  |      
|                                         |  | 2006  |  | 2005 
|Share premium account                    |  | £m    |  | £m   
|                                        
|Balance at 1 January and
    31 December |  | 1,857 |  | 1,857
|                                        

|                                                |  |              |  |              |  |            |  |            |  |      
|----------------------------------------------- |  | ------------ |  | ------------ |  | ---------- |  | ---------- |  | -----
|                                                |  |              |  |              |  | Preference |  |            |  |      
|                                                |  | Ordinary     |  | Preference   |  | shares of  |  | Preference |  |      
|                                                |  | shares of 10 |  | shares of £1 |  | US$0.01    |  | shares of  |  |      
|                                                |  | pence each   |  | each         |  | each       |  | 0.01 each |  | Total
|Share premium account                           |  | £m           |  | £m           |  | £m         |  | £m         |  | £m   
|                                               
|At 1 January 2005                               |  | 1,857        |  | 10           |  | 297        |  |           |  | 2,164
|Reclassification to other borrowed
    funds(1) |  | (297)        |  |             |  | (307)      |  |            |  |      
|                                               
|At 31 December 2005 and
    2006                |  | 1,857        |  |             |  |           |  |           |  | 1,857
|                                               

|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On transition to IAS 32, Financial Instruments:
    Presentation on 1 January 2005, all preference shares were
    reclassified and disclosed within Other borrowed funds on the
    balance sheet (see Note 35).

44. Retained earnings




|                                                                   |  |       |  |         |  |       |  |      
|------------------------------------------------------------------ |  | ----- |  | ------- |  | ----- |  | -----
|                                                                   |  | Group |  | Company
|                                                                   |  |      
|                                                                   |  | 2006  |  | 2005    |  | 2006  |  | 2005 
|                                                                   |  | £m    |  | £m      |  | £m    |  | £m   
|                                                                  
|At 31 December                                                     |  | 1,105 |  | 1,083   |  | 903   |  | 650  
|Prospective IFRS adjustments                                       |  |      |  | (293)   |  |      |  | (332)
|                                                                  
|Restated 1 January                                                 |  | 1,105 |  | 790     |  | 903   |  | 318  
|Profit/(loss) for the year                                         |  | 68    |  | 420     |  | (128) |  | 691  
|Post tax actuarial movement on
    defined benefit pension schemes |  | 153   |  | (108)   |  | 126   |  | (106)
|Gains on available for sale
    securities                         |  | 1     |  |        |  |      |  |     
|Exchange differences on translation
    of foreign operations      |  | (9)   |  | 3       |  |      |  |     
|Equity dividends paid                                              |  | (207) |  |        |  | (207) |  |     
|                                                                  
|At 31 December                                                     |  | 1,111 |  | 1,105   |  | 694   |  | 903  
|                                                                  



|                               |  |       |  |         |  |      |  |      |  |      |  |     
|------------------------------ |  | ----- |  | ------- |  | ---- |  | ---- |  | ---- |  | ----
|                               |  | Group |  | Company
|                               |  |      
|                               |  | 2006  |  | 2005    |  | 2004 |  | 2006 |  | 2005 |  | 2004
|                               |  | £m    |  | £m      |  | £m   |  | £m   |  | £m   |  | £m  
|                              
|Ordinary shares (equity):      |  |       |  |         |  |      |  |      |  |      |  |     
|2003 Final                     |  |      |  |        |  | 244  |  |     |  |     |  | 244 
|2004 Interim                   |  |      |  |        |  | 122  |  |     |  |     |  | 122 
|2004 Special                   |  |      |  |        |  | 461  |  |     |  |     |  | 461 
|2006 Interim                   |  | 207   |  |        |  |     |  | 207  |  |     |  |    
|                              
|                               |  | 207   |  |        |  | 827  |  | 207  |  |     |  | 827 
|Preference shares (non-equity) |  |      |  |        |  | 47   |  |     |  |     |  | 47  
|                              
|                               |  | 207   |  |        |  | 874  |  | 207  |  |     |  | 874 
|                              

123



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                          |  |           |  |           |  |           |  |           |  |           |  |          
|------------------------- |  | --------- |  | --------- |  | --------- |  | --------- |  | --------- |  | ---------
|                          |  | Group     |  | Company  
|                          |  |          
|                          |  | 2006      |  | 2005      |  | 2004      |  | 2006      |  | 2005      |  | 2004     
|                          |  | Pence per |  | Pence per |  | Pence per |  | Pence per |  | Pence per |  | Pence per
|                          |  | share     |  | share     |  | share     |  | share     |  | share     |  | share    
|                         
|Ordinary shares (equity): |  |           |  |           |  |           |  |           |  |           |  |          
|2003 Final                |  |          |  |          |  | 16.67     |  |          |  |          |  | 16.67    
|2004 Interim              |  |          |  |          |  | 8.33      |  |          |  |          |  | 8.33     
|2004 Special              |  |          |  |          |  | 31.00     |  |          |  |          |  | 31.00    
|2006 Interim              |  | 13.93     |  |          |  |          |  | 13.93     |  |          |  |         
|                         
|                          |  | 13.93     |  |          |  | 56.00     |  | 13.93     |  |          |  | 56.00    
|                         

45. Consolidated cash flow statement


a) Reconciliation of profit/(loss) before tax to net
cash inflow/(outflow) from operating activities:


|                                                                                 |  |          |  |         |  |         |  |          |  |         |  |        
|-------------------------------------------------------------------------------- |  | -------- |  | ------- |  | ------- |  | -------- |  | ------- |  | -------
|                                                                                 |  | Group    |  | Company
|                                                                                 |  |         
|                                                                                 |  | 2006     |  | 2005    |  | 2004    |  | 2006     |  | 2005    |  | 2004   
|                                                                                 |  | £m       |  | £m      |  | £m      |  | £m       |  | £m      |  | £m     
|                                                                                
|Group profit/(loss) for the
    year                                             |  | 68       |  | 420     |  | (54)    |  | (128)    |  | 691     |  | (284)  
|Non cash items included in net
    profit                                        |  |          |  |         |  |         |  |          |  |         |  |        
|Decrease/(increase) in prepayments
    and accrued
    income                    |  | (91)     |  | (306)   |  | 157     |  | (91)     |  | (203)   |  | (52)   
|Increase/(decrease) in accruals and
    deferred
    income                      |  | 176      |  | (220)   |  | 588     |  | (64)     |  | 109     |  | 508    
|Depreciation and amortisation                                                    |  | 217      |  | 199     |  | 252     |  | 79       |  | 66      |  | (66)   
|Loss/(profit) on sale of subsidiary
    and associated
    undertakings          |  | 223      |  | (62)    |  | (46)    |  |         |  |        |  |       
|Change in value of in-force Life
    Assurance
    Business                      |  | 96       |  | 56      |  | (452)   |  |         |  |        |  |       
|Provisions for liabilities and
    charges                                       |  | 63       |  | 3       |  | 233     |  | 159      |  |        |  | 170    
|Provision for impairment                                                         |  | 413      |  | 218     |  | (38)    |  | 375      |  | (296)   |  | 54     
|Other non-cash items                                                             |  | 28       |  | 385     |  | (841)   |  | (207)    |  | 216     |  | (786)  
|                                                                                
|                                                                                 |  | 1,193    |  | 693     |  | (201)   |  | 123      |  | 583     |  | (456)  
|                                                                                
|Changes in operating assets and
    liabilities                                  |  |          |  |         |  |         |  |          |  |         |  |        
|Net increase in trading assets                                                   |  | (938)    |  | (7,330) |  |        |  |         |  |        |  |       
|Movement in fair value of
    derivatives                                        |  | 1,466    |  | (2,006) |  | (1,821) |  | 639      |  | (347)   |  |       
|Net decrease/(increase) in
    financial assets
    designated at fair value     |  | (933)    |  | (2,859) |  |        |  | 724      |  | (79)    |  |       
|Net (increase)/decrease in loans
    and advances to
    banks and customers     |  | (9,914)  |  | (2,352) |  | 381     |  | (20,801) |  | (8,232) |  | (4,472)
|Net decrease in debt securities,
    treasury bills and
    other eligible bills |  |         |  |        |  | 1,518   |  |         |  |        |  |       
|Net (increase)/decrease in other
    assets                                      |  | (360)    |  | 2,650   |  | 326     |  | (166)    |  | 943     |  | 84     
|Net (increase/decrease in deferred
    acquisition
    costs                     |  | (3)      |  | 67      |  |        |  |         |  |        |  |       
|Net increase/(decrease) in deposits
    by banks and
    deposits by customers   |  | 329      |  | (5,973) |  | 194     |  | 470      |  | 2,894   |  | 9,212  
|Net (decrease)/increase in trading
    liabilities                               |  | (6,668)  |  | 14,218  |  |        |  |         |  |        |  |       
|Net increase in financial
    liabilities designated at
    fair value           |  | 679      |  | 21      |  |        |  |         |  |        |  |       
|Net decrease in insurance contract
    liabilities                               |  | (1,832)  |  | (231)   |  | (1,279) |  |         |  |        |  |       
|Net (decrease)/increase in
    investment contract
    liabilities               |  | (53)     |  | 93      |  |        |  |         |  |        |  |       
|Net increase/(decrease) in debt
    issued                                       |  | 5,879    |  | (185)   |  | (1,414) |  |         |  | 1       |  |       
|Net (decrease)/increase in other
    liabilities                                 |  | (675)    |  | (4,009) |  | (2,098) |  | (134)    |  | (1,580) |  | 187    
|Effects of exchange rate differences                                             |  | (1,196)  |  | 80      |  | (633)   |  | (108)    |  | 122     |  | (164)  
|                                                                                
|Net cash flow (used in)/from
    operating
    activities before tax             |  | (13,026) |  | (7,123) |  | (5,027) |  | (19,253) |  | (5,695) |  | 4,391  
|                                                                                
|Income tax (paid)/received                                                       |  | (60)     |  | (132)   |  | (12)    |  | 56       |  | (8)     |  | 2      
|                                                                                
|Net cash flow (used in)/from
    operating
    activities                        |  | (13,086) |  | (7,255) |  | (5,039) |  | (19,197) |  | (5,703) |  | 4,393  
|                                                                                

b) Analysis of the balances of cash and cash equivalents
in the balance sheet


|                                           |  |         |  |         |  |         |  |          |  |          |  |        
|------------------------------------------ |  | ------- |  | ------- |  | ------- |  | -------- |  | -------- |  | -------
|                                           |  | Group   |  | Company
|                                           |  |        
|                                           |  | 2006    |  | 2005    |  | 2004    |  | 2006     |  | 2005     |  | 2004   
|                                           |  | £m      |  | £m      |  | £m      |  | £m       |  | £m       |  | £m     
|                                          
|Cash and balances with central banks       |  | 888     |  | 991     |  | 454     |  | 888      |  | 370      |  | 443    
|Debt securities                            |  | 8,026   |  | 16,117  |  | 12,215  |  |         |  |         |  |       
|Net trading other cash equivalents         |  | (6,629) |  | (5,175) |  | 3,282   |  |         |  |         |  |       
|Net non trading other cash
    equivalents |  | (6,132) |  | (3,692) |  | (4,692) |  | (32,431) |  | (15,454) |  | (9,961)
|                                          
|Cash and cash
    equivalents              |  | (3,847) |  | 8,241   |  | 11,259  |  | (31,543) |  | (15,084) |  | (9,518)
|                                          

124



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

c)       Sale of
subsidiaries, associated undertakings and businesses

|                                                       |  |          |  |       |  |      
|------------------------------------------------------ |  | -------- |  | ----- |  | -----
|                                                       |  | Group   
|                                                       |  |         
|                                                       |  | 2006     |  | 2005  |  | 2004 
|                                                       |  | £m       |  | £m    |  | £m   
|                                                      
|Net assets disposed
    of:                            |  |          |  |       |  |      
|Derivative financial instruments                       |  | 1,007    |  |      |  |     
|Financial assets designated at fair
    value          |  | 24,130   |  |      |  |     
|Loans and advances to banks                            |  | 1,329    |  |      |  | 9    
|Loans and advances to customers                        |  | 19       |  | 1,092 |  | 3,772
|Available for sale securities                          |  |         |  |      |  | 6    
|Value of in force business                             |  | 1,625    |  |      |  |     
|Property, plant and equipment                          |  |         |  |      |  | 1    
|Current tax accounts                                   |  | 4        |  |      |  |     
|Deferred tax asset                                     |  | 1        |  |      |  |     
|Other assets                                           |  | 1,903    |  | 20    |  | 36   
|Prepayments and accrued income                         |  |         |  |      |  | 2    
|Deposits by banks                                      |  | (609)    |  |      |  | (386)
|Deposits by customers                                  |  | (3)      |  |      |  |     
|Financial liabilities designated at
    fair value     |  | (544)    |  |      |  |     
|Debt securities in issue                               |  | (67)     |  |      |  |     
|Subordinated liabilities                               |  | (334)    |  |      |  |     
|Insurance and reinsurance
    liabilities              |  | (19,647) |  |      |  |     
|Other liabilities                                      |  | (1,151)  |  | (329) |  | (107)
|Accruals and deferred income                           |  |         |  |      |  | (17) 
|Investment contract liabilities                        |  | (3,253)  |  |      |  |     
|Other provisions                                       |  |         |  |      |  | (194)
|Current tax liabilities                                |  | (34)     |  |      |  |     
|Deferred tax liabilities                               |  | (406)    |  |      |  |     
|Retirement benefit obligations                         |  | (2)      |  |      |  |     
|Goodwill disposed of                                   |  |         |  |      |  | 6    
|Goodwill written back                                  |  |         |  |      |  | 6    
|                                                      
|                                                       |  | 3,968    |  | 783   |  | 3,134
|                                                      
|Profit/ (loss) on disposal                             |  | (223)    |  | 62    |  | 46   
|                                                      
|                                                       |  | 3,745    |  | 845   |  | 3,180
|                                                      
|Satisfied by:                                          |  |          |  |       |  |      
|Cash and cash equivalents                              |  | 3,745    |  | 845   |  | 3,180
|Less: Cash and cash equivalents in
    subsidiary sold |  | (3,501)  |  |      |  |     
|                                                      
|Net cash inflow of sale                                |  | 244      |  | 845   |  | 3,180
|                                                      

d) Discontinued operations




46. Collateral pledged and received
















125



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

47. Share-based compensation

Abbey granted share options to executive officers and employees
under the Executive Share Option scheme, Sharesave scheme and
the Employee Share Option scheme prior to being acquired by
Banco Santander Central Hispano, S.A on 12 November 2004.
Options granted under the Executive Share Option scheme are
generally exercisable between the third and tenth anniversaries
of the grant date, provided that certain performance criteria
are met. Under the Sharesave scheme, eligible employees can
elect to exercise their options either three, five or seven
years after the grant date. These options were accounted for as
equity settled share-based payments under UK GAAP. All of the
share options prior to the 12 November 2004 relate to
shares in Abbey National plc. After 12 November 2004, all
share options relate to shares in Banco Santander Central
Hispano, S.A. On 12 November 2004 all holders of options in
ordinary shares of Abbey National plc were given the option to
exercise their options, to cancel their options in return for a
cash payment or to transfer their options to options in shares
of Banco Santander Central Hispano, S.A. The options over Banco
Santander Central Hispano, S.A shares are accounted for as cash
settled share-based transactions. On acquisition of Abbey by
Banco Santander Central Hispano, S.A there was no fair value
adjustment of options modified to rights over Banco Santander
Central Hispano, S.A. shares. From 12 November 2004 Abbey
has purchased Banco Santander Central Hispano, S.A shares on the
open market in order to settle its share based compensation
obligations. In 2006, Abbey paid £36m (2005: £12m,
2004: nil) to acquire shares in order to satisfy share option
exercises. Abbey expects to purchase approximately 1m shares
during 2007, in order to settle its share based compensation
obligations.

The total compensation expense for
equity-settled share
based transactions recognised in the income statement was nil
(2005: nil, 2004: £12m). The associated income tax benefit
recognised in the income statement was nil (2005: nil, 2004:
nil). The total compensation expense for cash-settled share
based transactions recognised in the income statement was
£21m (2005: £25m, 2004: £29m). The total carrying
amount at the end of the period for liabilities arising from
share-based payment
transactions was £54m (2005: £55m, 2004: £30m).
Cash received from the exercise of share options and the actual
tax benefits realised from tax deductions were £18m (2005:
£8m) and £6m (2005: £1m), respectively.

The fair value of each option for 2006, 2005 and 2004 have been
estimated at the date of acquisition or grant using a partial
differential equation model with the following assumptions:

|                                                                                     |  |                    |  |                    |  |                  
|------------------------------------------------------------------------------------ |  | ------------------ |  | ------------------ |  | -----------------
|                                                                                     |  | 2006               |  | 2005               |  | 2004             
|                                                                                    
|Risk free interest rate                                                              |  | 4.5%-5.0%          |  | 4.5%-4.6%          |  | 4.4%-4.6%        
|Dividend growth, based solely upon
    average growth since 1989                     |  | 10%                |  | 10%                |  | 10%              
|Volatility of underlying shares
    based upon historical volatility over five years |  | 17.70%-
    19.85% |  | 16.96%-
    17.58% |  | 18.0%-
    21.54%
|Expected lives of options granted
    under:                                         |  |                    |  |                    |  |                  
| Employee Sharesave 3,
    5 & 7 year schemes                                       |  | 3, 5 & 7 years     |  | 3, 5 & 7 years     |  | 3, 5 & 7 years   
| Executive Share Option scheme                                                      |  | 10 years           |  | 10 years           |  | 10 years         
| Employee Share Option scheme                                                       |  | 10 years           |  | 10 years           |  | 10 years         
| Medium term incentive plan                                                         |  | 3 years            |  | 3 years            |  | 3 years          
|                                                                                    





|                                                 |  |                               |  |                           |  |                              |  |          |  |           |  |         
|------------------------------------------------ |  | ----------------------------- |  | ------------------------- |  | ---------------------------- |  | -------- |  | --------- |  | --------
|                                                 |  | Executive Share Option scheme |  | Employee Sharesave scheme |  | Employee Share Option scheme
|                                                 |  |                              
|                                                 |  |                               |  | Weighted                  |  |                              |  | Weighted |  |           |  | Weighted
|                                                 |  |                               |  | average                   |  |                              |  | average  |  |           |  | average 
|                                                 |  | Number of                     |  | exercise                  |  | Number of                    |  | exercise |  | Number of |  | exercise
|                                                 |  | options                       |  | price                     |  | options                      |  | price    |  | options   |  | price   
|                                                 |  | 000s                         |  | £                         |  | 000s                        |  | £        |  | 000s     |  | £       
|                                                
|2006                                             |  |                               |  |                           |  |                              |  |          |  |           |  |         
|Options outstanding at the start of
    the year |  | 270                           |  | 4.08                      |  | 13,799                       |  | 3.38     |  | 54        |  | 5.90    
|Options exercised during the year                |  | (92)                          |  | 4.01                      |  | (5,095)                      |  | 3.36     |  | (33)      |  | 5.90    
|Options forfeited during the year                |  |                              |  |                          |  | (897)                        |  | 3.42     |  |          |  |        
|Options expired during the year                  |  |                              |  |                          |  | (169)                        |  | 6.05     |  | (21)      |  | 5.90    
|Options outstanding at the end of
    the year   |  | 178                           |  | 4.11                      |  | 7,638                        |  | 3.32     |  |          |  |        
|Options exercisable at the end of
    the year   |  | 178                           |  | 4.11                      |  |                             |  |         |  |          |  |        
|2005                                             |  |                               |  |                           |  |                              |  |          |  |           |  |         
|Options outstanding at the start of
    the year |  | 359                           |  | 4.16                      |  | 17,260                       |  | 3.56     |  | 57        |  | 5.90    
|Options exercised during the year                |  | (89)                          |  | 4.43                      |  | (1,677)                      |  | 4.45     |  | (3)       |  | 5.90    
|Options forfeited during the year                |  |                              |  |                          |  | (1,775)                      |  | 4.07     |  |          |  |        
|Options expired during the year                  |  |                              |  |                          |  | (9)                          |  | 7.69     |  |          |  |        
|Options outstanding at the end of
    the year   |  | 270                           |  | 4.08                      |  | 13,799                       |  | 3.38     |  | 54        |  | 5.90    
|Options exercisable at the end of
    the year   |  | 270                           |  | 4.08                      |  | 3                            |  | 7.17     |  | 54        |  | 5.90    
|                                                

126



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                                                  |  |                               |  |                           |  |                              |  |          |  |           |  |         
|--------------------------------------------------------------------------------- |  | ----------------------------- |  | ------------------------- |  | ---------------------------- |  | -------- |  | --------- |  | --------
|                                                                                  |  | Executive Share Option scheme |  | Employee Sharesave scheme |  | Employee Share Option scheme
|                                                                                  |  |                              
|                                                                                  |  |                               |  | Weighted                  |  |                              |  | Weighted |  |           |  | Weighted
|                                                                                  |  |                               |  | average                   |  |                              |  | average  |  |           |  | average 
|                                                                                  |  | Number of                     |  | exercise                  |  | Number of                    |  | exercise |  | Number of |  | exercise
|                                                                                  |  | options                       |  | price                     |  | options                      |  | price    |  | options   |  | price   
|                                                                                  |  | 000s                         |  | £                         |  | 000s                        |  | £        |  | 000s     |  | £       
|                                                                                 
|2004                                                                              |  |                               |  |                           |  |                              |  |          |  |           |  |         
|Options outstanding at the start of
    the year                                  |  | 15,181                        |  | 6.27                      |  | 28,329                       |  | 3.61     |  | 8,909     |  | 11.07   
|Options granted during the year                                                   |  | 2,040                         |  | 4.61                      |  | 3,878                        |  | 3.98     |  |          |  |        
|Options exercised during the year                                                 |  | (4,361)                       |  | 3.93                      |  | (1,768)                      |  | 3.51     |  | (10)      |  | 5.90    
|Options forfeited during the year                                                 |  | (12,501)                      |  | 6.88                      |  | (13,176)                     |  | 3.79     |  | (1,667)   |  | 10.28   
|Options expired during the year                                                   |  |                              |  |                          |  | (3)                          |  | 7.65     |  | (7,175)   |  | 11.25   
|Options outstanding at the end of
    the year                                    |  | 359                           |  | 4.16                      |  | 17,260                       |  | 3.56     |  | 57        |  | 5.90    
|Options exercisable at the end of
    the year                                    |  | 359                           |  | 4.16                      |  |                             |  |         |  | 57        |  | 5.90    
|The weighted-average grant-date
    fair value of options granted during the year |  |                              |  | 0.96                      |  |                             |  | 0.99     |  |          |  |        
|                                                                                 





|                                                        |  |                               |  |                          
|------------------------------------------------------- |  | ----------------------------- |  | -------------------------
|                                                        |  | Executive Share Option scheme |  | Employee Sharesave scheme
|                                                       
|Number of options exercisable
    (000s)               |  | 178                           |  |                         
|Aggregate intrinsic value (£m)                          |  | 1                             |  |                         
|Weighted average remaining
    contractual term (years) |  | 7                             |  |                         
|                                                       

Executive share option scheme




|                         |  |                     |  |                     |  |          |  |        |  |         
|------------------------ |  | ------------------- |  | ------------------- |  | -------- |  | ------ |  | --------
|                         |  | Options outstanding |  | Options exercisable
|                         |  |                    
|                         |  |                     |  | Weighted            |  | Weighted |  |        |  | Weighted
|                         |  |                     |  | average             |  | average  |  |        |  | average 
|                         |  |                     |  | remaining           |  | exercise |  |        |  | exercise
|                         |  | Number              |  | contractual life    |  | price    |  | Number |  | price   
|Range of exercise prices |  | 000s               |  | years               |  | £        |  | 000s  |  | £       
|                        
|Between £3 and £4        |  | 94                  |  | 6                   |  | 3.73     |  | 94     |  | 3.73    
|Between £4 and £5        |  | 84                  |  | 7                   |  | 4.54     |  | 84     |  | 4.54    
|                        



|                         |  |                     |  |                     |  |                  |  |        |  |                 
|------------------------ |  | ------------------- |  | ------------------- |  | ---------------- |  | ------ |  | ----------------
|                         |  | Options outstanding |  | Options exercisable
|                         |  |                    
|                         |  |                     |  | Weighted            |  |                 
|                         |  |                     |  | average             |  | Weighted         |  |        |  | Weighted        
|                         |  |                     |  | remaining           |  | average exercise |  |        |  | average exercise
|                         |  | Number              |  | contractual life    |  | price            |  | Number |  | price           
|Range of exercise prices |  | 000s               |  | years               |  | £                |  | 000s  |  | £               
|                        
|Between £3 and £4        |  | 155                 |  | 7                   |  | 3.73             |  | 155    |  | 3.73            
|Between £4 and £5        |  | 115                 |  | 8                   |  | 4.54             |  | 115    |  | 4.54            
|                        

Employee sharesave scheme




Employee share option scheme




Medium Term Incentive Plan




127



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                                |  |           |  |             
|--------------------------------------------------------------- |  | --------- |  | ------------
|                                                                |  | Number of |  |             
|                                                                |  | awards    |  | Weighted    
|                                                                |  | granted   |  | average fair
|                                                                |  | 000s      |  | value       
|2006                                                            |  |           |  | £           
|                                                                |  |          
|Conditional awards outstanding at
    the beginning of the year |  | 2,519     |  | 7.34        
|Conditional awards granted during
    the year                  |  | 306       |  | 8.83        
|Conditional awards forfeited during
    the year                |  | (288)     |  | 7.34        
|Conditional awards outstanding at
    the end of the year       |  | 2,537     |  | 9.39        
|                                                               

|                                                          |  |           |  |             
|--------------------------------------------------------- |  | --------- |  | ------------
|                                                          |  | Number of |  |             
|                                                          |  | awards    |  | Weighted    
|                                                          |  | granted   |  | average fair
|                                                          |  | 000s      |  | value       
|2005                                                      |  |           |  | £           
|                                                          |  |          
|Conditional awards granted during
    the year            |  | 2,651     |  | 7.25        
|Conditional awards forfeited during
    the year          |  | (132)     |  | 7.25        
|Conditional awards outstanding at
    the end of the year |  | 2,519     |  | 7.34        
|                                                         





48. Directors emoluments and interests






|                                    |  |           |  |            
|----------------------------------- |  | --------- |  | -----------
|                                    |  |           |  | Aggregate  
|                                    |  |           |  | amount     
|                                    |  | Number of |  | outstanding
|2006                                |  | persons   |  | £000       
|                                   
|Directors                           |  |           |  |            
|Loans                               |  |          |  |           
|Quasi loans                         |  |          |  |           
|Credit transactions                 |  |          |  |           
|                                   
|Other Key Management
    Personnel* |  |           |  |            
|Loans                               |  | 2         |  | 1,281      
|Quasi loans                         |  |          |  |           
|Credit transactions                 |  |          |  |           
|                                   

|                                    |  |           |  |            
|----------------------------------- |  | --------- |  | -----------
|                                    |  |           |  | Aggregate  
|                                    |  |           |  | amount     
|                                    |  | Number of |  | outstanding
|2005                                |  | persons   |  | £000       
|                                   
|Directors                           |  |           |  |            
|Loans                               |  |          |  |           
|Quasi loans                         |  |          |  |           
|Credit transactions                 |  |          |  |           
|                                   
|Other Key Management
    Personnel* |  |           |  |            
|Loans                               |  | 1         |  | 215        
|Quasi loans                         |  |          |  |           
|Credit transactions                 |  |          |  |           
|                                   

|  |                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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 the year.



128



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

49. Related party disclosures

Transactions with Directors, Other Key Management Personnel
and each of their connected persons

Directors, Other Key Management Personnel and their connected
persons have undertaken the following transactions with Abbey in
the course of normal banking and life assurance business.

|                                                                                |  |                     |  |                      
|------------------------------------------------------------------------------- |  | ------------------- |  | ---------------------
|                                                                                |  |                     |  | Amounts in respect of
|                                                                                |  | Number of directors |  | directors, Other Key 
|                                                                                |  | and                 |  | Management           
|                                                                                |  | Other Key           |  | Personnel(1)and their
|                                                                                |  | Management          |  | connected persons    
|2006                                                                            |  | Personnel(1)        |  | £000                 
|                                                                               
|Secured loans, unsecured loans
    and overdrafts                               |  |                     |  |                      
|Loans outstanding at 1 January                                                  |  | 1                   |  | 215                  
|Net movements in the year                                                       |  | 1                   |  | 1,066                
|                                                                               
|Loans outstanding as at 31 December                                             |  | 2                   |  | 1,281                
|                                                                               
|Deposit, bank and instant access
    accounts and investments                   |  |                     |  |                      
|Deposits, bank instant access
    accounts and investments at 1 January         |  | 12                  |  | 4,904                
|Net movements in the year                                                       |  | 2                   |  | (2,316)              
|                                                                               
|Deposit, bank and instant access
    accounts and investments as at 31 December |  | 14                  |  | 2,588                
|                                                                               
|Life assurance
    policies                                                     |  |                     |  |                      
|Life assurance policies at 1 January                                            |  | 6                   |  | 1,202                
|Net movements in the year                                                       |  |                    |  | 313                  
|                                                                               
|Life assurance policies as at 31
    December                                   |  | 6                   |  | 1,515                
|                                                                               

|                                                                                |  |                     |  |                    
|------------------------------------------------------------------------------- |  | ------------------- |  | -------------------
|                                                                                |  |                     |  | Amounts in respect 
|                                                                                |  |                     |  | of directors, Other
|                                                                                |  |                     |  | Key Management     
|                                                                                |  | Number of directors |  | Personnel(1)and    
|                                                                                |  | and Other Key       |  | their connected    
|                                                                                |  | Management          |  | persons            
|2005                                                                            |  | Personnel(1)        |  | £000               
|                                                                               
|Secured loans, unsecured loans
    and overdrafts                               |  |                     |  |                    
|Loans outstanding at 1 January                                                  |  | 1                   |  | 240                
|Net movements in the year                                                       |  |                    |  | (25)               
|                                                                               
|Loans outstanding as at 31 December                                             |  | 1                   |  | 215                
|                                                                               
|Deposit, bank and instant access
    accounts and investments                   |  |                     |  |                    
|Deposits, bank instant access
    accounts and investments at 1 January         |  | 8                   |  | 2,080              
|Net movements in the year                                                       |  | 4                   |  | 2,824              
|                                                                               
|Deposit, bank and instant access
    accounts and investments as at 31 December |  | 12                  |  | 4,904              
|                                                                               
|Life assurance
    policies                                                     |  |                     |  |                    
|Life assurance policies at 1 January                                            |  | 3                   |  | 50                 
|Net movements in the year                                                       |  | 3                   |  | 1,152              
|                                                                               
|Life assurance policies as at 31
    December                                   |  | 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 the year.









Remuneration of Key Management Personnel




129



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                             |  |            |  |            |  |          
|---------------------------- |  | ---------- |  | ---------- |  | ---------
|                             |  | 2006       |  | 2005       |  | 2004*    
|Key management compensation  |  | £          |  | £          |  | £        
|                            
|Short-term employee benefits |  | 15,076,922 |  | 14,700,960 |  | 7,421,848
|Post employment benefits     |  | 89,753     |  | 4,138,247  |  | 424,747  
|Other long term benefits     |  | 548,692    |  |           |  |         
|Termination benefits         |  |           |  | 771,661    |  | 450,842  
|Share-based payments         |  | 904,217    |  | 984,105    |  |         
|                            
|                             |  | 16,619,584 |  | 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




three-year three-year


Parent undertaking and controlling party




Transactions with related parties




|                    |  |                       |  |                     |  |                 |  |                    |  |      |  |      |  |       |  |      |  |       |  |        
|------------------- |  | --------------------- |  | ------------------- |  | --------------- |  | ------------------ |  | ---- |  | ---- |  | ----- |  | ---- |  | ----- |  | -------
|                    |  | Interest, fees and    |  | Interest, fees and  |  | Amounts owed by |  | Amounts owed      
|                    |  | other income received |  | other expenses paid |  | related parties |  | to related parties
|                    |  |                      
|                    |  | 2006                  |  | 2005                |  | 2004            |  | 2006               |  | 2005 |  | 2004 |  | 2006  |  | 2005 |  | 2006  |  | 2005   
|                    |  | £m                    |  | £m                  |  | £m              |  | £m                 |  | £m   |  | £m   |  | £m    |  | £m   |  | £m    |  | £m     
|                   
|Parent company      |  | (23)                  |  | (16)                |  |                |  | 80                 |  | 40   |  |     |  | 1,562 |  | 50   |  | (40)  |  | (2,025)
|Fellow subsidiaries |  | (28)                  |  |                    |  |                |  | 84                 |  | 108  |  |     |  | 2,732 |  | 1    |  |      |  | (82)   
|Associates          |  |                      |  |                    |  |                |  | 2                  |  |     |  |     |  | 340   |  | 1    |  | (408) |  |       
|                   
|                    |  | (51)                  |  | (16)                |  |                |  | 166                |  | 148  |  |     |  | 4,634 |  | 52   |  | (448) |  | (2,107)
|                   



|                    |  |                       |  |                     |  |                 |  |                    |  |       |  |       |  |        |  |        |  |          |  |         
|------------------- |  | --------------------- |  | ------------------- |  | --------------- |  | ------------------ |  | ----- |  | ----- |  | ------ |  | ------ |  | -------- |  | --------
|                    |  | Interest, fees and    |  | Interest, fees and  |  | Amounts owed by |  | Amounts owed      
|                    |  | other income received |  | other expenses paid |  | related parties |  | to related parties
|                    |  |                      
|                    |  | 2006                  |  | 2005                |  | 2004            |  | 2006               |  | 2005  |  | 2004  |  | 2006   |  | 2005   |  | 2006     |  | 2005    
|                    |  | £m                    |  | £m                  |  | £m              |  | £m                 |  | £m    |  | £m    |  | £m     |  | £m     |  | £m       |  | £m      
|                   
|Parent company      |  | (21)                  |  |                    |  |                |  | 7                  |  |      |  |      |  | 1,500  |  |       |  |         |  |        
|Subsidiaries        |  | (1,611)               |  | (1,541)             |  | (956)           |  | 3,592              |  | 3,442 |  | 2,069 |  | 41,219 |  | 34,361 |  | (84,278) |  | (71,847)
|Fellow subsidiaries |  | (3)                   |  |                    |  |                |  | 61                 |  |      |  |      |  | 7      |  |       |  | (373)    |  |        
|Associates          |  |                      |  |                    |  |                |  |                   |  |      |  |      |  | 1      |  | 1      |  |         |  |        
|                   
|                    |  | (1,635)               |  | (1,541)             |  | (956)           |  | 3,660              |  | 3,442 |  | 2,069 |  | 42,727 |  | 34,362 |  | (84,651) |  | (71,847)
|                   





50. Events after the balance sheet date




130



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

51. Financial Instruments

Financial assets and financial liabilities are measured on an
ongoing basis either at fair value or at amortised cost. The
accounting policies note describes how the classes of financial
instruments are measured, and how income and expenses, including
fair value gains and losses, are recognised. The following table
analyses the financial assets and liabilities in the balance
sheet by the class of financial instrument to which they are
assigned, and by the measurement basis:

|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|-------------------------------------------------- |  | ------- |  | ---------- |  | ----------- |  | -------------- |  | --------- |  | ----------- |  | -------
|                                                   |  | Group  
|                                                   |  |        
|2006                                               |  |         |  | Financial  |  |            
|                                                   |  | Held    |  | Designated |  |             |  | liabilities at |  |          
|                                                   |  | for     |  | at fair    |  | Loans and   |  | Available      |  | amortised |  |            
|                                                   |  | trading |  | value      |  | Receivables |  | for sale       |  | cost      |  | Derivatives |  | Total  
|                                                   |  | £m      |  | £m         |  | £m          |  | £m             |  | £m        |  | £m          |  | £m     
|                                                  
|Assets                                             |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Cash and balances at central banks                 |  |        |  |           |  | 888         |  |               |  |          |  |            |  | 888    
|Trading assets                                     |  | 62,314  |  |           |  |            |  |               |  |          |  |            |  | 62,314 
|Derivative financial instruments                   |  |        |  |           |  |            |  |               |  |          |  | 8,336       |  | 8,336  
|Financial assets designated at fair
    value      |  |        |  | 8,713      |  |            |  |               |  |          |  |            |  | 8,713  
|Loans and advances to banks                        |  |        |  |           |  | 2,242       |  |               |  |          |  |            |  | 2,242  
|Loans and advances to customers                    |  |        |  |           |  | 103,146     |  |               |  |          |  |            |  | 103,146
|Available for sale securities                      |  |        |  |           |  |            |  | 23             |  |          |  |            |  | 23     
|                                                  
|Total financial assets                             |  | 62,314  |  | 8,713      |  | 106,276     |  | 23             |  |           |  | 8,336       |  | 185,662
|                                                   |  |        
|Total non financial assets                         |  |         |  |            |  |             |  |                |  |           |  |             |  | 6,143  
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Total assets                                       |  |         |  |            |  |             |  |                |  |           |  |             |  | 191,805
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|                                                  
|Liabilities                                        |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Deposits by banks                                  |  |        |  |           |  |            |  |               |  | 6,656     |  |            |  | 6,656  
|Deposits by customers                              |  |        |  |           |  |            |  |               |  | 66,519    |  |            |  | 66,519 
|Derivative financial instruments                   |  |        |  |           |  |            |  |               |  |          |  | 10,218      |  | 10,218 
|Trading liabilities                                |  | 57,604  |  |           |  |            |  |               |  |          |  |            |  | 57,604 
|Financial liabilities designated at
    fair value |  |        |  | 8,151      |  |            |  |               |  |          |  |            |  | 8,151  
|Debt securities in issue                           |  |        |  |           |  |            |  |               |  | 28,998    |  |            |  | 28,998 
|Other borrowed funds                               |  |        |  |           |  |            |  |               |  | 1,655     |  |            |  | 1,655  
|Subordinated liabilities                           |  |        |  |           |  |            |  |               |  | 5,020     |  |            |  | 5,020  
|                                                  
|Total financial
    liabilities                    |  | 57,604  |  | 8,151      |  |            |  |               |  | 108,848   |  | 10,218      |  | 184,821
|                                                   |  |        
|Total non financial liabilities                    |  |         |  |            |  |             |  |                |  |           |  |             |  | 3,868  
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Total liabilities                                  |  |         |  |            |  |             |  |                |  |           |  |             |  | 188,689
|Equity                                             |  |         |  |            |  |             |  |                |  |           |  |             |  | 3,116  
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Total liabilities and
    equity                   |  |         |  |            |  |             |  |                |  |           |  |             |  | 191,805
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        

|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|-------------------------------------------------- |  | ------- |  | ---------- |  | ----------- |  | -------------- |  | --------- |  | ----------- |  | -------
|                                                   |  | Group  
|                                                   |  |        
|2005                                               |  |         |  | Financial  |  |            
|                                                   |  | Held    |  | Designated |  |             |  | liabilities at |  |          
|                                                   |  | for     |  | at fair    |  | Loans and   |  | Available      |  | amortised |  |            
|                                                   |  | trading |  | value      |  | Receivables |  | for sale       |  | cost      |  | Derivatives |  | Total  
|                                                   |  | £m      |  | £m         |  | £m          |  | £m             |  | £m        |  | £m          |  | £m     
|                                                  
|Assets                                             |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Cash and balances at central banks                 |  |        |  |           |  | 991         |  |               |  |          |  |            |  | 991    
|Trading assets                                     |  | 58,231  |  |           |  |            |  |               |  |          |  |            |  | 58,231 
|Derivative financial instruments                   |  |        |  |           |  |            |  |               |  |          |  | 11,855      |  | 11,855 
|Financial assets designated at fair
    value      |  |        |  | 30,597     |  |            |  |               |  |          |  |            |  | 30,597 
|Loans and advances to banks                        |  |        |  |           |  | 444         |  |               |  |          |  |            |  | 444    
|Loans and advances to customers                    |  |        |  |           |  | 95,467      |  |               |  |          |  |            |  | 95,467 
|Available for sale securities                      |  |        |  |           |  |            |  | 13             |  |          |  |            |  | 13     
|                                                  
|Total financial assets                             |  | 58,231  |  | 30,597     |  | 96,902      |  | 13             |  |          |  | 11,855      |  | 197,598
|                                                   |  |        
|Total non financial assets                         |  |         |  |            |  |             |  |                |  |           |  |             |  | 9,436  
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Total assets                                       |  |         |  |            |  |             |  |                |  |           |  |             |  | 207,034
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|                                                  
|Liabilities                                        |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Deposits by banks                                  |  |        |  |           |  |            |  |               |  | 5,617     |  |            |  | 5,617  
|Deposits by customers                              |  |        |  |           |  |            |  |               |  | 65,889    |  |            |  | 65,889 
|Derivative financial instruments                   |  |        |  |           |  |            |  |               |  |          |  | 11,264      |  | 11,264 
|Trading liabilities                                |  | 52,664  |  |           |  |            |  |               |  |          |  |            |  | 52,664 
|Financial liabilities designated at
    fair value |  |        |  | 7,948      |  |            |  |               |  |          |  |            |  | 7,948  
|Debt securities in issue                           |  |        |  |           |  |            |  |               |  | 21,276    |  |            |  | 21,276 
|Other borrowed funds                               |  |        |  |           |  |            |  |               |  | 2,244     |  |            |  | 2,244  
|Subordinated liabilities                           |  |        |  |           |  |            |  |               |  | 6,205     |  |            |  | 6,205  
|Investment contract liabilities                    |  |        |  | 3,306      |  |            |  |               |  |          |  |            |  | 3,306  
|                                                  
|Total financial
    liabilities                    |  | 52,664  |  | 11,254     |  |            |  |               |  | 101,231   |  | 11,264      |  | 176,413
|                                                   |  |        
|Total non financial liabilities                    |  |         |  |            |  |             |  |                |  |           |  |             |  | 27,511 
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Total liabilities                                  |  |         |  |            |  |             |  |                |  |           |  |             |  | 203,924
|Equity                                             |  |         |  |            |  |             |  |                |  |           |  |             |  | 3,110  
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        
|Total liabilities and
    equity                   |  |         |  |            |  |             |  |                |  |           |  |             |  | 207,034
|                                                   |  |         |  |            |  |             |  |                |  |           |  |             |  |        

131



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                              |  |               |  |             |  |           |  |                |  |             |  |        
|--------------------------------------------- |  | ------------- |  | ----------- |  | --------- |  | -------------- |  | ----------- |  | -------
|                                              |  | Company      
|                                              |  |              
|                                              |  |               |  | Financial   |  |          
|                                              |  | Designated    |  | Loans and   |  | Available |  | liabilities at |  |            
|                                              |  | at fair value |  | Receivables |  | for sale  |  | amortised cost |  | Derivatives |  | Total  
|2006                                          |  | £m            |  | £m          |  | £m        |  | £m             |  | £m          |  | £m     
|                                             
|Assets                                        |  |               |  |             |  |           |  |                |  |             |  |        
|Cash and balances at central banks            |  |              |  | 888         |  |          |  |               |  |            |  | 888    
|Derivative financial instruments              |  |              |  |            |  |          |  |               |  | 646         |  | 646    
|Financial assets designated at fair
    value |  | 66            |  |            |  |          |  |               |  |            |  | 66     
|Loans and advances to banks                   |  |              |  | 41,711      |  |          |  |               |  |            |  | 41,711 
|Loans and advances to customers               |  |              |  | 103,249     |  |          |  |               |  |            |  | 103,249
|Available for sale securities                 |  |              |  |            |  | 12        |  |               |  |            |  | 12     
|                                             
|Total financial assets                        |  | 66            |  | 145,848     |  | 12        |  |               |  | 646         |  | 146,572
|                                             
|Total non financial assets                    |  |               |  |             |  |           |  |                |  |             |  | 7,029  
|                                             
|Total assets                                  |  |               |  |             |  |           |  |                |  |             |  | 153,601
|                                             
|Liabilities                                   |  |               |  |             |  |           |  |                |  |             |  |        
|Deposits by banks                             |  |              |  |            |  |          |  | 61,123         |  |            |  | 61,123 
|Deposits by customers                         |  |              |  |            |  |          |  | 80,104         |  |            |  | 80,104 
|Derivative financial instruments              |  |              |  |            |  |          |  |               |  | 681         |  | 681    
|Debt securities in issue                      |  |              |  |            |  |          |  | 4              |  |            |  | 4      
|Other borrowed funds                          |  |              |  |            |  |          |  | 1,082          |  |            |  | 1,082  
|Subordinated liabilities                      |  |              |  |            |  |          |  | 5,563          |  |            |  | 5,563  
|                                             
|Total financial
    liabilities               |  |              |  |            |  |          |  | 147,876        |  | 681         |  | 148,557
|                                             
|Total non financial liabilities               |  |               |  |             |  |           |  |                |  |             |  | 2,345  
|                                             
|Total liabilities                             |  |               |  |             |  |           |  |                |  |             |  | 150,902
|Equity                                        |  |               |  |             |  |           |  |                |  |             |  | 2,699  
|                                             
|Total liabilities and
    equity              |  |               |  |             |  |           |  |                |  |             |  | 153,601
|                                             

|                                              |  |               |  |             |  |           |  |                |  |             |  |        
|--------------------------------------------- |  | ------------- |  | ----------- |  | --------- |  | -------------- |  | ----------- |  | -------
|                                              |  | Company      
|                                              |  |              
|                                              |  |               |  | Financial   |  |          
|                                              |  | Designated    |  | Loans and   |  | Available |  | liabilities at |  |            
|                                              |  | at fair value |  | Receivables |  | for sale  |  | amortised cost |  | Derivatives |  | Total  
|2005                                          |  | £m            |  | £m          |  | £m        |  | £m             |  | £m          |  | £m     
|                                             
|Assets                                        |  |               |  |             |  |           |  |                |  |             |  |        
|Cash and balances at central banks            |  |              |  | 370         |  |          |  |               |  |            |  | 370    
|Derivative financial instruments              |  |              |  |            |  |          |  |               |  | 1,227       |  | 1,227  
|Financial assets designated at fair
    value |  | 790           |  |            |  |          |  |               |  |            |  | 790    
|Loans and advances to banks                   |  |              |  | 33,009      |  |          |  |               |  |            |  | 33,009 
|Loans and advances to customers               |  |              |  | 95,230      |  |          |  |               |  |            |  | 95,230 
|Available for sale securities                 |  |              |  |            |  | 272       |  |               |  |            |  | 272    
|                                             
|Total financial assets                        |  | 790           |  | 128,609     |  | 272       |  |               |  | 1,227       |  | 130,898
|                                             
|Total non financial assets                    |  |               |  |             |  |           |  |                |  |             |  | 10,502 
|                                             
|Total assets                                  |  |               |  |             |  |           |  |                |  |             |  | 141,400
|                                             
|Liabilities                                   |  |               |  |             |  |           |  |                |  |             |  |        
|Deposits by banks                             |  |              |  |            |  |          |  | 48,267         |  |            |  | 48,267 
|Deposits by customers                         |  |              |  |            |  |          |  | 79,288         |  |            |  | 79,288 
|Derivative financial instruments              |  |              |  |            |  |          |  |               |  | 623         |  | 623    
|Debt securities in issue                      |  |              |  |            |  |          |  | 4              |  |            |  | 4      
|Other borrowed funds                          |  |              |  |            |  |          |  | 1,452          |  |            |  | 1,452  
|Subordinated liabilities                      |  |              |  |            |  |          |  | 6,477          |  |            |  | 6,477  
|                                             
|Total financial
    liabilities               |  |              |  |            |  |          |  | 135,488        |  | 623         |  | 136,111
|                                             
|Total non financial liabilities               |  |               |  |             |  |           |  |                |  |             |  | 2,381  
|                                             
|Total liabilities                             |  |               |  |             |  |           |  |                |  |             |  | 138,492
|Equity                                        |  |               |  |             |  |           |  |                |  |             |  | 2,908  
|                                             
|Total liabilities and
    equity              |  |               |  |             |  |           |  |                |  |             |  | 141,400
|                                             

132



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The following tables provide an analysis of the fair value of
financial instruments not measured at fair value in the balance
sheet:

|                                   |  |          |  |            |  |          
|---------------------------------- |  | -------- |  | ---------- |  | ---------
|                                   |  | Group   
|                                   |  |         
|2006                               |  | Carrying |  |            |  | Surplus/ 
|                                   |  | value    |  | Fair value |  | (deficit)
|                                   |  | £m       |  | £m         |  | £m       
|                                  
|Assets                             |  |          |  |            |  |          
|Cash and balances at central banks |  | 888      |  | 888        |  |         
|Loans and advances to banks        |  | 2,242    |  | 2,242      |  |         
|Loans and advances to customers    |  | 103,146  |  | 103,309    |  | 163      
|                                  
|Liabilities                        |  |          |  |            |  |          
|Deposits by banks                  |  | 6,656    |  | 6,656      |  |         
|Deposits by customers              |  | 66,519   |  | 66,571     |  | (52)     
|Debt securities in issue           |  | 28,998   |  | 29,142     |  | (144)    
|Other borrowed funds               |  | 1,655    |  | 2,069      |  | (414)    
|Subordinated liabilities           |  | 5,020    |  | 5,200      |  | (180)    
|                                  

|                                   |  |          |  |            |  |          
|---------------------------------- |  | -------- |  | ---------- |  | ---------
|                                   |  | Company 
|                                   |  |         
|2006                               |  | Carrying |  |            |  | Surplus/ 
|                                   |  | value    |  | Fair value |  | (deficit)
|                                   |  | £m       |  | £m         |  | £m       
|                                  
|Assets                             |  |          |  |            |  |          
|Cash and balances at central banks |  | 888      |  | 888        |  |         
|Loans and advances to banks        |  | 41,711   |  | 41,711     |  |         
|Loans and advances to customers    |  | 103,249  |  | 103,412    |  | 163      
|                                  
|Liabilities                        |  |          |  |            |  |          
|Deposits by banks                  |  | 61,123   |  | 60,955     |  | 168      
|Deposits by customers              |  | 80,104   |  | 80,156     |  | (52)     
|Debt securities in issue           |  | 4        |  | 4          |  |         
|Other borrowed funds               |  | 1,082    |  | 1,392      |  | (310)    
|Subordinated liabilities           |  | 5,563    |  | 5,877      |  | (314)    
|                                  

|                                   |  |          |  |            |  |          
|---------------------------------- |  | -------- |  | ---------- |  | ---------
|                                   |  | Group   
|                                   |  |         
|2005                               |  | Carrying |  |            |  | Surplus/ 
|                                   |  | value    |  | Fair value |  | (deficit)
|                                   |  | £m       |  | £m         |  | £m       
|                                  
|Assets                             |  |          |  |            |  |          
|Cash and balances at central banks |  | 991      |  | 991        |  |         
|Loans and advances to banks        |  | 444      |  | 444        |  |         
|Loans and advances to customers    |  | 95,467   |  | 95,871     |  | 404      
|                                  
|Liabilities                        |  |          |  |            |  |          
|Deposits by banks                  |  | 5,617    |  | 5,617      |  |         
|Deposits by customers              |  | 65,889   |  | 66,066     |  | (177)    
|Debt securities in issue           |  | 21,276   |  | 20,591     |  | 685      
|Other borrowed funds               |  | 2,244    |  | 2,540      |  | (296)    
|Subordinated liabilities           |  | 6,205    |  | 7,204      |  | (999)    
|                                  

|                                   |  |          |  |            |  |          
|---------------------------------- |  | -------- |  | ---------- |  | ---------
|                                   |  | Company 
|                                   |  |         
|2005                               |  | Carrying |  |            |  | Surplus/ 
|                                   |  | value    |  | Fair value |  | (deficit)
|                                   |  | £m       |  | £m         |  | £m       
|                                  
|Assets                             |  |          |  |            |  |          
|Cash 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     |  | 404      
|                                  
|Liabilities                        |  |          |  |            |  |          
|Deposits by banks                  |  | 48,267   |  | 48,267     |  |         
|Deposits by customers              |  | 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)    
|                                  



133



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

Fair value measurement

The fair value of financial instruments is the estimated amount
at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or
liquidation sale. If a quoted market price is available for an
instrument, the fair value is calculated based on the market
price. Where quoted market prices are not available, fair value
is determined using pricing models which use a mathematical
methodology based on accepted financial theories, depending on
the product type and its components. Pricing models take into
account the contract terms of the securities as well as
market-based valuation parameters, such as interest rates,
volatility, exchange rates and the credit rating of the
counterparty. Valuation adjustments are an integral component of
the fair value estimation process and are taken on individual
positions where either the absolute size of the trade or other
specific features of the trade or the particular market (such as
counterparty credit risk, concentration or market liquidity)
require more than the simple application of pricing models.

Fair value management

The fair value exposures, as tabled above, are managed by using
a combination of hedging derivatives and offsetting on balance
sheet positions.

The approach to specific categories of financial instruments is
described below.

Assets:

Cash and balances at central banks/ Loans and advances to
banks

The carrying amount is deemed a reasonable approximation of the
fair value, because they are short term in nature.

Loans and advances to customers

Loans and advances to personal customers are made both at
variable and at fixed rates. As there is no active secondary
market in the UK for such loans and advances, there is no
reliable market value available for such a significant portfolio.

a) Variable rate

The Directors believe that the carrying value of the variable
rate loans may be assumed to be their fair value.

b) Fixed rate

Certain of the loans secured on residential properties are at a
fixed rate for a limited period, typically two to five years
from their commencement. At the end of this period these loans
revert to the relevant variable rate. The excess of fair value
over carrying value of each of these loans has been estimated by
reference to the market rates available at the balance sheet
date for similar loans of maturity equal to the remaining fixed
period.

Liabilities:

Deposits by banks

The carrying amount is deemed a reasonable approximation of the
fair value, because they are short term in nature.

Deposits by customers

The majority of deposit liabilities are payable on demand and
therefore can be deemed short term in nature with the fair value
equal to the carrying value. However, given the long-term and
continuing nature of the relationships with Abbeys
customers, the Directors believe there is significant value to
Abbey in this source of funds. Certain of the deposit
liabilities are at a fixed rate until maturity. The deficit of
fair value over carrying value of these liabilities has been
estimated by reference to the market rates available at the
balance sheet date for similar deposit liabilities of similar
maturities.

Debt securities in issue and subordinated liabilities

Where reliable prices are available, the fair value of debt
securities in issue and subordinated liabilities has been
calculated using quoted market prices. Other market values have
been determined using in-house pricing models.

Intra Group balances

Included in the asset and liability categories on the Company
balance sheet are outstanding intra group balances. The fair
value of these balances has been estimated using in-house
pricing models.

52. Explanation of transition to International Financial
Reporting Standards

Abbey, in line with all listed entities in the European Union
(EU), 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 Consolidated Financial Statements in accordance
with UK Generally Accepted Accounting Principals (UK GAAP).

Key standards IAS 32 Financial Instruments: Disclosure and
Presentation, and 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.

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##### 

Financial Statements

Notes to the Financial
Statementscontinued

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        |  | Company     
|                                                                      |  |             
|                                                                      |  | At 1 January |  | At 1 January
|                                                                      |  | 2005         |  | 2005        
|Shareholders Equity                                                  |  | £m           |  | £m          
|                                                                     
|Shareholders equity as
    previously reported under UK GAAP         |  | 4,924        |  | 4,079       
|Non IAS 32, IAS 39 and IFRS 4
    adjustments                         |  | (1,204)      |  | (792)       
|                                                                     
|Shareholders equity before
    IAS 32, IAS 39 and IFRS 4 adjustments |  | 3,720        |  | 3,287       
|De-recognition of liabilities                                         |  | (154)        |  | (154)       
|Fees & Commissions                                                    |  | (73)         |  | (113)       
|Non-trading derivatives                                               |  | (288)        |  | (238)       
|Fair value classification                                             |  | 141          |  | 16          
|Preference shares reclassification
    to debt                        |  | (570)        |  | (570)       
|Life investment products                                              |  | (84)         |  |            
|Other                                                                 |  | (34)         |  | (51)        
|Deferred tax                                                          |  | 29           |  |            
|Tax impact of the above items                                         |  | 108          |  | 146         
|                                                                     
|Total shareholders equity
    under IFRS                             |  | 2,795        |  | 2,323       
|                                                                     

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






135



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

Fair value classification

Under IAS 39 Financial Instruments: Recognition and
Measurement, non-trading financial assets and liabilities,
if certain criteria are met, may be designated at fair value,
with changes in the fair value recognised in the income
statement, or classified as available for sale securities at
fair value, with changes in fair value recognised in equity. At
1 January 2005 Abbey designated some investment securities
at fair value, with the remaining non-trading investment
securities classified as available for sale securities. Abbey
also designated at fair value certain loans and advances to
customers, other financial investments and some debt securities
in issue meeting the criteria for designation at fair value.

Preference share reclassification

IAS 32 Financial Instruments: Disclosure and
Presentation requires preference shares to be classified
as either liabilities or equities depending on their substance.
Abbeys preference shares have a contractual obligation to
transfer cash and therefore they have been reclassified as
liabilities and the coupon payments are reflected as interest
payable rather than dividends. The equity adjustment comprises
this reclassification and the translation of Abbeys USD
preference shares to local currency based on the year-end rate,
compared to UK GAAP carrying value at historic rate.

Life investment products

Under IFRS 4 Insurance contracts, life insurance
contracts that are largely investment in nature (i.e. do not
contain significant insurance risk) will be accounted for as
financial instruments under IAS 39 Financial Instruments:
Recognition and Measurement. Whilst the discounted value
of future profits (DVFP) will no longer be
recognised in respect of products classified as investment
contracts, companies may recognise particular deferred
acquisition costs (DAC). However, the acquisition
costs deferrable under IFRS are limited, and the DAC asset
recognised is significantly lower than the loss in DVFP.

The above adjustments would have been required to comply with
IAS32/39 and IFRS4 in the 2004 comparatives.

136



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

53. Differences between IFRS and US GAAP

The significant differences applicable to Abbeys
Consolidated Financial Statements are summarised below.

(a) Goodwill

IFRSUnder IFRS 3 Business Combinations,
goodwill resulting from acquisitions is capitalised and tested
annually for impairment at the cash generating unit level.
Goodwill is carried at cost less accumulated impairment losses.
The Group has applied IFRS 3 to business combinations that
occurred on or after 1 January 2004. Business combinations
before that date have not been restated. Prior to that date,
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. In addition, under previous GAAP,
goodwill was subject to an annual impairment test at the income
generating unit level.

US GAAPStatement of Financial Accounting Standards
(SFAS) 142, Goodwill and Other Intangible
Assets, requires that goodwill resulting from acquisitions
be capitalised. Until 2002, goodwill balances were amortised.
Goodwill balances are no longer amortised, but are subject to an
annual impairment test at a reporting unit level. Goodwill is
written off to the extent that it is judged to be impaired.

(b) Other intangible assets

IFRSAn intangible asset is a non-financial asset that
does not have physical substance but is identifiable and
controlled by the entity through custody or legal rights. Under
IFRS, in connection with acquisitions, the values of depositor
relationships are normally considered separately identifiable
assets. However, under the IFRS transition rules, the values of
the depositor relationships arising on acquisitions prior to the
adoption date of IFRS did not meet the recognition criteria in
IFRS 1, as they would not have been recorded in the acquired
company balance sheet.

US GAAPAn intangible asset shall be recognised if it
arises from contracted or other legal rights or if it is capable
of being separated or divided from the acquired entity and sold,
transferred, licensed, rented or exchanged. Under US GAAP, in
connection with acquisitions, the values of depositor
relationships are considered separately identifiable assets. To
the extent that such assets are recognised there are equivalent
reductions in goodwill. The value ascribed to depositor
relationships is amortised to net income over the average life
of the depositor relationship in question.

(c) Pension costs

IFRSFor defined benefit schemes, IAS 19 Employee
Benefits (IAS 19) requires pension liabilities
to be determined on the basis of current actuarial valuations
performed on each plan, and pension assets to be measured at
fair value. The net pension surplus or deficit, representing the
difference between plan assets and liabilities, is recognised on
the balance sheet. In accordance with IAS 19 (revised 2004),
Abbey has elected to record all actuarial gains and losses on
the pension surplus or deficit in the year in which they occur
within the statement of recognised income and expense.

US GAAPEffective 31 December 2006, Abbey adopted
SFAS 158 Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans
(SFAS 158) requiring an employer to recognise
the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multi-employer plan) as an
asset or liability in the statement of financial position and to
recognise changes in that funded status in the year in which the
changes occur through comprehensive income. The requirements of
SFAS 158 are similar to the requirements of IAS 19 under
IFRS. Prior to the adoption of SFAS 158, Abbey recognised
an additional minimum pension liability to the extent that the
value of benefits accrued based on employee service up to the
balance sheet date (the accumulated benefit obligation) exceeded
the value of plan assets, and the excess was greater than any
accrual already established for unfunded pension costs. The
transitional adjustment required on adoption of SFAS 158
was recorded as an adjustment to the 2006 year-end balance
of accumulated other comprehensive income. Abbey continues, as
permitted by SFAS 87 Employers Accounting for
Pensions (SFAS 87), to use the
corridor method, whereby actuarial gains and losses
outside a certain range are recognised in the income statement
in equal amounts over the remaining service lives of current
employees. That range is 10% of the greater of the
market-related value of plan assets or the projected benefit
obligation.

(d) Securities and investments

IFRSUnder IAS 39, from 1 January 2005, the Group
classifies its financial assets in the following categories:
financial assets at fair value through profit and loss, loans
and receivables, available-for-sale financial assets and held to
maturity. Management determines the classification of its
investments at initial recognition.

(i) Financial assets at fair value through profit and loss

Financial assets are classified as fair value through profit or
loss if they are either held for trading or otherwise designated
at fair value through profit or loss on initial recognition. A
financial asset is classified as held for trading if it is a
derivative or it is acquired principally for the purpose of
selling in the near term, or forms part of a portfolio of
financial instruments that are managed together and for which
there is evidence of short term profit taking.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with
fixed or determinable payments and which are not classified as
available for sale. They arise when the Group provides money or
services directly to a customer with no intention of trading the
loan. Loans and receivables are initially recognised at fair
value including direct and incremental transaction costs. They
are subsequently valued at amortised cost, using the effective
interest method. They are derecognised when the rights to
receive cash flows have expired or the Group has transferred
substantially all of the risks and rewards of ownership.

137



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

(iii) Available for sale

Available for sale investments are non-derivative financial
investments that are designated as available for sale and are
not categorised into any of the other categories described
above. They are initially recognised at fair value including
direct and incremental transaction costs. They are subsequently
held at fair value.

Gains and losses arising from changes in fair value are included
as a separate component of equity until sale when the cumulative
gain or loss is transferred to the income statement. Interest is
determined using the effective interest method. Income on
investments in equity shares and other similar interests is
recognised as and when dividends are declared and interest is
accrued. These amounts are recorded in the income statement.
Impairment losses and translation differences on monetary items
are recognised in the income statement. The investments are
derecognised when the rights to receive cash flows have expired
or the Group has transferred substantially all the risks and
rewards of ownership.

(iv) Held to maturity

Held to maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturity that an
entity has the positive intention and ability to hold to
maturity and they are not classified into any of the categories
described above. Abbey does not hold any held to maturity
financial assets.

Prior to 1 January 2005, financial assets were only
accounted for at fair value through profit and loss if they were
classified as trading; the accounting for loans and receivables
was unchanged; and securities were classified as held for
investment purposes or not held for investment purposes (that
is, for trading). Securities held for investment purposes were
stated at cost adjusted for any amortisation of premium or
discount. Provision was made for any impairment in value. All
securities not held for investment purposes were stated at fair
value and profits and losses arising from this revaluation were
taken to the income statement. Debt and equity securities were
periodically reviewed on a case-by-case basis to determine
whether any decline in fair value below the carrying value was
an indication of impairment. A review for impairment of a
security included, among other things, consideration of the
credit risk associated with the security, including an
assessment of the likelihood of collection of amounts due
pursuant to the contractual terms of the security in excess of
the cost of the security. Should an event have reversed the
effects of a previous impairment, the carrying value of the
security may have been written up to a value no higher than the
original cost which would have been recognised had the original
impairment not occurred.

US GAAPInvestments in equity securities with readily
determinable market values and all debt securities are
classified as trading securities, available for sale securities,
or held to maturity securities in accordance with SFAS 115.
Abbey has no securities classified as held to maturity.
Securities classified as trading represent securities that Abbey
has bought and holds principally for the purpose of selling in
the near term or that were designated at their purchase date as
such. Trading securities are accounted for in the same way as
trading securities under IAS 39. Debt and equity securities
classified as available for sale represent securities not
classified as either held to maturity or trading securities.
They are initially recognised at fair value including direct and
incremental transaction costs. They are subsequently held at
fair value. Gains and losses on available for sale securities
arising from changes in fair value are included as a separate
component of equity until sale when the cumulative gain or loss
is transferred to the income statement. Foreign exchange
differences on available-for-sale securities denominated in
foreign currency are also excluded from earnings and recorded as
part of the same separate component of shareholders funds.
Securities classified as available-for-sale are required to be
reviewed on an individual basis to identify whether their fair
values have declined to a level below amortised cost and, if so,
whether the decline is other-than-temporary. Provision is
reflected in earnings as a realised loss for any impairment that
is considered to be other-than-temporary. If it is probable that
an investor will be unable to collect all amounts due according
to the contractual terms of a debt security, an
other-than-temporary impairment is considered to have occurred.
Recognition of other-than-temporary impairment may be required
as a result of a decline in a securitys value due to
deterioration in the issuers creditworthiness, an increase
in market interest rates or a change in foreign exchange rates
since acquisition. Other circumstances in which a decline in the
fair value of a debt security may be other-than-temporary
include situations where the security will be disposed of before
it matures or the investment is not realisable.

Emerging Issues Task Force (EITF) pronouncement EITF 99-20
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitised Financial
Assets (EITF 99-20) requires impairment testing on
applicable asset-backed securities to be performed using a
discounted cash flow model on an individual security basis. If
the present value of the securitys original cash flows
estimated at the initial transaction date (or the last date
previously revised) is greater than the present value of the
current estimated cash flows at the financial reporting date, an
other-than-temporary impairment is considered to have occurred.
The security is written down to fair value with the resulting
change being included in income. Abbey has adopted the specific
impairment testing methodology required by EITF 99-20 for
applicable asset-backed securities for IFRS purposes.

If an impairment loss is recognised, the cost basis of the
individual security is written down to fair value as a new cost
basis. The new cost basis is not changed for subsequent
recoveries in fair value.

(e) Securitised assets

IFRSThe Group has entered into certain arrangements
where undertakings have issued mortgage-backed securities or
have entered into funding arrangements with lenders in order to
finance specific loans and advances to customers. All such
financial instruments continue to be held on the Group balance
sheet, and a liability recognised for the proceeds of the
funding transaction, as Abbey has not transferred substantially
all the risks and rewards associated with the loans.

US GAAPSFAS 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, requires that after a transfer of financial
assets an entity recognises the financial and servicing assets
it controls and the liabilities it has incurred, derecognises
financial assets when control has been surrendered, and
derecognises liabilities when extinguished. The statement
contains rules for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. Under
US GAAP, Abbeys mortgage securitisation vehicles are
considered qualifying special purpose entities and
fall outside the scope of FIN 46R. Consequently, Abbey
treats its securitisations of mortgage loans as sales and, where
appropriate, recognises a servicing asset and an interest-only
security.

138



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

The servicing asset is amortised over the periods in which the
benefits are expected to be received and the interest-only
security is accounted for as an available for sale security, and
is evaluated for impairment in accordance with EITF 99-20.

(f) Loan origination fees and costs

IFRSUnder IAS 39, from 1 January 2005, interest
income on loans is determined using the effective interest rate
method. The effective interest rate is the rate that discounts
the estimated future cash payments or receipts over the expected
life of the instrument or, when appropriate, a shorter period,
to the net carrying amount of the financial asset. The
calculation includes all amounts paid or received by the Group
that are an integral part of the overall return, direct
incremental transaction costs related to the acquisition, issue
or disposal of a financial instrument and all other premiums or
discounts. Prior to 1 January 2005, loan origination fees
received in respect of services provided were taken to the
income statement when the related services were performed. Where
loan origination fees or costs were in the nature of interest or
income, they were recognised in the income statement over the
expected life of the transaction to which they related or over
the period of time in which Abbey had the right to recover the
incentives in the event of early redemption.

US GAAPLoan origination fees not offset by related
direct costs, internal costs, and discount mortgage incentives
are deferred and amortised through the income statement over the
life of the loan, in accordance with SFAS 91,
Accounting for Non-refundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of
Losses (SFAS 91). Abbey includes
estimates of future prepayments in the calculation of the
effective yield. These estimates are based on detailed mortgage
prepayment models. When the interest rate increases during the
term of the loan, SFAS 91 prohibits the recognition of
interest income to the extent that the loan would increase to an
amount greater than the amount at which the borrower could
settle the loan.

(g) Derivatives

IFRSPrior to 1 January 2005, derivatives were
classified as trading or non-trading. Derivatives classified as
trading were carried at market value in the balance sheet. Gains
and losses were taken directly to the income statement.
Non-trading derivatives, which were transacted for hedging and
risk management purposes, were accounted for on an accruals
basis, equivalent to the assets, liabilities or net positions
being hedged. From 1 January 2005, under IAS 39,
derivatives are initially recognised at fair value on the date
on which a derivative contract is entered into and are
subsequently remeasured at their fair value. The Group
designates certain derivatives as hedges of the fair value of
recognised assets or liabilities or firm commitments (fair value
hedge) provided certain criteria are met.

US GAAPSFAS 133, Accounting for Derivatives
Instruments and Hedging Activities, requires that all
derivative instruments be recorded on the balance sheet at their
fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated and
effective as part of a hedge transaction and, if it is, the type
of hedge transaction. For fair-value hedge transactions in which
Abbey is hedging changes in the fair value of an asset,
liability, or firm commitment, changes in the fair value of the
derivative will generally be offset in the income statement by
changes in the hedged items fair value. Abbey has no cash
flow hedge transactions. From 1 January 2005 Abbey ceased
to claim hedge accounting for US GAAP purposes.

(h) Debt securities in issue

IFRSFrom 1 January 2005, under IAS 39, the Group
has designated certain debt securities in issue as fair value
though profit or loss. In addition, from 1 January 2005,
also under IAS 39, the Group has claimed hedge accounting for
other debt securities in issue, as also described above. Prior
to 1 January 2005, all debt securities in issue were
accrual accounted.

The application of IAS 39 Financial Instruments:
Recognition and Measurement as at 1 January 2005
resulted in the recognition of additional assets and liabilities
relating to the fair values of derivatives at that date which
were previously accounted for on an accruals basis. In addition,
the carrying values of non-derivatives subject to fair value
hedges were adjusted at 1 January 2005 in relation to the
fair value attributable to the hedged risks of those financial
instruments.

US GAAPFrom 1 January 2005, Abbey adopted the fair
value option provided under SFAS 155 for selected debt
securities in issue that qualified as hybrid financial
instruments that had been bifurcated under SFAS 133, in
order to achieve greater consistency with the accounting
requirements of the fair value option under IAS 39.

Prior to 1 January 2005, the Group claimed hedge accounting
under US GAAP for only a limited number of debt securities in
issue, primarily due to the additional administrative burden
associated with complying with the detailed hedge accounting
requirements of SFAS 133, such documentation and testing
not being otherwise required before the adoption of IAS 39. As
Abbeys business model is now primarily structured to
maximise use of the fair value option under IFRS, the Group
decided to cease claiming any hedge accounting for US GAAP
purposes, and de-designated all its hedges under US GAAP from
1 January 2005 in order to reduce the administrative burden
on the Group. Prior to 1 January 2005, Abbey had designated
certain of its cross-currency and interest rate swaps as fair
value hedges of the interest and/or exchange rate risk arising
from certain debt securities, debt securities in issue and
subordinated liabilities. As a result of the decision to
de-designate these swaps as hedges, the hedge accounting
adjustment at 31 December 2004 was frozen and is being
amortised through the income statement over the remaining lives
of the items formerly being hedged. In addition, the effects of
applying hedge accounting under IFRS have been reversed.

(i) Preference shares

IFRSFrom 1 January 2005, preference shares are
classified as financial liabilities, and presented in other
borrowed funds. Preference shares denominated in a foreign
currency are retranslated at each balance sheet date. The
dividends on preference shares are recognised in the income
statement as interest expense on an amortised cost basis using
the effective interest method. Prior to 1 January 2005,
preference shares were classified in shareholders equity.

139



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

Preference shares denominated in a foreign currency were not
retranslated at each balance sheet date, and the dividends on
preference shares were accounted for as an appropriation of
profit.

US GAAPPreference shares are classified in
shareholders equity if they are not mandatorily redeemable
and do not have redemption features that are not solely within
the control of Abbey. Preference shares denominated in a foreign
currency are not retranslated at each balance sheet date. The
dividends on preference shares are accounted for as an
appropriation of profit.

(j) Consolidation

IFRSSubsidiaries, which are those companies and other
entities (including Special Purpose Entities) in which the
Group, directly or indirectly, has power to govern the financial
and operating policies, are consolidated. The existence and
effect of potential voting rights that are presently exercisable
or presently convertible are considered when assessing whether
the Group controls another entity.

US GAAPAbbey is required to consolidate variable
interest entities for which it is deemed to be the primary
beneficiary and to deconsolidate variable interest entities for
which it is not deemed to be the primary beneficiary.

(k) Derecognition of liabilities

IFRSFrom 1 January 2005, under IAS 39, a debt is
removed from the balance sheet when, and only when, it is
extinguished  that is, when the obligation specified
in the contract is discharged or cancelled or expires. Prior to
1 January 2005, a debt could be derecognised for financial
reporting purposes when it was beyond reasonable doubt that
performance would not be required under the obligation.

US GAAP A debt is considered extinguished for financial
reporting purposes only when the debtor pays the creditor and is
relieved of all its obligations with respect to the debt; or the
debtor is legally released as the primary obligor under the
debt, either judicially or by the creditor. With the adoption of
IAS 39, there is no longer a difference between IFRS and US GAAP.

(l) Discontinued operations

During 2006, Abbey sold its entire life insurance business, as
disclosed in Note 12. As a result, under both IFRS and US
GAAP, the results of the life insurance business are classified
as a discontinued operation as disclosed in Note 12 and
Note 57(p) Discontinued operations. The results of the
discontinued operations are retrospectively presented as a
single line in the income statement under both IFRS and US GAAP.
Consequently, the income statement GAAP differences relating to
discontinued operations only affect a single income statement
line and result in a single reconciling item in the US GAAP net
income reconciliations. There is no change in the presentation
of the assets and liabilities of the discontinued operations and
therefore no change to the US GAAP shareholders equity
reconciliations.

The following explanatory notes describe differences in
insurance accounting under IFRS and US GAAP. All these
differences were applicable to Abbeys life insurance
businesses and the amounts related to them are included in the
reconciliations on page 146 under the income statement caption
Discontinued operations. Notes (m), (n) and (o) below
set out the effects of the differences between IFRS and US GAAP
on individual assets and liabilities.

Contract Classification

IFRSThe long-term insurance business issued insurance
contracts and investment contracts. Insurance contracts are
those contracts that transfer significant insurance risk.
Investment contracts are those contracts that carry no
significant insurance risk. A number of insurance and investment
contracts contained a discretionary participation feature which
entitled the holder to receive, as a supplement to guaranteed
benefits, additional benefits or bonuses that are likely to be a
significant portion of the total contractual benefits and whose
amount or timing was contractually at the discretion of the
Group and based on the performance of specified assets.
Contracts containing a discretionary participation feature were
referred to as participating contracts. This is set out in more
detail in Participating or with-profits
business below.

Abbey accounts for insurance and investment contracts as follows:

(i) Insurance contracts and participating investment contracts
using the IFRS embedded value basis of accounting used by
banking groups that own life insurance operations, modified, as
necessary, to comply with the requirements of IFRS. In
particular, this included a consolidation on a line-by-line
basis of the life insurance business relating to these contracts
into the Consolidated Financial Statements, along with the
present value of in-force business, which was calculated by
projecting future surpluses and other net cash flows
attributable to the shareholder arising from business written by
the balance sheet date and discounting the result at a rate
which reflects the shareholders overall risk premium.

(ii) Investment contracts that are non-participating were
accounted for as financial instruments in accordance with IAS
39. All of the Groups non-participating investment
contracts were unit-linked.

US GAAPExcept as regards acquired blocks of business,
the net present value of the profits of the in-force business
was not recognised under US GAAP. Contracts which cover
with-profits pension (with minimal insurance risk), unitised
with-profits, and unit linked policies were classified as
universal life or investment contracts and accounted for in
accordance with SFAS 97, Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and
Realised Gains and Losses from the Sale of Investments and
SOP 03-1 Accounting and Reporting by Insurance Enterprises
for Certain Non-traditional Long-Duration Contracts and for
Separate Accounts. Contracts for all other policies with
significant mortality and/or morbidity risk including endowment,
term and whole of life policies were accounted for in accordance
with SFAS 60, Accounting and Reporting by Insurance
Enterprises.

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Financial Statements

Notes to the Financial
Statementscontinued

Revenue Recognition

IFRSPremiums received in respect of life insurance
contracts and participating investment contracts were recognised
as revenue when due and shown before deduction of commission.
Fee and charge income was recognised in relation to investment
non-participating contracts in line with the investment
management service provided.

US GAAPPremiums for long-duration products were
recognised as revenue when due from policyholders and the costs
of claims were recognised over the contract period through the
establishment of a liability for future policy benefits. For
short-duration contracts, the premium was recognised over the
contract period with costs or claims recognised as they
occurred. For long-duration contracts, the liability for future
policy benefits was determined as the present value of future
benefits to be paid less the present value of the net premiums
to be collected. Premiums for universal life and investment
contracts were applied as increases to policyholder account
balances when received. Revenues derived from these policies
consisted of mortality charges, policy administration charges,
investment management fees, and surrender charges that were
deducted from the policyholder account balances. Premiums and
policy charges received from customers that related to future
periods were deferred until the period to which they related and
were recorded as a deferred income liability. For limited
payment contracts, the excess of the gross premium over the US
GAAP net benefit premium was deferred and amortised in relation
to expected future benefit payments. For investment and
universal life contracts, policy charges that related to future
periods and related acquisition costs were deferred and
amortised in relation to estimated gross profits. Estimated
gross profits were projected on current best estimate
assumptions with no provisions for adverse deviation. Costs of
claims in excess of the policyholder account balance were
recognised when insured events occurred. To the extent that a
reinsurance contract did not, despite its form, provide for
indemnification of the insured by the re-insurer against loss or
liability, the premium paid less the amount of the premium to be
retained by the re-insurer was accounted for as a deposit by the
insured company.

Participating or with-profits business

With-profits policies entitled the policyholder to participate
in the surplus within the with-profits life fund of the
insurance company, which issued the policy. Regular bonuses were
determined and declared annually by the issuing companys
board of directors on the advice of the with-profits actuary.
Bonuses took the form of additional benefits, which were only
paid on termination of the policy. The bonuses that were be
declared were highly correlated, over a period of time, to the
overall performance of the underlying assets and liabilities of
the fund in which the contract was invested over that same
period of time. Bonuses were designed to provide policyholders
with a share of the total performance of the fund during the
period of the contract broadly consistent with the asset
share of the individual contract.

The contract for with-profits business written into the
with-profits fund provided that approximately 90 per cent of the
surplus arising from the net assets of the fund which was
distributed is allocated to policyholders in the form of either
annual bonuses or terminal bonuses, which were allocated at the
end of the contract. For unitised with-profits business written
into the with-profits fund, all of the surplus that was
distributed was allocated to policyholders as a bonus.

IFRSThe Group had an obligation to pay policyholders a
specified portion of all interest and realisable gains and
losses arising from the assets backing participating contracts.
Any amounts not yet determined as being due to policyholders
were recognised as a liability.

US GAAPA liability was established for undistributed
policyholder allocations. The excess of assets over liabilities
in the with-profits fund was allocated to the policyholders and
shareholders in accordance with the proportions prescribed by
the contracts. The remaining liability comprised the obligation
of the insurance company to the policyholders. Any deficit
arising in the with-profit fund was provided for in full.

Deferred acquisition costs

The effect on the income statement of differences with respect
to deferred acquisition costs can be found in Note
(n) Deferred acquisition costs below.

Policyholder liabilities

The effect on the income statement of differences with respect
to policyholder liabilities can be found in Note
(o) Policyholder liabilities below.

Investment property

IFRSProperty held for long-term rental yields and
capital appreciation within the long-term assurance funds is
classified as investment property. Investment property is stated
at fair value, which is determined annually as the open market
value. These valuations are reviewed annually by an independent
valuation expert. Changes in fair values are recorded in the
income statement.

US GAAP Investment property is stated at historical cost
and is depreciated on a straight-line basis over its useful life.

(m) Value of in-force business

IFRSAs mentioned above, Abbey accounted for the
insurance contracts and participating investment contracts using
the IFRS embedded value basis of accounting used by banking
groups that own life insurance operations, modified, as
necessary, to comply with the requirements of IFRS. This
included recognising the present value of in-force business,
which was calculated by projecting future surpluses and other
net cash flows attributable to the shareholder arising from
business written by the balance sheet date and discounting the
result at a rate which reflects the shareholders overall
risk premium.

US GAAPExcept as regards acquired blocks of business,
the net present value of the profits of the in-force business
was not recognised under US GAAP.

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##### 

Financial Statements

Notes to the Financial
Statementscontinued

(n) Deferred acquisition costs

IFRSIn relation to insurance contracts and participating
contracts, the cost of acquiring new and renewal life insurance
business was recognised in the IFRS embedded value calculation
as incurred. In relation to investment contracts, directly
incremental commissions that varied with and were related to
either securing new or renewing existing non-participating
investment contracts were capitalised as an intangible asset;
all other costs were recognised as expenses when incurred.

This asset was subsequently amortised over the period of the
provision of investment management services and was reviewed for
impairment in circumstances where its carrying amount was not
recoverable.

US GAAPUnder US GAAP the costs incurred by the insurer
in the acquisition of new and renewal life insurance business
were capitalised. Acquisition costs consisted principally of
commissions and other variable sales costs. Deferred acquisition
costs for SFAS 60 products were amortised in relation to
premium income using assumptions consistent with those used in
computing policyholder benefits provisions. Deferred acquisition
costs related to investment and universal life contracts were
amortised in proportion to the estimated gross profits arising
from the contracts. On the acquisition of another insurance
company, an intangible asset (value of business acquired) was
recognised which represented the present value of estimated
future cash flows embedded in the existing contracts acquired.
The amortisation was based upon the equivalent method for
amortising the deferred acquisition costs, as above.

(o) Policyholder liabilities

IFRSLiabilities 
life insurance contracts or participating investment contracts,
which are not unit linked

A liability for contractual benefits that was expected to be
incurred in the future was recorded when the premium was
recognised. The liability was calculated by estimating the
future cash flows over the duration of the in-force policies and
discounting them back to the valuation date allowing for
probabilities of occurrence. The liability varied with movements
in interest rates and with the cost of life insurance and
annuity benefits where future mortality was uncertain.
Assumptions were made in respect of all material factors
affecting future cash flows, including future interest rates,
mortality and costs. For conventional life and pensions
business, the gross premium valuation method was used.

Liabilities  life insurance contracts or
participating investment contracts, which are unit linked

Allocated premiums in respect of unit linked contacts that were
either life insurance contracts or participating investment
contracts were recognised as liabilities. These liabilities were
increased or reduced by the change in the unit prices and were
reduced by policy administration fees, mortality and surrender
charges and any withdrawals and included any amounts necessary
to compensate the Group for services to be performed over future
periods. The mortality charges deducted in each period from the
policyholders as a group were considered adequate to cover the
expected total death benefits claims in excess of the contract
account balances in each period and hence no additional
liability was established for these claims in excess of the
contract balances. Revenue consisted of fees deducted for
mortality, policy administration and surrender charges. Interest
or changes in the unit prices credited to the account balances
and excess benefit claims in excess of the account balances
incurred in the period were charged as expenses in the income
statement.

Liabilities  investment contracts which are
unit-linked

These contracts were accounted for as financial liabilities
whose value is contractually linked to the fair values of
financial assets within the Groups unitised investment
funds. The value of the unit-linked financial liabilities was
determined using current unit prices multiplied by the number of
units attributed to the contract holders at the balance sheet
date. Their value was never less than the amount payable on
surrender, discounted for the required notice period where
applicable.

US GAAPFor SFAS 97 defined products, the liability
was represented by the policyholders account balance
before any applicable surrender charges. Policyholder benefit
liabilities for products defined by SFAS 60 were developed
using the net level premiums method. Assumptions for interest,
mortality, morbidity withdrawals and expenses were prepared
using best estimates at date of policy issue (or date of company
acquisition by Abbey, if later) plus a provision for adverse
deviation based on the insurers experience, and were not
revised unless a loss recognition event arose. In the event
where future expected claim costs exceeded related unearned
premiums, a liability was accrued to the extent that it exceeded
any unamortised acquisition costs.

Guaranteed Annuity Options

Abbey issued a number of with-profits pensions contracts, both
regular and single premium, which have a guaranteed
convertibility option on maturity, fixing a minimum rate at
which conversion into an immediate annuity will be made.

IFRSAn estimate of the fair value of the guarantee
payable to the policyholders, on a net present value basis, was
provided for in the liabilities of the with-profits fund.

US GAAPAs a result of the adoption of SOP 03-1, an
additional liability was established if, at the expected
annuitisation date, the present value of the expected
annuitisation payments (plus related expenses) exceeded the
projected account balance. The additional liability was
calculated by accumulating that portion of the policy
assessments that exactly amounted to the present value of the
additional liability on the expected annuitisation date, using a
range of scenarios.

(p) Other operating income  profit on sale of
subsidiaries

IFRSIn 2006, Abbey sold its wholly owned subsidiaries
that operate in the asset management businesses to Santander
Asset Management UK Holdings Limited, an indirect subsidiary of
Banco Santander Central Hispano, S.A. The transaction was
accounted for at fair value and a profit on the sale was
recognised in the income statement, classified as other
operating income.

US GAAPIn accordance with US GAAP, the transfer of the
net assets of its wholly owned subsidiaries that operate in the
asset management businesses to Santander Asset Management UK
Holdings Limited has been accounted for at historical cost as it
is a transaction between entities under common control. As a
result, the profit on the transfer recognised under IFRS was
accounted for as a capital contribution for the purposes of US
GAAP.

142



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

54. Recently adopted US accounting guidance

SFAS 123R: Share-Based Payment

On December 16, 2004, the FASB issued
SFAS No. 123 (revised 2004) Share-based
Payment, which is a revision of SFAS 123,
Accounting for Stock-Based Compensation.
SFAS 123R supersedes APB opinion No. 25,
Accounting for Stock issued to Employees and its
interpretations, and revises SFAS 123 Accounting for
Stock-Based Compensation. SFAS 123R eliminates the
alternative to use APB Opinion 25s intrinsic value method
of accounting that was provided in SFAS 123 as originally
issued. SFAS 123R requires entities to recognise the cost
of employee services received in exchange for awards of equity
instruments based on the grant-date fair value of those awards,
which is consistent with Abbeys accounting under
SFAS 123. SFAS 123R applies to all awards granted and
modified, repurchased, or cancelled after the first interim or
annual period beginning after 15 June 2005. The adoption of
SFAS 123(R) did not have a material impact on the
Companys financial position or results of operations.

SFAS 154: Accounting Changes and Error
Corrections  a replacement of APB 20 and
SFAS 3

In May 2005, the FASB issued SFAS 154 Accounting
Changes and Error Corrections   a replacement of APB
Opinion No. 20 and FASB Statement No. 3.
SFAS 154 replaces APB 20, Accounting Changes,
and SFAS 3, Reporting Accounting Changes in Interim
Financial Statements, and amends the requirements for the
accounting for and reporting of a change in accounting
principle. SFAS 154 establishes retrospective application,
unless impracticable, as the required method for reporting a
change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting
principle. SFAS 154 also provides guidance for determining
whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when
retrospective application is impracticable. Under SFAS 154,
the correction of an error in previously issued financial
statements is not an accounting change, but involves adjustments
to previously issued financial statements. In many, but not all
aspects, under SFAS 154 the accounting for changes and
error corrections are converged with IAS 8 Accounting
Policies, Changes in Accounting Estimates and Errors.
SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after
15 December 2005. The adoption of SFAS 154 did not
have a material impact on the Companys financial position
or results of operations.

SEC Staff Accounting Bulletin 108, codified as
SAB Topic 1.N: Considering the Effects of Prior Year
Misstatements

When Quantifying Misstatements in Current Year Financial
Statements (SAB 108)

In September 2006, the SEC Staff released SAB 108.
SAB 108 states that registrants should use both a balance
sheet (iron curtain) approach and an income statement
(rollover) approach when quantifying and evaluating the
materiality of a misstatement. SAB 108 provides transition
guidance for correcting errors existing in prior years. If
prior-year errors that had been previously considered immaterial
(based on the appropriate use of the registrants prior
approach) now are considered material, the registrant need not
restate prior period financial statements, but is permitted to
record a one-time cumulative-effect adjustment to correct these
misstatements. SAB 108 is effective for annual financial
statements covering the first fiscal year ending after
15 November 2006. The adoption of SAB 108 did not have
a material impact on the Companys financial position or
results of operations.

SFAS 155: Accounting for Certain Hybrid Financial
Instruments  an amendment of SFAS 133 and
SFAS 140

In February 2006, the FASB issued SFAS 155 Accounting
for Certain Hybrid Financial Instruments  an
amendment of FASB Statements No. 133 and 140.
SFAS 155 amends SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, and
SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities and
resolves issues addressed in SFAS 133 Implementation Issue
No. D1, Application of Statement 133 to Beneficial
Interests in Securitized Financial Assets as follows:

>
    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; and>
    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.SFAS 155 is effective for all financial instruments
acquired or issued after the first fiscal year beginning after
15 September 2006. With effect from 1 January 2005,
Abbey adopted the fair value option provided under SFAS 155
for selected hybrid financial instruments that had been
bifurcated under paragraph 12 of SFAS 133 in order to
achieve greater consistency with the accounting requirements of
the fair value option under IAS 39. The impact of adoption of
SFAS 155 is disclosed in Note 57(l).

143



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

SFAS 158: Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans

In September 2006, the FASB issued SFAS 158. SFAS 158
requires an employer to recognise the overfunded or underfunded
status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of
financial position and to recognise changes in that funded
status in the year in which the changes occur through
comprehensive income of a business entity. SFAS 158 also
requires an employer to measure the funded status of a plan as
of the date of its year-end statement of financial position,
with limited exceptions. SFAS 158 requires an employer that
is a business entity and sponsors one or more single-employer
defined benefit plans to (1) recognise the funded status of
a benefit plan  measured as the difference between
plan assets at fair value (with limited exceptions) and the
benefit obligation  in its statement of financial
position. For a pension plan, the benefit obligation is the
projected benefit obligation; for any other postretirement
benefit plan, such as a retiree health care plan, the benefit
obligation is the accumulated postretirement benefit obligation,
(2) recognise as a component of other comprehensive income,
net of tax, the gains or losses and prior service costs or
credits that arise during the period but are not recognised as
components of net periodic benefit cost pursuant to
SFAS 87, or SFAS 106 Employers Accounting
for Postretirement Benefits Other Than Pensions. Amounts
recognised in accumulated other comprehensive income, including
the gains or losses, prior service costs or credits, and the
transition asset or obligation remaining from the initial
application of SFAS 87 and SFAS 106, are adjusted as
they are subsequently recognised as components of net periodic
benefit cost pursuant to the recognition and amortization
provisions of those Statements, (3) measure defined benefit
plan assets and obligations as of the date of the
employers fiscal year-end statement of financial position
(with limited exceptions) and (4) disclose in the notes to
financial statements additional information about certain
effects on net periodic benefit cost for the next fiscal year
that arise from delayed recognition of the gains or losses,
prior service costs or credits, and transition asset or
obligation. Abbey adopted SFAS 158 from 31 December
2006. The impact of adoption is disclosed in Note 57(c).

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

In June 2005, the FASB issued 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
(DIG Issue 38). DIG Issue 38 clarifies that in
applying paragraph 12(c) of SFAS 133 to a put option
or call option (including a prepayment option) embedded in a
debt instrument, the potential settlement of the debtors
obligation to the creditor that would occur upon exercise of the
put option or call option does not meet the net settlement
criterion in paragraph 9(a) of SFAS 133. The
application of paragraph 12(c) is relevant when an embedded
put option or call option is not considered to be clearly and
closely related to the debt host under paragraph 12(a) and
related paragraph 13 or 61(d). DIG Issue 38 is effective
for fiscal years beginning after 15 December 2005. The
adoption of DIG Issue 38 did not have a material impact on the
Companys financial position or results of operations.

SFAS 133 Implementation Issue No. B39, Embedded
Derivatives: Application of Paragraph 13(b) to Call Options
That Are Exercisable Only by the Debtor

In June 2005, the FASB issued SFAS 133 Implementation Issue
No. B39, Embedded Derivatives: Application of
Paragraph 13(b) to Call Options That Are Exercisable Only
by the Debtor (DIG Issue 39). DIG Issue 39
describes the circumstances in which an embedded call option
(including a prepayment option) that can accelerate the
settlement of a hybrid instrument containing a debt host
contract would not be subject to the conditions in
paragraph 13(b) of SFAS 133. DIG Issue B39 is
effective for fiscal years beginning after 15 December
2005. The adoption of DIG Issue B39 did not have a material
impact on the Companys financial position or results of
operations.

EITF 05-1: Conversion of an Instrument That Became
Convertible Upon the Issuers Exercise of a Call Option

In June 2006, the Emerging Issues Task Force, reached a final
consensus on EITF 05-1 Conversion of an Instrument That
Became Convertible Upon the Issuers Exercise of a Call
Option. EITF 05-1 addresses whether the conversion of such
a debt instrument into issuer shares should be accounted for
akin to a conversion or an extinguishment. The Task Force
concluded that the call option and the resulting equity
securities issued should be accounted for akin to a conversion
(no gain or loss recorded) provided that the debt instrument, at
issuance, contains a substantive conversion feature (meaning
that it is at least reasonably possible of becoming exercisable
absent the issuers ability to call the instrument). The
transaction, otherwise, should be recorded as a debt
extinguishment. EITF 05-1 is effective for all conversions
within its scope that result from the exercise of call options
in interim or annual reporting periods beginning after
28 June 2006. The adoption of EITF 05-1 did not have a
material impact on the Companys financial position or
results of operations.

144



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

55. Recently issued US accounting guidance

SFAS 156: Accounting for Servicing of Financial
Assets  an amendment of SFAS 140

In March 2006, the FASB issued SFAS 156 Accounting
for Servicing of Financial Assets  an amendment of
FASB Statement No. 140. SFAS 156 amends
SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, with
respect to the accounting for separately recognised servicing
assets and servicing liabilities. SFAS 156 requires a
company to recognise a servicing asset or servicing liability
each time it undertakes an obligation to service a financial
asset by entering into a servicing contract principally in a
transfer of the servicers financial assets that either
meets the requirements for sale accounting, or is to a
qualifying special-purpose entity in a guaranteed mortgage
securitisation in which the transferor retains all of the
resulting securities and classifies them as either
available-for-sale securities or trading securities in
accordance with SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities. SFAS 156
requires all separately recognised servicing assets and
servicing liabilities to be initially measured at fair value, if
practicable, and permits a company to choose to subsequently
measure each class of separately recognised servicing assets and
servicing liabilities using either a specified amortisation
method or a specified fair value measurement method. At its
initial adoption, SFAS 156 permits a one-time
reclassification of available-for-sale securities to trading
securities by companies with recognised servicing rights,
without calling into question the treatment of other
available-for-sale securities under SFAS 115, provided that
the available-for-sale securities are identified in some manner
as offsetting the companys exposure to changes in fair
value of servicing assets or servicing liabilities that a
servicer elects to subsequently measure at fair value.
SFAS 156 is applicable to all transactions entered into in
fiscal years that begin after 15 September 2006. The
adoption of SFAS 156 is not expected to have a material
impact on the Companys financial position or results of
operations.

SFAS 157: Fair Value Measurement

In September 2006, the FASB issued SFAS 157 Fair
Value Measurement. SFAS 157 provides a single
definition of fair value, together with a framework for
measuring it, and requires additional disclosure about the use
of fair value to measure assets and liabilities. SFAS 157
also emphasises that fair value is a market-based measurement,
not an entity-specific measurement, and sets out a fair value
hierarchy with the highest priority being quoted prices in
active markets. Under SFAS 157 fair value measurements are
disclosed by level within that hierarchy. While the Statement
does not add any new fair value measurements, it may change
current practice. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
15 November 2007. Abbey is currently evaluating the impact
of SFAS 157 on the Companys financial position and
results of operations.

SFAS 159: The Fair Value Option for Financial Assets and
Financial Liabilities

In February 2007, the FASB issued SFAS 159 The Fair
Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement
No. 115. The fair value option established by
SFAS 159 permits all entities to choose to measure eligible
items at fair value at specified election dates. Eligible items
include a recognised financial asset and financial liability, a
firm commitment involving financial instruments that would not
otherwise be recognised at fair value, a written loan
commitment, certain rights and obligations under an insurance
contract, and certain rights and obligations under a warranty. A
business entity shall report unrealised gains and losses on
items for which the fair value option has been elected in
earnings (or another performance indicator if the business
entity does not report earnings) at each subsequent reporting
date. In accordance with SFAS 159, the fair value option
(1) can be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the
equity method, (2) is irrevocable (unless a new election
date occurs), and (3) has to be applied to entire
instruments and not to portions of it. SFAS 159 is
effective from an entitys first year beginning after
15 November 2007. Early adoption is permitted as of the
beginning of the year that begins on or before 15 November
2007, provided the entity also elects to apply the provisions of
SFAS 157,Fair Value Measurements. Abbey is
currently evaluating the impact of the requirements of
SFAS 159 on the Companys financial position and
results of operations.

FASB Interpretation 48: Accounting for Uncertainty in Income
Taxes

In July 2006, the FASB issued FIN 48 Accounting for
Uncertainty in Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The evaluation of a tax
position in accordance with this Interpretation is a two-step
process. The first step is recognition: the enterprise
determines whether it is more likely than not that a tax
position will be sustained upon examination, including
resolution of any related appeals or litigation processes, based
on the technical merits of the position. In evaluating whether a
tax position has met the more-likely-than-not recognition
threshold, the enterprise should presume that the position will
be examined by the appropriate taxing authority that has full
knowledge of all relevant information. The second step is
measurement: a tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of
benefit to recognise in the financial statements. The tax
position is measured at the largest amount of benefit that is
greater than 50 percent likely of being realised upon
ultimate settlement. Differences between tax positions taken in
a tax return and amounts recognised in the financial statements
will generally result in one of the following: (a) An
increase in a liability for income taxes payable or a reduction
of an income tax refund receivable; (b) A reduction in a
deferred tax asset or an increase in a deferred tax liability;
or both (a) and (b). Tax positions that previously failed
to meet the more-likely-than-not recognition threshold should be
recognised in the first subsequent financial reporting period in
which that threshold is met. Previously recognised tax positions
that no longer meet the more-likely-than-not recognition
threshold should be derecognised in the first subsequent
financial reporting period in which that threshold is no longer
met. FIN 48 is effective for fiscal years beginning after
15 December 2006. Abbey is currently evaluating the impact
of the requirements of FIN 48 on the Companys
financial position and results of operations.

145



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##### 

Financial Statements

Notes to the Financial
Statementscontinued

56. US GAAP reconciliation

The following table summarises the significant adjustments to
consolidated net income and shareholders equity which
would result from the application of US GAAP instead of IFRS.
Where applicable, the adjustments are stated gross of tax with
the cumulative tax effect of all adjustments included separately.

|                                                                          |  |         |  |         |  |       |  |       |  |      
|------------------------------------------------------------------------- |  | ------- |  | ------- |  | ----- |  | ----- |  | -----
|                                                                          |  | Note 53 |  | Note 57 |  | 2006  |  | 2005  |  | 2004 
|Income statement                                                          |  |         |  |         |  | £m    |  | £m    |  | £m   
|                                                                         
|Profit from continuing operations
    for the year  IFRS                 |  |         |  |         |  | 313   |  | 254   |  | 28   
|US GAAP adjustments:                                                      |  |         |  |         |  |       |  |       |  |      
|Goodwill                                                                  |  | a       |  | a       |  |      |  |      |  | (9)  
|Other intangible assets                                                   |  | b       |  | a       |  | (14)  |  | (14)  |  | (15) 
|Pension cost                                                              |  | c       |  | c       |  | (169) |  | (78)  |  | (79) 
|Securities and investments                                                |  | d       |  | e       |  | 130   |  | (66)  |  |     
|Securitised assets                                                        |  | e       |  | g       |  | 117   |  | 50    |  | 30   
|Loan origination fees and costs                                           |  | f       |  |         |  | 46    |  | 54    |  | 12   
|Debt securities in issue                                                  |  | h       |  |         |  | (207) |  | 180   |  |     
|Preference shares                                                         |  | i       |  |         |  | (3)   |  | 88    |  |     
|Other operating income                                                    |  | p       |  |         |  | (41)  |  |      |  |     
|Derivatives                                                               |  | g       |  |         |  |      |  |      |  | 54   
|Consolidation                                                             |  | j       |  |         |  |      |  |      |  | (49) 
|Derecognition of liabilities                                              |  | k       |  |         |  |      |  |      |  | (41) 
|Discontinued operations                                                   |  | l       |  | p       |  |      |  | (53)  |  | (34) 
|Other                                                                     |  |         |  |         |  | 3     |  | 4     |  | (16) 
|Tax effect of the above adjustments                                       |  |         |  | d       |  | 19    |  | (16)  |  | 18   
|                                                                         
|Net income/(loss) from continuing
    operations  US GAAP                |  |         |  |         |  | 194   |  | 403   |  | (101)
|                                                                         
|Net income/(loss) from discontinued
    operations  US GAAP (net of tax) |  | l       |  | p       |  | (21)  |  | (150) |  | 81   
|                                                                         
|Net income/(loss)  US
    GAAP                                           |  |         |  |         |  | 173   |  | 253   |  | (20) 
|                                                                         

|                                    |  |         |  |         |  |       |  |         |  | 
|----------------------------------- |  | ------- |  | ------- |  | ----- |  | ------- |  | 
|                                    |  | Note 53 |  | Note 57 |  | 2006  |  | 2005    |  | 
|Shareholders equity                |  |         |  |         |  | £m    |  | £m      |  | 
|                                    |  |        
|Shareholders
    equity  IFRS     |  |         |  |         |  | 3,116 |  | 3,110   |  | 
|US GAAP adjustments:                |  |         |  |         |  |       |  |         |  | 
|Goodwill                            |  | a       |  | a       |  | 233   |  | 326     |  | 
|Other intangible assets             |  | b       |  | a       |  | 22    |  | 36      |  | 
|Pension cost                        |  | c       |  | c       |  | (35)  |  | 603     |  | 
|Securities and investments          |  | d       |  | e       |  | (54)  |  | (162)   |  | 
|Securitised assets                  |  | e       |  | g       |  | 430   |  | 331     |  | 
|Loan origination fees and costs     |  | f       |  |         |  | 233   |  | 187     |  | 
|Debt securities in issue            |  | h       |  |         |  | 417   |  | 734     |  | 
|Preference shares                   |  | i       |  |         |  | 344   |  | 612     |  | 
|Value of in-force business          |  | m       |  | a       |  |      |  | (1,301) |  | 
|Deferred acquisition costs          |  | n       |  | q       |  |      |  | 774     |  | 
|Policyholder liabilities            |  | o       |  | r       |  |      |  | 95      |  | 
|Other                               |  |         |  |         |  | 29    |  | 21      |  | 
|Tax effect of the above adjustments |  |         |  | d       |  | (315) |  | (406)   |  | 
|                                    |  |        
|Shareholders
    equity  US GAAP  |  |         |  |         |  | 4,420 |  | 4,960   |  | 
|                                    |  |        



57. Further note disclosures on differences between IFRS and
US GAAP, and certain additional US disclosures


a) Goodwill and other intangible assets




146



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                               |  |         |  |           |  |            |  |            |  |      
|---------------------------------------------- |  | ------- |  | --------- |  | ---------- |  | ---------- |  | -----
|                                               |  | Retail  |  | Financial |  | Wealth     |  | Sold Life  |  | Group
|                                               |  | Banking |  | Markets   |  | Management |  | Businesses |  | Total
|Goodwill                                       |  | £m      |  | £m        |  | £m         |  | £m         |  | £m   
|                                              
|Carrying value at 1 January
    2006           |  | 222     |  | 69        |  | 32         |  | 139        |  | 462  
|Disposals                                      |  |        |  |          |  |           |  | (139)      |  | (139)
|                                              
|Carrying value at 31 December
    2006         |  | 222     |  | 69        |  | 32         |  |           |  | 323  
|Total capitalised per IFRS                     |  |        |  |          |  | 90         |  |           |  | 90   
|US GAAP adjustment to
    shareholders equity |  | 222     |  | 69        |  | (58)       |  |           |  | 233  
|                                              

|                                               |  |         |  |           |  |            |  |            |  |      
|---------------------------------------------- |  | ------- |  | --------- |  | ---------- |  | ---------- |  | -----
|                                               |  | Retail  |  | Financial |  | Wealth     |  | Sold Life  |  | Group
|                                               |  | Banking |  | Markets   |  | Management |  | Businesses |  | Total
|                                               |  | £m      |  | £m        |  | £m         |  | £m         |  | £m   
|                                              
|Carrying value at 1 January
    2005           |  | 222     |  | 69        |  | 32         |  | 672        |  | 995  
|Impairments                                    |  |        |  |          |  |           |  | (533)      |  | (533)
|                                              
|Carrying value at 31 December
    2005         |  | 222     |  | 69        |  | 32         |  | 139        |  | 462  
|Total capitalised per IFRS                     |  |        |  |          |  | 90         |  | 46         |  | 136  
|US GAAP adjustment to
    shareholders equity |  | 222     |  | 69        |  | (58)       |  | 93         |  | 326  
|                                              





|                                               |  |      |  |     
|---------------------------------------------- |  | ---- |  | ----
|                                               |  | 2006 |  | 2005
|Core deposit intangibles                       |  | £m   |  | £m  
|                                              
|Cost                                           |  |      |  |     
|At 1 January and 31 December                   |  | 416  |  | 416 
|                                              
|Accumulated amortisation/impairment            |  |      |  |     
|At 1 January                                   |  | 380  |  | 366 
|Charge for the year                            |  | 14   |  | 14  
|                                              
|At 31 December                                 |  | 394  |  | 380 
|                                              
|Net book value                                 |  |      |  |     
|Total capitalised per US GAAP                  |  | 22   |  | 36  
|Total capitalised per IFRS                     |  |     |  |    
|                                              
|US GAAP adjustment to
    shareholders equity |  | 22   |  | 36  
|                                              



|                           |  |       |  |     
|-------------------------- |  | ----- |  | ----
|                           |  | 2006  |  | 2005
|Value of business acquired |  | £m    |  | £m  
|                          
|At 1 January               |  | 391   |  | 461 
|Amortisation               |  | (19)  |  | (70)
|Disposal                   |  | (372) |  |    
|                          
|At 31 December             |  |      |  | 391 
|                          



|                        |  |   
|----------------------- |  | --
|Year ended 31 December: |  | £m
|                       
|2007                    |  | 14
|2008                    |  | 8 
|                       

147



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

b) Investment properties

|                    |  |                        |  |        
|------------------- |  | ---------------------- |  | -------
|                    |  | Year ended 31 December
|                    |  |                       
|                    |  | 2006                   |  | 2005   
|                    |  | £m                     |  | £m     
|                   
|Cost or valuation   |  |                        |  |        
|At 1 January        |  |                       |  | 1,164  
|Disposals           |  |                       |  | (1,164)
|                   
|At 31 December      |  |                       |  |       
|                   
|Amortisation        |  |                        |  |        
|At 1 January        |  |                       |  | 154    
|Charge for the year |  |                       |  | 32     
|Disposals           |  |                       |  | (186)  
|                   
|At 31 December      |  |                       |  |       
|                   
|Net book value      |  |                       |  |       
|                   



c) Pension costs






|                                   |  |       |  |       |  |      
|---------------------------------- |  | ----- |  | ----- |  | -----
|Year ended 31 December            
|                                  
|                                   |  | 2006  |  | 2005  |  | 2004 
|                                   |  | £m    |  | £m    |  | £m   
|                                  
|Service cost                       |  | 94    |  | 105   |  | 124  
|Interest cost                      |  | 211   |  | 200   |  | 182  
|Expected return on assets          |  | (156) |  | (149) |  | (140)
|Contractual termination benefits   |  | 16    |  | 21    |  | 24   
|Recognised losses                  |  | 73    |  | 61    |  | 52   
|Amortisation of prior service cost |  | 1     |  |      |  | 1    
|                                  
|Net periodic pension cost          |  | 239   |  | 238   |  | 243  
|                                  



|                                     |  |       |  |      
|------------------------------------ |  | ----- |  | -----
|                                     |  |      
|                                     |  | 2006  |  | 2005 
|                                     |  | £m    |  | £m   
|                                    
|Benefit obligation at 1 January      |  | 4,404 |  | 3,730
|Service cost                         |  | 94    |  | 105  
|Interest cost                        |  | 211   |  | 200  
|Plan participants
    contributions |  | 9     |  | 12   
|Contractual termination benefits     |  | 16    |  | 21   
|Settlements and curtailments         |  | (79)  |  |     
|Actuarial (gain)/loss                |  | (235) |  | 439  
|Benefits paid                        |  | (121) |  | (103)
|                                    
|Benefit obligation at 31 December    |  | 4,299 |  | 4,404
|                                    



|                                                   |  |                        |  |      
|-------------------------------------------------- |  | ---------------------- |  | -----
|                                                   |  | Year ended 31 December
|                                                   |  |                       
|                                                   |  | 2006                   |  | 2005 
|                                                   |  | £m                     |  | £m   
|                                                  
|Fair value of plan assets at
    beginning of year |  | 2,981                  |  | 2,489
|Expected return on plan assets                     |  | 156                    |  | 149  
|Actuarial gain                                     |  | 8                      |  | 303  
|Employer contributions                             |  | 197                    |  | 131  
|Plan participants
    contributions               |  | 9                      |  | 12   
|Benefits paid                                      |  | (121)                  |  | (103)
|                                                  
|Fair value of plan assets at 31
    December       |  | 3,230                  |  | 2,981
|                                                  

148



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The following tables sets forth the amounts recognised in
accumulated other comprehensive income.

|                                                           |  |                        |  |       |  |      
|---------------------------------------------------------- |  | ---------------------- |  | ----- |  | -----
|                                                           |  | Year ended 31 December
|                                                           |  |                       
|                                                           |  | 2006                   |  | 2005  |  | 2004 
|Actuarial gains/(losses):                                  |  | £m                     |  | £m    |  | £m   
|                                                          
|Opening balance                                            |  | (366)                  |  | (303) |  | (261)
|Gain/(loss) recognised in other
    comprehensive income   |  | 116                    |  | (124) |  | (94) 
|Recognised as a component of net
    periodic pension cost |  | 73                     |  | 61    |  | 52   
|                                                          
|Closing balance                                            |  | (177)                  |  | (366) |  | (303)
|                                                          





|                                                         |  |                        |  |      |  |     
|-------------------------------------------------------- |  | ---------------------- |  | ---- |  | ----
|                                                         |  | Year ended 31 December
|                                                         |  |                       
|                                                         |  | 2006                   |  | 2005 |  | 2004
|Prior service cost:                                      |  | £m                     |  | £m   |  | £m  
|                                                        
|Opening balance                                          |  | (1)                    |  | (1)  |  | (2) 
|Recognised as a component of net
    period pension cost |  | 1                      |  |     |  | 1   
|                                                        
|Closing balance                                          |  |                       |  | (1)  |  | (1) 
|                                                        





|                                           |  |                |  |            |  |               
|------------------------------------------ |  | -------------- |  | ---------- |  | --------------
|                                           |  |               
|                                           |  | Before         |  | Adjustment |  | After         
|                                           |  | application of |  |            |  | application of
|                                           |  | FAS 158        |  |            |  | FAS 158       
|                                           |  | £m             |  | £m         |  | £m            
|                                          
|Deferred tax asset                         |  | 707            |  | 132        |  | 839           
|Other assets                               |  | 2,680          |  | (17)       |  | 2,663         
|                                          
|Total assets                               |  | 211,832        |  | 115        |  | 211,947       
|Retirement benefit obligations             |  | 647            |  | 422        |  | 1,069         
|                                          
|Total liabilities                          |  | 207,105        |  | 422        |  | 207,527       
|Accumulated other comprehensive
    income |  | (73)           |  | (307)      |  | (380)         
|                                          
|Total shareholders
    equity             |  | 4,727          |  | (307)      |  | 4,420         
|                                          

d) Taxes




|                                                    |  |       |  |        
|--------------------------------------------------- |  | ----- |  | -------
|                                                    |  | 2006  |  | 2005   
|                                                    |  | £m    |  | £m     
|                                                   
|Deferred tax assets:                                |  |       |  |        
|Pensions and other postretirement
    benefits      |  | 321   |  | 233    
|Provisions and short-term temporary
    differences |  | 264   |  | 320    
|Excess of capital allowances over
    depreciation  |  | 64    |  | 35     
|Tax losses carried forward                          |  | 194   |  | 89     
|Valuation allowance                                 |  | (4)   |  |       
|                                                   
|                                                    |  | 839   |  | 677    
|                                                   
|Deferred tax liabilities:                           |  |       |  |        
|Accelerated tax depreciation                        |  | (483) |  | (489)  
|Provisions and short-term temporary
    differences |  | (431) |  | (684)  
|                                                   
|                                                    |  | (914) |  | (1,173)
|                                                   
|Net deferred tax liabilities                        |  | (75)  |  | (496)  
|                                                   



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 2006 and 2005. The following table provides an
    analysis of the balance sheet totals under US GAAP:

149



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                   |  |        |  |       
|---------------------------------- |  | ------ |  | ------
|                                   |  |       
|                                   |  | 2006   |  | 2005  
|                                   |  | £m     |  | £m    
|                                  
|Trading securities                 |  | 40,631 |  | 60,444
|Available for sale securities (ii) |  | 812    |  | 742   
|                                  
|                                   |  | 41,443 |  | 61,186
|                                  





|                                                                                           |  |           |  |                  |  |                  |  |      
|------------------------------------------------------------------------------------------ |  | --------- |  | ---------------- |  | ---------------- |  | -----
|                                                                                           |  | Amortised |  | Gross unrealised |  | Gross unrealised |  | Fair 
|                                                                                           |  | cost      |  | gains            |  | losses           |  | value
|At 31 December 2006                                                                        |  | £m        |  | £m               |  | £m               |  | £m   
|                                                                                          
|Equity securities                                                                          |  | 14        |  | 1                |  |                 |  | 15   
|Asset-backed and corporate debt
    securities                                             |  | 243       |  | 38               |  |                 |  | 281  
|Mortgage backed securities other
    than those issued or backed by US government agencies |  | 395       |  | 35               |  |                 |  | 430  
|Other debt securities                                                                      |  | 86        |  |                 |  |                 |  | 86   
|                                                                                          
|                                                                                           |  | 738       |  | 74               |  |                 |  | 812  
|                                                                                          

|                                                                                           |  |           |  |                  |  |                  |  |      
|------------------------------------------------------------------------------------------ |  | --------- |  | ---------------- |  | ---------------- |  | -----
|                                                                                           |  | Amortised |  | Gross unrealised |  | Gross unrealised |  | Fair 
|                                                                                           |  | cost      |  | gains            |  | losses           |  | value
|At 31 December 2005                                                                        |  | £m        |  | £m               |  | £m               |  | £m   
|                                                                                          
|Equity securities                                                                          |  | 13        |  |                 |  |                 |  | 13   
|Asset-backed and corporate debt
    securities                                             |  | 287       |  | 63               |  | (3)              |  | 347  
|Mortgage backed securities other
    than those issued or backed by US government agencies |  | 281       |  | 58               |  |                 |  | 339  
|Other debt securities                                                                      |  | 43        |  |                 |  |                 |  | 43   
|                                                                                          
|                                                                                           |  | 624       |  | 121              |  | (3)              |  | 742  
|                                                                                          



|                        |  |          |  |                |  |              |  |          |  |      
|----------------------- |  | -------- |  | -------------- |  | ------------ |  | -------- |  | -----
|                        |  |          |  |                |  | In more than |  |          |  |      
|                        |  |          |  | In more than   |  | 5 years but  |  |          |  |      
|                        |  | Not more |  | 1 year but not |  | not more     |  | In more  |  |      
|                        |  | than     |  | more than      |  | than         |  | than     |  |      
|                        |  | 1 year   |  | 5 years        |  | 10 years     |  | 10 years |  | Total
|Maturity analysis       |  | £m       |  | £m             |  | £m           |  | £m       |  | £m   
|                       
|At 31 December
    2006 |  | 108      |  | 408            |  | 25           |  | 271      |  | 812  
|                       



|                                               |  |                     |  |                   |  |       |  |            |  |       |  |           
|---------------------------------------------- |  | ------------------- |  | ----------------- |  | ----- |  | ---------- |  | ----- |  | ----------
|                                               |  | Less than 12 months |  | 12 months or more |  | Total
|                                               |  |                    
|                                               |  | Fair                |  | Unrealised        |  | Fair  |  | Unrealised |  | Fair  |  | Unrealised
|                                               |  | value               |  | losses            |  | value |  | losses     |  | value |  | losses    
|At 31 December 2005                            |  | £m                  |  | £m                |  | £m    |  | £m         |  | £m    |  | £m        
|                                              
|Asset-backed and corporate debt
    securities |  | 124                 |  | 3                 |  |      |  |           |  | 124   |  | 3         
|                                              
|Total temporarily impaired
    securities      |  | 124                 |  | 3                 |  |      |  |           |  | 124   |  | 3         
|                                              



|                               |  |      |  |      |  |      
|------------------------------ |  | ---- |  | ---- |  | -----
|                               |  | 2006 |  | 2005 |  | 2004 
|                               |  | £m   |  | £m   |  | £m   
|                              
|Proceeds from sales            |  | 77   |  | 334  |  | 2,040
|Gross realised losses on sales |  | 8    |  |     |  | 154  
|Gross realised gains on sales  |  |     |  |     |  | (60) 
|                              
|Amortised cost of sales        |  | 85   |  | 334  |  | 2,134
|                              





|     |                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(iv) | There were no realised gains and losses on transfers from
    available for sale securities during the years ended
    31 December 2006, 2005 and 2004.

150



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued



(v)
    Net trading gains of £23m (2005: £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

Under FIN 46R, an entity is considered a variable interest
entity subject to consolidation if the equity investment at risk
is not sufficient to finance its activities without additional
subordinated financial support or if the equity investors lack
one of three characteristics of a controlling financial
interest. First, the equity investors lack the ability to make
decisions about the entitys activities through voting
rights or other similar rights. Second, they do not bear the
obligation to absorb the expected losses of the entity if they
occur, and thirdly they do not claim the right to receive
expected returns of the entity, if they occur, which are the
compensation for the risk of absorbing the expected losses.
Variable interest entities are consolidated by the primary
beneficiary, that is the interest holder that remains exposed to
the majority of the entitys expected losses or residual
returns.

In 2005, Abbey sold a number of Group companies holding finance
lease receivables that met the definition of a variable interest
entity. In 2004, the application of FIN 46R had resulted in
these entities being deconsolidated and equity accounted as
parties other than Abbey were the primary beneficiaries. This
change in accounting treatment had no impact on Abbeys net
income and shareholders equity under US GAAP at 31 December
2004. The total assets and the maximum exposure to loss of these
vehicles at 31 December 2004 were £1,336m and
£974m, respectively.

g) Securitised assets

Abbey makes use of a type of securitisation known as a master
trust structure. In this structure, a pool of assets is assigned
to a trust company by the asset originator, initially funded by
the originator. A funding entity acquires beneficial interests
in a share of the portfolios of assets with funds borrowed from
qualifying special purpose entities, which at the same time
issue asset-backed securities to third-party investors. The
purpose of the special purpose entities is to obtain diverse,
low cost funding through the issue of asset-backed securities.
The share of the pool of assets not purchased from the trust
company by the funding entity is known as the beneficial
interest of the originator. Using this structure, Abbey has
assigned portfolios of residential mortgages and their related
security to Holmes Trustees Limited, a trust company that holds
the portfolios of mortgages on trust for Abbey and Holmes
Funding Limited. Holmes Funding Limited acquires beneficial
interests in the portfolios of mortgages with funds borrowed
from the securitisation companies Holmes Financing No.s 1-2 plc,
Holmes Financing No.s 6-10 plc and Holmes Master Issuer plc.

Holmes Financing No.s 1-2 plc, Holmes Financing No.s 6-10 plc
and Holmes Master Issuer plc are qualifying special purpose
entities in accordance with SFAS 140 and issued
mortgage-backed securities to third party investors. Abbey
consolidates Holmes Trustees Limited and Holmes Funding Limited.
In addition, Abbeys beneficial interest in the mortgages
that has not been purchased from Holmes Trustees Limited by
Holmes Funding remains on balance sheet. Details of the mortgage
asset securitisations, including Abbeys rights and
obligations, are included in Note 19. The assets that have
been transferred to the qualifying special purpose entities
(securitised) meet the criteria required under
SFAS 140 for a sale and are no longer retained on the
balance sheet. Due to the recognition of a retained interest
under US GAAP, gains of £110m (2005: £60m, 2004:
£48m) have been recognised. The remuneration received by
Abbey for servicing is considered to be adequate and therefore
no servicing assets were recognised. As required by
SFAS 140, a retained interest (interest only strip) has
been recognised which represents Abbeys retained interest
in the securitised assets. The fair value of the interest only
strip is represented by the present value of the future income
streams expected to be received from Abbeys retained
interest in the securitised assets. Abbey determines the present
value of future income streams by discounting future income by
market discount rates for these types of securities. In
accordance with SFAS 140, the receivable is treated as an
available for sale security that is revalued at the end of each
reporting period. Increases and decreases in value are taken to
the statement of comprehensive income, unless the value of the
security falls below its original cost. In such circumstances,
other-than-temporary losses are considered to have occurred and
the impairment losses are taken to the income statement. There
were no impairment losses in any of the periods presented.

Mortgage asset securitisations

|                                                             |  |      |  |     
|------------------------------------------------------------ |  | ---- |  | ----
|                                                             |  | 2006 |  | 2005
|                                                             |  | £m   |  | £m  
|                                                            
|Inception value of interest only
    strip(1)                |  | 395  |  | 281 
|Increase in value of interest only
    strip since inception |  | 35   |  | 58  
|                                                            
|Value of interest only strip at 31
    December(1)           |  | 430  |  | 339 
|                                                            





|               |  |         |  |        
|-------------- |  | ------- |  | -------
|               |  | 2006    |  | 2005   
|               |  | £m      |  | £m     
|              
|Receipts       |  | 7,390   |  | 3,797  
|Payments       |  | (5,330) |  | (4,374)
|              
|Net cash flows |  | 2,060   |  | (577)  
|              

151



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The principal amount of loans held by the above special purpose
securitisation companies 90 days or more past due at
31 December 2006 was £91m (2005: £89m), which
represented 0.6% (2005: 0.6%) of the mortgage loans held by
those companies. The equivalent statistics for loans held by
Abbey were £481m (2005: £515m) and 0.6% (2005: 0.7%).
Net credit losses were £4m in the year ended
31 December 2006 (2005: £3m, 2004: nil). The
equivalent statistic for loans held by Abbey was £16m
(2005: £4m, 2004: £4m).

Sensitivity analysis

The impact of adverse changes in the discount rate on the value
of interest only strip assets with a balance of £430m at
31 December 2006 is shown below:

|                                    |  |   
|----------------------------------- |  | --
|                                    |  | £m
|                                   
|10% adverse change in discount rate |  | 9 
|20% adverse change in discount rate |  | 18
|                                   





|                        |  |                          |  |     
|----------------------- |  | ------------------------ |  | ----
|                        |  | Mortgages securitised in
|                        |  |                         
|                        |  | 2006                     |  | 2005
|                        |  | %                        |  | %   
|                       
|At 31 December
    2006 |  | 0.05                     |  | 0.01
|At 31 December 2005     |  |                         |  | 0.01
|                       

h) Presentation of the consolidated income statement




i) Presentation of the consolidated balance sheet




j) Stock borrowing and lending against non-cash collateral




k) Collateralised loans and secured borrowings










152



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

l) Derivatives and fair value option

On 1 January 2005, Abbey adopted the fair value option
provided under SFAS 155 for selected hybrid financial
instruments that had been bifurcated under SFAS 133 in
order to achieve greater consistency with the accounting
requirements of the fair value option under IAS 39. Upon
adoption of SFAS 155, there was no significant difference
between the fair value of the hybrid financial instruments and
the combined values of the host contracts and the embedded
derivatives that had formerly been bifurcated.

Equity index-linked deposits

Contracts involving the receipt of cash on which customers
receive an index-linked return are accounted for under IFRS as
equity index-linked deposits. There are two principal product
types.

Capital at Risk:These products are designed to replicate
the investment performance of an equity index, subject to a
floor. In the event the index falls under a certain
predetermined level, customers forfeit a predetermined
percentage of principal up to a predetermined amount.

Capital Guaranteed:These products give the customers a
limited participation in the upside growth of an equity index.
In the event the index falls in price, a cash principal element
is guaranteed.

Under IFRS and US GAAP, Abbeys equity index-linked
deposits are remeasured at fair value at each reporting date
with changes in fair values recognised in the income statement.
The equity index-linked deposits contain embedded derivatives.
These embedded derivatives, in combination with the principal
cash deposit element, are designed to replicate the investment
performance profile tailored to the return agreed in the
contracts with customers. The embedded derivatives are not
separated from the host instrument and are not separately
accounted for as a derivative instrument, as the entire contract
embodies both the embedded derivative and the host instrument
and is remeasured at fair value at each reporting date. As such,
Abbey is not required to bifurcate the embedded derivative in
its equity index-linked deposits.

Abbeys equity index-linked deposits are managed within the
equity derivatives trading book as an integral part of the
equity derivatives portfolio. The total fair value of equity
index-linked deposits was £2,546m at 31 December 2006
(2005: £2,390m).

m) Loan impairment

For US GAAP purposes, Abbey applies SFAS 114,
Accounting by Creditors for Impairment of a Loan,
and the subsequent amendment SFAS 118, Accounting by
Creditors for Impairment of a Loan  Income
Recognition and Disclosures. SFAS 114 applies to
impaired loans only. Under SFAS 114, a loan is considered
impaired, based on current information and events, if it is
probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of
impaired loans is primarily based on the present value of
expected future cash flows discounted at the loans
effective interest rate, except for collateral dependent loans
where impairment is based on the fair value of the collateral.
Smaller balance homogeneous consumer loans (credit card
advances, residential mortgages, consumer instalment loans,
overdrafts) that are collectively evaluated for impairment,
leases and debt securities are outside the scope of
SFAS 114.

Impaired loans within the scope of SFAS 114 amounted to
£68m (2005: £75m). The impairment reserve in respect
of these loans estimated in accordance with the provisions of
SFAS 114 was £22m (2005: £29m). During the year
ended 31 December 2006, impaired loans averaged £71m
(2005: £182m) and interest income recognised on these loans
was £4m (2005: £5m, 2004: £16m).

n) Financial guarantees

In the ordinary course of business Abbey enters into various
financial guarantees. Abbey expects most of its financial
guarantees to expire unused. The majority of Abbeys
financial guarantees are commercial letters of credit.
Abbeys other financial guarantees are summarised as
follows:

|                                                   |  |                                                               |  |             |  |        |  |        |  |         |  |           |  |         
|-------------------------------------------------- |  | ------------------------------------------------------------- |  | ----------- |  | ------ |  | ------ |  | ------- |  | --------- |  | --------
|                                                   |  | Maximum potential amount of future payments as at 31 December
|                                                   |  |                                                              
|                                                   |  |                                                               |  | Less than 1 |  | 1 to 3 |  | 3 to 5 |  | After 5 |  | No stated
|                                                   |  | 2006                                                          |  | 2005        |  | year   |  | years  |  | years   |  | years     |  | maturity
|                                                   |  | £m                                                            |  | £m          |  | £m     |  | £m     |  | £m      |  | £m        |  | £m      
|                                                  
|Guaranteed cheques                                 |  | 5,168                                                         |  | 4,079       |  |       |  |       |  |        |  |          |  | 5,168   
|Warranties/indemnities on sale of
    subsidiaries |  | 4,599                                                         |  | 2,794       |  | 579    |  | 578    |  | 310     |  | 2,546     |  | 586     
|Stand-by letters of credit                         |  | 372                                                           |  | 375         |  |       |  | 47     |  | 42      |  | 283       |  |        
|                                                  
|                                                   |  | 10,139                                                        |  | 7,248       |  | 579    |  | 625    |  | 352     |  | 2,829     |  | 5,754   
|                                                  





153



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

The maximum potential amount of future payments represents the
notional amounts that could be lost under the guarantees if the
counterparty does not perform under the contract, without
consideration of possible recoveries under recourse provisions
or from collateral held or pledged. Such amounts greatly exceed
the anticipated losses and, therefore, the contractual amounts
are not indicative of the actual credit exposure or future cash
flow requirements for such commitments.

Abbey also enters into contracts that contain other
indemnification and warranty provisions. Such indemnification
agreements that function as financial guarantees are considered
to have a remote risk of loss. Abbeys maximum exposure to
loss and actual loss experience is not significant. The
indemnification clauses are often standard contractual terms and
were entered into in the normal course of business based on an
assessment that the risk of loss would be remote. In many cases,
there are no stated or notional amounts included in the
indemnification clauses and the contingencies triggering the
obligation to indemnify have not occurred, and are not expected
to occur. There are no amounts reflected on the consolidated
balance sheet at 31 December 2005 and 2004 related to these
indemnifications. These potential obligations are not included
in the table above.

To mitigate credit risk, Abbey may require the counterparty to
pledge collateral in the form of cash, securities or other
assets. Cash collateral available to Abbey to reimburse losses
realised under these guarantees amounted to £372m at
31 December 2006 (2005: £376m). Other property may
also be available to Abbey to cover losses under certain
guarantees and indemnifications. However, the value of such
property has not been determined.

o) Fair value option

Abbey has taken the fair value option under both IFRS and US
GAAP for debt securities in issue that are considered hybrid
financial instruments, and has irrevocably elected to initially
and subsequently measure those hybrid financial instruments in
their entirety at fair value for purposes of US GAAP in order to
align the accounting under IFRS and US GAAP. Under US GAAP, the
fair value and non-fair-value amounts included in debt
securities in issue at 31 December 2006 were £12,473m
(2005: £14,912m) and £36,361m (2005: £27,986m),
respectively. During the year-ended 31 December 2006, an
increase in the fair value of hybrid financial instruments
measured at fair value under the election of £63m (2005:
£2m) was reported in the income statement under US GAAP.
The adoption of the fair value option from 1 January 2005
has reduced volatility in the income statement by offsetting
changes in the fair value of derivatives.

p) Discontinued operations

In 2006 the Company sold its life insurance businesses as
disclosed in Note 12. During 2005, the Company sold its
remaining businesses holding finance lease receivables. In 2004,
the Company sold its other subsidiaries holding finance lease
receivables, asset finance and leasing business assets, its
French subsidiaries, and its residual debt securities investment
business. All these businesses, subsidiaries and assets qualify
as discontinued operations under US GAAP. The results of
the discontinued operations under US GAAP were as follows:

|                                                                                                                         |  |                        |  |       |  |      
|------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- |  | ----- |  | -----
|                                                                                                                         |  | Year ended 31 December
|                                                                                                                         |  |                       
|                                                                                                                         |  | 2006                   |  | 2005  |  | 2004 
|                                                                                                                         |  | £m                     |  | £m    |  | £m   
|                                                                                                                        
|Profit/(loss) from discontinued
    operations including profit/(loss) on disposal of £(5m)
    (2005: £64m, 2004: £15m) |  | (47)                   |  | (72)  |  | 186  
|Taxation                                                                                                                 |  | 26                     |  | (78)  |  | (105)
|                                                                                                                        
|Profit/(loss) on discontinued
    operations                                                                             |  | (21)                   |  | (150) |  | 81   
|                                                                                                                        



q) Deferred acquisition costs




|               |  |                        |  |      
|-------------- |  | ---------------------- |  | -----
|               |  | Year ended 31 December
|               |  |                       
|               |  | 2006                   |  | 2005 
|               |  | £m                     |  | £m   
|              
|At 1 January   |  | 822                    |  | 884  
|Additions      |  | 52                     |  | 77   
|Amortisation   |  | (96)                   |  | (139)
|Disposal       |  | (778)                  |  |     
|              
|At 31 December |  |                       |  | 822  
|              

154



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

r) Policy liabilities

The changes in the carrying amounts of policyholder liabilities
calculated in accordance with US GAAP were as follows:

|                                      |  |                        |  |         
|------------------------------------- |  | ---------------------- |  | --------
|                                      |  | Year ended 31 December
|                                      |  |                       
|                                      |  | 2006                   |  | 2005    
|                                      |  | £m                     |  | £m      
|                                     
|At 1 January                          |  | (22,042)               |  | (21,841)
|Decrease / (increase) in the
    year |  | 1,376                  |  | (201)   
|Disposal                              |  | 20,666                 |  |        
|                                     
|At 31 December                        |  |                       |  | (22,042)
|                                     



|                                                |  |                        |  |         
|----------------------------------------------- |  | ---------------------- |  | --------
|                                                |  | Year ended 31 December
|                                                |  |                       
|                                                |  | 2006                   |  | 2005    
|                                                |  | £m                     |  | £m      
|                                               
|SFAS 60 liabilities                             |  |                       |  | (4,613) 
|SFAS 97 liabilities                             |  |                       |  | (16,438)
|                                               
|Total                                           |  |                       |  | (21,051)
|Reinsurance                                     |  |                       |  | 1,072   
|                                               
|Policyholder liabilities net of
    reassurance |  |                       |  | (19,979)
|Policyholder bonus fund                         |  |                       |  | (2,063) 
|                                               
|Total                                           |  |                       |  | (22,042)
|                                               



58. Consolidating financial information


F-3


S-X




IFRS income statements


|                                                     |  |             |  |                |  |       |  |             |  |             
|---------------------------------------------------- |  | ----------- |  | -------------- |  | ----- |  | ----------- |  | ------------
|                                                     |  |             |  | Abbey National |  |       |  |             |  |             
|                                                     |  |             |  | Treasury       |  |       |  |             |  |             
|                                                     |  | The Company |  | Services       |  | Other |  | Adjustments |  | Consolidated
|For the year ended 31 December 2006                  |  | £m          |  | £m             |  | £m    |  | £m          |  | £m          
|                                                    
|Net interest income                                  |  | 983         |  | 109            |  | 136   |  |            |  | 1,228       
|Fee, commission, trading, and other
    income       |  | 574         |  | 122            |  | 805   |  | (259)       |  | 1,242       
|                                                    
|Total operating income                               |  | 1,557       |  | 231            |  | 941   |  | (259)       |  | 2,470       
|Administration expenses                              |  | (1,181)     |  | (109)          |  | (130) |  |            |  | (1,420)     
|Depreciation and amortisation                        |  | (79)        |  | (3)            |  | (133) |  |            |  | (215)       
|Impairment and provisions                            |  | (534)       |  |               |  | 165   |  | (38)        |  | (407)       
|                                                    
|Profit/(loss) on continuing ops
    before tax       |  | (237)       |  | 119            |  | 843   |  | (297)       |  | 428         
|Tax on profit/(loss) on continuing
    ops           |  | 109         |  | (55)           |  | (169) |  |            |  | (115)       
|                                                    
|Profit/ (loss) for the year
    from continuing ops  |  | (128)       |  | 64             |  | 674   |  | (297)       |  | 313         
|                                                    
|Profit/(loss) for the year from
    discontinued ops |  |            |  |               |  | (245) |  |            |  | (245)       
|                                                    
|Profit/(loss) for the
    year                       |  | (128)       |  | 64             |  | 429   |  | (297)       |  | 68          
|                                                    

155



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                     |  |             |  |                |  |       |  |             |  |             
|---------------------------------------------------- |  | ----------- |  | -------------- |  | ----- |  | ----------- |  | ------------
|                                                     |  |             |  | Abbey National |  |       |  |             |  |             
|                                                     |  |             |  | Treasury       |  |       |  |             |  |             
|                                                     |  | The Company |  | Services       |  | Other |  | Adjustments |  | Consolidated
|For the year ended 31 December 2005                  |  | £m          |  | £m             |  | £m    |  | £m          |  | £m          
|                                                    
|Net interest income                                  |  | 748         |  | 156            |  | 263   |  | 5           |  | 1,172       
|Fee, commission, trading, and other
    income       |  | 1,162       |  | 240            |  | 419   |  | (638)       |  | 1,183       
|                                                    
|Total operating income                               |  | 1,910       |  | 396            |  | 682   |  | (633)       |  | 2,355       
|Administration expenses                              |  | (1,441)     |  | (128)          |  | (26)  |  | 18          |  | (1,577)     
|Depreciation and amortisation                        |  | (66)        |  | (3)            |  | (126) |  |            |  | (195)       
|Impairment and provisions                            |  | 296         |  |               |  | (233) |  | (284)       |  | (221)       
|                                                    
|Profit/(loss) on continuing ops
    before tax       |  | 699         |  | 265            |  | 297   |  | (899)       |  | 362         
|Tax on profit/(loss) on continuing
    ops           |  | (8)         |  | (89)           |  | (1)   |  | (10)        |  | (108)       
|                                                    
|Profit/ (loss) for the year
    from continuing ops  |  | 691         |  | 176            |  | 296   |  | (909)       |  | 254         
|                                                    
|Profit/(loss) for the year from
    discontinued ops |  |            |  |               |  | 166   |  |            |  | 166         
|                                                    
|Profit/(loss) for the
    year                       |  | 691         |  | 176            |  | 462   |  | (909)       |  | 420         
|                                                    

|                                                     |  |             |  |                |  |       |  |             |  |             
|---------------------------------------------------- |  | ----------- |  | -------------- |  | ----- |  | ----------- |  | ------------
|                                                     |  |             |  | Abbey National |  |       |  |             |  |             
|                                                     |  |             |  | Treasury       |  |       |  |             |  |             
|                                                     |  | The Company |  | Services       |  | Other |  | Adjustments |  | Consolidated
|For the year ended 31 December 2004                  |  | £m          |  | £m             |  | £m    |  | £m          |  | £m          
|                                                    
|Net interest income                                  |  | 907         |  | 272            |  | 211   |  | 16          |  | 1,406       
|Fee, commission, trading, and other
    income       |  | 613         |  |               |  | 902   |  | (391)       |  | 1,124       
|                                                    
|Total operating income                               |  | 1,520       |  | 272            |  | 1,113 |  | (375)       |  | 2,530       
|Administration expenses                              |  | (1,691)     |  | (126)          |  | (409) |  | 213         |  | (2,013)     
|Depreciation and amortisation                        |  | (142)       |  | (2)            |  | (211) |  |            |  | (355)       
|Impairment and provisions                            |  | (177)       |  | 160            |  | (51)  |  | (78)        |  | (146)       
|                                                    
|Profit/(loss) on continuing ops
    before tax       |  | (490)       |  | 304            |  | 442   |  | (240)       |  | 16          
|Tax on profit/(loss) on continuing
    ops           |  | 206         |  | (107)          |  | 185   |  | (272)       |  | 12          
|                                                    
|Profit/ (loss) for the year
    from continuing ops  |  | (284)       |  | 197            |  | 627   |  | (512)       |  | 28          
|                                                    
|Profit/(loss) for the year from
    discontinued ops |  |            |  |               |  | (82)  |  |            |  | (82)        
|                                                    
|Profit/(loss) for the
    year                       |  | (284)       |  | 197            |  | 545   |  | (512)       |  | (54)        
|                                                    

IFRS balance sheets


|                                                   |  |             |  |          |  |        |  |             |  |             
|-------------------------------------------------- |  | ----------- |  | -------- |  | ------ |  | ----------- |  | ------------
|                                                   |  |             |  | Abbey    |  |        |  |             |  |             
|                                                   |  |             |  | National |  |        |  |             |  |             
|                                                   |  |             |  | Treasury |  |        |  |             |  |             
|                                                   |  | The Company |  | Services |  | Other  |  | Adjustments |  | Consolidated
|At 31 December 2006                                |  | £m          |  | £m       |  | £m     |  | £m          |  | £m          
|                                                  
|Cash and balances at central banks                 |  | 888         |  |         |  |       |  |            |  | 888         
|Trading assets                                     |  |            |  | 39,611   |  | 22,703 |  |            |  | 62,314      
|Derivative financial instruments                   |  | 646         |  | 9,000    |  | 427    |  | (1,737)     |  | 8,336       
|Financial assets designated at fair
    value      |  | 66          |  | 8,137    |  | 510    |  |            |  | 8,713       
|Loans and advances to banks                        |  | 41,711      |  | 57,784   |  | 39,348 |  | (136,601)   |  | 2,242       
|Loans and advances to customers                    |  | 103,249     |  | 4,860    |  | 19,946 |  | (24,909)    |  | 103,146     
|Available for sale securities                      |  | 12          |  | 46       |  | 1,883  |  | (1,918)     |  | 23          
|Investment in associated
    undertakings          |  | 25          |  |         |  |       |  | (3)         |  | 22          
|Investment in subsidiary
    undertakings          |  | 4,926       |  | 2,341    |  | 2,518  |  | (9,785)     |  |            
|Intangible assets                                  |  |            |  |         |  | 90     |  |            |  | 90          
|Property, plant and equipment                      |  | 395         |  | 8        |  | 12     |  |            |  | 415         
|Operating lease assets                             |  |            |  |         |  | 2,082  |  |            |  | 2,082       
|Current tax assets                                 |  | 192         |  |         |  | 31     |  |            |  | 223         
|Deferred tax assets                                |  | 747         |  | 22       |  | 35     |  |            |  | 804         
|Other assets                                       |  | 744         |  | 1,470    |  | 293    |  |            |  | 2,507       
|                                                  
|Total assets                                       |  | 153,601     |  | 123,279  |  | 89,878 |  | (174,953)   |  | 191,805     
|                                                  
|Deposits by banks                                  |  | 61,123      |  | 49,012   |  | 8,007  |  | (111,486)   |  | 6,656       
|Deposits by customers                              |  | 80,104      |  | 8,261    |  | 28,340 |  | (50,186)    |  | 66,519      
|Derivative financial instruments                   |  | 681         |  | 10,236   |  | 1,038  |  | (1,737)     |  | 10,218      
|Trading liabilities                                |  |            |  | 38,287   |  | 19,317 |  |            |  | 57,604      
|Financial liabilities designated at
    fair value |  |            |  | 8,134    |  | 17     |  |            |  | 8,151       
|Debt securities in issue                           |  | 4           |  | 6,232    |  | 22,762 |  |            |  | 28,998      
|Other borrowed funds                               |  | 1,082       |  |         |  | 847    |  | (274)       |  | 1,655       
|Subordinated liabilities                           |  | 5,563       |  |         |  | 1,102  |  | (1,645)     |  | 5,020       
|Macro hedge of interest rate risk                  |  | 6           |  | 168      |  |       |  |            |  | 174         
|Other liabilities                                  |  | 1,027       |  | 177      |  | 412    |  |            |  | 1,616       
|Other provisions                                   |  | 157         |  |         |  | 23     |  |            |  | 180         
|Current tax liabilities                            |  | 122         |  | 160      |  | 18     |  |            |  | 300         
|Deferred tax liabilities                           |  |            |  |         |  | 564    |  |            |  | 564         
|Retirement benefit obligations                     |  | 1,033       |  |         |  | 1      |  |            |  | 1,034       
|                                                  
|Total liabilities                                  |  | 150,902     |  | 120,667  |  | 82,448 |  | (165,328)   |  | 188,689     
|                                                  
|Total shareholders equity                          |  | 2,699       |  | 2,612    |  | 7,430  |  | (9,625)     |  | 3,116       
|                                                  
|Total liabilities and
    equity                   |  | 153,601     |  | 123,279  |  | 89,878 |  | (174,953)   |  | 191,805     
|                                                  

156



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                   |  |             |  |                |  |         |  |             |  |             
|-------------------------------------------------- |  | ----------- |  | -------------- |  | ------- |  | ----------- |  | ------------
|                                                   |  |             |  | Abbey National |  |         |  |             |  |             
|                                                   |  |             |  | Treasury       |  |         |  |             |  |             
|                                                   |  | The Company |  | Services       |  | Other   |  | Adjustments |  | Consolidated
|At 31 December 2005                                |  | £m          |  | £m             |  | £m      |  | £m          |  | £m          
|                                                  
|Cash and balances at central banks                 |  | 370         |  |               |  | 1       |  | 620         |  | 991         
|Trading assets                                     |  |            |  | 29,933         |  | 28,313  |  | (15)        |  | 58,231      
|Derivative financial instruments                   |  | 1,227       |  | 12,422         |  | 1,793   |  | (3,587)     |  | 11,855      
|Financial assets designated at fair
    value      |  | 790         |  | 3,810          |  | 25,584  |  | 413         |  | 30,597      
|Loans and advances to banks                        |  | 33,009      |  | 49,556         |  | 42,582  |  | (124,703)   |  | 444         
|Loans and advances to customers                    |  | 95,230      |  | 5,225          |  | 30,862  |  | (35,850)    |  | 95,467      
|Available for sale securities                      |  | 272         |  | 52             |  | 2,159   |  | (2,470)     |  | 13          
|Investment in associated
    undertakings          |  | 24          |  |               |  |        |  |            |  | 24          
|Investment in subsidiary
    undertakings          |  | 8,690       |  | 2,641          |  | 8,596   |  | (19,927)    |  |            
|Intangible assets                                  |  |            |  |               |  | 171     |  |            |  | 171         
|Value of in force business                         |  |            |  |               |  | 1,721   |  |            |  | 1,721       
|Property, plant and equipment                      |  | 298         |  | 5              |  | 11      |  |            |  | 314         
|Operating lease assets                             |  |            |  |               |  | 2,172   |  |            |  | 2,172       
|Investment property                                |  |            |  |               |  | 3       |  | (3)         |  |            
|Current tax assets                                 |  | 235         |  |               |  |        |  |            |  | 235         
|Deferred tax assets                                |  | 702         |  | 23             |  | 71      |  |            |  | 796         
|Other assets                                       |  | 553         |  | 657            |  | 5,047   |  | (2,254)     |  | 4,003       
|                                                  
|Total assets                                       |  | 141,400     |  | 104,324        |  | 149,086 |  | (187,776)   |  | 207,034     
|                                                  
|Deposits by banks                                  |  | 48,267      |  | 43,366         |  | 24,122  |  | (110,138)   |  | 5,617       
|Deposits by customers                              |  | 79,288      |  | 8,079          |  | 29,013  |  | (50,491)    |  | 65,889      
|Derivative financial instruments                   |  | 623         |  | 13,483         |  | 745     |  | (3,587)     |  | 11,264      
|Trading liabilities                                |  |            |  | 20,693         |  | 32,012  |  | (41)        |  | 52,664      
|Financial liabilities designated at
    fair value |  |            |  | 8,308          |  |        |  | (360)       |  | 7,948       
|Debt securities in issue                           |  | 4           |  | 7,206          |  | 14,066  |  |            |  | 21,276      
|Other borrowed funds                               |  | 1,452       |  |               |  | 1,347   |  | (555)       |  | 2,244       
|Subordinated liabilities                           |  | 6,477       |  | 269            |  | 1,215   |  | (1,756)     |  | 6,205       
|Insurance and reinsurance
    liabilities          |  |            |  |               |  | 22,090  |  | (589)       |  | 21,501      
|Macro hedge of interest rate risk                  |  | 13          |  |               |  |        |  |            |  | 13          
|Other liabilities                                  |  | 814         |  | 164            |  | 2,266   |  | (54)        |  | 3,190       
|Investment contract liabilities                    |  |            |  |               |  | 3,730   |  | (424)       |  | 3,306       
|Other provisions                                   |  | 202         |  |               |  | 51      |  |            |  | 253         
|Current tax liabilities                            |  | 112         |  | 201            |  | (25)    |  |            |  | 288         
|Deferred tax liabilities                           |  |            |  |               |  | 886     |  |            |  | 886         
|Retirement benefit obligations                     |  | 1,240       |  |               |  | 140     |  |            |  | 1,380       
|                                                  
|Total liabilities                                  |  | 138,492     |  | 101,769        |  | 131,658 |  | (167,995)   |  | 203,924     
|                                                  
|Total shareholders equity                          |  | 2,908       |  | 2,555          |  | 17,428  |  | (19,781)    |  | 3,110       
|                                                  
|Total liabilities and
    equity                   |  | 141,400     |  | 104,324        |  | 149,086 |  | (187,776)   |  | 207,034     
|                                                  

IFRS cash flow statements


|                                                                      |  |             |  |                |  |         |  |             |  |             
|--------------------------------------------------------------------- |  | ----------- |  | -------------- |  | ------- |  | ----------- |  | ------------
|                                                                      |  |             |  | Abbey National |  |         |  |             |  |             
|                                                                      |  |             |  | Treasury       |  |         |  |             |  |             
|                                                                      |  | The Company |  | Services       |  | Other   |  | Adjustments |  | Consolidated
|For the year ended 31 December 2006                                   |  | £m          |  | £m             |  | £m      |  | £m          |  | £m          
|                                                                     
|Net cash flow from/(used in)
    operating activities                 |  | (19,197)    |  | 1,301          |  | 4,810   |  |            |  | (13,086)    
|Net cash flow from/(used in)
    investing activities                 |  | 3,977       |  | 294            |  | (4,259) |  |            |  | 12          
|Net cash flow from/(used in)
    financing activities                 |  | (1,239)     |  | (247)          |  | 3,244   |  |            |  | 1,758       
|                                                                     
|Net increase/(decrease) in
    cash and cash
    equivalents          |  | (16,459)    |  | 1,348          |  | 3,795   |  |            |  | (11,316)    
|Cash and cash equivalents at
    beginning of
    the year            |  | (15,084)    |  | 9,553          |  | 13,772  |  |            |  | 8,241       
|Effects of exchange rate changes on
    cash and
    cash equivalents |  |            |  | 502            |  | (1,274) |  |            |  | (772)       
|                                                                     
|Cash and cash equivalents at end
    of the year                      |  | (31,543)    |  | 11,403         |  | 16,293  |  |            |  | (3,847)     
|                                                                     

|                                                                      |  |             |  |                |  |         |  |             |  |             
|--------------------------------------------------------------------- |  | ----------- |  | -------------- |  | ------- |  | ----------- |  | ------------
|                                                                      |  |             |  | Abbey National |  |         |  |             |  |             
|                                                                      |  |             |  | Treasury       |  |         |  |             |  |             
|                                                                      |  | The Company |  | Services       |  | Other   |  | Adjustments |  | Consolidated
|For the year ended 31 December 2005                                   |  | £m          |  | £m             |  | £m      |  | £m          |  | £m          
|                                                                     
|Net cash flow (used in) operating
    activities                      |  | (5,703)     |  | (16,657)       |  | 15,105  |  |            |  | (7,255)     
|Net cash flow from/(used in)
    investing activities                 |  | 41          |  | 243            |  | 1,750   |  |            |  | 2,034       
|Net cash flow from/(used in)
    financing activities                 |  | 96          |  | (38)           |  | 1,368   |  |            |  | 1,426       
|                                                                     
|Net (decrease) in cash and
    cash equivalents                       |  | (5,566)     |  | (16,452)       |  | 18,223  |  |            |  | (3,795)     
|Cash and cash equivalents at
    beginning of
    the year            |  | (9,518)     |  | 26,392         |  | (5,615) |  |            |  | 11,259      
|Effects of exchange rate changes on
    cash and
    cash equivalents |  |            |  | (387)          |  | 1,164   |  |            |  | 777         
|                                                                     
|Cash and cash equivalents at end
    of the year                      |  | (15,084)    |  | 9,553          |  | 13,772  |  |            |  | 8,241       
|                                                                     

157



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                                  |  |             |  |                |  |          |  |             |  |             
|----------------------------------------------------------------- |  | ----------- |  | -------------- |  | -------- |  | ----------- |  | ------------
|                                                                  |  |             |  | Abbey National |  |          |  |             |  |             
|                                                                  |  |             |  | Treasury       |  |          |  |             |  |             
|                                                                  |  | The Company |  | Services       |  | Other    |  | Adjustments |  | Consolidated
|For the year ended 31 December 2004                               |  | £m          |  | £m             |  | £m       |  | £m          |  | £m          
|                                                                 
|Net cash flow from/ (used in)
    operating activities            |  | 4,393       |  | 18,135         |  | (27,567) |  |            |  | (5,039)     
|Net cash flow from/ (used in)
    investing activities            |  | 996         |  | 149            |  | 3,006    |  |            |  | 4,151       
|Net cash flow (used in) financing
    activities                  |  | (1,561)     |  | (32)           |  | 96       |  |            |  | (1,497)     
|                                                                 
|Net increase/ (decrease) in
    cash and cash equivalents         |  | 3,828       |  | 18,252         |  | (24,465) |  |            |  | (2,385)     
|Cash and cash equivalents at
    beginning of the year            |  | (13,346)    |  | 8,140          |  | 19,295   |  |            |  | 14,089      
|Effects of exchange rate changes on
    cash and cash equivalents |  |            |  |               |  | (445)    |  |            |  | (445)       
|                                                                 
|Cash and cash equivalents at end
    of the year                  |  | (9,518)     |  | 26,392         |  | (5,615)  |  |            |  | 11,259      
|                                                                 

US GAAP reconciliations


|                                                                   |  |             |  |                |  |       |  |             |  |             
|------------------------------------------------------------------ |  | ----------- |  | -------------- |  | ----- |  | ----------- |  | ------------
|                                                                   |  |             |  | Abbey National |  |       |  |             |  |             
|                                                                   |  |             |  | Treasury       |  |       |  |             |  |             
|                                                                   |  | The Company |  | Services       |  | Other |  | Adjustments |  | Consolidated
|2006                                                               |  | £m          |  | £m             |  | £m    |  | £m          |  | £m          
|                                                                  
|Income statement                                                   |  |             |  |                |  |       |  |             |  |             
|Profit for the year from
    continuing operations  IFRS          |  | (128)       |  | 64             |  | 674   |  | (297)       |  | 313         
|US GAAP adjustments:                                               |  |             |  |                |  |       |  |             |  |             
|Other intangible assets                                            |  |            |  |               |  | (14)  |  |            |  | (14)        
|Pension cost                                                       |  | (132)       |  | (4)            |  | (33)  |  |            |  | (169)       
|Securities and investments                                         |  | 30          |  | 100            |  |      |  |            |  | 130         
|Securitised assets                                                 |  | 125         |  |               |  |      |  | (8)         |  | 117         
|Loan origination fees and costs                                    |  | 46          |  |               |  |      |  |            |  | 46          
|Debt securities in issue                                           |  | (353)       |  | 146            |  |      |  |            |  | (207)       
|Preference shares                                                  |  | (3)         |  |               |  |      |  |            |  | (3)         
|Other operating income                                             |  | (41)        |  |               |  |      |  |            |  | (41)        
|Other                                                              |  | 2           |  | 2              |  | (1)   |  |            |  | 3           
|Tax effect of the above adjustments                                |  | 85          |  | (73)           |  | 7     |  |            |  | 19          
|                                                                  
|Net income/(loss) from continuing
    ops  US GAAP                |  | (369)       |  | 235            |  | 633   |  | (305)       |  | 194         
|                                                                  
|Net income/(loss) from discontinued
    ops  US GAAP (net of tax) |  |            |  |               |  | (21)  |  |            |  | (21)        
|                                                                  
|Net income/(loss)  US
    GAAP(1)                                 |  | (369)       |  | 235            |  | 612   |  | (305)       |  | 173         
|                                                                  
|                                                                  
|                                                                  
|Shareholders
    equity                                           |  |             |  |                |  |       |  |             |  |             
|                                                                  
|Shareholders
    equity  IFRS                                    |  | 2,699       |  | 2,612          |  | 7,430 |  | (9,625)     |  | 3,116       
|US GAAP adjustments:                                               |  |             |  |                |  |       |  |             |  |             
|Goodwill                                                           |  |            |  |               |  |      |  | 233         |  | 233         
|Other intangible assets                                            |  |            |  |               |  | 22    |  |            |  | 22          
|Pension cost                                                       |  | (27)        |  | (1)            |  | (7)   |  |            |  | (35)        
|Securities and investments                                         |  | (2)         |  | (52)           |  |      |  |            |  | (54)        
|Securitised assets                                                 |  | 430         |  |               |  |      |  |            |  | 430         
|Loan origination fees and costs                                    |  | 233         |  |               |  |      |  |            |  | 233         
|Debt securities in issue                                           |  | 325         |  | 92             |  |      |  |            |  | 417         
|Preference shares                                                  |  | 344         |  |               |  |      |  |            |  | 344         
|Other                                                              |  | 18          |  | 1              |  | 10    |  |            |  | 29          
|Tax effect of the above adjustments                                |  | (293)       |  | (12)           |  | (10)  |  |            |  | (315)       
|                                                                  
|Shareholders
    equity  US
    GAAP(1)                          |  | 3,727       |  | 2,640          |  | 7,445 |  | (9,392)     |  | 4,420       
|                                                                  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As described on page 155, under IFRS investments in
    subsidiaries have been accounted for at cost subject to
    impairment. Rule 3.10 of Regulation S-X requires a
    company to account for its investments in subsidiaries using the
    equity method. The effects of this difference on the results and
    the net assets of the Company and Abbey National Treasury
    Services are disclosed on page 155.

158



---



##### 

Financial Statements

Notes to the Financial
Statementscontinued

|                                                                 |  |             |  |                |  |         |  |             |  |             
|---------------------------------------------------------------- |  | ----------- |  | -------------- |  | ------- |  | ----------- |  | ------------
|                                                                 |  |             |  | Abbey National |  |         |  |             |  |             
|                                                                 |  |             |  | Treasury       |  |         |  |             |  |             
|                                                                 |  | The Company |  | Services       |  | Other   |  | Adjustments |  | Consolidated
|2005                                                             |  | £m          |  | £m             |  | £m      |  | £m          |  | £m          
|                                                                
|Income statement                                                 |  |             |  |                |  |         |  |             |  |             
|Profit/(loss) from continuing
    operations for the year  IFRS |  | 691         |  | 176            |  | 296     |  | (909)       |  | 254         
|US GAAP adjustments:                                             |  |             |  |                |  |         |  |             |  |             
|Goodwill                                                         |  |            |  |               |  |        |  |            |  |            
|Other intangible assets                                          |  |            |  |               |  | (14)    |  |            |  | (14)        
|Pension cost                                                     |  | (57)        |  | (2)            |  | (19)    |  |            |  | (78)        
|Securities and investments                                       |  | (16)        |  | (50)           |  |        |  |            |  | (66)        
|Securitised assets                                               |  | 60          |  |               |  |        |  | (10)        |  | 50          
|Loan origination fees and costs                                  |  | 56          |  |               |  | (2)     |  |            |  | 54          
|Debt securities in issue                                         |  | 397         |  | (217)          |  |        |  |            |  | 180         
|Preference shares                                                |  | 88          |  |               |  |        |  |            |  | 88          
|Discontinued operations                                          |  |            |  |               |  | (53)    |  |            |  | (53)        
|Other                                                            |  | (6)         |  | 3              |  | 7       |  |            |  | 4           
|Tax effect of the above adjustments                              |  | (130)       |  | 80             |  | 34      |  |            |  | (16)        
|                                                                
|Net income/(loss) from continuing
    ops  US GAAP              |  | 1,083       |  | (10)           |  | 249     |  | (919)       |  | 403         
|Net income from discontinued
    ops  US GAAP (net of tax)      |  |            |  |               |  | (150)   |  |            |  | (150)       
|                                                                
|Net income/ (loss) 
    US
    GAAP(1)                          |  | 1,083       |  | (10)           |  | 99      |  | (919)       |  | 253         
|                                                                
|                                                                
|                                                                
|Shareholders
    equity                                         |  |             |  |                |  |         |  |             |  |             
|                                                                
|Shareholders
    equity  IFRS                                  |  | 2,908       |  | 2,555          |  | 17,428  |  | (19,781)    |  | 3,110       
|US GAAP adjustments:                                             |  |             |  |                |  |         |  |             |  |             
|Goodwill                                                         |  |            |  |               |  |        |  | 326         |  | 326         
|Other intangible assets                                          |  |            |  |               |  | 36      |  |            |  | 36          
|Pension cost                                                     |  | 443         |  | 14             |  | 146     |  |            |  | 603         
|Securities and investments                                       |  | (16)        |  | (146)          |  |        |  |            |  | (162)       
|Securitised assets                                               |  | 339         |  |               |  |        |  | (8)         |  | 331         
|Loan origination fees and costs                                  |  | 187         |  |               |  |        |  |            |  | 187         
|Debt securities in issue                                         |  | 785         |  | (51)           |  |        |  |            |  | 734         
|Preference shares                                                |  | 612         |  |               |  |        |  |            |  | 612         
|Value of in force business                                       |  |            |  |               |  | (1,301) |  |            |  | (1,301)     
|Deferred acquisition costs                                       |  |            |  |               |  | 774     |  |            |  | 774         
|Policy liabilities                                               |  |            |  |               |  | 95      |  |            |  | 95          
|Other                                                            |  | 8           |  | (1)            |  | 14      |  |            |  | 21          
|Tax effect of the above adjustments                              |  | (524)       |  | 55             |  | 63      |  |            |  | (406)       
|                                                                
|Shareholders
    equity  US GAAP
    (1)                       |  | 4,742       |  | 2,426          |  | 17,255  |  | (19,463)    |  | 4,960       
|                                                                

|                                                                  |  |             |  |                |  |       |  |             |  |             
|----------------------------------------------------------------- |  | ----------- |  | -------------- |  | ----- |  | ----------- |  | ------------
|                                                                  |  |             |  | Abbey National |  |       |  |             |  |             
|                                                                  |  |             |  | Treasury       |  |       |  |             |  |             
|                                                                  |  | The Company |  | Services       |  | Other |  | Adjustments |  | Consolidated
|2004                                                              |  | £m          |  | £m             |  | £m    |  | £m          |  | £m          
|                                                                 
|Income statement                                                  |  |             |  |                |  |       |  |             |  |             
|(Loss)/ profit for the year from
    continuing operations  IFRS |  | (284)       |  | 197            |  | 627   |  | (512)       |  | 28          
|US GAAP adjustments:                                              |  |             |  |                |  |       |  |             |  |             
|Goodwill                                                          |  |            |  |               |  |      |  | (9)         |  | (9)         
|Other intangible assets                                           |  |            |  |               |  | (15)  |  |            |  | (15)        
|Pension cost                                                      |  | (65)        |  | (2)            |  | (12)  |  |            |  | (79)        
|Securitised assets                                                |  | 30          |  |               |  |      |  |            |  | 30          
|Loan origination fees and costs                                   |  | 12          |  |               |  |      |  |            |  | 12          
|Derivatives                                                       |  | (261)       |  | 297            |  | 18    |  |            |  | 54          
|Consolidation                                                     |  | (49)        |  |               |  |      |  |            |  | (49)        
|Derecognition of liabilities                                      |  | (9)         |  |               |  | (32)  |  |            |  | (41)        
|Discontinued operations                                           |  |            |  |               |  | (34)  |  |            |  | (34)        
|Other                                                             |  | 24          |  | (5)            |  | (35)  |  |            |  | (16)        
|Tax effect of the above adjustments                               |  | (81)        |  | 87             |  | 12    |  |            |  | 18          
|                                                                 
|Net income/(loss) from continuing
    ops  US
    GAAP           |  | (683)       |  | 574            |  | 529   |  | (521)       |  | (101)       
|Net income from discontinued
    ops  US
    GAAP (net of tax)   |  |            |  |               |  | 81    |  |            |  | 81          
|                                                                 
|Net (loss)/income  US
    GAAP(1)                                |  | (683)       |  | 574            |  | 610   |  | (521)       |  | (20)        
|                                                                 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As described on page 155, under IFRS investments in
    subsidiaries have been accounted for at cost subject to
    impairment. Rule 3.10 of Regulation S-X requires a
    company to account for its investments in subsidiaries using the
    equity method. The effects of this difference on the results and
    the net assets of the Company and Abbey National Treasury
    Services are disclosed on page 155.

159



---



##### 

Selected financial data





Selected financial data

The IFRS financial information set forth below for the twelve
month periods ended 31 December 2006, 2005 and 2004 and as
at 31 December 2006 and 2005 has been derived from the
Consolidated Financial Statements of the Group prepared in
accordance with IFRS included elsewhere in this Annual Report.
The information should be read in connection with, and is
qualified in its entirety by reference to, the Groups
consolidated financial statements and the notes thereto.
Financial information set forth below for the twelve-month
periods ended 31 December 2003 and 2002, and as at
31 December 2004, 2003 and 2002, has been derived from the
audited Consolidated Financial Statements of the Group for 2004,
2003 and 2002 not included in this Annual Report. The financial
information in this selected consolidated financial and
statistical data does not constitute statutory accounts within
the meaning of the Companies Act 1985. The auditors report
in the financial statements for each of the five years ended
31 December 2006 was unqualified and did not include a
statement under sections 237(2) and 237(3) of the Companies Act
1985. The Consolidated Financial Statements of the Group for the
years ended 31 December 2006, 2005, 2004, 2003, and 2002
were audited by Deloitte & Touche LLP, independent
accountants. The Groups Consolidated Financial Statements
for the twelve-month periods ended 31 December 2006, 2005
and 2004 included elsewhere in this Annual Report have been
prepared in accordance with IFRS, which differ in certain
significant respects from US GAAP. Certain significant
differences between IFRS and US GAAP are discussed in
Note 53 to the Consolidated Financial Statements, and
Note 56 to the Consolidated Financial Statements includes
reconciliations of certain amounts calculated in accordance with
IFRS to US GAAP.

Income Statements

|                                                       |  |         |  |         |  |         |  |        
|------------------------------------------------------ |  | ------- |  | ------- |  | ------- |  | -------
|                                                       |  | 2006(1) |  | 2006(2) |  | 2005(3) |  | 2004   
|                                                       |  | $m      |  | £m      |  | £m      |  | £m     
|                                                      
|Net interest income                                    |  | 2,407   |  | 1,228   |  | 1,172   |  | 1,406  
|                                                      
|Net fee and commission
    income                      |  | 1,370   |  | 699     |  | 644     |  | 526    
|Dividend income                                        |  | 2       |  | 1       |  | 1       |  | 1      
|Net trading income                                     |  | 800     |  | 408     |  | 471     |  | 267    
|Other operating income                                 |  | 262     |  | 134     |  | 67      |  | 330    
|                                                      
|Total operating income                                 |  | 4,841   |  | 2,470   |  | 2,355   |  | 2,530  
|                                                      
|Administration expenses                                |  | (2,783) |  | (1,420) |  | (1,577) |  | (2,013)
|Depreciation and amortisation                          |  | (422)   |  | (215)   |  | (195)   |  | (355)  
|                                                      
|Total operating
    expenses                           |  | (3,205) |  | (1,635) |  | (1,772) |  | (2,368)
|Impairment losses on loans and
    advances            |  | (674)   |  | (344)   |  | (218)   |  | (25)   
|Amounts written off fixed asset
    investments        |  |        |  |        |  |        |  | 80     
|Provisions for other liabilities
    and charges       |  | (124)   |  | (63)    |  | (3)     |  | (201)  
|                                                      
|Profit on continuing operations
    before tax         |  | 838     |  | 428     |  | 362     |  | 16     
|Tax on profit on continuing
    operations             |  | (225)   |  | (115)   |  | (108)   |  | 12     
|                                                      
|Profit on continuing operations
    after tax          |  | 613     |  | 313     |  | 254     |  | 28     
|Profit/(loss) on discontinued
    operations after tax |  | (480)   |  | (245)   |  | 166     |  | (82)   
|                                                      
|Profit/(loss) for the
    year                         |  | 133     |  | 68      |  | 420     |  | (54)   
|                                                      

|                                                   |  |         |  |         |  |         |  |       |  |       |  |        
|-------------------------------------------------- |  | ------- |  | ------- |  | ------- |  | ----- |  | ----- |  | -------
|                                                   |  | 2006(1) |  | 2006(2) |  | 2005(4) |  | 2004  |  | 2003  |  | 2002   
|                                                   |  | $m      |  | £m      |  | £m      |  | £m    |  | £m    |  | £m     
|                                                  
|Selected US GAAP income
    statement data         |  |         |  |         |  |         |  |       |  |       |  |        
|Net income/(loss) from continuing
    operations   |  | 380     |  | 194     |  | 403     |  | (101) |  | 381   |  | 49     
|Net income/(loss) from discontinued
    operations |  | (41)    |  | (21)    |  | (150)   |  | 81    |  | (504) |  | (1,456)
|                                                  
|Net income/(loss)                                  |  | 339     |  | 173     |  | 253     |  | (20)  |  | (123) |  | (1,407)
|                                                  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Amounts stated in dollars have been translated from sterling at
    the rate of £1.00  $1.96, the noon buying rate
    on 29 December 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|2. | In the third quarter of 2006 Abbey sold its life insurance
    business. A description of the transaction, and an analysis of
    the results of the life insurance business is disclosed in
    Note 12 of the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|3. | 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.
|4. | 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.                                                                                                             

160



---



##### 

Selected financial data



Selected financial datacontinued

Balance sheets

|                                                          |  |       |  |         |  |         |  |         |  |        
|--------------------------------------------------------- |  | ----- |  | ------- |  | ------- |  | ------- |  | -------
|                                                          |  |       |  | 2006(1) |  | 2006(2) |  | 2005(4) |  | 2004   
|                                                          |  | Notes |  | $m      |  | £m      |  | £m      |  | £m     
|                                                         
|Assets                                                    |  |       |  |         |  |         |  |         |  |        
|Cash and balances at central banks                        |  | 13    |  | 1,741   |  | 888     |  | 991     |  | 454    
|Trading assets                                            |  | 14    |  | 122,135 |  | 62,314  |  | 58,231  |  |       
|Derivative financial instruments                          |  | 15    |  | 16,339  |  | 8,336   |  | 11,855  |  | 2,377  
|Financial assets designated at fair
    value             |  | 16    |  | 17,078  |  | 8,713   |  | 30,597  |  |       
|Loans and advances to banks                               |  | 17    |  | 4,394   |  | 2,242   |  | 444     |  | 11,751 
|Loans and advances to customers                           |  | 18    |  | 202,166 |  | 103,146 |  | 95,467  |  | 109,416
|Debt securities                                           |  |       |  |        |  |        |  |        |  | 37,010 
|Equity securities and other
    variable yield securities |  |       |  |        |  |        |  |        |  | 10,792 
|Available for sale securities                             |  | 20    |  | 45      |  | 23      |  | 13      |  |       
|Investment in associated
    undertakings                 |  | 22    |  | 43      |  | 22      |  | 24      |  | 25     
|Intangible assets                                         |  | 23    |  | 176     |  | 90      |  | 171     |  | 175    
|Value of in-force business                                |  | 24    |  |        |  |        |  | 1,721   |  | 1,844  
|Property, plant and equipment                             |  | 25    |  | 813     |  | 415     |  | 314     |  | 262    
|Operating lease assets                                    |  | 26    |  | 4,081   |  | 2,082   |  | 2,172   |  | 2,275  
|Investment property                                       |  |       |  |        |  |        |  |        |  | 1,228  
|Current tax assets                                        |  |       |  | 437     |  | 223     |  | 235     |  | 242    
|Deferred tax assets                                       |  | 28    |  | 1,576   |  | 804     |  | 796     |  | 501    
|Other assets                                              |  | 29    |  | 4,914   |  | 2,507   |  | 4,003   |  | 6,381  
|                                                         
|Total assets                                              |  |       |  | 375,938 |  | 191,805 |  | 207,034 |  | 184,733
|                                                         
|Liabilities                                               |  |       |  |         |  |         |  |         |  |        
|Deposits by banks                                         |  | 30    |  | 13,046  |  | 6,656   |  | 5,617   |  | 18,412 
|Deposits by customers                                     |  | 31    |  | 130,377 |  | 66,519  |  | 65,889  |  | 78,660 
|Derivative financial instruments                          |  | 15    |  | 20,027  |  | 10,218  |  | 11,264  |  | 3,665  
|Trading liabilities                                       |  | 32    |  | 112,904 |  | 57,604  |  | 52,664  |  |       
|Financial liabilities designated at
    fair value        |  | 33    |  | 15,976  |  | 8,151   |  | 7,948   |  |       
|Debt securities in issue                                  |  | 34    |  | 56,836  |  | 28,998  |  | 21,276  |  | 37,067 
|Other borrowed funds                                      |  | 35    |  | 3,244   |  | 1,655   |  | 2,244   |  | 722    
|Subordinated liabilities                                  |  | 36    |  | 9,839   |  | 5,020   |  | 6,205   |  | 5,484  
|Insurance and reinsurance
    liabilities                 |  | 37    |  |        |  |        |  | 21,501  |  | 24,923 
|Macro hedge of interest rate risk                         |  |       |  | 341     |  | 174     |  | 13      |  |       
|Other liabilities                                         |  | 38    |  | 3,167   |  | 1,616   |  | 3,190   |  | 8,844  
|Investment contract liabilities                           |  | 39    |  |        |  |        |  | 3,306   |  |       
|Other provisions                                          |  | 40    |  | 353     |  | 180     |  | 253     |  | 302    
|Current tax liabilities                                   |  |       |  | 588     |  | 300     |  | 288     |  | 161    
|Deferred tax liabilities                                  |  | 28    |  | 1,105   |  | 564     |  | 886     |  | 1,064  
|Retirement benefit obligations                            |  | 41    |  | 2,027   |  | 1,034   |  | 1,380   |  | 1,197  
|Minority interests 
    non-equity                       |  |       |  |        |  |        |  |        |  | 512    
|                                                         
|Total liabilities                                         |  |       |  | 369,830 |  | 188,689 |  | 203,924 |  | 181,013
|                                                         
|Share capital                                             |  | 43    |  | 290     |  | 148     |  | 148     |  | 473    
|Share premium account                                     |  | 43    |  | 3,640   |  | 1,857   |  | 1,857   |  | 2,164  
|Retained earnings                                         |  | 44    |  | 2,178   |  | 1,111   |  | 1,105   |  | 1,083  
|                                                         
|Total shareholders
    equity                             |  |       |  | 6,108   |  | 3,116   |  | 3,110   |  | 3,720  
|                                                         
|Total liabilities and
    equity                          |  |       |  | 375,938 |  | 191,805 |  | 207,034 |  | 184,733
|                                                         

|                                    |  |         |  |            |  |         |  |         |  |         |  |        
|----------------------------------- |  | ------- |  | ---------- |  | ------- |  | ------- |  | ------- |  | -------
|                                    |  | 2006(1) |  | 2006(2)(3) |  | 2005(5) |  | 2004    |  | 2003    |  | 2002   
|                                    |  | $m      |  | £m         |  | £m      |  | £m      |  | £m      |  | £m     
|                                   
|Selected US GAAP balance sheet data |  |         |  |            |  |         |  |         |  |         |  |        
|Shareholders funds                 |  | 8,663   |  | 4,420      |  | 4,960   |  | 4,843   |  | 5,629   |  | 5,889  
|Total assets                        |  | 415,416 |  | 211,947    |  | 228,909 |  | 186,265 |  | 197,836 |  | 187,869
|                                   

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | Amounts stated in dollars have been translated from sterling at
    the rate of £1.00  $1.96, the noon buying rate
    on 29 December 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|2. | In the third quarter of 2006 Abbey sold its life insurance
    business. A description of the transaction, and an analysis of
    the results of the life insurance business is disclosed in
    Note 12 of the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3. | On 31 December 2006 Abbey adopted, SFAS 158
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans which required Abbey to
    recognise the underfunded status of its defined benefit
    postretirement plans as a liability in the statement of
    financial position. Prior to the adoption of SFAS 158,
    Abbey recognised under US GAAP an additional minimum pension
    liability to the extent that the value of benefits accrued based
    on employee service up to the balance sheet date (the
    accumulated benefit obligation) exceeded the value of plan
    assets, and the excess was greater than any accrual already
    established for unfunded pension costs. The transitional
    adjustment required on adoption of SFAS 158 was recorded as
    an adjustment to the 2006 year-end balance of accumulated
    other comprehensive income. Further disclosures are contained in
    Note 57 of the Consolidated Financial Statements.
|4. | 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.                                                                                                                                                                                                                                                                        
|5. | 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.                                                                                                                                                                                                                                                                                                                                                                                     

161



---



##### 

Selected financial data



Selected financial datacontinued

Selected statistical information

|                                                                                        |  |         |  |         |  |       
|--------------------------------------------------------------------------------------- |  | ------- |  | ------- |  | ------
|                                                                                        |  | 2006(7) |  | 2005(9) |  | 2004  
|Selected IFRS financial statistics                                                      |  | %       |  | %       |  | %     
|                                                                                       
|Profitability ratios:                                                                   |  |         |  |         |  |       
|Return on average total
    assets(1)                                                   |  | 0.03    |  | 0.21    |  | (0.03)
|Return on average ordinary
    shareholders
    funds(2)                               |  | 2.20    |  | 19.56   |  | (1.17)
|Return on average risk weighted
    assets(3)                                           |  | 0.11    |  | 0.75    |  | (0.09)
|Net interest
    margin(4)                                                              |  | 1.19    |  | 1.19    |  | 1.36  
|PFS trading cost income
    ratio(5)                                                    |  | 55.5    |  | 61.3    |  | 70.10 
|Capital ratios:                                                                         |  |         |  |         |  |       
|Average ordinary shareholders
    funds as a percentage of average total
    assets(9) |  | 1.54    |  | 1.07    |  | 2.23  
|Risk asset ratios:                                                                      |  |         |  |         |  |       
|Total                                                                                   |  | 12.6    |  | 12.5    |  | 12.0  
|Tier 1                                                                                  |  | 8.0     |  | 10.0    |  | 10.4  
|Ratio of earnings to fixed
    charges:(6)                                              |  |         |  |         |  |       
|Excluding interest on retail
    deposits                                               |  | 122.57  |  | 121.45  |  | 100.77
|Including interest on retail
    deposits                                               |  | 109.70  |  | 108.52  |  | 100.38
|                                                                                       

|                                                                               |  |              |  |          |  |            |  |          |  |        
|------------------------------------------------------------------------------ |  | ------------ |  | -------- |  | ---------- |  | -------- |  | -------
|                                                                               |  | 2006(7), (8) |  | 2005(10) |  | 2004       |  | 2003     |  | 2002   
|Selected US GAAP financial statistics                                          |  | %            |  | %        |  | %          |  | %        |  | %      
|                                                                              
|Return on average total
    assets(1)                                          |  | 0.08         |  | 0.12     |  | (0.01)     |  | (0.06)   |  | (0.75) 
|Return on average equity
    shareholders
    funds(2)                        |  | 3.69         |  | 5.16     |  | (0.38)     |  | (2.14)   |  | (20.17)
|Dividends as a percentage of net
    income                                    |  | 139.88       |  | 20.16    |  | (4,375.00) |  | (233.33) |  | (56.50)
|Average equity shareholders
    funds as a percentage of average total assets |  | 2.13         |  | 2.36     |  | 2.73       |  | 2.99     |  | 3.71   
|                                                                              

|                                            |  |        |  |        |  |        |  |        |  |       
|------------------------------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|                                            |  | Number |  | Number |  | Number |  | Number |  | Number
|                                           
|Ratio of earnings to fixed charges:
    (6) |  |        |  |        |  |        |  |        |  |       
|Excluding interest on retail
    deposits   |  | 1.16   |  | 1.32   |  | 0.94   |  | 1.22   |  | 0.98  
|Including interest on retail
    deposits   |  | 1.07   |  | 1.13   |  | 0.97   |  | 1.13   |  | 0.99  
|                                           



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.  | The PFS trading cost income ratio is defined as trading expenses
    divided by trading income of the Personal Financial Services
    businesses. A discussion and analysis of the trading adjustments
    is contained in Other Material Items- Adjustments between the
    statutory basis and the trading basis on pages 21 to 23.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|6.  | For the purpose of calculating the ratios of earnings to fixed
    charges, earnings consist of profit on continuing operations
    before tax 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|7.  | In the third quarter of 2006 Abbey sold its life insurance
    business. A description of the transaction, and an analysis of
    the results of the life insurance business is disclosed in
    Note 12 of the Consolidated Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|8.  | On 31 December 2006 Abbey adopted, SFAS 158
    Employers Accounting for Defined Benefit Pension and
    Other Postretirement Plans which required Abbey to
    recognise the underfunded status of its defined benefit
    postretirement plans as a liability in the statement of
    financial position. Prior to the adoption of SFAS 158,
    Abbey recognised under US GAAP an additional minimum pension
    liability to the extent that the value of benefits accrued based
    on employee service up to the balance sheet date (the
    accumulated benefit obligation) exceeded the value of plan
    assets, and the excess was greater than any accrual already
    established for unfunded pension costs. The transitional
    adjustment required on adoption of SFAS 158 was recorded as
    an adjustment to the 2006 year-end balance of accumulated
    other comprehensive income. Further disclosures are contained in
    Note 57 of the Consolidated Financial Statements.
|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.                                                                                                                                                                                                                                                                                                                                                                                     

162



---



##### 

Selected financial data

Selected financial datacontinued

Exchange rates

The following tables set forth, for the periods indicated,
certain information concerning the exchange rate for pounds
sterling based on the noon buying rate in New York City for
cable transfers in foreign currencies, as certified for customs
purposes by the Federal Reserve Bank of New York, expressed in
US dollars per £1.00. No representation is made that
amounts in pounds sterling have been, could have been or could
be converted into US dollars at the noon buying rate or at any
other rate. The noon buying rate for US dollars on
12 March 2007 was $1.96.

|                         |  |        |  |        |  |            |  |           
|------------------------ |  | ------ |  | ------ |  | ---------- |  | ----------
|                         |  | High   |  | Low    |  | Average(1) |  | Period end
|Calendar period          |  | $ Rate |  | $ Rate |  | $ Rate     |  | $ Rate    
|                        
|Years ended 31 December: |  |        |  |        |  |            |  |           
|2006                     |  | 1.98   |  | 1.73   |  | 1.84       |  | 1.96      
|2005                     |  | 1.93   |  | 1.72   |  | 1.81       |  | 1.72      
|2004                     |  | 1.95   |  | 1.75   |  | 1.84       |  | 1.78      
|2003                     |  | 1.78   |  | 1.55   |  | 1.64       |  | 1.78      
|2002                     |  | 1.61   |  | 1.41   |  | 1.51       |  | 1.61      
|Months ended:            |  |        |  |        |  |            |  |           
|March
    2007(2)        |  | 1.96   |  | 1.92   |  | 1.93       |  | 1.96      
|February 2007            |  | 1.97   |  | 1.94   |  | 1.96       |  | 1.94      
|January 2007             |  | 1.98   |  | 1.93   |  | 1.96       |  | 1.96      
|December 2006            |  | 1.98   |  | 1.95   |  | 1.96       |  | 1.96      
|November 2006            |  | 1.97   |  | 1.89   |  | 1.91       |  | 1.97      
|October 2006             |  | 1.91   |  | 1.85   |  | 1.88       |  | 1.91      
|                        





163



---



##### 

Shareholder Information





Dividend and Share Information

US Dollar-denominated preference shares and American
Depositary Shares

The call feature on all of the outstanding Series B
non-cumulative dollar-denominated preference shares was
triggered on 24 October 2006 and those
US Dollar-denominated preference shares were called on
9 November 2006. As at 31 December 2006, Abbey
therefore had no dollar denominated preference shares
outstanding.

Sterling-denominated preference shares.

At 31 December 2006, Abbey National plc had
outstanding 325,000,000 sterling denominated preference shares,
nominal value of £1.00 each. The sterling denominated
preference shares were issued on 23 October 1995,
13 February 1996 and 9 June 1997. Currently, the only
trading market for these sterling denominated preference shares
is the London Stock Exchange.

Major shareholders

As at 31 December 2006, Abbey National plc was a
wholly owned subsidiary of Banco Santander Central
Hispano, S.A. The acquisition was effected by means of a
scheme of arrangement under Section 425 Companies Act on
12 November 2004. The ordinary shares in Abbey National plc
were cancelled and holders of Abbey National plc shares who were
on the register at 4.30pm on 12 November 2004 received one
Banco Santander Central Hispano, S.A. share for each Abbey
National plc share.

Exchange controls

There are no UK laws, decrees or regulations that restrict
Abbeys export or import of capital, including the
availability of cash and cash equivalents for use by Abbey, or
that affect the remittance of dividends or other shareholder
payments to non-UK Holders of Abbey National plc shares, except
as outlined in the section on Taxation.

164



---



##### 

Shareholder Information





Risk Factors

An investment in Abbey involves a number of risks, the material
ones of which are set forth below.

Risks concerning enforcement of judgements made in the United
States

Abbey is a public limited company incorporated in England and
Wales. All of Abbeys Directors live outside the United
States. As a result, it may not be possible to serve process on
such persons or Abbey in the United States or to enforce
judgements obtained in US courts against them or Abbey
based on the civil liability provisions of the US federal
securities laws or other laws of the United States or any state
thereof.

The Directors Report on pages 58 to 63 has been prepared
and presented in accordance with and in reliance upon English
company law and the liabilities of the Directors in connection
with that Report shall be subject to the limitations and
restrictions provided by such law. Under the UK Companies Act
2006, a new safe harbour limits the liability of Directors in
respect of statements in and omissions from the Directors
Report on pages 58 to 63, under English law the Directors
would be liable to the company (but not to any third party) if
the Directors Report contains errors as a result of
recklessness or knowing misstatement or dishonest concealment of
a material fact, but would not otherwise be liable.

Risks concerning borrower credit quality and general economic
conditions are inherent in Abbeys business

Risks arising from changes in credit quality and the
recoverability of loans and amounts due from counterparties are
inherent in a wide range of Abbeys businesses. Adverse
changes in the credit quality of Abbeys borrowers and
counterparties or a general deterioration in UK or global
economic conditions, or arising from systemic risks in the
financial systems, could reduce the recoverability and value of
Abbeys assets and require an increase in Abbeys
level of provisions for bad and doubtful debts. Deterioration in
the UK economy could reduce the profit margins for Abbeys
banking and financial services businesses. See Risk
management for a discussion of these items.

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

The most significant market risks Abbey faces are interest rate,
foreign exchange and bond and equity price risks.

Changes in interest rate levels, yield curves and spreads may
affect the interest rate margin realised between lending and
borrowing costs. Abbeys interest rate spread was broadly
flat during the year. Should interest rate spreads decrease,
this could adversely affect Abbeys profit from banking
operations.

Changes in currency rates, particularly in the sterling-dollar
and sterling-euro exchange rates, affect the value of assets and
liabilities denominated in foreign currencies and affect
earnings reported by Abbeys non-UK businesses.

The performance of financial markets may cause changes in the
value of Abbeys investment and trading portfolios. In
addition, Abbey is exposed to changes in the equity markets
through its final salary pension scheme (closed to new entrants
in 2002). Abbey has implemented risk management methods to
mitigate and control these and other market risks to which Abbey
is exposed. However, it is difficult to predict with accuracy
changes in economic or market conditions and to anticipate the
effects that such changes could have on Abbeys financial
performance and business operations. See Risk
Management for a discussion of these risks.

Operational risks are inherent in Abbeys business

Abbeys businesses depend on the ability to process a large
number of transactions efficiently and accurately. Losses can
result from inadequate or failed internal control processes,
people and systems, or from external events that interrupt
normal business operations. See Risk
Management  Operational risk.

Abbeys businesses are subject to substantial
legislation, regulatory and governmental oversight

Abbey is subject to financial services laws, regulations,
administrative actions and policies in each location in which
Abbey operates and, indirectly, in Spain, as a result of being
part of Santander. Changes in supervision and regulation, in
particular in the UK, which are beyond our control, could
materially affect Abbeys business, the products and
services offered and the value of assets as well as our
operations. Although Abbey works closely with its regulators and
continually monitors the situation, future changes in
regulation, fiscal or other policies can be unpredictable and
are beyond the control of Abbey. No assurance can be given
generally that laws or regulations will be adopted, enforced or
interpreted in a manner which will not have an adverse effect on
Abbeys business.

The resolution of a number of issues, including regulatory
investigations and reviews, affecting the UK financial services
industry, including Abbey, could have a negative impact on
Abbeys results on operations or on its relations with some
of its customers and potential customers.

Risks associated with strategic decisions regarding organic
growth, the competitive environment and potential acquisitions
and disposals

Abbey devotes substantial management and planning resources
developing strategic plans for organic growth and identifying
possible acquisitions and disposals and the restructuring of
Abbeys businesses. If the outcome of these plans do not
match expectations, Abbeys earnings may not develop as
forecast. In addition, the market for UK financial services and
the other markets within which Abbey operates are highly
competitive; Abbeys ability to generate an appropriate
return depends significantly upon managements response to
the competitive environment. See Business
Overview  Competition for additional
information.

165



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##### 

Shareholder Information





Taxation for US Investors

The following is a summary, under current law, of the principal
UK and US federal income tax considerations relating
to the beneficial ownership by a US taxpayer of the
Series B Non-cumulative Dollar-denominated preference
shares, or the American Depositary Shares (ADSs) representing an
interest in such preference shares, the 7.25% Perpetual
Subordinated Capital Securities or the 7.375% Perpetual
Subordinated Capital Securities. The following summary is
provided for general guidance and does not address investors
that are subject to special rules or that do not hold the
preference shares or the perpetual securities as capital assets.
US residents should consult their local tax advisers,
particularly in connection with potential liability to pay
US taxes on disposal, lifetime gift or bequest of their
preference shares or perpetual securities.

If you hold preference shares through ADSs, you generally will
be treated as owning the underlying preference shares for US
federal income tax purposes, and deposits and withdrawals of
shares in exchange for ADSs generally will not be taxable events
for such purposes.

United States tax status of perpetual securities

For US federal income tax purposes, the perpetual securities
will be treated as equity of the issuer, and payments of
interest on the securities will be treated as dividends.

United Kingdom taxation on dividends

Under UK law, income tax is not withheld from dividends paid by
UK companies. Shareholders, whether resident in the UK or not,
receive the full amount of the dividend actually declared.

United States taxation on dividends

If you are a shareholder resident in the US, cash dividends up
to the amount of our earnings and profits for US federal income
tax purposes will be dividend income, which must be included in
income on the date that you or the ADS depository receives them.
In accordance with their treatment as dividends for US federal
income tax purposes, interest payments on the perpetual
securities generally will be includible in your income on the
date of receipt without regard to your method of tax accounting.

Dividends received by an individual during taxable years before
2011 will be taxed at a maximum rate of 15%, provided that the
individual has held the shares unhedged for more than
60 days during the 121-day period beginning 60 days
before the ex-dividend date, that Abbey National plc is a
qualified foreign corporation and certain other conditions are
satisfied. Abbey National plc is a qualified foreign corporation
for this purpose. Dividends received by an individual for
taxable years after 2010 will be subject to tax at ordinary
income rates. The dividend is not eligible for the dividends
received deduction allowable to corporations. The dividend is
foreign source income for US foreign tax credit purposes.

Any portion of the dividend that exceeds our US earnings and
profits is subject to different rules. This portion is a
tax-free return of capital to the extent of your basis in
Abbeys shares or perpetual securities, and thereafter is
treated as a gain on a disposition of the shares or perpetual
securities.

United Kingdom taxation on capital gains

Under UK law, when you sell shares you may be liable to pay
either capital gains tax or corporation tax on chargeable gains.
However if you are either:

>
    an individual who is neither
    resident nor ordinarily resident in the UK; or>
    a company which is not resident
    in the UK;you will not be liable to UK tax on any capital gains made on
disposal of your shares. The exception is if the shares are held
in connection with a trade or business that is conducted in the
UK through a branch or agency (for capital gains tax purposes)
or a permanent establishment (for corporation tax purposes).

United States taxation of dispositions

Dispositions of shares or perpetual securities by you generally
will give rise to capital gain or loss, which will be long-term
capital gain or loss, subject to taxation at reduced rates for
non-corporate taxpayers, if the shares or perpetual securities
were held for more than one year.

In accordance with the treatment of the perpetual securities as
equity for US federal income tax purposes, you generally will
not be required to account separately for accrued interest
realised upon a disposition of the securities, and instead will
treat amounts received in respect of accrued interest as part of
the amount realised for purposes of determining gain or loss
realised upon the disposition.

United Kingdom inheritance tax

Under the current estate and gift tax convention between the US
and the UK, shares held by an individual shareholder who is:

>
    domiciled for the purposes of the
    convention in the US; and>
    is not for the purposes of the
    convention a national of the UK;will not be subject to UK inheritance tax on:

>
    the individuals death; or>
    on a gift of the shares during
    the individuals lifetime.The exception is if the shares are part of the business property
of a permanent establishment of the individual in the UK or, in
the case of a shareholder who performs independent personal
services, pertain to a fixed base situated in the UK.

166



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##### 

Contact Information

Abbey National plc registered and principal office and
investor relations department

Abbey National House,

2 Triton Square,

Regents Place

London

NW1 3AN

Registered Number 2294747

Registered in England and Wales

Santander shareholder department

Santander

Santander House

100, Ludgate Hill

London

EC4M 7NJ

Phone numbers

Abbey Switchboard

+44 (0) 870-607-6000

Santander Shareholder Services

+44 (0) 870-532-9430

Documents on display

Abbey is subject to the information requirements of the US
Securities and Exchange Act 1934. In accordance with these
requirements, Abbey files its Annual Report and other related
documents with the SEC. These documents may be inspected by US
investors at the SECs public reference rooms, which are
located at 100 F Street, NE, Room 1580, Washington, DC
20549-0102. Information on the operation of the public reference
rooms can be obtained by calling the SEC on 1-202-551-8090 or by
looking at the SECs website at www.sec.gov.

Corporate Governance

A disclosure of the difference between the corporate governance
rules applicable to Abbey and the NYSE corporate governance
rules is available on our website at www.abbey.com>About
Abbey>General Information>Our Policies>Corporate
Governance>NYSE Corporate Governance.

Memorandum and Articles of Association

Pursuant to the requirements of Item 10(B) of
Form 20-F, the
following is a summary of the Memorandum and Articles of
Association of Abbey National plc.

Abbey is a public company registered in England and Wales,
registered number 2294747. Abbeys objects and
purposes are set out in the Memorandum and Articles of
Association. These include the power to carry on financial
business and financial operations as well as a wide range of
other specified powers and an overarching power to carry on any
business or activity which the Board of Directors believes will
enhance the value or profitability of the business of Abbey.

Subject to certain exceptions, as permitted by English law, no
director may vote, or be counted in the quorum for a Board
meeting in relation to any resolution concerning his own
appointment or the terms of his appointment, or in respect of
any contract in which he has a material interest.

The Remuneration Committee (a committee of the Board
consisting of at least three non-executive directors) has
been constituted pursuant to the Memorandum and Articles of
Association to recommend and approve executive directors
remuneration.

The Board may exercise all the powers of Abbey to borrow money
and to mortgage or charge all or any part of Abbey or to issue
debentures and other securities whether outright or as
collateral security.

A director has to leave office at the Annual General Meeting
following his or her
70th birthday,
although that director may be reappointed at that Annual General
Meeting.

No share ownership is required for a director to qualify.

Preference shares

Preference shares entitle the holder to receive a preferential
dividend payment at a fixed or variable rate, such dividend to
be payable on a date determined by the Board prior to the
allotment of the shares. The Board will also determine whether
these dividend rights are cumulative or
non-cumulative. If
dividends are unclaimed for twelve years, the right to the
dividend ceases.

The holders of any series of preference shares will only be
entitled to receive notice of and to attend any general meeting
of Abbey if the preference dividend on the preference shares of
such series has not, at the date of the notice of the Annual
General Meeting, been paid in full in respect of such dividend
periods as the Board may (prior to allotment) determine, in
which case the holders of the preference shares will be entitled
to speak and/or vote upon any resolution proposed; or, if a
resolution is proposed at the Annual General Meeting, for, or in
relation to, the winding-up of Abbey; or varying, altering or
abrogating any of the rights, privileges, limitations or
restrictions attached to the preference shares of such series,
in which case the holders of the preference shares of such
series will be entitled to speak and/or vote only upon such
resolution; or in such other circumstances, and upon and subject
to such terms, as the Board may determine prior to allotment.

167



---



##### 

Contact Informationcontinued

If Abbey commences liquidation, the liquidator may, with the
sanction of a special resolution and any other sanction required
by the Companies Acts:-

>
    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.Unless the Board determines, prior to allotment, that the series
of preference shares shall be non-redeemable, each series shall
be redeemable at the option of Abbey on any date falling not
earlier than five years and one day after the date of allotment.
On redemption Abbey shall pay the amount due. The formula for
calculation of any relevant redemption premium is set out in the
Memorandum and Articles of Association.

There are no sinking fund provisions. Where the preference
shares are partly paid, the Board may make further calls upon
the holders. There are no provisions discriminating against any
existing or prospective shareholder as a result of such
shareholder owning a substantial number of shares.

Ordinary Shares

Dividends are payable to the holders of ordinary shares. These
ordinary shares are transferable. If dividends are unclaimed for
twelve years, the right to the dividend ceases.

Subject to any special terms as to voting upon which any
ordinary shares may be issued or may for the time being be held
or any suspension or any abrogation of voting rights as set out
in the Memorandum and Articles of Association, on a show of
hands every member who is present in person at a Annual General
Meeting of Abbey shall have one vote, and on a poll every member
who is present in person or by proxy shall have one vote for
every share of which he is the holder.

Subject to the prior rights of holders of preference shares,
Abbey pays dividends on its ordinary shares only out of its
distributable profits and not out of share capital. Dividends
are determined by the Board.

If Abbey commences liquidation, the liquidator may, with the
sanction of a special resolution and any other sanction required
by the Companies Acts:-

>
    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.Abbeys Memorandum and Articles of Association authorise it
to issue redeemable shares, but Abbeys ordinary shares are
not redeemable. There are no sinking fund provisions. The Board
may from time to time make calls upon the members in respect of
any monies unpaid on their shares. There are no provisions
discriminating against any existing or prospective shareholder
as a result of such shareholder owning a substantial number of
ordinary shares.

Subject to the provisions of the Companies Acts, all or any of
the rights attached to any class of shares (whether or not Abbey
is being wound up) may be varied with the consent in writing of
the holders of not less than three-fourths in nominal value of
the issued shares of that class or with the sanction of an
extraordinary resolution passed at a separate Annual General
Meeting of the holders of those ordinary shares. Additional
quorum and voting requirements apply to such meeting.

Abbeys Memorandum and Articles of Association provide that
an Annual General Meeting must be held each year and not more
than 15 months after the previous one. Twenty-one days
written notice is required to be given.

All other meetings are Extraordinary General Meetings and may be
called by the Board or by shareholders holding at least
one-tenth of the paid up share capital carrying voting rights at
Annual General Meetings. In addition, shareholders holding at
least 95% in nominal value of shares carrying voting rights at
Annual General Meetings may require directors to call an
Extraordinary General Meeting. The notice period depends on the
resolutions to be put to the meeting and will be either 14 or
21 days.

There are no restrictions on the rights to own securities for
either resident or non-resident shareholders, other than those
to which they may be subject as a result of the laws and
regulations in their home jurisdiction.

There are no provisions that would have the effect of delaying,
deferring or preventing a change in control of Abbey that would
operate only with respect to a merger, acquisition or corporate
restructuring.

There are no provisions governing the ownership threshold above
which shareholder ownership must be disclosed.

There are no conditions governing changes in capital in the
Memorandum and Articles of Association which are more stringent
than those implied by law.

168



---



##### 

Glossary and Definitions





Glossary and Definitions

|                                           |  |                                                                                                                
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------
|Terms used                                 |  | US equivalent or brief description of meaning                                                                  
|                                          
|Accounts                                   |  | Financial statements                                                                                           
|Allotted                                   |  | Issued                                                                                                         
|Attributable profit                        |  | Net income                                                                                                     
|Balance sheet                              |  | Statement of financial position                                                                                
|Bills                                      |  | Notes                                                                                                          
|Called up share capital                    |  | Ordinary shares or common stock and
    preferred stock, issued and fully paid                                 
|Capital allowances                         |  | Tax depreciation allowances                                                                                    
|Combined Code                              |  | UK-derived principles of good
    corporate governance and code of best practice                               
|Creditors                                  |  | Payables                                                                                                       
|Current account                            |  | Checking account                                                                                               
|Dealing                                    |  | Trading                                                                                                        
|Debtors                                    |  | Receivables                                                                                                    
|Deferred tax                               |  | Deferred income tax                                                                                            
|Depreciation                               |  | Write-down of tangible fixed assets
    over their estimated useful lives                                      
|Fees and commissions payable               |  | Fees and commissions expense                                                                                   
|Fees and commissions receivable            |  | Fees and commissions income                                                                                    
|Finance lease                              |  | Capital lease                                                                                                  
|Freehold                                   |  | Ownership with absolute rights in
    perpetuity                                                               
|Interest payable                           |  | Interest expense                                                                                               
|Interest receivable                        |  | Interest income                                                                                                
|Loans and advances                         |  | Lendings                                                                                                       
|Loan capital                               |  | Long-term debt                                                                                                 
|Long-term assurance fund                   |  | Long-term insurance fund                                                                                       
|Members                                    |  | Shareholders                                                                                                   
|Memorandum and Articles of
    Association |  | Bylaws                                                                                                         
|Net asset value                            |  | Book value                                                                                                     
|Nominal value                              |  | Par value                                                                                                      
|One-off                                    |  | Non-recurring                                                                                                  
|Ordinary shares                            |  | Common stock                                                                                                   
|Overdraft                                  |  | A line of credit established
    through a customers current account and contractually
    repayable on demand
|Preference shares                          |  | Preferred stock                                                                                                
|Premises                                   |  | Real estate                                                                                                    
|Profit                                     |  | Income                                                                                                         
|Provisions                                 |  | Allowances                                                                                                     
|Share capital                              |  | Ordinary shares, or common stock,
    and preferred stock                                                      
|Shareholders funds                        |  | Stockholders equity                                                                                           
|Share premium account                      |  | Additional paid-in capital                                                                                     
|Shares in issue                            |  | Shares outstanding                                                                                             
|Tangible fixed assets                      |  | Property, plant and equipment                                                                                  
|Undistributable reserves                   |  | Restricted surplus                                                                                             
|Write-offs                                 |  | Charge-offs                                                                                                    
|                                          

169



---



##### 

Cross-reference to
Form 20-F





Cross-reference to
Form 20-F

|         |  |                                                                                   |  |                                                                                 |  |               
|-------- |  | --------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- |  | --------------
|Part I   |  |                                                                                   |  |                                                                                
|        
|1        |  | Identity of Directors, Senior
    Management and Advisers                         |  | *                                                                              
|        
|2        |  | Offer Statistics and Expected
    Timetable                                       |  |                                                                                 |  | *             
|        
|3        |  | Key Information                                                                   |  | Selected Financial Data                                                         |  | 160           
|         |  |                                                                                   |  | Capitalisation and Indebtedness                                                 |  | *             
|         |  |                                                                                   |  | Reasons for the Offer and use of
    Proceeds                                   |  | *             
|         |  |                                                                                   |  | Exchange Rates                                                                  |  | 163           
|         |  |                                                                                   |  | Risk Factors                                                                    |  | 165           
|        
|4        |  | Information on the
    Company                                                    |  | History and Development of the
    Company                                      |  | 5             
|         |  |                                                                                   |  | Business Overview                                                               |  | 5             
|         |  |                                                                                   |  | Supervision and Regulation                                                      |  | 64            
|         |  |                                                                                   |  | Organisational Structure                                                        |  | 5             
|         |  |                                                                                   |  | Property, Plant and Equipment                                                   |  | 30, 31        
|        
|4A       |  | Unresolved Staff
    Comments                                                     |  |                                                                                 |  | N/a           
|        
|5        |  | Operating and Financial Review
    and Prospects                                  |  | Operating Results                                                               |  | 10            
|         |  |                                                                                   |  | Liquidity and Capital Resources                                                 |  | 31, 32, 33    
|         |  |                                                                                   |  | Research and Development, Patents
    and Licenses, etc                         |  | N/a           
|         |  |                                                                                   |  | Trend Information                                                               |  | 2             
|         |  |                                                                                   |  | Off-Balance Sheet Arrangements                                                  |  | 32            
|         |  |                                                                                   |  | Contractual Obligations                                                         |  | 34            
|        
|6        |  | Directors, Senior Management and
    Employees                                    |  | Directors                                                                       |  | 55, 56, 57    
|         |  |                                                                                   |  | Compensation                                                                    |  | 60            
|         |  |                                                                                   |  | Board Practices                                                                 |  | 58, 59        
|         |  |                                                                                   |  | Employees                                                                       |  | 61, 62        
|         |  |                                                                                   |  | Share Ownership                                                                 |  | 61            
|        
|7        |  | Major Shareholders and Related
    Party Transactions                             |  | Major Shareholders                                                              |  | 164           
|         |  |                                                                                   |  | Related Party Transactions                                                      |  | 60, 129, 130  
|         |  |                                                                                   |  | Interests of Experts and Counsel                                                |  | *             
|        
|8        |  | Financial Information                                                             |  | Consolidated Statements and Other
    Financial
    Information                 |  | 68            
|         |  |                                                                                   |  | Significant Changes                                                             |  | 9             
|        
|9        |  | The Offer and Listing                                                             |  | Offer Listing and Details                                                       |  | *             
|         |  |                                                                                   |  | Plan of Distribution                                                            |  | *             
|         |  |                                                                                   |  | Markets                                                                         |  | N/a           
|         |  |                                                                                   |  | Selling shareholders                                                            |  | *             
|         |  |                                                                                   |  | Dilution                                                                        |  | *             
|         |  |                                                                                   |  | Expenses of the Issue                                                           |  | *             
|        
|10       |  | Additional Information                                                            |  | Share Capital                                                                   |  | *             
|         |  |                                                                                   |  | Memorandum and Articles of
    Association                                      |  | 167           
|         |  |                                                                                   |  | Material Contracts                                                              |  | 23            
|         |  |                                                                                   |  | Exchange Controls                                                               |  | N/a           
|         |  |                                                                                   |  | Taxation                                                                        |  | 166           
|         |  |                                                                                   |  | Dividends and Paying Agents                                                     |  | *             
|         |  |                                                                                   |  | Statements by Experts                                                           |  | *             
|         |  |                                                                                   |  | Documents on Display                                                            |  | 167           
|         |  |                                                                                   |  | Subsidiary Information                                                          |  | N/a           
|        
|11       |  | Quantitative and Qualitative
    Disclosures about Market Risk                    |  | 45, 46                                                                         
|        
|12       |  | Description of Securities Other
    Than Equity Securities                        |  | Debt Securities                                                                 |  | *             
|         |  |                                                                                   |  | Warrants and Rights                                                             |  | *             
|         |  |                                                                                   |  | Other Securities                                                                |  | *             
|         |  |                                                                                   |  | American Depositary Shares                                                      |  | *             
|        
|Part II  |  |                                                                                   |  |                                                                                
|        
|13       |  | Defaults, Dividend Arrearages
    and Delinquencies                               |  |                                                                                 |  | N/a           
|        
|14       |  | Material Modifications to the
    Rights of Security Holders and Use of Proceeds. |  | N/a                                                                            
|        
|15       |  | Controls and
    Procedures                                                       |  | Disclosure Controls and Procedures                                              |  | 62, 63        
|         |  |                                                                                   |  | Managements Annual Report on
    Internal Control
    over Financial Reporting |  | N/a           
|         |  |                                                                                   |  | Attestation Report of the
    Registered Public                                 |  | N/a           
|         |  |                                                                                   |  | Accounting Firm                                                                 |  |               
|         |  |                                                                                   |  | Changes in Internal Control Over
    Financial Reporting                        |  | 63            
|        
|15T      |  | Controls and
    Procedures                                                       |  |                                                                                 |  | N/a           
|        
|16A      |  | Audit Committee Financial
    Expert                                              |  |                                                                                 |  | 59            
|        
|16B      |  | Code of Ethics                                                                    |  |                                                                                 |  | 62            
|        
|16C      |  | Principal Accountant Fees and
    Services                                        |  |                                                                                 |  | 93            
|        
|16D      |  | Exemptions from the Listing
    Standards for Audit Committees                    |  | *                                                                              
|        
|16E      |  | Purchases of Equity Securities
    by the Issuer and Affiliated Purchasers        |  | N/a                                                                            
|        
|Part III |  |                                                                                   |  |                                                                                
|        
|17       |  | Financial Statements                                                              |  |                                                                                 |  | N/a           
|        
|18       |  | Financial Statements                                                              |  |                                                                                 |  | 68            
|        
|19       |  | Exhibits                                                                          |  |                                                                                 |  | Filed with SEC
|        



170



---



##### 

SIGNATURE

The registrant hereby certifies that it meets all the
requirements for filing on
Form 20-F and that
it has duly caused and authorized the undersigned to sign this
annual report on its behalf.



ABBEY NATIONAL plc

By:
    /s/ António Horta-OsórioAntónio Horta-OsórioChief ExecutiveDate: 15 March 2007



---



##### 

EXHIBIT INDEX

Exhibits*

| |    |    |  |                                                                                                                                
| | -- | -- |  | -------------------------------------------------------------------------------------------------------------------------------
| | 1  | .1 |  | Memorandum and Articles of
    Association of Abbey National plc***                                                            
| | 4  | .1 |  | Sale and Purchase Agreement between
    Abbey National plc, Resolution Life Limited and Resolution plc
    dated 7 June 2006***
| | 7  | .1 |  | Statement of ratio of earning to
    fixed charges**                                                                           
| | 8  | .1 |  | List of Subsidiaries of Abbey
    National plc                                                                                 
| | 12 | .1 |  | CEO Certificate pursuant to Section
    302 of the Sarbanes-Oxley Act of 2002                                                  
| | 12 | .2 |  | CFO Certificate pursuant to Section
    302 of the Sarbanes-Oxley Act of 2002                                                  
| | 13 | .1 |  | Certificate pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002                                                      
| | 15 | .1 |  | Consent of Deloitte & Touche
    LLP**                                                                                         






|    |                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Documents concerning Abbey National plc referred to within the
    Annual Report on
    Form 20-F
    2006 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).                                                                                                                                                                                                   
|   
|*** | As previously filed with the Securities and Exchange Commission
    as an exhibit to Abbey National plcs
    Form 20-F dated
    26 June 2006.