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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 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from  toCommission file number 0-25670
 Abbey National plc  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 registeredNon-cumulative Dollar-denominated Preference
    
    New York Stock Exchange*Shares of nominal value $0.01
each, Series BAmerican Depositary Shares,
    
    New York Stock Exchangeeach representing one Non-cumulativeDollar-denominated Preference Shareof nominal value $0.01, Series B (ANBPRC)7.25% Perpetual Subordinated Capital Securities
    
    New York Stock Exchange(SXA)7.375% Perpetual Subordinated
Capital Securities
    
    New York Stock Exchange(SXP)
    Securities registered or to be registered pursuant to Section 12(g) of
the Act. None Indicate the number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report. Ordinary Shares of nominal value 10 pence each
    
    
    None10 3/8% 
Non-cumulative Preference Shares of nominal value £1 each
    
    
    200,000,0008 5/8% Non-cumulative Preference Shares of nominal value £1 each
    
    
    125,000,0007 3/8% Non-cumulative Dollar-denominated Preference Shares of nominal value
$0.01 each, Series B
    
    
    18,000,000
   Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ            No o Indicate by check mark
which financial statement item the registrant has elected to follow. Item 17 o            Item 18 þ




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Contents Business Review and Forward-looking StatementsChairmans Statement
    
    
    2Chief Executives Review
    
    
    3Forward-looking Statements
    
    
    6Operating and Financial ReviewBusiness Overview
    

    
    7Operating Review  Summary
    
    
    11Operating Review  Personal Financial Services
    
    
    19Operating Review  Portfolio Business Unit
    
    
    38Other Material Items
    
    
    43Balance Sheet Operating Review
    
    
    47Risk Management
    
    
    70Report of the DirectorsDirectors
    
    
    80Directors Report
    
    
    83Supervision and Regulation
    
    
    92Financial StatementsIndependent Auditors Report to the Members of Abbey National plc
    
    
    97Primary Financial Statements
    
    
    98Accounting Policies
    
    
    103Notes to the Financial Statements
    
    
    109Five Year Record
    
    
    195Shareholder InformationDividend and Share Information
    
    
    199Risk Factors
    
    
    201Taxation for US Investors
    
    
    202Contact Information
    
    
    203Glossary and Definitions
    
    
    205Cross-reference to Form 20-F
    
    
    206Memorandum and Articles of Association of Abbey National plcList of Subsidiaries of Abbey National plcCEO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002CFO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Consent of Deloitte & Touche LLP
  (ABBEY LOGO) 1




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Business Review and Forward-looking statements 
 Chairmans Statement This was a year of unprecedented change for Abbey National plc (Abbey) culminating in the
acquisition of Abbey by Banco Santander Central Hispano, S.A. The offer was recommended by the
Boards of both companies and it became effective on 12 November 2004. 2004 was the second year of a three-year turnaround plan involving a significant amount of
reorganisation across the whole company - particularly in the first six months. At the same time
we - like our peers - have had to prepare for and implement significant regulatory changes
including rules governing mortgage lending. In addition, Abbey and its people also had to cope
with the uncertainty and extra demands arising from the takeover activity. Given these challenges, Abbey produced a resilient set of results. At the start of 2004, I
said that we had to be able to show tangible evidence of progress - both for our customers and our
shareholders. For our customers we have improved the quality of the service and products that we
offer - but accept that we can and must do better. For our shareholders, the value of the Banco
Santander Central Hispano, S.A. offer represented a premium of circa 38% compared to the average
share price in the three months prior to announcing the deal - and subsequently the strong
performance in the Banco Santander Central Hispano, S.A. share price to the date of this report has
increased this value further. Abbey returned to profit in 2004 after two successive years of losses even after incurring a
further £564m of reorganisation costs and post acquisition charges. The risks within the Portfolio
Business Unit have been substantially removed - and we have reached agreement with the Financial
Services Authority in relation to the closed with-profits funds. There have been a number of changes to the management team since the completion of the sale of
Abbey. Francisco Gómez-Roldán, formerly Finance Director of Banco Santander Central Hispano, S.A.,
is Abbeys new Chief Executive. Francisco has held various senior posts with Banco Santander
Central Hispano, S.A., including key roles in turning around the performance of two Spanish banks,
Banesto and Argentaria. Since his appointment we have restructured the board - introducing a
simpler structure with clearer lines of responsibility with increased prominence to risk and
compliance. In February, Graeme Hardie, former Head of NatWest Retail Banking, joined the Board as
Executive Director, Sales and Marketing, and in May, Paul Bradshaw
joined Abbey as Head of Insurance and Asset
Management. Nathan Bostock also joined the Board as Executive Director, Finance
and Markets. We also have a new non-executive director team - with Keith Woodley and myself being
joined by a number of highly experienced individuals from Banco Santander Central Hispano, S.A.,
and Andrew Longhurst, former Chairman of Cheltenham & Gloucester. I expect 2005 to be a good year for Abbey. I continue to be impressed by our people, and
their resilience and willingness to rise to the challenge. We have clear priorities for 2005, set
around cost reduction and sales productivity, whilst maintaining a strong focus on risk and
compliance. Although there are still challenges ahead, and we will have to make some tough decisions, we
are now in a strong position with the support of Grupo Santander to reaffirm Abbeys position as
one of the leading banks in the UK. Lord Burns, Chairman 2




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Business Review and Forward-looking Statements 
 Chief Executives Review Overview Abbey returned to profit, with resilient results given a year of change, and the impact of takeover
activity on the business in the second half. Abbey is now emerging from a period of significant
disruption, having tackled and removed serious risks that threatened the companys prospects and
future. There remains huge potential in Abbeys core retail banking franchise  with about 18 million
customers, the Abbey brand and strong market positions  there is scope for Abbey to reverse the
underperformance in recent years and reaffirm its position as a leader in personal financial
services in the UK. We need to do more with our existing customers  both in terms of retention
and cross-selling more products that meet their needs. On 12 November 2004, the acquisition of Abbey by Banco Santander Central Hispano, S.A. was
completed, making Abbey an important part of one of the largest global banking groups in the world.
Abbeys focus, like that of Grupo Santander is retail banking  working hard at the basics and
aiming to improve sales and revenue performance across all our sales channels. At Executive level,
we are completing a top class team and are confident we will demonstrate good progress throughout
2005. Key financial highlights: >
    
    statutory profit before tax of £273m (2003: a loss of £(686)m), and a profit attributable to ordinary
shareholders of £32m (2003: a loss of £(759)m);>
    
    statutory profit before tax for Personal Financial Services of £250m (2003: £235m);>
    
    trading profit before tax for Personal Financial Services of £814m compared with £1,021m in 2003, with the
decline largely attributable to a narrowing of the Personal Financial Services Spread by 30 basis points;>
    
    excluding restructuring charges, trading cost growth was restrained to below inflation;>
    
    credit quality remains excellent, with no significant signs of deterioration on either the secured or unsecured
loan portfolios;>
    
    a Personal Financial Services trading cost:income ratio of 61.5% and return on equity of 12.1%;>
    
    non-trading charges of £564m include £321m of reorganisation costs incurred through 2004, and a further £243m of
post-acquisition charges;>
    
    total customer loans of £94.3bn, up 4% on last year;>
    
    the Portfolio Business Unit assets have further reduced by 62% to £4.7bn, now less than 10% of the original
£60bn, and a statutory profit reported for 2004; and>
    
    capital ratios remain strong, with an equity tier 1 ratio of 7.0%.
 New business flows in 2004 were mixed, with mortgage new business and investment sales lower than
in 2003, but with a turnaround in savings inflows building momentum, and good performances in terms
of unsecured lending and bank account openings. During the latter part of 2004 signs of revenue stabilisation have been apparent, but the
outlook on revenues for 2005 remains tough. Against this backdrop we will work to improve sales
productivity while at the same time reducing costs. Rebranding: In February, we also announced the alignment of the Abbey corporate identity with the global
identity used by Grupo Santander across 40 countries. The familiar Abbey brand name will continue
to be used with Grupo Santanders flame symbol, showing that Abbey is now part of a strong and
dynamic group. The focus on improving the customer experience remains  we want to make banking an
easier and better experience. Strategic Outline Priorities for 2005: >
    
    improving sales performance and productivity;>
    
    stabilising revenue trends in mortgages and savings, and
positioning the Personal Financial Services business for
revenue growth in 2006;>
    
    significant cost base reductions; and>
    
    maintaining a strong focus on risk and compliance.
 3




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Business Review and Forward-looking Statements Chief Executives Review Improving sales performance and productivity: Key to unlocking the potential in the Abbey customer franchise is improving sales performance and
productivity across all sales channels  branch, telephone, electronic and intermediary. Work is underway to: >
    
    increase the number and quality of customer-facing employees;>
    
    introduce a new incentive scheme more closely linked to performance and quality of service;>
    
    introduce new minimum sales performance standards;>
    
    improve local management information, particularly in branches, to increase local accountability;>
    
    rebrand and refurbish branches, commencing from May; and>
    
    ensure that all call centres can advise and sell across a wider range of Personal Financial Services products  with
a seamless link with the branches to assist in terms of retention.
 The intermediary channel remains an important part of Abbeys plans for delivering growth, with the
priority on improving service levels, particularly for our main Independent Financial Adviser
relationships, including enhancing our online capability and tailoring products exclusively for the
Independent Financial Adviser channel. Revenues: In 2005, the aim is to stabilise mortgage and savings income, with retaining existing customers a
key driver of value. In terms of new business we are targeting an improvement in mortgage sales
trends through all channels. In the future, Abbey will compete more effectively in its core
markets, and over the next 18 months, we will continue to develop higher margin products such as
large loans, buy-to-let and new build. In savings, the focus continues to be to rebuild the profitable branch-based franchise, in
addition to using electronic channels. Outside mortgages and savings, improvements are expected in 2005 across most product areas. In
particular, we expect to make progress in rebuilding investment sales with the first step being a
new range launched in March, focusing on capital guaranteed offers that use our structuring
capability in Abbey Financial Markets. We are also developing plans to boost our unsecured
lending, general insurance and Small and Medium Enterprise operations. Tackling the cost base: The first phase of work to reduce Abbeys cost base is underway, including: >
    
    removing 4,000 roles by the end of the year. The vast majority of the roles removed to date relate to back-office
functions without affecting our risk and compliance capability;>
    
    cancellation of 60% of projects, that do not relate to Partenon, Grupo Santanders
information technology platform. This is without damaging revenue prospects; and>
    
    introduction of a new management team with specific responsibility to control the cost base.
 In 2005, the programme of site rationalisation will be accelerated, focusing on reducing the number
of call centres in the UK (currently 25), and supported by the development of a single telephony
platform. The other component of the first phase of cost reduction involves a project spanning 10
workstreams focusing on business and process re-engineering, with benefits expected to increase
from 2006. The second phase of cost reduction involves the rollout, from late in 2006, of Partenon, and
detailed plans are now in place. Measuring Abbeys progress: We remain confident of achieving the published revenue and cost synergies: >
    
    £150m of revenue synergies by 2007 with momentum from 2006; and>
    
    a run-rate of £200m gross cost savings by the end of 2006, rising to £300m by 2007.
 During the course of 2005 we expect to be able to demonstrate evidence of: >
    
    increased numbers of customer facing staff;>
    
    increased staffing levels dedicated to sell;>
    
    reduced new joiner staff turnover;>
    
    improved sales performance across all channels;>
    
    improved market share trends across the range of Personal Financial Services products;>
    
    successful product launches;>
    
    further site closures; and>
    
    4,000 roles removed across the business.
 In terms of financial performance during 2005, we are targeting to: >
    
    stabilise Personal Financial Services trading revenue trends on an underlying basis;>
    
    accelerate cost savings, with a cost reduction in 2005 of £150m instead of the £100m originally targeted; and
 4




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Business Review and Forward-looking Statements Chief Executives Review >
    
    reduce reorganisation charges, which will be in line with previous
guidance of circa £150m per year, in addition to which, there will be
some ongoing spend associated with regulatory change.
 2004 marked the year that Abbey returned to profit. This business has huge potential. We can now
realise this using Santanders strength and placing a strong emphasis on execution. Francisco Gómez-Roldán
Chief Executive 5




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Business review and forward-looking statements 
 Forward-looking statements Abbey may from time to time make written or oral forward-looking statements. 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. 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, and plans 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 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. These factors 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 Abbey does not undertake any
obligation to update or revise any of them, whether as a result of new information, future events
or otherwise. 6




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Operating and Financial Review 
 Business Overview This section 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 6. General Abbey National plc (Abbey) and its subsidiaries operate primarily in the UK, and from 12
November 2004 form part of Grupo Santander. Abbey is a significant financial services provider in
the UK, being the second largest residential mortgage lender, third largest savings brand, and
operates across the full range of personal financial services serving circa 18 million customers.
Grupo Santander is Europes largest banking group with 5,900 branches in 15 countries and is one of
the worlds 10 largest banks by market capitalisation. The principal executive office and the registered office of Abbey National plc and Abbey
National Treasury Services plc is Abbey 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 National plc in the United States is CT Corporation System, with offices at 111 Eighth
Avenue, New York, NY 10011. Please see Operating and Financial review  Tangible fixed assets for
further information regarding Abbeys properties. Summary history of Abbey National plc 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
we use in this Annual Report and Accounts. During 2004, Abbey was acquired by Banco Santander
Central Hispano, S.A. The transaction was recommended by the Board of Abbey, and via a scheme of
arrangement became effective on 12 November 2004. Corporate purpose and strategy Abbeys purpose and goal is to maximise value for the shareholders of Banco Santander Central
Hispano, S.A., focusing on the provision of personal financial services in the UK. Over the last two years, Abbey has made good progress in restructuring the business  exiting
the large majority of £60bn of assets and businesses that were deemed non-core and investing in the
ongoing Personal Financial Services operations. As part of Grupo Santander, this programme will be
accelerated. Priorities for 2005 are delivering material further cost savings, improving sales
productivity in Abbeys sales channels, and positioning the bank for a return to revenue growth. From a Banco Santander Central Hispano, S.A. perspective, the acquisition of Abbey reflects
its confidence in being able to accelerate Abbeys turnaround, as well as providing a platform for
growth in the UK and improving its global diversification and balance. Executive Responsibility Following the completion of the acquisition by Banco Santander Central Hispano, S.A., a new
organisational structure is being implemented with a revised set of executive responsibilities. The new management structure, announced in November 2004, is headed by Francisco Gómez-Roldán
(Chief Executive). Francisco was previously Finance Director of Banco Santander Central Hispano,
S.A., before which he held a variety of other senior positions in Banco Santander Central Hispano,
S.A. The new structure has the following divisions: >
    
    Sales and Marketing- responsible for all direct sales (branches,
telephone, internet banking) and intermediary channels. Also
responsible for marketing including product design and pricing,
branding and advertising. This role combines the previous Customer
Sales and Customer Propositions functions. Graeme Hardie, former head
of Natwest retail customer sales, joined Abbey and was appointed to
the Board in February 2005 to head this division.>
    
    Insurance and Asset Management- responsible for the long-term
savings and general insurance business together with the asset
management activities of the Group. This is a new division reflecting
the importance of these markets to Abbey and is headed by Paul
Bradshaw who joined Abbey in May 2005.>
    
    Manufacturing- responsible for all information technology and
operations activity (including service centres). This is a new
division that combines the previous Customer Operations and
Information Technology divisions, and is headed by Tony Wyatt.>
    
    Finance and Markets- this is a new division that comprises Abbey
Financial Markets, Finance and the Portfolio Business Unit, and is
headed by Nathan Bostock.>
    
    Human Resources- responsible for all human resources strategy and
personnel support. This division is headed by Priscilla Vacassin.>
    
    Risk- responsible for ensuring that the Board and senior management
team of Abbey are provided with an appropriate risk policy and
control framework, and to report any material risk issues to the Risk
Committee and the Board. This division is headed by Ian Jenkins.
 These divisions are supported by four central units  Compliance, Communications, Legal,
Secretariat and Tax, and Strategy and Planning. 7




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Operating and Financial Review Business Overview Competition Competitive environment and future trends Abbeys main competitors are established UK banks, building societies and insurance companies and
other providers such as supermarket chains and large retailers. In recent years, customer access, choice and mobility have all increased, as has the extent of
regulation. The market is competitive, driven largely by market incumbents. Competition outlook Management is confident of Abbeys strength and potential in its core personal financial services
markets, and the potential to improve business performance. Personal Financial Services The overview of Personal Financial Services set out below reflects the reporting structure in
place during 2004 on which the segmental information has been presented. Banking and Savings Residential mortgages Abbey is the second largest provider of residential mortgages in the UK, 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 installments 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
arranged for a 25-year term, with no minimum term. Historically interest on mortgage loans has been
charged at floating 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 for between two and five years, after which they
bear interest at floating rates. In common with the market, an increasing proportion of new business in recent years has been
through trackers that track the Bank of England base rate. More recently, a proportion of new loans
are flexible mortgages, allowing the customer to vary their monthly payments, or take payment
holidays, within predetermined criteria. 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 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 is delivered through its strategic alliance with MBNA
Europe Bank Limited, who are responsible for taking the credit risk and managing the credit card
base on an ongoing basis. Abbey National Offshore Abbey National International Limited, the principal offshore company, uses the Abbey Offshore
brand. Abbey National International Limiteds head office is in Jersey and it has an operational
centre in the Isle of Man. Abbey National International Limiteds focus is on attracting deposits
by offering a range of savings accounts denominated in sterling, US dollars and euro. Cater Allen Limited Cater Allen Limited offers banking services under the trading name Cater Allen Private Bank and
aims to provide a personal banking service to high net worth individuals and small corporate
clients. The bank attracts clients by marketing to introducers, including Independent Financial
Advisers. James Hay James Hay provides and offers administration services for self-invested personal pension schemes
and small self-administered pension schemes. Its services are provided to end customers mainly via
Independent Financial Advisers and branded financial service providers. cahoot cahoot is Abbeys separately branded, e-commerce retail banking and financial services provider.
cahoot targets customers who wish to access banking services either through the internet or
telephone. 8




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Operating and Financial Review Business Overviewcontinued Investment and Protection The UK life insurance industry consists of three principal segments: protection, investment and
savings, and pensions. >
    
    Protection. The traditional form of protection policy, known as term
insurance, provides a lump sum benefit payable on death within a
specified term. Policies are also available to provide protection
against critical illness and disability.>
    
    Investment and savings. Investment bonds, with-profit bonds,
structured products, unit trusts, Individual Savings Accounts and
endowment life insurance policies are included in this category.>
    
    Pensions. In the UK pensions are a tax-efficient way of saving to
provide benefits on retirement. This is a result of the tax
deductibility of contributions made and the generally tax-free growth
granted to pension funds.
 The polarised regime for investment sales is being removed in 2005. Abbey is in the process of
making the mandatory changes to comply with the new regime but will continue to sell only its own
products for the time being while continuing to review the opportunities that depolarisation
presents, for example, gap filling. Abbey National Life, and its related subsidiary companies distribute via the marketing
associate route, whereby the associate is required to recommend the most suitable products from the
product range of the companies for which it acts as associate as well as via the Independent
Financial Adviser route in the UK. Independent Financial Advisers must provide suitable advice on
the complete product range that exists in the market place. Abbey National Life provides a wide range of products including pension, protection and
investment products. The subsidiaries of Abbey National Life are Abbey National Unit Trust Managers Limited which
manages a range of Unit Trusts and Abbey National Personal Equity Plans and Individual Savings
Accounts Managers Limited which manages the Personal Equity Plans and Individual Savings Accounts
businesses of Abbey. The trustees of the unit trusts changed during the last quarter of 2004 from
Citicorp and HSBC to Royal Bank of Scotland Trustee and Depository Services Limited and the
investment manager up to January 2004 was Abbey National Asset Managers. On 22 January 2004 Abbey
announced that it was transferring certain of its fund management activities to a number of
external fund managers. Scottish Mutual Assurance plc distributes principally via the Independent Financial Adviser
route in the UK. Scottish Mutual Assurance plc and its predecessors have been in the insurance
business since 1883. Scottish Mutual provides a broad range of products including personal
pensions, single premium products such as investment bonds annuities and products to cover death,
critical illness and disability. Since the acquisition of Scottish Provident in 2001, its
operations have been combined with Abbeys other life assurance operations, realising cost
synergies. New conventional protection business sold under the Scottish Provident brand in the UK
is written into Scottish Mutual Assurance plc. General Insurance The range of non-life insurance products sold 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 and over the telephone, often at the
same time that a mortgage is being taken out. The business model currently uses a panel of competing insurers to offer a wider choice of
products and more competitive retail pricing. In addition, Capita Eastgate and Cap Gemini are
responsible for the management and development of new systems to support the general insurance
business whilst the servicing of policies was outsourced to Capita Eastgate and some claims
administration to Aviva plc. The process of fully implementing these arrangements and new systems
is nearing completion. During 2004, Abbey ceased offering motor and travel insurance. Abbey Financial Markets (formerly Treasury Services) Abbey Financial Markets is now structured into the following three business areas: Asset and Liability Management Asset and Liability Management is responsible for managing the structural liquidity of the bank.
This includes Abbeys capital management activities and medium and long-term funding, including
Abbeys securitisation programme. It manages Abbeys product and structural exposure to interest
rates and, in that role, is a link between the retail and wholesale banking areas. Asset and
Liability Management helps set and implement Board, Asset and Liability 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. In carrying out its
financing role, it maintains many relationships in the financial world which are utilised by other
parts of the organisation, including the Personal Financial Services businesses and the two
customer-facing Abbey Financial Markets businesses. Derivatives and Structured Products Derivatives and Structured Products cover equity, fixed income and credit derivative activities
including the manufacture of structured products sold to retail customers by Abbey and other
financial services organisations. Short-Term Markets Short-Term Markets is responsible for managing the operating liquidity of the bank. It runs Abbeys
short-term funding and liquidity management activities and the securities lending/borrowing and
repo businesses. Short-Term Markets focuses on managing Abbeys liquidity, within the overall
balance sheet management framework set by Asset and Liability Management, which also creates
trading opportunities. Additionally, Short-Term Markets operates in several international
non-cash markets, in particular the stock borrowing and lending repo markets. It has retained a US
office, to facilitate Abbeys short-term multi-currency fund raising. 9




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Operating and Financial Review Business Overviewcontinued Financing Abbey Financial Markets continued to raise funding during the year, across the maturity spectrum
and in a diverse range of currencies and instruments, but raised no new capital in 2004. Major debt issuance programs managed by Abbey Financial Markets(1): Programme
    
    Outstanding at 31 December 2004
    
    Comments$15bn medium-term notes
    
    $10.5bn
    
    Issued in European markets$7bn U.S. medium-term notes
    
    $1.6bn
    
    Issued in the United States$4bn commercial paper
    
    $0.7bn
    
    Issued in European markets$20bn U.S. commercial paper (2)
    
    $2.5bn
    
    Issued in the United States
   (1)
    
    Securities issued by Abbey National Treasury Services plc unless otherwise stated.(2)
    
    Managed for Abbey National North America LLC, a guaranteed subsidiary of Abbey. Abbey first registered with the Securities and Exchange Commission in October 1994. Abbey
National plc, Abbey National Treasury Services plc and Abbey National First Capital B.V. 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 approximately $7bn. Under the shelf facility registered with the SEC, Abbey National Treasury Services plc may
issue senior debt securities, and Abbey National plc and Abbey National First Capital B.V. may
issue subordinated debt securities. Abbey acts as guarantor on a senior basis of the debt
securities issued by Abbey National Treasury Services plc, and as guarantor on a subordinated basis
of the debt securities issued by Abbey National First Capital B.V. Various other entities within
the Abbey group of companies may issue other subordinated securities under the shelf facility. At 31 December 2004, the aggregate amount of outstanding claims of creditors senior to the
holders of subordinated debt of the following entities (and in the case of Abbey, senior to the
holders of subordinated debt guaranteed by Abbey) was as follows: Abbey and its subsidiaries
    
    £
    158,223mAbbey National plc
    
    £
    87,401m
 At 31 December 2004, the aggregate amount of outstanding claims of creditors of the following
entities that will rank pari passuwith the subordinated debt issued by those entities (and, in the
case of Abbey, with the subordinated debt guaranteed by Abbey) was as follows: Abbey National plc
    
    £
    6,395m
 In March 2004 there was a further issue through a new issue under Abbeys UK Residential Mortgage
Backed Securitisation programme, Holmes Financing Master Trust, bringing the total issuance under
the programme to £20.6bn, (of which £15.1bn is outstanding). The terms and conditions of the
underlying mortgages remain unaffected by the securitisation process. See also Liquidity sources. Group Infrastructure Group Infrastructure comprises Central Services, Financial Holdings (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 small non-core businesses. Portfolio Business Unit The Portfolio Business Unit originally comprised a number of businesses, assets and portfolios
that were deemed inconsistent with the new strategy focusing on personal financial services in the
UK. Of the £60bn of assets that existed at the start of the programme, now only £4.7bn remains
including finance leases, operating leases (principally Porterbrook), Motor Finance and Litigation
Funding. 10




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##### Table of Contents



Operating and Financial Review 
 Operating 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. For a discussion of
certain cautionary statements relating to forward-looking statements, see Forward-looking
Statements on page 6. The following discussion is based on and should be read in conjunction with the Consolidated
Financial Statements included elsewhere in this document. The Consolidated Financial Statements are
prepared in accordance with UK GAAP, which varies in certain significant respects from US GAAP. A
discussion of such differences can be found in the Other Material Items section of the Operating
and Financial Review and a reconciliation of certain UK GAAP amounts to US GAAP is included in note
61 of the Consolidated Financial Statements. Executive summary Abbey has prepared this Operating 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 Operating and Financial Review: >
    
    Operating 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 Consolidated Statutory Profit and Loss with commentary, a summary Consolidated Statutory Profit and Loss analysed between
Personal Financial Services and the Portfolio Business Unit, and a summary of the nature of adjustments between our statutory basis of
accounting and Abbeys management basis of accounting (known as the trading basis);>
    
    Personal Financial Services- this contains a summary of the results, and commentary thereon, by profit and loss line item on a trading basis
for each segment. Additional detailed information is provided for certain segments such as the Banking and Savings and Investment and
Protection segments due to the significance of their impact on Abbeys results;>
    
    Portfolio Business Unit- this contains a summary of the results and commentary thereon on a management basis for each segment. Additional
detailed information is provided on the assets (and relevant provisions) of the Portfolio Business Unit due to these businesses being managed
for exit;>
    
    Other Material Items- this contains detailed information about the statutory to trading basis adjustments. It also contains details of the
differences between UK GAAP and US GAAP and the movements therein; and>
    
    Balance Sheet Review- this contains an analysis of Abbeys balance sheet as a whole, including:
 >
    
    Capital disclosures- this contains an analysis of Abbeys capital needs and availability;>
    
    Off-Balance Sheet disclosures- this contains a summary of Abbeys off-balance
sheet arrangements, their business purpose, and importance to Abbey; and>
    
    Liquidity disclosures- this contains an analysis of Abbeys sources and uses of liquidity and recent cashflows.
 Basis of results presentation Results are disclosed to reflect the segmental structure of the group and which is as follows: >
    
    Banking and Savings;>
    
    Investment and Protection;>
    
    Abbey Financial Markets;>
    
    General Insurance;>
    
    Group Infrastructure;>
    
    Wholesale Banking;>
    
    Motor Finance and Litigation Funding, (formerly First National); and>
    
    Other.
 This report reflects the split of Abbey between the ongoing Personal Financial Services businesses,
and those being managed for exit in the Portfolio Business Unit. The Banking and Savings, Investment and Protection, General Insurance, Abbey Financial Markets
and Group Infrastructure segments represent the Personal Financial Services businesses. The
Wholesale Banking, Motor Finance and Litigation Funding and Other segments represent the Portfolio
Business Unit. Critical factors affecting results Critical accounting policies and areas of significant management judgement The preparation of Abbeys 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 Abbeys
financial condition. (a) Provisions for bad and doubtful debts Abbey estimates provisions for bad and doubtful debts with the objective of maintaining reserve
levels believed by management to be sufficient to absorb current estimated probable losses in
connection with loans and advances to banks and loans and advances to customers. The calculation of
specific 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. General provisions are 11




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##### Table of Contents



Operating and Financial Review Operating Review - Summarycontinued determined based on historic experience, general credit and lending quality, and current or
near-future economic prospects. These determinations are supplemented by various formulaic
calculations and the application of management judgement.
Abbey considers accounting estimates related to provisions for bad and doubtful debts 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 Abbeys estimated losses (as reflected in the specific and general provisions) and actual
losses will require Abbey to take provisions which, if significantly different, could have a
material impact on its future Profit and Loss Account and its Balance Sheet. Abbey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 bad and doubtful debts, less amounts released and recoveries of amounts written
off in previous years, are charged to the line item Provisions for bad and doubtful debts in the
Profit and Loss Account. The specific and general provisions are deducted from the Loans and
advances to banks and the Loans and advances to customers line items on the balance sheet. If
Abbey believes that additions to the allowance for such credit losses are required, then Abbey
records additional provisions for credit losses, which would be treated as a charge in the line
item Provisions for bad and doubtful debts in the Profit and Loss Account. For US GAAP reporting
purposes, allowances for lending losses related to loans within the scope of SFAS 114 Accounting
by Creditors for Impairment of a Loan, are determined based on the present value of expected
future cash flows discounted at the loans effective rate, or at the loans observable market price
or the fair value of the collateral if the loan is collateral-dependent. Credit exposures that are
deemed to be uncollectable and credit losses, net of recoveries of previously written off amounts,
are first allocated against the cumulative Provisions for bad and doubtful debts, with any
difference charged or credited to the line item Provisions for bad and doubtful debts within the
Profit and Loss Account. Abbey could have chosen, in the current period, estimates that would have had a materially
different impact on its financial presentation. For example, the financial statements for the year
ended 31 December 2004 include a provision charge for bad and doubtful debts in the Banking and
Savings segment for an amount equal to £35m. This provision was reduced (in 2003 it was £130m),
reflecting both favourable economic conditions through 2004 resulting
in lower defaults and write-offs, and improvements to the overall quality of the lending portfolio as a result of effective
risk management and debt management operations. In calculating the general provisions within the Banking and Savings segment, a range of
outcomes was calculated based principally on managements conclusions regarding the current
economic outlook. Had management used different assumptions regarding the current economic outlook,
a larger or smaller provision for bad and doubtful debts would have resulted in the Banking and
Savings segment that could have had a material impact on Abbeys reported operating profit in 2004.
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 bad and doubtful debts in the Banking and Savings segment could have decreased
in 2004 from an actual provision charge of £35m (2003: £130m) by as much as £15m (2003: £124m),
with a potential corresponding increase in Abbeys operating profit in 2004 of up to 6% (2003:
19%), or increased by £87m (2003: £20m), with a potential corresponding decrease in Abbeys
operating profit in 2004 of up to 32% (2003: 3%). The actual provision charge of £35m (2003: £130m)
in 2004, was based on what management estimated to be the most probable economic outlook within the
range of reasonably possible economic outlooks. (b) Trading securities and derivatives Securities which are not held for the purpose of investment, and the associated funding and
derivatives classified as trading, 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. Where quoted market prices are not available, as is the case with certain over-the-counter
derivatives, 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, 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. 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. 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 either through historical analysis of other observable market data (such as spot prices)
or through an estimation of a valuation adjustment appropriate for each product. Typically,
historical benchmarks are combined with management judgement in this process. Abbey 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 Dealing profits in the Profit and Loss Account
and the Other assets and Other liabilities line items in Abbeys balance sheet. 12




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##### Table of Contents



Operating and Financial Review Operating Review  - Summarycontinued Abbey could have chosen, in the current period, estimates that would have had a materially
different impact on its financial presentation. 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 Abbeys reported operating profit in 2004. For details of our US GAAP accounting policy refer to Note 58 of the financial statements. (c) Long-term assurance business Abbey accounts for the value of the shareholders interest in the long-term assurance business
using the embedded value basis of accounting, in accordance with UK GAAP for banking groups that
own life assurance operations. The embedded value is comprised of the net tangible assets of the
life assurance subsidiaries and the present value of the in-force business, which is calculated by
projecting future surpluses and other net cash flows attributable to the shareholders arising from
business written by the balance sheet date and discounting the result at a rate which reflects the
shareholders overall risk premium. Future surpluses will depend on lapse rates, mortality, persistency, investment returns for
various categories of investments and levels of expenses (both salary and non-salary). Surpluses
are estimated by management through assumptions about future experience, having regard to both
actual experience and current economic trends. Surpluses expected to emerge in the future are
discounted at risk-adjusted discount rates after provision has been made for taxation. There is an
acceptable range into which these assumptions can validly fall, and the use of different
assumptions or changes to these assumptions may cause the present value of future surpluses to
differ from those assumed at the balance sheet date. This could significantly affect the income
recognised, and the value attributed to the in-force business, in the accounts. The value of the in-force business could also be affected by changes in the amounts and timing
of other net cash flows, principally annual management charges and other fees levied upon the
policy holders, which are reflected in the Profit and Loss Account using unsmoothed fund values. In
addition, to the extent that actual experience is different from that assumed, the effect will be
recognised in the Profit and Loss Account for the period. Demographic assumptions are set
individually by product. It is therefore not appropriate to apply a global adjustment to these
percentages as it would not give a meaningful sensitivity as different products will react
differently or even contrarily to changes in economic conditions. (d) Impairment of goodwill The carrying value of goodwill is stated at cost less accumulated amortisation. The carrying value
of goodwill is written down by the amount of any impairment, and the loss is recognised in the
Profit and Loss Account in the period in which this occurs. Should an external event reverse the
effects of a previous impairment, the carrying value of the goodwill may be written up to a value
no higher than the original amortised cost. Impairments are calculated with reference to the
discounted cash flows of the entity or income-generating unit. Assumptions about expected future
cash flows require management to make assumptions about interest rates, the health of the economy
and operating costs. This involves significant judgement because such factors have fluctuated in
the past and are expected to continue to do so. Abbey considers that the accounting estimate related to impairment of goodwill 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 future cash flows, interest rates, the health of
the economy and operating costs, and (ii) the impact that recognising a goodwill impairment charge
would have on the assets reported on its Balance Sheet as well as on its net profit/(loss) could be
material. Goodwill impairment charges are accounted for in the line item Impairment of goodwill in the
Profit and Loss Account and the Intangible fixed assets line item in the Balance Sheet. Abbey could have chosen, in the current period, estimates that would have had a materially
different impact on its financial presentation. Had management used different assumptions regarding
the future cash flows, interest rates, the health of the economy and operating costs, a goodwill
impairment charge would have resulted that could have had a material impact on Abbeys reported
operating profit in 2004. (e) Provisions for misselling Abbey estimates provisions for misselling with the
objective of maintaining reserve levels believed by management to be sufficient to absorb
current estimated probable losses in connection with compensation and costs relating to the
handling of complaints from customers who claim misselling of endowment policies and other
products. The calculation of provisions for misselling is based on the estimated number of
claims that will be received, of those, the number that will be upheld, and the estimated
average settlement per case. These assessments are based on
managements estimate for each of these three factors. Abbey considers accounting estimates related to
misselling provisions critical accounting estimates because: (i) they are highly susceptible
 to change from period to period in the three factors above, and (ii) any significant
difference between Abbeys estimated losses as reflected in the specific provisions and actual
losses will require Abbey to take provisions which, if significantly different, could have a
material impact on its future Profit and Loss Account and its Balance
Sheet. Abbeys assumptions
about estimated losses are based on past claims uphold rates, past customer behaviour, and past
average settlements, which are not necessarily an indication of future losses. Provisions for misselling are charged to the line item
Provisions for contingent liabilities and commitments in the Profit and Loss Account. The
provision is included in the Provisions for liabilities and
charges line item on the balance
sheet. If Abbey believes that additions to the misselling provision are required, then Abbey
records additional provisions, which would be treated as a charge in the line item Provisions
for contingent liabilities and commitments in the Profit and Loss Account. The financial statements for the year ended 31 December
2004 include a provision charge for misselling in the Banking and Savings segment for an
amount equal to £153m. This provision was increased (in 2003 it
was £61m), reflecting both
increased claims and claims upheld. 13




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##### Table of Contents



Operating and Financial Review Operating Review - Summarycontinued In calculating the misselling provision within the
Banking and Savings 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 Banking and Savings segment that could have had a
material impact on Abbeys
reported operating profit in 2004. Management are not, however, able to quantify reliably a
meaningful sensitivity or range of possible outcomes. Specifically, due to the non-homogenous
nature of the population, any of the factors could change in a way that could either offset or
amplify the effect of a change in another factor. Change in accounting presentation From 1 January 2004, within Abbey Financial Markets there has been a presentational change such
that interest on mark-to-market securities and money market instruments is now classified within
dealing profits (in non-interest income) rather than in net interest income. This has no impact on
profit. In the 12 months to 31 December 2003 this change resulted in reclassification of £86m
(2002: £105m) from net interest income and the comparatives for that period have been amended to
reflect this change. Profit on disposal of Group undertakings Profits of £46m were made in the year ended 31 December 2004 on the disposal of Group undertakings. Significant acquisitions and disposals The results for the year ended 31 December 2004 have not been materially impacted by the disposals.
There were no significant acquisitions in the year. Current and future accounting developments Abbey, along with all listed companies in the European Union, will be required to prepare its
financial statements under International Financial Reporting Standards (sometimes referred to as
International Accounting Standards) from 1 January 2005. These standards represent a significant
change from UK GAAP. 14




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##### Table of Contents



Operating and Financial Review Operating Review - Summarycontinued Impact of International Financial Reporting Standards (IFRS) The impacts below are based on the standards currently in issue and managements current
interpretations of them. As such, the impacts discussed are indicative and intended only to convey
direction and approximate scale. These impacts are unaudited. The main standards affecting Abbey
are outlined below. IAS 19 - Pensions- An equity charge will reflect the actuarial pension deficit being recognised on
the balance sheet. The profit before tax impact in 2004 is not material since the increased pension
charge after applying a discount rate to liabilities is offset by adding back the release of
existing SSAP 24 accruals. The increase in ongoing pension costs should be substantially offset by
the forecast level of full-time employee reductions following the Banco Santander Central Hispano,
S.A. acquisition. From a regulatory perspective, the IAS equity impact will be substituted with a charge based
on the amount of the pension fund deficit that the company would have to meet by way of additional
payments (over-and-above normal annual contributions) over the next five years. IAS 16 and 17 - Leasing- These standards require leased assets to be depreciated on a
straight-line basis over the estimated useful life. Abbey currently uses an actuarial after tax
method for the majority of the leased assets. The straight-line method generally leads to higher
depreciation over the early part of the assets life and consequently leads to reduction in opening
equity. The effect of this higher depreciation on the 2004 profit and loss is largely offset by the
increased profit on sale of leasing companies during the year. IAS 38 - Software capitalisation- The standard requires software costs to be capitalised and
amortised rather than expensed immediately. The amounts previously capitalised have been impaired
following the Banco Santander Central Hispano, S.A. acquisition and well documented information
technology improvements that are expected to follow. On an ongoing basis, this impairment should
lead to a minimal impact on earnings. IFRS 2 - Stock option expensing- The treatment of share options granted to staff by subsidiaries
in the shares of the parent is still being finalised by International Financial Reporting
Interpretation Committee (IFRIC). The present guidance is that a subsidiary should treat such
options as cash settled in the subsidiary accounts, whereas in the parent accounts such options
should be treated as equity settled. Abbey became a subsidiary of Banco Santander Central Hispano, S.A. in 2004, and at that time a
number of options in the shares of Abbey were rolled over into Banco Santander Central Hispano,
S.A. shares. The profit and loss treatment of this change is yet to be clarified, but the
cumulative effect will be included as an equity adjustment. IFRS 4 and IAS 39 - Life assurance- Under IFRS 4 contracts that are largely investment in nature
(do not contain significant insurance risk) will be accounted for as financial instruments under
IAS 39. Whilst discounted value of future profits will no longer be recognised in respect of
products classified as investment contracts, companies may recognise particular deferred
acquisition cost. However, the acquisition costs that are deferrable under IAS are limited, and the
deferred acquisition cost asset recognised will be significantly lower than discounted value of
future profits reported. There is no requirement for a statutory restatement of 2004 earnings. Going forward, there
will be the positive effect of no longer recognising prior periods discounted value of future
profits on investment business, partly offset by the impact of not recognising discounted value of
future profits on new investment business. The impact is currently anticipated to be relatively
small which reflects Abbeys current view that most of the existing book does contain an element of
insurance risk. However, industry consensus is still being finalised on the precise split of
products between insurance and investment, and this could alter the adjustment. IAS 39 - Non-trading derivatives- Abbeys hedging business model has been substantially changed
with the aim of minimising the impact of IAS 39. In future Abbey expects a modest increase in
earnings volatility arising in this respect. IAS 39 - Fees and commissions- This represents the impact of origination fees receivable on loans
(booking/application fees, high loan-to-value fees, survey fees), early redemption fees receivable,
and directly related incremental costs of originating loans (survey fees and introducer commissions
on mortgages, and issue costs on floating rate notes in special purpose vehicles) being deferred
and recognised in income over the expected life of the loan on an effective yield basis. IAS 39 - Derecognition of liabilities- The standard allows liabilities to be derecognised only
when legally extinguished. An equity adjustment will represent the reinstating of certain
liabilities to their original contractual values. This standard is not expected to have any impact
on 2005 earnings relative to 2004. IAS 32 - Preference shares- Preference shares will be classified as debt, and coupon payments
reflected as interest payable rather than dividends. 15




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##### Table of Contents



Operating and Financial Review Operating Review - Summarycontinued Group summary Summarised consolidated statutory Profit and Loss Account and selected ratios 31 December 2003
    
    
    31 December 200231 December 2004
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mNet interest income (1)
    
    
    1,530
    
    
    
    2,062
    
    
    
    2,584Non-interest income(1)
    
    
    1,114
    
    
    
    370
    
    
    
    916Total operating income
    
    
    2,644
    
    
    
    2,432
    
    
    
    3,500Administrative expenses and depreciation on fixed assets
    
    
    (2,134
    )
    
    
    (2,126
    )
    
    
    (1,955
    )Goodwill impairment and amortisation
    
    
    (20
    )
    
    
    (38
    )
    
    
    (1,202
    )Depreciation and impairment on operating lease assets
    
    
    (151
    )
    
    
    (251
    )
    
    
    (280
    )Provision for bad and doubtful debts
    
    
    35
    
    
    
    (474
    )
    
    
    (514
    )Provisions for contingent liabilities and commitments
    
    
    (202
    )
    
    
    (104
    )
    
    
    (50
    )Amounts written off fixed asset investments
    
    
    80
    
    
    
    (193
    )
    
    
    (511
    )Operating profit/(loss)
    
    
    252
    
    
    
    (754
    )
    
    
    (1,012
    )Income from associated undertakings
    
    
    6
    
    
    
    12
    
    
    
    17Profit on disposal of Group undertakings
    
    
    46
    
    
    
    89
    
    
    
    48(Loss) on the sale or termination of an operation
    
    
    (31
    )
    
    
    (33
    )
    
    
    Profit/(loss) on ordinary activities before tax
    
    
    273
    
    
    
    (686
    )
    
    
    (947
    )Tax on profit/(loss) on ordinary activities
    
    
    (144
    )
    
    
    42
    
    
    
    (152
    )Profit/(loss) on ordinary activities after tax
    
    
    129
    
    
    
    (644
    )
    
    
    (1,099
    )Earnings/(loss) per ordinary share
    
    
    2.2p
    
    
    
    (52.4
    )p
    
    
    (84.8
    )pDividend per ordinary share
    
    
    39.3p
    
    
    
    25.0p
    
    
    
    25.0pEquity Shareholders funds
    
    
    4,292
    
    
    
    4,699
    
    
    
    5,602Net asset value per ordinary share
    
    
    288p
    
    
    
    321p
    
    
    
    384pTier 1 capital ratio
    
    
    10.4
    %
    
    
    10.1
    %
    
    
    9.2
    %Equity Tier 1 capital ratio
    
    
    7.0
    %
    
    
    6.9
    %
    
    
    6.4
    %Banking Equity Tier 1 capital ratio
    
    
    4.4
    %
    
    
    4.7
    %
    
    
    4.6
    %Closing risk weighted assets (£bn)
    
    
    54.2
    
    
    
    61.2
    
    
    
    78.7
   (1)
    
    Note, from the first half of 2004, within Abbey Financial Markets there has been a
presentational change such that interest on mark-to-market securities and market instruments
is now classified within dealing profits (in non-interest income) rather than in net interest
income. This has no impact on profit. In the 12 months to December 2003 this change resulted
in reclassification of £86m (2002: £105m) from net interest income to non-interest income and
the comparatives for that period have been amended to reflect this change. Under the previous
presentation net interest income in 2003 was £2,148m (2002: £2,689m) and non-interest income
was £284m (2002: £811m). 2004 compared to 2003 Total profit before tax of £273m compared to a loss of £686m in 2003. Material movements by line included: >
    
    net interest income of £1,530m (2003: £2,062m) down 26%, reflecting lower product redemption
charge income, and a changing business mix with lower margin new business replacing the run-off
of higher margin back book in both the mortgages and savings portfolios. The fall in net
interest income also reflects the lower level of interest earning assets in the Portfolio
Business Unit;>
    
    non-interest income of £1,114m (2003: £370m), up 201% as a result of the non-recurrence of
certain embedded value rebasing charges that impacted life assurance earnings in 2003, in
addition to lower loss realisations from Portfolio Business Unit asset sales in 2004;>
    
    administrative expenses of £2,134m (2003: £2,126m) were broadly in line with 2003. Personal
Financial Services expenses rose £202m to £2,044m largely reflecting expenses related to the
acquisition of Abbey by Banco Santander Central Hispano, S.A. and resulting redundancy and
restructuring provisions. Portfolio Business Unit expenses fell due to the reduced size of
operations;>
    
    goodwill of £20m relates primarily to amortisation of the remaining Scottish Provident goodwill;>
    
    depreciation on operating lease assets of £151m (2003: £251m), down 40% reflecting the sale of
leasing companies in the Portfolio Business Unit;>
    
    a credit provision release in relation to bad and doubtful debts of £35m (2003: £474m charge),
was mainly driven by a reduction in the level of general provisions on mortgages, the release
of provisions relating to the Scottish Provident contingent loan and the non-recurrence of
Portfolio Business Unit provisions;>
    
    provisions for contingent liabilities and commitments increased to £202m (2003: £104m) mainly
due to increases in the level of misselling provisions; and>
    
    a release of amounts written off fixed asset investments of £80m (2003: £193m charge)
reflecting the disposal of Portfolio Business Unit assets for amounts in excess of their
written down value, reflecting the improvement in economic conditions relating to these assets.
 16




---



##### Table of Contents



Operating and Financial Review Operating Review - Summarycontinued 2003 compared to 2002 Loss on ordinary activities before tax of £686m compared to £947m in 2002. Material movements by line included: >
    
    net interest income of £2,062m (2002: £2,584m), down 20%, with lower
average asset balances reflecting accelerated Portfolio Business Unit
disposals;>
    
    non-interest income of £370m (2002: £916m), down 60% as a result of
increased loss realisations driven from Portfolio Business Unit asset
sales;>
    
    administrative expenses and depreciation on fixed assets of £2,126m
(2002: £1,955m), up 9%, driven by reorganisation expenses including
asset write-downs, partly offset by savings from the cost programme;>
    
    goodwill impairment and amortisation of £38m which relates primarily
to amortisation of remaining Scottish Provident goodwill, and is
significantly lower than the charge in 2002 that was driven by
goodwill impairments of £1,138m;>
    
    provisions for bad and doubtful debts of £474m (2002: £514m), down 8%
benefiting from lower Portfolio Business Unit related provisions given
reduced asset balances;>
    
    provisions for contingent liabilities and commitments up to £104m
(2002: £50m) following a £50m provision for product misselling
exposures; and>
    
    lower amounts written off fixed-asset investments of £193m (2002:
£511m) reflecting provisioning raised in 2002 arising from specific
counterparty deterioration in the Portfolio Business Unit, and
consistent with the significant reduction in asset balances during
2003.
 Summarised consolidated statutory profit and loss account analysed between Personal Financial
Services and the Portfolio Business Unit 31 December 2004
    
    
    31 December 2003 (restated)
    
    
    31 December 2002 (restated)PFS
    
    
    PBU
    
    
    Total
    
    
    PFS
    
    
    PBU
    
    
    Total
    
    
    PFS
    
    
    PBU
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,470
    
    
    
    60
    
    
    
    1,530
    
    
    
    1,709
    
    
    
    353
    
    
    
    2,062
    
    
    
    1,738
    
    
    
    846
    
    
    
    2,584Non-interest income
    
    
    1,031
    
    
    
    83
    
    
    
    1,114
    
    
    
    701
    
    
    
    (331
    )
    
    
    370
    
    
    
    722
    
    
    
    194
    
    
    
    916Total operating income
    
    
    2,501
    
    
    
    143
    
    
    
    2,644
    
    
    
    2,410
    
    
    
    22
    
    
    
    2,432
    
    
    
    2,460
    
    
    
    1,040
    
    
    
    3,500Administrative expenses
    
    
    (2,044
    )
    
    
    (90
    )
    
    
    (2,134
    )
    
    
    (1,842
    )
    
    
    (284
    )
    
    
    (2,126
    )
    
    
    (1,611
    )
    
    
    (344
    )
    
    
    (1,955
    )Goodwill impairment
and amortisation
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )
    
    
    (28
    )
    
    
    (10
    )
    
    
    (38
    )
    
    
    (811
    )
    
    
    (391
    )
    
    
    (1,202
    )Depreciation of
operating lease assets
    
    
    
    
    
    
    (151
    )
    
    
    (151
    )
    
    
    
    
    
    
    (251
    )
    
    
    (251
    )
    
    
    (23
    )
    
    
    (257
    )
    
    
    (280
    )Provision for bad and
doubtful debts
    
    
    46
    
    
    
    11
    
    
    
    35
    
    
    
    (210
    )
    
    
    (264
    )
    
    
    (474
    )
    
    
    (150
    )
    
    
    (364
    )
    
    
    (514
    )Provisions for
contingent liabilities
and commitments
    
    
    (202
    )
    
    
    
    
    
    
    (202
    )
    
    
    (85
    )
    
    
    (19
    )
    
    
    (104
    )
    
    
    (46
    )
    
    
    (4
    )
    
    
    (50
    )Amounts written off
fixed asset
investments
    
    
    
    
    
    
    80
    
    
    
    80
    
    
    
    (10
    )
    
    
    (183
    )
    
    
    (193
    )
    
    
    2
    
    
    
    (513
    )
    
    
    (511
    )Operating profit/(loss)
    
    
    281
    
    
    
    (29
    )
    
    
    252
    
    
    
    235
    
    
    
    (989
    )
    
    
    (754
    )
    
    
    (179
    )
    
    
    (833
    )
    
    
    (1,012
    )Income from associated
undertakings
    
    
    
    
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    12
    
    
    
    12
    
    
    
    
    
    
    
    17
    
    
    
    17Profit on disposal of
Group undertakings
    
    
    
    
    
    
    46
    
    
    
    46
    
    
    
    
    
    
    
    89
    
    
    
    89
    
    
    
    
    
    
    
    48
    
    
    
    48(Loss) on the sale or
termination of an
operation
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    Profit/(loss) on
ordinary activities
before tax
    
    
    250
    
    
    
    23
    
    
    
    273
    
    
    
    235
    
    
    
    (921
    )
    
    
    (686
    )
    
    
    (179
    )
    
    
    (768
    )
    
    
    (947
    )
 17




---



##### Table of Contents



Operating and Financial Review Operating Review - Summarycontinued Adjustments between the statutory basis and the trading basis Abbeys management reviews discrete financial information for each of its segments that
includes measures of operating results and assets. However, due to the differing natures of its
ongoing Personal Financial Services group of reportable segments and its Portfolio Business Unit
group of reportable segments, which is being managed for exit, the Personal Financial Services
group of reportable segments and Portfolio Business Unit group of reportable segments are managed
differently. The Personal Financial Services group of reportable segments are managed primarily on
the basis of its results, which are measured on a trading basis. The Portfolio Business Unit group
of reportable segments is managed both on the basis of its results, which is measured on a
management basis, and on the basis of its net asset value. On a consolidated level, the trading
results of the Personal Financial Services group of reportable segments is aggregated with the
management results of the Portfolio Business Unit group of reportable segments to give the
summarised trading Profit and Loss Account. The trading basis for Abbeys Personal Financial
Services group of reportable segments and the management basis for its Portfolio Business Unit
group of reportable segments are collectively known as the trading basis, as presented below. Management considers that the trading basis provides the most appropriate way of reviewing the
performance of the business. The main adjustments are: >
    
    Embedded value charges and rebasing - these are unpredictable as they
depend on both equity and debt market movements which do not affect
the underlying performance of what is a very long-term business. The
short-term market movements remain a very important factor in the
management of the business but these are managed separately with a
more risk-based focus.>
    
    Reorganisation costs - in 2002, Abbey initiated a far-reaching cost
reduction programme and embarked on a period of significant
organisational investment and change. Management needs to understand
the underlying drivers of the cost base that will remain after the
exercise is complete, and does not want this view to be clouded by
the costs of the exercise, which are managed independently. More
recently, Abbey was acquired by Banco Santander Central Hispano,
S.A., which increased the charge in 2004 and will give rise to
further restructuring expenditure.>
    
    Goodwill charges - these charges can vary significantly year on year,
and hence can materially affect the profit or loss for that year. As
a result Abbey reviews these charges separately to avoid clouding the
presentation of underlying results.>
    
    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.>
    
    Income from associated undertakings is included within trading income
because it is a regular source of income to Abbeys operations.
Therefore management believes its inclusion at this level reflects
the aggregate income from Abbeys activities.>
    
    Profit on disposal of Group undertakings is included within trading
income for reasons similar to those noted above relating to income
from associated undertakings.
 For a detailed explanation of these items, please refer to the Other material items section of
the Operating and Financial Review. The Personal Financial Services group of reportable segments
adjustments are the deduction of: >
    
    embedded value charges and rebasing;>
    
    reorganisation costs (including
post-acquisition expenses and provisions); and>
    
    goodwill charges.>
    
    There is also a single reclassification adjustment where depreciation on operating lease
assets is netted within trading income as opposed to being recorded as a part of
operating expenses.
 The Portfolio Business Unit group of reportable segments adjustments are: >
    
    depreciation on operating lease assets is netted within trading income as opposed to
being recorded as a part of operating expenses;>
    
    income from associated undertakings is reported as part of non-interest income as opposed
to being reported below the operating loss or profit line; and>
    
    profit on disposal of group undertakings is also reported as part of non-interest income
as opposed to being reported below the operating loss or profit line.
 The movement of each of these adjustments is discussed in more detail in the Other Material Items
section. 18




---



##### Table of Contents



Operating and Financial Review 
 Operating Review  Personal Financial Services Personal Financial Services profit before tax by segment Investment
    
    
    AbbeyBanking and
    
    
    and
    
    
    Financial
    
    
    General
    
    
    Group Infra-Savings
    
    
    Protection
    
    
    Markets
    
    
    Insurance
    
    
    structure
    
    
    Total31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,510
    
    
    
    77
    
    
    
    21
    
    
    
    (4
    )
    
    
    (134
    )
    
    
    1,470Non-interest income
    
    
    438
    
    
    
    171
    
    
    
    291
    
    
    
    114
    
    
    
    116
    
    
    
    1,130Depreciation of operating lease assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total trading income
    
    
    1,948
    
    
    
    248
    
    
    
    312
    
    
    
    110
    
    
    
    (18
    )
    
    
    2,600Total trading expenses
    
    
    (1,114
    )
    
    
    (83
    )
    
    
    (109
    )
    
    
    (40
    )
    
    
    (253
    )
    
    
    (1,599
    )Provision for bad and doubtful debts
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )Provisions for contingent liabilities and
commitments
    
    
    (155
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (153
    )Amounts written off fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trading profit before tax
    
    
    645
    
    
    
    165
    
    
    
    203
    
    
    
    70
    
    
    
    (269
    )
    
    
    814Adjust for:- Embedded value charges and rebasing
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21- Reorganisation expenses
    
    
    (183
    )
    
    
    (57
    )
    
    
    (24
    )
    
    
    (16
    )
    
    
    (285
    )
    
    
    (565
    )- Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Operating profit/(loss)
    
    
    462
    
    
    
    129
    
    
    
    179
    
    
    
    54
    
    
    
    (574
    )
    
    
    250
 Investment
    
    
    AbbeyBanking and
    
    
    and
    
    
    Financial
    
    
    General
    
    
    GroupSavings
    
    
    Protection
    
    
    Markets
    
    
    Insurance
    
    
    Infrastructure
    
    
    Total31 December 2003
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,720
    
    
    
    83
    
    
    
    26
    
    
    
    (5
    )
    
    
    (115
    )
    
    
    1,709Non-interest income
    
    
    427
    
    
    
    214
    
    
    
    223
    
    
    
    126
    
    
    
    90
    
    
    
    1,080Depreciation of operating lease assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total trading income
    
    
    2,147
    
    
    
    297
    
    
    
    249
    
    
    
    121
    
    
    
    (25
    )
    
    
    2,789Total trading expenses
    
    
    (1,132
    )
    
    
    (58
    )
    
    
    (109
    )
    
    
    (48
    )
    
    
    (230
    )
    
    
    (1,577
    )Provision for bad and doubtful debts
    
    
    (130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (130
    )Provisions for contingent liabilities and
commitments
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    (61
    )Amounts written off fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trading profit before tax
    
    
    876
    
    
    
    239
    
    
    
    140
    
    
    
    73
    
    
    
    (307
    )
    
    
    1,021Adjust for:- Embedded value charges and rebasing
    
    
    
    
    
    
    (443
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (443
    )- Reorganisation expenses
    
    
    (169
    )
    
    
    (16
    )
    
    
    (19
    )
    
    
    (41
    )
    
    
    (70
    )
    
    
    (315
    )- Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Operating profit/(loss)
    
    
    707
    
    
    
    (220
    )
    
    
    121
    
    
    
    32
    
    
    
    (405
    )
    
    
    235
 Investment
    
    
    AbbeyBanking and
    
    
    and
    
    
    Financial
    
    
    General
    
    
    GroupSavings
    
    
    Protection
    
    
    Markets
    
    
    Insurance
    
    
    Infrastructure
    
    
    Total31 December 2002
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,799
    
    
    
    90
    
    
    
    27
    
    
    
    (3
    )
    
    
    (175
    )
    
    
    1,738Non-interest income
    
    
    454
    
    
    
    335
    
    
    
    231
    
    
    
    149
    
    
    
    106
    
    
    
    1,275Depreciation of operating lease assets
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )Total trading income
    
    
    2,230
    
    
    
    425
    
    
    
    258
    
    
    
    146
    
    
    
    (69
    )
    
    
    2,990Total trading expenses
    
    
    (1,108
    )
    
    
    (53
    )
    
    
    (110
    )
    
    
    (54
    )
    
    
    (252
    )
    
    
    (1,577
    )Provision for bad and doubtful debts
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (150
    )Provisions for contingent liabilities and
commitments
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (46
    )Amounts written off fixed asset investments
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Trading profit before tax
    
    
    962
    
    
    
    372
    
    
    
    148
    
    
    
    92
    
    
    
    (355
    )
    
    
    1,219Adjust for:- Embedded value charges and rebasing
    
    
    
    
    
    
    (553
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (553
    )- Reorganisation expenses
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    (34
    )- Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (811
    )
    
    
    (811
    )Operating profit/(loss)
    
    
    939
    
    
    
    (181
    )
    
    
    148
    
    
    
    92
    
    
    
    (1,177
    )
    
    
    (179
    )
 19




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 2004 compared to 2003 >
    
    Personal Financial Services trading profit before tax of £814m
was down 20% on 2003 (2003: £1,021m), largely due to a fall in
net interest income reflecting a 30 basis point reduction in
spread.>
    
    Banking and Savings trading profit before tax decreased by 26%
to £645m (2003: £876m). This was largely attributable to the
reduction in the Personal Financial Services Banking spread,
with a £153m provision for contingent liabilities including
misselling risks, largely offset by a £117m release of general
provisions.>
    
    Investment and Protection trading profit before tax decreased
to £165m (2003: £239m). The main reason for the movement is
the reduction in the discount rate and the increase in the
internal value based management charge due to a change in the
assumed mix of gearing in the business.>
    
    General Insurance trading profit before tax of £70m was £3m
lower than 2003 largely due to falls in new business volumes
and lower retention levels, offset by decreases in expenses.>
    
    Abbey Financial Markets trading profit before tax of £203m was
up 45%, reflecting favourable market conditions and a number
of positive risk management trades which totalled circa £65m,
that will not repeat in 2005.>
    
    Group Infrastructure trading loss before tax of £269m
decreased by £38m (2003: loss of £307m) due partly to the
allocation of more net interest cost to the businesses, to
reflect current gearing in the businesses, combined with a
lower provision for contingent liabilities.2003 compared to 2002>
    
    Personal Financial Services trading profit before tax of
£1,021m (2002: £1,219m) was down 16%, largely reflecting
reduced earnings from the life assurance businesses and a fall
in net interest income in Banking and Savings.>
    
    Banking and Savings trading profit before tax decreased by 9%
to £876m (2002: £962m). This is largely attributable to a fall
in the interest spread.>
    
    Investment and Protections trading profit before tax
decreased to £239m (2002: £372m) largely due to a £142m
adverse swing in experience and assumption changes. This was
partially offset by a £44m improvement in expected return.
Despite relatively stable margins, contributions from new
business were also down 15%, reflecting the drop in investment
business volumes.>
    
    Abbey Financial Markets trading profit before tax was down 5%
to £140m (2002: £148m), with a weaker second half performance
reflecting less favourable markets.>
    
    General Insurances trading profit before tax of £73m was £19m
lower than 2002, primarily due to a reduction in retail margin
following an increase in the risk premiums payable to the
principal underwriter.>
    
    Group Infrastructures trading loss before tax improved by
£48m to £(307)m (2002: £(355)m) due to increased earnings on
centrally held capital and lower expenses. This was partly
offset by a provision of £50m relating to potential product
misselling.
 20




---



##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 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.
These flows can also enable the reader to compare Abbey with other Personal Financial Services
organisations. Personal Financial Services business flows 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002Banking and SavingsMortgages:(1)Gross mortgage lending
    
    
    £25.0
    bn
    
    
    £29.1
    bn
    
    
    £22.1
    bnCapital repayments
    
    
    £21.9
    bn
    
    
    £19.7
    bn
    
    
    £15.4
    bnNet mortgage lending
    
    
    £3.1
    bn
    
    
    £9.4
    bn
    
    
    £6.7
    bnMortgage stock
    
    
    £90.9
    bn
    
    
    £87.8
    bn
    
    
    £78.4
    bnOf which: Abbey retail
    
    
    £87.5
    bn
    
    
    £84.7
    bn
    
    
    £75.7
    bn Housing Association
    
    
    £3.4
    bn
    
    
    £3.1
    bn
    
    
    £2.7
    bnMarket share  gross mortgage lending
    
    
    8.6
    %
    
    
    10.7
    %
    
    
    10.1
    %Market share  capital repayments
    
    
    11.5
    %
    
    
    11.2
    %
    
    
    11.0
    %Market share  net mortgage lending
    
    
    3.1
    %
    
    
    9.9
    %
    
    
    8.6
    %Market share  mortgage stock
    
    
    10.4
    %
    
    
    11.5
    %
    
    
    11.7
    %Retail deposits:(2)Total net deposit flows
    
    
    £1.4
    bn
    
    
    £1.2
    bn
    
    
    £1.9
    bnOf which: Abbey retail
    
    
    £0.3
    bn
    
    
    £0.4
    bn
    
    
    £1.0
    bn Other
    
    
    £1.1
    bn
    
    
    £0.8
    bn
    
    
    £0.9
    bnDeposit stock
    
    
    £61.9
    bn
    
    
    £60.5
    bn
    
    
    £59.3
    bnOf which: Abbey retail
    
    
    £49.7
    bn
    
    
    £49.4
    bn
    
    
    £48.8
    bn Other
    
    
    £12.2
    bn
    
    
    £11.1
    bn
    
    
    £10.5
    bnMarket share  total household deposit flows
    
    
    2.3
    %
    
    
    1.6
    %
    
    
    2.2
    %Market share  outstanding household deposits
    
    
    6.8
    %
    
    
    7.1
    %
    
    
    7.6
    %Banking:Bank account openings: Abbey retail
    
    
    334,950
    
    
    
    344,000
    
    
    
    354,000 Other
    
    
    54,776
    
    
    
    52,000
    
    
    
    90,000389,726
    
    
    
    396,000
    
    
    
    444,000Bank account stock: Abbey retail
    
    
    3,522,525
    
    
    
    3,335,000
    
    
    
    3,138,000 Other
    
    
    460,696
    
    
    
    443,000
    
    
    
    447,0003,983,221
    
    
    
    3,778,000
    
    
    
    3,585,000Bank account liability: Abbey retail
    
    
    £4.5
    bn
    
    
    £4.3
    bn
    
    
    £3.5
    bn Other
    
    
    £3.1
    bn
    
    
    £3.4
    bn
    
    
    £3.9
    bn£7.6
    bn
    
    
    £7.7
    bn
    
    
    £7.4
    bnCredit card openings: Abbey retail
    
    
    185,000
    
    
    
    215,000
    
    
    
    216,000 Other
    
    
    13,040
    
    
    
    36,000
    
    
    
    48,000198,040
    
    
    
    251,000
    
    
    
    264,000Credit card stock: Abbey retail
    
    
    1,048,000
    
    
    
    904,000
    
    
    
    748,000 Other
    
    
    139,634
    
    
    
    141,000
    
    
    
    114,0001,187,634
    
    
    
    1,045,000
    
    
    
    862,000
 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002Gross unsecured personal loan lending: Abbey retail
    
    
    £1.1
    bn
    
    
    £1.0
    bn
    
    
    £1.0
    bn Other
    
    
    £1.0
    bn
    
    
    £0.7
    bn
    
    
    £0.5
    bn£2.1
    bn
    
    
    £1.7
    bn
    
    
    £1.5
    bnUnsecured lending asset:(3) Abbey retail
    
    
    £2.0
    bn
    
    
    £1.9
    bn
    
    
    £2.0
    bn Other
    
    
    £1.4
    bn
    
    
    £1.0
    bn
    
    
    £0.6
    bn£3.4
    bn
    
    
    £2.9
    bn
    
    
    £2.6
    bn*SME account openings (net)
    
    
    29,245
    
    
    
    38,000
    
    
    
    36,000*SME account stock
    
    
    158,027
    
    
    
    129,000
    
    
    
    91,000*SME account liability
    
    
    £3.7
    bn
    
    
    £3.2
    bn
    
    
    £2.9
    bn
 21




---



##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002Investment and ProtectionInvestment:New business premiums: Investments
    
    
    £476m
    
    
    
    £917m
    
    
    
    £866mNew business premiums: Pensions
    
    
    £292m
    
    
    
    £464m
    
    
    
    £1,342mWith-profits
 closed
    
    
    
    
    
    
    £2m
    
    
    
    £197mPrudence Bonds  closed
    
    
    £3m
    
    
    
    £54m
    
    
    
    £11mTotal life assurance new business premiums
    
    
    £771m
    
    
    
    £1,437m
    
    
    
    £2,416mInscape and James Hay
    
    
    £250m
    
    
    
    £256m
    
    
    
    £296mTotal investment new business premiums
    
    
    £1,021m
    
    
    
    £1,693m
    
    
    
    £2,712mAnnualised equivalent (excluding with-profit bonds)
    
    
    £119m
    
    
    
    £184m
    
    
    
    £302mAnnualised equivalent  with-profit bonds
    
    
    
    
    
    
    
    
    
    
    £20mTotal life assurance annualised equivalent
    
    
    £119m
    
    
    
    £184m
    
    
    
    £322mBranch and Direct  annualised equivalent
    
    
    £70m
    
    
    
    £100m
    
    
    
    £170mIntermediary  annualised equivalent
    
    
    £49m
    
    
    
    £84m
    
    
    
    £152mTotal life assurance annualised equivalent
    
    
    £119m
    
    
    
    £184m
    
    
    
    £322mJames HayNew business cases: (by number) (4)
    
    
    6,099
    
    
    
    7,098
    
    
    
    8,452Protection:Annualised equivalent
    
    
    £97m
    
    
    
    £125m
    
    
    
    £112mBranch and Direct  annualised equivalent
    
    
    £19m
    
    
    
    £28m
    
    
    
    £27mIntermediary  annualised equivalent
    
    
    £78m
    
    
    
    £97m
    
    
    
    £85mTotal protection annualised equivalent
    
    
    £97m
    
    
    
    £125m
    
    
    
    £112mFunds under management  life assurance
    
    
    £25bn
    
    
    
    £26bn
    
    
    
    £26bn
   *
    
    Small and Medium Enterprise. 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002General InsuranceNew policy sales:Building and Contents
    
    
    198,453
    
    
    
    218,298
    
    
    
    267,000Motor
    
    
    8,701
    
    
    
    25,013
    
    
    
    35,000Creditor
    
    
    116,236
    
    
    
    129,719
    
    
    
    144,000Travel
    
    
    6,361
    
    
    
    33,295
    
    
    
    26,000Other
    
    
    46,030
    
    
    
    46,048
    
    
    
    35,000375,781
    
    
    
    452,373
    
    
    
    507,000Policies in force:Building and Contents
    
    
    1,151,187
    
    
    
    1,262,000
    
    
    
    1,321,000Motor
    
    
    48,884
    
    
    
    68,000
    
    
    
    107,000Creditor
    
    
    298,407
    
    
    
    295,000
    
    
    
    296,000Travel
    
    
    1,915
    
    
    
    8,000
    
    
    
    7,000Other
    
    
    189,419
    
    
    
    174,000
    
    
    
    135,0001,689,812
    
    
    
    1,807,000
    
    
    
    1,866,000
   (1)
    
    Mortgage data has been adjusted for all periods to remove the impact of the disposed First
National business.(2)
    
    Deposit inflows and stock have been defined to include all (both retail household and
non-household) deposits made through the branch network and remote channels in our
retail-orientated businesses, which are predominantly UK-based. For market share purposes
only, personal deposits have been used to calculate the share of Outstanding Household
Deposits, in terms of both stock and flow, using a market size estimated from the Office of
National Statistics data.(3)
    
    Unsecured lending asset comprises the sum of unsecured personal loans, credit cards (cahoot
only) and overdrafts.(4)
    
    Adjusted to exclude James Hay inflows now replaced by new business cases (by number). New
business cases represent the number of individual SIPPs, SASSs & WRAPs sold. Fixed fees are
generated from these sales including Establishment fees, annual Administration fees and
Transaction fees which are not affected by the size of the investment flow into the SIPP, SASS
& WRAP. 2004 compared to 2003 Banking and Savings Mortgages Gross mortgage lending of £25bn was lower than last year (2003: £29.1bn), and represented a reduced
market share of 8.6% (2003: 10.7%). This reflected the extent of reorganisation across all of our
sales channels, but also less aggressive targeting of the lower profitability remortgage market.
During the second half of the year, lending capability was temporarily restricted due to the
implementation of new processes and procedures required to comply with Financial Services Authority
mortgage regulation. Capital repayments increased to £21.9bn (2003: £19.7bn) driven by the
significant increase in asset reaching the end of its incentive period, and market share increased
slightly to 11.5% (2003: 11.2%). Net lending of £3.1bn was 67% lower than 2003, equating to a market share of 3.1%. This
significant drop was driven by a combination of increased capital repayments and lower gross
lending, and was particularly evident in the second half of the year. Of the £6.3bn reduction in
net lending, 65% (£4.1bn) was due to lower gross lending and 35% (£2.2bn) was due to higher capital
repayments. 22




---



##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued Retail Deposits Deposit inflows of £1.4bn for the year, with a strong second half performance of £2.4bn. The focus
on profitable branch-based deposits has delivered positive results in the second half, with inflows
into accounts such as Flexible Saver broadly offsetting attrition from back book accounts. cahoot
also made a strong contribution to deposit inflows. Banking Bank account openings were broadly flat compared to 2003 with stock volume continuing to grow, up
5% on 2003. Abbey branded in-credit liability increased by 5%, but other bank account liability
decreased largely due to cahoot rates remaining unchanged, despite base rate rises. New credit card openings were lower than 2003 performance for the first half of the year,
however this position was significantly improved in the second half where a 22% increase on the
first half was achieved following competitive pricing, new product development, and an increased
focus on credit cards in the branch network. Despite the slow start, stock of cards grew by 14%. A 26% increase was achieved in unsecured personal loan gross lending compared to 2003 (£2,098m
versus £1,660m) and this resulted in a 17% growth in asset. This was achieved while maintaining
rates at a broadly constant level in an increasingly competitive marketplace. Only in the final
quarter of 2004, was a more aggressive pricing position adopted. Openings of small and medium enterprise accounts were down on last year but total account
numbers increased by 22% and account balances by 16%. Investment and Protection Investment In the direct channels  Individual Savings Accounts and Unit Trusts sales were lower compared to
2003, reflecting market trends. Via intermediary channels  sale of investments products were significantly down on last year,
largely due to lower Flexible Investment Bond sales following the withdrawal of the special offer
on the Cash Fund. Investment sales continue to be adversely impacted by Abbeys withdrawal from
with-profits products. Pension sales are also down on last year, although sales picked up in the
latter half of 2004. Protection Protection sales are down, in part due to lower mortgage sales, but also due to increased
competition in the market. Scottish Provident remains one of the leading players in this sector. General Insurance General Insurance policy sales of 375,781 were down 17% on 2003. The decline in household sales has
been due to lower mortgage volumes reducing cross-selling opportunities, coupled with increased
lapses due to a switch to new systems. Lower business volumes were offset by higher household sales
margins. Abbey exited both the travel and motor markets in 2004, reducing new policy sales by
27,000 and 16,000 respectively. 2003 compared to 2002 Banking and Savings Mortgages Full-year gross mortgage lending of £29.1bn (2002: £22.1bn) was up 32%, and represented a market
share of 10.7%. With remortgage activity remaining significant throughout the year, capital
repayments increased to £19.7bn (2002: £15.4bn), but were still slightly below natural stock share. Net lending of £9.4bn was 40% higher than 2002 (£6.7bn), equating to a market share of 9.9%. Retail deposits Total retail deposit inflows of £1.2bn were lower than the £1.9bn in 2002, with the estimated
market share of total household deposit flows also deteriorating to 1.6% from 2.2%. Inflows into
Abbey-branded accounts were £0.4bn (2002: £1.0bn), reflecting positive inflows into the personal
and business bank account ranges. Cash Individual Savings Account sales were £1.3bn (2002: £1.3bn),
in line with last year. The remainder of the inflows relate to Abbey National Offshore and cahoot. Banking Bank account openings totalled 396,000 (2002: 444,000), with a total stock of accounts nearing
3.8m. Abbey retail in-credit balances were up 23% to £4.3bn (2002: £3.5bn). Openings in cahoot and
other businesses were 42% lower at 52,000 (2002: 90,000) largely due to an increased number of
customers opening the cahoot savings account rather than the current account. Unsecured lending balances, which incorporate credit cards (cahoot only), unsecured personal
loans and overdrafts, increased by 12% to £2.9bn (2002: £2.6bn) driven in particular by growth in
cahoot unsecured personal loans. Gross unsecured personal loan new business of £1.7bn was up 13% on
2002. Openings of Small and Medium Enterprise accounts exceeded 38,000, up 6% on 2002 levels, with
balances now in excess of £3bn. Credit card openings of 251,000 were down 5% on 2002. 23




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued Investment and Protection Total life assurance new business premiums were £1.4bn (2002: £2.4bn), reflecting a general decline
in demand due to investor nervousness about stock market conditions relating to with-profits funds.
The impact on our new business flows was more marked as a result of our previous dependence on
with-profits, and subsequent withdrawal from this market and declaration of a zero bonus for
with-profit policyholders in 2003. By product, the main movements include a significant fall in sales of single premium pension
products in Scottish Mutual and Scottish Provident (£(0.4)bn), falls in single premium structured
Individual Savings Account and investment bond sales in Abbey National Life (£(0.4)bn), and the
withdrawal from the with-profits bond market (£(0.2)bn). Sales of protection products were up 12% to £125m (2002: £112m). General Insurance General Insurance policy sales of 452,373 were down 11% on 2002, with a fall in household policy
sales, only partially offset by increased sales of personal accident and accidental death policies. The decline in household policy sales in part reflects the high proportion of mortgage lending
through the intermediaries resulting in lower cross sales. Personal Financial Services trading incomePersonal Financial Services trading income by segment by business 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mAbbey retail
    
    
    1,810
    
    
    
    2,009
    
    
    
    2,082cahoot
    
    
    69
    
    
    
    57
    
    
    
    30Cater Allen and Offshore
    
    
    69
    
    
    
    81
    
    
    
    118Banking and Savings
    
    
    1,948
    
    
    
    2,147
    
    
    
    2,230Scottish Mutual
    
    
    84
    
    
    
    59

    
    
    
    129Scottish Provident
    
    
    36
    
    
    
    114
    
    
    
    49Abbey National Life
    
    
    85
    
    
    
    89
    
    
    
    216Other
    
    
    43
    
    
    
    35
    
    
    
    31Investment and Protection
    
    
    248
    
    
    
    297
    
    
    
    425General Insurance

    
    
    110
    
    
    
    121
    
    
    
    146Abbey Financial Markets
    
    
    312
    
    
    
    249
    
    
    
    258Group Infrastructure
    
    
    (18
    )
    
    
    (25
    )
    
    
    (69
    )Total trading income
    
    
    2,600
    
    
    
    2,789
    
    
    
    2,990Adjust for:- Embedded value charges and rebasing(1)
    
    
    (27
    )
    
    
    (363
    )
    
    
    (553
    )-
Reorganisation expenses - life assurance
    
    
    (72
    )
    
    
    (16
    )
    
    
    - Depreciation on operating lease assets
    
    
    
    
    
    
    
    
    
    
    23PFS total operating income
    
    
    2,501
    
    
    
    2,410
    
    
    
    2,460
   (1)
    The £363m embedded value charges and rebasing in 2003 does not include £80m relating to the
tax law changes on the Scottish Provident acquisition structure, which are reported as
provisions for bad and doubtful debts for statutory purposes. 2004 compared to 2003 Banking and Savings trading income was £199m lower at £1,948m (2003: £2,147m), largely attributable
to the reduction in the Personal Financial Services Banking spread by 30 basis points. This was
partially offset by a release of unused reassurance reserves of £42m that are not expected to recur
in 2005. Investment and Protection trading income of £248m was £49m lower than the previous period
(2003: £297m), largely due to lower expected return from embedded value earnings due to the
lowering of the discount rate assumption and higher internal value based management charges
following a change in the assumed mix of capital support. The 2004 result includes £(59)m of
experience variances and assumption charges. (These are discussed in more detail in the life
assurance profit before tax section). In General Insurance trading income fell £11m to £110m (2003: £121m) caused mainly by reduced
new policy sales and lower renewals business. Abbey Financial Markets trading income of £312m was £63m higher than the previous period
(2003: £249m), largely due to a number of risk management opportunities and a favourable interest
rate environment. In total, the 2004 results include circa £65m of one-off items that are not
expected to repeat in 2005. Group Infrastructure trading income of £(18)m (2003: £(25)m) was broadly in line with last
year, but benefiting from the allocation of more interest cost to the business areas. In addition, 2004 results include circa £50m of income in relation to pre-tax earnings on the
Groups capital, that will not recur in 2005 as a result of the closeout of hedging in 2004. 2003 compared to 2002 Banking and Savings trading income was £83m lower at £2,147m (2002: £2,230m). A fall in net
interest income was largely due to high levels of mortgage redemptions being replaced by lower
margin new business. This also contributed to a lower overall standard variable rate asset, and
more than offset the strong volume growth. 24




---



##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued Investment and Protection trading income of £297m was 30% lower than 2002 at £425m. The main
contributor to this decrease was the impact of experience variances and assumption changes on the
life assurance businesses, which have moved from £84m favourable in 2002 to £58m unfavourable in
2003. In General Insurance, trading income fell to £121m (2002: £146m), reflecting primarily an
increase in the risk premiums payable to the principal underwriter, combined with a fall in
policies-in-force. Abbey Financial Markets trading income fell by £9m to £249m (2002: £258m), largely due to the
impact of reduced business opportunities resulting from the narrower Personal Financial Services
mandate following the Portfolio Business Unit disposal process. Group Infrastructure trading income of £(25)m (2002: £(69)m) improved by £44m, with net
interest income benefiting from earnings on surplus capital arising from the continued Portfolio
Business Unit disposal process. Trading non-interest income was negatively impacted by the
non-recurrence of some disposal gains in 2002. Personal Financial Services net interest income and spreadPersonal Financial Services net interest income by segment 31 December
    
    
    31 December31 December
    
    
    2003
    
    
    20022004(1)
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mBanking and Savings
    
    
    1,510
    
    
    
    1,720
    
    
    
    1,799Investment and Protection
    
    
    77
    
    
    
    83
    
    
    
    90General Insurance
    
    
    (4
    )
    
    
    (5
    )
    
    
    (3
    )Abbey Financial Markets
    
    
    21
    
    
    
    26
    
    
    
    27Group Infrastructure
    
    
    (134
    )
    
    
    (115
    )
    
    
    (175
    )Net interest income
    
    
    1,470
    
    
    
    1,709
    
    
    
    1,738
   (1)
    For details of restated presentation of interest and dealing
profits see page 14. 2004 compared to 2003 Excluding Banking and Savings (analysed below), net interest income decreased by £29m. 2003 compared to 2002 Excluding Banking and Savings, net interest income decreased by £50m. Personal Financial Services Banking spread 31 December31 December
    
    
    20032004
    
    
    (restated)Net interest income (£m)
    
    
    1,510
    
    
    
    1,720PFS Banking spread
    
    
    1.48
    %
    
    
    1.78
    %PFS Average asset spread
    
    
    0.70
    %
    
    
    0.90
    %PFS Average liability spread
    
    
    0.78
    %
    
    
    0.88
    %PFS Banking margin
    
    
    1.60
    %
    
    
    1.98
    %
  (1)
    Banking and Savings net interest income includes income associated with the Housing
Association asset, however the Personal Financial Services Banking spread excludes Social
Housing.  (2)
    Average spread is defined as interest received (mortgage, unsecured personal loans and
overdraft interest less suspended interest) over average interest earning assets, less
interest payable (savings, in-credit bank accounts) over interest bearing liabilities
(including an element of wholesale funding). The 2003 spread, has been restated to reflect the
sale of asset financing businesses in June 2004, and also adjustment of certain reported asset
and liability balances.  (3)
    Asset and liability spreads are calculated using the third party interest payments (such as
mortgage interest receivable or savings interest payable) net of relevant hedging compared to
an internal transfer price of average base rate plus 15 bps.  (4)
    Average margin is defined as net interest income (less suspended interest but including a
recapitalisation adjustment that equates to earnings on regulatory capital) divided by the
average interest earning assets.(5)
    Information relating to Personal Financial Services Banking Spread is not available for 2002. The Personal Financial Services Banking spread was 1.48%, 30 basis points lower than the same
period of last year with pressure on the asset spread mainly being responsible for the decline. The
reduction in the free-to-go standard variable rate asset contributed circa 8bps of the fall, lower
product redemption charges a further circa 11bps. The liability spread reduced to 0.78% (2003:
0.88%), benefiting in the first half from a rising rate environment, but with underlying
pressure-reflecting attrition from high margin back-book accounts. Through 2005, a modest decline in the spread is expected following a period of relative
stability in the last two quarters. 2004 compared to 2003 Banking and Savings net interest income of £1,510m was down 12.2% (2003: £1,720m), in part
reflecting a sharp reduction in product redemption charges to £114m (2003: £194m), with a higher
proportion of redemptions being penalty free, as well as a further reduction in average penalties
per customer. The absolute fall in the level of standard variable rate asset has also had an adverse impact
of circa £40m in net interest income in 2004 compared with 2003. 25




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued Earnings from deposits were down by circa £35m, with benefits from rising interest rates and spread
widening (particularly in bank accounts) being more than offset by attrition from high margin
back-book accounts. 2003 compared to 2002 Banking and Savings net interest income of £1,720m was down 4% (2002: £1,799m), primarily
reflecting a fall in the average mortgage book margin, with high levels of redemptions and
incentive maturities being replaced by lower margin new lending. 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002Mortgage asset mix(1)
    
    £bn
    
    
    £bn
    
    
    £bnIncentive periodStandard variable rate linked
    
    
    14
    
    
    
    18
    
    
    
    19Base-rate linked
    
    
    28
    
    
    
    26
    
    
    
    19Fixed
    
    
    18
    
    
    
    17
    
    
    
    14Tied in
    
    
    
    
    
    
    1
    
    
    
    260
    
    
    
    62
    
    
    
    54Free-to-goStandard variable rate linked
    
    
    12
    
    
    
    15
    
    
    
    17Base-rate linked
    
    
    7
    
    
    
    2
    
    
    
    1Fixed
    
    
    6
    
    
    
    5
    
    
    

    3Tied in
    
    
    1
    
    
    
    1
    
    
    
    126
    
    
    
    23
    
    
    
    22Total mortgage asset
    
    
    86
    
    
    
    85
    
    
    
    76
   (1)
    Quoted mortgage asset excludes £3.1bn (2003: £3.1bn; 2001: £2.2bn) of Housing Association
lending, consistent with the methodology used to calculate the Abbey retail spread. In
addition, the split of the asset has been restated in prior periods to correct
misclassifications, increasing the amount of fixed rate asset, offset by reducing the standard
variable rate linked and Base rate linked incentive period values. 2004 compared to 2003 In overall terms, the amount of assets in incentive periods reduced during 2004 reflecting lower
gross lending but also high levels of assets reaching the end of their incentive period and
reverting to base rate linked (free-to-go). Of the remaining incentive period asset, the standard
variable rate linked incentive period business mainly constitutes higher margin variable internal
transfer business which all tracks and reverts to standard variable rate. Base rate linked business
contains most of the front book business and is linked to base rates in the incentive period. The
free-to-go standard variable rate asset has fallen over the past few years due partly to
the increase in remortgage business and also the selling of Classic and Lifestyle products which
revert to a base rate tracker after the incentive period. Through 2005, incentive period maturities will again start reverting to standard variable
rate, and therefore a more stable profile in the high margin standard variable rate asset is
expected. 2003 compared to 2002 At year end, free-to-go standard variable rate was £15bn, reducing through 2003, but in particular
from September 2003, as an increased proportion of incentive-based customer loans started to mature
onto base rate linked reversion products. This latter segment is broadly restricted to lending
undertaken between April 2001 and August 2002. 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002Liability mix
    
    £bn
    
    
    £bn
    
    
    £bnBanking
    
    
    4.5
    
    
    
    4.3
    
    
    
    3.5Remote
    
    
    11.0
    
    
    
    12.2
    
    
    
    13.2Fixed term and tax free savings
    
    
    15.1
    
    
    
    14.5
    
    
    
    14.7Branch-based deposits
    
    
    15.3
    
    
    
    15.3
    
    
    
    15.4Total Abbey branded household liability(1)
    
    
    45.9
    
    
    
    46.3
    
    
    
    46.8Other brands (1)
    
    
    16.0
    
    
    
    14.2
    
    
    
    12.5Total PFS liability
    
    
    61.9
    
    
    
    60.5
    
    
    
    59.3
   (1)
    The split is different to that in the Personal Financial Services business flows section
due to the treatment of Abbey Business. 2004 compared to 2003 Overall, branch-based deposits have remained stable at £15.3bn. Changes in mix reflect attrition
from older branch-based accounts, partly offset by positive flows into new lower but still positive
margin, branch-based offerings, such as Flexible Saver and Branch Saver. Remote savings balances, including internet and postal, have reduced to £11.0bn (December
2003: £12.2bn). Fixed term and tax-free savings balances increased, with Individual Savings Account
(ISA) inflows offsetting bond and Tax Exempt Special Savings Account maturities. Growth in balances outside Abbey retail relate primarily to cahoot. 26




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 2003 compared to 2002 Overall, branch-based deposits remained broadly stable at £15.3bn. Current account growth
contributed positively to the stability of branch-based balances. Remote savings balances, including internet and postal, have reduced to £12.2bn (2002:
£13.2bn). Fixed term and tax-free savings balances fell modestly, with Individual Savings Account
inflows partially offsetting bond and Tax Exempt Specialist Savings Account (TESSA) maturities. Growth in balances outside Abbey retail relate primarily to cahoot and Abbey National
Offshore. Trading non-interest income 31 December
    
    
    31 December 2003
    
    
    31 December 20022004
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mMortgages:Administration, survey and legal fees
    
    
    66
    
    
    
    73
    
    
    
    65Application and booking fees
    
    
    40
    
    
    
    43
    
    
    
    13Fee income on high loan-to-value loans
    
    
    88
    
    
    
    55
    
    
    
    87Introducer fees payable
    
    
    (31
    )
    
    
    (20
    )
    
    
    (17
    )Other
    
    
    17
    
    
    
    12
    
    
    
    3180
    
    
    
    163
    
    
    
    151Savings
    
    
    28
    
    
    
    47
    
    
    
    67Banking:Fees and commissions receivable
    
    
    278
    
    
    
    246
    
    
    
    235Fees and commissions payable
    
    
    (40
    )
    
    
    (38
    )
    
    
    (31
    )Other
    
    
    (8
    )
    
    
    9
    
    
    
    9230
    
    
    
    217
    
    
    
    213Banking and Savings
    
    
    438
    
    
    
    427
    
    
    
    431Investment and Protection
    
    
    171
    
    
    
    214
    
    
    
    335Building and contents
    
    
    91
    
    
    
    94
    
    
    
    118Motor
    
    
    
    
    
    
    6
    
    
    
    6Creditor
    
    
    21
    
    
    
    24
    
    
    
    22Other
    
    
    2
    
    
    
    2
    
    
    
    3General Insurance
    
    
    114
    
    
    
    126
    
    
    
    149Abbey Financial Markets(1)
    
    
    291
    
    
    
    223
    
    
    
    231Group Infrastructure
    
    
    116
    
    
    
    90
    
    
    
    106PFS trading non-interest income
    
    
    1,130
    
    
    
    1,080
    
    
    
    1,252
   (1)
    For details of restated presentation of interest and dealing
profits see page 14. 2004 compared to 2003 Total mortgage non-interest income has increased by £17m to £180m (2003: £163m), predominantly due
to a release of unused reassurance reserves relating to high loan-to-value mortgages, offset by
increased introducer fees (due to revised amortisation of fees introduced from 2002), and a fall in
administration, survey and legal fees, as a result of reduced mortgage completions in 2004. Savings non-interest income of £28m is down £19m on last year (2003: £47m), largely due to a
fall in the level of both protection and investment sales. Banking related non-interest income increased by £13m to £230m (2003: £217m) driven by a new
penalty charging structure, offset by the outsourcing costs of cash processing and reduced
automatic teller machine income following the loss of key sites at supermarkets. Investment and Protection trading non-interest income is analysed in the life assurance income
section. General insurance non-interest income of £114m (2003: £126m) was slightly lower than the
equivalent period in 2003, with lower new business volumes and a reduction in renewals, in part
offset by improved margins. Abbey Financial Markets non-interest income increased 30% to £291m (2003: £223m), largely due
to a number of risk management trades (totalling circa £65m that are not expected to repeat in
2005) and a favourable interest rate environment. In Group Infrastructure, non-interest income of £116m (2003: £90m) increased by £26m,
reflecting higher capital charges allocated to the life assurance companies in line with the
groups gearing ratio. 2003 compared to 2002 Total mortgage non-interest income has increased by £12m to £163m (2002: £151m), largely due to
increased new business levels. These improvements have been offset by reduced fee income on high
loan-to-value lending, due primarily to lower levels of new business with loan-to-value greater
than 90%. Savings non-interest income of £47m (2002: £67m) was down 30%, resulting from a fall in
commissions earned on lower sales of life assurance policies. Banking related trading non-interest income was £4m higher at £217m. Investment and Protection trading non-interest income is analysed in the Life assurance income
section. 27




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued General Insurance income has fallen to £126m (2002: £149m). Buildings and contents income has been
impacted by an increase in the costs payable to the principal insurer of £18m not passed on to
customers. Reduced new business and lower renewals have also contributed to the overall reduction
in income. Abbey Financial Markets non-interest income decreased 3% to £223m (2002: £231m). In Group Infrastructure, non-interest income of £90m (2002: £106m) fell by £16m, reflecting
the non-recurrence of one-off gains in 2002. Life assurance income 31 December 2004Scottish
    
    
    ScottishAN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mNew business contribution to embedded value
    
    
    14
    
    
    
    (1
    )
    
    
    32
    
    
    
    45Contribution from existing business to embedded value:- expected return
    
    
    37
    
    
    
    109
    
    
    
    60
    
    
    
    206- experience variances and changes in assumptions
    
    
    3
    
    
    
    (4
    )
    
    
    (58
    )
    
    
    (59
    )Increase in value of long-term assurance businesses
    
    
    54
    
    
    
    104
    
    
    
    34
    
    
    
    192Non-embedded value earnings:ANUTM and ANPIM Contribution (1)
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38Other income and operating expenses
    
    
    (22
    )
    
    
    (31
    )
    
    
    2
    
    
    
    (51
    )Trading profit before tax(3)
    
    
    70
    
    
    
    73
    
    
    
    36
    
    
    
    179Less: embedded value charges and rebasing
    
    
    (5
    )
    
    
    (79
    )
    
    
    105
    
    
    
    21Less: reorganisation expenses
    
    
    (7
    )
    
    
    (18
    )
    
    
    (30
    )
    
    
    (55
    )Profit/(loss) before tax
    
    
    58
    
    
    
    (24
    )
    
    
    111
    
    
    
    145New business margin (%) (2)
    
    
    40
    %
    
    
    (2
    )%
    
    
    45
    %
    
    
    28
    %
 31 December 2003Scottish
    
    
    ScottishAN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mNew business contribution to embedded value
    
    
    21
    
    
    
    6
    
    
    
    18
    
    
    
    45Contribution from existing business to embedded value:- expected return
    
    
    43
    
    
    
    128
    
    
    
    44
    
    
    
    215- experience variances and changes in assumptions
    
    
    (14
    )
    
    
    (69
    )
    
    
    25
    
    
    
    (58
    )Increase in value of long-term assurance businesses
    
    
    50
    
    
    
    65
    
    
    
    87
    
    
    
    202Non-embedded value earnings:ANUTM and ANPIM Contribution (1)
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    43Other income and operating expenses
    
    
    (14
    )
    
    
    (15
    )
    
    
    26
    
    
    
    (3
    )Trading profit before tax(3)
    
    
    79
    
    
    
    50
    
    
    
    113
    
    
    
    242Less: embedded value charges and rebasing
    
    
    26
    
    
    
    (207
    )
    
    
    (262
    )
    
    
    (443
    )Less: reorganisation expenses
    
    
    
    
    
    
    (8
    )
    
    
    (8
    )
    
    
    (16
    )Profit/(loss) before tax
    
    
    105
    
    
    
    (165
    )
    
    
    (157
    )
    
    
    (217
    )New business margin (%) (2)
    
    
    46
    %
    
    
    7
    %
    
    
    22
    %
    
    
    21
    %
 31 December 2002Scottish
    
    
    ScottishAN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mNew business contribution to embedded value
    
    
    31
    
    
    
    7
    
    
    
    15
    
    
    
    53Contribution from existing business to embedded value:- expected return
    
    
    50
    
    
    
    98
    
    
    
    23
    
    
    
    171- experience variances and changes in assumptions
    
    
    50
    
    
    
    47
    
    
    
    (13
    )
    
    
    84Increase in value of long-term assurance businesses
    
    
    131
    
    
    
    152
    
    
    
    25
    
    
    
    308Non-embedded value earnings:ANUTM and ANPIM Contribution (1)
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    63Other income and operating expenses
    
    
    11
    
    
    
    (26
    )
    
    
    23
    
    
    
    8Trading profit before tax(3)
    
    
    205
    
    
    
    126
    
    
    
    48
    
    
    
    379Less: embedded value charges and rebasing
    
    
    (32
    )
    
    
    (481
    )
    
    
    (40
    )
    
    
    (553
    )Profit/(loss) before tax
    
    
    173
    
    
    
    (355
    )
    
    
    8
    
    
    
    (174
    )New business margin (%) (2)
    
    
    41
    %
    
    
    5
    %
    
    
    22
    %
    
    
    19
    %
   (1)
    ANUTM represents Abbey National Unit Trust Managers, while ANPIM represents Abbey National
PEP and ISA Managers.  (2)
    New business margin is calculated as new business contribution to embedded value, divided by
related annualised equivalent premiums for Life contracts.  (3)
    The difference between trading profit before tax for the life assurance business and the
Investment and Protection segment of £(14)m (2003: £(3)m and 2002: £(7)m) consists of the
profit before tax for the James Hay, Inscape and City Deal Businesses. 28




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 2004 compared to 2003 New business contribution to embedded value New business contribution to embedded value earnings remained in line with 2003. Reductions in
Abbey National Life and Scottish Mutual Assurance were offset by increases in Scottish Provident.
The Abbey National Life reductions were mainly attributable to decreases in protection volumes
although there was also a drop in investment product volumes. The reductions in Scottish Mutual
Assurance were attributable to lower flexible investment bond sales and a reduction in Pegasus
product sales and profitability. Despite volume decreases Scottish Provident new business
contribution increased due to higher profitability in protection sales. Expected return Expected return represents the unwind of the discount on the discounted value of future profits,
together with the return on shareholders funds held in the long-term business fund. Overall, the
expected return of £206m (2003: £215m) was down £9m. The overall decline was due to the reduction
in the risk discount rate. This fall was partly offset by earnings on former contingent loan
balances being recognised as part of embedded value rather than in net interest income. Abbey National Unit Trust Managers and Abbey National PEP and ISA managers contribution ANUTM and ANPIM non-interest income of £38m was slightly below last year (2003: £43m) due to lower
sales volumes. Other Income and Operating Expenses Other income and operating expenses of £(51)m was down £48m in 2003. This is due to a fall in net
interest income of £17m largely due to the unwind of the Scottish Provident and Scottish Mutual
Assurance contingent loan arrangements in July 2004, and an increase in the internal management
charge for debt capital in line with group gearing. 2003 compared to 2002 New business contribution to embedded value The decrease in Abbey National Life new business contribution is due to reduced sales of investment
products, particularly with-profits bonds together with reduced profitability from protection
business resulting from increased reassurance charges. Reduced sales of investment products also
lead to a reduction in new business contribution from Scottish Mutual though this is largely offset
by reductions in low margin pension business. The increase from Scottish Provident is due to the
increase in protection volumes partly offset by reduced profitability in the first half of the year
due to increased reassurance rates. Expected return Overall, the expected return of £215m (2002: £171m) was up £44m. The impact of lower balances on the unwind of the discount in 2003 was around £70m negative,
compared to £30m negative in 2002. This negative impact in 2003 was broadly offset by new business
written in 2002 increasing the opening discounted value of future profits. The balance of the year-on-year increase largely relates to increased earnings on capital
injections made into the long-term business fund, totalling £825m made in Scottish Mutual in the
latter half of 2002 and in early 2003, £220m was injected into Scottish Provident. Abbey National Unit Trust Managers and Abbey National PEP and ISA Managers contribution The reduction in Abbey National Unit Trust Managers and Abbey National PEP and ISA Managers
contributions is due to lower sales volumes with a lower margin sales mix. 29




---



##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued Experience variances and changes in assumptions Experience variances and assumption changes of £(59)m (2003: £(58)m) have deteriorated as
follows: December 2004
    
    
    December 2003Scottish
    
    
    Scottish
    
    
    
    
    
    
    
    
    
    
    Scottish
    
    
    ScottishAN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total
    
    
    AN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mMortality and morbidity experience
    
    
    3
    
    
    
    8
    
    
    
    5
    
    
    
    16
    
    
    
    8
    
    
    
    (21
    )
    
    
    23
    
    
    
    10Lapse experience
    
    
    (1
    )
    
    
    (22
    )
    
    
    (14
    )
    
    
    (37
    )
    
    
    (8
    )
    
    
    (23
    )
    
    
    (16
    )
    
    
    (47
    )Expenses (over)/under run
    
    
    (2
    )
    
    
    (11
    )
    
    
    5
    
    
    
    (8
    )
    
    
    (1
    )
    
    
    (16
    )
    
    
    21
    
    
    
    4Taxation adjustment
    
    
    (6
    )
    
    
    20
    
    
    
    (1
    )
    
    
    13
    
    
    
    (10
    )
    
    
    (16
    )
    
    
    7
    
    
    
    (19
    )Changes to reserving and modelling
methodology
    
    
    14
    
    
    
    7
    
    
    
    (50
    )
    
    
    (29
    )
    
    
    3
    
    
    
    6
    
    
    
    (11
    )
    
    
    (2
    )Other
    
    
    (6
    )
    
    
    (5
    )
    
    
    (3
    )
    
    
    (14
    )
    
    
    (6
    )
    
    
    1
    
    
    
    1
    
    
    
    (4
    )Total experience and assumption
changes variance
    
    
    2
    
    
    
    (3
    )
    
    
    (58
    )
    
    
    (59
    )
    
    
    (14
    )
    
    
    (69
    )
    
    
    25
    
    
    
    (58
    )
 Experience variances relate to the current year and changes in assumptions capture the effect
both in current year, and on the discounted value of future profits, of the difference between the
actual experience and the assumptions built in the models for calculating the new business
contribution and the expected return. However, investment variances
and other one-off items are
excluded. Taxation adjustments affect profit before tax as profit is calculated on a post-tax basis
and grossed up at the rate applicable to the company and type of business in question. Mortality and morbidity experience variances have been favourable following the assumption
changes made in all three value centres at the end of 2003. Lapse experience of £(37)m improved £10m on the prior year. The lapse experience was still
negative due to the poor lapse experience in relation to with-profit products. Expense (over)/under run is a measure of efficiency of cost management within the funds and is
impacted by sales volumes, sales mix and actual versus assumed costs. Overall, the expense variance
across all funds declined to a negative experience of £(8)m in 2004 from a positive variance of £4m
in 2003. This is due partly to Scottish Provident including a one-off capitalised benefit for lower
investment expenses in 2003. Taxation experience is up £32m following the recognition of a deferred tax asset in Scottish
Mutual Assurance in 2004. Changes to modelling and reserving assumptions total £29m including the
impact of mid-year annuity reassurance arrangements and changes in Irish tax assumptions in
Scottish Provident. Embedded value charges and rebasing Embedded value charges and rebasing were £21m (2003: £(443)m). The embedded value charges and rebasing are disclosed in the Other Material Items section.
The investment assumptions and variances total has two main drivers. Firstly, the impact of
investment markets over the period differing from expectations. This includes actual less expected
interest on surpluses retained in the funds and the difference between actual and expected
management charges on unit funds over the period. Secondly, the impact of closing market levels
being different than expected on the discounted value of future profits. This includes items such
as changes to the active economic basis, changes in asset mix and the impact of higher or lower
unit values on the stream of future management charges. Other one-off adjustments included here
reflect changes in provisioning and the impacts of stabilising the with-profits funds. Life assurance new business premiums 31 December 2004Scottish
    
    
    ScottishAN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mSinglePension
    
    
    17
    
    
    
    222
    
    
    
    21
    
    
    
    260Life and investments:- ISA and unit trusts
    
    
    409
    
    
    
    
    
    
    
    
    
    
    
    409- Life and other bonds
    
    
    4
    
    
    
    17
    
    
    
    31
    
    
    
    52- With-profits (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    430
    
    
    
    239
    
    
    
    52
    
    
    
    721AnnualPension
    
    
    13
    
    
    
    18
    
    
    
    1
    
    
    
    32Life and investments:- ISA and unit trusts
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    13- Life and other bonds
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    1- Term assurance and other protection
    
    
    19
    
    
    
    11
    
    
    
    68
    
    
    
    9845
    
    
    
    29
    
    
    
    70
    
    
    
    144Total new business premiums
    
    
    475
    
    
    
    268
    
    
    
    122
    
    
    
    865Annualised equivalent (2)
    
    
    89
    
    
    
    53
    
    
    
    75
    
    
    
    217New business margin (3)
    
    
    40
    %
    
    
    (2
    )%
    
    
    45
    %
    
    
    28
    %
   (1)
    Excludes sales of Prudential Bonds where only commissions are earned, which totalled £3m.(2)
    Calculated as 10% of single premium new business premiums, plus annual new business premiums.(3)
    New business margin is calculated as new business contribution to embedded value, divided by
related annualised premiums for life contracts. 30




---



##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 31 December 2003Scottish
    
    
    ScottishAN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mSinglePension
    
    
    30
    
    
    
    280
    
    
    
    113
    
    
    
    423Life and investments:- ISA and unit trusts
    
    
    714
    
    
    
    3
    
    
    
    
    
    
    
    717- Life and other bonds
    
    
    20
    
    
    
    170
    
    
    
    
    
    
    
    190- With-profits (1)
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2764
    
    
    
    455
    
    
    
    113
    
    
    
    1,332AnnualPension
    
    
    15
    
    
    
    24
    
    
    
    2
    
    
    
    41Life and investments:- ISA and unit trusts
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9- Life and other bonds
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1- Term assurance and other protection
    
    
    28
    
    
    
    15
    
    
    
    82
    
    
    
    12553
    
    
    
    39
    
    
    
    84
    
    
    
    176Total new business premiums
    
    
    817
    
    
    
    494
    
    
    
    197
    
    
    
    1,508Annualised equivalent (2)
    
    
    129
    
    
    
    85
    
    
    
    95
    
    
    
    309New business margin (3)
    
    
    46
    %
    
    
    7
    %
    
    
    22
    %
    
    
    21
    %
   (1)
    Excludes sales of Prudential Bonds where only commissions are earned, which totalled £54m.(2)
    Calculated as 10% of single premium new business premiums, plus annual new business premiums.(3)
    New business margin is calculated as new business contribution to embedded value, divided by
related annualised equivalent premiums for life contracts. 31 December 2002Scottish
    
    
    ScottishAN Life
    
    
    Mutual
    
    
    Provident
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mSinglePension
    
    
    29
    
    
    
    623
    
    
    
    150
    
    
    
    802Life and investments:- ISA and unit trusts
    
    
    1,031
    
    
    
    50
    
    
    
    
    
    
    
    1,081- Life and other bonds
    
    
    111
    
    
    
    124
    
    
    
    
    
    
    
    235- With-profits (1)
    
    
    101
    
    
    
    96
    
    
    
    
    
    
    
    1971,272
    
    
    
    893
    
    
    
    150
    
    
    
    2,315AnnualPension
    
    
    18
    
    
    
    42
    
    
    
    4
    
    
    
    64Life and investments:- ISA and unit trusts
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19- Life and other bonds
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    7- Term assurance and other protection
    
    
    27
    
    
    
    15
    
    
    
    70
    
    
    
    11269
    
    
    
    59
    
    
    
    74
    
    
    
    202Total new business premiums
    
    
    1,341
    
    
    
    952
    
    
    
    224
    
    
    
    2,517Annualised equivalent (2)
    
    
    196
    
    
    
    149
    
    
    
    89
    
    
    
    434New business margin (3)
    
    
    41
    %
    
    
    5
    %
    
    
    22
    %
    
    
    19
    %
   (1)
    Excludes sales of Prudential Bonds where only commissions are earned, which totalled £11m.(2)
    Calculated as 10% of single premium new business premiums, plus annual new business premiums.(3)
    New business margin is calculated as new business contribution to embedded value, divided by
related annualised equivalent premiums for Life contracts. 2004 compared to 2003 Total Personal Financial Services life assurance new business premiums of £865m were 43% lower than
2003 (£1,508m), mainly reflecting the general decline in the Individual Savings Account market. A more detailed analysis of the movement includes: >
    
    Abbey National Life new business totalled £475m (2003: £817m), down
42%, impacted by a large fall in life and investment products. This
was driven by falls in single premium structured Individual Savings
Account sales and investment bonds.>
    
    New business premiums in Scottish Mutual of £268m were 46% lower than
2003, predominantly due to reduced sales of single premium pension
and investment products. Single premium life sales suffered from the
withdrawal of the special offer on the cash fund in relation to the
Flexible Investment bond.>
    
    Scottish Provident new business fell 38% to £122m (2003: £197m),
largely due to reduced sales of single premium pension products, and
lower protection volumes partly offset by sales of the Scottish
Provident International offshore bond.
 31




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 2003 compared to 2002 Total Personal Financial Services life assurance new business premiums of £1.5bn were 40% lower
than 2002 (£2.5bn), reflecting the withdrawal from the with-profit bond market and a general
decline in demand due to investor nervousness about stock market conditions. The impact on our new business flows has been more marked as a result of our previous
dependence on with-profits. Assets under management The table below shows the Abbey National Asset Managers funds under management by company
(including related Portfolio Business Unit entities), and by type of business. 31 December 2004Scottish
    
    
    ScottishAN Life
    
    
    Mutual(2)
    
    
    Provident
    
    
    Total£bn
    
    
    £bn
    
    
    £bn
    
    
    £bnClosed with-profit funds
    
    
    
    
    
    
    7.5
    
    
    
    4.3
    
    
    
    11.8Ongoing businesses
    
    
    4.7
    
    
    
    7.7
    
    
    
    2.1
    
    
    
    14.5Total (1)
    
    
    4.7
    
    
    
    15.2
    
    
    
    6.4
    
    
    
    26.3
   (1)
    Total funds under management are split £25bn in Personal Financial Services, and £1.3bn
within the Portfolio Business Unit.(2)
    Scottish Mutual includes Scottish Mutual International.Note: The funds under management disclosed in the table above were largely outsourced in 2004. 31 December 2003Scottish
    
    
    ScottishAN Life
    
    
    Mutual(2)
    
    
    Provident
    
    
    Total£bn
    
    
    £bn
    
    
    £bn
    
    
    £bnWith-profits fund
    
    
    
    
    
    
    9.4
    
    
    
    4.9
    
    
    
    14.3Non-profit fund
    
    
    4.8
    
    
    
    7.5
    
    
    
    2.5
    
    
    
    14.8Total (1)
    
    
    4.8
    
    
    
    16.9
    
    
    
    7.4
    
    
    
    29.1
   (1)
    Total funds under management is split £25.9bn in Personal Financial Services grouped
segments, and £3.2bn in Portfolio Business Unit grouped segments.(2)
    Scottish Mutual includes Scottish Mutual International. 31 December 2002Scottish
    
    
    ScottishAN Life
    
    
    Mutual(2)
    
    
    Provident
    
    
    Total£bn
    
    
    £bn
    
    
    £bn
    
    
    £bnWith-profits fund
    
    
    
    
    
    
    9.3
    
    
    
    5.1
    
    
    
    14.4Non-profit fund
    
    
    4.9
    
    
    
    7.6
    
    
    
    2.4
    
    
    
    14.9Total (1)
    
    
    4.9
    
    
    
    16.9
    
    
    
    7.5
    
    
    
    29.3
   (1)
    Total funds under management is split £26.3bn in Personal Financial Services grouped
segments, and £3.0bn in Portfolio Business Unit grouped segments.(2)
    Scottish Mutual includes Scottish Mutual International. Personal Financial Services trading expensesPersonal Financial Services trading expenses by segment by business 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mAbbey retail
    

    
    1,037
    
    
    
    1,041
    
    
    
    1,002cahoot
    
    
    41
    
    
    
    43
    
    
    
    43Cater Allen and Offshore
    
    
    36
    
    
    
    48
    
    
    
    63Banking and Savings
    
    
    1,114
    
    
    
    1,132
    
    
    
    1,108Scottish Mutual (1)
    
    
    11
    
    
    
    9
    
    
    
    3Scottish Provident(1)
    
    
    
    
    
    
    1
    
    
    
    1Abbey National Life(1)
    
    
    15
    
    
    
    10
    
    
    
    11Other
    
    
    57
    
    
    
    38
    
    
    
    38Investment and Protection
    
    
    83
    
    
    
    58
    
    
    
    53General Insurance
    
    
    40
    
    
    
    48
    
    
    
    54Abbey Financial Markets
    
    
    109
    
    
    
    109
    
    
    
    110Group Infrastructure
    
    
    253
    
    
    
    230
    
    
    
    252Total trading expenses
    
    
    1,599
    
    
    
    1,577
    
    
    
    1,577Adjust for:- Reorganisation expenses
    
    
    445
    
    
    
    265
    
    
    
    34- Goodwill charges
    
    
    20
    
    
    
    28
    
    
    
    811PFS expenses
    
    
    2,064
    
    
    
    1,870
    
    
    
    2,422
   (1)
    The quoted operating expenses for the Life Assurance businesses exclude operating expenses
that are accounted for as part of embedded value and reported as non-interest income. These
totalled £165m (2003: £179m). 32




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 2004 compared to 2003 Banking and Savings trading expenses were down £18m to £1,114m (2003: £1,132m). This was mainly due
to lower salary costs and reduced property expenses reflecting site closures, more than offsetting
increased marketing promotion. Investment and Protection expenses (excluding those within embedded value) were up £25m to
£83m (2003: £58m). The majority of this increase relates to system development spend in James Hay. General Insurance expenses of £40m (2003: £48m) were down £8m reflecting cost reductions
following systems integration. Abbey Financial Markets costs remained flat year on year with salary expense decreases due to
headcount reductions being offset by an increase in bonus payments consistent with revenue
performance. In Group Infrastructure, trading expenses were up 10% to £253m (2003: £230m) largely due to
wage inflation, pension contribution increases and a rise in outsourced service costs, previously
capitalised. 2003 compared to 2002 Banking and Savings trading expenses were up £24m to £1,132m (2002: £1,108m). Increased employment
costs reflected wage inflation, increased customer-facing headcount, and increased national
insurance and pension costs. This, combined with increased marketing spend, has more than offset
the cost savings in Abbey retail. Investment and Protection expenses were up £5m to £58m (2002: £53m), reflecting the costs of
rolling out multi-manager in Scottish Mutual, and some additional spend to support the expansion of
James Hay. General Insurance expenses of £48m (2002: £54m) were down £6m, largely due to a significant
reduction in headcount as part of the cost reduction programme. Trading expenses in the Abbey Financial Markets business of £109m were stable. In Group Infrastructure trading expenses were down 9% to £230m (2002: £252m), largely as a
result of benefits associated with the cost reduction programme and the non-recurrence of project
spend incurred in the second half of 2002. A breakdown of the non-trading items is provided in the Other Material Items section. Personal Financial Services trading expenses by type 31 December31 December
    
    
    2003
    
    
    31 December 20022004
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mSalaries and other compensation payments
    
    
    640
    
    
    
    639
    
    
    
    638Social security costs
    
    
    60
    
    
    
    55
    
    
    
    51Pension costs(1)
    
    
    120
    
    
    
    121
    
    
    
    81Salaries and other staff costs
    
    
    820
    
    
    
    815
    
    
    
    770Bank, legal and professional expenses
    
    
    145
    
    
    
    123
    
    
    
    109Advertising and marketing
    
    
    109
    
    
    
    91
    
    
    
    90Bank, legal, marketing and professional expenses
    
    
    254
    
    
    
    214
    
    
    
    199Software, computer and administration expenses
    
    
    268
    
    
    
    270
    
    
    
    333Premises and equipment depreciation
    
    
    81
    
    
    
    90
    
    
    
    92Other property and equipment expenses
    
    
    176
    
    
    
    188
    
    
    
    183PFS trading expenses
    
    
    1,599
    
    
    
    1,577
    
    
    
    1,577
   (1)
    Pension costs relate to Personal Financial Services only, and do not include £12m (2003:
£12m, 2002: £12m) relating to the life businesses accounted for on an embedded value basis. 2004 compared to 2003 Total employment costs were higher at £820m (2003: £815m) comprising: >
    
    Salaries and other compensation benefits broadly flat with reductions in headcount offset by higher bonus payments;>
    
    Social security costs have increased due to staff movements out of the State Earnings Related Pension Scheme, where a
rebate was previously available to Abbey; and>
    
    Pension costs have remained flat.
 Bank, legal, and professional expenses of £145m were up 18% on 2003, largely due to information
technology outsourcing costs and outsourcing in the General Insurance Division. Advertising and
marketing spend was £18m higher (2003: £91m) representing a variety of new marketing campaigns. Software, computer and administration expenses of £268m (2003: £270m) were broadly flat. Premises and equipment depreciation expenses of £81m decreased by 10% (2003: £90m), due to
asset write-offs and run-off more than offsetting increased capital investment. Other property and equipment expenses fell 6% to £176m (2003: £188m), a result of a reduction
in property running costs due to site closures and rationalisation. 33




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 2003 compared to 2002 Total salaries and other staff costs were up 6% to £815m (2002: £770m) comprising:>
    
    salaries and other compensation payments remained broadly flat, with normal salary inflation, being offset by head count
savings from the cost programme;>
    
    social security costs up 6% in total, reflecting the increase in employers contribution rate effective from April 2002; and>
    
    an increase in pension costs of £40m to £121m (2002: £81m), largely due to increased charges resulting from the pension
fund deficit. A detailed analysis of the pension fund deficit is included in the Other material items section.
 Bank, legal, marketing and professional expenses of £214m were up 8% on last year. Advertising and
marketing spend was broadly stable, with a reduction in non-Abbey branded spend being offset by
increased Abbey advertising. Software, computer and administration expenses of £270m (2002: £333m) were down 19%, largely
reflecting the benefits of the cost reduction programme. Premises and equipment depreciation expenses of £90m decreased by 2%, due to increased
information technology costs in relation to upgrading our telecommunications network, customer
relationship management software and upgrades to the branch information technology infrastructure. Other property and equipment expenses were broadly unchanged at £188m (2002: £183m). Personal Financial
Services trading provisions
Personal Financial Services trading provisions by type 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mMortgages
    
    
    (119
    )
    
    
    8
    
    
    
    17Unsecured personal loans
    
    
    78
    
    
    
    61
    
    
    
    47Credit cards
    
    
    8
    
    
    
    10
    
    
    
    4Banking
    
    
    62
    
    
    
    39
    
    
    
    68Other
    
    
    5
    
    
    
    12
    
    
    
    14PFS provisions for bad and doubtful debts
    
    
    34
    
    
    
    130
    
    
    
    150Provisions for contingent liabilities
    
    
    153
    
    
    
    61
    
    
    
    46Amounts written off fixed-asset investments
    
    
    
    
    
    
    
    
    
    
    (2
    )Total PFS trading provisions
    
    
    187
    
    
    
    191
    
    
    
    194Add: embedded value charges and rebasing(1)
    
    
    (48
    )
    
    
    80
    
    
    
    Add: reorganisation expenses(2)
    
    
    48
    
    
    
    34
    
    
    
    PFS provisions
    
    
    187
    
    
    
    305
    
    
    
    194
   (1)
    
    Charge in 2003 relates to the impact of tax law changes on the structure of the Scottish
Provident acquisition.(2)
    
    Includes empty premises provisions arising from the review of site locations and certain
asset write-downs. 2004 compared to 2003 In total, Personal Financial Services trading provisions were lower at £187m (2003: £191m). There was a release of mortgage provisions of £119m (2003: £8m charge) reflecting favourable
arrears, and lower properties in possession and related losses incurred. Offsetting this are higher
provisions on unsecured lending arising from increased fraud write-offs in Banking, and increased
reserving on unsecured personal loans reflecting growth. Most of the higher charge under provisions for contingent liabilities and commitments relate
to increased reserving for misselling contributions. 2003 compared to 2002 In total, Personal Financial Services trading provisions fell by 2% to £191m (2002: £194m). Personal Financial Services provisions for bad and doubtful debts of £130m fell 13% (2002:
£150m). The mortgage provisions charge of £8m (2002: £17m) benefited from an improvement in arrears,
while provisions relating to unsecured personal loans grew by £14m to £61m due to continued asset
growth, particularly in cahoot. Banking provisions decreased to £39m (2002: £68m). Provisions for contingent liabilities and commitments of £61m (2002: £46m) include a provision
of £50m related to uncertainty about the regulatory environment for product misselling. Total Personal Financial Services non-performing loans 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mLoans provided for
    
    
    216
    
    
    
    167
    
    
    
    174Arrears greater than 90 days not provided
    
    
    428
    
    
    
    414
    
    
    
    528Total non-performing loans
    
    
    644
    
    
    
    581
    
    
    
    702Total loans and advances to customers(1)
    
    
    78,314
    
    
    
    75,114
    
    
    
    66,072Total provisions
    
    
    207
    
    
    
    315
    
    
    
    292NPLs as a % of loans and advances
    
    
    0.82
    %
    
    
    0.77
    %
    
    
    1.06
    %Provisions as a % of NPLs
    
    
    32.14
    %
    
    
    54.22
    %
    
    
    41.60
    %
   (1)
    
    The quoted loans and advances to customers are net of securitisations. 34




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued 2004 compared to 2003 The value of non-performing loans increased to £644m (2003: £581m), driven by several interest rate
rises during the year but mitigated by a good credit quality of business written. As a percentage of loans and advances, non-performing loans have increased to 0.82% (2003:
0.77%), with provision coverage of 32.14% (2003: 54.22%) - an appropriate coverage ratio given
level of asset growth and quality despite the release of mortgage provisions during the year. 2003 compared to 2002 The total value of non-performing loans decreased to £581m (2002: £702m), benefiting from
favourable market conditions, good credit control, and strong credit quality of new business
written. As a percentage of loans and advances, non-performing loans decreased to 0.77% (2002: 1.06%),
with provision coverage of 54.22% (2002: 41.60%). Personal Financial Services mortgage arrears, properties in possession and lending mixMortgage arrears 31 December 2004
    
    
    31 December 2003CML(1)
    
    
    
    
    
    
    CML (1)Number of
    
    
    
    
    
    
    Industry
    
    
    Number of
    
    
    
    
    
    
    IndustryCases
    
    cases (000)
    
    
    % of total
    
    
    average %
    
    
    cases (000)
    
    
    % of total
    
    
    average %1  2 months arrears
    
    
    24.6
    
    
    
    1.88
    
    
    
    n/a
    
    
    
    20.2
    
    
    
    1.47
    
    
    
    n/a3  5 months arrears
    
    
    5.9
    
    
    
    0.45
    
    
    
    0.47
    
    
    
    5.5
    
    
    
    0.40
    
    
    
    0.496  11 months arrears
    
    
    1.8
    
    
    
    0.14
    
    
    
    0.23
    
    
    
    2.2
    
    
    
    0.16
    
    
    
    0.2712 months + arrears
    
    
    0.3
    
    
    
    0.02
    
    
    
    0.10
    
    
    
    0.5
    
    
    
    0.03
    
    
    
    0.12
 31 December 2004
    
    
    31 December 2003Value of arrears
    
    £m
    
    
    % of total
    
    
    £m
    
    
    % of total1  2 months arrears
    
    
    16.1
    
    
    
    0.02
    
    
    
    11.2
    
    
    
    0.013  5 months arrears
    
    
    9.6
    
    
    
    0.01
    
    
    
    7.5
    
    
    
    0.016  11 months arrears
    
    
    5.2
    
    
    
    0.01
    
    
    
    5.3
    
    
    
    0.0112 months + arrears
    
    
    2.7
    
    
    
    
    
    
    
    3.2
    
    
    
    Total arrears
    
    
    33.6
    
    
    
    0.04
    
    
    
    27.2
    
    
    
    0.03Balance sheet provisions
    
    
    76.8
    
    
    
    
    
    
    
    19.01Coverage (times)
    
    
    2.3
    
    
    
    
    
    
    
    7.0
 Mortgage properties in possession 31 December 2004
    
    
    31 December 2003CML(1)
    
    
    
    
    
    
    CML (1)Industry
    
    
    Number of
    
    
    
    
    
    
    IndustryCases
    
    Number of cases
    
    
    % of total
    
    
    average %
    
    
    cases
    
    
    % of total
    
    
    average %No. of repossessions
    
    
    987
    
    
    
    0.08
    
    
    
    0.05
    
    
    
    1,642
    
    
    
    0.06
    
    
    
    0.03No. of sales
    
    
    1,024
    
    
    
    0.08
    
    
    
    0.05
    
    
    
    1,736
    
    
    
    0.06
    
    
    
    0.04Stock
    
    
    288
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    325
    
    
    
    0.02
    
    
    
    0.02
   (1)
    
    The abbreviation CML stands for Council of Mortgage Lenders. 2004 compared to 2003 Mortgage 3-month-plus arrears cases have experienced a slight reduction to 8,000 compared to 8,200
at 31 December 2003. This amounts to 0.61% of the total, compared to 0.59% at 31 December 2003 and
0.80% for the industry as a whole (per Council of Mortgage Lenders). By value, 3-month-plus arrears totalled £17.5m (December 2003: £16.0m), with provisions in
place of £76.8m (December 2003: £190.1m). The stock of properties in possession fell by 11% to 288 (December 2003: 325), with the number
of property repossessions also falling by 655 to 987 (December 2003: 1,642). Given slightly higher
interest rates, a modest deterioration in credit quality in 2005 is expected. 2003 compared to 2002 3-month-plus arrears cases of 8,200 was 39% lower than December 2002, and was 0.59% of the mortgage
book, compared to 0.88% for the Council of Mortgage Lenders industry average. By value, the 3-month-plus arrears category totalled £16m (2002: £27m), with provisions in
place of £190m (2002: £181m). The number of repossessions fell significantly by 38% to 1,642 (2002: 2,628), resulting in the
stock of properties in possession falling to 325 (2002: 419). 35




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##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued Mortgage new business credit quality 31 December
    
    
    31 December2004
    
    
    2003Loan-to-value analysis:New business> 90%
    
    
    6
    %
    
    
    7
    %75% - 90%
    
    
    32
    %
    
    
    30
    %< 75%
    
    
    62
    %
    
    
    63
    %Average (at inception)
    
    
    61
    %
    
    
    62
    %Average loan-to-value of stock (indexed)
    
    
    45
    %
    
    
    50
    %New business profile:First-time buyers
    
    
    18
    %
    
    
    17
    %Home movers
    
    
    39
    %
    
    
    33
    %Remortgagers
    
    
    43
    %
    
    
    50
    %Average earnings multiple
    
    
    2.7
    
    
    
    2.5
 There has been no significant deterioration of quality over the period, with most credit
quality indicators remaining similar to or better than those reported in 2003. In particular: >
    
    The average loan-to-value of new business has remained broadly constant in 2004 at 61%, despite remortgage business
reducing as a proportion of Abbeys new business.>
    
    The proportion of new business written with a high loan-to-value (greater than 90%) has decreased slightly in 2004.>
    
    There has been a tightening of policy rules around income verification with a fast-track mortgage introduced for
loan-to-value mortgages less than 60%.>
    
    Income multiples have increased in line with the market, given the continued increase in house prices. A review of income
multiples has resulted in tighter guidelines for riskier segments of business and more relaxed policy for more valued and
low risk customers.>
    
    For niche markets such as Buy-to-Let, Abbey is under-represented and has not significantly increased its exposure. These
niche markets are still under review for a wider rollout.>
    
    The proportion of remortgage business taking further equity release has remained unchanged for the last 18 months.
 Personal Financial Services Banking and unsecured personal loan arrears 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mTotal banking and unsecured personal loan arrears(1,2)
    
    
    183
    
    
    
    146
    
    
    
    126Total banking and unsecured personal loan asset
    
    
    3,393
    
    
    
    3,019
    
    
    
    2,779Banking and unsecured personal loan arrearsas a % of asset
    
    
    5.4
    %
    
    
    4.8
    %
    
    
    4.5
    %
   (1)
    
    Banking arrears are defined as customers whose borrowings exceed their overdraft by over
£100.(2)
    
    Unsecured personal loan arrears are defined as the balances of accounts that are two or more
monthly instalments in arrears. 2004 compared to 2003 Banking arrears have increased to £183m (2003: £146m) in line with asset growth, whereas unsecured
personal loan arrears have increased above the rate of asset growth, mainly in cahoot and is due to
a maturing book. 2003 compared to 2002 Arrears levels have increased 16% to £146m (2002: £126m) driven by increases in asset levels and
the growing maturity of the cahoot unsecured lending book. Abbey-branded arrears have fallen 15%. Personal Financial Services provisions for doubtful debts analysis  balance sheet 31 December 2004
    
    
    31 December 2003Provisions
    
    
    Balance
    
    
    Provisions
    
    
    Balancebalance
    
    
    as % of
    
    
    balance
    
    
    as % of£m
    
    
    loan asset
    
    
    £m
    
    
    loan assetMortgages
    
    
    73
    
    
    
    0.1
    
    
    
    190
    
    
    
    0.2Personal banking
    
    
    44
    
    
    
    13.1
    
    
    
    42
    
    
    
    8.2Unsecured personal loans
    
    
    58
    
    
    
    3.0
    
    
    
    43
    
    
    
    2.7Abbey Business
    
    
    5
    
    
    
    0.5
    
    
    
    18
    
    
    
    1.2cahoot
    
    
    35
    
    
    
    2.5
    
    
    
    30
    
    
    
    2.3Banking and Savings
    
    
    215
    
    
    
    0.3
    
    
    
    323
    
    
    
    0.4Scottish Provident
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    6.3Group Infrastructure
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total PFS
    
    
    215
    
    
    
    0.3
    
    
    
    403
    
    
    
    0.5
 Secured provisions have fallen in 2004 due to the general provision reduction. The increase in personal banking is due to reserves set aside for dormant accounts. 36




---



##### Table of Contents



Operating and Financial Review Operating Review  Personal Financial Servicescontinued Abbey Business excludes the business units disposed in 2004, which had higher reserve coverage. On
the remaining assets, the coverage has reduced slightly. The increase in cahoots reserves was driven by a maturing book profile, which results in
higher non-performing loans and consequently, higher specific provision. Personal Financial Services provisions for doubtful debts analysis  balance sheet reconciliation Mortgages
    
    
    Unsecured
    
    
    Other
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004General
    
    
    183
    
    
    
    27
    
    
    
    88
    
    
    
    298Specific
    
    
    7
    
    
    
    90
    
    
    
    8
    
    
    
    105Total
    
    
    190
    
    
    
    117
    
    
    
    96
    
    
    
    403Transfer (to)/from P&L account
    
    
    (120
    )
    
    
    151
    
    
    
    3
    
    
    
    34Recoveries
    
    
    3
    
    
    
    25
    
    
    
    
    
    
    
    28Reduction due to sale of leasing business
    
    
    
    
    
    
    
    
    
    
    (92
    )
    
    
    (92
    )Irrecoverable amounts written off
    
    
    
    
    
    
    (154
    )
    
    
    (4
    )
    
    
    (158
    )At 31 December 2004
    
    
    73
    
    
    
    139
    
    
    
    3
    
    
    
    215General
    
    
    64
    
    
    
    35
    
    
    
    3
    
    
    
    102Specific
    
    
    9
    
    
    
    104
    
    
    
    
    
    
    
    113Total
    
    
    73
    
    
    
    139
    
    
    
    3
    
    
    
    215
 Mortgages
    
    
    Unsecured
    
    
    Other
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2003General
    
    
    171
    
    
    
    23
    
    
    
    9
    
    
    
    203Specific
    
    
    10
    
    
    
    73
    
    
    
    6
    
    
    
    89Total
    
    
    181
    
    
    
    96
    
    
    
    15
    
    
    
    292Transfer (to)/from P&L account
    
    
    6
    
    
    
    110
    
    
    
    94
    
    
    
    210Recoveries
    
    
    5
    
    
    
    28
    
    
    
    1
    
    
    
    34Irrecoverable amounts written off
    
    
    (2
    )
    
    
    (117
    )
    
    
    (14
    )
    
    
    (133
    )At 31 December 2003
    
    
    190
    
    
    
    117
    
    
    
    96
    
    
    
    403General
    
    
    183
    
    
    
    27
    
    
    
    88
    
    
    
    298Specific
    
    
    7
    
    
    
    90
    
    
    
    8
    
    
    
    105Total
    
    
    190
    
    
    
    117
    
    
    
    96
    
    
    
    403
 37




---



##### Table of Contents



Operating and Financial Review 
 Operating Review  Portfolio Business Unit (PBU) Portfolio Business Unit trading profit/(loss) on ordinary activities before tax by segment Motor FinanceWholesale
    
    
    and LitigationBanking
    
    
    Funding
    
    
    Other
    
    
    Total PBU31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    (70
    )
    
    
    98
    
    
    
    32
    
    
    
    60Non-interest income
    
    
    186
    
    
    
    (24
    )
    
    
    (27
    )
    
    
    135Depreciation and impairment on operating lease assets
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    (151
    )Total trading income
    
    
    (35
    )
    
    
    74
    
    
    
    5
    
    
    
    44Total trading expenses
    
    
    (30
    )
    
    
    (22
    )
    
    
    (38
    )
    
    
    (90
    )Provision for bad and doubtful debts
    
    
    88
    
    
    
    (89
    )
    
    
    (10
    )
    
    
    (11
    )Amounts written off fixed asset investments
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    80Trading profit/(loss) on ordinary activities before tax
    
    
    103
    
    
    
    (37
    )
    
    
    (43
    )
    
    
    23Adjust for:Income from associated undertakings
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    (6
    )Profit on disposal of Group undertakings
    
    
    (32
    )
    
    
    
    
    
    
    (14
    )
    
    
    (46
    )Operating profit/(loss)
    
    
    71
    
    
    
    (43
    )
    
    
    (57
    )
    
    
    (29
    )
 Motor FinanceWholesale
    
    
    and LitigationBanking
    
    
    Funding
    
    
    Other
    
    
    Total PBU31 December 2003
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    22
    
    
    
    245
    
    
    
    86
    
    
    
    353Non-interest income
    
    
    (197
    )
    
    
    (58
    )
    
    
    25
    
    
    
    (230
    )Depreciation and impairment on operating lease assets
    
    
    (250
    )
    
    
    (1
    )
    
    
    
    
    
    
    (251
    )Total trading income
    
    
    (425
    )
    
    
    186
    
    
    
    111
    
    
    
    (128
    )Total trading expenses
    
    
    (107
    )
    
    
    (137
    )
    
    
    (83
    )
    
    
    (327
    )Provision for bad and doubtful debts
    
    
    (154
    )
    
    
    (99
    )
    
    
    (11
    )
    
    
    (264
    )Provision for contingent liabilities and commitments
    
    
    (2
    )
    
    
    
    
    
    
    (17
    )
    
    
    (19
    )Amounts written off fixed asset investments
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    (183
    )Trading profit/(loss) on ordinary activities before tax
    
    
    (871
    )
    
    
    (50
    )
    
    
    
    
    
    
    (921
    )Adjust for:Income from associated undertakings
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )Profit on disposal of Group undertakings
    
    
    (50
    )
    
    
    1
    
    
    
    (40
    )
    
    
    (89
    )Profit/(loss) on the sale or termination of an operation
    
    
    6
    
    
    
    27
    
    
    
    
    
    
    
    33Operating profit/(loss)
    
    
    (915
    )
    
    
    (34
    )
    
    
    (40
    )
    
    
    (989
    )
 Motor FinanceWholesale
    
    
    and LitigationBanking
    
    
    Funding
    
    
    Other
    
    
    Total PBU31 December 2002
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    327
    
    
    
    464
    
    
    
    55
    
    
    
    846Non-interest income
    
    
    378
    
    
    
    (48
    )
    
    
    (71
    )
    
    
    259Depreciation and impairment on operating lease assets
    
    
    (252
    )
    
    
    (5
    )
    
    
    
    
    
    
    (257
    )Total trading income
    
    
    453
    
    
    
    411
    
    
    
    (16
    )
    
    
    848Total trading expenses
    
    
    (123
    )
    
    
    (546
    )
    
    
    (66
    )
    
    
    (735
    )Provision for bad and doubtful debts
    
    
    (247
    )
    
    
    (115
    )
    
    
    (2
    )
    
    
    (364
    )Provision for contingent liabilities and commitments
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (4
    )Amounts written off fixed asset investments
    
    
    (513
    )
    
    
    
    
    
    
    
    
    
    
    (513
    )Trading profit/(loss) on ordinary activities before tax
    
    
    (430
    )
    
    
    (254
    )
    
    
    (84
    )
    
    
    (768
    )Adjust for:Income from associated undertakings
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )Profit on disposal of Group undertakings
    
    
    (46
    )
    
    
    (2
    )
    
    
    
    
    
    
    (48
    )Operating profit/(loss)
    
    
    (476
    )
    
    
    (273
    )
    
    
    (84
    )
    
    
    (833
    )
 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002Profit on ordinary activities by line of business
    
    £m
    
    
    £m
    
    
    £mOther:- International life assurance business
    
    
    (39
    )
    
    
    (26
    )
    
    
    (92
    )- European banking and other
    
    
    (4
    )
    
    
    26
    
    
    
    8(43
    )
    
    
    
    
    
    
    (84
    )
 2004 compared to 2003 The Portfolio Business Unit trading result improved from a loss of £921m in 2003 to a trading
profit of £23m in 2004, with a profit in the Wholesale Banking Portfolio being offset by continued
provisioning and restructuring costs associated with the wind-down of the remaining Motor Finance
and Litigation Funding businesses and stabilisation provisions in the Portfolio Business Unit Life
Assurance entity. 38




---



##### Table of Contents



Operating and Financial Review Operating Review 
Portfolio Business Unit (PBU) continued The Wholesale Banking trading profit before tax was £103m (2003: loss £(871)m). The improved
performance in the Wholesale Banking Portfolio reflects the significantly lower absolute level of
asset disposals, and the provisioning to market realisable values taken in the course of 2003. >
    
    Net interest income decreased by £92m to £(70)m (2003: £22m) due to lower average asset balances.>
    
    Non-interest income increased £383m to £186m (2003: £(197)m), reflecting lower absolute levels of asset disposals and
related losses.>
    
    Depreciation on operating lease assets fell £99m to £151m (2003: £250m), due to continued disposals of operating lease
businesses.>
    
    Trading operating expenses fell to £30m (2003: £107m) due to reduced size of operations.>
    
    A decrease of £242m to £88m release for provision for bad and doubtful debts (2003: £154m charge) due to more favourable
market conditions relating to the assets disposed of.>
    
    A credit of £80m to amounts written off fixed asset investments (2003: £183m charge) arose as a result of assets being
disposed of for amounts in excess of their existing written down value.
 The Motor Finance and Litigation Funding trading loss decreased by £13m to £37m (2003: £(50)m) with
2003 including provisions for redundancy and other costs associated with the wind-down of the
business. >
    
    Net interest income decreased by £147m to £98m (2003: £245m) mainly due to three months of First National Bank net
interest income being included in 2003.>
    
    Non-interest income increased £34m to £(24)m (2003: £(58)m), reflecting lower levels of fees being paid to introducers as
a result of the run-off of these businesses.>
    
    Trading operating expenses fell to £22m (2003: £137m) due to the sale, referred to above.>
    
    Provisions for bad and doubtful debts were lower than the prior period at £89m (2003: £99m) due to run-off of the business
and provisions made in prior periods.
 The Other trading loss increased to £43m (2003: £nil) mainly due to provisions in Scottish Mutual
International for fund stabilisation costs and the profit on the sale of Abbey National Italy in
2003. >
    
    Net interest income decreased by £54m to £32m (2003: £86m) mainly due
to the sale of Abbey National Italy in 2003 and the sale of Abbey
National France in 2004.>
    
    Non-interest income decreased £52m to £(27)m (2003: £25m), mainly due
to provisions for fund stabilisation costs in Scottish Mutual
International and the sale of Abbey National Italy in 2003.
 2003 compared to 2002 The Portfolio Business Unit trading loss before tax increased by £153m to £921m (2002: £768m). The Wholesale Banking trading loss before tax was £871m (2002: £430m). The loss increase was
primarily due to lower losses on assets disposals. The First National trading loss before tax was £50m (2002: £254m). The loss decrease was
primarily due to the non-recurrence of the £357m impairment. The other trading loss before tax decreased by £84m to nil in 2003, primarily due to
rationalisation costs incurred in 2002 which did not recur in 2003. Also results were negatively
impacted in 2002 by embedded value charges and rebasing. Portfolio Business Unit assets and risk-weighted assets by segment At 31 December 2004
    
    
    At 31 December 2003Risk-weighted
    
    
    Risk-weightedAssets
    
    
    assets
    
    
    Assets
    
    
    assets£bn
    
    
    £bn
    
    
    £bn
    
    
    £bnWholesale Banking
    
    
    3.8
    
    
    
    3.1
    
    
    
    8.3
    
    
    
    5.4Motor Finance and Litigation Funding
    
    
    0.9
    
    
    
    0.8
    
    
    
    2.1
    
    
    
    2.4Other
    
    
    
    
    
    
    
    
    
    
    1.9
    
    
    
    1.2Total PBU
    
    
    4.7
    
    
    
    3.9
    
    
    
    12.3
    
    
    
    9.0
   (1)

    The table excludes the shareholder net assets of the international life assurance
businesses of £208m (December 2003: £207m) since they do not have a risk-weighted assets
equivalent. The following section provides a detailed analysis of the 2004 balance sheet movements,
focusing on the outstanding balances in these exit portfolios. Total Portfolio Business Unit assets of £4.7bn were 62% lower than at December 2003, with a
57% reduction in risk-weighted assets to £3.9bn (2003: £9.0bn). >
    
    The outstanding unrealised mark-to-market deficit (net of provisions) on the debt securities
portfolio is £nil (2003: £nil), with the equivalent figure on the loan portfolio also £nil
(2003: £66m). The mark-to-market positions do not cover portfolios such as leasing (including
aircraft and Porterbrook) or private equity, although aircraft leasing has now been provided
down to managements estimate of realisable value and the private equity business was sold in
the first half of 2004.
 39




---



##### Table of Contents



Operating and Financial Review Operating Review 
Portfolio Business Unit (PBU) continued Wholesale Banking exit portfolios The total charge for provisions, impairments and disposal losses for 2004 is £nil (December
2003: charge of £1,011m). This reflects the significantly lower level of asset disposals, and the
provisioning down to market realisable values in securities and loans taken in 2003. Balance sheet provisions and coverage Total balance sheet provisions reduced to £124m during 2004 as a result of sales of debt
securities and loans. The difference between the profit and loss provision charge and the balance
sheet provision movement is a reflection of balance sheet provisions releases following asset sales
and exchange rate movements. Specific
    
    
    General
    
    
    Totalprovisions
    
    
    provisions
    
    
    provisions£m
    
    
    £m
    
    
    £mClosing balance at 31 December 2003
    
    
    599
    
    
    
    173
    
    
    
    772Profit and loss charge in 12 months to December 2004
    
    
    32
    
    
    
    (156
    )
    
    
    (124
    )Release on disposal
    
    
    (501
    )
    
    
    
    
    
    
    (501
    )Other (incl. foreign exchange movements)
    
    
    (23
    )
    
    
    
    
    
    
    (23
    )Closing balance at 31 December 2004
    
    
    107
    
    
    
    17
    
    
    
    124
 Summary portfolio details Debt securities At 31 December 2004
    
    
    At 31 December 2003Assets
    
    
    RWAs
    
    
    Assets
    
    
    RWAs£m
    
    
    £m
    
    
    £m
    
    
    £mCorporates
    
    
    
    
    
    
    2
    
    
    
    53
    
    
    
    100Asset-Backed Securities (excluding CDOs)
    
    
    43
    
    
    
    31
    
    
    
    189
    
    
    
    214CDOs
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    31High yield (1)
    
    
    
    
    
    
    
    
    
    
    712
    
    
    
    100Total debt securities
    
    
    43
    
    
    
    33
    
    
    
    988
    
    
    
    445
   (1)
    
    See the Wholesale Banking exit portfolios
 credit exposure analysis section for further
details. Fair value of debt securities, equity shares and other similar interests The following table provides an analysis of the fair value of Abbeys investment securities by
investment category at 31 December 2004. All amounts relate to securities held by Personal
Financial Services businesses. Gross
    
    
    GrossAmortised
    
    
    unrealised
    
    
    unrealisedcost
    
    
    gains
    
    
    losses
    
    
    Fair value£m
    
    
    £m
    
    
    £m
    
    
    £mEquity securities
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Asset backed and corporate debt securities
    
    
    282
    
    
    
    51
    
    
    
    (2
    )
    
    
    331Mortgage backed securities other than
those issued or backed by US government
agencies
    
    
    38
    
    
    
    3
    
    
    
    
    
    
    
    41Other debt securities
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    322672
    
    
    
    54
    
    
    
    (2
    )
    
    
    724
 Loan portfolio At 31 December 2004
    
    
    At 31 December 2003Assets
    
    
    RWAs
    
    
    Assets
    
    
    RWAs£m
    
    
    £m
    
    
    £m
    
    
    £mInfrastructure
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.4Project finance: real estate
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1 other
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.9
    
    
    
    1.0Acquisition finance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Structured finance lending
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    0.20.4
    
    
    
    0.4
    
    
    
    2.0
    
    
    
    1.7
 The change in the loan portfolio reflected sales across all portfolios. Leasing At 31 December 2004
    
    
    At 31 December 2003Assets
    
    
    RWAs
    
    
    Assets
    
    
    RWAs£bn
    
    
    £bn
    
    
    £bn
    
    
    £bnFinance leases
    
    
    1.1
    
    
    
    0.4
    
    
    
    2.2
    
    
    
    0.6Operating leases
    
    
    2.3
    
    
    
    2.3
    
    
    
    2.5
    
    
    
    2.43.4
    
    
    
    2.7
    
    
    
    4.7
    
    
    
    3.0
 40




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##### Table of Contents



Operating and Financial Review Operating Review  Portfolio Business Unit (PBU)continued The finance leasing portfolio is predominantly high quality with over 70% of exposure being to
counterparties rated AA or better. The operating lease portfolio principally represents assets held
in Porterbrook (£2.2bn) and aircraft leasing (£0.1bn) portfolios. The value of the aircraft leasing
business has been written down to net asset value based on current market conditions. The decrease in operating leases in the 12 months to 31 December 2004 was due to sales of
aircraft leasing. Private equity At 31 December
    
    
    At 31 December2004
    
    
    2003£m
    
    
    £mOpening balance of draw-downs (net of provisions)
    
    
    373
    
    
    
    797Draw-downs in the current period
    
    
    
    
    
    
    159Disposals
    
    
    (378
    )
    
    
    (445
    )Provision write-backs/(offs)
    
    
    6
    
    
    
    (138
    )Closing balance of draw-downs
    
    
    1
    
    
    
    373Undrawn commitments
    
    
    
    
    
    
    239
 Wholesale Banking exit portfolios  credit exposure analysis Certain tables presented in prior periods have been omitted as the date is no longer meaningful
due to the significant reduction in exposure. Credit exposures by credit rating At 31 December 2004
    
    
    At 31 December 2003Average of
    
    
    
    
    
    
    
    
    
    
    Average ofAverage
    
    
    top five
    
    
    Total
    
    
    Average
    
    
    top five
    
    
    Totalexposure
    
    
    exposures(2)
    
    
    exposure
    
    
    exposure
    
    
    exposures (2)
    
    
    exposure£m
    
    
    £m
    
    
    £bn
    
    
    £m
    
    
    £m
    
    
    £bnAAA
    
    
    25.7
    
    
    
    50.2
    
    
    
    0.2
    
    
    
    25.7
    
    
    
    87.9
    
    
    
    0.5AA
    
    
    22.3
    
    
    
    145.9
    
    
    
    1.0
    
    
    
    40.0
    
    
    
    175.1
    
    
    
    1.6A
    
    
    17.0
    
    
    
    76.4
    
    
    
    0.4
    
    
    
    20.2
    
    
    
    107.9
    
    
    
    0.9BBB
    
    
    35.8
    
    
    
    125.1
    
    
    
    0.9
    
    
    
    23.7
    
    
    
    141.4
    
    
    
    1.3Total investment grade
    
    
    
    
    
    
    
    
    
    
    2.5
    
    
    
    
    
    
    
    
    
    
    
    4.3BB
    
    
    17.0
    
    
    
    38.2
    
    
    
    0.2
    
    
    
    17.2
    
    
    
    49.4
    
    
    
    0.5B
    
    
    7.4
    
    
    
    10.2
    
    
    
    0.1
    
    
    
    15.1
    
    
    
    41.3
    
    
    
    0.4CCC
    
    
    7.4
    
    
    
    10.3
    
    
    
    0.1
    
    
    
    14.5
    
    
    
    42.1
    
    
    
    0.4Total sub-investment grade
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    
    
    
    
    1.3Equity
    
    
    n/a
    
    
    
    n/a
    
    
    
    
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    0.5Total exposure(1)
    
    
    
    
    
    
    
    
    
    
    2.9
    
    
    
    
    
    
    
    
    
    
    
    6.1
   (1)
    Total exposure of £2.9bn is £0.9bn lower than total assets of £3.8bn. This results mainly
from the exposure amounts including amounts due from leasing counterparties rather than the
asset value of leasing businesses.  (2)
    In some instances there are now less than five individual counterparties. In these cases a
true average is reported, which results in an apparent disconnect between the average of the
top five and the total exposure. Additional sector analysis At 31 December
    
    
    At 31 December2004
    
    
    2003Aircraft
    
    £m
    
    
    £mIEM Airfinance BV
    
    
    39
    
    
    
    174Asset-backed securities
    
    
    
    
    
    
    183Other (including operating leases)
    
    
    75
    
    
    
    82114
    
    
    
    439
 At 31 December
    
    
    At 31 December2004
    
    
    2003US and UK power lending
    
    £m
    
    
    £mUK
    
    
    6
    
    
    
    221US
    
    
    39
    
    
    
    35045
    
    
    
    571Of which:Power projects lending on credit watch
    
    
    37
    
    
    
    360
 Credit exposures by region Investment
    
    
    Sub-investmentgrade
    
    
    grade
    
    
    TotalAt 31 December 2004
    
    £bn
    
    
    £bn
    
    
    £bnEurope
    
    
    2.1
    
    
    
    0.3
    
    
    
    2.4North America
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.5Total exposure
    
    
    2.5
    
    
    
    0.4
    
    
    
    2.9
 41




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##### Table of Contents



Operating and Financial Review Operating Review  Portfolio Business Unit (PBU)continued Investment
    
    
    Sub-investmentgrade
    
    
    grade
    
    
    TotalAt 31 December 2003
    
    £bn
    
    
    £bn
    
    
    £bnEurope
    
    
    3.4
    
    
    
    1.0
    
    
    
    4.4North America
    
    
    0.8
    
    
    
    0.6
    
    
    
    1.4Asia-pacific
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2Latin America
    
    
    
    
    
    
    0.1
    
    
    
    0.1Total exposure
    
    
    4.3
    
    
    
    1.8
    
    
    
    6.1
 Sub-investment grade credit exposure At 31 December 2004
    
    
    At 31 December 2003Average of
    
    
    
    
    
    
    
    
    
    
    Average ofSpecific
    
    
    top five
    
    
    Total
    
    
    Specific
    
    
    top five
    
    
    Totalprovisions
    
    
    exposures(1)
    
    
    exposure
    
    
    provisions
    
    
    exposures
    
    
    exposure£m
    
    
    £m
    
    
    £bn
    
    
    £m
    
    
    £m
    
    
    £bnCorporates
    
    
    
    
    
    
    16.8
    
    
    
    0.1
    
    
    
    
    
    
    
    37.0
    
    
    
    0.2Asset Finance
    
    
    96.0
    
    
    
    38.6
    
    
    
    0.3
    
    
    
    180.0
    
    
    
    49.0
    
    
    
    0.9ABS / MBS
    
    
    10.0
    
    
    
    
    
    
    
    
    
    
    
    88.0
    
    
    
    40.5
    
    
    
    0.2Credit exposure
    
    
    106.0
    
    
    
    
    
    
    
    0.4
    
    
    
    268.0
    
    
    
    
    
    
    
    1.3High yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69.0
    
    
    
    
    
    
    
    0.1Private equity (excluding undrawns)
    
    
    1.0
    
    
    
    
    
    
    
    
    
    
    
    262.0
    
    
    
    
    
    
    
    0.4Total exposure
    
    
    107.0
    
    
    
    
    
    
    
    0.4
    
    
    
    599.0
    
    
    
    
    
    
    
    1.8
   (1)
    In some instances there are now less than five individual counterparties. In these cases a
true average is reported, which results in an apparent disconnect between the average of the
top five and the total exposure. Motor Finance and Litigation Funding At 31 December 2004
    
    
    At 31 December 2003Risk-weighted
    
    
    
    
    
    
    Risk-weightedAssets
    
    
    assets
    
    
    Assets
    
    
    assets(1)£bn
    
    
    £bn
    
    
    £bn
    
    
    £bn0.9
    
    
    
    0.8
    
    
    
    2.1
    
    
    
    2.4
   (1)
    In 2003 Motor Finance and Litigation Funding risk-weighted assets exceeded the value of
assets due to the regulatory treatment of the joint venture with Peugeot, whereby 100% of
assets are included for regulatory purposes. Other International life assurance businesses At 31 December
    
    
    At 31 December2004
    
    
    2003£m
    
    
    £mLoss before tax
    
    
    (39
    )
    
    
    (26
    )Embedded value asset
    
    
    88
    
    
    
    192New business premiums
    
    
    2
    
    
    
    226
 On 1 January 2004, Scottish Provident International was transferred into the ongoing Personal
Financial Services business following the decision to retain the business as an integral part of
the offering. The 2003 results have not been restated for the transfer, though the business
accounted for £8m of loss, £71m of the embedded value asset and £57m of the new business reflected
above. The Dublin based international life businesses which are reported in the Portfolio Business
Unit in 2004, have now been transferred back into Personal Financial Services from 1 January 2005,
with a loss before tax of £(39)m (2003: loss £(18)m), deteriorating due to additional provisioning
in respect of fund stabilisation costs in Scottish Mutual International. European operations and other Total assets at 31 December 2003 of £1.9bn consisted largely of Abbey National France which was
disposed of in 2004. 42




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##### Table of Contents



Operating and Financial Review 
 Other Material Items Impact of embedded value charges and rebasing 31 December31 December 2004
    
    
    31 December 2003
    
    
    2002AN
    
    
    Scottish
    
    
    Scottish
    
    
    
    
    
    
    AN
    
    
    Scottish
    
    
    ScottishLife
    
    
    Mutual
    
    
    Provident
    
    
    Total
    
    
    Life
    
    
    Mutual
    
    
    Provident
    
    
    Total
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mInvestment
assumptions and
variances
    
    
    (5
    )
    
    
    (19
    )
    
    
    7
    
    
    
    (17
    )
    
    
    26
    
    
    
    (122
    )
    
    
    (22
    )
    
    
    (118
    )
    
    
    (668
    )Other one-off adjustments
    
    
    
    
    
    
    (60
    )
    
    
    98
    
    
    
    38
    
    
    
    
    
    
    
    (85
    )
    
    
    (240
    )
    
    
    (325
    )
    
    
    115Total embedded value
charges and rebasing
    
    
    (5
    )
    
    
    (79
    )
    
    
    105
    
    
    
    21
    
    
    
    26
    
    
    
    (207
    )
    
    
    (262
    )
    
    
    (443
    )
    
    
    (553
    )
 Investment assumptions and variances This variance represents the adjustment to allow for differences between actual market performance
and our assumptions set out at the beginning of the year. Overall, investment assumptions and
variances have improved by £101m. The improvement shows that during 2004 investment performance and
market movements were in closer alignment with assumptions. In Scottish Mutual, the cost of £19m
principally reflects realised losses and an adjustment to the assumed value of future profits
following changes in asset mix during the period. The positive £7m Scottish Provident investment
variance is largely driven by a change in asset mix in the non-profit sub-fund out of cash and into
bonds. Other one-off adjustments The 2003 results included provisions in relation to the realistic balance sheet position of the
funds. The 2004 results include a release of the provisions in respect of the Scottish Provident
contingent loan in the long-term fund and shareholders fund. Reorganisation expenses 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mCost reduction programme
    
    
    (459
    )
    
    
    (174
    )
    
    
    (34
    )Asset write-downs
    
    
    (106
    )
    
    
    (141
    )
    
    
    (565
    )
    
    
    (315
    )
    
    
    (34
    )
 Reorganisation expenses of £565m were a combination of expenses in relation to the
reorganisation programme initiated early in 2003, costs associated with the sale of Abbey to Banco
Santander Central Hispano, S.A., and costs and provisions raised post-completion of the
transaction. The post-acquisition charges amount to £243m in the last quarter, consisting largely
of redundancy costs and asset write-downs. Goodwill charges 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mGoodwill amortisation
    
    
    (20
    )
    
    
    (18
    )
    
    
    (64
    )Goodwill impairment
    
    
    
    
    
    
    (10
    )
    
    
    (747
    )Total goodwill charges
    
    
    (20
    )
    
    
    (28
    )
    
    
    (811
    )
 Goodwill charges of £20m comprise mainly the ongoing amortisation charge in relation to Scottish
Provident and Fleming Premier Banking. Pension fund 31 December
    
    
    31 December
    
    
    31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mRegular cost
    
    
    66
    
    
    
    75
    
    
    
    85Amortisation of surpluses arising on pension schemes
    
    
    
    
    
    
    
    
    
    
    (3
    )Amortisation of deficits arising on pension schemes
    
    
    50
    
    
    
    45
    
    
    
    16Amortisation of surplus arising from fair value
adjustment on acquisition of National and Provincial
    
    
    2
    
    
    
    2
    
    
    
    2P&L charge in respect of defined benefit schemes
    
    
    118
    
    
    
    122
    
    
    
    100Add: P&L charge in respect of other schemes (1)
    
    
    4
    
    
    
    6
    
    
    
    1Total pension charges (2)
    
    
    122
    
    
    
    128
    
    
    
    101Less: Portfolio Business Unit charges
    
    
    (2
    )
    
    
    (7
    )
    
    
    (20
    )PFS charges
    
    
    120
    
    
    
    121
    
    
    
    81
   (1)
    
    Comprises defined contribution pension schemes.(2)
    
    Excludes £10m of pension charges relating to the life assurance businesses reported in
non-interest income under embedded value accounting (2003: £7m; 2002: £11m). 43




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##### Table of Contents



Operating and Financial Review Other Material Itemscontinued The following comments refer to the pension cost for the combined Personal Financial Services
and Portfolio Business Unit businesses. The Abbey defined benefit pension schemes were closed to new members in March 2002 being
replaced with a defined contribution scheme. The decrease in the regular cost to £66m (2003: £75m)
is due to members of the defined benefit schemes leaving employment during 2004, partially offset
by salary inflation. The annual review of Abbeys pension schemes in March 2004 indicated a pre-tax deficit of
£563m compared to £604m in 2003. FRS 17 disclosure 31 December
    
    
    31 December2004
    
    
    2003£m
    
    
    £mTotal market value of assets
    
    
    2,493
    
    
    
    2,205Present value of scheme liabilities
    
    
    (3,689
    )
    
    
    (3,306
    )FRS 17 scheme deficit
    
    
    (1,196
    )
    
    
    (1,101
    )Related deferred tax asset
    
    
    359
    
    
    
    330Net FRS 17 scheme deficit
    
    
    (837
    )
    
    
    (771
    )
 The table above and the following comments reflect the position of Abbeys defined benefit
schemes in totality. At 31 December 2004, taking assets at market value and discounting future liabilities at an AA
Corporate Bond Rate of return the scheme deficit under FRS 17 was £837m post tax compared to £771m
in December 2003. Asset growth of £288m was primarily driven by £243m investment returns, along
with contributions to the fund being greater than benefits paid out and transfers out. Valuations under FRS 17 are dependent upon market conditions at the balance sheet date,
potentially leading to volatility in results between reporting dates. Based on an asset value of
£2,493m at December 2004 and asset allocation targets of 50% equities, 30% Bonds, and 20% Gilts and
assuming average market returns, the estimated sensitivity to a 10% market movement is £125m for
equities, £75m for Bonds and £50m for Gilts. Liabilities are determined 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. These increased by £383m to £3,689m (2003: £3,306m). The principal movements in the
liabilities were the inclusion of a further 12 months service cost for current scheme members
£120m, the unwind of the discount £183m, a decrease in the discount rate from 5.5% to 5.4% £76m,
based on a long-term AA Corporate Bond return and an increase in the inflation rate from 2.7% to
2.8% £78m, offset in part by benefits paid of £88m. Under FRS 17, the profit and loss charge for 2004 would be £183m, determined by the
assumptions below and the actual service accrued by scheme members. This principally comprises a
£139m investment return offset by £120m service cost, £24m past service cost and a £183m financing
cost, equating to the unwind of the discount on liabilities. 31 December 2004
    
    
    31 December 2003%
    
    
    %Discount rate for scheme liabilities
    
    
    5.40
    
    
    
    5.50Pension and deferred pension increases
    
    
    2.80
    
    
    
    2.70General salary increase
    
    
    4.30
    
    
    
    4.20General price inflation
    
    
    2.80
    
    
    
    2.70Expected rate of return on equities
    
    
    8.00
    
    
    
    7.25Expected rate of return on bonds
    
    
    5.00
    
    
    
    5.50
 UK GAAP to US GAAP reconciliation Profit/(loss) attributable to the shareholders of Abbey National plc under UK GAAP in each of
the years ended 31 December 2004, 2003 and 2002 was £80m, £(699)m and £(1,161)m, respectively.
Under US GAAP the corresponding amounts were £(68)m,
£(128)m (restated) and £(1,407)m (restated),
respectively. Reconciliations between the UK GAAP and US GAAP amounts, together with detailed
explanations of the accounting differences, are included in Notes
58-65 to the Consolidated
Financial Statements. As part of the preparation of Abbeys 2004 Consolidated Financial Statements,
certain US GAAP differences for 2003 and 2002 have been restated to reflect the correction of
errors in the accounting treatment for securitisations, loan origination fees and costs, goodwill,
the deferred acquisition costs in the life assurance businesses, derecognition of liabilities and
operating leases. The effects of the restatements are set out on page 186. As a result of managements review and restatement of previous US GAAP financial results,
management has concluded that there was a material weakness in Abbeys internal control over
financial reporting as of December 31, 2004, regarding Abbey and certain of its subsidiaries
having insufficient personnel in the corporate accounting department with sufficient knowledge and
experience in US GAAP and the SEC requirements. As part of Abbeys strengthening of internal
controls in the context of these findings, Abbey has undertaken a number of remediation procedures
in order to address the internal control deficiencies that contributed to these errors. These
remediation efforts will continue during 2005 and include hiring additional accounting personnel
knowledgeable in US GAAP; training current accounting staff on the application of US GAAP
accounting pronouncements; reinforcing existing US GAAP reporting controls over the reporting
process of subsidiaries, including levels of review; and improving standardized reconciliation
templates to assist in the reconciliation process between UK GAAP and
US GAAP. 44




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##### Table of Contents



Operating and Financial Review Other Material Itemscontinued The principal differences between UK and US GAAP, which affected net income, were as follows: The treatment of shareholders interest in the long-term assurance business.Under UK GAAP
applicable to banking groups, the net present value of future profits inherent in the long-term
assurance business are recognised in the current reporting period. Under US GAAP revenue is
recognised when premiums fall due from the policyholders and costs of claims are recognised in the
period that such an assured event occurs, resulting in a more even recognition of profit over the
life of the related policies. In addition, under UK GAAP the shareholder profit and loss account only ever gets credit for
the with-profit result at the time of bonus allocation. Under US GAAP the shareholder gets 10% of
the with-profit result for a period as the result arises. The methods of accounting for goodwill and intangible assets.For UK GAAP, FRS 10 continues to
require goodwill to be recorded at the income-generating unit and to be amortised over a reputable
period of 20 years. Since June 2002, US GAAP requires goodwill to be capitalised at a reporting
unit level and all goodwill balances are subject to an annual impairment test. Such goodwill is
written off to the extent that it is judged to be impaired. Under US GAAP, intangible assets representing the value of customer relationships distribution
channels and brands associated with acquisitions are established separately. Under UK GAAP,
expenses incurred on the purchase or development of computer software are charged to the Profit and
Loss account as incurred. Under US GAAP, certain of such costs are capitalised and amortised over
the expected useful life of the software. In addition, capitalised costs are tested for impairment. The treatment of non-trading financial instruments and the derivatives that hedge these financial
instruments.The majority of Abbeys hedging contracts are transacted with an in-house risk
management and trading operation, in order to manage financial risks with external markets
efficiently. Abbey transfers substantially all of the risk into the external markets on a portfolio
basis, in order to benefit from economies of scale. Under UK GAAP, derivatives held as non-trading
instruments are accounted for on an accrual basis. Under US GAAP these derivatives are treated as
trading, with the unrealised mark-to-market gains and losses taken to the Profit and Loss Account
as they arise. As Abbey will continue to hold a significant number of derivatives which are hedge
accounted under UK GAAP, net income and shareholders equity under US GAAP will be subject to
increased volatility. Loan origination fees and costs.Under UK GAAP, loan origination fees and costs are taken to the
Profit and Loss Account when services are provided, unless the origination fees and costs are in
the nature of interest or income, in which case they are taken to the Profit and Loss Account over
the expected life of the transaction to which they relate or over the period of time that Abbey has
the right to recover the incentives in the event of early redemption. For US GAAP, SFAS 91 requires
all loan origination fees not offset by directly related costs to be deferred and amortised over
the life of the related loan. Securities.Under UK GAAP, securities held for investment purposes are stated at cost and adjusted
for any amortisation of premium or discount, with a provision also being made for any impairment.
Securities not held for investment are stated at their market values, with any gains or losses
taken to the Profit and Loss Account. Under US GAAP, investments in equity securities with readily
determinable market values and all investments in debt securities are classified as trading,
available for sale or held to maturity securities, in accordance with SFAS 115. Trading securities
are accounted for in the same manner as investments not held for investment purposes under UK GAAP.
Available for sale Securities are reported at market value, with any unhedged, unrealised gains
and losses taken directly to shareholders funds. Securities covered by fair value hedges will have
the unrealised portion of the security and the underlying fair value of the derivative taken to the
profit and loss account. Held to maturity securities are treated in the same manner as securities
held for investment purposes under UK GAAP. The treatment of dividends declared or proposed after the year-end by the Board of Directors.For
UK GAAP, dividends are recorded in the period to which they relate, while under US GAAP dividends
are recorded in the period that they are actually declared. The tax-effect of the above adjustments is made in accordance with the provisions for
accounting for deferred income tax. 2004 compared to 2003 Net loss available to
ordinary shareholders under US GAAP is £68m in 2004, £110m lower than the
equivalent amount available under UK GAAP. In 2003 the US GAAP loss available to ordinary
shareholders was £128m (restated), £631m higher than the UK GAAP equivalent. The
UK to US GAAP adjustments decreased £741m from
income of £631m in 2003 to a £110m expenses in 2004. Material movements include the following. >
    
    During 2004, measures were implemented to reduce the shareholders
exposure to losses within the with-profit funds. As a result,
provisions made in previous years against the prospect of such
losses, to the extent not utilised, were reduced. This contributed to
the £109m increase in 2004 in shareholders interest in long-term
assurance business.>
    
    A charge related to software impairments and disposal losses
following the Banco Santander Central Hispano, S.A. acquisition and
well documented technology improvements that are expected to follow.>
    
    An impairment charge related to the value of distribution channels
due to reduced profitability in a competitive UK protection market
through the independent adviser channels in place at the date of
Scottish Providents acquisition.>
    
    2003 was affected by the closeout of derivatives which hedged
Portfolio Business Unit assets, a process that was largely complete
by the end of that year. 2004 reflects the remaining reduced level of
UK non-trading derivatives for which hedge accounting is not obtained
compared to earlier years.
 45




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##### Table of Contents



Operating and Financial Review Other Material Items continued 2003 compared to 2002 Net loss available to
ordinary shareholders under US GAAP is £128m in
2003, £631m lower than
the equivalent amount available under UK GAAP. In 2002 the US GAAP loss available to ordinary
shareholders was £1,407m (restated), £246m higher than the UK GAAP equivalent. The
UK to US GAAP adjustments increased £824m from
expense of £193m in 2002 to a £631m
income in 2003. Material movements include the following. >
    
    An increase in shareholders interests in long-term
assurance business (from expense of £673m in 2002 to income of
£270m in 2003), primarily due to recognition under US GAAP of the
deficits in the policyholder with-profits funds whereas, under UK
GAAP, only that amount for which the shareholder is responsible is
recognised. The deficits were due to the sharp fall in equity markets
in 2002 which have partially recovered in 2003, reducing the overall
deficit on a US GAAP basis. The difference was reduced in 2003
following the provision for realistic balance sheet liabilities in
the UK GAAP result. The improvement was also due to lower levels of
new business in 2003 with UK GAAP recognising more of the profit
up-front while US GAAP spreads the profit over the life of the
contract and there is therefore a greater benefit from the in-force
book.
 >
    
    An increase in derivatives and hedged underlying transactions of
£441m primarily due to the close-out of derivative instruments
which hedged Portfolio Business Unit assets as part of the disposal
process.
 >
    
    A decrease of £692m in goodwill (from £714m in 2002 to £22m in 2003) primarily due to a
£660m difference on impairments recognised under UK and US GAAP in 2002 and reversal of
amortisation recorded under UK GAAP.
 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 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
save as referred to in note 24 of the Financial Statements. For the two years ended 31 December
2004, there have been no material contracts being contracts entered into outside the ordinary
course of business. Audit fees Please refer to Note 8 of the Consolidated Financial Statements. 46




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Operating and Financial Review 
 Balance Sheet Operating 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 for each of the three years
ended 31 December. Average: year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mDeposits by banksUK
    
    
    7,340
    
    
    
    7,144
    
    
    
    8,159Non-UK
    
    
    697
    
    
    
    1,761
    
    
    
    3,758Total
    
    
    8,037
    
    
    
    8,905
    
    
    
    11,917Customers accounts (all interest bearing)UK
    
    
    59,405
    
    
    
    63,154
    
    
    
    63,326Non-UK
    
    
    5,301
    
    
    
    5,501
    
    
    
    5,200Total
    
    
    64,706
    
    
    
    68,655
    
    
    
    68,526
 Customers accounts  by type Average: year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mUKRetail demand deposits
    
    
    41,761
    
    
    
    42,477
    
    
    
    38,727Retail time deposits
    
    
    12,177
    
    
    
    12,620
    
    
    
    14,396Wholesale deposits
    
    
    5,467
    
    
    
    8,057
    
    
    
    10,20359,405
    
    
    
    63,154
    
    
    
    63,326Non-UKRetail demand deposits
    
    
    1,152
    
    
    
    1,260
    
    
    
    1,320Retail time deposits
    
    
    4,149
    
    
    
    4,083
    
    
    
    3,417Wholesale deposits
    
    
    
    
    
    
    158
    
    
    
    4635,301
    
    
    
    5,501
    
    
    
    5,200Total
    
    
    64,706
    
    
    
    68,655
    
    
    
    68,526
 Substantially all retail demand and time deposits are obtained either through the branch network,
cahoot or remotely (such as postal accounts) and administered by the branch network, or cahoot,
Abbeys separately branded internet banking proposition. Retail demand and time deposits are also
obtained outside the UK, principally through Abbey National Offshore. They are all interest bearing
and interest rates are varied from time to time in response to competitive conditions. Demand Deposits Demand deposits largely consist of passbook-based and interest accounts whose balances are
available on demand. The category also includes Individual Savings Accounts, current accounts,
instant saver savings accounts, remote access accounts, such as those serviced by post, and a
number of other accounts which are passbook- or interest-based but which allow the customer a
limited number of notice-free withdrawals per year depending on the balance remaining in the
account. These accounts are treated as demand deposits because the entire account balance may be
withdrawn on demand without penalty as one of the notice-free withdrawals. Time Deposits The main constituents of time deposits are notice accounts which require customers to give notice
of an intention to make a withdrawal and bond accounts which have a minimum deposit requirement. In
each of these accounts early withdrawal incurs an interest penalty. Wholesale Deposits Wholesale deposits are those which either are obtained through the money markets or for which
interest rates are quoted on request rather than being publicly advertised. These deposits are of
fixed maturity and bear interest rates which reflect the inter-bank money market rates. Short-term borrowings The following tables set forth certain information regarding short-term borrowings (composed of
deposits by banks, commercial paper and negotiable certificates of deposit) for each of the three
years ended 31 December. While deposits by banks are reported in the deposits section above, they
are also shown under Short-term borrowings because of their importance as a source of funding to
Abbey. 47




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Deposits by banks Year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mYear-end balance (1)
    
    
    8,578
    
    
    
    1,178
    
    
    
    11,481Average balance (2)
    
    
    8,037
    
    
    
    8,905
    
    
    
    11,917Maximum balance
    
    
    12,575
    
    
    
    10,979
    
    
    
    19,101%
    
    
    
    %
    
    
    
    %Average interest rate during year
    
    
    3.15
    
    
    
    2.78
    
    
    
    2.75Year-end interest rate (3)
    
    
    5.43
    
    
    
    2.83
    
    
    
    2.80
 At 31 December 2004, deposits by foreign banks amounted to £9,538m (2003: £5,881m, 2002:
£10,364m). Commercial paper Year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mYear-end balance
    
    
    1,056
    
    
    
    1,298
    
    
    
    8,439Average balance (2)
    
    
    2,086
    
    
    
    4,199
    
    
    
    12,958Maximum balance
    
    
    3,367
    
    
    
    7,300
    
    
    
    15,813%
    
    
    
    %
    
    
    
    %Average interest rate during year
    
    
    0.57
    
    
    
    1.60
    
    
    
    3.42Year-end interest rate(3)
    
    
    0.22
    
    
    
    5.16
    
    
    
    1.46
 Commercial paper is issued by Abbey generally in denominations of not less than $50,000, with
maturities of up to 365 days. Commercial paper is issued by Abbey National Treasury Services plc
and Abbey National North America Corporation, a subsidiary of Abbey National Treasury Services plc. Included in the above year-end balance for 2002 is £3.6bn in respect of commercial paper
issued by Moriarty Limited and Moriarty LLC. Moriarty was a bankruptcy-remote asset-backed
commercial paper programme sponsored by Abbey National Treasury Services plc. Negotiable certificates of deposit Year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mYear-end balance
    
    
    7,073
    
    
    
    8,211
    
    
    
    21,744Average balance (2)
    
    
    8,446
    
    
    
    13,996
    
    
    
    26,917Maximum balance
    
    
    9,901
    
    
    
    22,429
    
    
    
    30,468%
    
    
    
    %
    
    
    
    %Average interest rate during year
    
    
    3.04
    
    
    
    2.17
    
    
    
    2.70Year-end interest rate(3)
    
    
    3.65
    
    
    
    3.70
    
    
    
    2.75
   (1)
    
    The year-end deposits by banks balance includes non-interest bearing items in the course of
transmission of £161m (2003: £204m, 2002: £221m).(2)
    
    Average balances for 2004, 2003, and 2002 are based upon daily data for Abbey National
Treasury Services plc and its subsidiaries and monthly data for all other operations.(3)
    
    Year-end interest rates are calculated on the basis of the interest earned in the year
relative to the year-end balance, and are therefore not representative of actual interest
rates. Certificates of deposit and certain time deposits The following table sets forth the maturities of Abbeys certificates of deposit and other
large wholesale time deposits from non-bank counterparties in excess of £50,000 (or the
non-sterling equivalent of £50,000) at 31 December 2004. A proportion of Abbeys retail time
deposits also exceeds £50,000 at any given date; however, the ease of access and other terms of
these accounts means that they may not have been in excess of £50,000 throughout 2004. Furthermore,
the customers may withdraw their funds on demand upon payment of an interest penalty. For these
reasons, no maturity analysis is presented for such deposits. See Short-term borrowings above for
information on amounts and maturities of claims under issues of commercial paper. 48




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued In more thanthree months
    
    
    In more thanbut not more
    
    
    six months butNot more than
    
    
    than six
    
    
    not more than
    
    
    In more than athree months
    
    
    months
    
    
    one year
    
    
    year
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCertificates of deposit:UK
    
    
    2,417
    
    
    
    1,349
    
    
    
    948
    
    
    
    80
    
    
    
    4,794Non-UK
    
    
    1,444
    
    
    
    550
    
    
    
    233
    
    
    
    52
    
    
    
    2,279Wholesale time deposits:UK
    
    
    3,082
    
    
    
    410
    
    
    
    325
    
    
    
    2,635
    
    
    
    6,452Non-UK
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    279Total
    
    
    7,222
    
    
    
    2,309
    
    
    
    1,506
    
    
    
    2,767
    
    
    
    13,804
 At 31 December 2004, there were an additional £2,390m of wholesale deposits which were
repayable on demand. All wholesale time deposits exceeded £50,000 at 31 December 2004. 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. 2004
    
    
    2003
    
    
    2002Net asset
    
    
    Market
    
    
    Net asset
    
    
    Market
    
    
    Net asset
    
    
    Marketvalue
    
    
    Value(1)
    
    
    value
    
    
    Value (1)
    
    
    value
    
    
    Value (1)£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mInvestment securitiesDebt securities:UK government
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    125
    
    
    
    133
    
    
    
    133US treasury and other US government agencies and
corporations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    778
    
    
    
    779Other public sector securities
    
    
    28
    
    
    
    28
    
    
    
    28
    
    
    
    29
    
    
    
    1,512
    
    
    
    1,699Bank and building society certificates of deposit
    
    
    317
    
    
    
    317
    
    
    
    204
    
    
    
    203
    
    
    
    1,011
    
    
    
    1,022Other issuers:(2)Floating rate notes
    
    
    32
    
    
    
    27
    
    
    
    330
    
    
    
    381
    
    
    
    3,138
    
    
    
    3,130Mortgage-backed securities
    
    
    38
    
    
    
    42
    
    
    
    36
    
    
    
    37
    
    
    
    4,022
    
    
    
    4,014Other asset-backed securities (3)
    
    
    257
    
    
    
    325
    
    
    
    535
    
    
    
    483
    
    
    
    13,392
    
    
    
    13,061Other
    
    
    
    
    
    
    
    
    
    
    495
    
    
    
    583
    
    
    
    8,989
    
    
    
    9,255Ordinary shares and similar securities
    
    
    30
    
    
    
    30
    
    
    
    394
    
    
    
    394
    
    
    
    893
    
    
    
    901Sub Total
    
    
    702
    
    
    
    769
    
    
    
    2,147
    
    
    
    2,235
    
    
    
    33,868
    
    
    
    34,004Other securities(3)Debt securities:UK government
    
    
    491
    
    
    
    491
    
    
    
    547
    
    
    
    547
    
    
    
    1,169
    
    
    
    1,169Other public sector securities
    
    
    2,869
    
    
    
    2,868
    
    
    
    3,798
    
    
    
    3,798
    
    
    
    4,706
    
    
    
    4,706Bank and building society certificates of deposit
    
    
    11,170
    
    
    
    11,170
    
    
    
    15,811
    
    
    
    15,811
    
    
    
    14,322
    
    
    
    14,322Other issuers:(2)Floating rate notes
    
    
    224
    
    
    
    224
    
    
    
    244
    
    
    
    244
    
    
    
    43
    
    
    
    43Mortgage-backed securities
    
    
    240
    
    
    
    240
    
    
    
    608
    
    
    
    608
    
    
    
    159
    
    
    
    159Other asset-backed securities (3)
    
    
    495
    
    
    
    495
    
    
    
    614
    
    
    
    614
    
    
    
    260
    
    
    
    260Other
    
    
    6,522
    
    
    
    6,522
    
    
    
    6,953
    
    
    
    6,953
    
    
    
    6,173
    
    
    
    6,173Ordinary shares and similar securities
    
    
    1,146
    
    
    
    1,146
    
    
    
    1,239
    
    
    
    1,239
    
    
    
    70
    
    
    
    70Sub Total
    
    
    23,157
    
    
    
    23,156
    
    
    
    29,814
    
    
    
    29,814
    
    
    
    26,902
    
    
    
    26,902Total
    
    
    23,859
    
    
    
    23,925
    
    
    
    31,961
    
    
    
    32,049
    
    
    
    60,770
    
    
    
    60,906
   (1)
    
    There are hedges in place in respect of certain securities where the rise or fall in their
market value will be offset by a substantially equivalent reduction or increase in the value
of the hedges.(2)
    
    Other securities comprise securities held for trading purposes and securities used for the
stock borrowing and lending business. These securities are carried at market value.(3)
    
    In 2002 this included a portfolio of asset-backed securities managed by Abbey National
Treasury Services plc on behalf of Moriarty and its associated companies. See Short-term
borrowings  Commercial paper included elsewhere in this Annual Report. A description of the characteristics of the securities held under each of the subcategories of
securities in the table above is provided below. UK government securities The holdings of UK government securities (gilts) are primarily at fixed rates. Abbeys assets and
liabilities are predominantly floating rate (as described under Risk management  market risk
included elsewhere in this Annual Report) which is used as the benchmark for risk management.
Fixed-rate securities (including gilts) are generally hedged into floating-rate, on either an
individual or an aggregate basis within the overall management of the appropriate book. 49




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued US treasury and other US government agencies and corporations This category comprises US treasury securities, mortgage-backed securities issued or guaranteed by
the US Government National Mortgage Association, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation (collectively, Agency Mortgage Backed Securities). Other public sector securities This category comprises issues by governments other than the US and UK governments, issues by
supranationals and issues by UK public sector bodies. These are a mixture of fixed-rate and
floating-rate securities. 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. A
number 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 out the maturities and weighted average yields of investment securities at
31 December 2004. Maturing after fiveMaturing within one
    
    
    Maturing after one but
    
    
    years but within ten
    
    
    Maturing after tenyear:
    
    
    within five years:
    
    
    years:
    
    
    years:
    
    
    Total:Amount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)
    
    
    Amount
    
    
    Yield(1)£m
    
    
    %
    
    
    £m
    
    
    %
    
    
    £m
    
    
    %
    
    
    £m
    
    
    %
    
    
    £m
    
    
    %Public sector securities
    
    
    28
    
    
    
    3.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    3.25Bank and building society
certificates of deposit
    
    
    310
    
    
    
    4.89
    
    
    
    7
    
    
    
    4.82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    317
    
    
    
    4.89Other issuers
    
    
    20
    
    
    
    0.64
    
    
    
    8
    
    
    
    1.09
    
    
    
    49
    
    
    
    1.27
    
    
    
    284
    
    
    
    9.13
    
    
    
    361
    
    
    
    7.42Sub total
    
    
    358
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    284
    
    
    
    
    
    
    
    706Ordinary shares (2)
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Total net asset value before
provisions
    
    
    388
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    284
    
    
    
    
    
    
    
    736Provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    
    
    
    
    (34
    )Total net asset value
    
    
    388
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    702Total market value
    
    
    382
    
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    336
    
    
    
    
    
    
    
    769
   (1)
    
    The weighted average yield for each range of maturities is calculated by dividing the
annualised interest income prevailing at 31 December 2004 by the net asset value of securities
held at that date, and is not necessarily representative when there are only a small number of
securities in the portfolio.(2)
    
    Ordinary shares by their nature do not permit the calculation of yields which are meaningful
in the same way as yields on debt securities; accordingly, these are omitted. The following table sets forth the book and market values of investment and other securities of
individual counterparties where the aggregate amount of those securities exceeded 10% of Abbeys
shareholders funds at 31 December 2004. 50




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Book value
    
    
    Market value£m
    
    
    £mHBOS plc
    
    
    3,249
    
    
    
    3,262Royal Bank of Scotland Group plc
    
    
    3,163
    
    
    
    3,170UK government
    
    
    1,690
    
    
    
    1,758Republic of Italy
    
    
    1,300
    
    
    
    1,316Barclays Bank plc
    
    
    907
    
    
    
    908Nationwide Building Society
    
    
    901
    
    
    
    901Credit Suisse Group
    
    
    776
    
    
    
    776Government of Germany
    
    
    598
    
    
    
    623
 For the purposes of determining the above, shareholders funds amounted to £4,924m at 31
December 2004. Loans and advances to banks Loans and advances to banks includes loans to banks and building societies and balances with
central banks (excluding those balances which can be withdrawn on demand). The geographical analysis of loans and advances presented in the following table are based on
the location of the office from which the loans and advances are made. Year ended 31 December2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUK
    
    
    9,478
    
    
    
    6,219
    
    
    
    6,465
    
    
    
    9,288
    
    
    
    12,031Non-UK
    
    
    670
    
    
    
    936
    
    
    
    135
    
    
    
    586
    
    
    
    137Total
    
    
    10,148
    
    
    
    7,155
    
    
    
    6,600
    
    
    
    9,874
    
    
    
    12,168
 The following tables set forth loans and advances to banks by maturity and interest rate
sensitivity at 31 December 2004. In more than
    
    
    In more thanthree months
    
    
    one year butIn not more
    
    
    but not more
    
    
    not moreOn
    
    
    than three
    
    
    than one
    
    
    than five
    
    
    In more thandemand
    
    
    months
    
    
    year
    
    
    years
    
    
    five years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUK
    
    
    2,879
    
    
    
    6,535
    
    
    
    63
    
    
    
    1
    
    
    
    
    
    
    
    9,478Non-UK
    
    
    8
    
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    670Total
    
    
    2,887
    
    
    
    7,197
    
    
    
    63
    
    
    
    1
    
    
    
    
    
    
    
    10,148
 Fixed rate
    
    
    Variable rate
    
    
    Total£m
    
    
    £m
    
    
    £mInterest-bearing loans and advances to banks:UK
    
    
    7,851
    
    
    
    1,520
    
    
    
    9,371Non-UK
    
    
    3
    
    
    
    667
    
    
    
    6707,854
    
    
    
    2,187
    
    
    
    10,041Items in the course of collection (non-interest bearing)UK
    
    
    n/a
    
    
    
    n/a
    
    
    
    107Non-UK
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    7,854
    
    
    
    2,187
    
    
    
    10,148
 Loans and Advances to Customers Abbey provides lending facilities primarily to personal customers in the form of mortgages
secured on residential properties and also provides finance lease facilities and a limited number
of lending facilities to corporate customers. Purchase and resale agreements represent sale and
repurchase activity with professional non-bank customers by Abbey Financial Markets short-term
markets business. The geographical analysis of loans and advances presented in the following table are based on
the location of the office from which the loans and advances are made. 51




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Year ended 31 December2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUKAdvances secured on residential properties
    
    
    76,065
    
    
    
    73,481
    
    
    
    65,777
    
    
    
    60,738
    
    
    
    64,053Purchase and resale agreements
    
    
    4,520
    
    
    
    2,958
    
    
    
    742
    
    
    
    2,704
    
    
    
    6,875Other secured advances
    
    
    1,793
    
    
    
    2,938
    
    
    
    4,645
    
    
    
    3,920
    
    
    
    2,367Corporate advances
    
    
    1,030
    
    
    
    3,762
    
    
    
    9,071
    
    
    
    9,119
    
    
    
    5,534Unsecured personal advances
    
    
    3,516
    
    
    
    3,228
    
    
    
    5,162
    
    
    
    4,833
    
    
    
    4,901Finance lease debtors
    
    
    1,148
    
    
    
    2,558
    
    
    
    3,429
    
    
    
    4,671
    
    
    
    5,17488,072
    
    
    
    88,925
    
    
    
    88,826
    
    
    
    85,985
    
    
    
    88,904Non-UKAdvances secured on residential properties
    
    
    14
    
    
    
    1,745
    
    
    
    3,186
    
    
    
    2,091
    
    
    
    1,635Purchase and resale agreements
    
    
    6,737
    
    
    
    6,414
    
    
    
    2,358
    
    
    
    1,507
    
    
    
    Other secured advances
    
    
    
    
    
    
    33
    
    
    
    106
    
    
    
    48
    
    
    
    104Unsecured personal advances
    
    
    
    
    
    
    145
    
    
    
    123
    
    
    
    119
    
    
    
    108Finance lease debtors
    
    
    
    
    
    
    15
    
    
    
    18
    
    
    
    67
    
    
    
    186,751
    
    
    
    8,352
    
    
    
    5,791
    
    
    
    3,832
    
    
    
    1,865Total
    
    
    94,823
    
    
    
    97,277
    
    
    
    94,617
    
    
    
    89,817
    
    
    
    90,769
 No single concentration of loans and advances, with the exception of advances secured on
residential properties and corporate advances in the UK, as disclosed above, accounts for more than
10% of total loans and advances and no individual country, other than the UK and US, accounts for
more than 5% of total loans and advances. The following tables set forth loans and advances to customers by maturity and interest rate
sensitivity at 31 December 2004. In the maturity analysis, overdrafts are included in the
on-demand category. Advances secured by residential properties are included in the maturity
analysis at their stated maturity; however, such advances may be repaid early. Abbeys mortgage
loans currently have an average life of six years depending on, among other factors, housing market
conditions. In more than
    
    
    In more thanthree months
    
    
    one year butOn
    
    
    In more than
    
    
    but not more
    
    
    not more than
    
    
    In more thandemand
    
    
    three months
    
    
    than one year
    
    
    five years
    
    
    five years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUKAdvances secured on
residential properties
    
    
    823
    
    
    
    1,688
    
    
    
    1,554
    
    
    
    9,308
    
    
    
    62,692
    
    
    
    76,065Purchase and resale agreements
    
    
    2,036
    
    
    
    2,484
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,520Other secured advances
    
    
    29
    
    
    
    116
    
    
    
    325
    
    
    
    263
    
    
    
    1,060
    
    
    
    1,793Corporate advances
    
    
    259
    
    
    
    204
    
    
    
    43
    
    
    
    186
    
    
    
    338
    
    
    
    1,030Unsecured personal advances
    
    
    1,041
    
    
    
    214
    
    
    
    559
    
    
    
    1,587
    
    
    
    115
    
    
    
    3,516Finance lease debtors
    
    
    
    
    
    
    25
    
    
    
    12
    
    
    
    84

    
    
    
    1,027
    
    
    
    1,148Total UK
    
    
    4,188
    
    
    
    4,731
    
    
    
    2,493
    
    
    
    11,428
    
    
    
    65,232
    
    
    
    88,072Non-UKAdvances secured on
residential properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    12
    
    
    
    14Purchase and resale agreements
    
    
    5,203
    
    
    
    1,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,737Other secured advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Unsecured advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Finance lease debtors
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-UK
    
    
    5,203
    
    
    
    1,534
    
    
    
    
    
    
    
    2
    
    
    
    12
    
    
    
    6,751Total
    
    
    9,391
    
    
    
    6,265
    
    
    
    2,493
    
    
    
    11,430
    
    
    
    65,244
    
    
    
    94,823
 Fixed rate
    
    
    Variable rate
    
    
    Total£m
    
    
    £m
    
    
    £mUK
    
    
    25,857
    
    
    
    62,215
    
    
    
    88,072Non-UK
    
    
    6,737
    
    
    
    14
    
    
    
    6,75132,594
    
    
    
    62,229
    
    
    
    94,823
 Abbeys policy is to hedge all fixed-rate loans and advances to customers using derivative
instruments, or by matching with other on-balance sheet interest rate exposures. 52




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Provisions on loans and advances to customers Abbeys provisioning policy is in accordance with UK industry practice as expressed in the
British Bankers Association Statement of Recommended Practice on Advances. 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:>
    Suspended interest interest continues to be debited to all impaired
loans. On advances secured by a charge on residential property
payment is deemed to be impaired or non-performing when they are 90
days overdue. The homogeneous nature of the loans, together with the
size of the loan portfolio, permits a reasonably accurate estimate to
be made of the amount of this interest for which eventual recovery is
doubtful. This amount is no longer credited to the Profit and Loss
Account and is placed in suspense. Interest is no longer accrued when
it is determined that there is no realistic prospect of recovery, the
exception to this being certain small specialist portfolios where it
is local market practice to place loans on a non-accrual basis where
there is no realistic prospect of recovery.>
    Specific provision a specific provision is established for all
impaired 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 is considered to be impaired
an assessment of the likelihood of collecting the principal of this
loan 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 result in losses net of any recovery where
applicable. For advances secured on residential property the
propensity of loans to become repossessed is also calculated.>
    General provision a general provision is established to cover
losses which are, from experience, known to exist at the balance
sheet date but which have not yet been identified. The general
provision is determined using management judgment given past loss
experience, lending quality and economic prospects, and is
supplemented by statistical calculations which corroborate the
conclusions reached.>
    Amounts written off losses are written off when it becomes certain
how much is not going to be recovered from repayment, from realising
any attached security, or from claiming on any mortgage indemnity
guarantee or other insurance. This write-off is determined on a
case-by-case basis. In the case of secured loans it is made when the
security has been realised and, since the values can then be
calculated with some certainty, the instances of further write-offs
or recoveries are minimal. In the case of unsecured loans, the
circumstances surrounding the asset will be considered before
deciding to write-off completely. 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 may be made a significant time in
advance of the related write-off. This is particularly the case for the loans secured on
commercial properties included within the other secured advances category. Legal proceedings
to repossess and realise the value of the security are complex and lengthy processes. This
means that, although the likely losses have been identified and appropriate provisions made
on a case-by-case basis, fewer cases have been determined precisely and written off, net of
recoveries, compared to other classes of lending. 53




---



##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Analysis of end-of-year provisions on loans and advances to customers 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSpecificAdvances secured on residential properties  UK
    
    
    9
    
    
    
    8
    
    
    
    24
    
    
    
    46
    
    
    
    50Other secured advances  UK
    
    
    148
    
    
    
    36
    
    
    
    42
    
    
    
    45
    
    
    
    57Unsecured personal advances  UK
    
    
    133
    
    
    
    171
    
    
    
    124
    
    
    
    152
    
    
    
    170Corporate advances  UK
    
    
    67
    
    
    
    161
    
    
    
    204
    
    
    
    
    
    
    
    Advances secured on residential properties  non-UK
    
    
    
    
    
    
    17
    
    
    
    26
    
    
    
    16
    
    
    
    11Other secured advances  non-UK
    
    
    
    
    
    
    26
    
    
    
    34
    
    
    
    27
    
    
    
    41Unsecured personal advances  non-UK
    
    
    
    
    
    
    4
    
    
    
    4
    
    
    
    4
    
    
    
    4Total specific provisions
    
    
    357
    
    
    
    423
    
    
    
    458
    
    
    
    290
    
    
    
    333GeneralAdvances secured on residential properties  UK
    
    
    58
    
    
    
    165
    
    
    
    165
    
    
    
    145
    
    
    
    139Other secured advances  UK
    
    
    3
    
    
    
    58
    
    
    
    19
    
    
    
    18
    
    
    
    15Unsecured personal advances  UK
    
    
    35
    
    
    
    32
    
    
    
    32
    
    
    
    35
    
    
    
    31Corporate advances  UK
    
    
    14
    
    
    
    173
    
    
    
    56
    
    
    
    
    
    
    
    Advances secured on residential properties  non-UK
    
    
    
    
    
    
    12
    
    
    
    9
    
    
    
    5
    
    
    
    3Other secured advances  non-UK
    
    
    
    
    
    
    2
    
    
    
    4
    
    
    
    4
    
    
    
    5Unsecured personal advances  non-UK
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    1
    
    
    
    1Total general provisions
    
    
    110
    
    
    
    442
    
    
    
    288
    
    
    
    208
    
    
    
    194Total provisions
    
    
    467
    
    
    
    865
    
    
    
    746
    
    
    
    498
    
    
    
    527Ratios
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Provisions at the year end as a percentage of
year-end loans and advances to customersAdvances secured on residential properties  UK
    
    
    0.09
    
    
    
    0.24
    
    
    
    0.29
    
    
    
    0.31
    
    
    
    0.30Other secured advances  UK
    
    
    8.44
    
    
    
    3.28
    
    
    
    1.30
    
    
    
    1.61
    
    
    
    3.03Unsecured personal advances  UK
    
    
    4.65
    
    
    
    6.20
    
    
    
    3.02
    
    
    
    3.87
    
    
    
    4.09Corporate advances  UK
    
    
    9.43
    
    
    
    13.83
    
    
    
    2.97Advances secured on residential properties  non-UK
    
    
    0.73
    
    
    
    1.70
    
    
    
    1.10
    
    
    
    1.00
    
    
    
    0.87Other secured advances  non-UK
    
    
    
    
    
    
    68.29
    
    
    
    80.85
    
    
    
    64.58
    
    
    
    44.23Unsecured personal advances  non-UK
    
    
    11.53
    
    
    
    2.76
    
    
    
    5.69
    
    
    
    4.20
    
    
    
    4.39Total loans and advances to customers
    
    
    0.49
    
    
    
    0.93
    
    
    
    0.82
    
    
    
    0.59
    
    
    
    0.62Amounts written off (net of recoveries) (1)
    
    
    0.35
    
    
    
    0.40
    
    
    
    0.33
    
    
    
    0.37
    
    
    
    0.35Percent of loans in each category to total loansAdvances secured on residential properties  UK
    
    
    80.29
    
    
    
    76.62
    
    
    
    69.76
    
    
    
    67.62
    
    
    
    70.57Purchase and resale agreements  UK
    
    
    4.77
    
    
    
    3.08
    
    
    
    0.79
    
    
    
    3.01
    
    
    
    7.57Other secured advances  UK
    
    
    1.89
    
    
    
    3.05
    
    
    
    4.99
    
    
    
    4.36
    
    
    
    2.61Corporate advances  UK
    
    
    0.91
    
    
    
    2.51
    
    
    
    9.27
    
    
    
    10.15
    
    
    
    6.10Unsecured personal advances  UK
    
    
    3.81
    
    
    
    3.40
    
    
    
    5.47
    
    
    
    5.38
    
    
    
    5.40Finance lease debtors  UK
    
    
    1.21
    
    
    
    2.67
    
    
    
    3.64
    
    
    
    5.20
    
    
    
    5.70Advances secured on residential properties  non-UK
    
    
    0.02
    
    
    
    1.78
    
    
    
    3.38
    
    
    
    2.33
    
    
    
    1.80Purchase and resale agreements  non-UK
    
    
    7.10
    
    
    
    6.68
    
    
    
    2.50
    
    
    
    1.70
    
    
    
    Other secured advances  non-UK
    
    
    
    
    
    
    0.04
    
    
    
    0.05
    
    
    
    0.05
    
    
    
    0.11Unsecured advances  non-UK
    
    
    
    
    
    
    0.15
    
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.12Finance lease debtors  non-UK
    
    
    
    
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.07
    
    
    
    0.02
   (1)
    
    Amounts written off (net of recoveries) ratio as a percentage of average loans and advances
to customers excluding finance leases. 54




---



##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Movements in provisions for bad and doubtful debts 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mProvisions at the beginning of the year
    
    
    865
    
    
    
    746
    
    
    
    498
    
    
    
    527
    
    
    
    529Acquisition of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Disposal of subsidiary undertakings
    
    
    (70
    )
    
    
    (94
    )
    
    
    (1
    )
    
    
    
    
    
    
    795
    
    
    
    652
    
    
    
    505
    
    
    
    527
    
    
    
    529Amounts written offAdvances secured on residential properties  UK
    
    
    (2
    )
    
    
    (16
    )
    
    
    (27
    )
    
    
    (41
    )
    
    
    (39
    )Other secured advances  UK
    
    
    (39
    )
    
    
    (45
    )
    
    
    (33
    )
    
    
    (49
    )
    
    
    (41
    )Unsecured personal advances  UK
    
    
    (136
    )
    
    
    (148
    )
    
    
    (335
    )
    
    
    (296
    )
    
    
    (234
    )Corporate advances  UK
    
    
    (164
    )
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    (341
    )
    
    
    (289
    )
    
    
    (395
    )
    
    
    (386
    )
    
    
    (314
    )Advances secured on residential properties  non-UK
    
    
    (2
    )
    
    
    (10
    )
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Other secured advances  non-UK
    
    
    (2
    )
    
    
    (10
    )
    
    
    
    
    
    
    (5
    )
    
    
    (7
    )Unsecured personal advances  non-UK
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    Total amounts written off
    
    
    (345
    )
    
    
    (309
    )
    
    
    (396
    )
    
    
    (393
    )
    
    
    (323
    )RecoveriesAdvances secured on residential properties  UK
    
    
    16
    
    
    
    4
    
    
    
    4
    
    
    
    9
    
    
    
    3Other secured advances  UK
    
    
    8
    
    
    
    
    
    
    
    3
    
    
    
    8
    
    
    
    12Unsecured personal advances  UK
    
    
    28
    
    
    
    38
    
    
    
    89
    
    
    
    85
    
    
    
    3352
    
    
    
    42
    
    
    
    96
    
    
    
    102
    
    
    
    48Advances secured on residential properties  non-UK
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    Other secured advances  non-UK
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    Total amount recovered
    
    
    52
    
    
    
    42
    
    
    
    107
    
    
    
    102
    
    
    
    48Specific provisions charged against profitAdvances secured on residential properties  UK
    
    
    (13
    )
    
    
    5
    
    
    
    1
    
    
    
    27
    
    
    
    24Other secured advances  UK
    
    
    147
    
    
    
    52
    
    
    
    25
    
    
    
    29
    
    
    
    52Unsecured personal advances  UK
    
    
    70
    
    
    
    205
    
    
    
    219
    
    
    
    193
    
    
    
    213Corporate advances  UK
    
    
    71
    
    
    
    36
    
    
    
    207
    
    
    
    
    
    
    
    275
    
    
    
    298
    
    
    
    452
    
    
    
    249
    
    
    
    289Advances secured on residential properties  non-UK
    
    
    (1
    )
    
    
    4
    
    
    
    2
    
    
    
    6
    
    
    
    1Other secured advances  non-UK
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (8
    )
    
    
    Unsecured personal advances  non-UK
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Total specific provisions charged against profit
    
    
    275
    
    
    
    302
    
    
    
    454
    
    
    
    248
    
    
    
    291General provisions charged against profit
    
    
    (310
    )
    
    
    172
    
    
    
    60
    
    
    
    15
    
    
    
    (18
    )Exchange and other adjustments
    
    
    
    
    
    
    6
    
    
    
    16
    
    
    
    (1
    )
    
    
    Provisions at the end of the year
    
    
    467
    
    
    
    865
    
    
    
    746
    
    
    
    498
    
    
    
    527
 Interest in suspense 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mInterest in suspense at the beginning of the year
    
    
    50
    
    
    
    76
    
    
    
    96
    
    
    
    100
    
    
    
    114Acquisition of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    Net interest suspended during the year
    
    
    7
    
    
    
    9
    
    
    
    10
    
    
    
    23
    
    
    
    32Disposal of subsidiary undertaking
    
    
    (42
    )
    
    
    (15
    )
    
    
    
    
    
    
    
    
    
    
    Interest written off
    
    
    (8
    )
    
    
    (24
    )
    
    
    (38
    )
    
    
    (26
    )
    
    
    (46
    )Exchange and other adjustments
    
    
    
    
    
    
    4
    
    
    
    5
    
    
    
    (1
    )
    
    
    Interest in suspense at the end of the year
    
    
    7
    
    
    
    50
    
    
    
    76
    
    
    
    96
    
    
    
    100
 Potential credit risk elements in loans and advances US banks typically stop accruing interest when loans become overdue by 90 days or more, or when
recovery is doubtful. In accordance with the British Bankers Association Statement of Recommended
Practice on Advances, Abbey continues to charge interest for collection purposes, where
appropriate, to accounts whose recovery is in doubt, but the interest is suspended as it accrues
and is excluded from interest income in the Profit and Loss Account. This suspension of interest
continues until such time as its recovery is considered to be unlikely at which time the advance is
written off. While such practice does not affect net income in comparison with the practice
followed in the US, it has the effect of increasing the reported level of potential credit risk
elements in loans and advances. The amount of this difference at 31 December 2004 was £7m. Other
than for the net interest suspended during the year, interest income in the Profit and Loss Account
is the same as would have been credited if all loans had been current in accordance with their
original terms. The following table presents the potential credit risk elements in Abbey loans and advances.
Additional categories of disclosure are included, however, to record loans and advances where
interest continues to be accrued and where either interest is being suspended or specific
provisions have been made. Normal US banking practice would be to place such loans and advances on
non-accrual status. However, at 31 December 2004, 2003 and 2002 there was a small amount of loan
assets placed on non-accrual status within Abbey, where such treatment is viewed as more
appropriate given the nature of the business and the particular circumstances of the loans. The
amounts are stated before deductions of the value of security held and specific provision or
interest suspended. 55




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Group non-performing loans and advances 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAccruing loans and advances on
which a proportion of interest has been
suspended and/or on which specific
provision has been made:UK
    
    
    422
    
    
    
    1,531
    
    
    
    515
    
    
    
    717
    
    
    
    777Non-UK
    
    
    
    
    
    
    101
    
    
    
    154
    
    
    
    131
    
    
    
    138422
    
    
    
    1,632
    
    
    
    669
    
    
    
    848
    
    
    
    915Accruing loans and advances 90 days
overdue on which no interest has been
suspended and on which no specific
provision has been made:UK
    
    
    801
    
    
    
    1,110
    
    
    
    1,364
    
    
    
    898
    
    
    
    871Non-UK
    
    
    
    
    
    
    4
    
    
    
    22
    
    
    
    19
    
    
    
    14801
    
    
    
    1,114
    
    
    
    1,386
    
    
    
    917
    
    
    
    885Non-accruing loans and advances:UK
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    125Non-UK
    
    
    
    
    
    
    30
    
    
    
    22
    
    
    
    27
    
    
    
    351
    
    
    
    30
    
    
    
    22
    
    
    
    28
    
    
    
    160Total non-performing loans and advances:UK
    
    
    1,223
    
    
    
    2,641
    
    
    
    1,879
    
    
    
    1,616
    
    
    
    1,773Non-UK
    
    
    
    
    
    
    135
    
    
    
    198
    
    
    
    177
    
    
    
    1871,223
    
    
    
    2,776
    
    
    
    2,077
    
    
    
    1,793
    
    
    
    1,960%
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Non-performing loans and advances as a
percentage of loans and advances to
customers excluding finance leases
    
    
    1.48
    
    
    
    3.25
    
    
    
    2.36
    
    
    
    2.22
    
    
    
    2.60Provision as a percentage of total
non-performing loans and advances
    
    
    38.18
    
    
    
    31.15
    
    
    
    35.92
    
    
    
    27.77
    
    
    
    26.89
 Overall, non-performing loans and advances as a percentage of loans and advances to customers
excluding finance leases have decreased from 3.25% to 1.48%, due to the unwind of the contingent
loans made by the long-term business funds of Scottish Provident and Scottish Mutual to Abbey
National Scottish Mutual Assurance Holdings in the course of 2004. These loans had provisions
against them in 2003. Provisions as a percentage of total non-performing loans and advances have
increased from 31.15% to 38.18% in 2004. This movement is attributable to the provision raised in
the Motor Finance and Litigation Funding businesses. Potential problem loans and advances The large number of relatively homogeneous residential mortgage loans has enabled Abbey to
develop statistical techniques to estimate capital and interest losses with reasonable accuracy. These techniques are used to establish the amount of provisions for bad and doubtful debts and
interest suspensions. In addition, Abbeys policy of initiating prompt contact with customers in
arrears, together with the nature of the security held, which in the case of advances secured on
residential property there has been a substantial increase in security values over the life of the
loan. This means that a significant proportion of non-performing loans will not result in a loss. 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. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m6 months to 12 months in arrears
    
    
    58
    
    
    
    62
    
    
    
    101
    
    
    
    114
    
    
    
    34112 months or more in arrears
    
    
    5
    
    
    
    44
    
    
    
    131
    
    
    
    111
    
    
    
    192Properties in possession
    
    
    10
    
    
    
    7
    
    
    
    9
    
    
    
    14
    
    
    
    57
 The approximate anticipated
bad debt write-offs and recoveries in respect of 2005 are as
follows: GroupAmounts written off
    
    £mAdvances secured on residential properties  UK
    
    
    4Unsecured personal advances  UK
    
    
    153Corporate advances  UK
    
    
    90Other secured advances  UK
    
    
    104Advances secured on residential properties  non-UK
    
    
    Other secured advances  non-UK
    
    
    Unsecured personal advances  non-UK
    
    
    351
 56




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued GroupRecoveries
    
    £mAdvances secured on residential properties  UK
    
    
    1Other secured advances  UK
    
    
    6Unsecured personal advances  UK
    
    
    22Advances secured on residential properties  non-UK
    
    
    Other secured advances  non-UK
    
    
    Unsecured personal advances  non-UK
    
    
    29
 Country risk exposure Abbey has minimal exposure to countries currently experiencing liquidity problems. Cross border outstandings The operations of Abbey involve operations in non-local currencies. These cross border
outstandings are controlled through a well-developed system of country limits, which are reviewed
to avoid concentrations of transfer, economic or political risks. Cross border outstandings, which exclude finance provided within Abbey National plc and its
subsidiaries, are based on the country of domicile of the borrower or guarantor of ultimate risk
and comprise loans and advances to customers and banks, finance lease debtors, interest-bearing
investments and other monetary assets denominated in currencies other than the borrowers local
currency, but exclude balances arising from off-balance sheet financial instruments. At 31 December 2004, the countries where cross border outstandings exceeded 1% of adjusted
assets (as defined below) was the US and consisted substantially of balances with banks and other
financial institutions, governments and official institutions and commercial, industrial and other
private sector entities. In this context, adjusted 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, adjusted assets amounted to £140.2bn at 31
December 2004 compared to £146.6bn at 31 December 2003 and £174.4bn at 31 December 2002. Cross border outstandings exceeding 1% of adjusted assets Commercial,Banks and other
    
    
    
    
    
    
    industrial andAs % of adjusted
    
    
    
    
    
    
    financial
    
    
    Governments and
    
    
    other privateassets
    
    
    Total
    
    
    institutions
    
    
    official institutions
    
    
    sector entities%
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004:United States
    
    
    5.31
    
    
    
    7,448
    
    
    
    7,412
    
    
    
    
    
    
    
    36At 31 December 2003:United States
    
    
    3.09
    
    
    
    4,533
    
    
    
    2,693
    
    
    
    25
    
    
    
    1,815Italy
    
    
    1.25
    
    
    
    1,836
    
    
    
    376
    
    
    
    1,395
    
    
    
    65At 31 December 2002:United States
    
    
    1.65
    
    
    
    2,884
    
    
    
    1,112
    
    
    
    19
    
    
    
    1,753Germany
    
    
    1.25
    
    
    
    2,176
    
    
    
    1,914
    
    
    
    
    
    
    
    262Canada
    
    
    1.19
    
    
    
    2,068
    
    
    
    1,536
    
    
    
    53
    
    
    
    479Netherlands
    
    
    1.14
    
    
    
    1,993
    
    
    
    1,262
    
    
    
    
    
    
    
    731
 Cross border outstandings between 0.75% and 1% of adjusted assets At 31 December 2004, Abbey had no aggregate cross border outstandings between 0.75% and 1% of
adjusted assets. At 31 December 2003, Abbey had aggregate cross border outstandings with France of 0.96% of
adjusted assets with aggregate outstandings of £1,408m. At 31 December 2002, Abbey had no aggregate cross border outstandings between 0.75% and 1% of
adjusted assets. Tangible fixed assets Year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mCapital expenditure
    
    
    90
    
    
    
    49
    
    
    
    165
 Capital expenditure to 31 December 2004 amounted to £90m. The majority of this amount, was
incurred by Bankings and Savings mostly related to computer infrastructure. Capital expenditure to 31 December 2003 amounted to £49m. The majority of this, £46m, was
incurred by Bankings and Savings mostly related to computer infrastructure. Capital expenditure to 31 December 2002 amounted to £165m. Expenditure of £139m within
Bankings and Savings mostly related to computer infrastructure, telecommunications, and automatic
teller machine investment. In Investment and Protection and Abbey Financial Markets, £16m and £10m,
respectively were spent. Abbey had 971 unique property interests at 31 December 2004 consisting of 12 freehold leases, 100
leasehold interests, and 859 operating lease interests, occupying a total floor space of 527,557
square meters. Abbeys leasehold 57




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued property interests are subject to leases ranging from 1 to 999 years in maturity with the majority
being 9 years in average duration and subject to annual contracted rental increases. 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 24 branches that were not occupied by Abbey as at 31 December 2004. Of Abbeys individual
properties, 852 are located in the UK, 15 in Europe, and 5 in the rest of the world. There are no
material environmental issues associated with the use of the above properties. Abbey has four principal sites at Triton Square, London, Nelson Street, Bradford, St. Vincent
Street, Glasgow, and Grafton Gate East, Milton Keynes. 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 or 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 requirement. The most obvious capital management techniques considered are the issue of equity, preference
and subordinated capital instruments. Other levers available include tools involving equity and
retained earnings. Another obvious measure is control of the amount of assets and risk on the
balance sheet and, finally, the use of asset mitigation tools designed to reduce the capital
required to back certain classes of asset by disposing of part of the risk associated with them. 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 requirements Capital adequacy and capital resources are monitored by Abbey on the basis of techniques developed
by the Basel Committee on Banking Supervision (the Basel Committee) and subsequently implemented
in the UK by the UK regulator, the Financial Services Authority. The supervision of capital adequacy for banks in the European Union is governed by European
Union Directives, and specifically the Banking Consolidation Directive and the Capital Adequacy
Directives. After continuing consultation, the Basel Committee has developed a new framework to replace
the 1988 Capital Accord, which the European Union has adapted and issued as Capital Adequacy
Directive three. It is currently expected that the New Capital Accord will be implemented during
2007 and 2008, although implementation in the European Union will be dependent on the adoption of a
directive amending the Banking Consolidation Directive and the Capital Adequacy Directives.
Although the Basel Committee intends to deliver a more risk-sensitive methodology, including a new
operational risk capital charge, its goal is that on average, the new approach should not raise nor
lower regulatory capital for the banking sector. The international minimum risk asset ratio of 8%
will be unchanged. On the basis of the developing proposals, management does not expect any material adverse
change to the business of Abbey to arise from the new capital adequacy framework. Capital ratios The following capital ratios, which exceed both the Basel Committee minimum risk asset ratio of 8%
and the Financial Services Authoritys specific recommendation for Abbey, are calculated for Abbey
as supervised by the Financial Services Authority. Abbey recognises the additional security
inherent in Tier 1 capital, and hence also presents a Tier 1 to risk-weighted assets ratio. An
equity Tier 1 ratio (Tier 1 excluding preference shares) is also presented. 58




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Group capital 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mBalance sheet:Distributable reserves and shareholders funds
    
    
    4,697
    
    
    
    4,961
    

    
    
    6,196Life assurance reserves  non-distributable
    
    
    307
    
    
    
    353
    
    
    
    153Less: goodwill recognised (1)
    
    
    (1,069
    )
    
    
    (1,068
    )
    
    
    (1,277
    )Core equity Tier 1
    
    
    3,935
    
    
    
    4,246
    
    
    
    5,072Tier 1 capital instruments
    
    
    1,893
    
    
    
    1,957
    
    
    
    2,174Total Tier 1 capital
    
    
    5,828
    
    
    
    6,203
    
    
    
    7,246Undated subordinated debt
    
    
    2,604
    
    
    
    2,976
    
    
    
    3,065Dated subordinated debt
    
    
    2,204
    
    
    
    2,513
    
    
    
    2,745General provisions and other
    
    
    177
    
    
    
    531
    
    
    
    394Total Tier 2 capital
    
    
    4,985
    
    
    
    6,020
    
    
    
    6,204Less:PFS:
investments in life assurance businesses
    
    
    (3,789
    )
    
    
    (3,521
    )
    
    
    (3,384
    )PFS: investment in non-life assurance businesses
    
    
    (68
    )
    
    
    (93
    )
    
    
    (166
    )Portfolio Business Unit
    
    
    (225
    )
    
    
    (476
    )
    
    
    (807
    )Total supervisory deductions
    
    
    (4,082
    )
    
    
    (4,090
    )
    
    
    (4,357
    )Total regulatory capital
    
    
    6,731
    
    
    
    8,133
    
    
    
    9,093Risk-weighted assets:Personal Financial Services
    
    
    52,198
    
    
    
    52,158
    
    
    
    46,019Portfolio Business Unit
    
    
    3,973
    
    
    
    8,997
    
    
    
    32,686Total Abbey risk-weighted assets
    
    
    56,171
    
    
    
    61,155
    
    
    
    78,705Banking book
    
    
    50,416
    
    
    
    55,873
    
    
    
    72,900Trading book
    
    
    5,755
    
    
    
    5,282
    
    
    
    5,805Total Abbey risk-weighted assets
    
    
    56,171
    
    
    
    61,155
    
    
    
    78,705Capital ratios:Risk asset ratio (%)
    
    
    12.0
    
    
    
    13.3
    
    
    
    11.6Tier 1 ratio (%)
    
    
    10.4
    
    
    
    10.1
    
    
    
    9.2Equity Tier 1 ratio (%)
    
    
    7.0
    
    
    
    6.9
    
    
    
    6.4Banking Equity Tier 1 ratio (%)
    
    
    4.4
    
    
    
    4.7
    
    
    
    4.6
   (1)
    
    Goodwill recognised in the table above of £1,069m differs to that quoted on a statutory
basis of £317m, largely as it is deducted from Tier 1 in full on acquisition, whilst the
statutory treatment is to amortise the charge over a number of years, together with impairment
tests being applied. The significant impairments to goodwill that have been taken in prior
years are the principal cause of this difference. Balance sheet As at 31 December 2004, the Equity Tier 1 ratio and the risk asset ratio were 7.0% and 12.0%
respectively. The increase in the Equity Tier 1 ratio was primarily due to the reduction in
Portfolio Business Unit risk-weighted assets. Tier 1 capital decreased by £375m to £5,828m, driven by the level of profit attributable to
shareholders of £80m and payment of ordinary dividends (£583m), including a special dividend to
Abbey shareholders subsequent to the completion of the takeover by Banco Santander Central Hispano,
S.A. Tier 1 capital includes a £307m non-distributable reserve, representing income from long-term
assurance businesses recognised in the Profit and Loss Account, but not distributed by the
long-term assurance funds. The decrease in Tier 2 capital of £1,035m was principally due to four subordinated debt issues
being retired, together with amortization of subordinated capital and a reduction in general
provisions. Supervisory deductions primarily represent capital invested in non-banking businesses  mainly
the equity investment and retained earnings in life assurance and insurance companies. The movement
in the year largely reflects the life assurance profit after tax and the unwind of special purpose
vehicles in the Portfolio Business Unit. Risk-weighted assets (RWAs) Personal Financial Services
risk-weighted assets were at the same level as at the end of December
2003. This was the result of an increase in Retail Personal Financial
Services risk-weighted assets
of £2.1bn after securitisation, offset by reductions of £1.7bn in Abbey Financial Markets Personal
Financial Services activities and a £0.4bn decrease relating to the sale of the Abbey Business
asset and leasing companies. Risk-weighted assets in the Portfolio Business Unit have decreased by £5.0bn reflecting the
continued asset disposals process. 59




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Reconciliation of Equity Tier 1 £m
    
    
    %Equity Tier 1 at 1 January 2004
    
    
    
    
    
    
    6.9Equity impacts:- Profit after tax (1)
    
    
    381
    
    
    
    0.6- Dividends and other (2)
    
    
    (692
    )
    
    
    (1.1
    )(311
    )
    
    
    (0.5
    )Risk-weighted asset impacts:- Personal Financial Services growth (excl. securitisations)
    
    
    2,144
    
    
    
    (0.2
    )- Securitisations (net of roll-offs)
    
    
    (266
    )
    
    
    - PFS business sales
    
    
    (1,838
    )
    
    
    0.2- PBU business and asset sales
    
    
    (5,024
    )
    
    
    0.6(4,984
    )
    
    
    0.6Equity Tier 1 at 31 December 2004
    
    
    
    
    
    
    7.0
   (1)
    
    Loss after tax for regulatory capital purposes excludes goodwill amortisation, as goodwill
is deducted from Tier 1 in full on acquisition. Additionally, the regulatory group structure
excludes certain non-banking entities, resulting in a slightly different tax charge to that
for the statutory group.(2)
    
    Dividends and other includes the net impact of ordinary dividends, preference dividends,
scrip dividends and movements in minority interests (including joint ventures). Analysis of life assurance capital 2004
    
    
    2003Value of long-term assurance business
    
    £m
    
    
    £mDiscounted value of future profits
    
    
    1,540
    
    
    
    1,171Net assets held by long-term assurance funds
    
    
    1,428
    
    
    
    1,101Embedded value of the long-term assurance business
    
    
    2,968
    
    
    
    2,272Contingent loan to Scottish Providents with-profits sub fund
    
    
    
    
    
    
    618Total value of long-term assurance business
    
    
    2,968
    
    
    
    2,890Contingent loan to Scottish Mutual
    
    
    
    
    
    
    575Other net assets of shareholder funds
    
    
    997
    
    
    
    427Total value of long-term assurance business
    
    
    3,965
    
    
    
    3,892
 The capital structure of the life companies changed significantly in July 2004 following the
completion of Abbeys review of the with-profits funds in Scottish Mutual and Scottish Provident
and its subsequent agreement with the Financial Services Authority. Both contingent loans were
repaid with no incremental capital or adverse profit impact over and above that already reported. A
significant contribution was made to the Scottish Mutual with-profits fund, which was covered by
provisions set up in prior years. In addition, the hedging programme was extended and moved into
the with-profits funds to allow them to stand independently, reducing policyholder and shareholder
risk. The discounted value of future profits represents the present value of the surplus expected to
emerge in the future from the business in-force. The increase in discounted value of future profits
since December 2003 of £369m to £1,540m was mainly driven by the unwind of the contingent loans
although growth in new business sales in Scottish Provident also contributed. These increases were
partly offset by policy maturities and stronger levels of surrenders in with-profits business. Net assets of the shareholders interest in the long-term business fund of £1,428m were £327m
above the December 2003 level, as a result of the reallocation of capital to the long-term fund
from the shareholders fund following the unwind of the contingent loan arrangement. Other net assets of the shareholders funds have increased by £570m from December 2003
representing capital retained within the shareholders funds following the unwind of the contingent
loan arrangement. A reconciliation between the opening and closing embedded value of the long-term assurance
business is as follows: Movements in embedded value of the long-term assurance business £mOpening value as at 1 January 2004
    
    
    2,272Transfers (to)/from shareholders funds
    
    
    731Increase in value of the long-term assurance business before tax
    
    
    76Tax on increase in value of the long-term assurance business
    
    
    (92
    )Dividends paid to Abbey
    
    
    (19
    )Closing value at 31 December 2004
    
    
    2,968
 Before the consideration of market movements and other embedded value charges and rebasing
adjustments, the increase in the value of long-term business is £108m pre-tax (£78m after tax) and
is achieved through ongoing management of the existing business and writing new business. (The
Personal Financial Services portion of this is £141m pre-tax and £106m after tax). The long-term
fund total investment variances and other adjustments of £(32)m pre-tax, (£94)m after tax relate to
the adjustments to period-end market values, and guaranteed liabilities/market value adjustments
but exclude restructuring costs. 60




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Injections into the long-term funds included £546m to Scottish Provident and £197m to Scottish
Mutual in July 2004, primarily driven by the unwind of the contingent loan arrangement. Abbey
National Life repaid £31m from the long-term fund in March 2004 with £19m of this being paid as
dividend to Abbey. Life assurance cashflows At 31 December
    
    
    At 31 December2004
    
    
    2003£m
    
    
    £mCapital injections made from Group
    
    
    5
    
    
    
    343Dividends and interest paid to Group
    
    
    (21
    )
    
    
    (181
    )Net cashflows (to)/from Group
    
    
    (16
    )
    
    
    162
 Intercompany flows to and from Group incurred during the general course of business, such as
interest, centrally based IT services and sales commissions for branch-based products, are excluded
from the table above. Realistic liabilities The following shows the aggregate realistic assets and liabilities of the two UK with-profit funds
managed by Scottish Mutual Assurance plc and Scottish Provident Limited, at 31 December 2004. SMA
    
    
    SPL
    
    
    Total£m
    
    
    £m
    
    
    £mAsset shares
    
    
    7,704
    
    
    
    4,049
    
    
    
    11,753Cost of guarantees
    
    
    621
    
    
    
    175
    
    
    
    796Cost of financial options
    
    
    106
    
    
    
    149
    
    
    
    255Other liabilities
    
    
    65
    
    
    
    410
    
    
    
    475Total realistic liabilities
    
    
    8,496
    
    
    
    4,783
    
    
    
    13,279Regulatory value of asset
    
    
    8,562
    
    
    
    4,900
    
    
    
    13,462Realistic adjustments
    
    
    9
    
    
    
    2
    
    
    
    11Total realistic assets
    
    
    8,571
    
    
    
    4,902
    
    
    
    13,473Excess realistic assets
    
    
    75
    
    
    
    119
    
    
    
    194
 Asset shares are 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 at 31 December 2004. 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 asset share 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-profit funds fall into three main categories; cash guarantees,
guaranteed annuity options, and guaranteed cash options. 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. 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-profit 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. Outside the UK with-profit funds 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. 61




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Assumptions The assumptions that have the greatest effect on the measurement of liabilities, including options
and guarantees are:  >
    economic assumptions;>
    persistency rates;>
    expenses;>
    mortality; and>
    take-up rates of guarantees and options. Economic 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 non-realistic
(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. 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. 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. Analysis of available capital SMA
    
    
    SMPL
    
    
    ANL
    
    
    SPL
    
    
    SMI
    
    
    SPILA
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mTotal shareholders funds (excl fund for
future appropriations)
    
    
    1,371
    
    
    
    94
    
    
    
    360
    
    
    
    1,342
    
    
    
    117
    
    
    
    33
    
    
    
    3,317Fund for future appropriations (1)
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    793
    
    
    
    19
    
    
    
    
    
    
    
    879Regulatory adjustments (2)
    
    
    (268
    )
    
    
    (23
    )
    
    
    (50
    )
    
    
    (635
    )
    
    
    
    
    
    
    
    
    
    
    (976
    )Other capital (3)
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    449Total available regulatory capital
    
    
    1,495
    
    
    
    71
    
    
    
    310
    
    
    
    1,624
    
    
    
    136
    
    
    
    33
    
    
    
    3,669
   (1)
    
    The fund for future appropriations represents the excess assets over liabilities in the
with-profit funds calculated on a statutory basis.(2)
    
    Regulatory adjustments include deferred acquisition costs and the removal of negative
sterling reserves and acquired discounted value of future profits.(3)
    
    Other capital includes subordinated debt and implicit items. The total shareholder funds shown are on a draft Modified Statutory Solvency Basis (MSSB).
Reconciliation to the Balance Sheet amount is given in the following table. £mTotal value of long-term assurance business
    
    
    3,965Less: non-acquired value of future profits
    
    
    (1,158
    )Plus: deferred acquisition costs
    
    
    293Plus: goodwill
    
    
    227Other (including deferred tax)
    
    
    (10
    )Total shareholders funds (MSSB)
    
    
    3,317
  62




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued 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, which 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. The determination of the risk capital margin
depends on various actuarial and other assumptions about potential changes in market prices, and
the actions management would take in the event of various adverse changes in market conditions. In
addition, this assessment is open to challenge by the Financial Services Authority who may issue
individual capital guidance 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. At 31 December 2004 the estimated solvency coverage for each of the life companies was as
follows: %Scottish Mutual Assurance
    
    
    260Scottish Mutual Pensions Limited
    
    
    1,150AN Life
    
    
    309Scottish Provident
    
    
    183Scottish Mutual International
    
    
    163Scottish Provident International
    
    
    1,127
  These reflect the new regulatory regime introduced in 2004 and are not directly comparable to
last years solvency ratios. However, actions taken during 2004 have in general strengthened the
solvency positions of the life companies. 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 2004 there is sufficient available capital to cover the Financial Services
Authoritys capital requirement. Most of the shareholder capital in Abbeys life businesses is
located in the shareholders funds, which are mainly held in cash and high-grade short-term debt
securities. Shareholders capital in the non-profit business is invested in the same asset
instruments as the assets backing the liabilities. With respect to the with-profit funds,
management can 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 sufficient capital on a stand-alone basis, and
therefore no capital injections are expected to be needed in the future. As the companies operate
as separate legal entities any transfer of capital out of any life companies would require the
continued satisfaction of various regulatory capital requirements. Intra-group capital arrangements Prior to the stabilisation project concluded in July 2004, Scottish Mutual and Scottish Provident
had contingent loan arrangements within the Abbey National Group. Post the stabilisation project
there are no intra-group capital arrangements apart from 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 and Scottish Mutual Pensions
Ltd into the Scottish Mutual with-profit fund. 63




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Off-Balance Sheet Arrangements In the ordinary course of business, Abbey issues guarantees on behalf of customers. The
significant types of guarantees are as follows:  >
    It is normal in the UK to issue cheque guarantee cards to current
account customers holding chequebooks, as retailers do not generally
accept cheques without such form of guarantee. The guarantee is not
automatic but depends on the retailer having sight of the cheque
guarantee card at the time the purchase is made. The bank is liable
to honour these cheques even where the customer doesnt have
sufficient funds in his account. The banks guarantee liability is in
theory the number of cheques in issue multiplied by the amount
guaranteed per cheque, which can be between £50 and £250. 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 and
warranties on the sale of subsidiaries. The maximum potential amount
of any claims made against these is 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. See notes 46, 47 and 48 to the Consolidated Financial Statements for additional information
regarding Abbeys guarantees as well as its commitments and contingencies. In the ordinary course of business, Abbey also enters into securitisation transactions. The
Holmes securitisation vehicles are consolidated under UK GAAP, though a linked presentation is used
whereby the non-recourse securities liabilities of the vehicles are netted off on the face of the
balance sheet against the related mortgage assets. The mortgage assets continue to be administered
by Abbey. The Holmes securitisation vehicles provide Abbey with an important source of stable
long-term funding and also a regulatory capital benefit. The assets are therefore treated as
on-balance sheet. Under US GAAP the vehicles are deconsolidated in accordance with SFAS 140 and an
interest-only strip calculated. This is a US GAAP adjustment only and does not affect the way the
vehicles or underlying assets are managed. Liquidity disclosures Liquidity risk is the potential that, although remaining solvent, Abbey does not have
sufficient financial resources to enable it to meet its obligations as they fall due, or can secure
them only at excessive cost. These obligations include the repayment of deposits on demand or at
their contractual maturity; the repayment of loan capital and other borrowings as they mature; the
payment of insurance policy benefits, claims and surrenders; the payment of lease obligations as
they become due; the payment of operating expenses and taxation; the payment of dividends to
shareholders; the ability to fund new and existing loan commitments; and the ability to take
advantage of new business opportunities. Abbeys board is responsible for defining the liquidity management and control framework and
has approved a Liquidity Risk Policy to cover major liquidity risks and define key liquidity
limits. Along with its internal Liquidity Risk Policy control framework, Abbey abides by the Sound
Practices for Managing Liquidity in Banking Organisations set out by the Basel Committee as its
standard for liquidity risk management and control. Abbey also complies with the Financial Services
Authoritys liquidity requirements, and has appropriate liquidity policies in place. Analysis of cash flow movements Cash flow forecasts at the consolidated and subsidiary levels are provided on a monthly basis, and
we use trend and variance analyses to project future cash needs, making adjustments to the
forecasts when needed. The table below shows our recent net cash flows: Year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mNet cash (outflow)/inflow from operating activities
    
    
    (2,019
    )
    
    
    (32,678
    )
    
    
    (10,952
    )Net cash (outflow) from returns on investments and servicing of finance
    
    
    (374
    )
    
    
    (372
    )
    
    
    (462
    )Taxation paid (outflow)
    
    
    (12
    )
    
    
    (99
    )
    
    
    (496
    )Net cash inflow/(outflow) from capital expenditure and financial investment
    
    
    534
    
    
    
    25,189
    
    
    
    9,555Acquisitions and disposals
    
    
    3,180
    
    
    
    8,803
    
    
    
    (536
    )Equity dividends paid
    
    
    (697
    )
    
    
    (216
    )
    
    
    (648
    )Net cash (outflow)/inflow from financing
    
    
    (800
    )
    
    
    (193
    )
    
    
    687Increase/(decrease) in cash
    
    
    (188
    )
    
    
    434
    
    
    
    (2,852
    )
 64




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued 2004 compared to 2003 Net cash movements decreased by £622m to a net outflow of £(188)m in 2004 as compared with a net cash inflow of £434m 2003.  The decrease was primarily due to:>
    a decrease in the net outflow from operating activities due to
lower debt issue redemptions compared to 2003 when a significant
amount of debt was redeemed as a result of the Portfolio
Business Unit disposal programme.>
    offsetting this was a lower net inflow arising from the
significant sales of Portfolio Business Unit investment
securities, lower inflows from sales of subsidiaries, increased
outflows from equity dividends paid and increased cash outflows
from financing due to the redemption of subordinated debt. 2003 compared to 2002 Net cash movements increased by £3,286m to a net inflow of £434m in 2003 as compared with a net outflow of £2,852m in 2002.  The increase was primarily due to:>
    an increase in the net outflow from operating activities due to
a lower level of debt issuance consistent with the lower funding
requirement arising from the run down of the Portfolio Business
Unit; and>
    offsetting this was the net inflow arising from the significant
sales of Portfolio Business Unit investment securities and
subsidiaries. Sources of liquidity Abbey has both wholesale and retail sources of funding and attracts them through a variety of
entities. The retail sources primarily originate from the Retail savings business, which forms part
of the core Personal Financial Services activity. Although primarily callable, these funds provide
a stable and predictable core of liquidity due to the nature of the retail accounts and the breadth
of personal customer relationships. Abbeys wholesale funding sources are diversified across funding types and geography. Through
the wholesale markets, Abbey has active relationships with over 500 counterparts across a range of
sectors, including banks, central banks, other financial institutions, corporates and investment
funds. Other sources of funding include collateralised borrowings, securitisations (primarily
mortgages) and long-term debt issuance. While there is no certainty regarding money market lines of
credit extended to Abbey, they are actively managed as part of the ongoing business. Currently, no
guaranteed lines of credit have been purchased, as they are not common in European banking
practice. The ability to sell assets quickly is also an important source of liquidity for Abbey. Abbey
holds marketable investment securities, such as central bank eligible government and other debt
securities, which could be disposed of, either by entering into sale and repurchase agreements, or
by being sold to provide additional funding should the need arise. Abbey also makes use of asset
securitisation arrangements to provide alternative funding sources. Under Abbeys Liquidity Risk Policy, in the calculation of liquidity ratios, Abbey only relies
on 95% of retail deposits with an allowance for up to 5% of such deposits being withdrawn at any
time. With respect to wholesale deposits, for a period up to and including a month, there is no
reliance on external wholesale deposits being renewed. These approaches are more conservative than
would be expected based on historical experience with respect to these types of deposits. Short-term funding is accessed through money market instruments, including time deposits,
certificates of deposit and commercial paper. Medium- to long-term funding is accessed primarily
through the stand-alone bond markets. In addition Abbey utilises its euro and, separately,
Securities and Exchange Commission-registered medium-term note programmes. The major debt issuance
programmes managed by Abbey National Treasury Services on its own behalf, except for the US
commercial paper programme which is managed for Abbey National North America LLC, a guaranteed
subsidiary of Abbey, are set forth below: Programme
    
    Outstanding at 31 December 2004
    
    
    Markets issued in:$15bn medium-term notes
    
    $10.5bn
    
    European$7bn medium-term notes
    
    $  1.6bn
    
    United States$4bn commercial paper
    
    $  0.7bn
    
    European$20bn commercial paper
    
    $  2.5bn
    
    United States
 Uses of liquidity The principal uses of liquidity for Abbey are the funding of Banking and Savings lending and
investment securities, payment of interest expense, dividends paid to shareholders, and the
repayment of debt. Our ability to pay dividends depends on a number of factors, including our
regulatory capital requirements, distributable reserves and financial performance. Payments due by periodLess than
    
    
    1-3
    
    
    3-5
    
    
    More than 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsContractual obligations
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mLiabilities of long-term assurance funds
    
    
    27,180
    
    
    
    3,262
    
    
    
    3,533
    
    
    
    3,533
    
    
    
    16,852Debt securities in issue
    
    
    21,969
    
    
    
    11,360
    
    
    
    6,103
    
    
    
    3,012
    
    
    
    1,494Subordinated liabilities including convertible debt
    
    
    5,360
    
    
    
    388
    
    
    
    100
    
    
    
    360
    
    
    
    4,512Capital leases obligations
    
    
    1,488
    
    
    
    120
    
    
    
    232
    
    
    
    196
    
    
    
    940Purchase obligations
    
    
    338
    
    
    
    125
    
    
    
    149
    
    
    
    64
    
    
    
    Other long-term capital instruments
    
    
    722
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    722Total
    
    
    57,057
    
    
    
    15,255
    
    
    
    10,117
    
    
    
    7,165
    
    
    
    24,520
 65




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued The amounts and maturities of Abbeys contractual obligations in connection with customer
accounts, deposits by banks, and guarantees are described in notes
31, 32, 46 and 62 to the
consolidated financial statements. The repayment terms of the debt securities may be accelerated in line with the covenants
contained within the individual loan agreements. Details of deposits by banks and customer accounts
can be found in notes 31 and 32 of the Consolidated Financial Statements. Based on previous
experience, it is Abbeys expectation that the undated subordinated liabilities will continue to be
outstanding for the foreseeable future. Abbey has entered into significant outsourcing contracts
where, in some circumstances, there is no minimum specified spending requirement. In these cases,
anticipated spending volumes have been included within purchase obligations. Based upon the levels of resources within the business and the ability of Abbey to access the
wholesale money markets or issue debt securities should the need arise, Abbey believes that its
overall liquidity is sufficient to meet current obligations to customers, policy holders and debt
holders, to support expectations for future changes in asset and liability levels, and to carry on
normal operations. 66




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued Average balance sheet(4, 5) 2004
    
    
    2003
    
    
    2002Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average
    
    

    Average
    
    
    Interest
    
    
    Averagebalance
    
    
    (1)
    
    
    rate
    
    
    balance
    
    
    (1)
    
    
    rate
    
    
    balance
    
    
    (1)
    
    
    rate£m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %AssetsLoans and advances to banksUK
    
    
    5,175
    
    
    
    243
    
    
    
    4.70
    
    
    
    3,685
    
    
    
    155
    
    
    
    4.21
    
    
    
    3,872
    
    
    
    120
    
    
    
    3.10Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    289
    
    
    
    7
    
    
    
    2.42
    
    
    
    638
    
    
    
    41
    
    
    
    6.43Loans and advances to customers (2)UK
    
    
    82,056
    
    
    
    4,439
    
    
    
    5.41
    
    
    
    83,692
    
    
    
    4,373
    
    
    
    5.23
    
    
    
    83,457
    
    
    
    4,868
    
    
    
    5.83Non-UK
    
    
    1,398
    
    
    
    59
    
    
    
    4.24
    
    
    
    4,197
    
    
    
    174
    
    
    
    4.28
    
    
    
    2,879
    
    
    
    150
    
    
    
    5.20Lease debtorsUK
    
    
    1,762
    
    
    
    95
    
    
    
    5.37
    
    
    
    3,098
    
    
    
    140
    
    
    
    4.52
    
    
    
    3,382
    
    
    
    202
    
    
    
    5.96Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    59
    
    
    
    2
    
    
    
    3.39
    
    
    
    68
    
    
    
    2
    
    
    
    2.94Debt securitiesUK
    
    
    3,255
    
    
    
    87
    
    
    
    2.66
    
    
    
    9,284
    
    
    
    324
    
    
    
    3.49
    
    
    
    26,208
    
    
    
    941
    
    
    
    3.59Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,518
    
    
    
    69
    
    
    
    2.74
    
    
    
    15,828
    
    
    
    444
    
    
    
    2.81Total average interest-earning assets and
interest income
- banking business
    
    
    93,646
    
    
    
    4,923
    
    
    
    5.26
    
    
    
    106,822
    
    
    
    5,244
    
    
    
    4.91
    
    
    
    136,332
    
    
    
    6,768
    
    
    
    4.96Provision for loan losses
    
    
    (792
    )
    
    
    
    
    
    
    
    
    
    
    (773
    )
    
    
    
    
    
    
    
    
    
    
    (652
    )
    
    
    
    
    
    
    Trading business
    
    
    56,787
    
    
    
    
    
    
    
    
    
    
    
    40,883
    
    
    
    978
    
    
    
    
    
    
    
    42,696
    
    
    
    
    
    
    
    Non-interest-earning assets:Long-term assurance fund assets
    
    
    27,461
    
    
    
    
    
    
    
    
    
    
    
    29,757
    
    
    
    
    
    
    
    
    
    
    
    26,939
    
    
    
    
    
    
    
    Other
    
    
    13,586
    
    
    
    
    
    
    
    
    
    
    
    17,429
    
    
    
    
    
    
    
    
    
    
    
    12,592
    
    
    
    
    
    
    
    Total average assets and interest income
    
    
    190,689
    
    
    
    
    
    
    
    
    
    
    
    194,119
    
    
    
    
    
    
    
    
    
    
    
    217,907
    
    
    
    6,768
    
    
    
    3.11Non-UK assets as a percentage of total
    
    
    0.73
    %
    
    
    
    
    
    
    
    
    
    
    9.70
    %
    
    
    
    
    
    
    
    
    
    
    8.91
    %
    
    
    
    
    
    
    LiabilitiesDeposits by banksUK
    
    
    (7,340
    )
    
    
    (243
    )
    
    
    3.32
    
    
    
    (7,144
    )
    
    
    (244
    )
    
    
    3.42
    
    
    
    (8,159
    )
    
    
    262
    
    
    
    (3.21
    )Non-UK
    
    
    (697
    )
    
    
    (10
    )
    
    
    1.48
    
    
    
    (1,761
    )
    
    
    (24
    )
    
    
    1.36
    
    
    
    (3,758
    )
    
    
    65
    
    
    
    (1.73
    )Customer accounts  retail demand deposits
(3)UK
    
    
    (41,761
    )
    
    
    (1,346
    )
    
    
    3.28
    
    
    
    (42,477
    )
    
    
    (1,061
    )
    
    
    2.50
    
    
    
    (38,727
    )
    
    
    1,090
    
    
    
    (2.82
    )Non-UK
    
    
    (1,152
    )
    
    
    (27
    )
    
    
    2.37
    
    
    
    (1,260
    )
    
    
    (28
    )
    
    
    2.22
    
    
    
    (1,320
    )
    
    
    33
    
    
    
    (2.52
    )Customer accounts  retail time deposits(3)UK
    
    
    (12,177
    )
    
    
    (481
    )
    
    
    3.75
    
    
    
    (12,620
    )
    
    
    (409
    )
    
    
    3.25
    
    
    
    (14,396
    )
    
    
    467
    
    
    
    (3.24
    )Non-UK
    
    
    (4,149
    )
    
    
    (183
    )
    
    
    4.40
    
    
    
    (4,083
    )
    
    
    (150
    )
    
    
    3.67
    
    
    
    (3,417
    )
    
    
    107
    
    
    
    3.13Customer accounts  wholesale deposits
(3)UK
    
    
    (5,467
    )
    
    
    (183
    )
    
    
    3.35
    
    
    
    (8,057
    )
    
    
    (280
    )
    
    
    3.48
    
    
    
    (10,203
    )
    
    
    335
    
    
    
    (3,29
    )Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (158
    )
    
    
    (2
    )
    
    
    1.27
    
    
    
    (463
    )
    
    
    7
    
    
    
    1.42Bonds and medium-term notesUK
    
    
    (12,524
    )
    
    
    (357
    )
    
    
    2.85
    
    
    
    (14,002
    )
    
    
    (333
    )
    
    
    2.38
    
    
    
    (17,546
    )
    
    
    484
    
    
    
    (2.76
    )Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (395
    )
    
    
    (6
    )
    
    
    1.52
    
    
    
    (761
    )
    
    
    15
    
    
    
    (1.92
    )Other debt securities in issueUK
    
    
    (5,676
    )
    
    
    (148
    )
    
    
    2.61
    
    
    
    (6,551
    )
    
    
    (146
    )
    
    
    2.23
    
    
    
    (12,107
    )
    
    
    411
    
    
    
    (3.39
    )Non-UK
    
    
    (5,302
    )
    
    
    (101
    )
    
    
    1.91
    
    
    
    (11,963
    )
    
    
    (180
    )
    
    
    1.50
    
    
    
    (25,234
    )
    
    
    541
    
    
    
    (2.15
    )Dated and undated loan capital and other
subordinated liabilitiesUK
    
    
    (6,544
    )
    
    
    (314
    )
    
    
    4.79
    
    
    
    (6,875
    )
    
    
    (311
    )
    
    
    4.52
    
    
    
    6,526
    
    
    
    324
    
    
    
    (4.96
    )Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (421
    )
    
    
    (7
    )
    
    
    1.66
    
    
    
    (586
    )
    
    
    41
    
    
    
    (7.00
    )Other interest-bearing liabilitiesUK
    
    
    (16
    )
    
    
    (1
    )
    
    
    5.87
    
    
    
    (19
    )
    
    
    (1
    )
    
    
    5.26
    
    
    
    (47
    )
    
    
    1
    
    
    
    (2.13
    )Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    3.25
    
    
    
    (49
    )
    
    
    1
    
    
    
    (2.04
    )
 67




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating Reviewcontinued 2004
    
    
    2003
    
    
    2002Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Average
    
    
    Average
    
    
    Interest
    
    
    Averagebalance
    
    
    (1)
    
    
    rate
    
    balance
    
    
    (1)
    
    
    rate
    
    
    balance
    
    
    (1)
    
    
    rate£m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %Total average
interest-bearing liabilities
and interest expense
- banking
    
    
    (102,805
    )
    
    
    (3,394
    )
    
    
    3.30
    
    
    
    (117,789
    )
    
    
    (3,182
    )
    
    
    2.70
    
    
    
    (143,299
    )
    
    
    4,184
    
    
    
    (2.92
    )Trading business
    
    
    (44,129
    )
    
    
    
    
    
    
    
    
    
    
    (24,269
    )
    
    
    
    
    
    
    
    
    
    
    (27,174
    )Non-interest-bearing liabilities
    
    
    (10,783
    )
    
    
    
    
    
    
    
    
    
    
    (13,999
    )
    
    
    
    
    
    
    
    
    
    
    (13,635
    )
    
    
    
    
    
    
    Long-term assurance fund
liabilities
    
    
    (27,461
    )
    
    
    
    
    
    
    
    
    
    
    (31,763
    )
    
    
    
    
    
    
    
    
    
    
    (26,939
    )
    
    
    
    
    
    
    OtherShareholders funds
    
    
    (5,510
    )
    
    
    
    
    
    
    
    
    
    
    (6,300
    )
    
    
    
    
    
    
    
    
    
    
    (6,860
    )
    
    
    
    
    
    
    Total average liabilities,
shareholders funds and
interest expense
    
    
    (190,688
    )
    
    
    
    
    
    
    
    
    
    
    (194,114
    )
    
    
    
    
    
    
    
    
    
    
    (217,907
    )
    
    
    
    
    
    
    Non-UK liabilities as a
percentage of total
    
    
    5.93
    
    
    
    
    
    
    
    
    
    
    
    14.94
    %
    
    
    
    
    
    
    
    
    
    
    16.33
    %Interest income as a percentage
of average interest-earning
assets
    
    
    
    
    
    
    
    
    
    
    5.26
    
    
    
    
    
    
    
    
    
    
    
    4.87
    
    
    
    
    
    
    
    
    
    
    
    4.96Interest expense as a
percentage of average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    3.30
    
    
    
    
    
    
    
    
    
    
    
    2.79
    
    
    
    
    
    
    
    
    
    
    
    2.92Interest spread
    
    
    
    
    
    
    
    
    
    
    1.96
    
    
    
    
    
    
    
    
    
    
    
    2.21
    
    
    
    
    
    
    
    
    
    
    
    2.04Net interest margin
    
    
    
    
    
    
    
    
    
    
    1.63
    
    
    
    
    
    
    
    
    
    
    
    1.93
    
    
    
    
    
    
    
    
    
    
    
    1.90
 Interest-earning assets, interest-bearing liabilities and the associated interest reflect a
linked presentation treatment for certain securitised assets (see notes to the Consolidated
Financial Statements). If a linked presentation was not adopted, the interest spread and net
interest margin would be as follows: Interest spread
    
    
    1.67
    
    
    
    1.94
    
    
    
    1.87Net interest margin
    
    
    1.40
    
    
    
    1.69
    
    
    
    1.73
   (1)
    
    For the purpose of the average balance sheet, interest income and interest expense have
been stated after allocation of interest on instruments entered into for hedging purposes.(2)
    
    Loans and advances to customers includes
non-performing loans. See analysis of end-of-year
provisions on loans and advances to customers and potential credit risk elements in loans
and advances above.(3)
    
    Demand deposits, time deposits and wholesale deposits are defined under Deposits above.(4)
    
    Abbey National Treasury Services prepares averages using average daily balances, whereas the
remainder of Abbey uses month end averages. These averages are representative of the
operations of Abbey.(5)
    
    The ratio of average interest-earning assets to interest-bearing liabilities for the year
ended 31 December 2004 was 91.0% (2003: 90.68%, 2002: 95.14%). Interest rate sensitivity Interest rate sensitivity refers to the relationship between interest rates and net interest
income resulting from the periodic repricing of assets and liabilities. The largest single
administered rate items in the Abbey balance sheet are residential mortgages and retail deposits,
the majority of which bear interest at variable rates. The contractual maturity of mortgage loans
is generally more than five years, but the maturity of the majority of retail deposits is primarily
within three months. This apparent mismatch gives rise to issues which are addressed by Abbey in
its liquidity management. However, their effect on interest rate management is less significant.
Abbey has the ability to reprice both its retail variable rate liabilities and variable rate
mortgage assets, subject to the constraints imposed by the competitive situation in the market
place. Management believes this ability enables Abbey to mitigate the impact of interest rate
movements on net interest income in UK Banking and Savings. Abbey also offers fixed-rate mortgages and savings products on which the interest rate paid by
or to the customer is fixed for an agreed period of time at the start of the contract. Abbey
manages the margin on fixed-rate products by the use of derivatives matching the fixed-rate
maturity profiles. The risk of prepayment is reduced by imposing penalty charges if the customers
terminate their contracts early. Wherever possible, Abbey seeks to minimise the risks associated with movements in market
prices such as interest rates or exchange rates. However, given the nature of financial activities,
a level of market risk is inevitable. Abbey has developed and implemented structures and systems to
manage this market risk exposure. For additional information, see Risk management elsewhere in this Annual Report. 68




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##### Table of Contents



Operating and Financial Review Balance Sheet Operating 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 2004 and 2003.
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. 2004/2003
    
    
    2003/2002Total
    
    
    Changes due to
    
    
    Total
    
    
    Changes due tochange
    
    
    increase/(decrease):
    
    
    change
    
    
    increase/(decrease):Volume
    
    
    Rate
    
    
    
    
    
    
    Volume
    
    
    RateInterest income
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mLoans and advances to banksUK
    
    
    132
    
    
    
    46
    
    
    
    86
    
    
    
    35
    
    
    
    (9
    )
    
    
    44Non-UK
    
    
    (7
    )
    
    
    (19
    )
    
    
    12
    
    
    
    (34
    )
    
    
    (17
    )
    
    
    (17
    )Loans and advances to customersUK
    
    
    22
    
    
    
    (95
    )
    
    
    117
    
    
    
    (495
    )
    
    
    16
    
    
    
    (511
    )Non-UK
    
    
    (115
    )
    
    
    (146
    )
    
    
    31
    
    
    
    24
    
    
    
    79
    
    
    
    (55
    )Lease debtorsUK
    
    
    (45
    )
    
    
    (80
    )
    
    
    35
    
    
    
    (62
    )
    
    
    (20
    )
    
    
    (42
    )Non-UK
    
    
    (2
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Debt securitiesUK
    
    
    (237
    )
    
    
    (216
    )
    
    
    (21
    )
    
    
    (617
    )
    
    
    (850
    )
    
    
    233Non-UK
    
    
    (69
    )
    
    
    (71
    )
    
    
    2
    
    
    
    (375
    )
    
    
    (604
    )
    
    
    229Trading assetsUK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest incomeUK
    
    
    (128
    )
    
    
    (345
    )
    
    
    217
    
    
    
    (1,060
    )
    
    
    (862
    )
    
    
    (198
    )Non-UK
    
    
    (193
    )
    
    
    (237
    )
    
    
    44
    
    
    
    (385
    )
    
    
    (542
    )
    
    
    157(321
    )
    
    
    (582
    )
    
    
    261
    
    
    
    (1,445
    )
    
    
    (1,404
    )
    
    
    (41
    )Interest expenseDeposits by banksUK
    
    
    (1
    )
    
    
    7
    
    
    
    (8
    )
    
    
    (18
    )
    
    
    (33
    )
    
    
    15Non-UK
    
    
    (14
    )
    
    
    (15
    )
    
    
    1
    
    
    
    (41
    )
    
    
    (35
    )
    
    
    (6
    )Customer accounts  retail demand depositsUK
    
    
    285
    
    
    
    (18
    )
    
    
    303
    
    
    
    (29
    )
    
    
    106
    
    
    
    (135
    )Non-UK
    
    
    (1
    )
    
    
    (2
    )
    
    
    1
    
    
    
    (5
    )
    
    
    (2
    )
    
    
    (4
    )Customer accounts  retail time depositsUK
    
    
    72
    
    
    
    (14
    )
    
    
    86
    
    
    
    (58
    )
    
    
    (58
    )
    
    
    Non-UK
    
    
    33
    
    
    
    2
    
    
    
    31
    
    
    
    43
    
    
    
    21
    
    
    
    22Customer accounts  wholesale depositsUK
    
    
    (97
    )
    
    
    (95
    )
    
    
    (2
    )
    
    
    (55
    )
    
    
    (70
    )
    
    
    15Non-UK
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    Bonds and medium-term notesUK
    
    
    24
    
    
    
    (35
    )
    
    
    59
    
    
    
    (151
    )
    
    
    (98
    )
    
    
    (53
    )Non-UK
    
    
    (6
    )
    
    
    (6
    )
    
    
    
    
    
    
    (9
    )
    
    
    (7
    )
    
    
    (2
    )Other debt securities in issueUK
    
    
    2
    
    
    
    (20
    )
    
    
    22
    
    
    
    (265
    )
    
    
    (189
    )
    
    
    (76
    )Non-UK
    
    
    (79
    )
    
    
    (100
    )
    
    
    21
    
    
    
    (361
    )
    
    
    (285
    )
    
    
    (76
    )Dated and undated loan capital and other
subordinated liabilitiesUK
    
    
    3
    
    
    
    (15
    )
    
    
    18
    
    
    
    (13
    )
    
    
    17
    
    
    
    (30
    )Non-UK
    
    
    (7
    )
    
    
    (7
    )
    
    
    
    
    
    
    (34
    )
    
    
    (12
    )
    
    
    (22
    )Other interest-bearing liabilitiesUK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    Trading liabilitiesUK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total interest expenseUK
    
    
    288
    
    
    
    (191
    )
    
    
    479
    
    
    
    (590
    )
    
    
    (325
    )
    
    
    (265
    )Non-UK
    
    
    (76
    )
    
    
    (128
    )
    
    
    52
    
    
    
    (412
    )
    
    
    (323
    )
    
    
    (89
    )212
    
    
    
    (318
    )
    
    
    530
    
    
    
    (1,001
    )
    
    
    (648
    )
    
    
    (353
    )Net interest income
    
    
    (533
    )
    
    
    (264
    )
    
    
    (269
    )
    
    
    (444
    )
    
    
    (615
    )
    
    
    171
 69




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##### Table of Contents



Operating and Financial Review 
 Risk Management Introduction Abbeys risk management focuses on the major areas of credit risk, market risk, liquidity risk,
insurance risk, operational risk and residual value risk. Authority flows from the Abbey National
plc Board of Directors to the Chief Executive Officer and from him to his direct reports.
Delegation of authority is to 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 Officer. Asset and Liability Management Committee:this is established under the authority of the Executive
Director, Finance and Markets and comprises selected senior executives and relevant experts. This
committee is responsible for advising the Executive Director, Finance and Markets on all matters
relating to the balance sheet of the Company, specifically for cross divisional asset and liability
management, capital structure, funding and liquidity. Risk Committee:this is a management committee established under the Chief Executives Officers
authority and comprises senior executives and the Chief Risk Officer. The Committee will consult
with the Chief Risk Officer 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 to enable it to release appropriately its
responsibilities. The Risk Committee also receives information from and is notified of key
decisions made by Risk Oversight Fora for Retail Banking, Financial Markets and Insurance and Asset
Management businesses. Chief Risk Officer:The Chief Risk Officer operates under authority delegated by the Chief
Executive Officer. The Chief Risk Officer is responsible for establishing and maintaining
comprehensive, accurate and effective risk reporting, and clear systems of risks limits. He is also
responsible for highlighting to management all matters relevant to understanding risks being taken
and to setting risk appetite. 70




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##### Table of Contents



Operating and Financial Review Risk Managementcontinued Risk Management in Personal Financial Services Credit risk Credit risk is the risk that counterparties will not meet their financial obligations and 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 in Banking and Savings This includes secured lending, bank accounts, unsecured personal loans and cahoot. 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. The majority of residential lending is subject to national lending policy and national 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
85% loan-to-value, the original property value is subject to indexation and no further survey is
carried out. If the loan exceeds 85% loan-to-value, a revaluation is carried out by a qualified
surveyor. The maximum loan-to-value ratio is usually no more than 95% where the maximum loan is
£250,000. Abbey typically charges a fee to customers where the loan-to-value ratio is 90% or
higher. Mortgage indemnity guarantee insurance and high loan-to-value fee. Mortgage indemnity guarantee insurance is an agreement between a lender and an insurance company to
underwrite the amount of every mortgage advance that generally exceeds 75% loan-to-value. The mortgage indemnity guarantee insurance arrangements for loans originated prior to 31
December 2001 for Abbey are as follows: >
    
    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 has obtained almost
all of its mortgage indemnity guarantee insurance from its insurance
subsidiary Carfax Insurance Limited (Carfax). Carfax in turn
reinsures a portion of the credit risk where commercially
appropriate. Such reinsurance covers a layer of risk above a level of
losses that Carfax believes it can prudently bear. Carfaxs
reinsurance is the only insurance purchased and accordingly the
provision for lending losses includes a provision for losses insured
by Carfax.
 In the Consolidated Financial Statements, fees charged to the customer to compensate for the
additional risk of mortgage advances are deferred and taken to Other operating income in the
Profit and Loss Account over the average anticipated life of the loan. From 1 January 2002, Abbey ceased purchasing mortgage indemnity guarantee insurance from
Carfax for the Banking and Savings mortgage book. Existing cover remains in force. Abbey continues
to charge to customers high loan-to-value fees, which are credited to the Profit and Loss Account
over the anticipated life of the loans. Mortgage indemnity guarantee insurance contracts between
Carfax and the rest of Abbey are accounted for as intra-Abbey transactions and are eliminated on
consolidation. Mortgage arrears and repossessions.Debt Management Operations is responsible for all debt
management initiatives on the secured portfolio for Banking and Savings. Debt management
strategies, which include powerdialling, negotiating repayment arrangements and concessions and
debt counselling, can start as early as the day after a repayment is missed due and will continue
until legal action. Different collection strategies are applied to different segments of the
portfolio subject to the perceived levels of risk for example, loan-to-value, collections score and
account characteristics. If the agreed repayment arrangement is not maintained, legal proceedings may be taken and may
result in the property being taken into possession. Abbey sells the repossessed property at market
price and uses the sale proceeds, net of costs, to pay off the outstanding value of the mortgage.
The stock of repossessed properties held by Abbey varies according to the number of new possessions
and the buoyancy of the housing market. The following table sets forth information on UK residential mortgage arrears and properties
in possession at 31 December 2004, 2003 and 2002 for Abbey compared to the industry average as
provided by the Council of Mortgage Lenders. 71




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##### Table of Contents



Operating and Financial Review Risk Managementcontinued Abbey
    
    
    CML(percentage of total mortgage loans by number)6 months to 11 months in arrears31 December 2002
    
    
    0.27
    
    
    
    0.3031 December 2003
    
    
    0.16
    
    
    
    0.2531 December 2004
    
    
    0.14
    
    
    
    0.2312 months or more in arrears31 December 2002
    
    
    0.07
    
    
    
    0.1531 December 2003
    
    
    0.03
    
    
    
    0.1131 December 2004
    
    
    0.02
    
    
    
    0.10Properties in possession31 December 2002
    
    
    0.03
    
    
    
    0.0231 December 2003
    
    
    0.02
    
    
    
    0.0231 December 2004
    
    
    0.02
    
    
    
    0.02
 Banking and Consumer Credit.Abbey uses many systems and processes to manage the risks involved
in providing unsecured personal loans and overdraft lending or in granting bank account facilities.
These include the use of application and behavioural scoring systems to assist in the granting of
credit facilities as well as regular monitoring of scorecard performance and the quality of the
unsecured lending portfolios. Behavioural scoring examines the lending relationships that a customer has with Abbey and how
the customer uses their bank account. This information generates a score that is used to assist in
deciding the level of risk (in terms of overdraft facility amount, card facilities granted and
preferred unsecured personal loan value) for each customer that Abbey is willing to accept.
Individual customer scores are normally updated on a monthly basis. Abbey has successfully extended the use of behavioural scoring into other areas of the
business, including the refinement of debt management strategies and bank account transaction
processing. cahoot.The processes used to manage credit risks are similar to those in the rest of Banking and
Savings. Managing credit risk in Abbey Business Business Banking provides a limited range of products to assist with the finance requirements of
businesses including overdrafts. Risk management policies are specific to and reflect the risks
inherent in each product set. Approval processes for credit risk include the use of judgement,
assisted by the use of probability of default and loss given default data, and the use of credit
scoring. Business Banking operates within policies and authority levels approved by the Chief Risk
Officer. Business Banking has a dedicated risk team, reflecting the desire for risk control to be
close to the business needs and risks. 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. Managing credit risk in Abbey Financial Markets The Risk Committee has established a set of risk appetite limits to cover the portfolio mix within
Financial Markets. Within these limits, the Chief Risk Officer has approved credit mandates and
policies to cover detailed industry/sector limits and asset quality. All transactions falling
within these mandates and policies are scrutinised by the appropriate credit approval authority.
Specific approval by the Risk Committee is required for any transaction that falls outside the risk
appetite. Analysis of credit exposures and credit risk trends are provided for 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 assessed using scenario analysis to determine the
potential future mark-to-market exposure of the instruments at a 95% statistical confidence level
and adding this value to the current mark-to-market value. The resulting loan equivalent 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 certain derivative
instruments (including, in particular, swaps). If collateral is deemed necessary to reduce credit
risk, then the amount and nature of the collateral to be obtained is based on managements credit
evaluation of the customer. Market risk Market risk is the potential for loss of income or decrease in the value of assets caused by
movements in the levels and prices of financial instruments. A major portion of the market risk arises from exposures to changes in the levels of interest
rates, equity markets and credit spreads. Interest rate exposure is generated from providing
fixed-rate loans and savings products, funding and trading activities in Financial Markets, and
management of Abbeys overall asset and liability structure. Changes in interest rates affect the
value of funds managed for the benefit of customers, as well as on specific shareholders funds of
the life assurance business. The life assurance business is also exposed to changes in the level of
equity markets. Other exposure to equity markets is generated by the creation and risk
management of structured products by Financial Markets for the 72




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Operating and Financial Review Risk Managementcontinued Personal Financial Services market and trading activities. Credit spread exposure arises from
credit risk management and trading activities within Financial Markets. Abbey accepts that market risk arises from the full range of activities undertaken as a
provider of Personal Financial Services. Abbey actively manages and controls market risk by
limiting the adverse impact of market movements whilst seeking to enhance earnings within clearly
defined parameters. The Market Risk Manual, which is reviewed and approved by the Chief Executive
Officer on an annual basis, sets the framework under which market risks are managed and controlled.
Business area policies, risks limits and mandates are established within the context of the Market
Risk Manual. The business areas are responsible for ensuring that they have sufficient expertise to
manage the risks associated with their operations. The independent Risk function, under the
direction of the Chief Risk Officer, ensures that risk taking and risk control occur within the
framework prescribed by the Manual. The Risk function also provides oversight of all risk-taking
activities through a rigorous process of regular reviews. Abbey ensures that exposure to market risks is measured and reported on an accurate and timely
basis to senior management. In addition to the regular reporting for the purposes of active risk
management, the board also receives consolidated reporting of all market risk exposures on a
monthly basis where actual exposure levels are measured against limits. Senior management recognise that different risk measures are required to best reflect the
risks faced in different types of business activities. In measuring exposure to market risk, Abbey
uses a range of complementary measures, covering both value and income as appropriate. The market
risk disclosures shown below for trading instruments are calculated using Value at Risk (using a
historical simulation approach) whilst disclosures for non-trading instruments are based upon a
combination of Value at Risk and sensitivity analysis. At both aggregated and business area levels
such analysis is complemented by stress testing. To achieve consistency in measurement across business areas, we have adopted a series of
market risk measurement standards to which business areas are required to adhere. Abbey report
market risks by type of exposure in two categories: Short-term 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 present 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 loans and savings products, or from the provision of hedging
against such risks. Although most long-term balance sheet positions are hedged, Abbey remains
exposed to variances in customer behaviour (often caused by market rate movements) impacting new
business take-up and early redemption and causing unfavourable
mismatches to arise. 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. The following table shows the value at risk-based consolidated exposures for the major risk
classes as at 31 December 2004, 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. We 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. 73




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Operating and Financial Review Risk Managementcontinued Exposure at 31 December
    
    
    Exposure for the year ended 31 DecemberActual exposure
    
    
    Average exposure
    
    
    Highest exposure
    
    
    Lowest exposure2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mGroup trading instrumentsInterest rate risks (1)
    
    
    4.8
    
    
    
    3.7
    
    
    
    4.3
    
    
    
    4.3
    
    
    
    7.1
    
    
    
    7.5
    
    
    
    2.8
    
    
    
    2.8Equity risks
    
    
    5.0
    
    
    
    1.6
    
    
    
    3.3
    
    
    
    2.3
    
    
    
    5.6
    
    
    
    5.2
    
    
    
    1.3
    
    
    
    1.4Spread risk
    
    
    1.5
    
    
    
    1.1
    
    
    
    1.8
    
    
    
    2.0
    
    
    
    2.4
    
    
    
    2.5
    
    
    
    1.1
    
    
    
    1.1Other risks (2)
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.0
    
    
    
    0.0Correlation offsets (3)
    
    
    (2.2
    )
    
    
    (1.2
    )
    
    
    (1.8
    )
    
    
    (2.6
    )Total correlated one-day Value at Risk
    
    
    9.4
    
    
    
    5.3
    
    
    
    7.8
    
    
    
    6.1
    
    
    
    10.5
    
    
    
    8.4
    
    
    
    4.8
    
    
    
    4.5
   (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. Non-trading activities An analysis of exposures on non-trading financial instruments is shown below. These numbers
represent the potential change in theoretical market values of such instruments, and do not
represent the potential effects on income for a given time period. Separate income at risk measures
are used to supplement these analyses for appropriate portfolios. Non-trading instruments are held
for collection in the form of cash over time, and are accounted for at amortised cost, with
earnings accrued over the relevant life of the instruments. Abbeys risk measures, however, focus
on potential risks over the life of the non-trading instruments wherever appropriate, and are
therefore based on valuation measures, using estimated discounted cash flows where reliable market
values are not available. For Abbeys non-trading instruments the actual, average, highest and lowest exposures shown
below are all calculated to a 95% level of confidence and are based upon one-day market movements
for short-term market risks, and market movements of between one day and three months (as
appropriate to the management of each portfolio) for structural market risk positions. Exposure at 31 December
    
    
    Exposure for the year ended 31 DecemberActual exposure
    
    
    Average exposure
    
    
    Highest exposure
    
    
    Lowest exposure2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mGroup non-trading instrumentsShort-term market riskInterest rate risks
    
    
    0.6
    
    
    
    1.0
    
    
    
    0.6
    
    
    
    1.4
    
    
    
    1.6
    
    
    
    2.7
    
    
    
    0.0
    
    
    
    0.5Equity risks
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.6
    
    
    
    0.0
    
    
    
    0.0Foreign exchange risks
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.1Structural market riskInterest rate risks
    
    
    8.5
    
    
    
    14.7
    
    
    
    12.9
    
    
    
    33.4
    
    
    
    16.0
    
    
    
    53.3
    
    
    
    8.5
    
    
    
    14.7Equity risks
    
    
    0.4
    
    
    
    1.7
    
    
    
    0.6
    
    
    
    3.6
    
    
    
    1.2
    
    
    
    5.7
    
    
    
    0.3
    
    
    
    1.7Foreign exchange risks
    
    
    2.9
    
    
    
    2.9
    
    
    
    3.1
    
    
    
    2.9
    
    
    
    3.7
    
    
    
    3.9
    
    
    
    2.6
    
    
    
    2.5
 The above sensitivity exposures should not be aggregated, as no account has been taken of the
correlation between risk classes. The 2003 Structural market risk results have been restated to reflect enhanced risk measurement
techniques used in the calculation of 2004 exposures. Managing market risk in Banking and Savings Business The primary risks within the Banking and Savings business are interest rate related. Abbey is able
to mitigate the consequences of interest rate movements on net interest income from Banking and
Savings by repricing separately the administered variable rate mortgages and variable rate retail
deposits, subject to competitive pressures. The absolute levels of interest rate risk are managed
via a portfolio of fixed interest rate instruments including interest rate swaps. However, to the
extent that 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 to administered variable rate products, Abbey also has a significant volume of
fixed-rate and structured mortgage and savings products. The market risk exposures from these
products are generally hedged with interest rate swaps which are transacted through Financial
Markets. However, during the period of product launches the hedging of actual volume can only be
estimated, so triggers on the maximum exposure are maintained during that period. The business also
remains exposed to variances from the expected redemption level of fixed-rate and structured
products by customers in advance of the contractual maturity, with measures and triggers in place
to control the exposure. Managing market risk in Financial Markets The primary risk exposures for Financial Markets are interest rate, equity, credit spread and
residual exposure to property indices. Equity risks are managed via equity stock, futures 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. 74




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Operating and Financial Review Risk Managementcontinued 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. 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. Managing market risk in Investment and Protection Abbey faces two main sources of market risk within the Personal Financial Services Life Companies: Firstly, there are exposures that arise directly from funds held for the account of Abbey in
the shareholder funds of the Life Companies. Abbey directly bears these risks and they are
consolidated with other corporate-wide market risk exposures. Secondly, there are indirect interest rate and equity risk exposures arising where there are
insufficient surpluses in the policyholder funds to fully mitigate the market risks associated with
the effects of adverse market movements on the funds. The sources of indirect market risks include
Market Value Adjustment free guarantees and Guaranteed Annuity Option exposures where any shortfall
on the with-profit business would be borne by Abbey. These exposures are risk managed using a
combination of equity index options and forward starting interest rate swaps. Market risk affects solvency, embedded and realistic balance sheet valuations, and the risks
under these different measures are managed simultaneously against their respective limits and
controls. The Life Companies Market Risk Function ensures that all risk positions are understood by
management and that key issues are escalated. Managing market risk in Group Infrastructure Risk exposure arises from the pool of interest earning assets funded by non-interest bearing
liabilities, for example share capital, retained profit as well as from other capital issuance and
investments in subsidiaries. Resulting exposures are managed by Financial Markets, operating within
the same market risk framework approved by the Chief Executive Officer in the Market Risk Manual. Market risk exposures are managed using a combination of earnings volatility and Value at Risk
measures. An appropriate set of limits are established and control processes are in place to ensure
that risk management activities operate within the established framework. Effect of repricing risks on Abbey The interest rate repricing gap information is shown in the notes to the Consolidated Financial
Statements. Hedging activity A significant part of Abbeys exposures are hedged internally, offset against other categories
of exposure in the balance sheet, or by using derivatives as part of an integrated approach to risk
management. For further details on the use of derivatives, see the section Derivatives below and
notes to the consolidated financial statements. Any unhedged residual risks are retained in Abbey businesses and are monitored, reported and
managed under the overall market risk framework. Liquidity risk Liquidity risk is the potential that, although remaining solvent, Abbey does not have
sufficient financial resources to enable it to meet its obligations as they fall due, or can secure
them only at excessive cost. Liquidity risk is a key risk faced by financial services
organisations. The Board is responsible for the liquidity management and control framework at Abbey and has
approved key liquidity limits in setting Abbeys liquidity risk appetite. Along with its internal
Liquidity Risk Manual, which sets out the liquidity risk control framework and policy, Abbey abides
by the Sound Practices for Managing Liquidity in Banking Organisations set out by the Basel
Committee as its standard for liquidity risk management and control. Managing Liquidity risk in Abbey Management of liquidity at Abbey, including the management of cash flows, raising funding, and
managing liquid asset holdings, is the responsibility of the Executive Director, Finance and
Markets. The active management of liquidity is undertaken by Financial Markets within the framework
of the Liquidity Risk Manual. The Asset and Liability Management Committee and the Risk Committee
monitor Abbeys liquidity position on a monthly basis. The Board also receives a monthly update on
key liquidity issues and Abbeys liquidity position is reported to the Financial Services Authority
on a monthly basis. Abbey views the essential elements of liquidity management as controlling potential cash outflows,
maintaining prudent levels of highly liquid assets and ensuring that access to funding is available
from a diversity of sources. A comprehensive management and monitoring process, and a series of
liquidity limits within which liquidity is managed, underpin these elements. For example, as
excessive concentration in either liquid assets or contractual liabilities contributes 75




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Operating and Financial Review Risk Managementcontinued to potential liquidity risk, appropriate limits have been defined under the Liquidity Risk
Appetite. Management also monitors Abbeys compliance with the Sterling Stock Liquidity limits set
by the Financial Services Authority, which focus on ensuring that sterling cash liabilities due
five days in advance can be met by realising liquid assets, with any excesses being reported to the
Risk Committee and the Board. In addition to such limits, liquidity ratios also have trigger-review
levels that require the Treasurer, Head of Asset and Liability Management, and Chief Risk Officer
to initiate appropriate reviews of current exposure when such levels are exceeded. The Liquidity Risk Manual has been designed to reduce the likelihood and impact of either firm
specific or system-wide liquidity problems. Abbey intends to maintain sufficient liquid assets and
marketable assets to meet the expected cash flow requirements of all its businesses, to ensure
customer and counterparty confidence, and to be in a position to withstand liquidity pressures
resulting from unexpected or exceptional circumstances. While Abbeys liquidity risk is consolidated and primarily controlled at the Abbey company
level, liquidity risk is also measured, monitored and controlled within the specific business area
or the subsidiary where it arises. Management recognises that while the liquidity approach
developed pursuant to the Liquidity Risk Manual is designed to reduce the likelihood of significant
liquidity issues arising, the possibility of such events cannot be eliminated. Consequently, Abbey
also operates a Liquidity Contingency Plan to manage and co-ordinate any actions that are required
in order to mitigate the effects of a liquidity shortfall. The Liquidity Contingency Plan defines
the circumstances under which the plan is activated, the management framework and notification
procedures, and the key roles and responsibilities during the operation of the plan. The Liquidity Contingency Plan becomes operational when the demand for cash, whether from
demands for repayment, from wholesale funding or from retail deposits, exceeds the limits for
liquidity management defined under the Liquidity Risk Appetite. The circumstances that cause this
to happen will tend to be sudden, unexpected events that trigger demands for cash that cannot be
managed within the procedures, limits and controls defined in the Liquidity Risk Manual. To be effective, the management of liquidity in a crisis must be timely, proactive and
flexible enough to respond to a variety of different circumstances. The management structure for
the Liquidity Contingency Plan, which is structured around a small team of individuals with the
authority to agree, co-ordinate and implement actions that will control a volatile, dynamic
situation, has two key elements: >
    
    the Treasurer, Head of Asset and Liability Management, is responsible
for the rapid assessment of the implications of a sudden, unexpected
event on the day-to-day liquidity of Abbey, and for the decision to
activate the Liquidity Contingency Plan; and>
    
    the liquidity crisis management team, under the chairmanship of the
Treasurer, Head of Asset and Liability Management, is the
decision-making authority in the event of a liquidity crisis, and is
responsible for implementing the Liquidity Contingency Plan.
 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. Potentially, if Abbeys usual funding sources become unavailable for an extended period of
time, the issuance of a retail savings bond may also be considered. 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 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 Abbey assets Abbey, through various special purpose vehicles, provide a wide range of 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. Abbey does not expect securitisations to represent a greater proportion of its overall
funding in the future than at present. However, in times of significant market disruption,
residential mortgage backed securitisation, which typically remains a very liquid and deep market,
might be accessed, and in such circumstances could provide a higher proportion of funding than is
presently expected. 76




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Operating and Financial Review Risk Managementcontinued Investment and Protection Insurance risk relates to the inherent uncertainty as to the occurrence, amount and timing of
insurance liabilities arising from death, continuity of life, disablement or sickness or when the
customer terminates his contract early. The exposure to insurance
risk arises in the life
assurance companies. The Appointed Actuary (UK) was responsible throughout 2004 for the independent review of the
management of insurance risk. During 2004, the Appointed Actuary (UK) chaired the Insurance Risk Committee which based on
the principle established under the insurance risk policy provided the control framework within
which insurance risk was managed. The Appointed Actuary role was discontinued from the end of 2004
with management of insurance risk now falling under the responsibility of the With-Profit Actuary
in respect of with-profit business and the Head of Actuarial Function for all other business. The essential elements of insurance risk management and mitigation include underwriting (from
the policy proposal document through to assessment of individual claims), pricing (taking into
account the level of underwriting, market experience, external studies and reassurance data),
reinsurance (for assistance in pricing of some risks and for spreading of risks) and reserving
(holding sufficient funds to meet expected claims). Operational risk Managing operational risk in Abbey Operational risk is the risk of loss to Abbey, resulting from inadequate or failed internal
processes, people and systems, or from external events. Risks are categorised by type, such as
fraud, process failure, inadequate Human Resource management and damage to assets. They are
assessed, not only in terms of their financial impact, but also in terms of their effect on
business objectives, regulatory responsibilities and Abbeys reputation. Abbey operates a hub and spokes model for the implementation of an operational risk
management programme. An independent operational risk hub function has responsibility for
establishing the framework within which risk is managed and working with the business aligned
spoke groups to ensure its consistent implementation across Abbey. The framework incorporates
industry practice and regulatory requirements, particularly those emanating from the Basel
Committee, European Union Directives and the Financial Services Authority. The primary purpose of
the framework, which is approved by the Risk Committee, is to define and articulate Abbey-wide
policy, processes, roles and responsibilities. The management of operational risk is the responsibility of business managers, who identify
assess and monitor risks, in line with the processes described in the framework. The operational
risk function ensures that all key risks are regularly reported to the Risk Committee and Board. In line with Financial Services Authoritys guidance and industry practice, the company has
crisis management and disaster recovery arrangements to ensure that critical business processes are
maintained in the event of an unforeseen interruption. Insurance policies are also purchased to
provide cover for a range of potential operational risk losses. The implementation of a
board-approved environmental policy is managed as part of the operational risk framework. Risk Management in Portfolio Business Unit The Portfolio Business Unit consists of businesses being managed for exit. The majority of the
risk management processes within these businesses follow the same management, measurement and
control guidelines as those in Personal Financial Services, except for credit risk in Motor Finance
and Litigation Funding businesses and residual value risk, which arises solely in Portfolio
Business Unit. Credit risk Managing credit risk in Wholesale Banking The management of credit risk in the Portfolio Business Unit follows the same management,
measurement and control guidelines as that in Financial Markets, except that risk appetite is
defined by the reducing portfolio size, and also that Credit personnel for the Portfolio Business
Unit form an integral part of the Wholesale Credit Risk function. Regular reviews of credit
exposures and counterparties continue to be undertaken and Credit Risk provides advice to the
respective business units in the sales process. Managing credit risk in Motor Finance and Litigation Funding Motor Finance provided funds via motor dealers acting as introducers to individuals and businesses.
A large majority of such arrangements are secured on the vehicles involved. In the course of these
operations, advances were also provided to participating dealers. No new business has been accepted
in 2004 the emphasis being on managing the repayment of extant loans. This is reflected in the
Credit Risk management policies and techniques employed. Litigation Funding plc provided loans via claims management companies and solicitors acting as
introducers to individual claimants for the purchase of after the event insurance cover. Such
cover provides the claimant with insurance against the costs of unsuccessful litigation. The
repayment of such loans is made by the claimants, either from damages and costs recovery, or from
the insurance policy. Other than fulfilling contractual requirements no new business has been
accepted during 2004 the emphasis being on the managing the repayment of extant loans. This is
reflected in the Credit Risk management policies and techniques employed. 77




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Operating and Financial Review Risk Managementcontinued Market risk Managing market risk in European operations The French subsidiary prior to its sale during 2004 was exposed to market risks arising from
banking and savings activity. These risks were monitored in a manner consistent with the Personal
Financial Services Banking and Savings exposures. The French subsidiary also had interest-earning
assets funded by non-interest bearing liabilities, similar to the same risk in Group Infrastructure
and interest rate risk exposure arising from the litigation funding vehicle. These risks were
measured, reviewed and reported by the Personal Financial Services Banking and Savings market risk
function. Managing market risk in Investment and Protection There is one Life company in the Portfolio Business Unit, Scottish Mutual International. Abbeys
market risk exposures in Portfolio Business Unit-Life are similar to those in Personal Financial
Services-Life. All Portfolio Business Unit-Life market risk exposures are measured, managed and
reported in a manner consistent with the Personal Financial Services-Life exposures and by the Life
companies market risk function. Managing market risk in Wholesale Banking The majority of Financial Markets Portfolio Business Unit positions were investment assets (bonds,
leases and structured loans) fully cash flow matched with interest rate swaps and hedged to
minimise interest rate risk exposure. The remaining portfolios are now being managed for exit, and
market risk management remains a key consideration in this process. Risk measurement, monitoring
and control continue to be applied, with oversight by the market risk function. Insurance risk Managing insurance risk The Appointed Actuary (International) has responsibility for managing the pricing and reserving of
insurance risk within the Portfolio Business Unit Life company. A process similar to that employed
in the Personal Financial Services companies is used in the Portfolio Business Unit company. Operational risk A process similar to that employed in Personal Financial Services is used in the Portfolio
Business Unit. Residual value risk Residual value risk occurs when the value of a physical asset at the end of certain contracts
(e.g. operating leases) potentially may be worth less than that required to achieve the anticipated
return from the transaction. Managing residual value risk in Wholesale Banking business Residual
value risk exposure in Wholesale Banking relates principally to trains and other rail assets
managed by Porterbrook Leasing Company Limited (Porterbrook), as well as aircraft managed by IEM
Airfinance BV (IEM). Periodic revaluations and/or impairment reviews are undertaken. Tools such as first loss and residual value guarantees where appropriate (aircraft), and
appropriate return conditions are employed by Abbey to mitigate the associated risks. The residual
value risk management framework includes business area mandates, asset specific policies and
delegated authorities agreed by Risk Committee and business area risk oversight fora (e.g.
Financial Markets) as appropriate. Managing residual value risk in Motor Finance and Litigation Funding businesses Within Motor Finance, exposure arises within portfolios of contract purchase agreements relating to
motor vehicles. Revaluations of motor vehicles are undertaken at least annually. Derivatives Derivative financial instruments (derivatives) are contracts or agreements whose value is
derived from one or more underlying indices or asset values inherent in the contract or agreement. They include interest rate, cross currency and equity related swaps, forward rate agreements,
futures, caps, floors, options and swaptions (see table below). Derivatives are used for trading
and non-trading purposes. These terms are defined in (Accounting policies: Derivatives). Non-trading derivatives The main non-trading derivatives are interest rate and cross currency swaps, which are used to
hedge Abbeys exposures to interest rates and exchange rates inherent in non-trading assets,
liabilities and positions, including fixed-rate lending and structured savings products within the
Banking and Savings segment and medium-term note issues, capital issues and fixed-rate asset
purchases within Financial Markets. Derivative products that are combinations of more basic derivatives (such as swaps with
embedded option features), or that 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. Derivatives used for non-trading activities were accounted for on an accruals basis consistent
with the assets, liabilities or positions being hedged. The following table summarises activities undertaken by Abbey, the related risks associated with
such activities and the types of derivatives used in managing such risks. Such risks may also be
managed using on-balance sheet instruments 78




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##### Table of Contents



Operating and Financial Review Risk Managementcontinued as part of an integrated approach to risk management. Further information is contained in Note 51
of the Consolidated Financial Statements. Activity
    
    Risk
    
    Type of hedgeManagement of the return on
variable rate assets financed by
shareholders funds and net
non-interest bearing liabilities.
    
    Reduced profitability due to falls in interest rates.
    
    Receive fixed interest rate swaps.Fixed rate lending and investments.
    
    Sensitivity to increases in interest rates.
    
    Pay fixed interest rate swaps.Fixed rate retail and wholesale funding.
    
    Sensitivity to falls in interest rates.
    
    Receive fixed interest rate swaps.Equity-linked retail funding.
    
    Sensitivity to increases in equity market indices.
    
    Receive equity swaps.Management of other net interest income
on retail activities.
    
    Sensitivity of returns to changes in interest rates.
    
    Interest rate swaps and
caps/floors according to the type
of risk identified.Profits earned in foreign currency.
    
    Sensitivity to strengthening of sterling against other
currencies.
    
    Forward foreign exchange contracts.Investment in foreign currency assets.
    
    Sensitivity to strengthening of sterling against other
currencies. Foreign currency funding.
    
    Cross-currency and foreign
exchange swaps.Issuance of products with embedded
equity options.
    
    Sensitivity to changes in underlying rate and rate
volatility causing option exercise.
    
    Interest rate swaps combined with
equity options.Lending and investments.
    
    Sensitivity to weakening credit quality.
    
    Purchase credit default and total
return swaps.Investment in, and issuance of,
products with embedded interest rate
options.
    
    Sensitivity to changes in underlying rate and rate
volatility causing option exercise.
    
    Interest rate swaps plus
caps/floors, and other matched
options.Investment in, and issuance of, bonds
with put/call features.
    
    Sensitivity to changes in rates causing option exercise.
    
    Interest rate swaps combined with
swaptions (1)and other
matched options.Firm commitments (e.g. asset purchases,
issues arranged).
    
    Sensitivity to changes in rates between arranging a
transaction and completion.
    
    Hedges are arranged at the time of
commitments if there is exposure
to rate movements.
   (1)
    
    A swaption is an option on a swap which gives the holder the right but not the obligation
to buy or sell a swap.Exchange-traded derivatives may additionally be used as hedges in any of the above activities
in lieu of interest rate swaps. Credit Derivatives The following table presents the notional amounts of credit derivatives protection bought and sold
at 31 December 2004. ProtectionPurchased
    
    
    Sold£m
    
    
    £mNotional amounts:Portfolio Business Unit protection
    
    
    15
    
    
    
    Trading activity(1)
    
    
    9,409
    
    
    
    6,393Total
    
    
    9,424
    
    
    
    6,393
   (1)
    
    This includes £562m (notional) of portfolio credit derivatives. The use of derivatives to manage exposures does not reduce the reported levels of assets on the
balance sheet or the level of off-balance sheet commitments. Portfolio Business Unit protection activity Within the Portfolio Business Unit, credit derivatives have been used as hedging instruments for
assets held on the balance sheet. Purchased protection at 31 December 2004 within the Portfolio
Business Unit totalled £15m. These transactions are accrual accounted. Trading activity The business trades in single-name credit derivatives and also a limited number of portfolio credit
derivative transactions. The credit derivatives trading function operates within the same
framework as other trading functions. Risk limits are established and closely monitored. At 31 December 2004, the total notional amounts of protection purchased and sold by the
trading business were £9.4bn and £6.4bn, respectively. The mismatch between notional amounts is
largely attributable to Abbey using credit derivative transactions hedged with securities
positions. The majority of positions are matched. Consequently the amount of retained credit risk
contributed by the credit derivatives trading activity is small in the context of Abbeys overall
credit exposures. 79




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Report of the Directors 
 Directors Board of Directors
As at 31 December 2004 Chairman Lord Burns Lord Burns (age 60) was appointed Joint Deputy Chairman on 1 December 2001 and Chairman on 1
February 2002. He is also Chairman of Glas Cymru Ltd (Welsh Water) and a Non-Executive Director of
Pearson Group plc and British Land plc. His current professional roles include President of the
Society of Business Economists, Fellow of the London Business School, Companion of the Institute of
Management, Governor 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 October 2001, he was a Non-Executive Director of
Legal & General Group plc and was Chairman of the National Lottery Commission (2000-2001). Executive directors Francisco Gómez-Roldán Chief Executive Officer Francisco Gómez-Roldán (age 51) was appointed Chief Executive Officer on 15 November 2004. He
joined Abbey from Banco Santander Central Hispano, S.A., where he was the Chief Financial Officer
for the Group, a position that he held since March 2002. Prior to this he joined Banesto, a banking
subsidiary of Banco Santander Central Hispano, S.A., in 2000 to become Chief Executive and
Executive Director. In 1992, he became Finance Director of the newly formed Grupo Argentaria, which aggregated a
number of leading public sector banks and joined the Groups board as an Executive Director in
1996. With degrees in aeronautical engineering and economics, he joined Banco Vizcaya in 1978. In
1984 he became Director General of Banca Catalana after its acquisition by Vizcaya and following
the merger of Banco Vizcaya and Banco Bilbao in 1988 to form BBV, he played a key role in creating
and developing the investment fund and pensions industry in Spain. He is currently a director of the Spain Fund, Bolsas y Mercados Españoles S.A. and AC Hoteles. Tony Wyatt Executive Director, Manufacturing Tony Wyatt (age 55) was appointed Executive Director, Customer Operations on 1 September 2003,
having previously held positions with Novartas, New Power, AT&T, Guardian Royal Exchange and
Midland Bank, including roles as Managing Director of Operations and Technology, Director of Group
Development, and Banking Systems Director. Priscilla Vacassin Executive Director, Human Resources Priscilla Vacassin (age 47) was appointed Executive Director, Human Resources on 1 June 2003. She
was previously Group Human Resources Director at BAA plc, before which she was Director of
Organisational Management and Development at the same company. She also spent 10 years with the
Kingfisher Group (1988 to 1998), before which she worked for United Biscuits. Mark Pain (resigned on 28 January 2005) Executive Director, Customer Sales Mark Pain (age 43) was appointed Finance Director on 1 January 1998, Managing Director of Wholesale
Banking in November 2001 and Executive Director, Customer Sales in 2003. He joined Abbey in 1989,
having previously held positions with Touche Ross & Co and TSB Group. His previous appointments at
Abbey include Manager of Strategic Planning, Manager of European Operations, Regional Director of
Retail, and Group Financial Controller. Angus Porter Executive Director, Customer Propositions (resigned on 25 February 2005) Angus Porter (age 47) was appointed as Executive Director, Customer Propositions on 1 July 2003. He
was formerly Managing Director for the Consumer Division of BT plc. Before BT, he spent 14 years at
Mars Confectionery in a variety of research and development, sales and marketing roles, including
four years as Marketing Director. He is also currently a Non-Executive Director of MyTravel plc. 80




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##### Table of Contents



Report of the Directors Directorscontinued Non-Executive Directors Juan Rodríguez Inciarte Deputy Chairman Juan Inciarte (age 52) joined Banco Santander Central Hispano, S.A. in 1985. After holding
different positions of responsibility, he was appointed to the Board of Directors in 1991, holding
this office until 1999. He is currently Deputy Chairman 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, Finanzauto S.A., Banco Banif S.A., Vista Capital de Espansion S.A.
and Euroresidencias Gestión. For several years he has served on the Board of Directors of First Union Corporation
(presently Wachovia) in the US and the Board of Directors and Executive Committee of San Paolo -
IMI in Italy. He is a member of the US-Spain Council and Fellow of The Chartered Institute of Bankers in
Scotland. Keith Woodley Senior Independent Non-Executive Director Keith Woodley (age 65) was appointed Non-Executive Director on 5 August 1996. He was made Deputy
Chairman and Senior Independent Non-Executive Director in April 1999. 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. Jóse María Fuster José María Fuster (age 46) 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
(CIO) of Grupo Santander. He joined Banco Español de Crédito in 1998 and was appointed as CIO of
Grupo Santander 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 at
CitiBank and Natwest Bank. José María Carballo José María Carballo (age 60) was appointed Non-Executive Director on 1 December 2004. He is
currently Chairman of La Unión Resinera Española, Chairman of Vista Desarrollo, Director of Star
Capital Partners Ltd. (U.K.), Director of SCH Activos Inmobiliarios, Director of Teleférico del
Pico de Teide. He is also Vice President and Honorary Treasurer of the Iberoamerican Benevolent
Society (U.K). Previously, he was Executive Vice President of Banco Santander Central Hispano S.A. from 1989
to 2001 and CEO 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. António Horta-Osório António Horta-Osório (age 40) was appointed Non-Executive Director on 1 December 2004. He is
currently Executive Vice President of Grupo Santander and member of its Management Committee as
well as Chief Executive Officer (CEO) of Banco Santander Totta in Portugal. He was previously CEO
of Banco Santander Brasil. António Horta-Osório 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, he joined Grupo Santander as CEO of Banco Santander de
Negócios Portugal. New Appointments post 31 December 2004 Executive Directors Graeme Hardie Graeme Hardie (age 43) was appointed Executive Director, Sales and Marketing on 22 February 2005. He was Managing Director of NatWest Retail Banking from January 2002 to December 2004, with
responsibility for all aspects of management of the Retail Branch Network. Prior to this, in March 2000, following the takeover of NatWest by the Royal Bank of Scotland
Group, he was appointed Director, NatWest Retail Change Planning. Before joining NatWest, he was Head of Retail Network Services for Royal Bank of Scotland
(RBSG). Appointed in February 1997, he was responsible for sales and service, processes, training
and development programmes, incentive and management information design. He joined Royal Bank of Scotland in 1978, initially in a variety of sales, marketing and
business development roles. Nathan Bostock Nathan Bostock (age 44) was appointed Executive Director, Finance and Markets on 22 February 2005.
This follows his appointment to Abbeys Executive Committee in November 2004. His responsibilities
include finance, treasury, Abbey Financial Markets and the Portfolio Business Unit. 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 81




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##### Table of Contents



Report of the Directors Directorscontinued Royal Bank of Scotland Group (RBS) where his roles included Director, Group Risk Management and
Chief Operating Officer, Treasury and Capital Markets. Prior to joining RBS, 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. Non-Executive Directors Andrew Longhurst Andrew Longhurst (age 65) was appointed Non-Executive Director on 28 January 2005. He was Chief Executive of the Cheltenham & Gloucester building society (1982 to 1995) during
the time that it converted to a public limited company and was sold to Lloyds Bank in 1995. He
joined the main board of Lloyds and later of LloydsTSB. He oversaw the extension of Cheltenham &
Gloucesters mortgage operation into Lloyds and TSB branches, and became Chairman of Cheltenham &
Gloucester (1997-98). In 1998, Andrew retired from full time executive employment and joined the boards of the
United Assurance Group, Thames Water (1998-2000) and Hermes Focus Asset Management (1998-present).
He was appointed Deputy Chairman of The Royal London Insurance Society Ltd following its
acquisition of United Assurance (2000-02). He has also served as Chairman of the Council of Mortgage Lenders (1994) and was a member of
the DTIs taskforce on deregulation of financial services (1993). Auditors
Deloitte & Touche LLP
Stonecutter Court
1 Stonecutter Street
London EC4A 4TR Registered Office and Principal Office
Abbey National House
2 Triton Square
Regents Place
London
NW1 3AN Abbey National plc (Abbey) is registered in England and Wales No 2294747. 82




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Report of the Directors 
 Directors Report Corporate Structure On 12 November 2004, a Scheme of Arrangement, which had been approved by the High Court of
England and Wales and by the shareholders of Abbey and Banco Santander Central Hispano, S.A. became
effective, whereby Abbey became a wholly owned subsidiary of Banco Santander Central Hispano, S.A.
and the ordinary shares of Abbey ceased to be traded on the London Stock Exchange. Shareholders in
the UK were awarded one new Banco Santander Central Hispano, S.A. share for each share which they
held in Abbey and holders of American Depository Shares in the US were awarded two new Banco
Santander Central Hispano, S.A. American Depository Shares for each Abbey American Depository
Share. Banco Santander Central Hispano, S.A. is incorporated in Spain and has its registered office
at Paseo de Pereda 9-12, Santander, Spain. Note 23 to the 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 rules of the UK Listing 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 which are normally part of the continuing obligations of
listed companies in the UK. This exemption applies, among other things, to corporate governance and
directors remuneration disclosures. Principal activities and Business Review The principal activity of Abbey and its subsidiaries continues to be the provision of an
extensive range of personal financial services. Abbey is authorised and regulated by the Financial
Services Authority. The Operating and Financial Review for the year, including a review of
non-banking activities, is set out on pages 7 to 69 of this document. Details of important events
which have occurred since the end of the financial year and prospects for 2005 are included in the
Business Overview and the Operating and Financial Review sections. Results and dividends The profit on ordinary activities before tax for the year ended 31 December 2004 was £273m
(2003: loss £686m). An interim net dividend of 8.33 pence per ordinary share was paid on 6 October 2004 (2003:
8.33 pence per ordinary share). In addition, a special dividend of 25 pence per ordinary share
together with 6 pence for dividend differential was paid on 14 December 2004. No final dividend is
proposed. Directors The members of the Board at 31 December 2004 are named on pages 80 to 82 together with
appointments made following the year end. Where a Director was appointed during the year, the date
of appointment is shown. All other Directors served throughout the year. As at 31 December 2004,
the Board comprised a Chairman, five Executive Directors, including the Chief Executive, and five
Non-Executive Directors. As at the date of publication of this report, there is now a Chairman,
five Executive Directors, including the Chief Executive, and six Non-Executive Directors. 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. There have been some additional changes since 31 December 2004. Mark Pain, Executive Director,
Customer Sales resigned from the Board with effect from 28 January 2005 and Angus Porter, Executive
Director, Customer Propositions resigned on 25 February 2005 from the Board, but stayed with Abbey
in a management capacity until 24 March 2005. Graeme Hardie was appointed to the Board on 22 February 2005 to take up the post of Executive
Director, Sales and Marketing, combining the previous roles of Mark Pain and Angus Porter. Nathan
Bostock was also appointed to the Board as Executive Director, Finance and Markets, on 22 February
2005. Andrew Longhurst was appointed to the Board as a Non-Executive Director on 28 January 2005.
Details of all three new appointments are included on pages 81 and 82. During 2004, the following directors resigned: Director
    
    Title
    
    Date of resignationLuqman Arnold
    
    Chief Executive Officer
    
    15 November 2004Stephen Hester
    
    Chief Operating Officer
    
    12 November 2004Yasmin Jetha
    
    Director
    
    30 November 2004Leon Allen
    
    Non-Executive Director
    
    1 December 2004Geoffrey Cooper
    
    Non-Executive Director
    
    1 December 2004Richard Hayden
    
    Non-Executive Director
    
    1 December 2004Gerard Murphy
    
    Non-Executive Director
    
    1 December 2004Vittorio Radice
    
    Non-Executive Director
    
    1 December 2004Charles Shuttleworth
    
    Non-Executive Director
    
    1 December 2004
 83




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Report of the Directors Directors Reportcontinued Non-Executive Directors are appointed for a three year term after which their appointment may
be extended upon mutual agreement. In accordance with the Companys Articles of Association,
one-third of the Board are required to retire by rotation each year and over a three year period
all Directors must have retired from the Board and faced re-election. The Companys Articles of
Association also require that a Director must retire at the first Annual General Meeting after
their 70th birthday. Francisco Gómez-Roldán, Juan Rodríguez Inciarte, Jóse María Fuster, Jóse María Carballo,
António Horta-Osório, Andrew Longhurst, Graeme Hardie and Nathan Bostock, having been appointed to
the Board since the last Annual General Meeting, will retire and, being eligible, may offer
themselves for election at the forthcoming Annual General Meeting. Keith Woodley, Lord Burns and
Priscilla Vacassin will retire by rotation at the forthcoming Annual General Meeting and, all being
eligible, may offer themselves for re-election. As described above, there were a number of changes to the Board of Directors, following the
acquisition of Abbey by Banco Santander Central Hispano, S.A. All the new directors were selected
for the wide knowledge and experience they have of the personal financial services market. In
addition, as they all have an existing relationship with Banco Santander Central Hispano, S.A. they
are therefore able to bring to Abbey their understanding of Banco Santander Central Hispano, S.A.s
successful business model. Committees of the Board The Board maintains three standing committees, all of which operate within written terms of
reference. They are the Audit and Risk Committee, the Remuneration Committee and the Policyholder
Review 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 regular reports from the external auditors, (currently Deloitte & Touche) and the
Chief Internal Auditor, and to review the preliminary results, interim information and annual
financial statements before they are presented to the Board, focusing in particular on accounting
policies and compliance and areas of management judgement and estimates. The Committees scope was
extended during 2003 to include risk oversight. 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 of the internal audit function, its
authority, resources and scope of work. Abbeys relationship with the external auditors is
monitored by the Audit and Risk Committee and 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 Chairman, Keith Woodley, is a chartered accountant and a previous President of the
Institute of Chartered Accountants in England and Wales. The Board has determined that Keith
Woodley 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. The other members of the
Audit and Risk Committee are Juan Inciarte and Jose Fuster. Remuneration Committee Membership of the Remuneration Committee consists of at least three non-executive Directors.
The Committee is responsible for remuneration and succession planning within Abbey to ensure that
these policies support the business objectives determined by the Abbey Board and the interests of
its shareholders. It is charged with recommending to the full Board Abbeys policy on Executive Director and
executive management remuneration. The Remuneration Committee determines the individual
remuneration package of each Executive Director and is also responsible for succession planning for
the Executive Director and Director Group populations and is responsible for any employee and
management share schemes. The chairman of the Remuneration Committee is Jose Carballo and the other members are Antonio
Horta, Juan Inciarte and Andrew Longhurst. Compensation for loss of office When they were appointed, Priscilla Vacassin, Angus Porter and Tony Wyatt were granted
contracts which initially entitled them to 24 months notice of termination of their employment. The
notice required reduces by one month for each month of service to 12 months notice after 12 months;
this is now the applicable notice period. Abbey may pay an Executive Director instead of allowing
them to work their notice period. Graeme Hardie has a similar provision in his contract. Mark Pain and Yasmin Jetha had contracts that entitled them to additional payments if they
were made redundant. They have now left Abbey and the figures for the compensation paid in respect
of 2004 are included in the table of directors remuneration below. When Angus Porter left Abbey he
received pay instead of notice pursuant to his contract as set out above. 84




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##### Table of Contents



Report of the Directors Directors Reportcontinued Directors remuneration The aggregate remuneration received by the Directors of Abbey in 2004 was: 2004£mSalaries and fees
    
    
    5,002,612Performance-related payments
    
    
    2,396,168Other taxable benefits
    
    
    23,068Total remuneration excluding pension contributions
    
    
    7,421,848Pension contributions
    
    
    424,747Compensation for loss of office
    
    
    450,842
 These totals exclude emoluments received by Directors in respect of their primary duties as
Directors or officers of Banco Santander Central Hispano, S.A. No apportionment of this
remuneration has been made. Compensation in cash for loss of office was paid to one Director due to
their redundancy in 2004. Remuneration of Highest Paid Director In 2004, the remuneration, excluding pension contributions, of the highest paid Director was
£1,375,418 (2003: £1,688,000) of which £550,167 (2003: £1,013,000) was performance related. Share
options were received by the highest paid Director and shares were received under a Long Term
Incentive Plan during the year. There was no accrued pension benefit for the highest paid Director
(2003: £nil). Retirement Benefits We provide defined-benefit pension plans to certain of our employees. See note 53 to the
Financial Statements for a description of the plans and the related costs and obligations. Share options During the year, prior to the acquisition of Abbey by Banco Santander Central Hispano, S.A.
seven of the Directors exercised share options and received shares under long-term incentive
schemes. These options and shares were in respect of Abbey ordinary shares. As part of the
acquisition, option holders were invited either to exercise, cash cancel or transfer their Abbey
options into an option over Banco Santander Central Hispano, S.A. shares. Where the option price
was higher than the purchase price per share of £6.22, these options effectively lapsed. As of 12
November 2004 when the acquisition of Abbey by Banco Santander Central Hispano, S.A. was completed,
no further options over Abbey ordinary shares remain. Currently, no new schemes with respect to
shares in Abbey are planned. Further details are provided in Note 55 on page 154. Long-term Performance Share Plan Under the Performance Share Plan, the Chief Executive could earn shares worth up to 175% of his
salary while the other executive Directors awards gave them the opportunity to earn shares worth
up to 150% of salary. The proportion of shares the Directors would receive at the end of three
years following the award depended on the performance of the Company during this period.
Performance was measured in two ways: (i) half the award depended on the real growth in the
earnings per share of the Personal Financial Services business and (ii) half the award was based on
the growth in total shareholder returns over the three year period, compared with a group of 16
other UK financial services companies. This plan ceased to operate after the acquisition. Non-Executive Directors Fees were paid to Non-Executive Directors in 2004 totalling £579,410 (2003: £402,232); this
amount is included above in the table of directors remuneration. Directors interests and Related Party Transactions In 2004, loans were made by Abbey to Directors, Executive Officers and connected persons and,
of these loans, principal amounts of £240,000 were outstanding at 31 December 2004. See Note 54 and
56 to the Consolidated Financial Statements included elsewhere in this Annual Report for
disclosures of deposits and investments made and insurance policies entered into by the Directors,
Executive Officers and connected persons with Abbey at 31
December 2004. Note 56 to the Consolidated Financial Statements also includes
details of related party transactions. In 2004, there were no other transactions, arrangements or agreements with Abbey or its
subsidiaries in which Directors or Executive Officers or persons connected with them had a material
interest, other than options to subscribe for ordinary shares under the share options schemes. No
director had a material interest in any contract of significance other than a service contract with
Abbey, or any of its subsidiaries, at any time during the year. Abbey seeks exemption under The Companies (Disclosure of Directors Interests) (Exceptions)
Regulations 1985 (SI 802), not to disclose the Directors interests in the shares of Banco
Santander Central Hispano, S.A., a company incorporated in Spain and the ultimate parent
undertaking of Abbey. 85




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##### Table of Contents



Report of the Directors Directors Reportcontinued Employee share ownership During 2004, eligible employees were able to become financial stakeholders in Abbey by taking
part in the Abbey Sharesave scheme or Partnership Shares scheme that gave staff the opportunity to
save money from their pre-tax salary. Through these schemes, and others we have offered over the
years, a number of our employees owned shares in Abbey. At the time of the acquisition by Banco
Santander Central Hispano, S.A., employees were given the option of exercising, cash cancelling or
transferring their interest to Banco Santander Central Hispano, S.A. shares and taking a cash
alternative. Those who have chosen to transfer their interest in the Sharesave Scheme can exercise
the option on maturity or in certain circumstances when they leave Abbey. In recognition of the
Banco Santander Central Hispano, S.A. acquisition, all employees were given 100 free shares on 15
February 2005, which will be held in trust for a minimum of three years. Currently, no new
all-employee schemes are planned to be launched. Further details can
be found in note 55 to the consolidated Financial Statements on page 154. 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. The four Abbey pension schemes have a common corporate
trustee which, at 31 December 2004, had nine Directors, comprising six Company appointed Directors
(three of whom are Directors of Abbey) together with three member-nominated Directors. The National and Provincial Pension Fund has a different corporate trustee, the Board of which
at 31 December 2004 comprised three Company appointed Directors, two of whom are Directors of
Abbey, and three member-elected Directors. At 31 December 2004, the Scottish Mutual Assurance plc Staff Pension Scheme had six trustees,
of whom four are selected by Scottish Mutual Assurance plc (two of whom are members) and two
member-elected trustees. In the case of the Scottish Provident Institution Staff Pension Fund, at
31 December 2004 there were eight trustees, of whom five (at least one of whom is a member) are
selected by Scottish Provident Limited, as principal employer of the Fund: the remaining three
trustees are elected by the active members from their number. 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. Asset management of the
Scottish Mutual Assurance Staff Pension Scheme is through a Trustee Investment Account invested in
a range of pooled funds operated by Scottish Mutual Assurance. Assets (other than petty cash) of
the Scottish Provident Institution Staff Pension Fund are invested in a Managed Fund policy held
with Scottish Provident Limited. 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
Abbey pension schemes and the National and Provincial Pension Fund are undertaken by Grant Thornton
UK LLP. The audits of the Scottish Mutual Assurance Staff Pension Scheme and SPI Staff Pension Fund
are undertaken by KPMG Audit Plc. Further information is provided in
note 53 to the consolidated Financial Statements on page 152. 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 below the fixed asset net book value of £32m, as
disclosed in note 26 to the Financial Statements, by approximately £13m. It is considered that,
except where specific provisions have been made, the land and buildings have a value in use to the
Abbey Group of companies which exceeds the estimated market value, and the net book value is not
impaired. Corporate social responsibility Abbey is committed to being a responsible corporate citizen and to treating all those who come
into contact with it in a fair and ethical manner. Abbey recognises the need to structure our
approach to corporate social responsibility and to report regularly on progress. Abbey does so
through its annual corporate social responsibility report (CSR Report), which is approved by the
Board and includes information about Abbeys ethical principles, corporate governance, treatment of
employees, community involvement and its environmental policy and performance. Abbeys previous
corporate social responsibility reports can be found on the website
www.aboutabbey.com>corporatesocialresponsibility and hard copies can be obtained by writing to
the corporate social responsibility Manager at the registered office
address shown on page 82 of
this Annual Report. Going forward Abbey will be working with Banco Santander Central Hispano, S.A.
to align its corporate social responsibility management and reporting. Management of Corporate Social Responsibility The Executive Director, Human Resources has responsibility for corporate social responsibility at
board level. Abbeys corporate social responsibility management framework follows the guidelines
recommended by Business in the Community and is governed across the four corporate social
responsibility areas of Workplace, Marketplace, Environment and Community. Abbey aims to comply with industry standards including the Association of British Insurers
disclosure guidelines on social responsibility, the Department of Trade and Industry Company Law
Review and the Accounting for People Report recommendations. Abbey is a member of the FORGE Group, a government-supported consortium of major financial
services companies that, in 2002, formalised a structured approach for the management and reporting
of corporate social responsibility issues for the financial sector. 86




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Report of the Directors Directors Reportcontinued Workplace Abbey regards all employees as partners in the business. Abbey recognises, respects and values
individual differences, and acknowledges the distinctive contribution that each person makes to the
success of the business. Abbey aims to be the financial services employer of choice in the UK.
Abbeys policy Valuing people as Individuals underpins these goals and this document can be found
via the website at www.aboutabbey.com>General Information>Our Policies>valuing people as
individuals. The total number of employees was 24,361 at December 31 2004, 27,726 at December 31 2003 and
32,364 at December 31 2002. Further details are given in the table below: Employees At 31 December
    
    
    At 31 December2004
    
    
    2003Total employees*
    
    
    24,361
    
    
    
    27,726Total female employees
    
    
    15,623
    
    
    
    18,402Total male employees
    
    
    8,738
    
    
    
    9,324Total full-time employees
    
    
    20,599
    
    
    
    21,116Total part-time employees
    
    
    3,762
    
    
    
    6,610Total ethnic minority employees
    
    
    1,655
    
    
    
    1,936Employees aged 50 and under
    
    
    22,195
    
    
    
    25,157Employees aged over 50
    
    
    2,166
    
    
    
    2,569Employee turnover (%)
    
    
    22
    
    
    
    14.7Average days absent per employee
    
    
    8
    
    
    
    10Total number of staff grievances (at final stage)
    
    
    7
    
    
    
    9Total employee satisfaction (%) (with everything measured by the employee opinion survey)
    
    
    56
    
    
    
    58TrainingTotal number of training days
    
    
    211,358
    
    
    
    188,752Average number of training days per employee
    
    
    8
    
    
    
    7Average £ invested in training per employee
    
    
    805
    
    
    
    614Health and SafetyTotal number of reported accidents
    
    
    319
    
    
    
    296Total number of accidents reported to enforcing authorities
    
    
    20
    
    
    
    36Total number of adjustments to workplaces
    
    
    608
    
    
    
    543Workplace adjustments for disabled employees
    
    
    128
    
    
    
    42
   *
    
    The total number of employees, at 31 December 2004, on a full-time equivalent basis. Equality and diversity Abbey wants to benefit from the full range of knowledge and skills society offers. Abbeys policy
Valuing People as Individuals sets out its approach to creating a workforce that reflects that
diversity. Abbey has a number of employee-led Diversity Action Groups which work to promote a more
diverse workforce in their local areas. Abbey also has a number of Disability Employment Action Teams which focus on setting up a
strong framework for the employment of people with disabilities. This aims to make sure that Abbey
has the appropriate processes in place to help recruit, develop and retain employees with
disabilities. Abbey is committed to the Disability Discrimination Act and the Disability Employment
Action Teams have been instrumental in ensuring that Abbey has been compliant with the new
requirements of the Disability Discrimination Act. Abbey is proud to use the Employment Service
Positive about Disabled People symbol. 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 make their working
life easier. Work-life balance Abbey is committed to supporting individuals in achieving a reasonable balance between their home
and working life. Abbey understands that people must be valued and supported through the various
stages of their lives. As a result, Abbey offers a wide range of flexible working options,
including part-time work, job sharing, homeworking, compressed working arrangements and career
breaks. Our employees well being is very important to us and we want to support them as much as we
can. Abbeys confidential Employee Advice Line can give information on their employment with Abbey
and point them in the right direction if they have a personal problem. Abbey also provides an
external counselling service which offers professional counselling on a wide range of work or
personal issues, including post trauma counselling. Health and Safety Abbey believes that healthy employees working in a safe environment enhance the business and the
achievement of its objectives. Ensuring this is good business practice and a positive investment
which protects its people, Abbeys most valuable asset. 87




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Report of the Directors Directors Reportcontinued Abbeys goal of health and safety excellence is put into practice through Abbeys policy statement
on health and safety at work. This is overseen by the Occupational Health and Safety team which
seeks to improve its health and safety performance. No health and safety enforcement actions were
taken against Abbey during 2004. Developing our people Abbeys Learning and Development department supports employees and its business by providing
training and development that is effective, efficient and responsive. The department works in
partnership with each business area to provide learning solutions activities where they will add
the most benefit. Abbey has also implemented a best-in-class learning management system to support
the delivery of computer-based training ensuring flexible learning opportunities for all employees.
This ensures Abbey delivers consistent and high-quality training, and that it provides appropriate
and cost-effective learning for all employees. Facilities are available to staff out of hours to
help them study outside their job role for their own personal development. Performance management Abbey wants to create a high performance culture. This means Abbey is committed to developing its
employees ability to perform at their best. Abbey continually encourages them to deliver better
service to its customers, support each other by removing obstacles and use their talent to produce
improved results. Abbey approach to performance development is simple and straightforward. Employees will
understand whats expected of them and get the right development and support to allow them to
succeed. And when theyve done this, they will be recognised and rewarded for their contribution.
Employees are responsible for their performance and their manager is responsible for making sure
they are clear about what they need to do to perform to their best, and for supporting them to
achieve it. Working in partnership Abbey wants to involve and inform employees on matters that affect them. Abbey believes this is key
to being successful and as such effective communication is vital to everything it does. Abbey
publishes a magazine every other month for employees  read, almost all employees have access to
our intranet  net and talk sessions where senior management, including the Chief Executive and
the Chairman, answer staff questions face to face. 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. These surveys
are confidential and employees dont have to give their names. 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. Offshoring Abbey carries out some operational activities, such as banking enquiries, in India. Abbey is
sensitive to concerns from stakeholders about the hosting of jobs outside of the UK operation.
Abbey believes these decisions are absolutely necessary to the health of Abbeys future and for
giving customers better service at a competitive price. MsourcE, its contractor in India, has a
proven track record in treating employees fairly and with respect. Marketplace Understanding customers Understanding customers has always been something Abbey has prided itself on, particularly at a
local, branch level. Abbeys business will only be successful if we understand customers
needs and provide the right products and services to meet them. Abbey has developed its
business and brand strategy with this recognition at its core. That is why Abbey devotes considerable time and money asking customers their views and
requirements. In 2004 Abbey carried out research with around 20,000 consumers. Some of these
interviews resulted in changes to processes and services, others in tone of voice and how Abbey
communicates with customers. Creating a better banking experience for customers is a key goal, and in so doing abbey aims
to help every customer get more for their money. Part of this is a continued focus on being
straightforward, practical and friendly with customers; ensuring Abbey people take a positive and
can do attitude in dealings with them; and always being alert to customers needs and changes in
the market place. Abbey wants to sell the right products to the right customers  this is the key
in making sure Abbey treats customers fairly. Financial inclusion Part of understanding customers is knowing where, when and how Abbey can help them. Abbey has a
heritage of offering people from all walks of life the opportunity to get more from their money.
Abbey fully supports the Government and the FSA in developing a National Strategy for Financial
Capability and continues to provide services for people who may have difficulty accessing
mainstream banking services through the Abbey basic bank account. Abey helps fund the Consumer
Credit Counselling Service, this is amongst a number of initiatives that gets Abbeys support. 88




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Report of the Directors Directors Reportcontinued Abbey is also committed to meeting the Disability Discrimination Acts access to services
requirements and has been working with disability groups to upgrade branches and other services to
comply with this act. Customer information is also made available in alternative formats including
Braille and large print, when requested. Complaints management Complaints represent a very important area of the business from which Abbey can learn and improve
its service. While Abbey is committed to ensuring that customers get the very highest levels of
service, from time to time service does not match the high expectations customers rightly have.
Abbey is focused on getting the basics of complaint management right, so Abbey can be clear and
responsive with customers who have concerns and can put right what might have gone wrong as quickly
as possible. Social housing Abbeys specialist Social Housing Finance unit delivers long-term finance solutions to Registered
Social Landlords to enable them to provide affordable housing for people in need and to undertake
wider social inclusion initiatives. Registered Social Landlords (often called Housing Associations)
are regulated, non-profit making, community-based organisations. Abbeys loan commitments currently
exceed £5bn. Procurement Abbey has in place a procurement policy that explicitly promotes competitive tendering and dealing
with suppliers in a fair and open manner. The policy requires a record of hospitality received to
be maintained by each department and made available for review. Abbey reserves the right to verify
the ethical standing of its suppliers as it deems appropriate. Abbey does not operate a single payment policy in respect of all classes of suppliers. Each
individual operating area is responsible for agreeing terms and conditions under which business is
to be transacted and for making the supplier aware of these beforehand. 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. Environment Abbey recognises its responsibility to consider the environmental issues associated with its
business. Abbeys environmental management strategy is to reduce the direct impacts of its
activities, for example energy and resource use, and to manage the indirect risks associated with
its main business interests. Abbeys environmental policy is approved by the Board, and the Chief Risk Officer is
accountable for ensuring management acts in accordance with its principles. The policy applies to
all business units, covers all significant environmental impacts and risks, and provides the basis
for Abbeys environmental management system. Senior managers are responsible for ensuring
compliance with the policy and risk management procedures. The policy can be viewed in full at
www.aboutabbey.com>General Information>Our policies> environmental policy statement. Abbey expects its suppliers and the organisations with which it
undertakes joint ventures or outsourcing operations to support it. Environmental risks are identified through the Operational Risk process, overseen by the Chief
Risk Officer and Risk Function. Through the risk process, environmental impacts are identified and
assessed, and there is opportunity to report significant environmental impacts to the Board and/or
Risk Committee on a monthly basis. Abbeys environmental performance is subject to internal audit
on a rolling basis and its disclosures in the Corporate Social Responsibility Report are externally
verified. Abbey is a signatory to, and an active member of, the United Nations Environment Programme
Financial Institutions Initiative. Community Abbey is proud of its involvement in the community and it supports a wide range of charitable
projects, primarily through the Abbey Charitable Trust Limited (the Trust). Abbey has built strong
links with local communities, in areas where it has a large presence, through seven Community
Partnership Groups. Their main role is to distribute donations from the Trust to meet the needs of
their local community. Charitable priorities Abbey has revised its charitable priorities in 2004 to reflect the changes to Abbeys core values.
The Abbey Charitable Trust Limited supports disadvantaged people through:  >
    education and training;>
    local regeneration projects which encourage cross community partnerships; and>
    financial advice which helps people manage their money. 89




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Report of the Directors Directors Reportcontinued Donations In 2004, Abbey made total cash donations of £2,342,087 (2003: £1,711,380) to a wide range of
charities. This included £586,793 (2003: £583,868) by matching the amount staff raised during the
year for local and national charities. Abbey continued its partnership with The Princes Trust, now
in its 12th year, with its funding focused on The Trusts Leaving Care Initiative and Business
Start-up Programme. Volunteering Abbey believes that providing opportunities for employee volunteering brings benefits to everyone
involved, including the company. Abbey co-ordinates its own Abbey schemes including an
E-mentoring programme that matches Year 10 pupils studying vocational General Certificates of
Secondary Education (GCSEs) with an Abbey employee who is working in that subject area and the
mentoring support is carried out by exchanging e-mails. Number Partners uses specially designed
board games to help small groups of eight- and nine-year-olds develop their number skills with the
help of trained groups of volunteers from Abbey head offices. Business Experts matches employees
with specialist business skills with charities in the local area. Abbey matches an employees
donated time on an hour-for-hour basis, up to a maximum of 35 hours per year. The total value of support to good causes amounted to £2,515,995 in 2004 (2003: £2,170,036).
This comprised cash donations and other support given in kind, including the value of the
volunteering scheme. In all 10% of Abbey employees were involved in one of its matching schemes.
These figures are collated using the London Benchmarking Group reporting model. Further details on Abbeys corporate social responsibility programme can be found via the
website at www.aboutabbey.com >corporate social responsibility. 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, confirms that:  >
    employees should raise concerns if they become aware that ethical polices and principles are not being followed;>
    Abbey values all employees as individuals and treat 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. 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 registered office
address as shown on page 82. Political contributions No contributions were made for political purposes. Policy and Practice on Payment of Creditors 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
amounts invoiced by trade creditors during the year to amounts of Abbey trade creditors at 31
December 2004, trade creditor days for Abbey were 12 (2003: 19 days). The equivalent period
calculated for Abbeys legal entities is 12 days (2003: 20 days). Going concern The Directors confirm that they are satisfied that the Abbey National and its subsidiaries has
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. Auditors A resolution to reappoint Deloitte & Touche LLP as auditors will be proposed at the forthcoming
Annual General Meeting. 90




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Report of the Directors Directors Reportcontinued Disclosure controls and procedures (Sarbanes-Oxley Act 2002) Over the past year, Abbey has been assessing and strengthening its internal controls over
financial reporting in preparation for the application of Section 404 of the Sarbanes-Oxley Act of
2002 and in connection with the implementation of International Financial Reporting Standards
during 2005. These procedures have included the documentation, testing and review by senior
management of processes previously established to report Abbeys US GAAP financial information.
As a result of these procedures, subsequent to the issuance of the
2003 Financial Statements, and also in connection with the
preparation of the 2004 financial statements, management has identified a number of errors in Abbeys
previously issued US GAAP financial information for the fiscal years 2002 and 2003 and it
determined that restatement of the 2002 and 2003 figures was
necessary, as set out in Note 62(t) to
the Consolidated Financial Statements. As a result
of managements review and restatement of previous US GAAP financial results, management has concluded that there was a material weakness in
Abbeys internal control over financial reporting as of
December 31, 2004, regarding Abbey and certain of its subsidiaries having insufficient personnel in the corporate accounting
department with sufficient knowledge and experience in US GAAP and
the SEC requirements. As part of Abbeys strengthening of internal controls in the context of these findings, Abbey
has undertaken a number of remediation procedures in order to address the internal control
deficiencies that contributed to these errors. These remediation efforts will continue during 2005
and include hiring additional accounting personnel knowledgeable in US GAAP; training current
accounting staff on the application of US GAAP accounting pronouncements; reinforcing existing US
GAAP reporting controls over the reporting process of subsidiaries, including levels of review; and
improving standardised reconciliation templates to assist in the reconciliation process between UK
GAAP and US GAAP. Abbey has carried out an evaluation under the supervision and with the participation of
Abbeys management, including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of Abbeys disclosure controls and procedures. Based upon
Abbeys evaluation, which considered both the findings and remediation efforts described above, the
Chief Executive Officer and the Chief Financial Officer cannot conclude that, as of 31 December
2004, the disclosure controls and procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports that Abbey files and submits under the Exchange
Act is recorded, processed, summarised and reported as and when required. Other than described above, there has been no change in Abbeys internal control over
financial reporting during Abbeys 2004 fiscal year that has materially affected, or is reasonably
likely to materially affect Abbeys internal control over financial reporting. Statement of directors responsibilities The directors of Abbey National plc are required by UK company law to prepare financial
statements for each financial year which give a true and fair view of the state of affairs of Abbey
National plc and its subsidiaries at the end of the financial year, and of the profit/(loss) for
Abbey National plc and its subsidiaries for the year. They are also responsible for ensuring that
proper and adequate accounting records have been maintained and that reasonable procedures have
been followed for safeguarding the assets of Abbey National plc and its subsidiaries and for
preventing and detecting fraud and other irregularities.  In respect of the financial statements the directors are required to:>
    ensure that suitable accounting policies, which follow generally
accepted accounting principles, have been applied consistently;>
    ensure that reasonable and prudent judgements and estimates have been
used in the preparation of the Consolidated Financial Statements;>
    prepare the Consolidated Financial Statements on a going concern
basis unless it is inappropriate to presume that Abbey will continue
in business; and>
    state whether applicable UK accounting standards have been followed
and to disclose and explain any material departures from the
financial statements. 91




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Report of the Directors 
 Supervision and Regulation European Union directives
General The framework for supervision of banking and financial services in the UK is largely formed by
European Union Directives which are required to be implemented in member states through national
legislation. Directives aim to harmonise banking and financial services regulation and supervision
throughout the European Union by laying down minimum standards in key areas, and requiring member
states to give mutual recognition to each others standards of prudential supervision. This has led
to the passport concept enshrined in the Banking Consolidation Directive and the Investment
Services Directive (soon to be replaced by the Markets in Financial Instruments Directive): that
is, freedom to establish branches in, and freedom to provide cross-border services into, other
European Union member states once a bank or investment firm is authorised in its home state.
Significant legislative changes are being made through the European Union Financial Services Action
Plan. Prudential supervision and capital adequacy The Banking Consolidation Directive sets out minimum conditions for authorisation and the ongoing
prudential supervision of banks. Minimum conditions for the authorisation and prudential
supervision of investment firms are set out in the Investment Services Directive. The overall
responsibility for prudential supervision falls on the home country regulator of a bank or
investment firm. The Banking Consolidation Directive and the Capital Adequacy Directives govern
supervision of capital adequacy for both banks and investment firms in the European Union. The
Capital Adequacy Directives contain detailed rules for the regulatory capital treatment of risks
arising in the trading book, that is broadly, positions and securities that a UK bank or investment
firm holds for proprietary trading purposes. For other (non-trading) risks, the Capital Adequacy
Directives refer to the Banking Consolidation Directive, which regulates the quality and
proportions of different types of capital to be held by an institution, the amount of capital to be
held for counterparty exposures arising outside the trading book and restrictions on exposures to
an individual counterparty or group of connected counterparties. In addition, the Capital Adequacy
Directives and the Banking Consolidation Directive require consolidated supervision of financial
groups; these requirements have recently been enhanced by the Financial Groups Directive. The Basel Committee on Banking Supervision on 26 June 2004 published the Basel 2 Accord which
amends the Basel 1 1988 Accord. Basel 2 promotes more risk sensitive approaches to the
determination of minimum regulatory capital requirements which would further strengthen the
soundness and stability of the international banking system. Banks will be able to choose between
three levels of sophistication to calculate regulatory capital for credit and operational risk and
this will change the way that many banks evaluate, measure and report capital adequacy. To ensure
that the most appropriate approaches are being used, banks are encouraged to move to the most
sophisticated method feasible. All major UK banks are in the process of implementing their
solutions and applications, to ensure they comply with the requirements of the Basel Accord. Under
the current timetable, the new Accord will become fully effective at the end of 2007. The Basel 2 Capital Accord will be implemented into European Union law through the Capital
Requirements Directive which was published in draft on July 15 2004. The Capital Requirements
Directive is not a single new directive, but comprises the significant changes proposed to the
Banking Consolidation Directive and the Capital Adequacy Directives and will result in a recast
Banking Consolidation Directive and a recast Capital Adequacy Directive. The Capital
Requirements Directive is currently being discussed by the Council of Ministers and the European
Parliament and a near final version is expected in the third quarter of 2005. The draft Capital
Requirements Directive proposes a staggered implementation date from 1 January 2007 for basic and
intermediate approaches and from 1 January 2008 for more advanced approaches. In the UK the Financial Services Authority will implement the Capital Requirements Directive
in the Integrated Prudential Sourcebook which can be different from the Capital Requirements
Directive in those areas where national discretions are permitted and where specific national
interpretation is required. Abbey intends to implement for credit risk the Internal Ratings Based
approach for Retail and the Advanced Internal Ratings Based approach for Financial Markets in line
with the home-host responsibilities under the capital requirement directive. For operational risk,
Abbey intends to adopt the Standardised Approach, which will be implemented from the end of 2006,
moving to the Advanced Measurement Approach when appropriate. Abbey has established a bank-wide programme which will manage the changes required to ensure
compliance with the Basel 2 requirements. UK regulations General The Financial Services Authority is the single statutory regulator responsible for regulating
deposit taking, mortgages, insurance and investment business pursuant to the Financial Services and
Markets Act 2000. It is a criminal offence for any person to carry on any of the activities
regulated under this Act in the UK by way of business unless that person is authorised by the
Financial Services Authority or falls under an exemption. The Financial Services Authority has authorised Abbey, as well as some of its subsidiaries, to
carry on certain regulated activities. The regulated activities they are authorised to engage in
depends upon permissions granted by the Financial Services Authority. The main permitted activities
of Abbey and its subsidiaries are listed below. Mortgages Lending secured on land at least 40% of which is used as a dwelling by an individual borrower or
relative has been regulated by the Financial Services Authority since 31 October 2004. Abbey is
authorised to enter into, advise and arrange regulated mortgage contracts. 92




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Report of the Directors Supervision and Regulationcontinued Banking Deposit taking is a regulated activity that requires a firm to be authorised and supervised by the
Financial Services Authority. Abbey has permission to carry on deposit taking as do several of its subsidiaries, including
Abbey National Treasury Services plc, Cater Allen Limited and Cater Allen Premier Banking Limited. Insurance UK banking groups may provide insurance services through other group companies. Insurance business
in the UK is divided between two main categories: long-term assurance (whole life, endowments, life
insurance investment bonds) and general insurance (building and contents cover and motor
insurance). Under the Financial Services and Markets Act, effecting or carrying out any contract of
insurance, whether general or long-term, is a regulated activity requiring authorisation. Life
insurance mediation has been subject to regulation for many years. Broking of long-term insurance
(for example, critical illness) became regulated on 31 October 2004. General insurance mediation
has been subject to regulation by the Financial Services Authority since 14 January 2005. Abbey has a number of subsidiaries which are authorised by the Financial Services Authority to
effect contracts of insurance. Abbey also acts as a broker, receiving commissions for the policies
arranged. Investment business Investment business such as dealing in, arranging deals in, managing and giving investment advice
in respect of most types of securities and other investments, including options, futures and
contracts for differences (which would include interest rate and currency swaps) and long-term
assurance contracts are all regulated activities under the Financial Services and Markets Act and
require authorisation by the Financial Services Authority. Abbey and a number of its subsidiaries have permission to engage in a wide range of wholesale
and retail investment businesses including selling certain life assurance and pension products,
unit trust products and Individual Savings Accounts (tax exempt saving products) and providing
certain retail equity products and services. Financial Services Authority conduct of business rules The Financial Services Authority conduct of business rules also apply to every authorised person
carrying on regulated activities and regulate the day-to-day conduct of business standards to be
observed by authorised persons in carrying on those activities. The conduct of business rules prescribe stringent rules relating to the circumstances and
manner in which authorised persons may communicate and approve financial promotions, which are
communications in the course of business which are invitations or inducements to engage in
investment activity. The Financial Services Compensation Scheme The Financial Services Compensation Scheme covers claims against authorised firms (or any
participating European Economic Area firms) where they are unable, or likely to be unable, to pay
claims against them. The Financial Services Compensation Scheme covers the following: Deposits:up
to £31,700 per person (100% of the first £2,000 and 90% of the next £33,000). The Scheme is
triggered when an authorized deposit taker (such as a bank, building society or credit union) is
unable, or likely to be unable, to repay its depositors. Investments:up to £48,000 per person (100% of the first £30,000 and 90% of the next £20,000). The
scheme provides protection if an authorised firm is unable to pay claims against it. Investments
covered include stocks and shares, unit trusts, futures and options; Mortgage advice and arranging:the scheme will pay up to £48,000 (100% of the first £30,000 and 90%
of the next £20,000) for claims against authorised mortgage firms that are unable to pay claims
against them. Long-term insurance (pensions and life assurances) firms:unlimited, 100% of the first £2,000 plus
90% of the remainder of the claim. Policyholder protection is triggered if an authorised insurer is
unable, or likely to be unable, to meet claims against it, for example if it has been placed in
provisional liquidation or administration. General insurance firms:Compulsory insurance (third party motor): unlimited, 100% of the claim;
non-compulsory insurance (home and general): unlimited, 100% of the first £2,000 plus 90% of the
remainder of the claim. Policyholder protection is triggered if an authorised insurer is unable, or
likely to be unable, to meet claims against it, for example if it has been placed in provisional
liquidation or administration. General insurance advice and arranging*:unlimited, comprising 100% of the first £2,000 plus 90% of
the remainder of the claim. Compulsory insurance is protected in full. *For business conducted on or after 14 January 2005. Data protection The UK Data Protection Act 1998 limits the ability of a UK company to hold and use personal
information relating to its customers. The law requires that UK companies notify the Information
Commissioner of their activities concerning the processing of personal data prior to commencing
those activities. The Information Commissioner maintains a public register of data controllers. In
addition, companies regulated by the Data Protection Act 1998 must comply with the eight
enforceable principles of good conduct, the data protection principles and must submit to
requests from the individual who is the subject of the data concerning matters such as giving
access to their data and the right to object to incorrect data being held or to direct marketing. 93




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Report of the Directors Supervision and Regulationcontinued Other main relevant legislation The Consumer Credit Act 1974regulates certain loans up to £25,000 to consumers both secured (but
excluding secured loans regulated by the Financial Services Authority
 see above) and unsecured
and associated credit broking. The Unfair Terms in Consumer Contracts Regulations 1999, apply to certain contracts for goods and
services entered into with consumers. The main effect of the Regulations is that a contractual term
covered by the Regulations which is unfair will not be enforceable against a consumer. The
Regulations contain an indicative list of unfair terms. These Regulations apply, inter alia, to
mortgages, savings accounts and related products and services. The Financial Services Authority has
issued guidance on how it will use its powers under the Regulations. Distance Marketing Directive This directive deals with distance contracts for financial services. It is implemented by the
Banking Code, Financial Services Authority Rules, Consumer Credit Act and the Financial Services
(Distance Marketing) Regulations 2004. It gives customers a right to cancel a distance contract
within 14 days (30 days for some insurance products) and the right to receive certain information
and a copy of the terms and conditions before they become bound by the contract. It came into force
on 31 October 2004. Current and future developments Payment Systems Following the Chancellors Pre-Budget Report in November 2003, the Office of Fair Trading has been
given an enhanced role in payments systems for a period of four years. The Government will then
review competition in the industry and may consider legislation. In March 2004, the Office of Fair
Trading Payments Systems Task Force was established to consider issues relating to competition,
efficiency and innovation in the UKs payments systems. The Task Force brings together payments
industry, retail, consumer and government representatives with an interest in payments systems. The
initial focus is on a faster electronic payments scheme for the UK. Other issues to be addressed
include cheques, governance and access, industry co-operation, European developments, pricing and
transparency. The payments industry is also under scrutiny from the Treasury Select Committee who are
conducting separate investigations into automatic teller machine charging and transparency of
credit card charges. A key objective within the European Unions Financial Services Action Plan is to create an
integrated system for payments in Europe. The European Commission has issued a draft Directive on a
New Legal Framework for Payments in Europe which could have wide reaching implications for the UK
payments industry. Future governance of insurance companies The Financial Services Authority are consulting on many issues which will affect the way insurers
carry on business. Child Trust Funds In October 2003 the government announced detailed proposals for Child Trust Funds. These are
designed to encourage parents and children to develop savings habits and to ensure that in future
all children have financial assets to start adult life. They are a tax wrapper (free of personal
income and capital gains tax), which can hold a variety of savings and investments. All children
born on or after 1 September 2002 qualify for a Child Trust Fund. From January 2005 Child Trust
Fund vouchers were sent to the entitled children and accounts are now being opened. Polarisation The polarisation rules control the way certain savings and investment products can be sold.
Advisers on life assurance, personal pension policies, collective investment schemes (unit trusts
and OEICS) and investment trust savings schemes have to be either: an Independent Financial Adviser
and advise across all products and companies in the market; or tied and represent just one company
or group and sell only its products. The Financial Services Authority has issued new regulations to
remove the polarisation restrictions with the aim of increasing the range of products available to
customers as well as giving them a clearer picture of what they are paying for advice. The
depolarisation rules are being implemented over a 6-month transitional period, beginning on 1
December 2004. Consumer Credit Bill The bill was reintroduced in the new Parliament in May 2005. When enacted, it will introduce
changes making it easier for consumers to challenge unfair practices, changes relating to increased
powers for Office of Fair Trading and new requirements relating to the information lenders must
give to consumers about their accounts. European Union developments There are a number of proposals emanating from the European Union, which will affect the UK
financial services industry in due course. These include proposals for a new Consumer Credit Directive, a directive on Unfair Commercial
Practices and implementing measures for the Markets in Financial Instruments Directive. There have
also been a number of measures which are aimed at facilitating the provision of financial services
across borders by use of e-commerce. 94




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Report of the Directors Supervision and Regulationcontinued New Banking Code The Banking Code is issued by the Code Sponsors, the British Bankers Association, the Building
Societies Association and Association of Payment Clearing Services and subscribers (including
Abbey) should ensure that they abide by the spirit as well as the letter of the Code. Changes cover
the key commitments, basic bank account, interest rates, terms and conditions, cancellation rights,
advertising, cards and personal identification numbers and credit cards. 95




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Financial Statements Contents to Financial Statements Financial Statements97
  Independent Auditors Report98
  Consolidated Profit and Loss Account for the years ended 31 December 2004, 2003 and 200299
  Consolidated Balance Sheet as at 31 December 2004 and 2003100 Company Balance Sheet as at 31 December 2004 and 2003101 Consolidated Statement of Total Recognised Gains and Losses for the years ended 31 December 2004, 2003 and 2002102 Consolidated Cash Flow Statement for the years ended 31 December 2004, 2003 and 2002103 Accounting Policies109 Notes to the Financial Statements195 Five Year Record
 96




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Financial Statements 
 Independent Auditors Report to the Member of Abbey National plc Report of Independent Registered Public Accounting Firm To the Board of directors and shareholders of Abbey National plc We have audited the accompanying consolidated balance sheets of Abbey National plc and its
subsidiary undertakings (together the Abbey National Group), a wholly owned subsidiary of Banco
Santander Central Hispano, S.A., as at 31 December 2004 and 2003, and the related consolidated
profit and loss accounts, the statements of consolidated total recognised gains and losses and the
consolidated cash flow statements for each of the three years in the
period ended 31 December 2004, the statement of accounting
policies and the related notes 1 to 65. These financial statements
have been prepared under the accounting policies set out therein. We
have also audited the information in the part of the directors
remuneration report that is described in note 54. These financial statements are the responsibility of the Abbey National Group directors. 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 consolidated 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. Our audits included 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, 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 2004 and 2003,
and the consolidated results of its operations and its cash flows for each of the three years in
the period ended 31 December 2004 in conformity with accounting principles generally accepted in
the United Kingdom. Accounting principles generally accepted in the United Kingdom vary in certain significant respects
from accounting principles generally accepted in the United States of America. The application of
the latter would have affected the determination of consolidated net income (loss) for each of the
three years in the period ended 31 December 2004 and the determination of the consolidated
shareholders equity as at 31 December 2004 and 2003, to the extent summarised in Note 61 to the
consolidated financial statements. The reported net income (loss) for the years ended 31 December 2003 and 2002 and shareholders
equity at 31 December 2003, as determined in accordance with accounting principles generally
accepted in the United States of America, have been restated for the
items described in Note 62(t). Deloitte & Touche LLP
Chartered Accountants and Registered Auditors
London, England
8 June 2005 97




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Financial Statements 
 Consolidated Profit and Loss Account For the years ended 31 December 2004, 2003 and 2002 2003
    
    
    20022004
    
    
    (restated)
    
    
    (restated)Notes
    
    
    £m
    
    
    £m
    
    
    £mInterest receivable:Interest receivable and similar income arising from debt securities
    
    
    
    
    
    
    87
    
    
    
    393
    
    
    
    1,386Other interest receivable and similar income
    
    
    3
    
    
    
    4,838
    
    
    
    4,851
    
    
    
    5,382Interest payable
    
    
    4
    
    
    
    (3,395
    )
    
    
    (3,182
    )
    
    
    (4,184
    )Net interest income
    
    
    
    
    
    
    1,530
    
    
    
    2,062
    
    
    
    2,584Dividend income
    
    
    5
    
    
    
    1
    
    
    
    1
    
    
    
    1Fees and commissions receivable
    
    
    
    
    
    
    639
    
    
    
    767
    
    
    
    786Fees and commissions payable
    
    
    
    
    
    
    (114
    )
    
    
    (248
    )
    
    
    (275
    )Dealing profits
    
    
    6
    
    
    
    268
    
    
    
    217
    
    
    
    205Income from long-term assurance business before embedded value charges and rebasing
    
    
    21
    
    
    
    108
    
    
    
    176
    
    
    
    321Embedded value charges and rebasing
    
    
    21
    
    
    
    (32
    )
    
    
    (378
    )
    
    
    (632
    )Income from long-term assurance business after embedded value charges and rebasing
    
    
    21
    
    
    
    76
    
    
    
    (202
    )
    
    
    (311
    )Other operating (expense) income
    
    
    7
    
    
    
    244
    
    
    
    (165
    )
    
    
    510Total operating income  continuing operations
    
    
    2
    
    
    
    2,626
    
    
    
    2,711
    
    
    
    3,141Total operating income  discontinued operations
    
    
    2
    
    
    
    18
    
    
    
    (279
    )
    
    
    359Total operating income
    
    
    
    
    
    
    2,644
    
    
    
    2,432
    
    
    
    3,500Administrative expenses
    
    
    8
    
    
    
    (2,053
    )
    
    
    (2,014
    )
    
    
    (1,852
    )Depreciation of fixed assets excluding operating lease assets
    
    
    26
    
    
    
    (81
    )
    
    
    (112
    )
    
    
    (103
    )Depreciation and impairment on operating lease assets
    
    
    27
    
    
    
    (151
    )
    
    
    (251
    )
    
    
    (280
    )Amortisation of goodwill
    
    
    25
    
    
    
    (20
    )
    
    
    (20
    )
    
    
    (64
    )Impairment of goodwill
    
    
    25
    
    
    
    
    
    
    
    (18
    )
    
    
    (1,138
    )Depreciation, amortisation and impairment
    
    
    
    
    
    
    (252
    )
    
    
    (401
    )
    
    
    (1,585
    )Provisions for bad and doubtful debts
    
    
    9
    
    
    
    35
    
    
    
    (474
    )
    
    
    (514
    )Provisions for contingent liabilities and commitments
    
    
    38
    
    
    
    (202
    )
    
    
    (104
    )
    
    
    (50
    )Amounts written off fixed asset investments debt securities
    
    
    19
    
    
    
    67
    
    
    
    (45
    )
    
    
    (388
    ) equity shares and similar investments
    
    
    20
    
    
    
    13
    
    
    
    (148
    )
    
    
    (123
    )Provisions and amounts written off fixed asset investments
    
    
    
    
    
    
    (87
    )
    
    
    (771
    )
    
    
    (1,075
    )Operating profit/(loss)
    
    
    
    
    
    
    252
    
    
    
    (754
    )
    
    
    (1,012
    )Income from associated undertakings
    
    
    
    
    
    
    6
    
    
    
    12
    
    
    
    17Profit on disposal of Group undertakings
    
    
    
    
    
    
    46
    
    
    
    89
    
    
    
    48Profit/(loss) on the sale or termination of an operation
    
    
    57
    
    
    
    (31
    )
    
    
    (33
    )
    
    
    Continuing operations
    
    
    2
    
    
    
    200
    
    
    
    (182
    )
    
    
    (278
    )Discontinued operations
    
    
    2
    
    
    
    73
    
    
    
    (504
    )
    
    
    (669
    )Profit/(loss) on ordinary activities before tax
    
    
    
    
    
    
    273
    
    
    
    (686
    )
    
    
    (947
    )Tax on profit/(loss) on ordinary activities
    
    
    10
    
    
    
    (144
    )
    
    
    42
    
    
    
    (152
    )Profit/(loss) on ordinary activities after tax
    
    
    
    
    
    
    129
    
    
    
    (644
    )
    
    
    (1,099
    )Minority interests  non-equity
    
    
    41
    
    
    
    (49
    )
    
    
    (55
    )
    
    
    (62
    )Profit/(loss) for the financial year attributable to the shareholders of Abbey
National plc
    
    
    
    
    
    
    80
    
    
    
    (699
    )
    
    
    (1,161
    )Transfer from/(to) non-distributable reserve
    
    
    43
    
    
    
    47
    
    
    
    (200
    )
    
    
    263Dividends including amounts attributable to non-equity interests
    
    
    12
    
    
    
    (631
    )
    
    
    (424
    )
    
    
    (424
    )Retained loss for the financial year
    
    
    
    
    
    
    (504
    )
    
    
    (1,323
    )
    
    
    (1,322
    )Profit/(loss) on ordinary activities before tax includes for acquired operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Earnings/(loss) per ordinary share  basic
    
    
    13
    
    
    
    2.2p
    
    
    
    (52.4p
    )
    
    
    (84.8p
    )Earnings/(loss) per ordinary share  diluted
    
    
    13
    
    
    
    2.2p
    
    
    
    (52.4p
    )
    
    
    (84.3p
    )
 The Groups results as reported are on an historical cost basis, except where, as described in
Accounting policies, special provisions of the Companies Act 1985 or industry standards apply.
Accordingly, no note of historical cost profits and losses has been presented. The 2003 and 2002 comparatives have been restated to include accrued interest on
mark-to-market securities and money market instruments within dealing profits. These amounts were
previously included within interest income and interest expense. The impact of the adjustment was
to move £978m (2002: £1,301m), from interest income and £892m (2002: £1,258m) from interest expense
into dealing profits. 98




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Financial Statements 
 Consolidated Balance Sheet As at 31 December 2004, 2003 and 2002 2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2002Notes
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    
    
    
    
    
    
    
    
    454
    
    
    
    
    
    
    
    439
    
    
    
    
    
    
    
    396Treasury bills and other eligible bills
    
    
    14
    
    
    
    
    
    
    
    1,990
    
    
    
    
    
    
    
    1,631
    
    
    
    
    
    
    
    1,483Loans and advances to banks
    
    
    15
    
    
    
    
    
    
    
    10,148
    
    
    
    
    
    
    
    7,155
    
    
    
    
    
    
    
    6,601Loans and advances to customers not subject to
securitisation
    
    
    
    
    
    
    79,331
    
    
    
    
    
    
    
    84,488
    
    
    
    
    
    
    
    81,427Loans and advances to customers subject to
securitisation
    
    
    17
    
    
    
    28,976
    
    
    
    
    
    
    
    23,833
    
    
    
    
    
    
    
    24,156Less: non-recourse finance
    
    
    
    
    
    
    (15,098
    )
    
    
    
    
    
    
    (14,482
    )
    
    
    
    
    
    
    (15,160
    )Loans and advances to customers
    
    
    16
    
    
    
    
    
    
    
    93,209
    
    
    
    
    
    
    
    93,839
    
    
    
    
    
    
    
    90,423Net investment in finance leases
    
    
    18
    
    
    
    
    
    
    
    1,148
    
    
    
    
    
    
    
    2,573
    
    
    
    
    
    
    
    3,447Debt securities
    
    
    19
    
    
    
    
    
    
    
    22,683
    
    
    
    
    
    
    
    30,328
    
    
    
    
    
    
    
    59,807Equity shares and other similar interests
    
    
    20
    
    
    
    
    
    
    
    1,176
    
    
    
    
    
    
    
    1,633
    
    
    
    
    
    
    
    963Long-term assurance business
    
    
    21
    
    
    
    
    
    
    
    2,968
    
    
    
    
    
    
    
    2,272
    
    
    
    
    
    
    
    2,316Interests in associated undertakings
    
    
    22
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    51Intangible fixed assets
    
    
    25
    
    
    
    
    
    
    
    317
    
    
    
    
    
    
    
    341
    
    
    
    
    
    
    
    376Tangible fixed assets excluding operating lease assets
    
    
    26
    
    
    
    246
    
    
    
    
    
    
    
    268
    
    
    
    
    
    
    
    371Operating lease assets
    
    
    27
    
    
    
    2,341
    
    
    
    
    
    
    
    2,529
    
    
    
    
    
    
    
    2,573Tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    2,587
    
    
    
    
    
    
    
    2,797
    
    
    
    
    
    
    
    2,944Other assets
    
    
    28
    
    
    
    
    
    
    
    4,661
    
    
    
    
    
    
    
    4,162
    
    
    
    
    
    
    
    5,085Prepayments and accrued income
    
    
    29
    
    
    
    
    
    
    
    1,195
    
    
    
    
    
    
    
    1,230
    
    
    
    
    
    
    
    1,891Assets of long-term assurance funds
    
    
    21
    
    
    
    
    
    
    
    27,180
    
    
    
    
    
    
    
    28,336
    
    
    
    
    
    
    
    29,411Total assets
    
    
    
    
    
    
    
    
    
    
    169,741
    
    
    
    
    
    
    
    176,775
    
    
    
    
    
    
    
    205,194LiabilitiesDeposits by banks
    
    
    31
    
    
    
    
    
    
    
    18,412
    
    
    
    
    
    
    
    22,125
    
    
    
    
    
    
    
    24,174Customer accounts
    
    
    32
    
    
    
    
    
    
    
    78,850
    
    
    
    
    
    
    
    74,401
    
    
    
    
    
    
    
    76,766Debt securities in issue
    
    
    33
    
    
    
    
    
    
    
    21,969
    
    
    
    
    
    
    
    24,834
    
    
    
    
    
    
    
    48,079Dividend payable
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    113Other liabilities
    
    
    34
    
    
    
    
    
    
    
    9,170
    
    
    
    
    
    
    
    11,452
    
    
    
    
    
    
    
    9,125Accruals and deferred income
    
    
    35
    
    
    
    
    
    
    
    1,729
    
    
    
    
    
    
    
    1,582
    
    
    
    
    
    
    
    2,218Provisions for liabilities and charges
    
    
    36
    
    
    
    
    
    
    
    870
    
    
    
    
    
    
    
    836
    
    
    
    
    
    
    
    1,028Subordinated liabilities including convertible debt
    
    
    39
    
    
    
    
    
    
    
    5,360
    
    
    
    
    
    
    
    6,337
    
    
    
    
    
    
    
    6,532Other long-term capital instruments
    
    
    40
    
    
    
    
    
    
    
    722
    
    
    
    
    
    
    
    742
    
    
    
    
    
    
    
    771Liabilities of long-term assurance funds
    
    
    21
    
    
    
    
    
    
    
    27,180
    
    
    
    
    
    
    
    28,336
    
    
    
    
    
    
    
    29,411Minority interests  non-equity
    
    
    41
    
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    554
    
    
    
    
    
    
    
    627164,817
    
    
    
    
    
    
    
    171,444
    
    
    
    
    
    
    
    198,844Called up share capital ordinary shares
    
    
    42
    
    
    
    148
    
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    146 preference shares
    
    
    42
    
    
    
    325
    
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    325Share premium account
    
    
    42
    
    
    
    2,164
    
    
    
    
    
    
    
    2,059
    
    
    
    
    
    
    
    2,155Reserves
    
    
    43
    
    
    
    306
    
    
    
    
    
    
    
    274
    
    
    
    
    
    
    
    74Profit and loss account
    
    
    43
    
    
    
    1,981
    
    
    
    
    
    
    
    2,527
    
    
    
    
    
    
    
    3,650Shareholders funds including non-equity interests
    
    
    44
    
    
    
    
    
    
    
    4,924
    
    
    
    
    
    
    
    5,331
    
    
    
    
    
    
    
    6,350Total liabilities
    
    
    
    
    
    
    
    
    
    
    169,741
    
    
    
    
    
    
    
    176,775
    
    
    
    
    
    
    
    205,194Memorandum itemsContingent liabilitiesGuarantees and assets pledged as collateral security
    
    
    46
    
    
    
    
    
    
    
    1,084
    
    
    
    
    
    
    
    2,148
    
    
    
    
    
    
    
    1,902Other contingent liabilities
    
    
    47
    
    
    
    
    
    
    
    116
    
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    1571,200
    
    
    
    
    
    
    
    2,307
    
    
    
    
    
    
    
    2,059CommitmentsObligations under stock borrowing and lending
agreements
    
    
    48
    
    
    
    
    
    
    
    20,508
    
    
    
    
    
    
    
    25,649
    
    
    
    
    
    
    
    19,137Other commitments
    
    
    48
    
    
    
    
    
    
    
    2,849
    
    
    
    
    
    
    
    3,018
    
    
    
    
    
    
    
    4,74223,357
    
    
    
    
    
    
    
    28,667
    
    
    
    
    
    
    
    23,879
 99




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##### Table of Contents



Financial Statements 
 Company Balance Sheet As at 31 December 2004, 2003 and 2002 2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2002Notes
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    
    
    
    
    
    
    
    
    443
    
    
    
    
    
    
    
    417
    
    
    
    
    
    
    
    356Loans and advances to banks
    
    
    15
    
    
    
    
    
    
    
    3,605
    
    
    
    
    
    
    
    4,218
    
    
    
    
    
    
    
    4,716Loans and advances to customers not subject to
securitisation
    
    
    
    
    
    
    63,829
    
    
    
    
    
    
    
    66,048
    
    
    
    
    
    
    
    59,628Loans and advances to customers subject to
securitisation
    
    
    17
    
    
    
    28,976
    
    
    
    
    
    
    
    23,835
    
    
    
    
    
    
    
    24,035Less: non-recourse finance
    
    
    
    
    
    
    (12,948
    )
    
    
    
    
    
    
    (13,813
    )
    
    
    
    
    
    
    (14,491
    )Loans and advances to customers
    
    
    16
    
    
    
    
    
    
    
    79,857
    
    
    
    
    
    
    
    76,070
    
    
    
    
    
    
    
    69,172Net investment in finance leases
    
    
    18
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    13Debt securities
    
    
    19
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    480
    
    
    
    
    
    
    
    1,394Equity shares and other similar interests
    
    
    20
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2Shares in Associate undertakings
    
    
    22
    
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    Shares in Group undertakings
    
    
    23
    
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    8,171
    
    
    
    
    
    
    
    7,545Tangible fixed assets
    
    
    26
    
    
    
    
    
    
    
    226
    
    
    
    
    
    
    
    239
    
    
    
    
    
    
    
    304Other assets
    
    
    28
    
    
    
    
    
    
    
    1,293
    
    
    
    
    
    
    
    1,001
    
    
    
    
    
    
    
    794Prepayments and accrued income
    
    
    29
    
    
    
    
    
    
    
    379
    
    
    
    
    
    
    
    501
    
    
    
    
    
    
    
    566Total assets
    
    
    
    
    
    
    
    
    
    
    94,474
    
    
    
    
    
    
    
    91,149
    
    
    
    
    
    
    
    84,862LiabilitiesDeposits by banks
    
    
    31
    
    
    
    
    
    
    
    15,697
    
    
    
    
    
    
    
    18,780
    
    
    
    
    
    
    
    14,307Customer accounts
    
    
    32
    
    
    
    
    
    
    
    65,910
    
    
    
    
    
    
    
    57,900
    
    
    
    
    
    
    
    55,444Debt securities in issue
    
    
    33
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Dividend payable
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    113Other liabilities
    
    
    34
    
    
    
    
    
    
    
    1,114
    
    
    
    
    
    
    
    1,030
    
    
    
    
    
    
    
    759Accruals and deferred income
    
    
    35
    
    
    
    
    
    
    
    1,008
    
    
    
    
    
    
    
    823
    
    
    
    
    
    
    
    941Provisions for liabilities and charges
    
    
    36
    
    
    
    
    
    
    
    224
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    43Subordinated liabilities including convertible debt
    
    
    39
    
    
    
    
    
    
    
    5,673
    
    
    
    
    
    
    
    6,689
    
    
    
    
    
    
    
    6,959Other long-term capital instruments
    
    
    40
    
    
    
    
    
    
    
    722
    
    
    
    
    
    
    
    742
    
    
    
    
    
    
    
    77190,395
    
    
    
    
    
    
    
    86,313
    
    
    
    
    
    
    
    79,341Called up share capital  ordinary shares
    
    
    42
    
    
    
    148
    
    
    
    
    
    
    
    146
    
    
    
    
    
    
    
    146- preference shares
    
    
    42
    
    
    
    325
    
    
    
    
    
    
    
    325
    
    
    
    
    
    
    
    325Share premium account
    
    
    42
    
    
    
    2,164
    
    
    
    
    
    
    
    2,059
    
    
    
    
    
    
    
    2,155Profit and loss account
    
    
    43
    
    
    
    1,442
    
    
    
    
    
    
    
    2,306
    
    
    
    
    
    
    
    2,895Shareholders funds including non-equity interests
    
    
    44
    
    
    
    
    
    
    
    4,079
    
    
    
    
    
    
    
    4,836
    
    
    
    
    
    
    
    5,521Total liabilities
    
    
    
    
    
    
    
    
    
    
    94,474
    
    
    
    
    
    
    
    91,149
    
    
    
    
    
    
    
    84,862Memorandum itemsContingent liabilitiesGuarantees and assets pledged as collateral security
    
    
    46
    
    
    
    
    
    
    
    63,009
    
    
    
    
    
    
    
    69,487
    
    
    
    
    
    
    
    110,882Other contingent liabilities
    
    
    47
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    2363,017
    
    
    
    
    
    
    
    69,495
    
    
    
    
    
    
    
    110,905Commitments
    
    
    48
    
    
    
    
    
    
    
    1,733
    
    
    
    
    
    
    
    1,627
    
    
    
    
    
    
    
    1,303
 100




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##### Table of Contents



Financial Statements 
 Consolidated Statement of Total Recognised Gains and Losses For the year ended 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Notes
    
    
    £m
    
    
    £m
    
    
    £mProfit/(loss) attributable to the shareholders of Abbey National plc
    
    
    
    
    
    
    80
    
    
    
    (699
    )
    
    
    (1,161
    )Translation differences on foreign currency net investment
    
    
    43
    
    
    
    (2
    )
    
    
    (1
    )
    
    
    (2
    )Total recognised gains /(losses) relating to the year
    
    
    
    
    
    
    78
    
    
    
    (700
    )
    
    
    (1,163
    )Total gains recognised since the prior year
    
    
    
    
    
    
    78
 101




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##### Table of Contents



Financial Statements 
 Consolidated Cash Flow Statement For the years ended 31 December 2004, 2003 and 2002 2004
    
    
    2003
    
    
    2002Notes
    
    
    £m
    
    
    £m
    
    
    £mNet cash (outflow)/inflow from operating activities
    
    
    52a
    
    
    
    (2,019
    )
    
    
    (32,678
    )
    
    
    (10,952
    )Returns on investments and servicing of finance:Interest paid on subordinated liabilities
    
    
    
    
    
    
    (277
    )
    
    
    (262
    )
    
    
    (337
    )Preference dividends paid
    
    
    
    
    
    
    (48
    )
    
    
    (55
    )
    
    
    (63
    )Payments to non-equity minority interests
    
    
    
    
    
    
    (49
    )
    
    
    (55
    )
    
    
    (62
    )Net cash outflow from returns on investments and servicing of finance
    
    
    
    
    
    
    (374
    )
    
    
    (372
    )
    
    
    (462
    )Taxation:UK corporation tax paid
    
    
    
    
    
    
    (2
    )
    
    
    (93
    )
    
    
    (481
    )Overseas tax paid
    
    
    
    
    
    
    (10
    )
    
    
    (6
    )
    
    
    (15
    )Total taxation paid
    
    
    
    
    
    
    (12
    )
    
    
    (99
    )
    
    
    (496
    )Capital expenditure and financial investment:Purchases of investment securities
    
    
    
    
    
    
    (1,713
    )
    
    
    (3,895
    )
    
    
    (16,636
    )Sales of investment securities
    
    
    
    
    
    
    1,796
    
    
    
    26,462
    
    
    
    12,926Redemptions and maturities of investment securities
    
    
    
    
    
    
    1,235
    
    
    
    3,175
    
    
    
    14,977Purchases of tangible fixed assets
    
    
    
    
    
    
    (155
    )
    
    
    (532
    )
    
    
    (909
    )Sales of tangible fixed assets
    
    
    
    
    
    
    83
    
    
    
    194
    
    
    
    79Transfers (to)/from life assurance funds
    
    
    
    
    
    
    (712
    )
    
    
    (215
    )
    
    
    (882
    )Net cash inflow/(outflow) from capital expenditure and financial investment
    
    
    
    
    
    
    534
    
    
    
    25,189
    
    
    
    9,555Acquisitions and disposals
    
    
    52e-g
    
    
    
    3,180
    
    
    
    8,803
    
    
    
    (536
    )Equity dividends paid
    
    
    
    
    
    
    (697
    )
    
    
    (216
    )
    
    
    (648
    )Net cash inflow/(outflow) before financing
    
    
    
    
    
    
    612
    
    
    
    627
    
    
    
    (3,539
    )Financing:Issue of ordinary share capital
    
    
    
    
    
    
    13
    
    
    
    2
    
    
    
    17Issue of loan capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    392Issue of other long-term capital instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    485Issue of preferred securities and minority interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Redemption of preference share capital
    
    
    
    
    
    
    
    
    
    
    (124
    )
    
    
    Redemption of preferred securities
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    Repayments of loan capital
    
    
    
    
    
    
    (813
    )
    
    
    (56
    )
    
    
    (222
    )Net cash (outflow)/inflow from financing
    
    
    52c
    
    
    
    (800
    )
    
    
    (193
    )
    
    
    687Increase/(decrease) in cash
    
    
    52b
    
    
    
    (188
    )
    
    
    434
    
    
    
    (2,852
    )
 For the purposes of the Consolidated Cash Flow Statement, cash includes all cash at bank and in
hand and loans and advances to banks repayable on demand without notice or penalty, including
amounts denominated in foreign currencies. 102




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Financial Statements 
 Accounting Policies Basis of presentation The Consolidated Financial Statements are prepared in accordance with the special provisions of
Part VII Schedule 9 of the Companies Act 1985 applicable to banking companies and banking groups. Accounting convention Abbey prepares its Consolidated Financial Statements under the historical cost convention,
modified by the revaluation of certain assets and liabilities. They are prepared in accordance with
applicable accounting standards of the Accounting Standards Board and pronouncements of its Urgent
Issues Task Force and with the Statements of Recommended Accounting Practice issued by the British
Bankers Association, the Irish Bankers Federation and the Finance and Leasing Association.
Accounting policies are reviewed regularly to ensure they are the most appropriate to the
circumstances of Abbey for the purposes of giving a true and fair view. Consistent with other banking groups, in preparing consolidated financial statements, the
long-term assurance business is valued using the embedded value method, with adjustments made for
the impact of investment variances to Long-Term Assumptions. Disclosures consistent with the
guidance provided by the Association of British Insurers in December 2001 is provided in either the
Consolidated Financial Statements or the Operating and Financial Review, wherever practical. Basis of consolidation The Group Financial Statements incorporate the Consolidated Financial Statements of the company
and all its subsidiary undertakings. 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 2004. The assets and liabilities of the long-term assurance funds are presented separately from
those of other businesses in order to reflect the different nature of the shareholders interests
therein. Interest in subsidiary undertakings and associated undertakings The companys interests in subsidiary undertakings and associated undertakings are stated at
cost less any provisions for impairment. The Groups interests in associated undertakings are
stated at Abbeys share of the book value of the net assets of the associated undertakings. Goodwill Goodwill arising on consolidation as a result of the acquisitions of subsidiary undertakings
and the purchase of businesses after 1 January 1998 is capitalised under the heading Intangible
fixed assets and amortised on a straight-line basis over its expected useful economic life. The
useful economic life is calculated using a valuation model which determines the period of time over
which returns are expected to exceed the cost of capital, subject to a maximum period of 20 years. Goodwill arising on consolidation as a result of the acquisitions of subsidiary undertakings,
and the purchase of businesses prior to 1 January 1998, has previously been written off directly to
reserves. On disposal of subsidiary undertakings and businesses, such goodwill is charged to the
Profit and Loss Account balanced by an equal credit to reserves. Where such goodwill in continuing
businesses has suffered an impairment, a similar charge to the Profit and Loss Account and credit
to reserves is made. Impairment of fixed assets and goodwill Tangible fixed assets, other than investment properties, and goodwill are subject to review for
impairment in accordance with FRS 11 Impairment of Fixed Assets and Goodwill. The carrying values
of tangible fixed assets and goodwill are written down by the amount of any impairment, and the
loss is recognised in the Profit and Loss Account in the period in which this occurs. Should an
event reverse the effects of a previous impairment, the carrying value of the tangible fixed assets
and goodwill may be written up to a value no higher than the original depreciated or amortised cost
which would have been recognised had the original impairment not occurred. Depreciation Tangible fixed assets excluding operating lease assets and investment properties are
depreciated on a straight-line basis over their estimated useful lives, as follows: Freehold buildings:
    
    100 yearsLong and short leasehold premises:
    
    Over the remainder of the lease,
with a maximum of 100 years.
Acquisition premiums are
depreciated over the period to
the next rent review.Freehold land:
    
    Not depreciatedOffice fixtures, equipment and furniture:
    
    5 to 8 yearsComputer equipment:
    
    3 to 5 years
 For a description of depreciation on operating lease assets, see Assets leased to customers
below. 103




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Financial Statements Accounting Policiescontinued Interest receivable and payable Interest receivable and payable is recognised in the Profit and Loss Account as it accrues.
Interest is suspended where due but not received on loans and advances in arrears where recovery is
doubtful. The amounts suspended are excluded from interest receivable on loans and advances until
recovered. Fees, commissions and dividends receivable Fees and commissions receivable in respect of services provided are taken to the Profit and
Loss Account when the related services are performed. Where fees, commissions and dividends are in
the nature of interest, these are taken to the Profit and Loss Account on a systematic basis over
the expected life of the transaction to which they relate, and are included under the heading
interest receivable, except for amounts that related to trading activities. Income on investments
in equity shares and other similar interests is recognised as and when dividends are declared, and
included within dividend income. Fees received on loans with high loan-to-value ratios are
accounted for as described under the heading Deferred income. This accounting policy has been amended to reflect the change in accounting policy described
in the dealing profits accounting policy. Lending-related fees and commissions payable and discounts Under certain schemes, payments and discounts may be made to customers as incentives to take
out loans. It is usually a condition of such schemes that incentive payments are recoverable by way
of early redemption penalty charges in the event of redemption within a specified period, the
penalty period, and it is Abbeys policy and normal practice to make such charges. Such incentive
payments are charged to the Profit and Loss Account over the penalty period where their cost is
recoverable from the net interest income earned from the related loans over the penalty period. If
the loan is redeemed within the penalty period the incentive payments are offset against the
penalty charge. When the related loan is redeemed, sold or becomes impaired any amounts previously
unamortised are charged to the Profit and Loss Account. The Profit and Loss Account charge for such
amounts is included under the heading interest receivable. Commissions payable to introducers in respect of obtaining certain lending business are
charged to the Profit and Loss Account over the anticipated life of the loans. The Profit and Loss
Account charge for such commissions is included under the heading Fees and commissions payable. Dealing profits Dealing profits include movements in prices on a mark-to-market basis, including interest and
dividends, on trading derivatives, trading security positions, trading treasury and other bills and
related funding. This is a presentational change in that previously interest on mark-to-market
securities and money market instruments was classified within interest receivable and interest
payable. This had no impact on profit. In the 12 months to December 2003 this change resulted in
reclassification of £86m (2002: £105m) from net interest income to non-interest income. Deferred income The arrangement of certain UK loans and advances secured on residential properties with high
loan-to-value ratios may result in a fee being charged. In Abbeys accounts, such fees are deferred and are included in the Balance Sheet under the
heading accruals and deferred income. The deferred income balance is taken to the Profit and Loss
Account over the average anticipated life of the loan and is included under the heading Other
operating income. Pensions Where pensions are provided by means of a funded defined benefits scheme, annual contributions
are based on actuarial advice. The expected cost of providing pensions is recognised on a
systematic basis over the expected average remaining service lives of members of the scheme. For defined contribution schemes the amount charged to the Profit and Loss Account in respect of
pensions costs and other post retirement benefits is the contributions payable in the year.
Differences between contributions payable in the year and contributions actually paid are shown as
either accruals or prepayments on the Balance Sheet. Provisions for bad and doubtful debts A specific provision is established for all impaired loans where it is likely that some of the
capital will not be repaid or, where the loan is secured, recovered through enforcement of
security. No provision is made where the security is in excess of the secured advance. Default is
taken to be likely after a specified period of repayment default. 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 historical experience. 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 a loan is placed on default status after a repayment
default depends on the nature of the collateral that secures the advance. On advances secured by
residential property, the default period is three months. On advances secured by commercial
property, the default period is five months, based on historical experience with business
customers. 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. 104




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Financial Statements Accounting Policiescontinued On unsecured advances, such as personal term loans, the default period is often less than three
months. 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. Wholesale lending and investment securities are placed on default status immediately upon
default on a payment due date or following any event specified in the loan documentation as a
default event. Securities are also placed on default status if the counterparty goes into
voluntary or forced administration or liquidation or makes an announcement that it would not meet
its commitments on the next payment due date. Once a loan is considered impaired, an assessment of the likelihood of collecting the
principal is made. This assessment includes, where appropriate, the use of statistical techniques
developed based on previous experience and on management judgment of economic conditions. These
techniques estimate the propensity of loans to result in losses net of any recovery where
applicable. A general provision is made against loans and advances to cover bad and doubtful debts which
have not been separately identified, but which are known from experience to be present in
portfolios of loans and advances. The general provision is determined using management judgment
given past loss experience, lending quality and economic conditions, and is supplemented by
statistical based calculations. The specific and general provisions are deducted from loans and advances. Provisions made
during the year, less amounts released and recoveries of amounts written off in previous years, are
charged to the Profit and Loss Account. Write offs are determined on a case-by-case basis for
different products and portfolios, at times ranging typically from 30 to 365 days. Share-based payments The costs of share-based instruments are accounted for on a fair value basis, computed by
reference to the grant date; such costs are expensed over the performance period to which the award
relates. The amount charged to the Profit and Loss Account is credited to reserves. In accordance with UITF 38 Accounting for ESOP Trusts, shares purchased through Employee Share
Option Trusts (ESOPs) are held at cost and treated as treasury shares and are taken as a deduction
from shareholders equity. Foreign currency translation Income and expenses arising in foreign currencies are translated into sterling at the average
rates of exchange over the accounting period unless they are hedged, in which case the relevant
hedge rate is applied. Dividends are translated at the rate prevailing on the date the dividend is
receivable. Monetary assets and liabilities denominated in foreign currencies are translated into
sterling at the rates of exchange current at the balance sheet date. In Abbeys Consolidated
Financial Statements, exchange differences on the translation of the opening net assets of foreign
undertakings to the closing rate of exchange are taken to reserves, as are those differences
resulting from the restatement of the profits and losses of foreign undertakings from average to
closing rates. Exchange differences arising on the translation of foreign currency borrowings used
to hedge investments in overseas undertakings are taken directly to reserves and offset against the
corresponding exchange differences arising on the translation of the investments. Other translation
differences are dealt with through the Profit and Loss Account. Securities Debt securities, equity shares and other similar interests (securities) held for investment
purposes are stated at cost, adjusted for any amortisation of premium or discount on an appropriate
basis over their estimated remaining lives. Provision is made for any impairment. In accordance with industry practice, securities which are not held for the purpose of
investment and the associated funding of these assets are stated at market value and profits and
losses arising from this revaluation are taken directly to the Profit and Loss Account. The net
return on these assets, including interest, appears in dealing profits in the Profit and Loss
Account. This net return comprises the revaluation profit and loss referred to above, plus profits
and losses on disposal of these assets. The difference between the cost and market value of
securities not held for investment is not disclosed as its determination is not practicable. The market values of securities are primarily derived using publicly quoted prices, direct
broker quotes or recognised market models. Where such prices are unavailable, market values for
those securities have been derived using in-house pricing models. Where securities are transferred between portfolios held for investment purposes and
portfolios held for other purposes, the securities are transferred at market value. Gains and
losses on these transfers are taken directly to the Profit and Loss Account, and are included
within other operating income. Securities are recognised as assets or, in the case of short positions, liabilities, at the
date at which the commitment to purchase or sell is considered to be binding. Securities sold subject to a sale and repurchase agreements (repurchase agreement) are
retained on the Balance Sheet where substantially all of the risk and rewards of ownership remain
within Abbey. Similarly, securities purchased subject to a purchase and resale agreement (resale
agreement) are treated as collateralised lending transactions where Abbey does not acquire
substantially all of the risks and rewards of ownership. This accounting policy has been amended to reflect the change in accounting policy described
in the dealing profits accounting policy. 105




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##### Table of Contents



Financial Statements Accounting Policiescontinued Repurchase and resale agreements Repurchase and resale agreements are included within loans and advances to banks, loans and
advances to customers, deposit by banks and customer accounts. The difference between sale and
repurchase and purchase and resale prices for such transactions is charged to the Profit and Loss
Account over the life of the relevant transaction and reported within dealing profits. Repurchase
and resale agreements transacted on standard settlement terms are recognised on the Balance Sheet
on a trade date basis while all non-standard settlement terms agreements are recognised on a value
date basis. Outright sale and purchase of securities combined with the total return swaps which remove the
risk inherent in those securities are accounted for as effectively repurchase and resale
agreements. Abbey adopts a value date accounting treatment for repurchase and resale agreements which fall
outside the standard terms of settlement. It is considered that this policy is more appropriate for
Balance Sheet presentation as it better reflects the economic risks and rewards of these
instruments. This accounting policy has been amended to reflect the change in accounting policy described
in the dealing profits accounting policy. Customer accounts/deposits Contracts involving the receipt of cash on which customers receive an index-linked return are
accounted for in substance as equity index-linked deposits. The current market value of the
contract is reported within Customer accounts. Equity index-linked deposits are managed within the equity derivatives trading book as an
integral part of the equity derivatives portfolio. Equity index-linked deposits are remeasured at
fair value at each reporting date with changes in fair values recognised in the consolidated Profit
and Loss Account. 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. Such
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
instrument and the host instrument and is remeasured at fair value at each reporting date. Stock borrowing and lending agreements Obligations taken on pursuant to entering into such agreements are reported as commitments.
Income earned and expense paid on stock borrowing and lending agreements is reported in dealing
profits. This accounting policy has been amended to reflect the change in accounting policy described
in the dealing profits accounting policy. Deferred taxation Deferred taxation is provided on all timing differences that have not reversed before the
balance sheet date at the rate of tax expected to apply when those timing differences will reverse.
Deferred tax assets are recognised to the extent that they are regarded as recoverable. Subordinated liabilities (including convertible debt) and debt securities in issue Bonds and notes issued are stated at net issue proceeds adjusted for amortisation. Premiums,
discounts and expenses relating to bonds and notes issued are amortised over the life of the
underlying transaction. Where premiums, discounts and expenses are matched by swap fees, the
respective balances have been netted. Derivatives Transactions are undertaken in derivative financial instruments, (derivatives), which include
interest rate swaps, cross currency and foreign exchange swaps, futures, equity and credit
derivatives, options and similar instruments for both trading and non-trading purposes. Derivatives classified as trading are held for market-making or portfolio management purposes
within Abbeys trading books. Trading book activity is the buying and selling of financial
instruments in order to take advantage of short-term changes in market prices or for market-making
purposes in order to facilitate customer requirements. Trading derivatives are carried at fair
value in the balance sheet within other assets and other liabilities. Valuation adjustments to
cover credit and market liquidity risks and other fair value adjustments are made. Positive and
negative market values of trading derivatives are offset where the contracts have been entered into
under master netting agreements or other arrangements that represent a legally enforceable right of
set off which will survive the liquidation of either party. Gains and losses are taken directly to
the Profit and Loss Account and reported within dealing profits. Derivatives classified as non-trading are those entered into for the purpose of matching or
eliminating risk from potential movements in foreign exchange rates, interest rates, and equity
prices inherent in Abbeys non-trading assets, liabilities and positions. Non-trading derivatives
are accounted for in a manner consistent with the assets, liabilities, or positions being hedged.
Income and expense on non-trading derivatives are recognised as they accrue over the life of the
instruments as an adjustment to interest receivable or interest payable. Credit derivatives,
designated as non-trading and through which credit risk is taken on, are reported as guarantees
which best reflect the economic substance of those transactions. Where a non-trading derivative no longer represents a hedge because either the underlying
non-trading asset, liability or position has been derecognised, or transferred into a trading
portfolio, or the effectiveness of the hedge has been undermined, it is restated at fair value and
any change in value is taken directly to the Profit and Loss Account and reported 106




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Financial Statements Accounting Policiescontinued within other operating income. Thereafter the derivative is classified as trading or redesignated
as a hedge of another non-trading item and accounted for accordingly. In other circumstances where
non-trading derivatives are reclassified as trading or where non-trading derivatives are
terminated, any resulting gains and losses are amortised over the remaining life of the hedged
asset, liability or position. Unamortised gains and losses are reported within prepayments and
accrued income and accruals and deferred income on the Balance Sheet. Derivatives hedging anticipatory transactions are accounted for on a basis consistent with the
relevant type of transaction. Where anticipatory transactions do not actually occur, related
derivatives are restated at fair value and changes in value are taken directly to the Profit and
Loss Account and reported within other operating income. Where retained, such derivatives are
reclassified as trading or redesignated as a hedge of a non-trading item and accounted for
accordingly. Assets leased to customers Assets leased to customers under agreements which transfer substantially all the risks and
rewards associated with ownership, other than legal title, are classified as finance leases. All
other assets leased to customers are classified as operating lease assets. The net investment in finance leases represents total minimum lease payments less gross
earnings allocated to future periods. Income from finance leases is credited to the Profit and Loss
Account using the actuarial after-tax method to give a constant periodic rate of return on the net
cash investment. Operating lease assets are reported at cost less depreciation. They are shown as a separate
class of tangible fixed asset because they are held for a different purpose to tangible fixed
assets used in administrative functions. In the Profit and Loss Account, income in respect of
operating lease assets is reported within other operating income, and depreciation on operating
lease assets is reported within depreciation and amortisation. Provision is made for any impairment
in value, any such amount being included in depreciation and amortisation. Abbey selects the most appropriate method for recognition of income and depreciation according
to the nature of the operating lease. This is determined by various factors including the length of
the lease in proportion to the total economic life of the asset, any terms providing protection
against early cancellation, and the amount of income retained in the lease to cover future
uncertainties in respect of the realisation of residual values. For a large proportion of Abbeys
operating leases, the most appropriate method of accounting for income and depreciation is the
actuarial after-tax method. Other operating leases are accounted for on a straight-line basis. Leases Assets held under finance leases and other similar contracts, which confer rights and
obligations similar to those attached to owned assets, are capitalised as tangible fixed assets and
are depreciated over the shorter of the lease terms and their useful lives. The capital elements of
future lease obligations are recorded as liabilities, while the interest elements are charged to
the Profit and Loss Account over the period of the leases to produce a constant rate of charge on
the balance of capital repayments outstanding. Hire purchase transactions are dealt with similarly
except that assets are depreciated over their useful lives. Rentals under operating leases are charged on a straight-line basis over the lease term, even if
the payments are not made on such a basis. Benefits received and receivable as an incentive to sign
an operating lease are similarly spread on a straight-line basis over the lease term, except where
the period to the review date on which the rent is first expected to be adjusted to the prevailing
market rate is shorter than the full lease term, in which case the shorter period is used. Property
rentals under operating leases are generally subject to annual escalation clauses or regular rent
reviews; increased costs are charged from the increase date. Securitisations Certain Group undertakings have issued debt securities, or have entered into funding
arrangements with lenders, in order to refinance existing assets or to finance the purchase of
certain portfolios of loan and investment assets. These obligations are secured on the assets of
the undertakings through non-recourse finance arrangements. Where the conditions for linked
presentation, as stipulated in FRS 5, are met, the proceeds of the note issues, to the extent that
there is no recourse to Abbey, are presented as non-recourse finance in Abbeys balance sheet and
shown deducted from the securitised assets, which are presented as Loans and advances to customers
subject to securitisation in Abbeys balance sheet. Long-term assurance business The value of the long-term assurance business represents the value of the shareholders
interest in the long-term assurance funds, which consists of the present value of the surplus
expected to emerge in the future from business currently in force, together with Abbeys interest
in the surplus retained within the long-term assurance funds. In determining this value, assumptions relating to investment returns, future mortality and
morbidity, persistency and levels of expenses are based on experience of the business concerned.
The surplus expected to emerge in the future is discounted at a risk-adjusted discount rate after
provision has been made for taxation. To demonstrate the impact of the actual investment return compared to the expected return over a
year, an adjustment is made (shown as embedded value charges and rebasing on long-term assurance
business, in the Profit and Loss Account) identifying separately the value generated from the
normal operations of the business, from that relating to market conditions. With the exception
of products with material explicit investment guarantees, assumptions as to future
investment returns (rather than forward market rates) are used to assess the future value
of both assets and liabilities, in all 107




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Financial Statements Accounting Policiescontinued cases projecting from the current market values. Where material investment guarantees are given,
the market forward rate is used to assess the value of the liability. Changes in the value of long-term assurance business, are included in the Profit and Loss Account
taking account of the effective rate of tax where appropriate. The post-tax increase in the value
is treated as non-distributable until it emerges as part of the surplus arising during the year. The values of the assets and liabilities of the long-term assurance funds are based on the
amounts included in the financial statements of the Life Assurance companies. The values are
determined in accordance with the terms of the Companies Act 1985 (Insurance Companies Accounts)
Regulations 1993, adjusted for the purposes of inclusion in Abbey Financial Statements in order to
be consistent with Abbeys accounting policies and presentation, where a separate asset is
established to account for the value of long-term assurance business. Reserve capital instruments Reserve capital instruments, included within other long-term capital instruments, are unsecured
securities, subordinated to the claims of unsubordinated and subordinated creditors. Reserve
capital instruments are treated as subordinated liabilities. Interest payable on the reserve
capital instruments is included within interest payable. 108




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##### Table of Contents



Financial Statements 
 Notes to the Financial Statements 1. Segmental analysis a) By class of business MotorFinanceBanking
    
    
    Investment
    
    
    Abbey
    
    
    
    
    
    
    
    Group
    
    
    Whole-
    
    
    &and
    
    
    and
    
    
    Financial
    
    
    General
    
    
    Infra-
    
    
    sale
    
    
    LitigationSavings
    
    
    Protection
    
    
    Markets
    
    
    Insurance
    
    
    structure
    
    
    Banking
    
    
    Funding
    
    
    Other
    
    
    Group(1)
    
    
    (1)
    
    
    (1)
    
    
    (1)
    
    
    (1)
    
    
    (2)
    
    
    (2,3)
    
    
    (2)
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Net interest income
    
    
    1,510
    
    
    
    77
    
    
    
    21
    
    
    
    (4
    )
    
    
    (134
    )
    
    
    (70
    )
    
    
    98
    
    
    
    32
    
    
    
    1,530Other income and charges
    
    
    438
    
    
    
    93
    
    
    
    291
    
    
    
    114
    
    
    
    95
    
    
    
    186
    
    
    
    (24
    )
    
    
    (27
    )
    
    
    1,166Total operating
income/(loss)
    
    
    1,948
    
    
    
    170
    
    
    
    312
    
    
    
    110
    
    
    
    (39
    )
    
    
    116
    
    
    
    74
    
    
    
    5
    
    
    
    2,696Operating expenses
excluding depreciation
on operating lease
assets
    
    
    (1,297
    )
    
    
    (89
    )
    
    
    (133
    )
    
    
    (56
    )
    
    
    (489
    )
    
    
    (30
    )
    
    
    (22
    )
    
    
    (38
    )
    
    
    (2,154
    )Depreciation and
impairment on operating
lease assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    (151
    )Provisions for bad and
doubtful debts
    
    
    (34
    )
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    (89
    )
    
    
    (10
    )
    
    
    35Provisions for
contingent liabilities
and commitments
    
    
    (155
    )
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (233
    )Amounts written off
fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    80Profit/(loss) before
taxation
    
    
    462
    
    
    
    129
    
    
    
    179
    
    
    
    54
    
    
    
    (574
    )
    
    
    103
    
    
    
    (37
    )
    
    
    (43
    )
    
    
    273Total assets
    
    
    79,645
    
    
    
    28,838
    
    
    
    50,073
    
    
    
    144
    
    
    
    812
    
    
    
    6,956
    
    
    
    646
    
    
    
    2,627
    
    
    
    169,741Net assets
    
    
    2,295
    
    
    
    1,968
    
    
    
    324
    
    

    
    8
    
    
    
    8
    
    
    
    187
    
    
    
    40
    
    
    
    94
    
    
    
    4,924The average number of
staff employed by the
Group during the year
was as follows:Employees
    
    
    18,015
    
    
    
    3,666
    
    
    
    486
    
    
    
    94
    
    
    
    2,038
    
    
    
    110
    
    
    
    28
    
    
    
    216
    
    
    
    24,6532003Net interest income
    
    
    1,720
    
    
    
    83
    
    
    
    26
    
    
    
    (5
    )
    
    
    (115
    )
    
    
    22
    
    
    
    245
    
    
    
    86
    
    
    
    2,062Other income and charges
    
    
    427
    
    
    
    (165
    )
    
    
    223
    
    
    
    126
    
    
    
    90
    
    
    
    (197
    )
    
    
    (58
    )
    
    
    25
    
    
    
    385Total operating income/(loss)
    
    
    2,147
    
    
    
    (82
    )
    
    
    249
    
    
    
    121
    
    
    
    (25
    )
    
    
    (175
    )
    
    
    187
    
    
    
    111
    
    
    
    2,533Operating expenses excluding
depreciation on operating
lease assets
    
    
    (1,286
    )
    
    
    (58
    )
    
    
    (128
    )
    
    
    (89
    )
    
    
    (309
    )
    
    
    (107
    )
    
    
    (137
    )
    
    
    (83
    )
    
    
    (2,197
    )Depreciation and impairment
on operating lease assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    (1
    )
    
    
    
    
    
    
    (251
    )Provisions for bad and
doubtful debts
    
    
    (130
    )
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    (99
    )
    
    
    (11
    )
    
    
    (474
    )Provisions for contingent
liabilities and commitments
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (71
    )
    
    
    (2
    )
    
    
    
    
    
    
    (17
    )
    
    
    (104
    )Amounts written off fixed
asset investments
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    (193
    )Profit/(loss) before taxation
    
    
    707
    
    
    
    (220
    )
    
    
    121
    
    
    
    32
    
    
    
    (405
    )
    
    
    (871
    )
    
    
    (50
    )
    
    
    
    
    
    
    (686
    )Total assets
    
    
    77,183
    
    
    
    28,790
    
    
    
    54,459
    
    
    
    165
    
    
    
    564
    
    
    
    7,426
    
    
    
    2,160
    
    
    
    6,028
    
    
    
    176,775Net assets
    
    
    2,325
    
    
    
    1,846
    
    
    
    425
    
    
    
    8
    
    
    
    8
    
    
    
    362
    
    
    
    127
    
    
    
    230
    
    
    
    5,331The average number of staff
employed by the Group during
the year was as follows:Employees
    
    
    16,378
    
    
    
    3,708
    
    
    
    511
    
    
    
    139
    
    
    
    3,999
    
    
    
    374
    
    
    
    1,170
    
    
    
    759
    
    
    
    27,038
 109




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued MotorFinanceBanking
    
    
    Investment
    
    
    Abbey
    
    
    
    
    
    
    
    Group
    
    
    Whole-
    
    
    &and
    
    
    and
    
    
    Financial
    
    
    General
    
    
    Infra-
    
    
    sale
    
    
    LitigationSavings
    
    
    Protection
    
    
    Markets
    
    
    Insurance
    
    
    structure
    
    
    Banking
    
    
    Funding
    
    
    Other
    
    
    Group(1)
    
    
    (1)
    
    
    (1)
    
    
    (1)
    
    
    (1)
    
    
    (2)
    
    
    (2,3)
    
    
    (2)
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2002Net interest income
    
    
    1,799
    
    
    
    90
    
    
    
    27
    
    
    
    (3
    )
    
    
    (175
    )
    
    
    327
    
    
    
    464
    
    
    
    55
    
    
    
    2,584Other income and charges
    
    
    454
    
    
    
    (218
    )
    
    
    231
    
    
    
    149
    
    
    
    106
    
    
    
    378
    
    
    
    (48
    )
    
    
    (71
    )
    
    
    981Total operating income (loss)
    
    
    2,253
    
    
    
    (128
    )
    
    
    258
    
    
    
    146
    
    
    
    (69
    )
    
    
    705
    
    
    
    416
    
    
    
    (16
    )
    
    
    3,565Operating expenses excluding
depreciation on operating
lease assets
    
    
    (1,131
    )
    
    
    (53
    )
    
    
    (110
    )
    
    
    (54
    )
    
    
    (1,074
    )
    
    
    (123
    )
    
    
    (546
    )
    
    
    (66
    )
    
    
    (3,157
    )Depreciation and impairment
on operating lease assets
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252
    )
    
    
    (5
    )
    
    
    
    
    
    
    (280
    )Provisions for bad and
doubtful debts
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (247
    )
    
    
    (115
    )
    
    
    (2
    )
    
    
    (514
    )Provisions for contingent
liabilities and commitments
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (50
    )Amounts written off fixed
asset investments
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (513
    )
    
    
    
    
    
    
    
    
    
    
    (511
    )Profit/(loss) before taxation
    
    
    939
    
    
    
    (181
    )
    
    
    148
    
    
    
    92
    
    
    
    (1,177
    )
    
    
    (430
    )
    
    
    (254
    )
    
    
    (84
    )
    
    
    (947
    )Total assets
    
    
    67,264
    
    
    
    30,404
    
    
    
    43,603
    
    
    
    199
    
    
    
    837
    
    
    
    48,401
    
    
    
    7,751
    
    
    
    6,735
    
    
    
    205,194Net assets
    
    
    2,060
    
    
    
    1,764
    
    
    
    386
    
    
    
    9
    
    
    
    14
    
    
    
    1,387
    
    
    
    393
    
    
    
    337
    
    
    
    6,350The average number of staff
employed by the Group during
the year was as follows:Employees
    
    
    15,882
    
    
    
    3,486
    
    
    
    539
    
    
    
    206
    
    
    
    4,788
    
    
    
    495
    
    
    
    1,503
    
    
    
    1,284
    
    
    
    28,183
 The average number of staff employed in the year is calculated on a full-time equivalent basis. Consistent with previous years, when arriving at the segmental analysis, certain adjustments have
been made. They include an adjustment to reflect the capital notionally absorbed by each segment,
based on the Groups Financial Services Authority regulatory requirements, and an allocation across
the segments of the earnings on Group reserves. (1) Collectively the
Personal Financial Services group of reportable segments.

(2) Collectively the Portfolio Business Unit group of reportable
segments.

(3) Motor Finance and Litigation Funding were previously known as First National. b) By geographical region Europe(excluding
    
    
    United
    
    
    Rest of
    
    
    GroupUK
    
    
    UK)
    
    
    States
    
    
    World
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Net interest income
    
    
    1,505
    
    
    
    30
    
    
    
    (5
    )
    
    
    
    
    
    
    1,530Dividend income
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net fees and commissions receivable
    
    
    524
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    525Dealing profits
    
    
    266
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    268Other operating income
    
    
    358
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    372Total operating income
    
    
    2,654
    
    
    
    45
    
    
    
    (3
    )
    
    
    
    
    
    
    2,696Operating expenses excluding depreciation on
operating lease assets
    
    
    (2,114
    )
    
    
    (37
    )
    
    
    (3
    )
    
    
    
    
    
    
    (2,154
    )Depreciation and impairment on operating lease assets
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )Provisions for bad and doubtful debts
    
    
    36
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    35Provisions for contingent liabilities and commitments
    
    
    (233
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (233
    )Amounts written off fixed asset investments
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Profit/(loss) before taxation
    
    
    272
    
    
    
    7
    
    
    
    (6
    )
    
    
    
    
    
    
    273Total assets
    
    
    168,465
    
    
    
    
    
    
    
    1,276
    
    
    
    
    
    
    
    169,741Net assets
    
    
    4,924
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,924
 110




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Europe
    
    
    United
    
    
    Rest of
    
    
    GroupUK
    
    
    (excluding UK)
    
    
    States
    
    
    World
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2003Net interest income
    
    
    1,977
    
    
    
    76
    
    
    
    12
    
    
    
    (3
    )
    
    
    2,062Dividend income
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net fees and commissions receivable
    
    
    514
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    519Dealing profits
    
    
    215
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    217Other operating income
    
    
    (308
    )
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    (266
    )Total operating income
    
    
    2,399
    
    
    
    123
    
    
    
    14
    
    
    
    (3
    )
    
    
    2,533Operating expenses excluding depreciation on
operating lease assets
    
    
    (2,138
    )
    
    
    (55
    )
    
    
    (4
    )
    
    
    
    
    
    
    (2,197
    )Depreciation and impairment on operating lease assets
    
    
    (251
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (251
    )Provisions for bad and doubtful debts
    
    
    (467
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    (474
    )Provisions for contingent liabilities and commitments
    
    
    (104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (104
    )Amounts written off fixed asset investments
    
    
    (193
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (193
    )Profit/(loss) before taxation
    
    
    (754
    )
    
    
    61
    
    
    
    10
    
    
    
    (3
    )
    
    
    (686
    )Total assets
    
    
    174,027
    
    
    
    1,867
    
    
    
    881
    
    
    
    
    
    
    
    176,775Net assets
    
    
    5,229
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    5,331
 Europe
    
    
    United
    
    
    Rest of
    
    
    GroupUK
    
    
    (excluding UK)
    
    
    States
    
    
    World
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2002Net interest income
    
    
    2,422
    
    
    
    109
    
    
    
    52
    
    
    
    1
    
    
    
    2,584Dividend income
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Net fees and commissions receivable
    
    
    508
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    511Dealing profits
    
    
    203
    
    
    
    (2
    )
    
    
    4
    
    
    
    
    
    
    
    205Other operating income
    
    
    218
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    264Total operating income
    
    
    3,352
    
    
    
    156
    
    
    
    56
    
    
    
    1
    
    
    
    3,565Operating expenses excluding depreciation on
operating lease assets
    
    
    (3,013
    )
    
    
    (135
    )
    
    
    (8
    )
    
    
    (1
    )
    
    
    (3,157
    )Depreciation and impairment on operating lease assets
    
    
    (280
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (280
    )Provisions for bad and doubtful debts
    
    
    (517
    )
    
    
    3
    
    
    
    
    
    

    
    
    
    
    
    (514
    )Provisions for contingent liabilities and commitments
    
    
    (50
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )Amounts written off fixed asset investments
    
    
    (513
    )
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (511
    )Profit/(loss) before taxation
    
    
    (1,021
    )
    
    
    26
    
    
    
    48
    
    
    
    
    
    
    
    (947
    )Total assets
    
    
    188,888
    
    
    
    8,705
    
    
    
    7,465
    
    
    
    136
    
    
    
    205,194Net assets
    
    
    5,525
    
    
    
    336
    
    
    
    478
    
    
    
    11
    
    
    
    6,350
 The above tables are based on the domicile of the office writing the business. 111




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 2. Discontinued Operations Dis-
    
    
    
    
    
    
    
    
    
    
    Dis-Dis-
    
    
    
    
    
    
    Continuing
    
    
    continued
    
    
    
    
    
    
    Continuing
    
    
    continuedContinuing
    
    
    continued
    
    
    
    
    
    
    operations
    
    
    operations
    
    
    Total
    
    
    operations
    
    
    operations
    
    
    Totaloperations
    
    
    operations
    
    
    Total
    
    
    2003
    
    
    2003
    
    
    2003
    
    
    2002
    
    
    2002
    
    
    20022004
    
    
    2004
    
    
    2004
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,501
    
    
    
    29
    
    
    
    1,530
    
    
    
    1,883
    
    
    
    179
    
    
    
    2,062
    
    
    
    2,159
    
    
    
    530
    
    
    
    2,689Other income and
charges
    
    
    1,125
    
    
    
    (11
    )
    
    
    1,114
    
    
    
    828
    
    
    
    (458
    )
    
    
    370
    
    
    
    982
    
    
    
    (171
    )
    
    
    811Total Income
    
    
    2,626
    
    
    
    18
    
    
    
    2,644
    
    
    
    2,711
    
    
    
    (279
    )
    
    
    2,432
    
    
    
    3,141
    
    
    
    359
    
    
    
    3,500Total administrative
expenses
    
    
    (2,030
    )
    
    
    (23
    )
    
    
    (2,053
    )
    
    
    (1,927
    )
    
    
    (87
    )
    
    
    (2,014
    )
    
    
    (1,670
    )
    
    
    (182
    )
    
    
    (1,852
    )Depreciation of
tangible fixed assets
excluding operating
lease assets
    
    
    (80
    )
    
    
    (1
    )
    
    
    (81
    )
    
    
    (111
    )
    
    
    (1
    )
    
    
    (112
    )
    
    
    (95
    )
    
    
    (8
    )
    
    
    (103
    )Amortisation  Goodwill
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )
    
    
    
    
    
    
    (20
    )
    
    

    (53
    )
    
    
    (11
    )
    
    
    (64
    )Impairment loss on
tangible & intangible
fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )
    
    
    (781
    )
    
    
    
    
    
    
    (781
    )Operating expenses
excluding depreciation
on operating lease
assets
    
    
    (2,130
    )
    
    
    (24
    )
    
    
    (2,154
    )
    
    
    (2,076
    )
    
    
    (88
    )
    
    
    (2,164
    )
    
    
    (2,599
    )
    
    
    (201
    )
    
    
    (2,800
    )Depreciation and
impairment on
operating lease assets
    
    
    (151
    )
    
    
    
    
    
    
    (151
    )
    
    
    (251
    )
    
    
    
    
    
    
    (251
    )
    
    
    (278
    )
    
    
    (2
    )
    
    
    (280
    )Provisions for bad and
doubtful debts
    
    
    36
    
    
    
    (1
    )
    
    
    35
    
    
    
    (446
    )
    
    
    (28
    )
    
    
    (474
    )
    
    
    (436
    )
    
    
    (78
    )
    
    
    (514
    )Provisions for
contingent liabilities
and commitments
    
    
    (202
    )
    
    
    
    
    
    
    (202
    )
    
    
    (104
    )
    
    
    
    
    
    
    (104
    )
    
    
    (46
    )
    
    
    (4
    )
    
    
    (50
    )Amounts written off
fixed assets
investments
    
    
    
    
    
    
    80
    
    
    
    80
    
    
    
    (118
    )
    
    
    (75
    )
    
    
    (193
    )
    
    
    (123
    )
    
    
    (388
    )
    
    
    (511
    )Operating profit/(loss)
    
    
    179
    
    
    
    73
    
    
    
    252
    
    
    
    (284
    )
    
    
    (470
    )
    
    
    (754
    )
    
    
    (341
    )
    
    
    (314
    )
    
    
    (655
    )Income from associated
undertakings
    
    
    6
    
    
    
    
    
    
    
    6
    
    
    
    12
    
    
    
    
    
    
    
    12
    
    
    
    17
    
    
    
    
    
    
    
    17Profit/loss on sale of
subsidiary
undertakings
    
    
    46
    
    
    
    
    
    
    
    46
    
    
    
    447
    
    
    
    (358
    )
    
    
    89
    
    
    
    46
    
    
    
    2
    
    
    
    48Less: 2002 provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (357
    )
    
    
    357
    
    
    
    
    
    
    
    
    
    
    
    (357
    )
    
    
    (357
    )Profit/(loss) on sale
or termination of an
operation
    
    
    (31
    )
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    (33
    )
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    Profit/(loss) before
taxation
    
    
    200
    
    
    
    73
    
    
    
    273
    
    
    
    (182
    )
    
    
    (504
    )
    
    
    (686
    )
    
    
    (278
    )
    
    
    (669
    )
    
    
    (947
    )
 Discontinued activities included:>
    
    The business which managed Abbeys debt securities portfolios in its Asset Management and Risk Transfer
businesses in the Wholesale Bank segment.>
    
    European Banking operations discontinued in 2004 following the sale of Abbey National France.>
    
    Total operating income and charges in 2004 consisted of £73m (2003: £(470)m loss).
 During 2003, Abbey discontinued the business which managed its debt securities portfolios in its
Asset Management and Risk Transfer businesses in the Wholesale Bank segment. Total charges and
operating income in 2003 consisted of £(470)m loss (2002: £(314)m loss). 112




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 3. Other interest receivable and similar income 2003
    
    
    20022004
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mOn secured advances
    
    
    4,055
    
    
    
    3,726
    
    
    
    3,805On unsecured advances
    
    
    350
    
    
    
    458
    
    
    
    707On wholesale lending
    
    
    79
    
    
    
    340
    
    
    
    490On finance leases
    
    
    95
    
    
    
    142
    
    
    
    202On other interest earning assets and investments
    
    
    259
    
    
    
    185
    
    
    
    1784,838
    
    
    
    4,851
    
    
    
    5,382
 Interest receivable on secured advances is net of £232m (2003: £284m, 2002: £401m) in respect
of the charge for lending-related fees and discounts payable, which are charged against interest
income over the period of time in which Abbey has the right to recover the incentives in the event
of early redemption and it is normal practice to do so. The movements on such incentives are as
follows: Group
    
    
    CompanyInterest rate
    
    
    Cash-
    
    
    
    
    
    
    Interest rate
    
    
    Cash-discounts
    
    
    backs
    
    
    Total
    
    
    discounts
    
    
    backs
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    18
    
    
    
    107
    
    
    
    125
    
    
    
    18
    
    
    
    107
    
    
    
    125Expenditure incurred in the year
    
    
    147
    
    
    
    23
    
    

    
    170
    
    
    
    147
    
    
    
    23
    
    
    
    170Transfer to profit and loss account
    
    
    (160
    )
    
    
    (72
    )
    
    
    (232
    )
    
    
    (160
    )
    
    
    (72
    )
    
    
    (232
    )At 31 December 2004
    
    
    5
    
    
    
    58
    
    
    
    63
    
    
    
    5
    
    
    
    58
    
    
    
    63
 Interest due but not received on loans and advances in arrears has not been recognised in
interest receivable where collectibility is in doubt, but has been suspended. A table showing the
movements on suspended interest is included in note 9. A presentational change has been made with respect to accrued interest as set out in the
accounting policy on dealing profits on page 104. 4. Interest payable 2003
    
    
    20022004
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mOn retail customer accounts
    
    
    2,090
    
    
    
    1,648
    
    
    
    1,699On other deposits and debt securities in issue
    
    
    992
    
    
    
    1,216
    
    
    
    2,120On subordinated liabilities including convertible debt
    
    
    313
    
    
    
    318
    
    
    
    3653,395
    
    
    
    3,182
    
    
    
    4,184
 A presentational change has been made with respect to accrued interest as set out in the
accounting policy on dealing profits on page 104. 5. Dividend income 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mIncome from equity shares
    
    
    1
    
    
    
    1
    
    
    
    1
 6. Dealing profits 2003
    
    
    20022004
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mSecurities
    
    
    83
    
    
    
    120
    
    
    
    117Interest rate, equity and credit derivatives
    
    
    185
    
    
    
    97
    
    
    
    88268
    
    
    
    217
    
    
    
    205
 A presentational change has been made with respect to accrued interest as set out in the
accounting policy on dealing profits on page 104. 113




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 7. Other operating (expenses)/income 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mFee income from high LTV lending (see note 35)
    
    
    37
    
    
    
    45
    
    
    
    85Profit/(loss) on disposal of investment securities
    
    
    (168
    )
    
    
    (474
    )
    
    
    (88
    )Profit/(loss) on disposal of equity shares
    
    
    
    
    
    
    (34
    )
    
    
    34Profit/(loss) on disposal of fixed assets
    
    
    (34
    )
    
    
    2
    
    
    
    3Income from operating leases
    
    
    291
    
    
    
    325
    
    
    
    400Other
    
    
    118
    
    
    
    (29
    )
    
    
    76244
    
    
    
    (165
    )
    
    
    510
 8. Administrative expenses 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mStaff costs: (1)Wages and salaries
    
    
    791
    
    
    
    782
    
    
    
    769Social security costs
    
    
    65
    
    
    
    64
    
    
    
    62Other pension costs
    
    
    123
    
    
    
    128
    
    
    
    101979
    
    
    
    974
    
    
    
    932Property and equipment expenses:Rents payable
    
    
    114
    
    
    
    115
    
    
    
    121Rates payable
    
    
    10
    
    
    
    28
    
    
    
    28Hire of equipment
    
    
    3
    
    
    
    3
    
    
    
    4Other property and equipment expenses
    
    
    58
    
    
    
    75
    
    
    
    63185
    
    
    
    221
    
    
    
    216Other administrative expenses
    
    
    889
    
    
    
    819
    
    
    
    7042,053
    
    
    
    2,014
    
    
    
    1,852
  (1)
    Excludes the following staff costs incurred by the Life Assurance businesses, which are
charged to income from long-term assurance business: 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mStaff costs:Wages and salaries
    
    
    76
    
    
    
    89
    
    
    
    82Social security costs
    
    
    5
    
    
    
    6
    
    
    
    6Other pension costs
    
    
    11
    
    
    
    13
    
    
    
    1092
    
    
    
    108
    
    
    
    98
 The aggregate remuneration for audit and other services payable to the auditors is analysed
below: 2004
    
    
    2003£m
    
    
    £mAudit services statutory audit
    
    
    4.1
    
    
    
    4.1 audit related regulatory reporting
    
    
    2.1
    
    
    
    0.96.2
    
    
    
    5.0Further assurance services
    
    
    1.9
    
    
    
    1.3Tax services compliance services
    
    
    0.1
    
    
    
    0.1 advisory services
    
    
    
    
    
    
    0.12.0
    
    
    
    1.5Other services other services
    
    
    1.1
    
    
    
    3.51.1
    
    
    
    3.59.3
    
    
    
    10.0% Non-Audit: Audit Services
    
    
    50
    
    
    
    100
 No internal audit, valuation, litigation or recruitment services were provided by the external
auditors during these years. Further assurance relates primarily to advice on accounting matters and accords with the
definition of audit related fees per Securities and Exchange Commission guidance. Tax services relate principally to advice on Abbeys tax affairs. The other service expenditure of £1.1m in 2004 primarily relates to consulting services, which
were subject to pre-approval by the Audit and Risk Committee. The bulk of the expenditure was in
connection with services provided in respect of the Sarbanes-Oxley readiness project including a
dry run assessment of readiness. The pre-approval of services provided by the external auditors is explained on page 84. Included within the remuneration for audit services is the audit fee for Abbey National plc of
£0.7m (2003: £0.9m). Of the fees payable to the Groups auditors for audit services, £4m (2003: £3.7m; 2002: £3.8m)
related to the UK. 114




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 9. Provisions for bad and doubtful debts On advancessecured on
    
    
    On other
    
    
    On
    
    
    Onresidential
    
    
    secured
    
    
    unsecured
    
    
    wholesaleproperties
    
    
    advances
    
    
    advances
    
    
    advances
    
    
    TotalGroup
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004General
    
    
    177
    
    
    
    61
    
    
    
    32
    
    
    
    172
    
    
    
    442Specific
    
    
    25
    
    
    
    63
    
    
    
    174
    
    
    
    161
    
    
    
    423Disposals of subsidiary undertakings
    
    
    (28
    )
    
    
    (38
    )
    
    
    (4
    )
    
    
    
    
    
    
    (70
    )Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Transfer from profit and loss account
    
    
    (119
    )
    
    
    98
    
    
    
    74
    
    
    
    (88
    )
    
    
    (35
    )Irrecoverable amounts written off
    
    
    (4
    )
    
    
    (41
    )
    
    
    (136
    )
    
    
    (164
    )
    
    
    (345
    )Recoveries
    
    
    16
    
    
    
    8
    
    
    
    28
    
    
    
    
    
    
    
    52At 31 December 2004
    
    
    67
    
    
    
    151
    
    
    
    168
    
    
    
    81
    
    
    
    467Being for the Group:General
    
    
    58
    
    
    
    3
    
    
    
    35
    
    
    
    14
    
    
    
    110Specific
    
    
    9
    
    
    
    148
    
    
    
    133
    
    
    
    67
    
    
    
    357At 1 January 2003General
    
    
    174
    
    
    
    23
    
    
    
    35
    
    
    
    56
    
    
    
    288Specific
    
    
    50
    
    
    
    76
    
    
    
    128
    
    
    
    204
    
    
    
    458Disposals of subsidiary undertakings
    
    
    (20
    )
    
    
    (13
    )
    
    
    (61
    )
    
    
    
    
    
    
    (94
    )Exchange adjustments
    
    
    3
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    6Transfer from profit and loss account
    
    
    17
    
    
    
    90
    
    
    
    214
    
    
    
    153
    
    
    
    474Irrecoverable amounts written off
    
    
    (26
    )
    
    
    (55
    )
    
    
    (148
    )
    
    
    (80
    )
    
    
    (309
    )Recoveries
    
    
    4
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    42At 31 December 2003
    
    
    202
    
    
    
    124
    
    
    
    206
    
    
    
    333
    
    
    
    865Being for the Group:General
    
    
    177
    
    
    
    61
    
    
    
    32
    
    
    
    172
    
    
    
    442Specific
    
    
    25
    
    
    
    63
    
    
    
    174
    
    
    
    161
    
    
    
    423At 1 January 2002General
    
    
    150
    
    
    
    22
    
    
    
    36
    
    
    
    
    
    
    
    208Specific
    
    
    62
    
    
    
    72
    
    
    
    156
    
    
    
    
    
    
    
    290Acquisition of subsidiary undertakings
    
    
    6
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    8Disposal of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Transfer from investment security provisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    16Exchange adjustments
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    (3
    )
    
    
    Transfer from profit and loss account
    
    
    23
    
    
    
    26
    
    
    
    218
    
    
    
    247
    
    
    
    514Irrecoverable amounts written off
    
    
    (27
    )
    
    
    (33
    )
    
    
    (336
    )
    
    
    
    
    
    
    (396
    )Recoveries
    
    
    9
    
    
    
    9
    
    
    
    89
    
    
    
    
    
    
    
    107At 31 December 2002
    
    
    224
    
    
    
    99
    
    
    
    163
    
    
    
    260
    
    
    
    746Being for the Group:General
    
    
    174
    
    
    
    23
    
    
    
    35
    
    
    
    56
    
    
    
    288Specific
    
    
    50
    
    
    
    76
    
    
    
    128
    
    
    
    204
    
    
    
    458
 On advancessecured on
    
    
    Onresidential
    
    
    other secured
    
    
    On unsecured
    
    
    On wholesaleproperties
    
    
    advances
    
    
    advances
    
    
    advances
    
    
    TotalCompany
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004General
    
    
    54
    
    
    
    3
    
    
    
    35
    
    
    
    
    
    
    
    92Specific
    
    
    7
    
    
    
    4
    
    
    
    130
    
    
    
    
    
    
    
    141At 31 December 2003General
    
    
    142
    
    
    
    3
    
    
    
    32
    
    
    
    
    
    
    
    177Specific
    
    
    5
    
    
    
    8
    
    
    
    87
    
    
    
    
    
    
    
    100At 31 December 2002General
    
    
    119
    
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    143Specific
    
    
    11
    
    
    
    6
    
    
    
    76
    
    
    
    
    
    
    
    93Total Group provisions at:At 31 December 2004UK
    
    
    67
    
    
    
    151
    
    
    
    168
    
    
    
    81
    
    
    
    467Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At 31 December 2003UK
    
    
    173
    
    
    
    96
    
    
    
    202
    
    
    
    333
    
    
    
    804Non-UK
    
    
    29
    
    
    
    28
    
    
    
    4
    
    
    
    
    
    
    
    61At 31 December 2002UK
    
    
    189
    
    
    
    61
    
    
    
    156
    
    
    
    260
    
    
    
    666Non-UK
    
    
    35
    
    
    
    38
    
    
    
    7
    
    
    
    
    
    
    
    80
 115




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Capital provisions as a percentage of loans and advances to customers: On advancessecured on
    
    
    On otherresidential
    
    
    secured
    
    
    On unsecured
    
    
    On wholesaleproperties
    
    
    advances
    
    
    advances
    
    
    advances
    
    
    TotalGroup
    
    %
    
    
    %
    
    
    %
    
    
    %
    
    
    %At 31 December 2004UK
    
    
    0.1
    
    
    
    5.1
    
    
    
    4.4
    
    
    
    9.4
    
    
    
    0.7Non-UK
    
    
    0.3
    
    
    
    
    
    
    
    67.3
    
    
    
    
    
    
    
    0.4At 31 December 2003UK
    
    
    0.3
    
    
    
    3.4
    
    
    
    4.2
    
    
    
    13.4
    
    
    
    1.0Non-UK
    
    
    1.6
    
    
    
    58.5
    
    
    
    2.7
    
    
    
    
    
    
    
    3.1At 31 December 2002UK
    
    
    0.3
    
    
    
    1.6
    
    
    
    2.3
    
    
    
    3.0
    
    
    
    0.8Non-UK
    
    
    1.1
    
    
    
    59.9
    
    
    
    5.9
    
    
    
    
    
    
    
    2.4CompanyAt 31 December 2004
    
    
    0.1
    
    
    
    0.9
    
    
    
    4.6
    
    
    
    
    
    
    
    0.4At 31 December 2003
    
    
    0.2
    
    
    
    0.8
    
    
    
    3.7
    
    
    
    
    
    
    
    0.4At 31 December 2002
    
    
    0.2
    
    
    
    0.6
    
    
    
    3.5
    
    
    
    
    
    
    
    0.4
 Analysis of movements on suspended interest: On advancessecured on
    
    
    On otherresidential
    
    
    secured
    
    
    On unsecuredproperties
    
    
    advances
    
    
    advances
    
    
    TotalGroup
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    14
    
    
    
    32
    
    
    
    4
    
    
    
    50Disposal of subsidiary undertakings
    
    
    (12
    )
    
    
    (29
    )
    
    
    (1
    )
    
    
    (42
    )Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amounts suspended in the period
    
    
    2
    
    
    
    1
    
    
    
    4
    
    
    
    7Irrecoverable amounts written off
    
    
    (2
    )
    
    
    (2
    )
    
    
    (4
    )
    

    
    (8
    )At 31 December 2004
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    7At 1 January 2003
    
    
    31
    
    
    
    37
    
    
    
    8
    
    
    
    76Disposal of subsidiary undertakings
    
    
    (12
    )
    
    
    
    
    
    
    (3
    )
    
    
    (15
    )Exchange adjustments
    
    
    2
    
    
    
    2
    
    
    
    
    
    
    
    4Amounts suspended in the period
    
    
    2
    
    
    
    2
    
    
    
    5
    
    
    
    9Irrecoverable amounts written off
    
    
    (9
    )
    
    
    (9
    )
    
    
    (6
    )
    
    
    (24
    )At 31 December 2003
    
    
    14
    
    
    
    32
    
    
    
    4
    
    
    
    50At 1 January 2002
    
    
    39
    
    
    
    47
    
    
    
    10
    
    
    
    96Exchange adjustments
    
    
    2
    
    
    
    3
    
    
    
    
    
    
    
    5Acquisitions of subsidiary undertakings
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Amounts suspended in the period
    
    
    
    
    
    
    2
    
    
    
    8
    
    
    
    10Irrecoverable amounts written off
    
    
    (13
    )
    
    
    (15
    )
    
    
    (10
    )
    
    
    (38
    )At 31 December 2002
    
    
    31
    
    
    
    37
    
    
    
    8
    
    
    
    76CompanyAt 31 December 2004
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    7At 31 December 2003
    
    
    1
    
    
    
    2
    
    
    
    3
    
    
    
    6At 31 December 2002
    
    
    13
    
    
    
    2
    
    
    
    4
    
    
    
    19
 116




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The value of loans and advances on which interest has been suspended is as follows: On advancessecured onresidential
    
    
    On other secured
    
    
    On unsecuredproperties
    
    
    advances
    
    
    advances
    
    
    TotalGroup
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004Loans and advances to customers
    
    
    43
    
    
    
    30
    
    
    
    140
    
    
    
    213Provisions on these amounts
    
    
    (7
    )
    
    
    
    
    
    
    (109
    )
    
    
    (116
    )At 31 December 2003Loans and advances to customers
    
    
    90
    
    
    
    117
    
    
    
    111
    
    
    
    318Provisions on these amounts
    
    
    (21
    )
    
    
    (27
    )
    
    
    (72
    )
    
    
    (120
    )CompanyAt 31 December 2004Loans and advances to customers
    
    
    47
    
    
    
    4
    
    
    
    140
    
    
    
    191Provisions on these amounts
    
    
    (7
    )
    
    
    (3
    )
    
    
    (109
    )
    
    
    (119
    )At 31 December 2003Loans and advances to customers
    
    
    38
    
    
    
    6
    
    
    
    95
    
    
    
    139Provisions on these amounts
    
    
    (4
    )
    
    
    (1
    )
    
    
    (69
    )
    
    
    (74
    )
 Analysis of Group non-performing loans and advances The following table presents loans and advances which are classified as non-performing. No
interest is suspended or provisions made in respect of such cases where the Group does not expect
to incur losses. 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mLoans and advances on which a proportion of interest has been
suspended and/or on which specific provision has been made
    
    
    422
    
    
    
    1,632
    
    
    
    669Loans and advances 90 days overdue on which no interest has been
suspended and on which no specific provision has been made
    
    
    801
    
    
    
    1,114
    
    
    
    1,386Non-accruing loans and advances
    
    
    1
    
    
    
    30
    
    
    
    221,224
    
    
    
    2,776
    
    
    
    2,077Non-performing loans and advances as a percentage of total loans and
advances to customers
    
    
    1.48
    %
    
    
    3.25
    %
    
    
    2.36
    %Provisions as a percentage of total non-performing loans and advances
    
    
    38.19
    %
    
    
    31.14
    %
    
    
    35.95
    %
 10. Tax on profit/(loss) on ordinary activities The charge or credit for taxation comprises: 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mUK Corporation tax:Current year
    
    
    78
    
    
    
    57
    
    
    
    252Prior years
    
    
    8
    
    
    
    (112
    )
    
    
    (31
    )Double tax relief
    
    
    
    
    
    
    (7
    )
    
    
    Share of associated undertakings taxation
    
    
    3
    
    
    
    5
    
    
    
    5Overseas taxation
    
    
    
    
    
    
    11
    
    
    
    8Total current tax (credit)/charge
    
    
    89
    
    
    
    (46
    )
    
    
    234Deferred tax:Timing differences, origination and reversal
    
    
    55
    
    
    
    4
    
    
    
    (82
    )144
    
    
    
    (42
    )
    
    
    152
 Factors affecting the charge for taxation for the year: 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mProfit/(loss) on ordinary activities before tax
    
    
    273
    
    
    
    (686
    )
    
    
    (947
    )Taxation at UK corporation tax rate of 30% of (2003: 30%, 2002: 30%)
    
    
    82
    
    
    
    (206
    )
    
    
    (284
    )Effect of non-allowable provisions and other non-equalised items
    
    
    54
    
    
    
    218
    
    
    
    38Amortisation and impairment of goodwill
    
    
    4
    
    
    
    11
    
    
    
    360Capital allowances for the period in excess of depreciation
    
    
    (46
    )
    
    
    (61
    )
    
    
    42Provisions and short term timing differences
    
    
    (19
    )
    
    
    98
    
    
    
    74Effect of non-UK profits and losses
    
    
    5
    
    
    
    6
    
    
    
    36Adjustment to prior year provisions
    
    
    8
    
    
    
    (112
    )
    
    
    (31
    )Effect of loss utilisation
    
    
    
    
    
    
    
    
    
    
    (1
    )Current tax charge for the year
    
    
    89
    
    
    
    (46
    )
    
    
    234
 117




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Factors that may affect future periods tax charges: Future profits in offshore subsidiaries where rates of tax are lower than the standard UK
corporation tax rate will continue to reduce the Group tax charges. However any dividends received
from these offshore subsidiaries will increase future Group tax charges. Future profits or losses on the sale of trading subsidiaries should not be subject to taxation
in the UK under the substantial shareholding exemption and this will have a corresponding impact on
the future Group tax charges. Any future non-allowable provisions and other non-equalised items will increase the future
Group tax charges. 11. Loss/profit on ordinary activities after tax The loss after tax of the Company attributable to the shareholders is £231m (2003: loss £167m;
2002: loss £497m). As permitted by Section 230 of the Companies Act 1985, the Companys Profit and
Loss Account has not been presented in these Consolidated Financial Statements. 12. Dividends 2004
    
    
    2003
    
    
    2002Pence per
    
    
    Pence per
    
    
    Pence per
    
    
    2004
    
    
    2003
    
    
    2002share
    
    
    share
    
    
    share
    
    
    £m
    
    
    £m
    
    
    £mOrdinary shares (equity):Interim (paid)
    
    
    8.33
    
    
    
    8.33
    
    
    
    17.65
    
    
    
    122
    
    
    
    120
    
    
    
    255Final (proposed)
    
    
    
    
    
    
    16.67
    
    
    
    7.35
    
    
    
    
    
    
    
    244
    
    
    
    107Special (paid)
    
    
    31.00
    
    
    
    
    
    
    
    
    
    
    
    461
    
    
    
    
    
    
    
    39.33
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    583
    
    
    
    364
    
    
    
    362Preference shares (non-equity)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    60
    
    
    
    62631
    
    
    
    424
    
    
    
    424
 13. Earnings/(loss) per ordinary share 2004
    
    
    2003
    
    
    2002Profit/(loss) attributable to the shareholders of Abbey National plc (£m)
    
    
    80
    
    
    
    (699
    )
    
    
    (1,161
    )Preference dividends (£m)
    
    
    (48
    )
    
    
    (60
    )
    
    
    (62
    )Profit/(loss) attributable to the ordinary shareholders of Abbey National plc (£m)
    
    
    32
    
    
    
    (759
    )
    
    
    (1,223
    )Weighted average number of ordinary shares in issue during the year  basic (million)
    
    
    1,460
    
    
    
    1,448
    
    
    
    1,442Dilutive effect of share options outstanding (million)
    
    
    9
    
    
    
    9
    
    
    
    8Weighted average number of ordinary shares in issue during the year  diluted (million)
    
    
    1,469
    
    
    
    1,457
    
    
    
    1,450Basic earnings/(loss) per ordinary share (pence)
    
    
    2.2
    p
    
    
    (52.4
    p)
    
    
    (84.8
    p)Diluted earnings/(loss) per ordinary share (pence)
    
    
    2.2
    p
    
    
    (52.4
    p)
    
    
    (84.3
    p)
 In accordance with UITF 13, Accounting for ESOP Trusts, shares held in trust in respect of
certain incentive schemes have been excluded from the calculation of earnings per ordinary share as
the trustees have waived dividend and voting rights. 14. Treasury bills and other eligible bills Group2004
    
    
    2004
    
    
    2003
    
    
    2003Book
    
    
    Market
    
    
    Book
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £mTreasury bills
    
    
    1,922
    
    
    
    1,922
    
    
    
    1,560
    
    
    
    1,560Other eligible bills
    
    
    68
    
    
    
    68
    
    
    
    71
    
    
    
    711,990
    
    
    
    1,990
    
    
    
    1,631
    
    
    
    1,631
 Treasury bills and other eligible bills are held for trading and liquidity management purposes. 118




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 15. Loans and advances to banks Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mItems in the course of collection
    
    
    94
    
    
    
    171
    
    
    
    85
    
    
    
    164Amounts due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    3,381
    
    
    
    3,925Purchase and resale agreements
    
    
    6,397
    
    
    
    5,034
    
    
    
    
    
    
    
    Other loans and advances
    
    
    3,657
    
    
    
    1,950
    
    
    
    139
    
    
    
    12910,148
    
    
    
    7,155
    
    
    
    3,605
    
    
    
    4,218Repayable:On demand
    
    
    2,887
    
    
    
    3,089
    
    
    
    209
    
    
    
    142In not more than 3 months
    
    
    7,197
    
    
    
    4,022
    
    
    
    85
    
    
    
    232In more than 3 months but not more than 1 year
    
    
    63
    
    
    
    11
    
    
    
    322
    
    
    
    546In more than 1 year but not more than 5 years
    
    
    1
    
    
    
    33
    
    
    
    740
    
    
    
    1,337In more than 5 years
    
    
    
    
    
    
    
    
    
    
    2,249
    
    
    
    1,96110,148
    
    
    
    7,155
    
    
    
    3,605
    
    
    
    4,218Banking business
    
    
    3,068
    
    
    
    1,031
    
    
    
    3,605
    
    
    
    4,218Trading business
    
    
    7,080
    
    
    
    6,124
    
    
    
    
    
    
    
    10,148
    
    
    
    7,155
    
    
    
    3,605
    
    
    
    4,218
 The loans and advances to banks in the above table have the following interest rate structures: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mFixed rate
    
    
    7,854
    
    
    
    5,225
    
    
    
    136
    
    
    
    115Variable rate
    
    
    2,187
    
    
    
    1,754
    
    
    
    3,375
    
    
    
    3,939Items in the course of collection (non-interest bearing)
    
    
    107
    
    
    
    176
    
    
    
    94
    
    
    
    16410,148
    
    
    
    7,155
    
    
    
    3,605
    
    
    
    4,218
 The Groups policy is to hedge fixed rate loans and advances to banks to floating rates using
derivative instruments, or by matching with other on-balance sheet interest rate exposures. See
note 51, Derivatives  Non-trading derivatives, for further information. 16. Loans and advances to customers Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mAdvances secured on residential properties
    
    
    76,012
    
    
    
    75,014
    
    
    
    75,114
    
    
    
    71,208Purchase and resale agreements
    
    
    11,257
    
    
    
    9,372
    
    
    
    1,083
    
    
    
    Other secured advances
    
    
    1,642
    
    
    
    2,849
    
    
    
    3,226
    
    
    
    1,300Unsecured advances
    
    
    3,413
    
    
    
    4,441
    
    
    
    
    
    
    
    2,797Wholesale lending
    
    
    880
    
    
    
    2,115
    
    
    
    
    
    
    
    Collateralised and guaranteed mortgage loans
    
    
    5
    
    
    
    48
    
    
    
    
    
    
    
    Amounts due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    434
    
    
    
    76593,209
    
    
    
    93,839
    
    
    
    79,857
    
    
    
    76,070Repayable:On demand or at short notice
    
    
    9,391
    
    
    
    10,844
    
    
    
    1,859
    
    
    
    1,648In not more than 3 months
    
    
    6,240
    
    
    
    3,971
    
    
    
    706
    
    
    
    946In more than 3 months but not more than 1 year
    
    
    2,482
    
    
    
    4,513
    
    
    
    1,930
    
    
    
    2,083In more than 1 year but not more than 5 years
    
    
    11,347
    
    
    
    12,899
    
    
    
    10,270
    
    
    
    10,720In more than 5 years
    
    
    64,216
    
    
    
    62,477
    
    
    
    65,325
    
    
    
    60,950Less: provisions (see note 9)
    
    
    (467
    )
    
    
    (865
    )
    
    
    (233
    )
    
    
    (277
    )93,209
    
    
    
    93,839
    
    
    
    79,857
    
    
    
    76,070Banking business
    
    
    81,852
    
    
    
    84,234
    
    
    
    79,857
    
    
    
    76,070Trading business
    
    
    11,357
    
    
    
    9,605
    
    
    
    
    
    
    
    93,209
    
    
    
    93,839
    
    
    
    79,857
    
    
    
    76,070
 Included within Group unsecured advances in 2003 were two contingent loans owed by the
with-profit sub funds of the long-term business funds of Scottish Mutual Assurance plc and Scottish
Provident Limited to Abbey National Scottish Mutual Assurance Holdings Limited of £571m and £623m
respectively. These loans include accrued interest of £75m and £80m and are subject to provisions
of £76m and £4m, respectively. These loans were repaid in the course of 2004. See note 21,
long-term assurance business, for further information. The loans and advances to customers included in the above table have the following interest
rate structures: 119




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mFixed rate
    
    
    32,502
    
    
    
    30,877
    
    
    
    18,446
    
    
    
    16,590Variable rate
    
    
    61,174
    
    
    
    63,827
    
    
    
    61,644
    
    
    
    59,757Provisions
    
    
    (467
    )
    
    
    (865
    )
    
    
    (233
    )
    
    
    (277
    )93,209
    
    
    
    93,839
    
    
    
    79,857
    
    
    
    76,070
 The Groups policy is to hedge fixed rate loans and advances to customers to floating rates
using derivative instruments, or by matching with other on-balance sheet interest rate exposures.
See note 51, Derivatives  Non-trading derivatives for further information. 17. Loans and advances to customers subject to securitisation Loans and advances to customers include portfolios of residential mortgage loans which are
subject to non-recourse finance arrangements. These loans have been purchased by, or assigned to,
special purpose securitisation companies (Securitisation Companies), and have been funded
primarily through the issue of mortgage-backed securities (Securities). No gain or loss has been
recognised as a result of these sales. These Securitisation Companies are consolidated and included
in the Group financial statements as quasi-subsidiaries. Abbey National plc and its subsidiaries are under no obligation to support any losses that may
be incurred by the Securitisation Companies or holders of the Securities except as described below,
and do not intend to provide such further support. Carfax Insurance Limited, a wholly owned
subsidiary of Abbey National plc, provides mortgage indemnity guarantee insurance to Abbey National
plc. Abbey National plc has assigned its interest under each mortgage indemnity guarantee policy to
the Securitisation Companies, to the extent that it relates to loans comprised in the current
portfolio. Since 1 January 2002 Abbey National plc has not taken out mortgage indemnity guarantee
insurance in relation to new mortgage loans. Holders of the Securities are only entitled to obtain
payment of principal and interest to the extent that the resources of the Securitisation Companies
are sufficient to support such payments, and the holders of the Securities have agreed in writing
not to seek recourse in any other form. Abbey National plc receives payments from the Securitisation Companies in respect of fees for
administering the loans, and payment of deferred consideration for the sale of the loans. In
addition, Abbey National plc has made interest bearing subordinated loans to Holmes Financing
(No.1) plc, Holmes Financing (No.2) plc, Holmes Financing (No.3) plc, Holmes Financing (No.4) plc,
Holmes Financing (No.5) plc, Holmes Financing (No.6) plc, Holmes Financing (No.7) plc and Holmes
Financing (No.8) plc. Abbey National plc does not guarantee the liabilities of the subsidiary which
provides mortgage indemnity guarantee insurance. Abbey National plc is contingently liable to pay
to the subsidiary any unpaid amounts in respect of share capital. At a Group level, a separate
presentation of assets and liabilities is adopted to the extent of the amount of insurance cover
provided by the subsidiary. Abbey National Treasury Services plc has entered into an interest rate swap with Holmes
Funding Limited. This swap in effect converts a proportion of the fixed and variable interest flows
receivable from customers into LIBOR based flows to match the interest payable on the Securities. Abbey National plc has no right or obligation to repurchase the benefit of any securitised
loan, except if certain representations and warranties given by Abbey National plc at the time of
transfer are breached. In April 2004 Holmes Funding Limited acquired, at book value, a beneficial interest in the
trust property vested in Holmes Trustees Limited. This further beneficial interest of £4.0bn was
acquired through borrowing from Holmes Financing (No.8) plc, which funded its advance to Holmes
Funding Limited, principally through the issue of mortgage backed securities. The remaining share
of the beneficial interest in residential mortgage loans held by Holmes Trustees Limited belongs to
Abbey National plc, and amounts to £15.8bn at 31 December 2004. The balances of assets securitised and non-recourse finance at 31 December 2004 were as follows: Gross assets
    
    
    
    
    
    
    Subordinated loanssecuritised
    
    
    Non- recourse finance
    
    
    made by the GroupSecuritisation company
    
    
    Date of securitisation
    
    £m
    
    
    £m
    
    
    £mHolmes Financing (No.1) plc
    
    19 July 2000
    
    
    * 1,520
    
    
    
    1,537
    
    
    
    4Holmes Financing (No.2) plc
    
    29 November 2000
    
    
    * 655
    
    
    
    856
    
    
    
    4Holmes Financing (No.3) plc
    
    23 May 2001
    
    
    * 533
    
    
    
    1,322
    
    
    
    6Holmes Financing (No.4) plc
    
    5 July 2001
    
    
    * 1,546
    
    
    
    1,791
    
    
    
    3Holmes Financing (No.5) plc
    
    8 November 2001
    
    
    * 901
    
    
    
    992
    
    
    
    2Holmes Financing (No.6) plc
    
    7 November 2002
    
    
    * 2,704
    
    
    
    2,878
    
    
    
    2Holmes Financing (No.7) plc
    
    20 March 2003
    
    
    * 1,540
    
    
    
    1,836
    
    
    
    1Holmes Financing (No. 8) plc
    
    1 April 2004
    
    
    3,769
    
    
    
    3,886
    
    
    
    12Retained interest in Holmes
Trustees Limited
    
    
    
    
    
    
    ** 15,808
    
    
    
    
    
    
    
    28,976
    
    
    
    15,098
    
    
    
    34
   *
    
    Represents the interest in the trust property at book value held by Holmes Funding Limited
related to the debt issued by these securitisation companies.**
    
    As part of the master structure trust agreement, a certain proportion of funds is required to be
retained in the trust. 120




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The securitisation vehicles have placed deposits totalling £2,150m representing cash which has
been accumulated to finance the redemption of a number of securities issued by the securitisation
companies. The securitisation companies contractual interest in advances secured on residential
property is therefore reduced by this amount. Abbey National plc does not own directly, or indirectly, any of the share capital of any of
the above securitisation companies or their parents. A summarised profit and loss account for the years ended 31 December 2004, 2003 and 2002 and
an aggregated balance sheet at 31 December 2004 and 2003 for the above companies is set out below: Profit and loss account for the year ended 31 December 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mNet interest income
    
    
    15
    
    
    
    3
    
    
    
    7Other operating income
    
    
    (9
    )
    
    
    (7
    )
    
    
    (8
    )Administrative expenses
    
    
    (1
    )
    
    
    (1
    )
    
    
    Provisions
    
    
    19
    
    
    
    (6
    )
    
    
    (7
    )Profit/(loss) for the financial period
    
    
    24
    
    
    
    (11
    )
    
    
    (8
    )
 Prior years have been restated for a reallocation between administrative expenses and other
operating expenses. Cash flow statement for period ended 31 December 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mNet cash outflow from operating activities
    
    
    (2
    )
    
    
    
    
    
    
    (5
    )Net cash outflow from returns on investment and servicing of finance
    
    
    
    
    
    
    
    
    
    
    Total taxation paid
    
    
    2
    
    
    
    
    
    
    
    Net cash inflow/(outflow) from capital expenditure and financing
investment
    
    
    
    
    
    
    
    
    
    
    Net cash outflow before financing
    
    
    
    
    
    
    
    
    
    
    Net cash inflow from financing
    
    
    
    
    
    
    
    
    
    
    Net (decrease)/increase in cash
    
    
    
    
    
    
    
    
    
    
    (5
    )
 Balance sheet as at 31 December 2004
    
    
    2003£m
    
    
    £mLoans and advances to banks
    
    
    2,982
    
    
    
    1,504Loans and advances to customers
    
    
    13,168
    
    
    
    14,053Prepayments
    
    
    101
    
    
    
    72Total assets
    
    
    16,251
    
    
    
    15,629Deposits by banks
    
    
    540
    
    
    
    547Debt securities in issue
    
    
    15,510
    
    
    
    14,895Accruals and deferred income
    
    
    203
    
    
    
    210Profit and loss account
    
    
    (2
    )
    
    
    (23
    )Total liabilities
    
    
    16,251
    
    
    
    15,629
 18. Net investment in finance leases Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mAmounts receivable
    
    
    1,983
    
    
    
    4,241
    
    
    
    3
    
    
    
    21Less: deferred income
    
    
    (835
    )
    
    
    (1,668
    )
    
    
    
    
    
    
    (3
    )1,148
    
    
    
    2,573
    
    
    
    3
    
    
    
    18Repayable:In not more than 3 months
    
    
    37
    
    
    
    31
    
    
    
    
    
    
    
    1In more than 3 months but not more than 1 year
    
    
    12
    
    
    
    66
    
    
    
    
    
    
    
    4In more than 1 year but not more than 5 years
    
    
    84
    
    
    
    537
    
    
    
    3
    
    
    
    13In more than 5 years
    
    
    1,015
    
    
    
    1,939
    
    
    
    
    
    
    
    1,148
    
    
    
    2,573
    
    
    
    3
    
    
    
    18Cost of assets acquired for the purpose of
letting under finance leases in the year
    
    
    
    
    
    
    176
    
    
    
    
    
    
    
    11Gross rentals receivable
    
    
    135
    
    
    
    611
    
    
    
    
    
    
    
    21Commitments as lessor for the purchase of
equipment for use in finance leases
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
 Provisions for impairment relate to small ticket leasing assets. 121




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 19. Debt securities Group2004
    
    
    2004
    
    
    2003
    
    
    2003Book
    
    
    Market
    
    
    Book
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    valueInvestment securities
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mIssued by public bodies:Government securities
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    125Other public sector securities
    
    
    28
    
    
    
    28
    
    
    
    28
    
    
    
    2828
    
    
    
    28
    
    
    
    153
    
    
    
    153Issued by other issuers:Bank and building society certificates of deposit
    
    
    317
    
    
    
    317
    
    
    
    204
    
    
    
    204Other debt securities
    
    
    361
    
    
    
    379
    
    
    
    1,574
    
    
    
    1,484678
    
    
    
    696
    
    
    
    1,778
    
    
    
    1,688Less: provisions
    
    
    (34
    )
    
    
    
    
    
    
    (178
    )
    
    
    Sub-total  Non-trading book
    
    
    672
    
    
    
    724
    
    
    
    1,753
    
    
    
    1,841Other securitiesIssued by public bodies:Government securities
    
    
    3,359
    
    
    
    3,359
    
    
    
    4,374
    
    
    
    4,374Issued by other issuers:Bank and building society certificates of deposit
    
    
    11,170
    
    
    
    11,170
    
    
    
    15,811
    
    
    
    15,811Other debt securities
    
    
    7,482
    
    
    
    7,482
    
    
    
    8,390
    
    
    
    8,39018,652
    
    
    
    18,652
    
    
    
    24,201
    
    
    
    24,201Sub-total  Trading book
    
    
    22,011
    
    
    
    22,011
    
    
    
    28,575
    
    
    
    28,575Total
    
    
    22,683
    
    
    
    22,735
    
    
    
    30,328
    
    
    
    30,416
 Company2004
    
    
    2004
    
    
    2003
    
    
    2003Book
    
    
    Market
    
    
    Book
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    valueInvestment securities
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mIssued by public bodies:Other public sector securities
    
    
    28
    
    
    
    28
    
    
    
    28
    
    
    
    28Issued by other issuers:Other debt securities
    
    
    377
    
    
    
    377
    
    
    
    452
    
    
    
    452405
    
    
    
    405
    
    
    
    480
    
    
    
    480
 The Company held no securities for purposes other than investment. The investment securities
held by the Company include subordinated investments in subsidiaries of £377m (2003: £432m) and are
included within Other debt securities. Investment securities held by the Group include £nil (2003:
£20m) of subordinated investments in associates and are included within Other debt securities. All of the securities held by the Company are unlisted. Analysed by listing status: Group2004
    
    
    2004
    
    
    2003
    
    
    2003Book
    
    
    Market
    
    
    Book
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    valueInvestment securities
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mListed in the UK
    
    
    370
    
    
    
    422
    
    
    
    701
    
    
    
    673Listed or registered elsewhere
    
    
    255
    
    
    
    257
    
    
    
    161
    
    
    
    223Unlisted
    
    
    47
    
    
    
    45
    
    
    
    891
    
    
    
    945Sub-total  Non-trading book
    
    
    672
    
    
    
    724
    
    
    
    1,753
    
    
    
    1,841Other securitiesListed in the UK
    
    
    1,199
    
    
    
    1,199
    
    
    
    2,015
    
    
    
    2,015Listed or registered elsewhere
    
    
    6,414
    
    
    
    6,414
    
    
    
    7,644
    
    
    
    7,644Unlisted
    
    
    14,398
    
    
    
    14,398
    
    
    
    18,916
    
    
    
    18,916Sub-total  Trading book
    
    
    22,011
    
    
    
    22,011
    
    
    
    28,575
    
    
    
    28,575Total
    
    
    22,683
    
    
    
    22,735
    
    
    
    30,328
    
    
    
    30,416
 122




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Book value of debt securities analysed by maturity: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mDue within 1 year
    
    
    12,996
    
    
    
    20,644
    
    
    
    28
    
    
    
    150Due in more than 1 year but not more than 5 years
    
    
    4,790
    
    
    
    3,712
    
    
    
    
    
    
    
    Due in more than 5 years but not more than 10 years
    
    
    3,920
    
    
    
    4,427
    
    
    
    
    
    
    
    32Due in more than 10 years
    
    
    1,011
    
    
    
    1,723
    
    
    
    377
    
    
    
    298Less: provisions
    
    
    (34
    )
    
    
    (178
    )
    
    
    
    
    
    
    22,683
    
    
    
    30,328
    
    
    
    405
    
    
    
    480
 The movement on debt securities held for investment purposes was as follows: GroupCost
    
    
    Provisions
    
    
    Net book value£m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    1,931
    
    
    
    (178
    )
    
    
    1,753Exchange adjustments
    
    
    (148
    )
    
    
    
    
    
    
    (148
    )Additions
    
    
    1,476
    
    
    
    
    
    
    
    1,476Disposals
    
    
    (1,331
    )
    
    
    93
    
    
    
    (1,238
    )Redemptions and maturities
    
    
    (1,239
    )
    
    
    
    
    
    
    (1,239
    )Transfers to other securities (net)
    
    
    
    
    
    
    (16
    )
    
    
    (16
    )Transfer from profit and loss account
    
    
    
    
    
    
    67
    
    
    
    67Net of amortisation of discounts (premiums)
    
    
    17
    
    
    
    
    
    
    
    17At 31 December 2004
    
    
    706
    
    
    
    (34
    )
    
    
    672
 CompanyCost
    
    
    Provisions
    
    
    Net book value£m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    480
    
    
    
    
    
    
    
    480Exchange Adjustments
    
    
    (43
    )
    
    
    
    
    
    
    (43
    )Disposals
    
    
    (32
    )
    
    
    
    
    
    
    (32
    )At 31 December 2004
    
    
    405
    
    
    
    
    
    
    
    405
 The total net book value of debt securities held for investment purposes at 31 December 2004
includes net unamortised premiums/discounts of £34m (2003: £39m). Included within debt securities are £nil (2003: £5m) of subordinated amounts due from third
parties, which comprise debt securities issued by financial services companies which qualify as
regulatory capital for the issuing company. There are hedges in place in respect of the majority of
fixed rate investment securities whereby the rise or fall in their market value, due to interest
rate movements, will be offset by a substantially equivalent reduction or increase in the value of
the hedges. The Group also purchases credit protection by entering into credit derivative
transactions such as credit default swaps and total return swaps with highly rated banks. In 2003
the Group had purchased protection on a £707m portfolio of high yield assets. Protection had been
purchased from a third party bank, which has in turn purchased protection from Newark (a synthetic
Collateral Debt Obligation) and super senior protection from a super senior Monoline insurer. The
Groups exposure under the structure was £91m. This consisted of a junior note exposure (net of
provisions) of £31m to Newark and a potential exposure with respect to credit spread of £60m. This
structure was unwound in the course of 2004. In prior years Investment debt securities included asset backed and mortgage-backed securities
sold to various bankruptcy-remote special purpose vehicles. The special purpose vehicles were owned directly by charitable trusts and therefore were not
legal subsidiaries of the Group. However they were consolidated into the Group on the basis that
substantially all the rewards inherent in those entities were retained in the Group. The debt security acquisitions by these special purpose vehicles were funded primarily through
the issue of commercial paper to the market. These vehicles were disposed in the course of 2003. An aggregated summary profit and loss account for the years ended 31 December 2004, 2003 and
2002, and an aggregated balance sheet as at 31 December 2004 and 2003 for these entities are shown
below. Profit and loss account for the year ended 31 December 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mInterest receivable
    
    
    
    
    
    
    33
    
    
    
    137Interest payable
    
    
    
    
    
    
    (29
    )
    
    
    (115
    )Net interest income
    
    
    
    
    
    
    4
    
    
    
    22Profit on disposal of investment debt securities
    
    
    
    
    
    
    4
    
    
    
    2Profit for the financial year
    
    
    
    
    
    
    8
    
    
    
    24Amounts charged to entities of the Group
    
    
    
    
    
    
    (8
    )
    
    
    (24
    )Retained profits
    
    
    
    
    
    
    
    
    
    
    
 123




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Balance sheet as at 31 December 2004
    
    
    2003£m
    
    
    £mInvestment debt securities
    
    
    
    
    
    
    Prepayments and accrued income
    
    
    
    
    
    
    Total assets
    
    
    
    
    
    
    Debt securities in issue
    
    
    
    
    
    
    Accruals and deferred income
    
    
    
    
    
    
    Total liabilities
    
    
    
    
    
    
    
 20. Equity shares and other similar interests Group2004
    
    
    2004
    
    
    2003
    
    
    2003Book
    
    
    Market
    
    
    Book
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £mListed in the UK
    
    
    502
    
    
    
    503
    
    
    
    1,164
    
    
    
    1,164Listed elsewhere
    
    
    663
    
    
    
    664
    
    
    
    93
    
    
    
    93Unlisted
    
    
    11
    
    
    
    11
    
    
    
    376
    
    
    
    3761,176
    
    
    
    1,178
    
    
    
    1,633
    
    
    
    1,633Banking business
    
    
    30
    
    
    
    32
    
    
    
    394
    
    
    
    394Trading business
    
    
    1,146
    
    
    
    1,146
    
    
    
    1,239
    
    
    
    1,2391,176
    
    
    
    1,178
    
    
    
    1,633
    
    
    
    1,633
 Company2004
    
    
    2004
    
    
    2003
    
    
    2003Book
    
    
    Market
    
    
    Book
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £mUnlisted
    
    
    1
    
    
    
    1
    
    
    
    2
    
    
    
    2
 The movement on equity shares and other similar interests held for investment purposes was as
follows: GroupCost
    
    
    Provisions
    
    
    Net book value£m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    655
    
    
    
    (261
    )
    
    
    394Exchange adjustments
    
    
    (14
    )
    
    
    5
    
    
    
    (9
    )Additions
    
    
    210
    
    
    
    
    
    
    
    210Disposals
    
    
    (808
    )
    
    
    244
    
    
    
    (564
    )Impairments
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )At 31 December 2004
    
    
    42
    
    
    
    (12
    )
    
    
    30
 There was a small movement on Company equity shares and other similar interests held for
investment purposes during the year. The total amount held was £1m (2003: £2m). There were no
provisions. These amounts exclude investment in subsidiary undertakings. 21. Long-term assurance business The value of the long-term assurance business is as follows: 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mGross of tax basis:Income from long-term assurance business before embedded value changes and rebasing
    
    
    108
    
    
    
    176
    
    
    
    321Embedded value charges and rebasing
    
    
    (32
    )
    
    
    (378
    )
    
    
    (632
    )Income from long-term assurance business after embedded value changes and rebasing
    
    
    76
    
    
    
    (202
    )
    
    
    (311
    )Net of tax basis:Income from long-term assurance business before embedded value changes and rebasing
    
    
    78
    
    
    
    110
    
    
    
    252Embedded value charges and rebasing
    
    
    (94
    )
    
    
    (369
    )
    
    
    (480
    )Income from long-term assurance business after embedded value changes and rebasing
    
    
    16
    
    
    
    (259
    )
    
    
    (228
    )
 The assets and liabilities of the long-term assurance funds are presented separately from those
of other businesses in order to reflect the different nature of the shareholders interest in them. 124




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Financial Statements Notes to the Financial Statementscontinued The value of the long-term assurance business is calculated by discounting the proportion of
surplus which is projected to accrue to shareholders in future years from business currently in
force, and adding the shareholders interest in the surplus retained within the long-term assurance
funds. The basis on which this value is determined is reviewed regularly in the light of the
experience of the business and expectations regarding future economic conditions. The principal long-term economic assumptions used are as follows: 2004
    
    
    2003%
    
    
    %Risk adjusted discount rate (net of tax)
    
    
    8.0
    
    
    
    7.5Return on equities (gross of tax  pension business)
    
    
    7.0
    
    
    
    7.25Return on equities (gross of tax  life business)
    
    
    7.0
    
    
    
    7.25Return on gilts (gross of tax)
    
    
    4.5
    
    
    
    4.75Return on corporate bonds (gross of tax)
    
    
    5.0
    
    
    
    5.25Return on property
    
    
    6.5
    
    
    
    6.75Inflation (indexation)
    
    
    2.75
    
    
    
    2.75Inflation (expenses)
    
    
    3.75
    
    
    
    3.75
 Embedded Value rebasing and other adjustments The embedded value rebasing is made up of two components: Investment assumptions and variances The variance represents the adjustment to allow for differences between actual market performance
and our assumptions set out at the beginning of the year. Overall investment assumptions and
variances have improved by £101m. The improvement shows that investment performance and market
movements were in closer alignment with assumptions. In Scottish Mutual, the cost of £19m
principally reflects realised losses and an adjustment to the assumed value of future profits
following changes in asset mix during the period. The positive £7m Scottish Provident investment
variance is largely driven by a change in asset mix in the non-profit sub-fund out of cash and into
bonds. Other one off adjustments The 2003 results included provisions in relation to the realistic balance sheet position of the
funds. The 2004 results include a partial release of provisions no longer required together with a
reallocation of provisions between entities in the long-term fund, excluding the shareholders
fund. Movement in the embedded value asset is calculated as follows: 2004
    
    
    2003£m
    
    
    £mAt 1 January
    
    
    2,272
    
    
    
    2,316Increase in value of long-term business after tax
    
    
    78
    
    
    
    110Embedded value rebasing and other adjustments
    
    
    (94
    )
    
    
    (369
    )Capital injections
    
    
    
    
    
    
    272Surplus transferred to/(from) long-term business funds
    
    
    712
    
    
    
    (57
    )At 31 December
    
    
    2,968
    
    
    
    2,272
 The assets and liabilities of the long-term assurance funds are: 2004
    
    
    2003£m
    
    
    £mInvestments
    
    
    17,913
    
    
    
    19,570Assets held to cover linked liabilities
    
    
    6,782
    
    
    
    7,041Debtors and prepayments
    
    
    2,893
    
    
    
    3,465Other assets
    
    
    2,656
    
    
    
    1,564Total assets
    
    
    30,244
    
    
    
    31,640Less: Attributable to shareholders
    
    
    3,064
    
    
    
    3,304Total assets attributable to policyholders
    
    
    27,180
    
    
    
    28,336Technical provisions
    
    
    16,601
    
    
    
    18,729Technical provisions for linked liabilities
    
    
    6,998
    
    
    
    7,142Fund for future appropriations
    
    
    898
    
    
    
    (769
    )Other creditors
    
    
    2,683
    
    
    
    3,234Total liabilities attributable to policyholders
    
    
    27,180
    
    
    
    28,336
 These balances are prepared in accordance with applicable UK Accounting Standards under the
historical cost accounting rules modified to include revaluation of investments. The accounts have
also been prepared in accordance with the Statement of Recommended Practice on Accounting for
Insurance Business issued by the Association of British Insurers in November 2003. The amounts of these assets, which are valued at market value, and liabilities of the
long-term assurance funds included in the consolidated balance sheet are based upon the draft life
assurance balance sheets prepared in compliance with the special provisions relating to insurance
groups of section 255A and Schedule 9A to the Companies Act 1985. 125




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Financial Statements Notes to the Financial Statementscontinued Included within other creditors in 2003 above are two contingent loans owed by the with-profit sub
funds of the long-term business funds of Scottish Mutual Assurance plc and Scottish Provident
Limited to Abbey National Scottish Mutual Assurance Holdings Limited of £500m and £619m,
respectively. Accrued interest on these loans amounted to £75m and £80m, respectively. The capital structure of the Life Companies changed significantly in July 2004 following the
completion of Abbeys review of the with-profits funds in Scottish Mutual and Scottish Provident
and its subsequent agreement with the Financial Services Authority. Both contingent loans were
repaid with no incremental capital or adverse profit impact over and above that already reported. A
significant contribution was made to the Scottish Mutual with-profits fund, which was covered by
provisions set up in prior years. In addition, the hedging programme was extended and moved into
the with-profits funds to allow them to stand independently, reducing policyholder and shareholder
risk. 22. Interests and shares in associated undertakings The movement in interests in associated undertakings for 2004 and 2003 was as follows: Group
    
    
    Company£m
    
    
    £mAt 1 January 2004
    
    
    39
    
    
    
    32Additions
    
    
    
    
    
    
    Dividend Received
    
    
    
    
    
    
    (20
    )Share of current year net assets
    
    
    (14
    )
    
    
    At 31 December 2004
    
    
    25
    
    
    
    12At 1 January 2003
    
    
    51
    
    
    
    Additions
    
    
    
    
    
    
    51Dividend Received
    
    
    
    
    
    
    (19
    )Share of current year net assets
    
    
    (12
    )
    
    
    At 31 December 2003
    
    
    39
    
    
    
    32
 The principal associated undertakings at 31 December 2004 are: Group InterestName and nature of business
    
    Issued share capital
    
    %EDS Credit Services Ltd,
Information technology services
    
    5,000 A ordinary shares of £0.01 each and 1,000 B ordinary shares of £0.01 each
    
    
    25PSA Finance plc, Personal finance
    
    40,000,000 £1 ordinary shares
    
    
    50IF Online Group Limited, Information technology services
    
    5,393,191 A ordinary shares of £1 each, 1,000,000 B ordinary shares of £1 each 930,120 Class A ordinary shares of £1 each 38,317 Class C preference shares of £1 each, 1 Founder share of £1 each, and 1 Abbey special share of £1 each
 Abbey National plc acquired PSA Finance plc from First National Bank plc on 1 February 2003. The UK is the principal area of operation of the principal associated undertakings and all are
registered in England and Wales. All associated undertakings are unlisted. EDS Credit Services Limited and PSA Finance plc
have a year end of 31 December. IF Online Group Limited has a year end of 30 November. 23. Shares in Group undertakings 2004
    
    
    2003Net book value
    
    
    Net book value£m
    
    
    £mSubsidiary undertakingsBanks
    
    
    2,486
    
    
    
    2,264Others
    
    
    5,764
    
    
    
    5,9078,250
    
    
    
    8,171
 The movement in shares in Group undertakings was as follows: Cost
    
    
    Impairment
    
    
    Company£m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    10,071
    
    
    
    (1,900
    )
    
    
    8,171Exchange adjustments
    
    
    
    
    
    
    
    
    
    
    Additions
    
    
    13
    
    
    
    (142
    )
    
    
    (129
    )Disposals
    
    
    (122
    )
    
    
    45
    
    
    
    (77
    )Write-back of impairments
    
    
    
    
    
    
    285
    
    
    
    285At 31 December 2004
    
    
    9,962
    
    
    
    (1,712
    )
    
    
    8,250
 Subscriptions for additional share capital in existing subsidiary undertakings during the year
amounted to £13m, including £5m in Abbey National Asset Managers and £5m in Abbey National
Independent Consulting Group. 126




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The write-back of impairments of shares in group undertakings in the year included: Abbey National
Treasury Services plc £285m. This was offset by impairment of shares in group undertakings in the following: Inscape
development £71m, Scottish Mutual International Holdings £35m and AN 123 Limited £25m. These
impairments are only in the Abbey National plc accounts and do not affect the consolidated
accounts. The following table details group undertakings sold in the year and the consideration
received. Date
    
    Company/Business disposed of
    
    
    Consideration5 Mar 2004
    
    Abbey National September Leasing (1) Limited
    
    £
    89m cash10 Mar 2004
    
    Royal St Georges Banque, S.A.
    
    £
    37m cash26 Mar 2004
    
    Abbey National September Leasing (2) Limited
    
    £
    251m cash30 Jun 2004
    
    Asset Finance & Leasing Business
    
    £
    875m cash31 Jul 2004
    
    Abbey National March Leasing (5) Limited
    
    £
    nil17 Sep 2004
    
    Abbey National September Leasing (6) Limited
    
    £
    13m cash21 Oct 2004
    
    Abbey National June Leasing (6) Limited
    
    £
    23m cash16 Nov 2004
    
    Abbey National France S.A.
    
    £
    1,525m cash25 Nov 2004
    
    Porterbrook Leasing Company (Euro) Limited
    
    £
    117m cash3 Dec 2004
    
    Eole Finance S.A.
    
    £
    3m cash9 Dec 2004
    
    Abbey National June Leasing (2) Limited
    
    £
    78m cash9 Dec 2004
    
    Abbey National December Leasing (2) Limited
    
    £
    169m cashTotal cash consideration
    
    
    
    £
    3,180m cash
 The principal subsidiaries of Abbey National plc at 31 December 2004 are shown below, all of
which are directly held and unlisted except where indicated. Nature of business
    
    Country of Incorporation or registrationAbbey National Leasing Companies* (9 companies)
    
    Finance leasing
    
    England & WalesAbbey National Treasury Services plc
    
    Treasury operations
    
    England & WalesAbbey National Unit Trust Managers*
    
    Unit trust management
    
    ScotlandAbbey National Treasury International Ltd*
    
    Personal finance
    
    JerseyCater Allen International Ltd*
    
    Money market and broker dealer
    
    England & WalesScottish Mutual Investment Managers Ltd*
    
    Investment managers
    
    ScotlandCarfax Insurance Ltd
    
    Insurance
    
    GuernseyAbbey National Life plc
    
    Insurance
    
    England & WalesAbbey National PEP and ISA Managers Ltd*
    
    PEP and ISA management
    
    ScotlandScottish Mutual Assurance plc*
    
    Insurance
    
    ScotlandScottish Provident Ltd*
    
    Insurance
    
    ScotlandScottish Mutual Pension Funds Investment Ltd
    
    Investment
    
    ScotlandAbbey National North America Corporation
    
    Funding
    
    United StatesAbbey National Securities Inc
    
    Broker Dealer
    
    United States
   *
    
    Held indirectly through subsidiary companies. All of the above entities have accounting reference dates of 31 December with the exception of
the following: Abbey National March Leasing (1) and (2) Limited (both 31 March); Abbey National
June Leasing (3), Limited (30 June); and Abbey National September Leasing Limited (30 September). All the above companies are included in the Consolidated Financial Statements. The Company
holds directly or indirectly 100% of the issued ordinary share capital of its principal
subsidiaries. All companies operate principally in their country of incorporation or registration.
Abbey National Treasury Services plc also has a branch office in the US. Abbey National plc has
branches in France and the Isle of Man and a representative office in Dubai. 24. Sale of Subsidiary Undertaking On 16 November 2004 the Group sold its 100% interest in the ordinary share capital of Abbey
National France SA. The profit of Abbey National France SA up to the date of disposal was £10m, and
for its last financial year £7m. Net Assets disposed of and the related sales proceeds were as
follows. £mLoans and Advances to Customers
    
    
    1,528Loans and advances to Banks
    
    
    8Other Assets
    
    
    25Deposits by Banks
    
    
    (15
    )Other Liabilities
    
    
    (27
    )Net Assets
    
    
    1,519Goodwill Written Back
    
    
    6Profit on Sale
    
    
    Sales Proceeds
    
    
    1,525Satisfied by cash
    
    
    1,525Net Cash Inflows in respect of sale compriseCash ConsiderationCash at Bank and in Hand Sold
    
    
    1,525
 127




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 25. Intangible fixed assets PurchasedgoodwillGroup£mCostAt 1 January 2004
    
    
    1,073Additions
    
    
    Disposals
    
    
    (6
    )At 31 December 2004
    
    
    1,067Amortisation and impairmentAt 1 January 2004
    
    
    732Charge for the year
    
    
    20Disposals
    
    
    (2
    )Impairments
    
    
    At 31 December 2004
    
    
    750Net book valueAt 31 December 2004
    
    
    317At 31 December 2003
    
    
    341
 Intangible fixed assets comprise positive purchased goodwill arising on acquisitions of
subsidiary undertakings and purchases of businesses made since 1 January 1998. Goodwill included above in respect of all material acquisitions is currently being amortised
over a period of 20 years. Previously, goodwill arising on acquisitions of subsidiary undertakings
and purchases of businesses was taken directly to reserves. In accordance with FRS 11, Impairment of fixed assets and goodwill, the carrying value of
goodwill has been reviewed for impairment if there is some indication that impairment has occurred. The cumulative amount of goodwill taken to the Profit and Loss Account reserve in previous
periods by the Group and not subsequently recognised in the Profit and Loss Account is £613m (2003:
£620m), and by the Company £528m (2003: £528m). 26. Tangible fixed assets excluding operating lease assets GroupPremises
    
    
    Equipment
    
    
    Total£m
    
    
    £m
    
    
    £mCost or valuationAt 1 January 2004
    
    
    43
    
    
    
    982
    
    
    
    1,025Disposals of subsidiary undertakings
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Additions
    
    
    6
    
    
    
    84
    
    
    
    90Disposals
    
    
    (7
    )
    
    
    (41
    )
    
    
    (48
    )At 31 December 2004
    
    
    42
    
    
    
    1,018
    
    
    
    1,060DepreciationAt 1 January 2004
    
    
    9
    
    
    
    748
    
    
    
    757Disposals of subsidiary undertakings
    
    
    
    
    
    
    (6
    )
    
    
    (6
    )Charge for the year
    
    
    3
    
    
    
    78
    
    
    
    81Disposals
    
    
    (2
    )
    
    
    (16
    )
    
    
    (18
    )At 31 December 2004
    
    
    10
    
    
    
    804
    
    
    
    814Net book valueAt 31 December 2004
    
    
    32
    
    
    
    214
    
    
    
    246At 31 December 2003
    
    
    34
    
    
    
    234
    
    
    
    268
 CompanyPremises
    
    
    Equipment
    
    
    Total£m
    
    
    £m
    
    
    £mCost1 January 2004
    
    
    24
    
    
    
    945
    
    
    
    969Disposal of businesses
    
    
    
    
    
    
    
    
    
    
    Additions
    
    
    9
    
    
    
    82
    
    
    
    91Disposals
    
    
    (2
    )
    
    
    (36
    )
    
    
    (38
    )At 31 December 2004
    
    
    31
    
    
    
    991
    
    
    
    1,022DepreciationAt 1 January 2004
    
    
    4
    
    
    
    726
    
    
    
    730Disposal of businesses
    
    
    
    
    
    
    
    
    
    
    Charge for the year
    
    
    3
    
    
    
    75
    
    
    
    78Disposals
    
    
    
    
    
    
    (12
    )
    
    
    (12
    )At 31 December 2004
    
    
    7
    
    
    
    789
    
    
    
    796Net book valueAt 31 December 2004
    
    
    24
    
    
    
    202
    
    
    
    226At 31 December 2003
    
    
    20
    
    
    
    219
    
    
    
    239
 128




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The net book value of Other premises comprises: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mFreeholds
    
    
    7
    
    
    
    9
    
    
    
    
    
    
    
    1Long leaseholds
    
    
    3
    
    
    
    5
    
    
    
    1
    
    
    
    1Short leaseholds
    
    
    22
    
    
    
    20
    
    
    
    22
    
    
    
    17Net book value at 31 December
    
    
    32
    
    
    
    34
    
    
    
    23
    
    
    
    19Of which occupied for own use
    
    
    29
    
    
    
    32
    
    
    
    23
    
    
    
    19The net book value of Other premises includes:Assets held under finance leases
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Depreciation charge for the year on these assets
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Capital expenditure which has been contracted,
but not provided for in the financial
statements
    
    
    13
    
    
    
    38
    
    
    
    13
    
    
    
    38
 27. Operating lease assets Group£mCostAt 1 January 2004
    
    
    3,763Additions
    
    
    316Disposals
    
    
    (766
    )At 31 December 2004
    
    
    3,312Depreciation and impairmentAt 1 January 2004
    
    
    1,234Charge for the year
    
    
    151Disposals
    
    
    (413
    )At 31 December 2004
    
    
    971Net book valueAt 31 December 2004
    
    
    2,341At 31 December 2003
    
    
    2,529
 The net book value of operating lease assets includes residual values at the end of current
lease terms, which will be recovered through reletting or disposal in the following periods: 2004
    
    
    2003£m
    
    
    £mIn not more than 1 year
    
    
    87
    
    
    
    493In more than 1 year but not more than 2 years
    
    
    364
    
    
    
    102In more than 2 years but not more than 5 years
    
    
    347
    
    
    
    432In more than 5 years
    
    
    1,312
    
    
    
    1,2232,110
    
    
    
    2,250Capital expenditure which has been contracted, but not provided for in the financial statements
    
    
    267
    
    
    
    324
 28. Other assets Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mForeign exchange, interest rate, equity & credit contracts:Positive market value of trading derivative contracts (note 51)
    
    
    2,377
    
    
    
    1,643
    
    
    
    
    
    
    
    Translation differences on foreign exchange derivatives used
for hedging purposes
    
    
    214
    
    
    
    209
    
    
    
    
    
    
    
    Debtors and other settlement balances
    
    
    915
    
    
    
    909
    
    
    
    147
    
    
    
    213Introducer fees
    
    
    22
    
    
    
    80
    
    
    
    6
    
    
    
    8Deferred tax asset (note 37)
    
    
    
    
    
    
    
    
    
    
    160
    
    
    
    122Other
    
    
    1,133
    
    
    
    1,321
    
    
    
    980
    
    
    
    6584,661
    
    
    
    4,162
    
    
    
    1,293
    
    
    
    1,001
 129




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 29. Prepayments and accrued income Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mAccrued interest due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    88Unamortised lending-related fees (see note 3)
    
    
    63
    
    
    
    125
    
    
    
    64
    
    
    
    125Other accrued interest
    
    
    812
    
    
    
    831
    
    
    
    187
    
    
    
    197Prepayments and other accruals
    
    
    320
    
    
    
    274
    
    
    
    82
    
    
    
    911,195
    
    
    
    1,230
    
    
    
    379
    
    
    
    501
 Other accrued interest includes interest on dealing assets. 30. Assets subject to sale and repurchase transactions Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities
    
    
    457
    
    
    
    1,968
    
    
    
    
    
    
    
    
 The above amounts are the assets held under sale and repurchase transactions included within
the amounts disclosed in note 19, Debt securities. 31. Deposits by banks Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mItems in the course of transmission
    
    
    161
    
    
    
    204
    
    
    
    161
    
    
    
    191Amounts due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    15,536
    
    
    
    18,589Sale and repurchase agreements
    
    
    6,592
    
    
    
    9,390
    
    
    
    
    
    
    
    Other deposits
    
    
    11,659
    
    
    
    12,531
    
    
    
    
    
    
    
    18,412
    
    
    
    22,125
    
    
    
    15,697
    
    
    
    18,780Repayable:On demand
    
    
    1,166
    
    
    
    5,422
    
    
    
    2
    
    
    
    372In not more than 3 months
    
    
    15,343
    
    
    
    14,766
    
    
    
    13,565
    
    
    
    17,480In more than 3 months but not more than 1 year
    
    
    874
    
    
    
    1,502
    
    
    
    639
    
    
    
    58In more than 1 year but not more than 5 years
    
    
    316
    
    
    
    18
    
    
    
    342
    
    
    
    In more than 5 years
    
    
    713
    
    
    
    417
    
    
    
    1,149
    
    
    
    87018,412
    
    
    
    22,125
    
    
    
    15,697
    
    
    
    18,780Banking business
    
    
    8,578
    
    
    
    1,178
    
    
    
    15,697
    
    
    
    18,780Trading business
    
    
    9,834
    
    
    
    20,947
    
    
    
    
    
    
    
    18,412
    
    
    
    22,125
    
    
    
    15,697
    
    
    
    18,780
 32. Customer accounts Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mRetail deposits
    
    
    61,887
    
    
    
    60,534
    
    
    
    52,919
    
    
    
    51,469Amounts due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    10,394
    
    
    
    3,886Sale and repurchase agreements
    
    
    7,843
    
    
    
    4,602
    
    
    
    
    
    
    
    Other customer accounts
    
    
    9,120
    
    
    
    9,265
    
    
    
    2,597
    
    
    
    2,54578,850
    
    
    
    74,401
    
    
    
    65,910
    
    
    
    57,900Repayable:On demand
    
    
    52,746
    
    
    
    46,847
    
    
    
    57,990
    
    
    
    43,404In not more than 3 months
    
    
    21,293
    
    
    
    21,900
    
    
    
    7,184
    
    
    
    13,526In more than 3 months but not more than 1 year
    
    
    2,116
    
    
    
    2,820
    
    
    
    52
    
    
    
    77In more than 1 year but not more than 5 years
    
    
    1,097
    
    
    
    641
    
    
    
    54
    
    
    
    27In more than 5 years
    
    
    1,598
    
    
    
    2,193
    
    
    
    630
    
    
    
    86678,850
    
    
    
    74,401
    
    
    
    65,910
    
    
    
    57,900Banking business
    
    
    69,348
    
    
    
    63,638
    
    
    
    65,910
    
    
    
    57,900Trading business
    
    
    9,502
    
    
    
    10,763
    
    
    
    
    
    
    
    78,850
    
    
    
    74,401
    

    
    
    65,910
    
    
    
    57,900
 Included in Group and Company customer accounts are amounts due to associated undertakings of
£nil (2003: £15m) and £nil (2003: £15m), respectively. 130




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Contracts involving the receipt of cash on which customers receive an index-linked return are
accounted for in substance as equity index-linked deposits. The current market value of the
contract is reported within Other customer accounts. 33. Debt securities in issue Group2004
    
    
    2004
    
    
    2003
    
    
    2003Book
    
    
    Market
    
    
    Book
    
    
    Marketvalue
    
    
    value
    
    
    value
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £mBonds and medium-term notes
    
    
    13,015
    
    
    
    14,397
    
    
    
    14,939
    
    
    
    14,996Other debt securities in issue
    
    
    8,954
    
    
    
    8,917
    
    
    
    9,895
    
    
    
    9,89721,969
    
    
    
    23,314
    
    
    
    24,834
    
    
    
    24,893
 The market values for medium and long-term debt securities in issue have been determined using
quoted market prices where reliable prices are available. In other cases, market values have been
determined using in-house pricing models, or stated at amortised cost. Company2004
    
    
    2003£m
    
    
    £mBonds and medium-term notes
    
    
    
    
    
    
    Other debt securities in issue
    
    
    4
    
    
    
    44
    
    
    
    4
 Bonds and medium-term notes are repayable: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mIn not more than 3 months
    
    
    410
    
    
    
    4,295
    
    
    
    
    
    
    
    In more than 3 months but not more than 1 year
    
    
    2,060
    
    
    
    1,742
    
    
    
    
    
    
    
    In more than 1 year but not more than 2 years
    
    
    4,468
    
    
    
    2,095
    
    
    
    
    
    
    
    In more than 2 years but not more than 5 years
    
    
    4,688
    
    
    
    4,391
    
    
    
    
    
    
    
    In more than 5 years
    
    
    1,389
    
    
    
    2,416
    
    
    
    
    
    
    
    13,015
    
    
    
    14,939
    
    
    
    
    
    
    
    
 Other debt securities in issue are repayable: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mIn not more than 3 months
    
    
    5,369
    
    
    
    5,114
    
    
    
    
    
    
    
    In more than 3 months but not more than 1 year
    
    
    3,215
    
    
    
    3,573
    
    
    
    
    
    
    
    In more than 1 year but not more than 2 years
    
    
    128
    
    
    
    789
    
    
    
    4
    
    
    
    In more than 2 years but not more than 5 years
    
    
    7
    
    
    
    21
    
    
    
    
    
    
    
    4In more than 5 years
    
    
    235
    
    
    
    398
    
    
    
    
    
    
    
    8,954
    
    
    
    9,895
    
    
    
    4
    
    
    
    4
 34. Other liabilities Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mCreditors and accrued expenses
    
    
    2,417
    
    
    
    2,122
    
    
    
    975
    
    
    
    1,051Short positions in government debt securities and equity shares
    
    
    2,715
    
    
    
    4,303
    
    
    
    
    
    
    
    Taxation
    
    
    37
    
    
    
    (5
    )
    
    
    (64
    )
    
    
    (137
    )Foreign exchange, interest rate, equity & credit contracts:Negative market value of trading derivative contracts (see
note 51)
    
    
    3,665
    
    
    
    4,762
    
    
    
    
    
    
    
    Translation differences on foreign exchange derivatives used
for hedging purposes
    
    
    336
    
    
    
    269
    
    
    
    199
    
    
    
    115Obligations under finance leases all payable in:Less than 1 year
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    11 year to 5 years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,170
    
    
    
    11,452
    
    

    
    1,114
    
    
    
    1,030
 Short positions in government debt securities are mainly held for trading liquidity and hedging
purposes. The market value of short positions in debt securities and equity shares is £2,715m
(2003: £4,303m). 131




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 35. Accruals and deferred income Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mInterest due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    89Other accrued interest
    
    
    1,578
    
    
    
    1,284
    
    
    
    886
    
    
    
    700Deferred income from residential mortgage lending
    
    
    43
    
    
    
    79
    
    
    
    
    
    
    
    Other deferred income
    
    
    108
    
    
    
    219
    
    
    
    14
    
    
    
    341,729
    
    
    
    1,582
    
    
    
    1,008
    
    
    
    823
 During the year, £37m (2003: £45m) of deferred income relating to high loan-to-value lending
was taken to the profit and loss account. Other accrued interest includes interest on dealing liabilities. 36. Provisions for liabilities and charges Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mDeferred taxation (see note 37)
    
    
    550
    
    
    
    690
    
    
    
    
    
    
    
    Other provisions for liabilities and charges (see note 38)
    
    
    320
    
    
    
    146
    
    
    
    224
    
    
    
    100870
    
    
    
    836
    
    
    
    224
    
    
    
    100
 37. Deferred taxation Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mTax effect of timing differences due to:Excess of capital allowances over depreciation
    
    
    (68
    )
    
    
    (64
    )
    
    
    (60
    )
    
    
    (54
    )Other
    
    
    (75
    )
    
    
    (98
    )
    
    
    (100
    )
    
    
    (68
    )Capital allowances on finance lease receivables
    
    
    693
    
    
    
    852
    
    
    
    
    
    
    
    550
    
    
    
    690
    
    
    
    (160
    )
    
    
    (122
    )
 Group
    
    
    Company£m
    
    
    £mAt 1 January 2004
    
    
    690
    
    
    
    (122
    )Transfer from profit and loss account
    
    
    55
    
    
    
    (38
    )Disposals of subsidiary undertakings
    
    
    (195
    )
    
    
    At 31 December 2004
    
    
    550
    
    
    
    (160
    )Deferred tax asset (see note 28)

    
    
    
    
    
    
    (160
    )Deferred tax liabilities
    
    
    550
    
    
    
    
 38. Other provisions for liabilities and charges GroupPension andother similar
    
    
    Provisions for
    
    
    Other provisionsobligations(1)
    
    
    commitments(2)
    
    
    (3)
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    7
    
    
    
    24
    
    
    
    115
    
    
    
    146Transfer from profit and loss account
    
    
    123
    
    
    
    17
    
    
    
    201
    
    
    
    341Pension contributions/provisions utilised
    
    
    (95
    )
    
    
    (3
    )
    
    
    (58
    )
    
    
    (156
    )Provision reversed
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (11
    )At 31 December 2004
    
    
    24
    
    
    
    38
    
    
    
    258
    
    
    
    320
 CompanyPension andother similar
    
    
    Provisions for
    
    
    Other provisionsobligations(1)
    
    
    commitments(2)
    
    
    (3)
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    (28
    )
    
    
    20
    
    
    
    108
    
    
    
    100Transfer from profit and loss account
    
    
    104
    
    
    
    17
    
    
    
    153
    
    
    
    274Pension contributions/provisions utilised
    
    
    (76
    )
    
    
    (6
    )
    
    
    (68
    )
    
    
    (150
    )At 31 December 2004
    
    
    
    
    
    
    31
    
    
    
    193
    
    
    
    224
 132




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The £202m charge shown in the Profit and Loss Account in respect of provisions for contingent
liabilities and commitments comprises the amounts transferred from the Profit and Loss Account and
unutilised provisions reversed for provisions for commitments, pension misselling compensation and
other provisions. (1) Pension and other similar obligations The above balance represents the difference between amounts paid to the respective pension schemes
of the Group and amounts charged to the Profit and Loss Account in accordance with SSAP 24,
Accounting for pension costs. In addition to pension and other similar obligations included in the above table, a balance in
respect of the pension surplus acquired with the purchase of the business of National and
Provincial Building Society (N&P) is included within other assets. This balance, which was £13m
(2003: £15m) at 31 December 2004, is being amortised over the remaining service lives of employees
contributing to the scheme, and £2m (2003: £2m) was charged to the profit and loss account in the
year ended 31 December 2004. See also note 53, Retirement benefits. (2) Provisions for commitments This comprises amounts in respect of committed expenditure, including amounts in respect of vacant
premises. (3) Other provisions Other provisions principally comprise amounts in respect of litigation and related expenses and
various other claims with respect to product misselling exposures. 39. Subordinated liabilities including convertible debt Group2004
    
    
    2003£m
    
    
    £mDated subordinated liabilities:Subordinated guaranteed floating rate notes 2003 (US $100m)Subordinated collared floating rate notes 2004 (CAN $100m)
    
    
    
    
    
    
    438.75% Subordinated guaranteed bond 2004
    
    
    
    
    
    
    1508.2% Subordinated bond 2004 (US $500m)
    
    
    
    
    
    
    2806.69% Subordinated bond 2005 (US $750m)
    
    
    388
    
    
    
    42010.75% Subordinated bond 2006
    
    
    100
    
    
    
    100Subordinated guaranteed floating rate step-up notes 2009 (Swiss Fr 130m)
    
    
    
    
    
    
    595.00%
Subordinated bond 2009 (511.3m)
    
    
    360
    
    
    
    3594.625% Subordinated notes 2011 (500m)
    
    
    352
    
    
    
    35211.50% Subordinated guaranteed bond 2017
    
    
    149
    
    
    
    14910.125% Subordinated guaranteed bond 2023
    
    
    149
    
    
    
    1497.57% Subordinated notes 2029 (US $1,000m)
    
    
    512
    
    
    
    5546.50% Subordinated notes 2030
    
    
    149
    
    
    
    1497.25% Subordinated notes 2021
    
    
    200
    
    
    
    200Callable capped subordinated floating rate notes 2012 (US $50m)
    
    
    26
    
    
    
    28Callable subordinated floating rate notes 2012 (US $50m)
    
    
    26
    
    
    
    28Callable subordinated floating rate notes 2012 (500m)
    
    
    352
    
    
    
    352
 Group2004
    
    
    2003£m
    
    
    £mUndated subordinated liabilities:10.0625% Exchangeable subordinated capital securities
    
    
    200
    
    
    
    1997.35% Perpetual subordinated reset capital securities (US $500m)
    
    
    258
    
    
    
    2797.25% Perpetual subordinated capital securities (US $150m)
    
    
    
    
    
    
    847.10% Perpetual callable subordinated notes (US $150m)
    
    
    
    
    
    
    847.00% Perpetual subordinated capital securities (US $250m)
    
    
    
    
    
    
    1406.70% Perpetual subordinated reset capital securities (US $500m)
    
    
    258
    
    
    
    2796.00% Step-down Perpetual callable subordinated notes (100m)
    
    
    70
    
    
    
    715.56% Subordinated guaranteed notes (YEN 15,000m)
    
    
    76
    
    
    
    795.50% Subordinated guaranteed notes (YEN 5,000m)
    
    
    25
    
    
    
    26Fixed/Floating rate subordinated notes (YEN 5,000m)
    
    
    25
    
    
    
    267.50% 10 Year step-up perpetual subordinated notes
    
    
    322
    
    
    
    3217.50% 15 Year step-up perpetual subordinated notes
    
    
    425
    
    
    
    4257.38% 20 Year step-up perpetual subordinated notes
    
    
    173
    
    
    
    1737.13% 30 Year step-up perpetual subordinated notes
    
    
    279
    
    
    
    2797.13% Fixed to floating rate perpetual subordinated notes (400m)
    
    
    281
    
    
    
    2807.25% Perpetual callable subordinated notes (US $400m)
    
    
    205
    
    
    
    2205,360
    
    
    
    6,337
 133




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Company2004
    
    
    2003£m
    
    
    £mDated subordinated liabilities:Subordinated floating rate notes 2003 (US $75m)Subordinated floating rate notes 2004 (US $74m)*
    
    
    
    
    
    
    41Subordinated floating rate notes 2004*
    
    
    
    
    
    
    150Subordinated floating rate notes 2004 (US $500m)*
    
    
    
    
    
    
    2806.69% Subordinated bond 2005 (US $750m)
    
    
    388
    
    
    
    42010.75% Subordinated bond 2006
    
    
    100
    
    
    
    100Subordinated floating rate notes 2009 (US $102m)*
    
    
    
    
    
    
    57Subordinated floating rate notes 2009 (511.3m)
    
    
    359
    
    
    
    3594.625% Subordinated notes 2011 (500m)
    
    
    352
    
    
    
    35211.59% Subordinated loan stock 2017*
    
    
    149
    
    
    
    15010.18% Subordinated loan stock 2023*
    
    
    149
    
    
    
    1507.57% Subordinated notes 2029 (US $1,000m)
    
    
    512
    
    
    
    5546.50% Subordinated notes 2030
    
    
    149
    
    
    
    1498.96% Subordinated notes 2030 (US $1,000m)**
    
    
    514
    
    
    
    554Callable capped subordinated floating rate notes 2012 (US $50m)
    
    
    26
    
    
    
    28Callable subordinated floating rate notes 2012 (US $50m)
    
    
    26
    
    
    
    28Callable subordinated floating rate notes 2012 (500m)
    
    
    352
    
    
    
    352
 Company2004
    
    
    2003£m
    
    
    £mUndated subordinated liabilities:10.0625% Exchangeable subordinated capital securities
    
    
    200
    
    
    
    1997.35% Perpetual subordinated reset capital securities (US $500m)
    
    
    258
    
    
    
    2797.25% Perpetual subordinated capital securities (US $150m)
    
    
    
    
    
    
    847.10% Perpetual callable subordinated notes (US $150m)
    
    
    
    
    
    
    847.00% Perpetual subordinated capital securities (US $250m)
    
    
    
    
    
    
    1406.70% Perpetual subordinated reset capital securities (US $500m)
    
    
    258
    
    
    
    2796.00% Step-down perpetual callable subordinated notes (100m)
    
    
    70
    
    
    
    715.56% Subordinated guaranteed notes (YEN 15,000m)
    
    
    76
    
    
    
    795.50% Subordinated guaranteed notes (YEN 5,000m)
    
    
    25
    
    
    
    26Fixed/Floating rate subordinated notes (YEN 5,000m)
    
    
    25
    
    
    
    267.50% 10 Year step-up perpetual subordinated notes
    
    
    322
    
    
    
    3217.50% 15 Year step-up perpetual subordinated notes
    
    
    425
    
    
    
    4257.38% 20 Year step-up perpetual subordinated notes
    
    
    173
    
    
    
    1737.13% 30 Year step-up perpetual subordinated notes
    
    
    279
    
    
    
    2797.13% Fixed to floating rate perpetual subordinated notes (400m)
    
    
    281
    
    
    
    2807.25% Perpetual callable subordinated notes (US $400m)
    
    
    205
    
    
    
    2205,673
    
    
    
    6,689
   *
    
    These represent the on-lending to the Company, on a subordinated basis, of issues by
subsidiary companies.**
    
    This represents the on-lending to the Company, on a subordinated basis, of the issue of
preferred securities (see note 41). The subordinated floating rate notes pay a rate of interest related to the LIBOR of the
currency of denomination. The 10.0625% Exchangeable subordinated capital securities are exchangeable into fully paid
10.375% non-cumulative non-redeemable sterling preference shares of £1 each, at the option of
Abbey. Exchange may take place on any interest payment date providing that between 30 and 60 days
notice has been given to the holders. The holders will receive one new sterling preference share
for each £1 principal amount of capital securities held. Note 42 details the rights attaching to
these shares, as they are the same. The 7.35% Perpetual subordinated reset capital securities are redeemable at par, at the option
of Abbey, on 15 October 2006 and each fifth anniversary thereafter. The 7.25% Perpetual subordinated capital securities were redeemed at par on the 15 June 2004. The 7.10% Perpetual callable subordinated notes were redeemed at par on the 12 March 2004. The 7.00% Perpetual subordinated capital securities were redeemed at par on the 29 April 2004. The 6.70% Perpetual subordinated reset capital securities are redeemable at par, at the option
of Abbey, on 15 June 2008 and each fifth anniversary thereafter. The 6.00% Step-down perpetual callable subordinated notes are redeemable at par, at the option
of Abbey, on each interest payment date. The 5.56% Subordinated guaranteed notes are redeemable at par, at the option of Abbey, on 31
January 2015 and each fifth anniversary thereafter. The 5.50% Subordinated guaranteed notes are redeemable at par, at the option of Abbey, on 27
June 2015 and each fifth anniversary thereafter. The Fixed/Floating rate subordinated notes are redeemable at par, at the option of Abbey, on
27 December 2016 and each interest payment date anniversary thereafter. 134




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The 7.50% 10 Year step-up perpetual subordinated notes are redeemable at par, at the option of
Abbey, on 28 September 2010 and each fifth anniversary thereafter. The 7.50% 15 Year step-up perpetual subordinated notes are redeemable at par, at the option of
Abbey, on 28 September 2015 and each fifth anniversary thereafter. The 7.38% 20 Year step-up perpetual subordinated notes are redeemable at par, at the option of
Abbey, on 28 September 2020 and each fifth anniversary thereafter. The 7.13% 30 Year step-up perpetual subordinated notes are redeemable at par, at the option of
Abbey, on 30 September 2030 and each fifth anniversary thereafter. The 7.13% Fixed to Floating rate perpetual subordinated notes are redeemable at par, at the
option of Abbey, on 28 September 2010 and each fifth anniversary thereafter. The 7.25% perpetual callable subordinated notes are redeemable at par, at the option of Abbey,
at any time on or after 15 August 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 United Kingdom, at their principal amount together with any accrued interest. Subordinated liabilities including convertible debt securities in issue are repayable: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mIn 1 year or less
    
    
    388
    
    
    
    473
    
    
    
    388
    
    
    
    472In more than 1 year but not more than 2 years
    
    
    100
    
    
    
    420
    
    
    
    100
    
    
    
    420In more than 2 years but not more than 5 years
    
    
    360
    
    
    
    100
    
    
    
    360
    
    
    
    100In more than 5 years
    
    
    1,915
    
    
    
    2,379
    
    
    
    2,228
    
    
    
    2,733Undated
    
    
    2,597
    
    
    
    2,965
    
    
    
    2,597
    
    
    
    2,9645,360
    
    
    
    6,337
    
    
    
    5,673
    
    
    
    6,689
 Subordinated liabilities including convertible debt issued by the Group have a market value,
calculated using quoted market prices where available, of £5,656m (2003: £7,068m). 40. Other long-term capital instruments Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mOther long-term capital instruments
    
    
    722
    
    
    
    742
    
    
    
    722
    
    
    
    742
 Other long-term capital instruments comprise £300m Step-up Callable Perpetual Reserve Capital
Instruments (RCIs), $500m tier One Perpetual Subordinated Debt Securities (Securities) and £175m
Fixed/Floating Rate Tier One Preferred Income Capital Securities (TOPICs). £300m Step-up Callable Perpetual Reserve Capital Instruments The Reserve Capital Instruments were issued in 2001 by Abbey National plc. Reserve Capital
Instruments are redeemable by Abbey on 14 February 2026 or on each coupon payment date thereafter,
subject to the prior approval of the Financial Services Authority and provided that the auditors
have reported to the Trustee within the previous six months that the solvency condition is met. The Reserve Capital Instruments bear interest at a rate of 7.037% per annum, payable annually
in arrears, from 14 February 2001 to 14 February 2026. Thereafter, the reserve capital instruments
will bear interest at a rate, reset every five years, of 3.75% per annum above the gross redemption
yield on the UK five year benchmark gilt rate. $500m Tier One Perpetual Subordinated Debt Securities The Securities were issued on 8 August 2002 by Abbey National plc. The Securities have no maturity
date. However, Abbey National plc has the option to redeem the Securities in whole, but not in part
on 15 September 2007 or on each coupon payment date thereafter. The Securities bear interest at a rate of 7.375% per annum, payable in US dollars quarterly in
arrears. £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities The Tier One Preferred Income Capital Securities were issued on 9 August 2002 by Abbey National
plc. The Tier One Preferred Income Capital Securities are redeemable by Abbey National plc in whole
but not in part on 9 February 2018 or on each coupon payment date thereafter, subject to the prior
approval of the Financial Services Authority. The Tier One Preferred Income Capital Securities bear interest at a rate of 6.984% par annum,
payable semi-annually in arrears. From (and including) 9 February 2018, the Tier One Preferred
Income Capital Securities will bear interest, at a rate reset semi-annually of 1.86% per annum
above the six-month sterling LIBOR rate, payable semi-annually in arrears. 135




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The Reserve Capital Instruments, Securities and Tier One Preferred Income Capital Securities are
not redeemable at the option of the holders and the holders do not have any rights against other
Abbey Group companies. Upon the occurrence of certain tax or regulatory events, the Reserve Capital
Instruments may be exchanged, their terms varied, or redeemed. Interest payments may be deferred, but Abbey National plc may not declare or pay dividends on
or redeem or repurchase any junior securities until Abbey National plc next make a scheduled
payment on the Reserve Capital Instruments, Securities and Tier One Preferred Income Capital
Securities. The Reserve Capital Instruments, Securities and Tier One Preferred Income Capital Securities
are unsecured securities of Abbey National plc and are subordinated to the claims of unsubordinated
creditors and subordinated creditors holding Abbey National plc loan capital. Upon the winding up
of Abbey National plc, the holder of each Reserve Capital Instruments, Securities and Tier One
Preferred Income Capital will rank pari passuwith the holders of the most senior class or classes
of preference shares (if any) of Abbey National plc then in issue and in priority to all other
Abbey shareholders. 41. Minority interests  non-equity Abbey National First Capital BV, Abbey National Capital Trust I, Abbey National Capital Trust
II, Abbey National Capital LP I and Abbey National Capital LP II are each 100% owned finance
subsidiaries of Abbey National plc. Abbey National First Capital BV has registered with the
Securities and Exchange Commission and issued to the public subordinated notes and medium-term
notes that have been fully and unconditionally guaranteed by Abbey National plc. Abbey National
Capital Trust I and Abbey National Capital Trust II have registered trust preferred securities, and
Abbey National Capital LP I and Abbey National Capital LP II have registered partnership preferred
securities, for issuance in the US. Abbey National Capital Trust I and Abbey National Capital Trust
II each serve solely as passive vehicles holding the partnership preferred securities issued by
Abbey National Capital LP I and Abbey National Capital LP II, respectively, and each has passed all
the rights relating to such partnership preferred securities to the holders of the issued trust
preferred securities. All of the trust preferred securities and the partnership preferred
securities have been fully and unconditionally guaranteed on a subordinated basis by Abbey National
plc. Abbey National Capital Trust I has issued to the public US $1,000,000,000 of 8.963%
Non-Cumulative Trust Preferred Securities. There are no significant restrictions on the ability of
Abbey National plc to obtain funds, by dividend or loan, from any subsidiary. After 30 June 2030,
the distribution rate on the preferred securities will be at the rate of 2.825% per annum above the
three-month US $ LIBOR rate for the relevant distribution period. The 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 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. 42. Called up share capital and share premium account Ordinary shares
    
    
    Preference
    
    
    Preference
    
    
    Preferenceof 10 pence
    
    
    shares of
    
    
    shares of
    
    
    shares ofeach
    
    
    £1 each
    
    
    US$0.01 each
    
    
    0.01 each
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAuthorised share capitalAt 31 December 2003
    
    
    175
    
    
    
    1,000
    
    
    
    6
    
    
    
    6
    
    
    
    1,187At 31 December 2004
    
    
    175
    
    
    
    1,000
    
    
    
    6
    
    
    
    6
    
    
    
    1,187Issued and fully paid share capitalAt 31 December 2003
    
    
    146
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    471At 31 December 2004
    
    
    148
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    473Share premium accountAt 1 January 2004
    
    
    1,752
    
    
    
    10
    
    
    
    297
    
    
    
    
    
    
    
    2,059Shares issued
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105Redemptions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortisation of issue costs
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Transfer from profit and loss reserve
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )At 31 December 2004
    
    
    1,857
    
    
    
    10
    
    
    
    297
    
    
    
    
    
    
    
    2,164
 136




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Ordinary shares
    
    
    Preference
    
    
    Preference
    
    
    Preferenceof 10 pence
    
    
    shares of
    
    
    shares of
    
    
    shares ofeach
    
    
    £1 each
    
    
    US$0.01 each
    
    
    0.01 each
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAuthorised share capitalAt 31 December 2002
    
    
    175
    
    
    
    1,000
    
    
    
    6
    
    
    
    6
    
    
    
    1,187At 31 December 2003
    
    
    175
    
    
    
    1,000
    
    
    
    6
    
    
    
    6
    
    
    
    1,187Issued and fully paid share capitalAt 31 December 2002
    
    
    146
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    471At 31 December 2003
    
    
    146
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    471Share premium accountAt 1 January 2003
    
    
    1,732
    
    
    
    9
    
    
    
    414
    
    
    
    
    
    
    
    2,155Shares issued
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Redemptions
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    (116
    )Amortisation of issue costs
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (2
    )Transfer from profit and loss reserve
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    2At 31 December 2003
    
    
    1,752
    
    
    
    9
    
    
    
    298
    
    
    
    
    
    
    
    2,059
 Ordinary shares
    
    
    Preference
    
    
    Preference
    
    
    Preferenceof 10 pence
    
    
    shares of
    
    
    shares of
    
    
    shares ofeach
    
    
    £1 each
    
    
    US$0.01 each
    
    
    0.01 each
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAuthorised share capitalAt 31 December 2001
    
    
    175
    
    
    
    1,000

    
    
    
    6
    
    
    
    6
    
    
    
    1,187At 31 December 2002
    
    
    175
    
    
    
    1,000
    
    
    
    6
    
    
    
    6
    
    
    
    1,187Issued and fully paid share capitalAt 31 December 2001
    
    
    145
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    470At 31 December 2002
    
    
    146
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    471Share premium accountAt 1 January 2002
    
    
    1,627
    
    
    
    9
    
    
    
    414
    
    
    
    
    
    
    
    2,050Shares issued
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98Capitalisation of reserves in
respect of shares issued via QUEST
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Amortisation of issue costs
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    3Transfer from profit and loss reserve
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (3
    )At 31 December 2002
    
    
    1,732
    
    
    
    9
    
    
    
    414
    
    
    
    
    
    
    
    2,155
 Under the Companys Executive, All Employee and Sharesave Schemes, employees hold options to
subscribe for 17,675,567 (2003: 52,418,724) ordinary shares at prices ranging from 420 to 644 pence
per share, exercisable up to April 2014. In addition, 17,791,398 ordinary shares were issued in
lieu of cash for dividends in 2004, in accordance with the terms of the Alternative Dividend Plan. The Qualifying Employee Share Trust operates in conjunction with the Sharesave Scheme by
acquiring shares in the Company and using them to satisfy Sharesave options, by delivering the
shares to the employees on payment of the option price. The shares were all transferred by the Qualifying Employee Share Trust to participants in
Abbeys Sharesave Scheme in satisfaction of their options. The price paid by option holders,
including executive Directors, was 997 pence per share (three year options), 989 pence per share
(five year options) and 607 pence per share (seven year options). The Companys contribution has
been included as a capitalisation of reserves. Abbey National plc sponsored the Abbey National ESOP Trust, a discretionary trust for the
benefit of employees and former employees of the Abbey Group and the AN Employee Trust, a
discretionary trust for the benefit of Directors and former Directors of Abbey National plc. The
Company has provided £nil to the trustees of Abbey National ESOP Trust and £nil to the trustees of
Abbey National Trust, interest free irrevocable loans and gifts of £nil and £nil respectively, to
enable them to purchase Abbey National plc ordinary shares, which are used to satisfy options and
share awards granted by the Company to meet its commitments arising under employee and Directors
share schemes. Under the terms of the trusts, the trustees have waived all but a nominal dividend
on the shares they hold. The cost of providing these shares, less any amounts paid by employees or
Directors, is charged to the profit and loss account on a systematic basis over the relevant
performance period for the employees and Directors. At 31 December 2004 and 2003 the number and
value of shares held were: AN ESOP Trust
    
    
    AN Employee Trust2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mNumber of shares held (000)
    
    
    
    
    
    
    7,613
    
    
    
    
    
    
    
    1,530Book value of shares held
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    13Market value of shares held
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    8
 137




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Prior to 2003 such shares were held as an asset within other assets on the balance sheet at the
lower of cost and net realisable value with any impairments being taken to the profit and loss
account. With the issue of UITF 38 Accounting for ESOP Trusts such shares are now held at cost and
treated as treasury shares and are taken as a deduction from shareholders equity. The 2003 Profit
and Loss Account and Balance Sheet have been restated accordingly. As of 31 December 2004 there were 780 shareholders. The following tables show an analysis of
their holdings: Size of shareholding
    
    Shareholders
    
    
    Number of ordinary shares of 10 pence each1-100
    
    
    
    
    
    
    101-1,000
    
    
    
    
    
    
    1,001+
    
    
    1
    
    
    
    1,485,893,6361
    
    
    
    1,485,893,636
 Size of shareholding
    
    Shareholders
    
    
    Preference shares of £1 each1-100
    
    
    1
    
    
    
    198101-1,000
    
    
    8
    
    
    
    31,0371,001+
    
    
    738
    
    
    
    324,968,765747
    
    
    
    325,000,000
 Size of shareholding
    
    Shareholders
    
    
    Preference shares of US$0.01 each1-100
    
    
    
    
    
    
    101-1,000
    
    
    28
    
    
    
    12,4601,001+
    
    
    4
    
    
    
    17,987,54032
    
    
    
    18,000,000
 Sterling preference shares Holders of the sterling preference shares are entitled to receive a biannual non-cumulative
preferential dividend payable in sterling out of the distributable profits of the Company. The rate
per annum will ensure that the sum of the dividend payable on such date and the associated tax
credit (as defined in the terms of the sterling preference shares) represents an annual rate of 8
5/8% per annum of the nominal amount of shares issued in 1997, and an annual rate of 10 3/8% for
shares issued in 1995 and 1996. On a return of capital or on a distribution of assets on a winding
up, the sterling preference shares shall rank pari passuwith any other shares that are expressed
to rank pari passutherewith as regards participation in assets, and otherwise in priority to any
other share capital of the Company. On such a return of capital or winding up, each sterling preference share shall, out of the
surplus assets of the Company available for distribution amongst the members after payment of the
Companys liabilities, carry the right to receive an amount equal to the amount paid up or credited
as paid together with any premium paid on issue and the full amount of any dividend otherwise due
for payment. Other than as set out above, no sterling preference share confers any right to participate on
a return of capital or a distribution of assets of the Company. Holders of the sterling preference shares are not entitled to receive notice of or attend,
speak and vote at general meetings of the Company unless the business of the meeting includes the
consideration of a resolution to wind up the Company or any resolution varying, altering or
abrogating any of the rights, privileges, limitations or restrictions attached to the sterling
preference shares or if the dividend on the sterling preference shares has not been paid in full
for the three consecutive dividend periods immediately prior to the relevant general meeting. In any such case, the sterling preference shareholders are entitled to receive notice of and
attend the general meeting at which such resolution is proposed and will be entitled to speak and
vote on such a resolution but not on any other resolution. US dollar preference shares Holders of the US dollar preference shares issued on 8 November 2001 are entitled to receive a
quarterly non-cumulative preferential dividend payable in US dollars out of the distributable
profits of the Company payable at the fixed rate of US$1.84375 per share annually (or 7.375% of the
US$25 offer price). The US dollar preference shares are redeemable, in whole or in part, at the option of Abbey at
any time and from time to time after five years and one day after the date of original issue. On a return of capital or on a distribution of assets on a winding up, the US dollar
preference shares shall rank pari passuwith any other shares that are expressed to rank pari passu
therewith as regards participation in assets, and otherwise in priority to any other share capital
of the Company. On such a return of capital or winding up, each US dollar preference share shall,
out of the surplus assets of the Company available for distribution amongst the members after
payment of the Companys liabilities, carry the right to receive an amount equal to $25, payable in
US dollars together with any accrued and unpaid dividends at that time. Other than as set out above, no US dollar preference share confers any right to participate in
a return of capital or a distribution of assets of the Company. Holders of the US dollar preference shares are not entitled to receive notice of or attend, speak
and vote at general meetings of the Company unless the business of the meeting includes the
consideration of a resolution to wind up the Company or any resolution varying, altering or
abrogating any of the rights, privileges, limitations or restrictions attached to 138




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued the US-dollar preference shares or if the dividend on the US-dollar preference shares has not been
paid in full for the six consecutive quarters immediately prior to the relevant general meeting. In any such case, the US dollar preference shareholders are entitled to receive notice of and
attend the general meeting at which such resolution is proposed and will be entitled to speak and
vote on such a resolution but not on any other resolution. 43. Reserves and profit and loss account Profit and loss accountGroup
    
    
    Company£m
    
    
    £mAt 1 January 2004
    
    
    2,527
    
    
    
    2,306(Loss) retained for the financial year
    
    
    (504
    )
    
    
    (862
    )Write-off of goodwill previously taken to reserves
    
    
    6
    
    
    
    Exchange differences
    
    
    (2
    )
    
    
    Transfer to share premium
    
    
    1
    
    
    
    1Share option compensation costs taken to reserves
    
    
    (4
    )
    
    
    (3
    )Transfer to treasury share reserve
    
    
    (43
    )
    
    
    At 31 December 2004
    
    
    1,981
    
    
    
    1,442
 Profit and loss accountGroup
    
    
    Company£m
    
    
    £mAt 1 January 2003
    
    
    3,650
    
    
    
    2,895(Loss) retained for the financial year
    
    
    (1,323
    )
    
    
    (591
    )Write-off of goodwill previously taken to reserves
    
    
    5
    
    
    
    Goodwill transferred to profit and loss account during the year
    
    
    190
    
    
    
    Exchange differences
    
    
    (1
    )
    
    
    (4
    )Transfer to share premium
    
    
    (2
    )
    
    
    (2
    )Share option compensation costs taken to reserves
    
    
    8
    
    
    
    8At 31 December 2003
    
    
    2,527
    
    
    
    2,306
 Profit and loss accountGroup
    
    
    Company£m
    
    
    £mAt 1 January 2002
    
    
    4,585
    
    
    
    3,815(Loss) retained for the financial year
    
    
    (1,322
    )
    
    
    (921
    )Write-off of goodwill previously taken to reserves
    
    
    373
    
    
    
    Goodwill transferred to profit and loss account during the year
    
    
    13
    
    
    
    Exchange differences
    
    
    (2
    )
    
    
    (2
    )Transfer from share premium
    
    
    3
    
    
    
    3Share option compensation costs taken to reserves
    
    
    7
    
    
    
    7Capitalised on exercise of share options issued via QUEST
    
    
    (7
    )
    
    
    (7
    )At 31 December 2002
    
    
    3,650
    
    
    
    2,895
 Exchange gains arising from foreign currency borrowings used to hedge investments in overseas
Group undertakings of £2m (2003: £1m) have been taken to the reserves of the Group and Company.
These exchange movements are matched by corresponding exchange movements on the net investments in
the financial statements of the Company and exchange movements on the net assets of overseas Group
undertakings in the Group financial statements. Treasury shares reserveNon-distributable reserve
    
    
    (restated)Group
    
    
    Company
    
    
    Group
    
    
    Company£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    353
    
    
    
    
    
    
    
    (79
    )
    
    
    Transfer from profit and loss account
    
    
    (47
    )
    
    
    
    
    
    
    43
    
    
    
    Proceeds on sale of own shares
    
    
    
    
    
    
    
    
    
    
    36
    
    
    
    At 31 December 2004
    
    
    306
    
    
    
    
    
    
    
    
    
    
    
    
 Treasury shares reserveNon-distributable reserve
    
    
    (restated)Group
    
    
    Company
    
    
    Group
    
    
    Company£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2003
    
    
    153
    
    
    
    
    
    
    
    (79
    )
    
    
    Transfer from profit and loss account
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    At 31 December 2003
    
    
    353
    
    
    
    
    
    
    
    (79
    )
    
    
    
 139




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Treasury shares reserveRevaluation reserve
    
    
    Non-distributable reserve
    
    
    (restated)Group
    
    
    Company
    
    
    Group
    
    
    Company
    
    
    Group
    
    
    Company£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2002
    
    
    
    
    
    
    
    
    
    
    416
    
    
    
    
    
    
    
    (43
    )
    
    
    Purchase of own shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    Transfer from profit and loss account
    
    
    
    
    
    
    
    
    
    
    (263
    )
    
    
    
    
    
    
    
    
    
    
    At 31 December 2002
    
    
    
    
    
    
    
    
    
    
    153
    
    
    
    
    
    
    
    (79
    )
    
    
    
 The non-distributable reserve represents the value of the Groups shareholders interest in the
long-term assurance funds of the life assurance businesses. The treasury shares reserve represented
shares of Abbey National plc that were held by Employee Share Ownership Trusts and other entities
within the Abbey group of companies. The treasury shares reserve no longer exists due to the
winding up of the Employee Share Ownership Trusts. 44. Reconciliation of movements in shareholders funds Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mProfit/(loss) attributable to shareholders
    
    
    80
    
    
    
    (699
    )
    
    
    (231
    )
    
    
    (167
    )Dividends
    
    
    (631
    )
    
    
    (424
    )
    
    
    (631
    )
    
    
    (424
    )(551
    )
    
    
    (1,123
    )
    
    
    (862
    )
    
    
    (591
    )Other recognised net losses relating to the year
    
    
    (1
    )
    
    
    (3
    )
    
    
    
    
    
    
    (6
    )Increases in ordinary share capital including share premium
    
    
    107
    
    
    
    20
    
    
    
    108
    
    
    
    20Share option compensation costs taken to reserves
    
    
    (4
    )
    
    
    8
    
    
    
    (3
    )
    
    
    8Redemptions of preference share capital including share
premium
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    (116
    )Capitalised reserves on exercise of share options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Goodwill written off in period
    
    
    6
    
    
    
    5
    
    
    
    
    
    
    
    Goodwill transferred from profit and loss account
    
    
    
    
    
    
    190
    
    
    
    
    
    
    
    Proceeds on sale of own shares
    
    
    36
    
    
    
    
    
    
    
    
    
    
    
    Net reduction to shareholders funds
    
    
    (407
    )
    
    
    (1,019
    )
    
    
    (757
    )
    
    
    (685
    )Shareholders funds at 1 January
    
    
    5,331
    
    
    
    6,350
    
    
    
    4,836
    
    
    
    5,521Shareholders funds at 31 December
    
    
    4,924
    
    
    
    5,331
    
    
    
    4,079
    
    
    
    4,836Equity shareholders funds
    
    
    4,292
    
    
    
    4,699
    
    
    
    3,447
    
    
    
    4,204Non-equity shareholders funds
    
    
    632
    
    
    
    632
    
    
    
    632
    
    
    
    632At 31 December
    
    
    4,924
    
    
    
    5,331
    
    
    
    4,079
    
    
    
    4,836
 Equity shareholders funds comprise called up ordinary share capital, ordinary share premium
account, profit and loss account and reserves. Non-equity shareholders funds comprise called-up preference share capital and preference
share premium account. 45. Assets and liabilities denominated in foreign currency The aggregate amounts of assets and liabilities denominated in currencies other than sterling
were as follows: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m

    
    
    £mAssets
    
    
    21,682
    
    
    
    35,140
    
    
    
    672
    
    
    
    1,213Liabilities
    
    
    26,567
    
    
    
    48,034
    
    
    
    1,656
    
    
    
    4,342
 The above assets and liabilities denominated in foreign currencies do not indicate Abbeys
exposure to foreign exchange risk. The Groups foreign currency positions are substantially hedged
by off-balance sheet hedging instruments, or by on-balance sheet assets and liabilities denominated
in the same currency. 46. Guarantees and assets pledged as collateral security Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mGuarantees given by Abbey
National plc of subsidiaries
liabilities
    
    
    
    
    
    
    
    
    
    
    63,009
    
    
    
    69,487Guarantees given to third parties
    
    
    756
    
    
    
    1,788
    
    
    
    
    
    
    
    Mortgaged assets granted
    
    
    328
    
    
    
    360
    
    
    
    
    
    
    
    1,084
    
    
    
    2,148
    
    
    
    63,009
    
    
    
    69,487
 140




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 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 obligations to third parties if the customer fails to do so. The Group expects most of
the guarantees it provides to expire unused. The current carrying amount and the maximum undiscounted potential amount of future payments
of third party guarantees is £756m of which £353m will be immediately recoverable in the event of
liquidation. Mortgaged assets granted are to secure future obligations to third parties who have provided
security to the leasing subsidiaries. 47. Other contingent liabilities Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mOther contingent liabilities
    
    
    116
    
    
    
    159
    
    
    
    8
    
    
    
    8
 The principal other contingent liabilities are as follows: Overseas tax demand Abbey National Treasury Services plc has received a demand from an overseas tax authority relating
to the repayment of certain tax credits and related charges. Following certain modifications to the
demand its nominal amount now stands at £101m (at the balance sheet exchange rate) (2003: £101m) as
compared with the original demand of £113m (at the balance sheet exchange rate) (2003: £112m). As
at 31 December 2004 additional interest in relation to the demand could amount to £16m (at the
balance sheet exchange rate) (2003: £14m). The amount of additional interest has been reduced from
the amount disclosed at 31 December 2003 of £36m due to certain modifications to the basis on which
additional interest might be due. Abbey National Treasury Services plc has received legal advice that it has strong grounds to
challenge the validity of the demand and accordingly no specific provision has been made. 48. Commitments Commitments
Obligations under stock borrowing and lending agreements
Obligations under stock borrowing and lending agreements represent contractual commitments to
return stock borrowed. These obligations totalling £20,508m at 31 December 2004 (2003: £25,649m)
are offset by a contractual right to receive stock under other contractual agreements. Other commitments The table below shows the contract or principal amount of commitments other than those relating to
derivatives (see note 51). Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mFormal standby facilities,
credit lines and other commitments
to lend:Less than one year
    
    
    1,739
    
    
    
    1,634
    
    
    
    1,733
    
    
    
    1,627One year and over
    
    
    1,110
    
    
    
    1,384
    
    
    
    
    
    
    
    2,849
    
    
    
    3,018
    
    
    
    1,733
    
    
    
    1,627
 49. Operating leases Group2004
    
    
    2004
    
    
    2003
    
    
    2003Property
    
    
    Equipment
    
    
    Property
    
    
    Equipment£m
    
    
    £m
    
    
    £m
    
    
    £mRental commitments under operating leases expiring:In not more than 1 year
    
    
    6
    
    
    
    1
    
    
    
    22
    
    
    
    3In more than 1 year but not more than 5 years
    
    
    23
    
    
    
    1
    
    
    
    19
    
    
    
    7In more than 5 years
    
    
    82
    
    
    
    
    
    
    
    87
    
    
    
    111
    
    
    
    2
    
    
    
    128
    
    
    
    10
 141




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Company2004
    
    
    2004
    
    
    2003
    
    
    2003Property
    
    
    Equipment
    
    
    Property
    
    
    Equipment£m
    
    
    £m
    
    
    £m
    
    
    £mRental commitments under operating leases expiring:In not more than 1 year
    
    
    5
    
    
    
    1
    
    
    
    16
    
    
    
    3In more than 1 year but not more than 5 years
    
    
    22
    
    
    
    1
    
    
    
    16
    
    
    
    7In more than 5 years
    
    
    80
    
    
    
    
    
    
    
    78
    
    
    
    107
    
    
    
    2
    
    
    
    110
    
    
    
    10
 At 31 December 2004 Abbey held various leases on land and buildings, many for extended periods,
and other leases for equipment, which require the following aggregate annual rental payments: Group
    
    
    Company2004
    
    
    2003
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mYear ended 31 December:2004
    
    
    
    
    
    
    135
    
    
    
    
    
    
    
    1182005
    
    
    113
    
    
    
    135
    
    
    
    109
    
    
    
    1182006
    
    
    111
    
    
    
    118
    
    
    
    108
    
    
    
    1052007
    
    
    108
    
    
    
    112
    
    
    
    105
    
    
    
    1002008
    
    
    96
    
    
    
    112
    
    
    
    93
    
    
    
    992009
    
    
    89
    
    
    
    112
    
    
    
    86
    
    
    
    100Total thereafter
    
    
    858
    
    
    
    992
    
    
    
    841
    
    
    
    957
 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mGroup rental expense comprises:In respect of minimum rentals
    
    
    118
    
    
    
    118
    
    
    
    117Less: sub-lease rentals
    
    
    (3
    )
    
    
    (3
    )
    
    
    (3
    )115
    
    
    
    115
    
    
    
    114
 50. Financial instruments Interest rate risk In accordance with FRS 13, interest rate repricing gap information is shown in the table (the gap
table) below, at 31 December 2004. It provides an estimate of the repricing profile of Abbeys
assets, liabilities and other off-balance sheet exposures for non-trading activities. For the major
categories of assets and liabilities, the gap table shows the values of interest earning assets and
interest bearing liabilities which reprice within selected time bands. Items are allocated to time
bands by reference to the earlier of the next interest rate repricing date and the legal maturity
date. This leads to an apparent timing mismatch where the anticipated maturity date is different
from the legal maturity date and hedges have been structured accordingly. The positions shown reflect both the repricing behaviour of the administered rates on mortgage
and savings products (over which Abbey has control) and contracted wholesale on and off-balance
sheet positions. The tables do not purport to measure market risk exposure. 142




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Interest rate repricing gap at 31 December 2004 In more
    
    
    In more
    
    
    In morethan 3
    
    
    than 6
    
    
    than 1months
    
    
    months
    
    
    year but
    
    
    
    
    
    
    Non-Not more
    
    
    but not
    
    
    but not
    
    
    not more
    
    
    In more
    
    
    interest
    
    
    Non-than 3
    
    
    more than
    
    
    more than
    
    
    than 5
    
    
    than 5
    
    
    bearing
    
    
    Tradingmonths
    
    
    6 months
    
    
    12 months
    
    
    years
    
    
    years
    
    
    amounts
    
    
    Total
    
    
    Trading
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsTreasury and other eligible bills
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,990
    
    
    
    1,990Cash and loans and advances to
banks(1)
    
    
    453
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    967
    
    
    
    1,420
    
    
    
    9,182
    
    
    
    10,602Loans and advances to customers(2)
    
    
    59,282
    
    
    
    1,982
    
    
    
    3,305
    
    
    
    12,903
    
    
    
    3,242
    
    
    
    1,138
    
    
    
    81,852
    
    
    
    11,357
    
    
    
    93,209Net investment in finance leases
    
    
    948
    
    
    
    46
    
    
    
    146
    
    
    
    2
    
    
    
    2
    
    
    
    4
    
    
    
    1,148
    
    
    
    
    
    
    
    1,148Securities and investments
    
    
    394
    
    
    
    173
    
    
    
    44
    
    
    
    40
    
    
    
    13
    
    
    
    38
    
    
    
    702
    
    
    
    23,157
    
    
    
    23,859Other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,376
    
    
    
    9,376
    
    
    
    2,377
    
    
    
    11,753Assets of long-term assurance funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,180
    
    
    
    27,180
    
    
    
    
    
    
    
    27,180Total assets
    
    
    61,077
    
    
    
    2,201
    
    
    
    3,495
    
    
    
    12,945
    
    
    
    3,257
    
    
    
    38,703
    
    
    
    121,678
    
    
    
    48,063
    
    
    
    169,741LiabilitiesDeposits by banks (1)
    
    
    (349
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161
    )
    
    
    (510
    )
    
    
    (17,902
    )
    
    
    (18,412
    )Customer accounts
    
    
    (63,690
    )
    
    
    (1,084
    )
    
    
    (2,016
    )
    
    
    (2,541
    )
    
    
    (17
    )
    
    
    
    
    
    
    (69,348
    )
    
    
    (9,502
    )
    
    
    (78,850
    )Debt securities in issue
    
    
    (7,991
    )
    
    
    (1,003
    )
    
    
    (444
    )
    
    
    (3,332
    )
    
    
    (252
    )
    
    
    
    
    
    
    (13,022
    )
    
    
    (8,947
    )
    
    
    (21,969
    )Subordinated liabilities and other
long-term capital instruments
    
    
    (405
    )
    
    
    
    
    
    
    (388
    )
    
    
    (1,328
    )
    
    
    (3,057
    )
    
    
    (704
    )
    
    
    (6,082
    )
    
    
    
    
    
    
    (6,082
    )Other liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,431
    )
    
    
    (5,432
    )
    
    
    (6,381
    )
    
    
    (11,812
    )Funding of trading book
    
    
    5,331
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,331
    
    
    
    (5,331
    )
    
    
    Liabilities of long-term assurance
funds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (27,180
    )
    
    
    (27,180
    )
    
    
    
    
    
    
    (27,180
    )Minority
interests  non-equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (512
    )
    
    
    (512
    )
    
    
    
    
    
    
    (512
    )Shareholders funds non-equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (632
    )
    
    
    (632
    )
    
    
    
    
    
    
    (632
    ) equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,292
    )
    
    
    (4,292
    )
    
    
    
    
    
    
    (4,292
    )Total liabilities
    
    
    (67,104
    )
    
    
    (2,087
    )
    
    
    (2,848
    )
    
    
    (7,401
    )
    
    
    (3,326
    )
    
    
    (38,912
    )
    
    
    (121,678
    )
    
    
    (48,063
    )
    
    
    (169,741
    )Off-balance sheet items(3)
    
    
    (5,295
    )
    
    
    1,730
    
    
    
    1,446
    
    
    
    (2,022
    )
    
    
    4,218
    
    
    
    (77
    )Interest rate repricing gap
    
    
    (11,322
    )
    
    
    1,844
    
    
    
    2,093
    
    
    
    3,522
    
    
    
    4,149
    
    
    
    (286
    )2004 Cumulative gap
    
    
    (1,322
    )
    
    
    (9,478
    )
    
    
    (7,385
    )
    
    
    (3,863
    )
    
    
    286
    
    
    
    2003 Cumulative gap
    
    
    (6,760
    )
    
    
    (7,356
    )
    
    
    (6,309
    )
    
    
    2,511
    
    
    
    691
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
   (1)
    
    Non-interest bearing items within Loans and advances to banks and Deposits by banks include
items in the course of collection and items in the course of transmission, respectively. These
are short-term receipts and payments within the UK retail banking clearing system. The
remaining non-interest bearing item within Loans and advances to banks relates to the interest
free deposit maintained with the Bank of England.(2)
    
    Non-interest bearing items within Loans and advances to customers relate to non-accruing
lendings after deduction of associated provisions.(3)
    
    Off-balance sheet items are classified in the table above according to the interest terms
contained in the contracts. Negative gaps are liability sensitive and, all other things being equal, would indicate a
benefit if interest rates decline. A positive gap is asset sensitive and, all other things being
equal, would indicate a benefit if interest rates increase. Gap positions shown within the interest
rate repricing table are attributable to the balance sheet management of the Abbeys capital, low
rate and non-interest bearing liabilities, aimed at reducing income volatility. Fixed rate assets
and liabilities are hedged in line with a broadly risk neutral management objective. A notional
allocation of liabilities has been made to the trading book for the purposes of the gap table. Such
an allocation represents the proportion of general funding supporting the trading book. A number of Abbey non-trading assets and liabilities are subject to more complex repricing
than can be reflected in the above table or repriced with reference to indices other than interest
rates. The market risk exposure is minimised through the use of matching derivatives. The risks
associated with such instruments, and their hedges, are reflected in note 51 to the financial
statements. 143




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Foreign exchange risk Abbeys main overseas operations are in the US. The main operating (or functional) currencies of
its operations are therefore sterling, euro and US dollar. As Abbey prepares its Consolidated
Financial Statements in sterling, these will be affected by movements in the euro/sterling and
dollar/sterling exchange rates. The structural currency exposures contained in Abbeys Consolidated
Balance Sheet is predominantly affected by movements in the exchange rates between the euro and
sterling. This structural currency exposure is not the same as structural market risk which arises
from a variety of exposures inherent in a product or portfolio. Translation gains and losses
arising from these exposures are recognised in the Statements of total recognised gains and losses. Abbey mitigates the effect of this exposure by financing a significant proportion of its net
investments in its overseas operations with borrowings in the currency of the local operation. Abbeys structural currency exposures at 31 December 2004 were as follows: BorrowingsNet
    
    
    hedging net
    
    
    Net structural
    
    
    Net structuralinvestments in
    
    
    investment in
    
    
    currency
    
    
    currencyoperations
    
    
    overseas
    
    
    exposures
    
    
    exposures2004
    
    
    operations 2004
    
    
    2004
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mEuro  Subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    ) Branches
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    (29
    )Other non-sterling amounts
    
    
    1
    
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
 Abbey also has some transactional (or non-structural) currency exposures. Such exposures arise
from the activities of Abbey where the operating unit undertakes activities in currencies other
than the units functional currency. Where such activities show currency mismatches between assets
and liabilities, Abbey uses a variety of derivative products to eliminate some or all of the
currency risk depending on the amount and nature of the transaction. Controls are in place to limit
the size of Abbeys open transactional foreign exchange positions. Certain transactional currency exposures give rise to net currency gains and losses which are
recognised in the Profit and Loss Account. Such exposures comprise the monetary assets and monetary
liabilities of Abbey that are not denominated in the functional currency of the operating unit
involved, other than certain non-sterling borrowings treated as hedges of net investments in
overseas operations (as shown in the above table). Transactional currency exposures are stated net
of derivatives used to hedge currency risk. Abbeys transactional currency exposures at 31 December 2004 and 2003 were as follows: 2004  Net foreign currency monetary assets/(liabilities)Sterling
    
    
    US Dollar
    
    
    Euro
    
    
    Other
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSterling
    
    
    n/a
    
    
    
    527
    
    
    
    70
    
    
    
    32
    
    
    
    629Euro
    
    
    88
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    8888
    
    
    
    527
    
    
    
    70
    
    
    
    32
    
    
    
    717
 2003  Net foreign currency monetary assets/(liabilities)Sterling
    
    
    US Dollar
    
    
    Euro
    
    
    Other
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSterling
    
    
    n/a
    
    
    
    268
    
    
    
    (20
    )
    
    
    32
    
    
    
    280Euro
    
    
    81
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    8181
    
    
    
    268
    
    
    
    (20
    )
    
    
    32
    
    
    
    361
 Certain areas of the business generate a significant proportion of their income in currencies
other than the functional currency, and may use forward foreign exchange contracts to fix the
functional currency equivalent of their forecast income. The outstanding nominal amount of such
transactions at 31 December 2004 was nil. 144




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Financial Statements Notes to the Financial Statementscontinued 51. Derivatives Derivative financial instruments (derivatives) are contracts or agreements whose value is
derived from one or more underlying indices or asset values inherent in the contract or agreement.
They include interest rate, cross-currency, equity and other index swaps, forward rate agreements,
futures, caps, floors, options, swaptions, credit default and total return swaps, equity index
contracts and exchange traded interest rate futures and equity index options. Derivatives are used
for trading and non-trading purposes. These terms are defined in Accounting policies  Derivatives. Non-trading derivatives The main non-trading derivatives are interest rate and cross-currency swaps, and credit default
swaps, which are used to hedge Abbeys exposures to interest rates, credit spread movements and
exchange rates inherent in non-trading assets, liabilities and positions, including fixed rate
lending and structured savings products within banking and saving segments and medium term note
issues, capital issues and fixed rate asset purchases within Abbey National Treasury Services. The following table illustrates activities undertaken by Abbey, the related risks associated
with such activities and the types of derivatives used in managing such risks. Such risks may also
be managed using on-balance sheet instruments as part of an integrated approach to risk management. Activity
    
    Risk
    
    Type of HedgeManagement of the return on
variable rate assets financed by
shareholders funds and net
non-interest bearing liabilities.
    
    Reduced profitability due to falls in
interest rates.
    
    Receive fixed interest rate swaps.Fixed rate lending and investments.
    
    Sensitivity to increases in interest rates.
    
    Pay fixed interest rate swaps.Fixed rate retail and wholesale funding.
    
    Sensitivity to falls in interest rates.
    
    Receive fixed interest rate swaps.Equity-linked retail funding.
    
    Sensitivity to increases in equity market
indices.
    
    Receive equity swaps.Management of other net interest income
on retail activities.
    
    Sensitivity of returns to changes in
interest rates.
    
    Interest rate swaps and caps/floors according
to the type of risk identified.Profits earned in foreign currency.
    
    Sensitivity to strengthening of sterling
against other currencies.
    
    Forward foreign exchange contracts.Investment in foreign currency assets.
    
    Sensitivity to strengthening of sterling
against other currencies.
    
    Cross-currency and foreign exchange swaps.
Foreign currency funding.Issuance of products with embedded
equity options.
    
    Sensitivity to changes in underlying rate
and rate volatility causing option
exercise.
    
    Interest rate swaps combined with equity
options.Lending and investments.
    
    Sensitivity to weakening credit quality.
    
    Purchase credit default and total return swaps.Investment in, and issuance of,
products with embedded interest rate
options.
    
    Sensitivity to changes in underlying rate
and rate volatility causing option
exercise.
    
    Interest rate swaps plus caps/floors, and
other matched options.Investment in, and issuance of, bonds
with put/call features.
    
    Sensitivity to changes in rates causing
option exercise.
    
    Interest rate swaps combined with
swaptions(1) and other matched
options.Firm commitments (e.g. asset purchases,
issues arranged).
    
    Sensitivity to changes in rates between
arranging a transaction and completion.
    
    Hedges are arranged at the time of commitments
if there is exposure to rate movements.
   (1)
    
    A swaption is an option on a swap which gives the holder the right but not the obligation
to buy or sell a swap.(2)
    
    Exchange-traded derivatives may additionally be used as hedges in any of the above activities
in lieu of interest rate swaps. 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 following tables show the contract or underlying principal amounts, positive and negative
market values and related book values of derivatives held for non-trading purposes at 31 December
2004 and 2003. Contract or underlying principal amounts indicate the volume of business outstanding
at the balance sheet date and do not represent amounts at risk. The fair values represent the
amount at which a contract could be exchanged in an arms length transaction, calculated at market
rates current at the balance sheet date. The positive and negative market values of the derivatives
should not be viewed in isolation because they are substantially matched by negative and positive
market values, respectively, on the assets, liabilities and positions being hedged. 145




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Group2004
    
    
    2004
    
    
    
    
    
    
    2004
    
    
    2004Contract or
    
    
    Positive
    
    
    2004
    
    
    Negative
    
    
    Relatedunderlying
    
    
    market
    
    
    Related
    
    
    market
    
    
    bookprincipal(1)
    
    
    values(2)
    
    
    book value
    
    
    values(2)
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross-currency swaps
    
    
    23,311
    
    
    
    761
    
    
    
    240
    
    
    
    1,440
    
    
    
    359Foreign exchange swaps and forwards
    
    
    1,194
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    Foreign exchange options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,505
    
    
    
    768
    
    
    
    240
    
    
    
    1,440
    
    
    
    359Interest rate contracts:Interest rate swaps
    
    
    49,143
    
    
    
    1,136
    
    
    
    374
    
    
    
    376
    
    
    
    66Caps, floors and swaptions
    
    
    1,707
    
    
    
    6
    
    
    
    16
    
    
    
    1
    
    
    
    Futures (exchange traded)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forward rate agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,850
    
    
    
    1,142
    
    
    
    390
    
    
    
    377
    
    
    
    66Equity and commodity contracts:Equity index options and similar products
    
    
    256
    
    
    
    
    
    
    
    
    
    
    
    140
    
    
    
    Equity and commodity index swaps
    
    
    418
    
    
    
    18
    
    
    
    
    
    
    
    50
    
    
    
    674
    
    
    
    18
    
    
    
    
    
    
    
    190
    
    
    
    76,029
    
    
    
    1,928
    
    
    
    630
    
    
    
    2,007
    
    
    
    425
 Group2003
    
    
    2003
    
    
    
    
    
    
    2003
    
    
    2003Contract or
    
    
    Positive
    
    
    2003
    
    
    Negative
    
    
    Relatedunderlying
    
    
    market
    
    
    Related
    
    
    market
    
    
    bookprincipal (1)
    
    
    values (2)
    
    
    book value
    
    
    values(2)
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross-currency swaps
    
    
    22,214
    
    
    
    928
    
    
    
    124
    
    
    
    1,380
    
    
    
    183Foreign exchange swaps and forwards
    
    
    1,630
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    Foreign exchange options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,844
    
    
    
    928
    
    
    
    132
    
    
    
    1,380
    
    
    
    183Interest rate contracts:Interest rate swaps
    
    
    69,433
    
    
    
    2,067
    
    
    
    650
    
    
    
    1,432
    
    
    
    362Caps, floors and swaptions
    
    
    2,484
    
    
    
    21
    
    
    
    37
    
    
    
    1
    
    
    
    Futures (exchange traded)
    
    
    4,907
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forward rate agreements
    
    
    2,213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    79,037
    
    
    
    2,088
    
    
    
    687
    
    
    
    1,433
    
    
    
    362Equity and commodity contracts:Equity index options and similar products
    
    
    257
    
    
    
    
    
    
    
    
    
    
    
    86
    
    
    
    Equity and commodity index swaps
    
    
    673
    
    
    
    22
    
    
    
    9
    
    
    
    20
    
    
    
    3930
    
    
    
    22
    
    
    
    9
    
    
    
    106
    
    
    
    3103,811
    
    
    
    3,038
    
    
    
    828
    
    
    
    2,919
    
    
    
    548
   (1)
    
    Included in the above analysis of non-trading derivatives are exchange rate contracts,
interest rate contracts and equity and commodity contracts, with underlying principal amounts
of £1,644m, (2003: £1,574m), £17,936m (2003: £47,685m) and £333m (2003: £363m), respectively,
which were undertaken by Group entities with Abbey National Financial Products. The total net
positive market value of such contracts amounted to £505m (2003: net positive £189m).
Associated contracts which Abbey National Financial Products transacted with external
counterparties are included in the analysis of trading derivatives. Net positive market values
of £505m (2003: net positive £189m) on all contracts held by Abbey National Financial Products
with other Group entities are included within Other assets.(2)
    
    Positive market values arise where the present value of cash inflows exceeds the present
value of cash outflows on a contract-by-contract basis. Negative market values arise where the
present value of cash outflows exceeds the present value of cash inflows on a
contract-by-contract basis. The following table analyses over-the-counter (OTC) and other non-exchange traded derivatives
held for non-trading purposes by remaining maturity: GroupContract or
    
    
    
    
    
    
    Contract orunderlying
    
    
    
    
    
    
    underlyingprincipal
    
    
    Replacement cost
    
    
    principal
    
    
    Replacement cost2004
    
    
    2004
    
    
    2003
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mNon-trading derivatives maturing:In not more than one year
    
    
    26,673
    
    
    
    286
    
    
    
    36,368
    
    
    
    806In more than one year but not more than five years
    
    
    38,727
    
    
    
    912
    
    
    
    47,672
    
    
    
    1,257In more than five years
    
    
    10,629
    
    
    
    730
    
    
    
    14,864
    
    
    
    97576,029
    
    
    
    1,928
    
    
    
    98,904
    
    
    
    3,038
 146




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The following table shows, by nominal amount, the activity in interest rate and cross currency
swaps entered into for hedging purposes, with third parties and Abbey National Financial Products
(ANFP). 2004
    
    
    2003Interest
    
    
    Cross
    
    
    
    
    
    
    Interest
    
    
    Crossrate
    
    
    currency
    
    
    
    
    
    
    rate
    
    
    currencyswaps
    
    
    swaps
    
    
    Total
    
    
    swaps
    
    
    swaps
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January (third party contracts)
    
    
    20,011
    
    
    
    20,641
    
    
    
    40,652
    
    
    
    46,219
    
    
    
    22,252
    
    
    
    68,471At 1 January (contracts with) ANFP
    
    
    49,422
    
    
    
    1,573
    
    
    
    50,995
    
    
    
    53,320
    
    
    
    1,597
    
    
    
    54,917New contracts
    
    
    25,618
    
    
    
    3,924
    
    
    
    29,542
    
    
    
    22,362
    
    
    
    5,483
    
    
    
    27,845Acquisitions of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Matured and amortised contracts
    
    
    (8,926
    )
    
    
    (2,237
    )
    
    
    (11,163
    )
    
    
    (32,416
    )
    
    
    (2,636
    )
    
    
    (35,052
    )Terminated contracts
    
    
    (5,776
    )
    
    
    (587
    )
    
    
    (6,363
    )
    
    
    (14,502
    )
    
    
    (4,430
    )
    
    
    (18,932
    )Effect of foreign exchange rate and other
movements
    
    
    280
    
    
    
    (74
    )
    
    
    206
    
    
    
    (1,652
    )
    
    
    (28
    )
    
    
    (1,680
    )Net (decrease) increase in contracts with ANFP
    
    
    (31,486
    )
    
    
    71
    
    
    
    (31,415
    )
    
    
    (3,898
    )
    
    
    (24
    )
    
    
    (3,922
    )At 31 December
    
    
    49,143
    
    
    
    23,311
    
    
    
    72,454
    
    
    
    69,433
    
    
    
    22,214
    
    
    
    91,647
 Abbey uses interest rate swaps and cross-currency swaps predominantly for hedging fixed-rate
assets and liabilities so that they become, in effect, floating-rate assets and liabilities. For
interest rate swaps and cross-currency swaps used for these purposes, the weighted average pay
fixed rates, receive fixed rates, pay variable rates and receive variable rates by maturity and
contract amount at 31 December 2004 were as follows: Pay fixed
    
    
    Receive fixed
    
    
    Pay variable
    
    
    Receive variableNominal
    
    
    
    
    
    
    Nominal
    
    
    
    
    
    
    Nominal
    
    
    
    
    
    
    Nominalamount
    
    
    Rate
    
    
    amount
    
    
    Rate
    
    
    amount
    
    
    Rate
    
    
    amount
    
    
    Rate£m
    
    
    %
    
    
    £m
    
    
    %
    
    
    £m
    
    
    %
    
    
    £m
    
    
    %Contracts maturing:(1)Less than one year
    
    
    4,449
    
    
    
    4.32
    
    
    
    11,822
    
    
    
    3.99
    
    
    
    22,076
    
    
    
    3.83
    
    
    
    15,315
    
    
    
    4.12One to three years
    
    
    2,787
    
    
    
    4.87
    
    
    
    1,768
    
    
    
    5.02
    
    
    
    14,797
    
    
    
    3.46
    
    
    
    15,811
    
    
    
    4.11Three to five years
    
    
    1,812
    
    
    
    5.01
    
    
    
    1,275
    
    
    
    6.32
    
    
    
    15,500
    
    
    
    4.14
    
    
    
    16,086
    
    
    
    4.61Over five years
    
    
    2,126
    
    
    
    6.06
    
    
    
    5,090
    
    
    
    7.24
    
    
    
    8,067
    
    
    
    5.05
    
    
    
    4,941
    
    
    
    4.3711,174
    
    
    
    
    
    
    
    19,955
    
    
    
    
    
    
    
    60,440
    
    
    
    
    
    
    
    52,153
   (1)
    
    For the purpose of this analysis, the maturity date has been taken to be the date when the
contract expires. The total pay fixed nominal amount comprises £11,133m in respect of interest rate swaps and
£41m in respect of cross-currency swaps. The total receive fixed nominal amount comprises £18,178m
in respect of interest rate swaps and £1,777m in respect of cross-currency swaps. The total pay
variable nominal amount comprises £38,008m in respect of interest rate swaps and £22,432m in
respect of cross-currency swaps. The total receive variable nominal amount comprises £30,964m in
respect of interest rate swaps and £21,189m in respect of cross-currency swaps. A difference arises when comparing nominal contract assets and nominal contract liabilities.
Whereas with single currency swaps there are equal and opposite nominal balances on either side of
the swap leg, this is not necessarily the case with cross-currency swaps. At contract date sterling
equivalent nominal amounts should be equal and opposite, however, subsequent exchange rate
movements will result in divergence in the nominal amounts. This exchange rate divergence explains
the difference between nominal contract asset balances and nominal contract liability balances. The weighted average interest rates presented in the tables above reflect interest rates in a
range of currencies. These rates should not be analysed in isolation from the rates on the
underlying instruments. The effect of hedges has been included in the average interest rates
presented in the Average balance sheet included elsewhere in this Annual Report. The contract amount of each type of end-use contract (excluding cross-currency swaps and
interest rate swaps which are included in the swaps detailed above) at 31 December 2004 are set
forth by currency in the table below. Of these contracts £1,194m mature within one year and £2,381m
mature after one year. Contract type by nominal amountForward foreignexchange and foreign
    
    
    Forward rate
    
    
    Options caps and
    
    
    Futures (exchangeexchange swaps
    
    
    agreements
    
    
    floors (OTC)(1)
    
    
    traded)
    
    
    Equity contracts2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mSterling
    
    
    543
    
    
    
    
    
    
    
    1,707
    
    
    
    
    
    
    
    355US dollars
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Euro
    
    
    120
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Hong Kong dollar
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Switzerland franc
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Total
    
    
    1,194
    
    
    
    
    
    
    
    1,707
    
    
    
    
    
    
    
    674
  (1) All over-the-counter option contracts are in respect of interest related
instruments. 147




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Trading derivatives The following table sets forth the contract or underlying principal (nominal) amounts, positive
market values and negative market values of derivatives held for trading purposes at 31 December
2004 and 2003. GroupContract or
    
    
    Positive
    
    
    Negative
    
    
    Contract or
    
    
    Positive
    
    
    Negativeunderlying
    
    
    market values
    
    
    market values
    
    
    underlying
    
    
    market values
    
    
    market valuesprincipal 2004
    
    
    2004
    
    
    2004
    
    
    principal 2003
    
    
    2003
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:Cross-currency swaps
    
    
    8,817
    
    
    
    194
    
    
    
    393
    
    
    
    10,572
    
    
    
    253
    
    
    
    428Foreign exchange swaps and
forwards
    
    
    3,533
    
    
    
    13
    
    
    
    164
    
    
    
    19,399
    
    
    
    76
    
    
    
    7212,350
    
    
    
    207
    
    
    
    557
    
    
    
    29,971
    
    
    
    329
    
    
    
    500Interest rate contracts:Interest rate swaps
    
    
    377,931
    
    
    
    8,350
    
    
    
    8,694
    
    
    
    380,989
    
    
    
    8,254
    
    
    
    8,794Caps, floors and swaptions
    
    
    54,074
    
    
    
    824
    
    
    
    765
    
    
    
    56,436
    
    
    
    771
    
    
    
    796Futures (exchange traded)
    
    
    1,069
    
    
    
    
    
    
    
    
    
    
    
    5,348
    
    
    
    32
    
    
    
    28Forward rate agreements
    
    
    2,290
    
    
    
    
    
    
    
    
    
    
    
    4,547
    
    
    
    2
    
    
    
    1435,364
    
    
    
    9,174
    
    
    
    9,459
    
    
    
    447,320
    
    
    
    9,059
    
    
    
    9,619Equity and credit contracts:Equity index and similar products
    
    
    15,696
    
    
    
    581
    
    
    
    1,750
    
    
    
    11,561
    
    
    
    538
    
    
    
    2,535Equity index options (exchange
traded)
    
    
    3,487
    
    
    
    128
    
    
    
    127
    
    
    
    8,363
    
    
    
    70
    
    
    
    301Credit default swaps and similar
products
    
    
    17,156
    
    
    
    90
    
    
    
    80
    
    
    
    16,171
    
    
    
    103
    
    
    
    7436,339
    
    
    
    799
    
    
    
    1,957
    
    
    
    36,095
    
    
    
    711
    
    
    
    2,910Total
    
    
    484,053
    
    
    
    10,180
    
    
    
    11,973
    
    
    
    513,386
    
    
    
    10,099
    
    
    
    13,029Effect of netting
    
    
    
    
    
    
    (8,308
    )
    
    
    (8,308
    )
    
    
    
    
    
    
    (8,456
    )
    
    
    (8,456
    )Fair values of contracts between
ANFP and other Group
entities (1)
    
    
    
    
    
    
    505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    189Amount included in Other
assets/Other liabilities
    
    
    
    
    
    
    2,377
    
    
    
    3,665
    
    
    
    
    
    
    
    1,643
    
    
    
    4,762
   (1)
    
    Associated contracts which Abbey National Financial Products has transacted with external
counterparties are included in the analysis of trading derivatives. Positive fair values arise where gross positive fair values exceed gross negative fair values
on a contract-by-contract basis. This equates to net replacement cost. Negative fair values arise
where gross negative fair values exceed gross positive fair values on a contract-by-contract basis.
The totals of positive and negative fair values arising on trading derivatives at 31 December 2004
have been netted where the Group has a legal right of offset with the relevant counterparty. All exchange-traded instruments are subject to cash requirements under the standard margin
arrangements applied by the individual exchanges. Such instruments are not subject to significant
credit risk. Abbey National Treasury Services plc has a mandate to deal in credit derivatives. Abbey
National Treasury Services plc acts as principal under this mandate, and takes a fee for
guaranteeing the counterparty against the default of the senior obligations of a third party.
Amounts in respect of non-trading credit derivative contracts are included under note 46,
Guarantees and assets pledged as collateral security. Substantially all of Abbeys over-the-counter derivatives activity is contracted with
financial institutions. The following table analyses replacement cost for over-the-counter and other non-exchange
traded derivatives with positive market values held for trading purposes by remaining maturity
before netting: GroupContacts or
    
    
    
    
    
    
    Contacts orunderlying
    
    
    Replacement
    
    
    underlying
    
    
    Replacementprincipal cost
    
    
    cost
    
    
    principal cost
    
    
    cost2004
    
    
    2004
    
    
    2003
    
    
    2003£m
    
    
    £m
    
    
    £m
    
    
    £mTrading derivatives maturing (before netting):In not more than one year
    
    
    80,237
    
    
    
    820
    
    
    
    105,884
    
    
    
    1,018In more than one year but not more than five years
    
    
    222,234
    
    
    
    3,470
    
    
    
    219,871
    
    
    
    3,914In more than five years
    
    
    177,026
    
    
    
    5,762
    
    
    
    173,920
    
    
    
    5,065479,497
    
    
    
    10,052
    
    
    
    499,675
    
    
    
    9,997
 148




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Unrecognised gains and losses on financial assets and financial liabilities resulting from
hedge accounting Gains and losses on financial instruments used for hedging are not recognised until the exposure
that is being hedged is itself recognised. Unrecognised gains and losses on instruments used for
hedging are as follows: Group2004
    
    
    2004
    
    
    2004Gains
    
    
    Losses
    
    
    Net gains£m
    
    
    £m
    
    
    (losses)£mGains and losses expected to be recognised:In one year or less
    
    
    209
    
    
    
    (89
    )
    
    
    120After one year
    
    
    1,328
    
    
    
    (1,732
    )
    
    
    (404
    )1,537
    
    
    
    (1,821
    )
    
    
    (284
    )
 Group2003
    
    
    2003
    
    
    2003Gains
    
    
    Losses
    
    
    Net gains (losses)£m
    
    
    £m
    
    
    £mGains and losses expected to be recognised:In one year or less
    
    
    633
    
    
    
    (423
    )
    
    
    210After one year
    
    
    1,561
    
    
    
    (2,071
    )
    
    
    (510
    )2,194
    
    
    
    (2,494
    )
    
    
    (300
    )
 The net gain unrecognised as at the start of the year and recognised during the year was £210m
(2003: £129m). Deferred gains and losses on financial assets and financial liabilities resulting from hedge
accounting Deferred balances relating to settled derivatives and other financial transactions previously used
as hedges will be released to the profit and loss account in the same periods as the income and
expense flows from the underlying hedged transactions. The movement in the period is as follows: GroupTotal net gainsGains
    
    
    Losses
    
    
    (losses)£m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    46
    
    
    
    (11
    )
    
    
    35Previous years deferred gains and losses recognised in the year
    
    
    (4
    )
    
    
    1
    
    
    
    (3
    )Gains and losses deferred in the year
    
    
    13
    
    
    
    (48
    )
    
    
    (35
    )At 31 December 2004
    
    
    55
    
    
    
    (58
    )
    
    
    (3
    )Gains and losses expected to be recognised:In one year or less
    
    
    41
    
    
    
    (7
    )
    
    
    34After one year
    
    
    14
    
    
    
    (51
    )
    
    
    (37
    )55
    
    
    
    (58
    )
    
    
    (3
    )
 52. Consolidated cash flow statement a) Reconciliation of (loss)/profit before tax to net cash inflow from operating activities 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mProfit/(loss) on ordinary activities before tax
    
    
    273
    
    
    
    (686
    )
    
    
    (984
    )Decrease in interest receivable and prepaid expenses
    
    
    192
    
    
    
    531
    
    
    
    540(Decrease)/increase in interest payable and accrued expenses
    
    
    735
    
    
    
    26
    
    
    
    (25
    )Provisions for bad and doubtful debts
    
    
    (35
    )
    
    
    474
    
    
    
    514Provisions for contingent liabilities and commitments
    
    
    233
    
    
    
    104
    
    
    
    50Net advances written off
    
    
    (293
    )
    
    
    (267
    )
    
    
    (289
    )Decrease before tax from Long-term Assurance business
    
    
    (76
    )
    
    
    202
    
    
    
    311Depreciation and amortisation
    
    
    252
    
    
    
    401
    
    
    
    1,585Income from associated undertakings
    
    
    (6
    )
    
    
    (12
    )
    
    
    (17
    )Profit on sale of subsidiary and associated undertakings
    
    
    (46
    )
    
    
    (89
    )
    
    
    (48
    )Profit/(loss) on sale of tangible fixed assets and investments
    
    
    128
    
    
    
    497
    
    
    
    55Effect of other deferrals and accruals of cash flows from operating activities
    
    
    (303
    )
    
    
    (278
    )
    
    
    190Net cash inflow from trading activities
    
    
    1,054
    
    
    
    903
    
    
    
    1,882Net (increase)/decrease in loans and advances to banks and customers
    
    
    (4,295
    )
    
    
    (10,943
    )
    
    
    (5,104
    )Net (increase)/decrease in investment in finance leases
    
    
    77
    
    
    
    (13
    )
    
    
    404Net (increase)/decrease in bills and securities
    
    
    6,380
    
    
    
    1,115
    
    
    
    (5,643
    )Net (decrease) in deposits and customer accounts
    
    
    602
    
    
    
    (3,291
    )
    
    
    (369
    )Net (decrease) in debt securities in issue
    
    
    (2,030
    )
    
    
    (21,778
    )
    
    
    (4,432
    )Net increase in other liabilities less assets
    
    
    (3,175
    )
    
    
    1,947
    
    
    
    2,006Exchange movements
    
    
    (633
    )
    
    
    (618
    )
    
    
    304Net cash (outflow)/inflow from operating activities
    
    
    (2,019
    )
    
    
    (32,678
    )
    
    
    (10,952
    )
 149




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Exchange movements represent exchange movements on cash balances and investing and financing
activities. The movements are not indicative of Abbeys exposure to foreign exchange risk on these
items, because foreign currency positions in such balances are substantially hedged by other
on-balance sheet and off-balance sheet foreign currency amounts. All other exchange movements,
including movements on hedges, are included in the relevant captions in the above reconciliation. b) Analysis of the balances of cash as shown in the balance sheet Included in the balance sheet are the following amounts of cash: Loans andadvances toCash and
    
    
    other banksbalances with
    
    
    repayable oncentral banks
    
    
    demand
    
    
    Total£m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    439
    
    
    
    3,089
    
    
    
    3,528Net cash inflow/(outflow)
    
    
    15
    
    
    
    (203
    )
    
    
    (188
    )At 31 December 2004
    
    
    454
    
    
    
    2,886
    
    
    
    3,340At 1 January 2003
    
    
    396
    
    
    
    2,698
    
    
    
    3,094Net cash inflow
    
    
    43
    
    
    
    391
    
    
    
    434At 31 December 2003
    
    
    439
    
    
    
    3,089
    
    
    
    3,528At 1 January 2002
    
    
    494
    
    
    
    5,452
    
    
    
    5,946Net cash (outflow)
    
    
    (98
    )
    
    
    (2,754
    )
    
    
    (2,852
    )At 31 December 2002
    
    
    396
    
    
    
    2,698
    
    
    
    3,094
 Abbey is required to maintain balances with the Bank of England which at 31 December 2004
amounted to £131m (2003: £127m, 2002: £131m). These are shown in loans and advances to banks, and
are not included in cash for the purposes of the Cash Flow Statement. c) Analysis of changes in financing during the year Share
    
    
    Non-equity
    
    
    Sub-
    
    
    Other long-termcapital inc.
    
    
    minority
    
    
    ordinated
    
    
    capitalshare premium
    
    
    interests
    
    
    liabilities
    
    
    instruments
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January 2004
    
    
    2,522
    
    
    
    554
    
    
    
    6,337
    
    
    
    742
    
    
    
    10,155Net cash (outflow) from financing
    
    
    13
    
    
    
    
    
    
    
    (813
    )
    
    
    
    
    
    
    (800
    )Shares issued for a non-cash consideration
    
    
    101
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101Effect of foreign exchange rate changes
    
    
    
    
    
    
    (42
    )
    
    
    (164
    )
    
    
    (20
    )
    
    
    (226
    )At 31 December 2004
    
    
    2,636
    
    
    
    512
    
    
    
    5,360
    
    
    
    722
    
    
    
    9,230At 1 January 2003
    
    
    2,626
    
    
    
    627
    
    
    
    6,532
    
    
    
    771
    
    
    
    10,556Net cash (outflow) from financing
    
    
    (122
    )
    
    
    (15
    )
    
    
    (56
    )
    
    
    
    
    
    
    (193
    )Shares issued for a non-cash consideration
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18Effect of foreign exchange rate changes
    
    
    
    
    
    
    (58
    )
    
    
    (139
    )
    
    
    (29
    )
    
    
    (226
    )At 31 December 2003
    
    
    2,522
    
    
    
    554
    
    
    
    6,337
    
    
    
    742
    
    
    
    10,155At 1 January 2002
    
    
    2,520
    
    
    

    681
    
    
    
    6,590
    
    
    
    297
    
    
    
    10,088Net cash inflow from financing
    
    
    17
    
    
    
    15
    
    
    
    170
    
    
    
    485
    
    
    
    687Shares issued for a non-cash consideration
    
    
    82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82Capitalised on exercise of share options
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Effect of foreign exchange rate changes
    
    
    
    
    
    
    (69
    )
    
    
    (228
    )
    
    
    (11
    )
    
    
    (308
    )At 31 December 2002
    
    
    2,626
    
    
    
    627
    
    
    
    6,532
    
    
    
    771
    
    
    
    10,556
 150




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued d) Acquisitions of subsidiary undertakings and purchase of businesses 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mNet assets acquired:Loans and advances to banks
    
    
    
    
    
    
    
    
    
    
    Loans and advances to customers
    
    
    
    
    
    
    
    
    
    
    281Operating lease assets
    
    
    
    
    
    
    
    
    
    
    Tangible fixed assets
    
    
    
    
    
    
    
    
    
    
    Other assets
    
    
    
    
    
    
    
    
    
    
    6Debt securities
    
    
    
    
    
    
    
    
    
    
    Long-term assurance business
    
    
    
    
    
    
    
    
    
    
    Assets of Long-term assurance funds
    
    
    
    
    
    
    
    
    
    
    Customer accounts
    
    
    
    
    
    
    
    
    
    
    Deposits by banks
    
    
    
    
    
    
    
    
    
    
    (50
    )Debt securities in issue
    
    
    
    
    
    
    
    
    
    
    (31
    )Provisions for liabilities and charges
    
    
    
    
    
    
    
    
    
    
    (2
    )Other liabilities
    
    
    
    
    
    
    
    
    
    
    (8
    )Liabilities of long-term assurance funds
    
    
    
    
    
    
    
    
    
    
    Goodwill on acquisitions
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    204Satisfied by:Cash
    
    
    
    
    
    
    
    
    
    
    1,597Deferred cash/loan notes*
    
    
    
    
    
    
    
    
    
    
    (1,393
    )
    
    
    
    
    
    
    
    204
  *
    Such items relate to the consideration for the settlement of Scottish Provident of £1,393m
settled in cash and £220m in loan notes at the option of the members during 2002. e) Analysis of the net outflow of cash in respect of acquisitions of subsidiary undertakings
and purchase of businesses 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mCash consideration
    
    
    
    
    
    
    
    
    
    
    1,597
 f) Sale of subsidiary, associated undertakings and businesses 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mNet assets disposed of:Cash at bank and in hand
    
    
    
    
    
    
    11
    
    
    
    Loans and advances to banks
    
    
    9
    
    
    
    26
    
    
    
    10Loans and advances to customers
    
    
    2,423
    
    
    
    7,780
    
    
    
    21Net investment in finance leases
    
    
    1,349
    
    
    
    887
    
    
    
    887Debt securities
    
    
    6
    
    
    
    16
    
    
    
    Equity shares and other similar interests
    
    
    
    
    
    
    
    
    
    
    Other assets
    
    
    36
    
    
    
    144
    
    
    
    54Prepayments and accrued income
    
    
    2
    
    
    
    
    
    
    
    Tangible fixed assets
    
    
    1
    
    
    
    14
    
    
    
    1Operating lease assets
    
    
    
    
    
    
    75
    
    
    
    362Interests in associated undertakings
    
    
    
    
    
    
    
    
    
    
    Deposits by banks
    
    
    (386
    )
    
    
    (56
    )
    
    
    (12
    )Customer accounts
    
    
    
    
    
    
    (1
    )
    
    
    Debt Securities in Issue
    
    
    
    
    
    
    (23
    )
    
    
    Other liabilities
    
    
    (107
    )
    
    
    (74
    )
    
    
    (107
    )Accruals and deferred income
    
    
    (17
    )
    
    
    
    
    
    
    Provisions for liabilities and charges
    
    
    (194
    )
    
    
    (266
    )
    
    
    (262
    )Goodwill disposed of
    
    
    6
    
    
    
    2
    
    
    
    46Goodwill written back
    
    
    6
    
    
    
    190
    
    
    
    13Profit on disposal
    
    
    46
    
    
    
    89
    
    
    
    483,180
    
    
    
    8,814
    
    
    
    1,061Satisfied by:Cash
    
    
    3,180
    
    
    
    8,814
    
    
    
    1,061
 g) Analysis of the net inflow of cash in respect of the sale of subsidiary and associated
undertakings 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mCash received as consideration
    
    
    3,180
    
    
    
    8,814
    
    
    
    1,061Cash disposed of
    
    
    
    
    
    
    (11
    )
    
    
    Net cash inflow in respect of sale of subsidiary and associated undertakings
    
    
    3,180
    
    
    
    8,803
    
    
    
    1,061
 151




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 53. Retirement benefits The Abbey National Amalgamated Pension Fund, Abbey National Group Pension Scheme, Abbey
National Associated Bodies Pension Fund, Scottish Mutual Assurance Staff Pension Scheme, Scottish
Provident Institutional Staff Pension Fund and National and Provincial Building Society Pension
Fund are the principal pension schemes within Abbey, covering 62% (2003: 70%) of Abbeys employees,
and are all funded defined benefits schemes. All are closed schemes, thus under the projected unit
method the current service cost will increase as members of the schemes reach retirement. Formal actuarial valuations of the assets and liabilities of the schemes are carried out on a
triennial basis by an independent professionally qualified actuary. The latest formal actuarial
valuation was made at 31 March 2002 for the Amalgamated Fund, Associated Bodies Fund and Group
Pension Scheme, and the Scottish Provident Institution Staff Pension Fund, 31 March 2003 for the
National and Provincial Building Society Pension Fund and 31 December 2003 for the Scottish Mutual
Assurance Staff Pension Scheme. In addition, there is an annual review by the appointed actuary.
The results of these reviews are included in the Consolidated Financial Statements. The main long-term financial assumptions, as stated in absolute terms, used in the 2004 annual
review were: 2004
    
    
    2003Nominal per annum
    
    
    Nominal per annum%
    
    
    %Investment returns
    
    
    6.4
    
    
    
    6.6Pension increases
    
    
    2.5
    
    
    
    2.5General salary increase
    
    
    4.0
    
    
    
    4.0General price inflation
    
    
    2.5
    
    
    
    2.5
 At the latest actuarial review date, the market value of the combined assets was £2,280m and
the combined funding level was 80.6%. All of the pension fund liabilities are valued on an
actuarial basis using the projected unit method. In the period ended 31 December 2004, the
employers contribution rates to the schemes ranged between 9.9% and 49.2%. In consultation with
the actuary, the agreed contribution rates for future years range from 9.8% to 52.6%. As shown in the table below, the pension cost reflects the regular contribution rate less
amounts in respect of the surplus or deficit being recognised over the expected remaining service
lives of the members of all Abbeys schemes in accordance with SSAP 24, Accounting for pension
costs. Surpluses or deficits are amortised on the basis of a percentage of payroll to align with
contribution rates. The pension cost charged to the Profit and Loss Account for the year was as
follows: Group2004
    
    
    2003£m
    
    
    £mRegular cost
    
    
    66
    
    
    
    75Amortisation of surpluses arising on pension schemes
    
    
    
    
    
    
    Amortisation of deficits arising on pension schemes
    
    
    50
    
    
    
    45Amortisation of surplus arising from fair value
adjustment on acquisition of National and Provincial
    
    
    2
    
    
    
    2Charged to profit and loss account (note 38)
    
    
    118
    
    
    
    122
 During 2004 an additional £31m (2003: £15) was paid to the schemes in respect of contractual
termination benefits arising from restructuring. In addition £4m (2003: £6m) was contributed to
defined contribution and overseas pensions schemes. Balances representing the difference between amounts paid to the respective pension schemes of
Abbey and any amounts charged to the Profit and Loss Account, in accordance with SSAP 24, are
included in the Balance Sheet. At 31 December 2004, an asset of £21m (2003: £23m) and a liability
of £40m (2003: £38m) have been included in the balance sheet accordingly. In addition, included in
other assets at 31 December 2004 was an amount of £14m (2003: £15m) in respect of the unamortised
pension scheme surplus assessed at the date the business of National and Provincial was purchased.
This was based on an actuarial assessment of the scheme at that date and is included in the Balance
Sheet in accordance with FRS 17. This balance is being amortised over the average remaining service
lives of employees in the scheme as shown above. During 2004 an additional £31m (2003: £15m) was paid to the scheme in respect of contractual
termination benefits arising from restructuring and various business disposals. Additional disclosures required under the transition provisions of FRS 17: Disclosures required under the transition provisions of FRS 17 are included below. The main long-term financial assumptions, as stated in absolute terms, under the provisions of
FRS 17 are as follows: 2004
    
    
    2003
    
    
    2002Nominal per annum
    
    
    Nominal per annum
    
    
    Nominal per annum%
    
    
    %
    
    
    %Discount rate for scheme liabilities
    
    
    5.4
    
    
    
    5.5
    
    
    
    5.75Pension and deferred pension increases
    
    
    2.8
    
    
    
    2.7
    
    
    
    2.4General salary increase
    
    
    4.3
    
    
    
    4.2
    
    
    
    3.9General price inflation
    
    
    2.8
    
    
    
    2.7
    
    
    
    2.4
 152




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The fair value of the assets held by the pension schemes at 31 December 2004, and the expected
rate of return for each class of assets for the current period, is as follows: 2004
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    2002Expected rate of
    
    
    Fair
    
    
    Expected rate of
    
    
    Fair
    
    
    Expected rate of
    
    
    Fairreturn
    
    
    value
    
    
    return
    
    
    value
    
    
    return
    
    
    value%
    
    
    £m
    
    
    %
    
    
    £m
    
    
    %
    
    
    £mEquities
    
    
    7.25
    
    
    
    1,265
    
    
    
    7.25
    
    
    
    1,150
    
    
    
    8.0
    
    
    
    1,477Bonds
    
    
    5.0
    
    
    
    1,076
    
    
    
    5.2
    
    
    
    1,025
    
    
    
    4.5
    
    
    
    326Others
    
    
    5.0
    
    
    
    152
    
    
    
    4.4
    
    
    
    30
    
    
    
    4.0
    
    
    
    772,493
    
    
    
    
    
    
    
    2,205
    
    
    
    
    
    
    
    1,880
 Pension fund liabilities are valued on an actuarial basis using the projected unit method and
pension assets are stated at their fair value. The net pension scheme deficit measured under FRS 17 at 31 December 2004 comprised the
following: 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mTotal market value of assets
    
    
    2,493
    
    
    
    2,205
    
    
    
    1,880Present value of scheme liabilities
    
    
    (3,689
    )
    
    
    (3,306
    )
    
    
    (2,722
    )FRS 17 scheme deficit
    
    
    (1,196
    )
    
    
    (1,101
    )
    
    
    (842
    )Related deferred tax asset
    
    
    359
    
    
    
    330
    
    
    
    253Net FRS 17 scheme deficit
    
    
    (837
    )
    
    
    (771
    )
    
    
    (589
    )
 The following amounts would be reflected in the Profit and Loss Account and statement of total
recognised gains and losses on implementation of FRS 17: 2004
    
    
    2003£m
    
    
    £mAmount that would be charged to operating profits:Current service cost
    
    
    120
    
    
    
    118Past service cost
    
    
    24
    
    
    
    15Gains on settlements
    
    
    (4
    )
    
    
    (13
    )Total operating charge
    
    
    140
    
    
    
    120Amount that would be credited to finance income:Expected return on pension scheme assets
    
    
    (139
    )
    
    
    (140
    )Interest on pension scheme liabilities
    
    
    182
    
    
    
    160Net return
    
    
    43
    
    
    
    20Amount that would be recognised in the statement of total recognised gains and losses:Actual return less expected return on pension scheme assets
    
    
    104
    
    
    
    94Experience gains and losses arising on scheme liabilities
    
    
    (10
    )
    
    
    31Gains arising from changes in assumptions underlying the present value of scheme liabilities
    
    
    (162
    )
    
    
    (359
    )Actuarial (loss)
    
    
    (68
    )
    
    
    (234
    )
 2004
    
    
    2003£m
    
    
    £mMovement on pension scheme deficits during the year:Deficit at 1 January
    
    
    (1,101
    )
    
    
    (842
    )Current service cost
    
    
    (120
    )
    
    
    (118
    )Contributions
    
    
    156
    
    
    
    115Past service cost
    
    
    (24
    )
    
    
    (15
    )Gain on settlements
    
    
    4
    
    
    
    13Other finance income
    
    
    (43
    )
    
    
    (20
    )Actuarial (loss)
    
    
    (68
    )
    
    
    (234
    )Deficit at 31 December
    
    
    (1,196
    )
    
    
    (1,101
    )
 2004
    
    
    2003£m
    
    
    £mHistory of experience gains/(losses)Difference between expected and actual return on scheme assets:Amount (£m)
    
    
    104
    
    
    
    94Percentage (%) of scheme assets
    
    
    4.2
    
    
    
    4.3Experience gains/(losses) on scheme liabilities:Amount (£m)
    
    
    (10
    )
    
    
    31Percentage (%) of the present value of scheme liabilities
    
    
    0.3
    
    
    
    0.9Total gain/(loss) recognised:Gain/(loss) on change of assumptions
    
    
    (68
    )
    
    
    (234
    )Percentage (%) of the present value of scheme liabilities
    
    
    1.8
    
    
    
    7.1
 153




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Financial Statements Notes to the Financial Statementscontinued If the full provisions of FRS 17 were reflected in the Consolidated Financial Statements, the
Group Profit and Loss Account reserve of £1,981m would be reduced by £834m (2003: £787m) to £1,147m
(2003: £1,740m). This reduction reflects the FRS 17 position shown above and the reversal of the
remaining unamortised asset relating to the surplus in the National and Provincial pension fund at
acquisition. 54. Directors emoluments and interests Further details of Directors emoluments and interests are included in the Directors Report on
pages 83 to 91. Ex gratiapensions paid to former Directors and the spouses of deceased Directors of Abbey in
2004, which would have been provided for previously, amounted to £54,020 (2003: £74,199). Details of loans, quasi loans and credit transactions entered into or agreed by the Company or
its subsidiaries with persons who are or were Directors and connected persons and officers of the
Company during the year were as follows: Number of
    
    
    Aggregate amount outstandingpersons
    
    
    £000DirectorsLoans
    
    
    1
    
    
    
    240Quasi loans
    
    
    
    
    
    
    Credit transactions
    
    
    
    
    
    
    Officers(1)Loans
    
    
    
    
    
    
    Quasi loans
    
    
    
    
    
    
    Credit transactions
    
    
    
    
    
    
    
   (1)
    
    Officers are defined as the Company Secretary and those non-Board members who, during the
year, were head of a division. Such loans were made in the
ordinary course of business and the mortgage loan was provided on the
same terms as those to other non-affiliated persons. No Director had a material interest in any contract of significance, other than a service contract,
with the Company or any of its subsidiaries at any time during the year. The Directors did not have
any interests in shares or debentures of subsidiaries. Further disclosures relating to these
transactions, as required under FRS 8, Related party disclosures, are given in note 56. 55. Share-based payments Abbey granted share options to executive officers and employees principally under the Executive
Share Option scheme, Sharesave scheme and the Employee Share Option scheme. 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 could elect to exercise their options either
three, five or seven years after the grant date. See note 42 to the Consolidated Financial
Statements for a description of the options granted under this scheme. The number of options authorised to be granted was limited to 10% of the total number of
shares issued since conversion. The total compensation expense for equity-settled share based transactions recognised in the
Profit and Loss Account was £12m (2003: £8m, 2002: £7m). The fair value of each option for 2004, 2003 and 2002 has been estimated as at the grant date
using the Black-Scholes option pricing model using the following assumptions: 2004
    
    
    2003
    
    
    2002Risk free interest rate
    
    
    3.7%-7.3
    %
    
    
    3.7%-7.3
    %
    
    
    4.2% - 7.9
    %Dividend growth, based solely upon average growth since 1989
    
    
    14
    %
    
    
    14
    %
    
    
    14
    %Volatility of underlying shares based upon historical volatility over five years
    
    
    22.7%-42.3
    %
    
    
    22.7%-42.3
    %
    
    
    22.7% - 40.0
    %Expected lives of options granted under:Employee Sharesave scheme
    
    3, 5 and 7 years*
    
    3, 5 and 7 years*
    
    3, 5 and 7 years*Executive Share Option scheme
    
    6 years
    
    6 years
    
    6 yearsEmployee Share Option scheme
    
    5 years
    
    5 years
    
    5 years
   *
    
    For three, five and seven year schemes respectively. The following table summarises the movement in the number of share options between those
outstanding at the beginning and end of the year, together with the changes in weighted average
exercise price over the same period. All of the shares options prior to 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 shares in return for a cash payment or to transfer their options to options in shares of
Banco Santander Central Hispano, S.A. 154




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Executive Share Option scheme
    
    
    Employee Sharesave scheme
    
    
    Employee Share Option schemeWeighted average
    
    
    
    
    
    
    Weighted average
    
    
    
    
    
    
    Weighted averageNumber of options
    
    
    exercise price
    
    
    Number of options
    
    
    exercise price
    
    
    Number of options
    
    
    exercise pricegranted
    
    
    £
    
    
    granted
    
    
    £
    
    
    granted
    
    
    £2004Options outstanding at the beginning of
the year
    
    
    15,180,932
    
    
    
    6.27
    
    
    
    28,328,589
    
    
    
    3.61
    
    
    
    8,909,143
    
    
    
    11.07Options granted before 12 November
    
    
    2,039,702
    
    
    
    4.61
    
    
    
    3,877,757
    
    
    
    3.98
    
    
    
    
    
    
    
    Options exercised before 12 November
    
    
    (4,360,768
    )
    
    
    3.93
    
    
    
    (1,727,980
    )
    
    
    3.51
    
    
    
    (4,050
    )
    
    
    5.91Options forfeited before 12 November
    
    
    (12,501,022
    )
    
    
    6.88
    
    
    
    (13,094,132
    )
    
    
    3.79
    
    
    
    (1,666,493
    )
    
    
    10.28Options expired before 12 November
    
    
    
    
    
    
    
    
    
    
    (12,734
    )
    
    
    7.65
    
    
    
    
    
    
    
    Options outstanding at 12 November
    
    
    358,844
    
    
    
    4.16
    
    
    
    17,371,500
    
    
    
    3.56
    
    
    
    7,238,600
    
    
    
    11.25Options granted after 12 November
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options exercised after 12 November
    
    
    
    
    
    
    
    
    
    
    (39,778
    )
    
    
    3.41
    
    
    
    (6,300
    )
    
    
    5.91Options forfeited after 12 November
    
    
    
    
    
    
    
    
    
    
    (80,926
    )
    
    
    4.23
    
    
    
    (150
    )
    
    
    5.91Options expired after 12 November
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,175,600
    )
    
    
    11.30Options outstanding at the year end
    
    
    358,844
    
    
    
    4.16
    
    
    
    17,250,796
    
    
    
    3.56
    
    
    
    56,550
    
    
    
    5.91Options exercisable at the end of the year
    
    
    11,327
    
    
    
    5.65
    
    
    
    
    
    
    
    
    
    
    
    56,550
    
    
    
    5.91The weighted-average grant-date fair
value of options granted during the year
    
    
    
    
    
    
    0.96
    
    
    
    
    
    
    
    0.99
    
    
    
    
    
    
    
    2003Options outstanding at the beginning of
the year
    
    
    8,005,206
    
    
    
    9.15
    
    
    
    18,173,482
    
    
    
    6.32
    
    
    
    10,507,253
    
    
    
    11.08Options granted during the year
    
    
    8,576,826
    
    
    
    3.80
    
    
    
    27,113,143
    
    
    
    3.20
    
    
    
    
    
    
    
    Options exercised during the year
    
    
    (114,990
    )
    
    
    3.98
    
    
    
    (246,456
    )
    
    
    4.06
    
    
    
    (450
    )
    
    
    5.91Options forfeited during the year
    
    
    (522,772
    )
    
    
    8.84
    
    
    
    (6,574,266
    )
    
    
    5.10
    
    
    
    (1,597,660
    )
    
    
    11.16Options expired during the year
    
    
    (763,338
    )
    
    
    7.13
    
    
    
    (10,137,314
    )
    
    
    6.39
    
    
    
    
    
    
    
    Options outstanding at the end of the year
    
    
    15,180,932
    
    
    
    6.27
    
    
    
    28,328,589
    
    
    
    3.61
    
    
    
    8,909,143
    
    
    
    11.07Options exercisable at the end of the year
    
    
    2,859,158
    
    
    
    8.39
    
    
    
    
    
    
    
    
    
    
    
    2,965,128
    
    
    
    10.59The weighted-average grant-date fair
value of options granted during the year
    
    
    
    
    
    
    0.52
    
    
    
    
    
    
    
    0.38
    
    
    
    
    
    
    
    2002Options outstanding at the beginning of
the year
    
    
    5,366,178
    
    
    
    8.85
    
    
    
    18,919,108
    
    
    
    6.02
    
    
    
    11,335,103
    
    
    
    11.04Options granted during the year
    
    
    3,822,618
    
    
    
    9.37
    
    
    
    4,800,602
    
    
    
    7.95
    
    
    
    
    
    
    
    Options exercised during the year
    
    
    (454,919
    )
    
    
    6.43
    
    
    
    (2,502,602
    )
    
    
    5.76
    
    
    
    (113,100
    )
    
    
    5.91Options forfeited during the year
    
    
    (622,983
    )
    
    
    9.53
    
    
    
    (2,142,906
    )
    
    
    7.34
    
    
    
    (396,500
    )
    
    
    11.25Options expired during the year
    
    
    (105,688
    )
    
    
    11.91
    
    
    
    (900,720
    )
    
    
    7.81
    
    
    
    (318,250
    )
    
    
    11.25Options outstanding at the end of the year
    
    
    8,005,206
    
    
    
    9.15
    
    
    
    18,173,482
    
    
    
    6.32
    
    
    
    10,507,253
    
    
    
    11.08Options exercisable at the end of the year
    
    
    2,098,028
    
    
    
    9.52
    
    
    
    39,182
    
    
    
    4.82
    
    
    
    561,128
    
    
    
    5.91The weighted-average grant-date fair
value of options granted during the year
    
    
    
    
    
    
    0.99
    
    
    
    
    
    
    
    2.37
    
    
    
    
    
    
    
    
 The following table summarises information about the options outstanding at 31 December 2004. Executive Share Option
    
    
    
    
    
    Options outstanding
    
    
    
    
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    remaining
    
    
    average
    
    
    Number
    
    
    averageoutstanding at
    
    
    contractual life
    
    
    exercise
    
    
    exercisable at
    
    
    exercise pricesRange of exercise prices
    
    31/12/2004
    
    
    (years)
    
    
    price (£)
    
    
    31/12/2004
    
    
    (£)Between £3 and £4
    
    
    182,474
    
    
    
    8.25
    
    
    
    3.73
    
    
    
    
    
    
    
    Between £4 and £5
    
    
    165,043
    
    
    
    9.25
    
    
    
    4.54
    
    
    
    
    
    
    
    Between £5 and £6
    
    
    11,327
    
    
    
    0.24
    
    
    
    5.65
    
    
    
    11,327
    
    
    
    5.65358,844
    
    
    
    
    
    
    
    
    
    
    
    11,327
 Under the Employee Sharesave scheme, the weighted-average exercise prices of options are less
than the market prices of the shares on the relevant grant dates. Employee Share Option Scheme
    
    
    
    
    
    Options outstanding
    
    
    
    
    
    
    Options exercisableWeightedaverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    remaining
    
    
    average
    
    
    Number
    
    
    averageoutstanding at
    
    
    contractual life
    
    
    exercise
    
    
    exercisable at
    
    
    exercise pricesRange of exercise prices
    
    31/12/2004
    
    
    (years)
    
    
    price (£)
    
    
    31/12/2004
    
    
    (£)Between £5 and £6
    
    
    56,550
    
    
    
    1.66
    
    
    
    5.91
    
    
    
    56,550
    
    
    
    5.91
 155




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 56. Related party disclosures a) Transactions with directors, executive officers and their close family members Directors, executive officers and members of their close families have undertaken the following
transactions with Abbey in the course of normal banking and life assurance business. Amounts in respect of
directors,executive officers (1) and theirNumber of directors and
    
    
    close family members 2004executive officers (1) 2004
    
    
    £000Secured loans, unsecured loans and overdraftsNet movements in the year
    
    
    
    
    
    
    226Balances outstanding as at 31 December
    
    
    1
    
    
    
    240Deposit, bank and instant access accounts and investmentsNet movements in the year
    
    
    (1
    )
    
    
    915Balances outstanding as at 31 December
    
    
    8
    
    
    
    2,080Life assurance policiesNet movements in the year
    
    
    1
    
    
    
    (57
    )Total sum insured/value of investment
    
    
    3
    
    
    
    50
 Amounts in respect of directors,executive officers (1) and theirNumber of directors and
    
    
    close family members 2003executive officers (1) 2003
    
    
    £000Secured loans, unsecured loans and overdraftsNet movements in the year
    
    
    1
    
    
    
    (375
    )Balances outstanding as at 31 December
    
    
    1
    
    
    
    14Deposit, bank and instant access accounts and investmentsNet movements in the year
    
    
    9
    
    
    
    (3,310
    )Balances outstanding as at 31 December
    
    
    9
    
    
    
    1,165Life assurance policiesNet movements in the year
    
    
    1
    
    
    
    7Total sum insured/value of investment
    
    
    2
    
    
    
    107
   (1)
    
    Executive officers are defined as the Company Secretary and those non-Board members who
during the year were head of a Division. Directors have also undertaken sharedealing transactions through an execution only stockbroker
subsidiary company of an aggregate net value of £2,280,413. The transactions were on normal
business terms and standard commission rates were payable. Secured and unsecured loans are made to Directors, executive officers and their close family
members on the same terms and conditions as applicable to other employees within Abbey. Amounts deposited by Directors, executive officers and their close family members earn
interest at the same rates as those offered to the market or on the same terms and conditions
applicable to other employees within Abbey. Such loans did not involve more than the normal risk of
collectibility or present other infavourable features. Life assurance policies and investments are entered into by Directors, Executive Officers and
their close family members on normal market terms and conditions, or on the same terms and
conditions as applicable to other employees within Abbey. Abbey entered into these loan agreements
in the ordinary course of business, with terms prevailing for comparable transactions with others
and these did not involve more than the normal risk of collectibility or present other unfavourable
features. b) Transactions with associated undertakings Abbey National plc holds a 50% share in PSA Finance plc (PSA), a subsidiary of Peugeot SA. PSA is a
finance organisation providing financial services to the Peugeot-Citroën car dealership network.
The income receivable from Abbeys interest in PSA amounted to £6m (2003: £12m) in the year. Abbey has a 25% interest in EDS Credit Services Ltd, a subsidiary of Electronic Data Systems
Ltd. Electronic Data Systems Ltd is a professional services firm specialising in information
technology. The income receivable from Abbeys interest in EDS Credit Services Ltd amounted to £nil
(2003: £nil) in the period. Balances outstanding between Abbey and associated companies at 31 December 2004 are detailed
in note 32. Further details of Abbeys interests in associated undertakings are shown in note 23. c) Transactions with Long-term Assurance Funds The long-term assurance funds
are related parties for the purposes of this disclosure because the assets and liabilities of the long-term assurance funds are included in the Balance Sheet. At 31 December 2004, Abbey entities owed £666m (2003: £858m) to, and were owed £1,354m (2003:
£411m) by, the long-term assurance funds. Of these respective amounts £662m (2003: £852m) relates
to amounts deposited by the long-term assurance funds with non-life assurance entities, and £1,327m
(2003: £376m) relates to amounts owed by the long-term assurance funds to non-life assurance entities. The remaining amounts represent balances between the long- 156




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Financial Statements Notes to the Financial Statementscontinued term assurance funds and the shareholders funds of the life assurance businesses. In addition, the
long-term assurance funds have lent £1,930m (2003: £1,647m) of investment assets to a subsidiary of
Abbey National Treasury Services under stock lending agreements at 31 December 2004. Included in Fees and commissions receivable in the year is an amount of £17m (2003: £27m)
receivable from the long-term assurance fund of Abbey National Life plc in respect of life
assurance products sold through the retail branch network, and an amount of £nil payable (2003:
£272m receivable) to the long-term assurance funds of Abbey National Life and Scottish Mutual
Assurance in respect of option premiums paid from/to Abbey Financial Markets. During the year Abbey National Financial Investment Services plc incurred costs amounting to
£213m (2003: £223m) on behalf of the long-term assurance funds. All such costs were recharged to
the long-term assurance funds and included within the charge to income from long-term assurance
business. Included within fees and commissions receivable are management fees received by Abbey
National Financial Investment Services totalling £200m (2003: £200m) from the long-term assurance
funds. Details of transfers of funds between shareholders funds and long-term assurance funds are
provided in note 21. Included within assets of long-term assurance funds and liabilities of
long-term assurance funds are amounts owing between the long-term assurance funds of £6m (2003:
£15m). The value of the funds holdings in internally managed unit trusts amounted to £4,438m (2003:
£4,604m) at 31 December 2004. The unit trusts are managed by Abbey National Unit Trust Management
Ltd, Scottish Mutual Investment Fund Managers Ltd, Scottish Mutual Investment Managers Ltd and
Abbey National Asset Managers Ltd. d) Subsidiary undertakings In accordance with Financial Reporting Standard 8 Related Party Disclosures (FRS 8),
transactions or balances between group entities that have been eliminated on consolidation are not
reported. e) Parent undertaking and controlling party Since 12 November 2004 the companys immediate and ultimate parent, and controlling party is Banco
Santander Central Hispano, S.A. The smallest and largest group into which the Groups results are
included is the group accounts of Banco Santander Central Hispano, S.A. copies of which may be
obtained from Grupo Santander, Shareholder Department, Grupo Santander, Santander House, 100
Ludgate Hill, London EC4M 7NJ. 57. Profit/(Loss) on sale or termination of a business As a consequence of the acquisition of Abbey by Banco Santander Central Hispano, S.A. in
November 2004, certain decisions were made to reorganise certain areas of the business. As a
result, a loss of £31m has been recognised during the year in relation to the exit of particular
parts of the business. A loss of £33m was recognised in 2003 as a result of Abbeys reorganisation
announced in February 2003. The total charge comprises £11m (2003: £16m) of employee redundancy
costs and £20m (2003: £17m) of other costs. 2004
    
    
    2003£m
    
    
    £mOpening balance
    
    
    33
    
    
    
    Transfer to profit and loss
    
    
    31
    
    
    
    33Utilised
    
    
    (15
    )
    
    
    Closing balance
    
    
    49
    
    
    
    33
 58. Differences between UK and US GAAP The significant differences applicable to Abbeys Consolidated Financial Statements are
summarised below. Goodwill UK GAAPGoodwill arising on consolidation as a result of the acquisitions of subsidiary and
associated undertakings after 1 January 1998, and goodwill arising on the purchase of businesses
after 1 January 1998, is capitalised under the heading, Intangible fixed assets, and amortised over
its expected useful economic life, subject to a maximum period of 20 years. Such goodwill is
subject to review for impairment in accordance with FRS 11, Impairment of fixed assets and
goodwill, which allows testing for impairment at the income generating unit level. The useful
economic life is calculated using a valuation model which determines the period of time over which
returns are expected to exceed the cost of capital. Goodwill arising on consolidation as a result
of the acquisitions of subsidiary and associated undertakings prior to 1 January 1998, and goodwill
which arose on the purchase of businesses prior to 1 January 1998, has previously been taken to
shareholders funds as reserves. US GAAPStatement of Financial Accounting Standards (SFAS) 142, Goodwill and Other Intangible
Assets, requires that goodwill resulting from acquisitions be capitalised. Goodwill balances are
not 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. Prior to the adoption of SFAS 142,
goodwill resulting from acquisitions was capitalised and amortised in the consolidated statement of
net income over the period in which the benefits were estimated to accrue. In the course of 2002 Abbey recorded an impairment of £604m related to the goodwill on
Scottish Provident Limited. UK GAAP requires impairment analysis at the income generating unit
level. Under US GAAP, Abbey tested Scottish Provident Limited for impairment at the reporting unit
level. As a result of this difference in analysis and the US GAAP book value of Scottish Provident
Limited being approximately £1.4bn less due to differences in accounting for shareholders interest
in long-term assurance business, there is no similar impairment of goodwill under US GAAP. 157




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Financial Statements Notes to the Financial Statementscontinued Other intangible assets UK GAAPAn 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 UK GAAP, in
connection with acquisitions, the values of depositor relationships, distribution channels,
trademarks and brands have not been considered separately identifiable assets and are included in
Goodwill. 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, distribution channels, trademarks and brands 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. The values ascribed to distribution
channels, trademarks and brands are amortised to net income over their estimated lives. Computer software UK GAAPExpenses on the purchase or development of computer software are charged to the Profit and
Loss Account as incurred. US GAAPThe American Institute of Certified Public Accountants (AICPA) Statement of Position 98-1
Accounting for the costs of computer software developed or obtained for internal use requires
certain costs relating to software developed or obtained for internal use to be capitalised and
amortised on a straight-line basis over the expected useful life of the software. Capitalised
software costs are tested for recoverability whenever events or changes in circumstances indicate
that their carrying amount may not be recoverable. An impairment loss is recognized if the
carrying amount is not recoverable and exceeds its fair value. Pension costs UK GAAPWhere pensions are provided by means of a funded defined benefits scheme, annual
contributions are based on actuarial advice. The expected cost of providing pensions is recognised
on a systematic basis over the expected average remaining service lives of the members of the
scheme. Variations from regular cost are spread over the average remaining service lives of current
employees on a straight-line basis. US GAAPSFAS 87, Employers Accounting for Pensions, prescribes the method of actuarial valuation,
which includes differences from certain assumptions used for the UK GAAP actuarial computation. In
addition, assets are assessed at fair value and liabilities are assessed at current settlement
rates. Certain variations from regular cost are allocated in equal amounts over the average
remaining service lives of current employees. Leasing UK GAAPFor lessors, income from finance leases, including benefits from declining tax rates, is
credited to the Profit and Loss Account using the actuarial after tax method to give a constant
periodic rate of return on the net cash investment. For lessees, leases are categorised as finance
leases when the substance of the agreement is that of a financing transaction and the lessee
assumes substantially all of the risks and benefits relating to the asset. All other leases are
categorised as operating leases. For assets leased to customers under operating leases, income and depreciation are recognised
in the Profit and Loss account using either the actuarial after-tax method or the straight-line
method, depending on the nature of the operating lease. In connection with a sale and leaseback, for the seller/lessee, a gain on sale is recognised
where the leaseback is an operating lease. US GAAPFor lessors, finance lease income is recognised so as to give a level rate of return on the
investment in the lease, but without taking into account tax payments and receipts. For lessees,
the general principles of UK GAAP and US GAAP are similar, however the latter has more stringent
requirements to classify leases as finance leases. These requirements are outlined in SFAS 13,
Accounting for Leases, and include, among other things, an assessment of whether the lease
contains a bargain purchase option and a minimum lease term of 75% of the leased assets useful
life. All other leases are classified as operating leases. For assets leased to customers under operating leases, income and depreciation are recognised
in the Profit and Loss account using the straight-line method. In connection with a sale and leaseback, for the seller/lessee, US GAAP precludes the
immediate recognition of a gain under certain conditions on a sale where the leaseback is an
operating lease. Rather this gain is deferred and amortised over the life of the contract. Shareholders interest in long-term assurance business UK GAAPAbbey accounts for its life assurance operations using the embedded value basis of
accounting, under UK GAAP applicable to banking groups. An embedded value is an actuarially
determined estimate of the economic value of a life assurance company, excluding any value which
may be attributed to future new business. The embedded value is the sum of the shareholders share
of net assets of the life assurance company and the present value of the shareholders share of
emerging surplus from the existing business. The value of the existing business is calculated by
projecting future net cash flows using appropriate economic and actuarial best estimate assumptions
and the result discounted at a rate which reflects the shareholders overall risk premium. In Abbeys balance sheet, the shareholders and policyholders interests in the long-term
assurance business are shown separately as one-line items in order to reflect their different
nature. The value of the long-term assurance business represents the embedded value described
above. Assets of long-term assurance funds mainly consist of investments held in the long-term assurance funds either on behalf of policyholders, or which have not yet been
allocated to either the policyholders or the shareholder. Liabilities of long-term assurance funds
mainly comprise policyholder benefits provisions. 158




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Financial Statements Notes to the Financial Statementscontinued US GAAPExcept as regards acquired blocks of business the net present value of the profits of the
in-force business is not recognised under US GAAP. Contracts which cover with-profits pension (with
minimal insurance risk), unitised with-profits, unit linked and annuity in payment policies are
classified as universal life, investment or limited payment policies 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. Contracts for
all other policies with significant mortality and/or morbidity risk including endowment, term and
whole of life policies are accounted for in accordance with SFAS 60, Accounting and Reporting by
Insurance Enterprises. Revenue Recognition UK GAAPThe change in embedded value during any reported period adjusted for any dividends declared
or capital injected, and grossed up at the underlying rate of corporation tax, is reflected in
Abbeys Profit and Loss Account as income from life assurance business. US GAAPPremiums for SFAS 60 products are recognised as revenue when due from policyholders and the
costs of claims are recognised when insured events occur. Acquisition costs are charged to the
Profit and Loss Account in proportion to premium revenue recognised. Premiums for universal life and investment contracts are applied as increases to policyholder
account balances when received. Revenues derived from these policies consist of mortality charges,
policy administration charges, investment management fees and surrender charges that are deducted
from the policyholder account balances. Premiums and policy charges received from customers that relate to future periods are deferred
until the period to which they relate and are recorded as a deferred income liability. For limited
payment contracts, the excess of the gross premium over the US GAAP net benefit premium is deferred
and amortised in relation to expected future benefit payments. For investment and universal life contracts, policy charges that relate to future periods and
related acquisition costs are deferred and amortised in relation to expected gross profits.
Expected gross profits are projected on current best estimate assumptions with no provisions for
adverse deviation. Costs of claims are recognised when insured events
occur. To the extent that a reinsurance contract does not, despite
its form, provide for indemnification of the insured by the reinsurer
against loss or liability, the premium paid less the amount of the
premium to be retained by the reinsurer is accounted for as a deposit
by the insured company. Deferred acquisition costs UK GAAPThe cost of acquiring new and renewal life assurance business is recognised in the embedded
value calculation as incurred under UK GAAP applicable to banking groups. US GAAPUnder US GAAP the costs incurred by the insurer in the acquisition of new and renewal life
insurance business are capitalised. These consist of the acquisition costs, principally,
commissions and other variable sales costs. Deferred acquisition costs for SFAS 60 products are 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 are amortised in
proportion to the estimated gross profits arising from the contracts. Policyholder liabilities UK GAAPFuture policyholder benefit provisions included in Abbeys balance sheet are calculated,
under UK GAAP applicable to banking groups, using approved actuarial methods (such as net and gross
premium methods) for with-profit life insurance and other protection-type policies and are based on
fund value for unitised with-profits insurance policies and investment-type policies. Net premiums
are calculated using assumptions for interest, mortality, morbidity and expenses. These assumptions
are determined as prudent best estimates at the date of valuation. Liabilities are not established
for future annual and terminal bonus declarations. US GAAPFor SFAS 97 defined products, the liability is represented by the policyholders account
balance before any applicable surrender charges. Policyholder benefit liabilities for products
defined by SFAS 60 are developed using the net level premiums method. Assumptions for interest,
mortality, morbidity withdrawals and expenses are 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. With-profits business With-profits policies entitle the policyholder to participate in the surplus within the
with-profits life fund of the insurance company which issued the policy. Regular bonuses are
determined and declared annually by the issuing companys Board of Directors on the advice of the
with-profits actuary. Bonuses take the form of additional benefits which are only paid on
termination of the policy. The bonuses that may be declared are highly correlated, over a period of
time, to the overall performance of the underlying assets and liabilities of the fund in which the
contract is invested over that same period of time. Bonuses are 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 provides that
approximately 90 per cent of the surplus arising from the net assets of the fund which is
distributed is allocated to policyholders in the form of either annual bonuses or terminal bonuses
which are allocated at the end of the contract. For unitised with-profits business written into the
with-profits fund all of the surplus that is distributed is allocated to policyholders as bonus. UK GAAPAll amounts in the with-profits funds not yet allocated to policyholders or shareholders
are recorded in the liabilities attributable to policyholders on Abbeys balance sheet. US GAAPA liability is established for undistributed policyholder allocations. The excess of assets
over liabilities in the with-profits fund is allocated to the policyholders and shareholders in
accordance with the proportions prescribed by the contracts. The remaining liability comprises the
obligation of the insurance company to the policyholders. Any deficit arising in the with-profit
fund is provided for in full. 159




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Financial Statements Notes to the Financial Statementscontinued Guaranteed Annuity Options Abbey has 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. UK GAAPAn estimate of the fair value of the guarantee payable to the policyholders, on a net
present value basis, is provided for in the liabilities of the with-profit fund. US GAAPThe guaranteed annuity option is considered to only give rise to a mortality risk when the
right to purchase is exercised by the policyholder. If purchased, the annuity is a new contract and
evaluated under SFAS 97 at that time. As a result of the adoption of SOP 03-1, an additional
liability has been recognised to allow for potential benefits in addition to the account balance
that are payable only upon annuitisation. Investments in securities UK GAAPSecurities held for investment purposes are stated at cost adjusted for any amortisation of
premium or discount. Provision is made for any impairment in value. All securities not held for investment purposes are stated at fair value and profits and
losses arising from this revaluation are taken to the profit and loss account. Debt and Equity
securities are periodically reviewed on a case-by-case basis to determine whether any decline in
fair value below the carrying value is an indication of impairment. A review for impairment of a
security includes, 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 reverse the effects of a previous impairment, the carrying value of the
security may be written up to a value no higher than the original cost which would have been
recognised had the original impairment not occurred. Providing a general allowance for unidentified impairment losses in a portfolio of securities
is permitted. US GAAPInvestments in securities with readily determinable market values are classified as trading
securities, available for sale securities, and held to maturity securities in accordance with SFAS
115. Debt securities classified as held to maturity represent securities that Abbey has both the
ability and the intent to hold until maturity. Held to maturity securities are stated at cost and
adjusted for any amortisation of premium or discount. Securities classified as trading represent securities that Abbey bought and holds principally
for the purpose of selling them in the near term. Trading securities are accounted for in the same
way as securities not held for investment purposes under UK GAAP. Debt and Equity securities
classified as available for sale represent securities not classified as either held to maturity or
trading securities. Available for sale securities are reported at fair value. Where a security, or
proportion of a security, is unhedged, the unrealised gains and losses are excluded from earnings
and reported in a separate component of shareholders funds. Foreign exchange gains or losses on
foreign currency denominated available-for-sale securities are also excluded from earnings and
recorded as part of the same separate component of shareholders funds. Where a security, or a
proportion of a security, is hedged by a fair value hedge, the unrealised gain or loss on both the
security and the derivative financial instrument hedging the available for sale security will be
taken to earnings. Securities classified as either available-for-sale or held-to-maturity 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 usually considered to have occurred. The security is
written down to fair value (i.e. the present value of the current estimated cash flows) with the
resulting change being included in income. In 2003, Abbey reviewed its UK impairment testing
procedures and adopted the specific impairment testing methodology required by EITF 99-20 for
applicable asset backed securities for UK GAAP 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. Providing a general allowance for unidentified impairment losses in a portfolio of securities
is not permitted. Loan origination fees and costs UK GAAPLoan origination fees received in respect of services provided are taken to the Profit and
Loss Account when the related services are performed. Where loan origination fees or costs are in
the nature of interest or income, they are recognised in the profit and loss account over the
expected life of the transaction to which they relate or over the period of time in which Abbey has
the right to recover the incentives in the event of early redemption. 160




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Financial Statements Notes to the Financial Statementscontinued US GAAPTo the extent that loan origination fees are not offset by related direct costs, they are
deferred and amortised through the Profit and Loss Account 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. Abbey includes estimates
of future prepayments in the calculation of constant yield. These estimates are based on detailed
mortgage prepayment models. Securitised assets UK GAAPUnder FRS 5, Reporting the substance of transactions, where assets are financed in such a
way that the maximum loss that Abbey can suffer is limited to a fixed monetary amount, whilst not
changing in any significant way the entitys access to the benefits (including servicing fees) or
risks of holding those assets, then providing certain conditions are met the assets remain on
balance sheet and any finance received is deducted from the assets. Specifically, paragraph D8(c)
of Application Note D to FRS 5, stipulates that derecognition is not appropriate where the
originator retains rights to further sums, including among other things, in the form of servicing
fees. Such treatment is referred to as linked presentation. Special purpose vehicles are treated
as quasi-subsidiaries and are consolidated where the risks and rewards from operations are similar
to those which would be obtained for a subsidiary. 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. The interests that Abbey retains in its securitisation
transactions are interest-only securities. Contrary to UK GAAP, the retention of a servicing asset
does not, of itself, preclude the transfer of financial assets to be treated as a sale. In
accordance with SFAS 140, Abbey treats its securitisations of mortgage loans as sales and, where
appropriate, recognises a servicing asset and an interest receivable asset. The servicing asset is
amortised over the periods in which the benefits are expected to be received and the receivable is
accounted for as an available for sale security. Derivatives and Hedging Activities UK GAAPDerivatives classified as trading are carried at market value in the balance sheet. Gains
and losses are taken directly to the profit and loss account and reported within dealing profits. Derivatives classified as non-trading are those entered into for the purpose of hedging risk
from potential movements in foreign exchange rates, interest rates, and equity prices inherent in
Abbeys non-trading assets, liabilities and positions. Non-trading derivatives are accounted for in
a manner consistent with the assets, liabilities or positions being hedged. Income and expense on
non-trading derivatives are recognised on an accruals basis. Credit derivatives, designated as
non-trading and through which credit risk is taken on, are reported as guarantees, which best
reflects the economic substance of those transactions. The majority of Abbeys hedging contracts are transacted with an in-house risk management and
trading operation, Abbey National Financial Products, in order to manage financial risks with
external markets efficiently. Abbey National Financial Products transfers substantially all such
risks into external markets on a portfolio basis in order to benefit from economies of scale,
managing risk within predetermined limits. In Abbeys accounts, derivatives held as non-trading
instruments are accounted for on an accruals basis. US GAAPSFAS 133, Accounting for Derivatives Instruments and Hedging Activities, requires that
all derivatives 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. For cash flow hedge transactions, in which Abbey is hedging the variability of cash flows
related to a variable-rate asset, liability, or a forecasted transaction, changes in the fair value
of the derivative instrument are reported in Other comprehensive income. The gains and losses on
the derivative instrument that are reported in Other comprehensive income are reclassified as
earnings in the periods in which earnings are impacted by the variability of the cash flows of the
hedged item. The ineffective portion of all hedges are recognised in current-period earnings. The majority of Abbeys hedges are undertaken with its in-house trading operation, Abbey
National Financial Products. Abbey National Financial Products match internal hedges with third
party derivatives on an aggregate rather than individual basis and hedges the net outstanding
position where Abbey has assets and liabilities, which largely offset the overall risk to Abbey.
These hedges do not qualify under SFAS 133 to be treated as cash flow, fair value or foreign
exchange hedges. For this reason, such contracts are restated at market value for the purposes of
the US GAAP reconciliation. Restructuring costs UK GAAPProvisions for vacant property may be recognised at the date when the decision has been
taken to vacate the property. US GAAPProvisions for vacant property can only be recognised when the property has been vacated. 161




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Financial Statements Notes to the Financial Statementscontinued Derecognition of liabilities UK GAAPA debt may be derecognised for financial reporting purposes when it is beyond reasonable
doubt that performance will not be required under the obligation. US GAAPA 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. Consolidation UK GAAPA company is required to consolidate all its subsidiary undertakings. US GAAPA company 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. Dividend payable UK GAAPDividends declared are recorded in the period to which they relate. US GAAPDividends are recorded in the period in which they are declared. Deferred Tax UK GAAPDeferred tax is provided for all timing differences between the recognition of gains and
losses in the financial statements and their recognition in a tax computation. Deferred tax assets
are recognised to the extent that it is regarded as more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying timing differences can be
deducted. US GAAPUnder SFAS 109 Accounting for Income Taxes deferred tax assets and liabilities are
recorded for all temporary differences. A valuation allowance is recorded against a deferred tax
asset where it is more likely than not that some portion of the deferred tax asset will not be
realised. Deferred tax is provided on enacted tax rates. 59. Current developments in UK and US GAAP FAS 150: Accounting for Certain Financial Instruments with Characteristics of both Liabilities
and Equity In May 2003, the
Financial Accounting Standards Board (FASB) issued SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 addresses how
an issuer classifies and measures certain financial instruments with characteristics of both
liabilities and equity and requires an issuer to classify a financial instrument that is within its
scope as a liability (or asset in some circumstances). SFAS 150 is effective for financial
instruments entered into or modified after 31 May 2003, and otherwise is effective at the beginning
of the first interim period beginning after 15 June 2003. SFAS
150 did not have a material impact on
Abbeys financial position or results of operations. FIN 46 R: Consolidation of Variable Interest Entities. In January 2003, the
FASB released FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) which was
revised by the FASB in December 2003. The revised interpretation
(FIN 46R) changes the method of determining whether certain entities, including securitisation
entities, should be included in Abbeys Consolidated Financial Statements. An entity is subject to
FIN 46R and is called a variable interest entity (VIE) if it has (1) equity that is insufficient to
permit the entity to finance its activities without additional subordinated financial support from
other parties, (2) equity investors that cannot make significant decisions about the entitys
operations, or that do not absorb the expected losses or receive the expected returns of the entity
or (3) equity investors that have voting rights that are not proportionate to their economic
interests and substantially all the activities of the entity involve, or are conducted on behalf
of, an investor with a disproportionately small voting interest. A variable interest entity is
consolidated by its primary beneficiary, which is the party involved with the variable interest
entity that has a majority of the expected losses or a majority of the expected residual returns or
both. Abbey has adopted the provisions of FIN 46R to all the entities subject to this
interpretation. The impact on the adoption of FIN 46 R is reflected in note 62(h) on page 174. EITF 03-1: The Meaning of Other -Than -Temporary Impairment and Its Application to Certain
Investments In March 2004, the FASB ratified EITF Issue No 03-1, The Meaning of Other -Than -Temporary
Impairment and Its Application to Certain Investments which provides guidance on recognising
other-than-temporary impairments on certain investments. The issue is effective for
other-than-temporary impairment evaluations for investments accounted for under SFAS 115,
Accounting for Certain Investments in Debt and Equity Securities, as well as non-marketable
securities accounted for under the cost method. The measurement provisions of this issue have been
indefinitely deferred. The disclosures now required are set out on page 172. 162




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Financial Statements Notes to the Financial Statementscontinued EITF 03-7: Accounting for the settlement of the Equity-Settled Portion of a Convertible Debt
Instrument That Permits or Requires the Conversion Spread to be Settled in Stock (Instrument C in
issue 90-19) In August 2003, the FASB ratified EITF 03-7, Accounting for the
Settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires
the Conversion Spread to be Settled in Stock (Instrument C in issue 90-19). EITF 03-7 addresses
how an issuer should account for the partial cash-based and partial stock-based settlement of a
debt instrument that is structured in the form of an Instrument C of EITF 90-19. Upon the
settlement of the debt by payment of the principal in cash and settlement of the conversion spread
with stock, only the cash payment is to be included in the computation of the gain or loss on
extinguishment of the debt. EITF 03-7 is applied prospectively for transactions or arrangements
entered into by Abbey after 1 January 2004. The adoption of EITF 03-7 did not have a material
impact on Abbeys financial position or results of operations. EITF 03-11: Reporting Gains and Losses on Derivative Instruments that are Subject to FASB No. 133,
Accounting for Derivative Instruments and Hedging Activities, and Not Held for Trading Purposes
as defined in EITF Issue No. 02-03, Issues Related to Accounting for Contracts Involved in Energy
Trading and Risk Management Activities In August 2003, the FASB ratified EITF 03-11, Reporting Gains and
Losses on Derivative Instruments That Are Subject to FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, and Not Held for Trading Purposes as Defined in
EITF Issue No. 02-3, Issues Related to Accounting for Contracts Involved in Energy Trading and
Risk Management Activities. EITF 03-11 requires companies, when determining whether realised gains
and losses on derivative contracts not held for trading purposes should be reported on a net or
gross basis, to make such determinations as a matter of judgement that depends on the relevant
facts and circumstances. EITF 03-11 is to be applied prospectively for transactions or arrangements entered into by
Abbey after 1 January 2004. The application of EITF 03-11 did not have a material impact on Abbeys
financial position or results of operations. SOP 03-1: Accounting and Reporting by Insurance Enterprises for Certain Non-traditional
Long-Duration Contracts and for Separate Accounts. In July 2003, the AICPA issued Statement of Position
(SOP) 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional
Long-Duration Contracts and for Separate Accounts. SOP 03-1 provides guidance related to the
reporting and disclosure of certain insurance contracts and separate accounts, including the
accounting for annuitisation options. SOP 03-1 also addresses the capitalisation and amortisation
of sales inducements to contract holders. SOP 03-1 is effective for fiscal years beginning after 15
December 2003. The impact of SOP 03-1 on Abbeys results of operations and financial condition is included in
the US GAAP reconciliation in the adjustment Shareholders interest in long-term assurance
business. SAB 105: Application of Accounting Principles to Loan Commitments In March 2004, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No.
105, Application of Accounting Principles to Loan
Commitments. SAB 105 requires that the fair value
measurement of loan commitments, which are derivatives, exclude any expected future cash flows
related to the customer relationship or servicing rights. The guidance in SAB 105 must be applied
to loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not have a
material impact on Abbeys financial position or results of operations. 163




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Financial Statements Notes to the Financial Statementscontinued 60. Future developments in US GAAP SOP 03-3: Accounting for Certain Loans or Debt Securities Acquired in a Transfer In December 2003, the
AICPA issued Statement of
Position 03-3 Accounting for Certain Loans or Debt Securities Acquired in a Transfer (SOP
03-3). SOP 03-3 addresses accounting for differences between contractual cash flows and cash flows
expected to be collected from an investors initial investment in loans or debt securities (loans)
acquired in a transfer if those differences are attributable, at least in part, to credit quality.
It includes such loans acquired in purchase business combinations, but does not apply to loans
originated by the entity. SOP 03-3 limits the yield that may be accreted to the excess of the
investors estimate of undiscounted expected principal, interest, and other cash flows over the
investors initial investment in the loan. The SOP requires that the excess of contractual cash
flows over cash flows expected to be collected (non-accretable difference) not be recognised as an
adjustment of yield, loss accrual, or valuation allowance. SOP 03-3 also prohibits investors from
displaying accretable yield and non-accretable difference in the balance sheet. Subsequent
increases in cash flows expected to be collected generally should be recognised prospectively
through adjustment of the loans yield over its remaining life. Decreases in cash flows expected to
be collected should be recognised as impairment. SOP 03-3 is effective for loans acquired in fiscal years beginning after 15 December 2004.
Abbey does not expect the adoption of SOP 03-3 to have a material
impact on the companys financial position or results of operations. FAS 123 R On December 16, 2004, the FASB issued FASB Statement (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 amends SFAS 95, Statement of Cash Flows. Generally, the approach to accounting for
share-based payments in SFAS 123R is similar to the fair-value approach permitted in SFAS 123.
However, SFAS 123R requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair values (i.e., pro
forma disclosure is no longer an alternative to financial statement recognition). SFAS 123R is
effective at the beginning of the first interim or annual period beginning after June 15, 2005.
Abbey does not expect the adoption of SFAS 123R to have a material
impact on the companys financial position or results of operations. FASB Staff Position 97-1, Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97,
Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for
Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned
Revenue Liability On June 18, 2004, FASB Staff Position 97-1 was issued to clarify the accounting requirements of
SFAS 97. SFAS 97 requires the recognition of an unearned revenue liability for amounts that have
been assessed to compensate insurers for services to be performed over future periods. Paragraph
26 of SOP 03-1 cites one situation (assessments resulting in profits in early years and losses in
subsequent years from the insurance benefit function) for which the recognition of an unearned
revenue liability is required. FASB Staff Position 97-1 clarifies that this requirement of SOP
03-1 does not amend SFAS 97 and does not limit the requirement of SFAS 97 to recognise a liability
for unearned revenue only to those situations where profits are expected to be followed by losses.
Abbey does not expect the adoption of FASB Staff Position 97-1 to have a material impact on the
companys financial position or results of operations. International Accounting Standards (IAS) Abbey, in line with all companies listed on exchanges in the European Union, will be required to
prepare its financial statements in accordance with IAS from 1 January 2005. Abbey is currently
assessing the impact of this change on its US GAAP reconciliations. For further details on the
conversion of IAS, see page 15. 164




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Financial Statements Notes to the Financial Statementscontinued 61. US GAAP reconciliation The following table summarises the significant adjustments to consolidated net income and
shareholders funds which would result from the application of US GAAP instead of UK GAAP. Where
applicable, the adjustments are stated gross of tax with the cumulative tax effect of all
adjustments included separately. 2004
    
    
    2003(1)
    
    
    2002(1)Income statement
    
    £m
    
    
    £m
    
    
    £mProfit/(loss) attributable to the shareholders of Abbey National plc  UK GAAP
    
    
    80
    
    
    
    (699
    )
    
    
    (1,161
    )Dividends on preference shares
    
    
    (48
    )
    
    
    (60
    )
    
    
    (62
    )32
    
    
    
    (759
    )
    
    
    (1,223
    )US GAAP adjustments:Goodwill
    
    
    5
    
    
    
    22
    
    
    
    714Other intangible assets
    
    
    (162
    )
    
    
    (53
    )
    
    
    (120
    )Computer software
    
    
    (109
    )
    
    
    (42
    )
    
    
    (24
    )Pensions cost
    
    
    (78
    )
    
    
    (7
    )
    
    
    (28
    )Securitisation
    
    
    30
    
    
    
    37
    
    
    
    26Shareholders interest in long-term assurance business
    
    
    109
    
    
    
    270
    
    
    
    (673
    )Derivatives and hedging activities
    
    
    54
    
    
    
    303
    
    
    
    (138
    )Loan origination fees and costs
    
    
    12
    
    
    
    37
    
    
    
    73Leasing
    
    
    1
    
    
    
    (30
    )
    
    
    94Other
    
    
    (66
    )
    
    
    2
    
    
    
    (37
    )Tax effect on the above adjustments
    
    
    104
    
    
    
    92
    
    
    
    (71
    )Net (loss)/income available to ordinary shareholders   US GAAP
    
    
    (68
    )
    
    
    (128
    )
    
    
    (1,407
    )Net income/(loss) from continuing operations  US GAAP
    
    
    (103
    )
    
    
    278
    
    
    
    (676
    )Net (loss)/income of discontinued operations  US GAAP
    
    
    35
    
    
    
    (406
    )
    
    
    (731
    )Net (loss)/income available to ordinary shareholders   US GAAP
    
    
    (68
    )
    
    
    (128
    )
    
    
    (1,407
    )(Loss)/earnings per 10 pence ordinary share:- from continuing operations- basic and
diluted
    
    
    (7.1)p
    
    
    
    19.2p
    
    
    
    (47.5)p- from discontinued operations- basic and
diluted
    
    
    2.4p
    
    
    
    (28.0)p
    
    
    
    (50.7)p- from net (loss)/income available to ordinary shareholders- basic and diluted
    
    
    (4.7)p
    
    
    
    (8.8)p
    
    
    
    (98.2)p
 2004
    
    
    2003(1)Shareholders funds
    
    £m
    
    
    £mShareholders funds including non-equity interests  UK GAAP
    
    
    4,924
    
    
    
    5,331US GAAP adjustments:Goodwill
    
    
    678
    
    
    
    673Other intangible assets
    
    
    89
    
    
    
    251Computer software
    
    
    8
    
    
    
    117Pensions cost
    
    
    (583
    )
    
    
    (464
    )Securitisation
    
    
    368
    
    
    
    310Shareholders interest in long-term assurance business
    
    
    (935
    )
    
    
    (1,044
    )Derivatives and hedging activities
    
    
    206
    
    
    
    152Loan origination fees and costs
    
    
    70
    
    
    
    58Leasing
    
    
    (197
    )
    
    
    (198
    )Other
    
    
    (138
    )
    
    
    (72
    )Securities and investments
    
    
    52
    
    
    
    89Dividend payable
    
    
    
    
    
    
    242Tax effect on the above adjustments
    
    
    301
    
    
    
    184Shareholders funds  US GAAP
    
    
    4,843
    
    
    
    5,629
   (1)
    
    Restated for the matters described in note 62 (t). 165




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 62. Further note disclosures on differences between UK and US GAAP, and certain additional US
disclosures a) Goodwill and other intangible assets The following tables provide analyses of goodwill and intangible assets included in the balance
sheet under US GAAP for the two years ended 31 December 2004, and 2003. The changes in the carrying amounts of goodwill, by segment, for the years ended 31 December
2004, and 2003 are as follows: MotorBanking
    
    
    Investment
    
    
    
    
    
    
    
    
    
    
    Finance &and
    
    
    and
    
    
    General
    
    
    Wholesale
    
    
    Litigation
    
    
    
    
    
    
    Groupsavings
    
    
    protection
    
    
    Insurance
    
    
    Banking
    
    
    Funding
    
    
    Other
    
    
    TotalGoodwill
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCarrying value at 1 January 2004
    
    
    257
    
    
    
    674
    
    
    
    4
    
    
    
    70
    
    
    
    
    
    
    
    9
    
    
    
    1,014Disposals
    
    
    (3
    )
    
    
    (2
    )
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (18
    )Other movements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )Carrying value at 31 December 2004
    
    
    254
    
    
    
    672
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    995Total Goodwill capitalised per UK GAAP
    
    
    90
    
    
    
    227
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    317US/UK GAAP adjustment to
shareholders funds
    
    
    164
    
    
    
    445
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    678
 MotorBanking
    
    
    Investment
    
    
    
    
    
    
    
    
    
    
    Finance &and
    
    
    and
    
    
    General
    
    
    Wholesale
    
    
    Litigation
    
    
    
    
    
    
    Groupsavings
    
    
    protection
    
    
    Insurance
    
    
    Banking
    
    
    Funding
    
    
    Other
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCarrying value at 1 January 2003
    
    
    273
    
    
    
    674
    
    
    
    4
    
    
    
    70
    
    
    
    190
    
    
    
    11
    
    
    
    1,222Disposals
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (190
    )
    
    
    (4
    )
    
    
    (194
    )Other movements
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (14
    )Carrying value at 31 December 2003
    
    
    257
    
    
    
    674
    
    
    
    4
    
    
    
    70
    
    
    
    
    
    
    
    9
    
    
    
    1,014Total Goodwill capitalised per UK GAAP
    
    
    95
    
    
    
    240
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    341US/UK GAAP adjustment to
shareholders funds
    
    
    162
    
    
    
    434
    
    
    
    4
    
    
    
    70
    
    
    
    
    
    
    
    3
    
    
    
    673
 Year ended 31 December2004
    
    
    2003Other intangible assets
    
    £m
    
    
    £mArising on consolidationAt 1 January
    
    
    675
    
    
    
    675Transfers from goodwill
    
    
    
    
    
    
    Additions
    
    
    
    
    
    
    At 31 December
    
    
    675
    
    
    
    675AmortisationAt 1 January
    
    
    424
    
    
    
    371Impairments
    
    
    135
    
    
    
    Charge for the year
    
    
    27
    
    
    
    53At 31 December
    
    
    586
    
    
    
    424Net book valueTotal capitalised per US GAAP
    
    
    89
    
    
    
    251Total capitalised per UK GAAP
    
    
    
    
    
    
    US GAAP adjustment to shareholders funds
    
    
    89
    
    
    
    251Total US GAAP adjustments to shareholders funds for goodwill and other intangible assets
    
    
    767
    
    
    
    924
 Total net book value of
£89m (2003: £251m) consists of core deposits £51m
(2003: £64m), trademarks £20m (2003: £21m) and
distribution channels £18m (2003: £166m). Abbey reviewed its other intangible assets for impairments, in accordance with the requirements
of SFAS 142. In 2004, an impairment in the value of distribution channels was recognised due to
the expectation of reduced profitability in a competitive UK protection market through the independent financial
adviser channels in place at the date of Scottish Providents acquisition. No impairment charge was
required in any of the other periods presented. All intangible assets (excluding goodwill) are amortised over their estimated average life.
The estimated future amortisation expense is as follows: Year ended 31 December:
    
    £m2005
    
    
    172006
    
    
    172007
    
    
    172008
    
    
    112009
    
    
    3
 166




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued b) Tangible fixed assets The following tables provide analyses of tangible fixed assets included in the Balance Sheet under
US GAAP for the two years ended 31 December 2004 and 2003. Year ended 31 December2004
    
    
    2003Computer software
    
    £m
    
    
    £mCost or
valuationAt 1 January
    
    
    357
    
    
    
    333Additions
    
    
    25
    
    
    
    34Disposals
    
    
    (117
    )
    
    
    (10
    )At 31 December
    
    
    265
    
    
    
    357AmortisationAt 1 January
    
    
    240
    
    
    
    173Disposals
    
    
    (99
    )
    
    
    (4
    )Impairment
    
    
    48
    
    
    
    Charge for the year
    
    
    68
    
    
    
    71At 31 December
    
    
    257
    
    
    
    240Net book
valueTotal capitalised per US GAAP
    
    
    8
    
    
    
    117Total capitalised per UK GAAP
    
    
    
    
    
    
    US GAAP adjustment to shareholders funds
    
    
    8
    
    
    
    117
 Abbey reviewed its computer software for impairments, in accordance with the requirements of
SFAS 144. In 2004, the amounts previously capitalised were disposed/impaired following the Banco
Santander Central Hispano S.A. acquisition. Year ended 31 December2004
    
    
    2003Investment properties
    
    £m
    
    
    £mCost or valuationAt 1 January
    
    
    1,309
    
    
    
    1,320Additions
    
    
    78
    
    
    
    120Disposals
    
    
    (223
    )
    
    
    (131
    )At 31 December
    
    
    1,164
    
    
    
    1,309AmortisationAt 1 January
    
    
    111
    
    
    
    65Disposals
    
    
    (30
    )
    
    
    (4
    )Charge for the year
    
    
    73
    
    
    
    50At 31 December
    
    
    154
    
    
    
    111Net book value
    
    
    1,010
    
    
    
    1,198
 c) Pension costs For the purposes of US GAAP, Abbey adopts the provisions of SFAS 87, Employers Accounting for
Pensions, as amended by SFAS 132, Employers Disclosures about Pensions and Other Post-retirement
Benefits, in respect of its pension plans, The Abbey National Amalgamated Pension Fund, the
Scottish Mutual Assurance plc Staff Pension Scheme, the National and Provincial Pension Fund, the
Abbey National Group Pension Scheme, the Scottish Provident Institution Staff Pension Fund and the
Abbey National Associated Bodies Pension Fund. The components of the estimated net periodic pension
cost computed under SFAS 87 are as follows: Year ended 31 December2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mService cost
    
    
    124
    
    
    
    122
    
    
    
    145Interest cost
    
    
    182
    
    
    
    160
    
    
    
    145Expected return on assets
    
    
    (140
    )
    
    
    (152
    )
    
    
    (155
    )Amortisation of initial transition amount
    
    
    
    
    
    
    (10
    )
    
    
    (8
    )Special termination benefits
    
    
    24
    
    
    
    15
    
    
    
    Recognised
(gain)/loss
    
    
    52
    
    
    
    8
    
    
    
    (1
    )Recognised prior service cost
    
    
    1
    
    
    
    2
    
    
    
    2Net periodic pension cost
    
    
    243

    
    
    
    145
    
    
    
    128
 The pensions costs calculated under UK and US GAAP are not directly comparable due to different
treatment of amounts charged to life businesses. 167




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Financial Statements Notes to the Financial Statementscontinued The following table sets forth a reconciliation of beginning and ending balances of the
projected benefit obligation: Year ended 31 December2004
    
    
    2003£m
    
    
    £mBenefit obligation at beginning of the year
    
    
    3,357
    
    
    
    2,798Service cost
    
    
    124
    
    
    
    122Interest cost
    
    
    182
    
    
    
    160Members contributions
    
    
    14
    
    
    
    17Business transfer
    
    
    
    
    
    
    50Special termination benefits
    
    
    24
    
    
    
    15Settlements and curtailments
    
    
    (44
    )
    
    
    Actuarial loss
    
    
    161
    
    
    
    276Benefits paid
    
    
    (88
    )
    
    
    (81
    )Benefit obligation at end of year
    
    
    3,730
    
    
    
    3,357
 The following table sets forth a reconciliation of the fair value of plan assets for the period
1 January to 31 December. Year ended 31 December2004
    
    
    2003£m
    
    
    £mFair value of plan assets at beginning of year
    
    
    2,204
    
    
    
    1,880Actual return on plan assets
    
    
    243
    
    
    
    231Business transfer
    
    
    
    
    
    
    42Settlements
    
    
    (40
    )
    
    
    Employer contributions
    
    
    156
    
    
    
    115Employee contributions
    
    
    14
    
    
    
    17Benefits paid
    
    
    (88
    )
    
    
    (81
    )Fair value of plan assets at end of year
    
    
    2,489
    
    
    
    2,204
 The following table sets forth the funded status of the plans. Year ended 31 December2004
    
    
    2003£m
    
    
    £mFunded status
    
    
    (1,241
    )
    
    
    (1,153
    )Unrecognised prior service cost
    
    
    1
    
    
    
    2Unrecognised loss
    
    
    934
    
    
    
    937Accrued liabilities
    
    
    (306
    )
    
    
    (214
    )
 The estimated accumulated benefit obligation at 31 December 2004 amounted to £3,090m (2003:
£2,675m). This requires a minimum additional liability of
£304m to be recognised, of which £263m
was recognised in 2003. For the purposes of amortising gains and losses the 10% corridor has been adopted, and the
market-related value of assets recognises realised and unrealised capital gains and losses over a
rolling three-year period. The financial assumptions used to calculate the projected benefit
obligations for the principal pension plans listed above were as follows: Year ended 31 December2004
    
    
    2003%
    
    
    %Discount rate (Weighted Average)
    
    
    5.4
    
    
    
    5.5Rate of pay escalation
    
    
    4.3
    
    
    
    4.2Rate of pension increase
    
    
    2.8
    
    
    
    2.7
 Abbey determined its expense measurements above based upon long-term assumptions taking into
account target asset allocations of equities and bonds set at the beginning of the year, offset by
actual returns during the year. Year end obligation measurements are determined by reference to
market conditions at the balance sheet date. Assumptions are set in consultation with third party
advisors, and in house expertise. The financial assumptions used to determine the net period benefit cost for the principal pension
plans listed above were as follows. Year ended 31 December2004
    
    
    2003%
    
    
    %Discount rate (Weighted Average)
    
    
    5.5
    
    
    
    5.75Rate of pension increase
    
    
    2.7
    
    
    
    2.4Rate of return on assets
    
    
    6.25
    
    
    
    6.5
 168




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Abbey expects to contribute £109m to its defined benefit pension plans in 2005. The benefits
expected to be paid in each of the next five years, and in the aggregate for the five years
thereafter are: Year ended 31 December:
    
    £m2005
    
    
    892006
    
    
    952007
    
    
    1032008
    
    
    1112009
    
    
    119Five years ended 31 December 2014
    
    
    752
 Abbeys pension scheme did not hold any equity securities of Abbey or any of its related
parties at 31 December 2004 (2003: nil). In addition, Abbey does not hold insurance policies over
the plans, nor has Abbey entered into any significant transactions with the plans. £24m of contractual termination benefits are included in net periodic pension costs. This
additional charge was brought about due to the restructuring announcement by Banco Santander
Central Hispano, S.A. Abbeys contribution to defined contribution plans in 2004 was £120m (2003: £96m). The trustees of the Abbey National Pension schemes are required under the Pensions Act 1995 to
prepare a statement of principles governing investment decisions. The principal duty of the
trustees is to act in the best interest of the members of the schemes and have developed the
following investment policies and strategies:  >
    To maintain a portfolio of suitable assets of appropriate liquidity which will generate
income and capital growth to meet, together with new contributions from members and the
employers, the cost of current and future benefits which the Fund provides, as set out in
the Trust Deed and Rules.>
    To limit the risk of the assets failing to meet the liabilities, over the long-term and
on a shorter term basis as required by prevailing legislation.>
    To minimise the long-term costs of the Fund by maximising the return on the assets
whilst having regard to the objectives shown above. The statement of investment principles has set the target allocation of plan assets at 50% UK
equities, 30% Bonds and 20% gilts which is unchanged from 2003. The year end allocation was 51%
Equities, 22% Bonds, 21% Gilts, 6% Property and other assets. The corresponding allocations at the
end of 2003 were 52% Equities, 26% Bonds, 20% Gilts, 2% Property and other assets. The expected asset returns by class are equities 8.00%, Bonds 5% and Gilts 4.6%. The overall
long-term rate of return on the assets employed has been determined after considering projected
movements in asset indices. d) Leasing Under US GAAP, SFAS 13 requires the following disclosures relating to finance and operating leases
at 31 December 2004 and 2003. The net investment in direct finance leases at 31 December 2004 and 2003 is as follows: 2004
    
    
    2003£m
    
    
    £mTotal minimum lease payments to be received
    
    
    320
    
    
    
    4,122Amounts representing estimated executory costs
    
    
    (15
    )
    
    
    (18
    )Minimum lease payments receivable
    
    
    305
    
    
    
    4,104Unearned income
    
    
    (113
    )
    
    
    (1,590
    )Net investment in direct financing leases
    
    
    192
    
    
    
    2,514
 At 31 December 2004, minimum lease sales-type and direct finance payments to be received for
each of the next five years are as follows: £16m in 2005, £16m in 2006, £15m in 2007, £15m in 2008
and £15m in 2009. At 31 December 2004, minimum operating lease payments to be received for each of the next five
years are as follows: £52m in 2005; £35m in 2006; £31m in 2007; £28m in 2008 and £22m in 2009. During the year £41m (2003: £96m, 2002: £149m) of sales-type and direct finance lease
contingent rentals was charged to the profit and loss account. During the year £1m (2003: £1m, 2002: £nil) of operating lease contingent rentals was charged
to the profit and loss account. 169




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued e) Taxes  (i)
    During 2004 £36m (2003: £(97)m, 2002: £122m) of tax (benefit) expense were attributable
to discontinued operations.(ii)
    The significant components of tax expense attributable to continuing operations are
shown in note 10.(iii)
    A reconciliation of taxes payable at the standard UK corporation tax rate and Abbeys
effective tax rate for each of the three years ended 31 December 2004, 2003, and 2002 is
shown as follows: Year ended 31 December2003
    
    
    20022004
    
    
    (restated)
    
    
    (restated)£m
    
    
    £m
    
    
    £mTaxation at standard UK corporation tax rate of 30% (2003: 30%, and 2002: 30%)
    
    
    (8)
    
    
    
    (136
    )
    
    
    (359
    )Effect of non-allowable provisions and other non-equalised items
    
    
    47
    
    
    
    67
    
    
    
    490Effect of non-UK profits and losses
    
    
    5
    
    
    
    6
    
    
    
    36Adjustment to prior year tax provisions
    
    
    (2
    )
    
    
    (71
    )
    
    
    56Effect of loss utilisation
    
    
    
    
    
    
    
    
    
    
    (1
    )Taxes
    
    
    42
    
    
    
    (134
    )
    
    
    222Effective tax rate (US GAAP)
    
    
    155.6
    %
    
    
    29.6
    %
    
    
    (18.6
    %)
  (i)
    The tax effects of the principal components of deferred tax liabilities and deferred tax
assets at 31 December 2004 and 2003 were as follows: 20032004
    
    
    (restated)£m
    
    
    £mDeferred tax assets:Provisions and short-term temporary differences
    
    
    465
    
    
    
    453Excess of capital allowances over depreciation
    
    
    68
    
    
    
    64Long-term assurance business
    
    
    334
    
    
    
    325Valuation allowance
    
    
    (41
    )
    
    
    (41
    )826
    
    
    
    801Deferred tax liabilities:Capital allowances on finance lease receivables
    
    
    (762
    )
    
    
    (923
    )Provisions and short-term temporary differences
    
    
    (254
    )
    
    
    (330
    )Undistributed earnings in overseas subsidiaries
    
    
    (60
    )
    
    
    (52
    )(1,076
    )
    
    
    (1,305
    )Net deferred tax liabilities
    
    
    (250
    )
    
    
    (504
    )
 f) Earnings per share Under US GAAP, SFAS 128 requires certain disclosures relating to earnings per share in addition to
the presentation of basic and diluted earnings per share on the face of the income statement. The following tables provide reconciliations of the income and number of shares used in the
calculation of basic and diluted earnings per share from continuing operations; discontinued
operations; and net (loss) income available to shareholders in accordance with US GAAP for the
years ended 31 December 2004, 2003 and 2002. Year ended 31 December 2004Income
    
    
    Shares
    
    
    EPSContinuing operations
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    (103
    )
    
    
    1,465
    
    
    
(7.1
    )
 Year ended 31 December 2003Income
    
    
    
    
    
    
    EPS(restated)
    
    
    Shares
    
    
    (restated)Continuing operations
    
    £m
    
    
    m
    
    
    PenceBasic and
diluted EPS
    
    
    278
    
    
    
    1,448
    
    
    
    19.2
 Year ended 31 December 2002Income
    
    
    
    
    
    
    EPS(restated)
    
    
    Shares
    
    
    (restated)Continuing operations
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    (685
    )
    
    
    1,442
    
    
    
    (47.5
    )
 170




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Year ended 31 December 2004Income
    
    
    Shares
    
    
    EPSDiscontinued operations
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    35
    
    
    
    1,460
    
    
    
    2.4
 Year ended 31 December 2003Income
    
    
    
    
    
    
    EPS(restated)
    
    
    Shares
    
    
    (restated)Discontinued operations
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    (406
    )
    
    
    1,454
    
    
    
    (28.0
    )
 Year ended 31 December 2002Income
    
    
    
    
    
    
    EPS(restated)
    
    
    Shares
    
    
    (restated)Discontinued operations
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    (731
    )
    
    
    1,442
    
    
    
    (50.7
    )
 Year ended 31 December 2004Income
    
    
    Shares
    
    
    EPSNet loss
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    (68
    )
    
    
    1,460
    
    
    
    (4.7
    )
 Year ended 31 December 2003Income
    
    
    
    
    
    
    EPS(restated)
    
    
    Shares
    
    
    (restated)Net loss
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    (128
    )
    
    
    1,448
    
    
    
    (8.8
    )
 Year ended 31 December 2002Income
    
    
    
    
    
    
    EPS(restated)
    
    
    Shares
    
    
    (restated)Net loss
    
    £m
    
    
    m
    
    
    PenceBasic and diluted EPS
    
    
    (1,416
    )
    
    
    1,442
    
    
    
    (98.2
    )
 Options to purchase nil ordinary shares (2003: 19.9m, 2002: 13.3m at prices ranging from 2003:
£5.13 to £13.06, 2002: £8.53 to £13.06) were outstanding throughout the year ended 31 December 2004
but were not included in the computation of diluted earnings per share because the options assumed
proceeds were greater than the average market price of the common shares. These options expire at
various dates upto September 2013. An option to purchase a further 12.7m
ordinary shares (2003: 32.3m, 2002: 19.2m) were not included in the compilation of diluted earnings
per share because to do so would have been antidilutive for the periods presented. Earnings per share, assuming full dilution, is computed based on the average number of common
shares outstanding during the period, plus the dilutive effect of stock options. The dilutive
effect of stock options is computed using the average market price of the Companys stock for the
period. 171




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued g) 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
2004 and 2003. The following table provides an analysis of the balance sheet totals under US
GAAP: At 31 December2004
    
    
    2003£m
    
    
    £mTrading securities
    
    
    42,157
    
    
    
    45,902Available for sale securities (ii)
    
    
    1,090
    
    
    
    2,131Securities held to maturity (iii)
    
    
    
    
    
    
    2043,247
    
    
    
    48,053
 Further disclosures required by SFAS 115 are as follows:  (i)
    Available for sale securities Amortised
    
    
    Gross unrealised
    
    
    Gross unrealised
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004Equity securities
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Asset backed and corporate debt securities
    
    
    282
    
    
    
    51
    
    
    
    (2
    )
    
    
    331Mortgage backed securities other than
those issued or backed by US government
agencies
    
    
    213
    
    
    
    200
    
    
    
    (6
    )
    
    
    407Other debt securities
    
    
    322
    
    
    
    
    
    
    
    
    
    
    
    322847
    
    
    
    251
    
    
    
    (8
    )
    
    
    1,090
 Available for sale securities include the interest-only strips recognised under US GAAP, not
recognised under UK GAAP, in connection with Abbeys securitisations as described in note 62(i). 172




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Amortised
    
    
    Gross unrealised
    
    
    Gross unrealised
    
    
    Faircost
    
    
    gains
    
    
    losses
    
    
    value£m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2003Equity securities
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    19Asset backed and corporate debt securities
    
    
    1,254
    
    
    
    93
    
    
    
    (43
    )
    
    
    1,304Mortgage backed securities other than
those issued or backed by US government
agencies
    
    
    215
    
    
    
    138
    
    
    
    (25
    )
    
    
    328Other debt securities
    
    
    437
    
    
    
    43
    
    
    
    
    
    
    
    4801,925
    
    
    
    274
    
    
    
    (68
    )
    
    
    2,131
 In more than 1
    
    
    In more than 5year but not
    
    
    years but notNot more
    
    
    more than 5
    
    
    more than 10
    
    
    In morethan 1 year
    
    
    years
    
    
    years
    
    
    than 10 years
    
    
    TotalMaturity analysis
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004Book value
    
    
    335
    
    
    
    189
    
    
    
    41
    
    
    
    284
    
    
    
    849Fair value
    
    
    335
    
    
    
    378
    
    
    
    41
    
    
    
    336
    
    
    
    1,090At 31 December 2003Book value
    
    
    421
    
    
    
    606
    
    
    
    333
    
    
    
    565
    
    
    
    1,925Fair value
    
    
    423
    
    
    
    790
    
    
    
    397
    
    
    
    521
    
    
    
    2,131
 The following tables show our investments gross unrealised losses and fair value, aggregated
by investment category and length of time that individual securities have been in a continuous
unrealised loss position, at 31 December 2004 and 2003. Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    
    
    
    
    Fair
    
    
    
    
    
    
    Fairvalue
    
    
    Unrealised losses
    
    
    value
    
    
    Unrealised losses
    
    
    value
    
    
    Unrealised lossesAt 31 December 2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAsset backed
and corporate debt securities
    
    
    6
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    2Mortgage backed securities other
than those issued or backed by US
government agencies
    
    
    41
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    6Total temporarily impaired securities
    
    
    47
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    8
 Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    
    
    
    
    Fair
    
    
    
    
    
    
    Fairvalue
    
    
    Unrealised losses
    
    
    value
    
    
    Unrealised losses
    
    
    value
    
    
    Unrealised lossesAt 31 December 2003
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAsset backed
and corporate debt securities
    
    
    172
    
    
    
    41
    
    
    
    37
    
    
    
    2
    
    
    
    209
    
    
    
    43Mortgage backed securities other
than those issued or backed by US
government agencies
    
    
    200
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    25Total temporarily impaired securities
    
    
    372
    
    
    
    66
    
    
    
    37
    
    
    
    2
    
    
    
    409
    
    
    
    68
 The unrealised losses above arise on securities within Abbeys ongoing Personal Financial
Services businesses. These are securities issued by UK housing associations and the interest-only
strips recognised in connection with Abbeys mortgage securitisation programme. The losses on the
UK housing association securities are considered temporary as Abbey has the ability and intent to
hold the securities to maturity and Abbey is satisfied that there has been no credit deterioration,
particularly as to date Abbey has suffered no defaults on this type of issuer. The unrealised
losses arise from changes in interest rates. This is evidenced by the fact that the related
derivative hedges, which as they are with Abbey National Financial Products, do not qualify for hedge accounting
under FAS 133, have an equal and opposite fair value surplus. The losses on the interest-only
strips are also considered temporary as Abbey has the ability and interest to hold the securities
until their maturity at the wind-down of the related securitisation programmes and Abbey is
satisfied that there has been no credit deterioration, particularly as to date Abbey has suffered
no defaults on the mortgage securitisation programme securities.  (iii)
    Held to maturity securities Gross unrealised
    
    
    Gross unrealisedAmortised cost
    
    
    gains
    
    
    losses
    
    
    Fair value£m
    
    
    £m
    
    
    £m
    
    
    £mCorporate debt securitiesAt 31 December 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At 31 December 2003
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    20
 173




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Financial Statements Notes to the Financial Statementscontinued In more than 1
    
    
    In more than 5year but not
    
    
    years but notNot more
    
    
    more than 5
    
    
    more than 10
    
    
    In morethan 1 year
    
    
    years
    
    
    years
    
    
    than 10 years
    
    
    TotalMaturity analysis
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2003Book value
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Fair value
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20
  (iv)
    Sales of available for sale securities during the years ended 31 December 2004, 2003 and
2002. 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mGross proceeds from sales
    
    
    2,040
    
    
    
    26,611
    
    
    
    13,837Gross realised losses on sales
    
    
    154
    
    
    
    1,297
    
    
    
    166Gross realised gains on sales
    
    
    (60
    )
    
    
    (795
    )
    
    
    (111
    )Amortised cost of sales
    
    
    2,134
    
    
    
    27,113
    
    
    
    13,892
 The cost of available for sale securities is determined by using the weighted average cost
basis, with premium/discount arising on purchase being amortised to profit and loss over the
expected life of the security.  (v)
    Redemptions and purchases of held to maturity securities during the year ended 31 December: 2004
    
    
    2003£m
    
    
    £mAmortised cost b/f
    
    
    20
    
    
    
    20Acquisitions  cost
    
    
    
    
    
    
    Redemptions at maturity
    
    
    (20
    )
    
    
    Exchange adjustments
    
    
    
    
    
    
    Amortised cost c/f
    
    
    
    
    
    
    20
  (vi)
    There were no realised gains and losses on transfers from available for sale securities
during the years ended 31 December 2004, 2003 and 2002.(vii)
    The net change in unrealised holding gains (losses) on trading securities, before the effect
of associated hedges, included in income for the year to 31 December 2004 is a loss of £213m
(2003: gain of £86m, 2002: gain of £216m). h) Consolidation of variable interest entities As defined in FIN 46 and FIN 46R, an entity is considered a variable interest entity (VIE) 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 lastly 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.
VIEs 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. Prior to the issuance of FIN 46R, Abbey consolidated the trust-preferred entities  Abbey
National Capital Trust I, Abbey National Capital Trust II, Abbey National Capital LP and Abbey
National Capital LPII. Accordingly, the inter-company 8.96% Subordinated notes 2030 issued by Abbey
to the trust preferred entities that are held by unaffiliated third parties were presented as
minority interests in Abbeys consolidated balance sheet. The application of FIN 46R has resulted
in the deconsolidation of these trust preferred entities and accordingly at 31 December 2004, the
£512m of trust preferred securities have been reclassified from minority interests to subordinated
liabilities. In addition, there are a number of Group companies holding finance lease receivables that meet
the definition of a variable interest entity. The application of FIN 46R has resulted in these
entities being deconsolidated and equity accounted as parties other than Abbey are the primary
beneficiaries. This change in accounting treatment has no impact on
Abbeys net income and shareholders funds under US GAAP. The
total assets and the maximum exposure to loss of these vehicles at
31 December
2004 were £1,336m and £974m respectively. i) Securitisations In accordance with SFAS 140, the assets which have been transferred to special purpose entities
(securitised) and meet the criteria required under SFAS 140 for a sale are no longer retained
on-balance sheet. Details in relation to the mortgage asset securitisations are included in note 17
of the consolidated financial statements. The assets were transferred to special purpose entities
at book value, and gains of £48m, £22m and £19m have
been recognised for the years ended 31 December 2004, 2003 and 2002 respectively. 174




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Financial Statements Notes to the Financial Statementscontinued The remuneration received by Abbey for servicing is considered to be adequate and therefore no
servicing assets were recognised. Additionally, as required by SFAS 140, an interest only strip asset 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.
Abbeys rights and obligations under the securitisations are detailed in note 17 of the
consolidated financial statements. In compliance 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. The receivables are tested
for impairment in accordance with EITF 99-20. Impairment losses are taken to the profit and loss
account. There were no impairment losses in any of the periods presented. Mortgage asset securitisations 20032004
    
    
    (restated)£m
    
    
    £mValue of interest only strip at inception (1)
    
    
    221
    
    
    
    173Increase/(decrease) in value of interest only strip
    
    
    145
    
    
    
    117Value of interest only strip at 31 December (1)
    
    
    366
    
    
    
    290
   (1)
    
    The valuation of the interest only strip asset is based on the following key assumptions:   Early repayments are based on actual experience at the valuation date. This was a range
of 10.2% to 69.33% at 31 December 2004 (2003: range 10.2% to 72.56%) A discount rate of 11.35% (2003: range of 10.05% to 11.2%) Summarised cash flows between the special purpose securitisation companies and Abbey are set
out below: Holmes Financing(No. 1 to No. 8) plc£mInter-company receipts
    
    
    3,283Inter-company payments
    
    
    (3,984
    )Net cash flows
    
    
    (701
    )
 The principal amount of loans held by the above special purpose securitisation companies 90
days or more past due at 31 December 2004 was £59m (2003:
£67m). The equivalent statistic for loans held by Abbey was
£444m (2003: £422m). Net credit losses were £nil in
the year ended 31 December 2004 (2003: £0.2m). The
equivalent statistic for loans held by Abbey was £4m (2003:
£26m). Sensitivity analysis The impact of adverse changes in the rate of repayments and discount rate on the value of interest
only strip assets with a balance of £366m at 31 December 2004 is shown below: £m10% adverse change in repayment rate
    
    
    20% adverse change in repayment rate
    
    
    10% adverse change in discount rate
    
    
    1520% adverse change in discount rate
    
    
    30
 These sensitivities are hypothetical and should be used with caution. Changes in fair value
based on a variation in assumptions generally cannot be extrapolated because the relationship of
the change in assumption to the change in fair value may not be linear. Also, in the above table,
the effect of a variation in a particular assumption on the fair value of the retained interest is
calculated without changing any other assumption; in reality, changes in one factor may result in
changes in another, which might magnify or counteract the sensitivities. Actual and projected credit losses (%) as of: Mortgages securitised in2004
    
    
    2003
    
    
    2002%
    
    
    %
    
    
    %At 31 December 2004
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.01At 31 December 2003
    
    
    
    
    
    
    0.01
    
    
    
    0.01At 31 December 2002
    
    
    
    
    
    
    
    
    
    
    0.01
 175




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Financial Statements Notes to the Financial Statementscontinued j) Consolidated cash flow statement Under SFAS 95, Statement of Cash Flows, Abbey experienced an outflow of cash and cash equivalents
of £5,823m during the year ended 31 December 2004. Under FRS 1 (Revised), Abbey experienced an
outflow of cash of £188m over the same period. Under US GAAP cash equivalents are defined as short term, highly liquid investments which are
readily convertible into known amounts of cash without notice and which were within three months of
maturity when acquired. The following table summarises the movement and composition of cash and cash equivalents under
US GAAP for the years ended 31 December 2004, 2003 and 2002. 2004
    
    
    2003
    
    
    2002£m
    
    
    £m
    
    
    £mCash and cash equivalents at 1 January
    
    
    28,352
    
    
    
    23,754
    
    
    
    20,058Net cash inflow/(outflow)
    
    
    (5,823
    )
    
    
    4,598
    
    
    
    3,696Cash and cash equivalents at 31 December
    
    
    22,529
    
    
    
    28,352
    
    
    
    23,754Consisting of:Cash and balances with central banks
    
    
    454
    
    
    
    439
    
    
    
    396Treasury and other eligible bills
    
    
    1,327
    
    
    
    1,449
    
    
    
    1,346Loans and advances to banks
    
    
    9,967
    
    
    
    6,996
    
    
    
    5,279Debt securities
    
    
    10,781
    
    
    
    19,468
    
    
    
    16,73322,529
    
    
    
    28,352
    
    
    
    23,754
 Other principal differences between FRS 1 and SFAS 95 relate to the classification of cash flow
transactions and are as follows: Classification under FRS 1(1)
    
    Classification under SFAS 95Dividends received
    
    Returns on investment and servicing of finance
    
    Operating activitiesTaxation paid
    
    Taxation paid
    
    Operating activitiesPreference dividends paid
    
    Returns on investment and servicing of finance
    
    Financing activitiesEquity dividends paid
    
    Equity dividends paid
    
    Financing activitiesPurchases/proceeds from disposal of
investment securities and fixed assets
    
    Capital expenditure and financial investment
    
    Investing activitiesPurchases/proceeds from disposal of
subsidiary and associated undertakings
    
    Acquisitions and disposals
    
    Investing activitiesNet change in loans and advances
    
    Operating activities
    
    Investing activitiesNet change in finance lease receivables
    
    Operating activities
    
    Investing activitiesNet change in deposits
    
    Operating activities
    
    Financing activitiesNet change in debt securities in issue
    
    Operating activities
    
    Financing activities
   (1)
    
    Under FRS 1, transactions designated as hedges are reported under the same heading as the
related assets or liabilities. k) Presentation of the consolidated Profit and Loss account The presentation of the profit and loss accounts for the years ended 31 December 2004, 2003 and
2002 as shown on page 98, would not be significantly different under US GAAP except provisions
would be shown as a component of total operating income and the results from Abbeys life assurance
business would be consolidated on a line by line basis. l) Presentation of the consolidated balance sheet The presentation of the balance sheet at 31 December 2004 and 2003 as shown on page 99, would not
be significantly different under US GAAP except the assets and liabilities of Abbeys life
assurance business would be consolidated on a line by line basis, stock borrowing and lending
transactions would be recorded as set out below and the fair values of hedging derivatives that do
not qualify for hedge accounting under US GAAP would be recognised on the balance sheet. m) Stock borrowing and lending against non-cash collateral Abbey enters into transactions under which it lends and borrows stock using other stock as
collateral, and these are accounted for as Commitments under UK GAAP. Under SFAS 140, these transactions are grossed up on the balance sheet. At 31 December 2004,
Abbey would record assets of £20,508m (2003: £25,649m) as collateral received and liabilities of
£20,508m (2003: £25,649m) as an obligation to return collateral received. n) Collateralised loans and secured borrowings Abbey enters into purchase and resale agreements (reverse repos and similar transactions), which
are accounted for as collateralised loans under UK GAAP. Upon entering into such transactions Abbey
receives collateral equal to 100%  105% of the loan amount. The level of collateral held is
monitored daily and, if required, further calls are made to ensure the market value of collateral
remains equal to the loan balance. Net assets of such transactions of £6,397m (2003:
£5,034m) and £11,257m (2003: £9,372m) are included in Loans and advances to banks and Loans and
advances to customers respectively. Under reverse repos and similar transactions, Abbey is permitted to sell or repledge the
collateral held. At 31 December 2004, the fair value of such collateral was £14,170m (2003:
£14,234m) of which £14,070m (2003: £13,933m) related to collateral that was sold or repledged. Abbey enters into sale and repurchase (repo) agreements and similar transactions which are
accounted for as secured borrowings under UK GAAP. Upon entering into such transactions Abbey
pledges collateral equal to 100%  105% 176




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Financial Statements Notes to the Financial Statementscontinued of the borrowed amount. Net liabilities under repos, stock loans and similar transactions of
£6,592m (2003: £9,390m) and £7,843m (2003: £4,602m) are included in Deposits by banks and Customer
accounts respectively. Under repos and similar transactions, Abbey sells or pledges collateral to counterparties.
Under SFAS 140, where the counterparty has a right to sell or repledge the collateral, any such
collateral would be reclassified within Abbeys balance sheet from securities to securities
pledged. At 31 December 2004, the application of SFAS 140 would result in £8,261m (2003: £17,340m)
of debt securities and £1,256m (2003: £1,409m) of treasury and eligible bills being reported as
securities pledged. In addition, at 31 December 2004, Abbey also enters into outright equity sales
and purchases in combination with total return swaps which are accounted for as in substance
reverse repos and repos under UK GAAP. These transactions are treated effectively as outright asset
purchases and sales and separate derivative contracts under US GAAP. Under SFAS 140, Loans and
advances to customers would be reduced by £896m (2003: £3,583m) and this amount would be reported
within Equity shares, representing the equity purchase. Customer accounts would be reduced by £413m
(2003: £1,333m) and this amount would be reported within Other liabilities, representing the short
equity sale. The related return swaps would be marked to market. Any relevant value is paid or
received as margin call. The £1,309m (2003: £4,916m) of nominal value of the return swaps would be
included within the trading derivatives disclosures. o) Derivatives and hedging activities Abbey has 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 including convertible debt. Abbey has other non-trading derivatives which are not designated as either a fair value hedge,
cash flow hedge or hedge of the net investment in a foreign operation in accordance with the
criteria of SFAS 133. These represent derivatives undertaken with Abbeys in-house trading
operation, Abbey National Financial Products. Abbey National Financial Products generally matches
internal hedges with third party derivatives on an aggregate, rather than individual, basis and
hedges the net outstanding position where Abbey has assets and liabilities, which largely offset
the overall risk to Abbey. All material derivative exposures are transacted with counterparties with whom Abbey have a
Collateral Service Agreement. Under the Collateral Service Agreement, cash will be placed with or
received from each counterparty according to the net mark-to-market of all derivative exposures to
that counterparty. Amounts received or placed will be updated on a regular basis or if the net
mark-to-market moves in excess of a pre-defined amount. In the event of a default of a given
counterparty, Abbey will be able to gain recourse from any losses on derivative exposures by
obtaining absolute right over cash received from the counterparty. Equity indexed-linked deposits Contracts involving the receipt of cash on which customers receive an index-linked return are
accounted for under UK GAAP in substance as equity indexed 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 UK GAAP, Abbeys equity index-linked deposits are remeasured at fair value at each
reporting date with changes in fair values recognised in the consolidated profit and loss account.
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. For US GAAP purposes, such 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 £2,305m at 31 December 2004 (2003: £2,478m). Cumulative foreign currency translation adjustment SFAS 52, Foreign Currency Translation, requires disclosure of the cumulative foreign currency
translation adjustment taken directly to reserves, on the consolidation of Abbeys foreign
undertakings and the translation of Abbeys US dollar preference shares. These cumulative
adjustments were £(2)m, £nil and £(26)m, at 31 December 2004, 2003 and 2002 respectively. 177




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Financial Statements Notes to the Financial Statementscontinued p) 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. At 31 December 2004 and 2003, Abbey estimated that the difference between the carrying value
of its loan portfolio under SFAS 114 and its value in Abbeys UK GAAP financial statements was such
that no adjustment to net income or consolidated shareholders equity was required. Loans and
advances within the scope of SFAS 114 consist of wholesale advances. Other loans and advances,
consisting of small, homogeneous secured and unsecured advances primarily to personal customers,
are assessed for impairment within the scope of SFAS 5. Impaired loans within the scope of SFAS 114
amounted to £4m (2003: £63m). The impairment reserve in respect of these loans estimated in
accordance with the provisions of SFAS 114 was £1m (2003: £34m). During the year ended 31 December
2004, impaired loans, including those excluded from SFAS 114, averaged £1,287m (2003: £1,790m) and
interest income recognised on these loans was £3m (2003: £6m). q) 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 paymentsAs of 31 December1 to 3
    
    
    3 to 5
    
    
    After 52003
    
    
    2004
    
    
    Less than 1 year
    
    
    years
    
    
    years
    
    
    years
    
    
    No stated maturity£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mGuarantees:(1)Stand-by letters of credit
    
    
    472
    
    
    
    355
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    298
    
    
    
    1Guarantees on sale of subsidiaries
    
    
    1,564
    
    
    
    2,303
    
    
    
    336
    
    
    
    650
    
    
    
    78
    
    
    
    831
    
    
    
    4082,036
    
    
    
    2,658
    
    
    
    336
    
    
    
    650
    
    
    
    134
    
    
    
    1,129
    
    
    
    409
   (1)
    
    In addition, Abbey guarantees the cheques of some of its customers up to a certain limit,
typically £50-250. The maximum potential amount of future payments in relation to guaranteed
cheques has been estimated as £3,981m (2003: £4,304m). These guarantees have no stated maturity. The provision for guarantees
which includes the amortised fair value at 31 December 2004 was
£18m (2003: £29m) and is included in Other Liabilities. Stand-by letters of credit are our
conditional commitments to guarantee the performance of a customer to a third party in borrowing
arrangements. Guarantees on sale of subsidiaries are contingent consideration in a business
combination. 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 indemnification 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 our 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 2004 and
2003, 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 £376m at 31 December 2004 (2003: £602m). Securities and
other marketable assets held as collateral amounted to £401m (2003: £854m). 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. r) Provisions for misselling Abbey estimates provisions for misselling with the objective of maintaining reserve levels
believed by management to be sufficient to absorb current estimated probable losses in connection
with compensation and costs relating to the handling of complaints from customers who claim
misselling of endowment policies and other products. The calculation of provisions for misselling
is based on the estimated number of claims that will be received, of
those, the number that will be upheld, and the estimated average settlement
per case. These assessments are based on managements estimate for
each of these three factors. Abbeys assumptions about estimated losses are based on past claims uphold
rates, past customer behaviour, and past average settlements, which are not necessarily an
indication of future losses. 178




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The financial statements
for the year ended 31 December 2004 include a provision charge for misselling in the Banking and
Savings segment for an amount equal to £153m. This provision was increased (in 2003 it
was £61m), reflecting both increased claims and claims upheld. In calculating the
misselling provision within the Banking and Savings 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 Banking and Savings segment that could have
had a material impact on Abbeys reported operating profit in 2004. Management are not, however,
able to quantify reliably a meaningful sensitivity or range of possible outcomes. Specifically,
due to the non-homogenous nature of the population, any of the factors could change in a way
that could either offset or amplify the effect of a change in another factor. s) Segmental analysis Under US GAAP, SFAS No. 131 Disclosure about Segments of an Enterprise and Related Information
(SFAS 131) requires the disclosure of certain information about a Companys operating segments and
related information. SFAS 131 defines an operating segment as a component of the business that
engages in business activities from which it may earn income or incur expenses and whose operating results are regularly reviewed by the Companys chief operating
decision maker to make decisions about resource allocation and to assess its performance. SFAS 131 permits the aggregation of operating segments if the segments demonstrate similar
economic characteristics and if the segments are similar in the following respects: the nature of
the products and services offered; the nature of the production processes; the type or class of
customer for their products or services; the distribution channels; and the nature of the
regulatory environment. Abbey has determined that its reportable segments identified in accordance with SFAS 131 also
satisfy the requirements of SSAP 25. SSAP 25 requires that the amounts to be disclosed in the UK
segmental analysis be presented on a statutory basis. Abbeys segmental analysis prepared in
accordance with UK GAAP is shown in Note 1. SFAS 131 requires that the amounts to be disclosed in
the US segmental analysis be presented on the basis used in the board report to evaluate
performance. Abbeys management reviews discrete financial information for each of its segments
that includes measures of operating results and assets. However, due to the differing natures of
our ongoing Personal Financial Services group of reportable segments and our Portfolio Business
Unit group of reportable segments, which are being managed for exit, the Personal Financial
Services group of reportable segments and Portfolio Business Unit group of reportable segments are
managed differently. The Personal Financial Services group of reportable segments are managed
primarily on the basis of their results, which are measured on a trading basis. The Portfolio
Business Unit group of reportable segments are managed both on the basis of their results, which
are measured on a management basis, and on the basis of their net asset value. On a consolidated
level the trading results of the Personal Financial Services group of reportable segments are
aggregated with the management results of the Portfolio Business Unit group of reportable segments
to give our summarised trading profit and loss account. The trading basis for our Personal
Financial Services group of reportable segments and the management basis for our Portfolio Business
Unit group of reportable segments are collectively known as the trading basis, as presented
below. Management considers that the trading basis provides the most appropriate way of reviewing the
performance of the business. This is because the adjustments are:  >
    Embedded value charges and rebasing  these are unpredictable as they depend on both equity
and debt market trends which do not affect the underlying performance of what is a very
long-term business. The short-term market movements are, however, a very important factor in
the management of the business but these are managed separately with a more risk-based focus.>
    Re-organisation costs  Abbey is going through a significant costs savings and
re-organisation exercise and management needs to understand the underlying drivers of the cost
base that will remain after the exercise is complete and does not want this view to be clouded
by the costs of the exercise. Those costs are managed independently.>
    Goodwill charges  these charges can vary significantly year on year, and hence can
materially affect our profit or loss for that year. As a result we review these charges
separately to avoid clouding the presentation of underlying results.>
    Depreciation on 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 we net the depreciation
against the related income.>
    Income from associated undertakings is included within trading income because it is a regular
source of income to our operations. Therefore management believes its inclusion at this level
reflects our aggregate income from our activities.>
    Profit on disposal of Group undertakings is included within trading income for similar
reasons to those noted above relating to our income from associated undertakings. For a detailed explanation of these items, please refer to the Other material items section of
the Operating and financial review. The Personal Financial Services group of reportable segments adjustments are the deduction of:  >
    Embedded value charges and rebasing>
    Re-organisation costs, and>
    Goodwill charges There is also a single reclassification adjustment where:  >
    Depreciation on operating lease assets is netted within trading income as opposed to being
recorded as a part of operating expenses. 179




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued The Portfolio Business Unit group of reportable segments adjustments are:  >
    Depreciation on operating lease assets is netted within trading income as opposed to being
recorded as a part of operating expenses >
    Income from associated undertakings is reported as part of non-interest income as opposed to
being reported below the operating loss or profit line>
    Profit on disposal of Group undertakings is also reported as part of non-interest income as
opposed to being reported below the operating loss or profit line. Also included within trading interest income in 2004 is £3,942m (2003: £2,063m 2002: £2,171m) of
inter-segment funding offset against interest expense. This adjustment results in statutory
interest income in 2004 of £4,926m (2003: £5,244m; 2002:
£6,768m) and statutory interest expense in
2004 of £3,396m (2003: £3,182m; 2002: £4,184m). Abbeys reportable 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 eight reportable segments. The Banking and Savings segment offers a
range of personal banking, savings and mortgage products and services. The Investment and
Protection segment offers a range of investment products such as pensions, investment bonds,
with-profits bonds, structured products, unit trusts, Individual Savings Accounts, Wrap products
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 General Insurance segment offers a
range of non-life insurance products, including property, motor, payment protection, accidental
death, personal accident and travel insurance. The Abbey Financial Markets segment manages Abbeys
liquidity, supports its funding and capital management activities, and provides risk management
services to third parties and Abbeys other businesses. The Group Infrastructure segment comprises Central Services,
Financial Holdings (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 small non-core
businesses. The Wholesale segment earns interest and other similar returns on wholesale banking
assets, including Abbeys debt securities portfolios, leasing and as well as structured corporate
banking. The Motor Finance and Litigation Funding segment offers a comprehensive range of loans and
insurance products for the purchase or leasing of motor vehicles, and litigation finance. The Other
segment consists of Abbeys international operations, excluding Abbey Offshore and international
treasury operations. The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. Inter-segment transactions are accounted for as if the
transactions were to third parties, that is, at current market prices. 180




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued MotorBanking
    
    
    Investment
    
    
    
    Abbey
    
    
    
    
    
    
    Group
    
    
    
    
    
    
    Finance &and
    
    
    and
    
    

Financial
    
    
    General
    
    
    Infra-
    
    
    Wholesale
    
    
    Litigation
    
    
    
    
    
    
    
    
    
    
    Adjust-
    
    
    GroupSavings
    
    
    protection
    
    
    Markets
    
    
    Insurance
    
    
    structure
    
    
    Banking
    
    
    Funding
    
    
    Other
    
    
    Total
    
    
    ments
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Interest income
    
    
    6,376
    
    
    
    113
    
    
    
    1,082
    
    
    
    1
    
    
    
    484
    
    
    
    588
    
    
    
    158
    
    
    
    66
    
    
    
    8,868
    
    
    
    (3,942
    )
    
    
    4,926Interest expense
    
    
    (4,866
    )
    
    
    (36
    )
    
    
    (1,061
    )
    
    
    (5
    )
    
    
    (618
    )
    
    
    (658
    )
    
    
    (60
    )
    
    
    (34
    )
    
    
    (7,338
    )
    
    
    3,942
    
    
    
    (3,396
    )Net interest income
    
    
    1,510
    
    
    
    77
    
    
    
    21
    
    
    
    (4
    )
    
    
    (134
    )
    
    
    (70
    )
    
    
    98
    
    
    
    32
    
    
    
    1,530
    
    
    
    
    
    
    
    1,530Non-interest income
    
    
    438
    
    
    
    171
    
    
    
    291
    
    
    
    114
    
    
    
    116
    
    
    
    154
    
    
    
    (30
    )
    
    
    (41
    )
    
    
    1,213
    
    
    
    (47
    )
    
    
    1,166Depreciation of
operating lease
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    (151
    )
    
    
    
    
    
    
    (151
    )Total trading income
    
    
    1,948
    
    
    
    248
    
    
    
    312
    
    
    
    110
    
    
    
    (18
    )
    
    
    (67
    )
    
    
    68
    
    
    
    (9
    )
    
    
    2,592
    
    
    
    (47
    )
    
    
    2,545Administrative and
other expenses
    
    
    (1,051
    )
    
    
    (82
    )
    
    
    (108
    )
    
    
    (39
    )
    
    
    (239
    )
    
    
    (30
    )
    
    
    (22
    )
    
    
    (38
    )
    
    
    (1,609
    )
    
    
    (465
    )
    
    
    (2,074
    )Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation of
non-operating lease
assets
    
    
    (63
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (14
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    (80
    )Total trading
expenses
    
    
    (1,114
    )
    
    
    (83
    )
    
    
    (109
    )
    
    
    (40
    )
    
    
    (253
    )
    
    
    (30
    )
    
    
    (22
    )
    
    
    (38
    )
    
    
    (1,689
    )
    
    
    (465
    )
    
    
    (2,154
    )Provisions for bad
and doubtful debts
    
    
    (34
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    (89
    )
    
    
    (10
    )
    
    
    (45
    )
    
    
    80
    
    
    
    35Provisions for
contingent
liabilities and
commitments
    
    
    (124
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (122
    )
    
    
    (111
    )
    
    
    (233
    )Amounts written off
fixed asset
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    
    
    
    
    80Trading
profit/(loss)
before taxation
    
    
    676
    
    
    
    165
    
    
    
    203
    
    
    
    70
    
    
    
    (269
    )
    
    
    71
    
    
    
    (43
    )
    
    
    (57
    )
    
    
    816
    
    
    
    (543
    )
    
    
    273Adjust for:Embedded value
charges and
rebasing
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21Reorganisation
expenses
    
    
    (183
    )
    
    
    (57
    )
    
    
    (24
    )
    
    
    (16
    )
    
    
    (285
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (565
    )Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Income from
associated
undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    6Profit on disposal
of group
undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32
    
    
    
    
    
    
    
    14
    
    
    
    46Loss on the
termination of an
operation
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )Operating
profit/(loss)
    
    
    462
    
    
    
    129
    
    
    
    179
    
    
    
    54
    
    
    
    (574
    )
    
    
    103
    
    
    
    (37
    )
    
    
    (43
    )
    
    
    273Total assets
    
    
    79,645
    
    
    
    28,838
    
    
    
    50,073
    
    
    
    144
    
    
    
    812
    
    
    
    6,956
    
    
    
    646
    
    
    
    2,627
    
    
    
    169,741
 181




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Depreciation
    
    
    Provision
    
    
    Provision
    
    
    Amounts
    
    
    
    
    
    
    Profit/Non-
    
    
    
    
    
    
    Depreciation
    
    
    of non-
    
    
    for bad and
    
    
    for
    
    
    written off
    
    
    
    
    
    
    (loss)interest
    
    
    Impair-
    
    
    of operating
    
    
    operating
    
    
    doubtful
    
    
    contingent
    
    
    fixed asset
    
    
    Other
    
    
    beforeAdjustments
    
    income
    
    
    ments
    
    
    lease assets
    
    
    lease assets
    
    
    debts
    
    
    liabilities
    
    
    investments
    
    
    expenses
    
    
    taxationcomprise:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2004Embedded value
charges and
rebasing
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    21Reorganisation
expenses
    
    
    (72
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    
    
    
    
    (445
    )
    
    
    (565
    )Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )
    
    
    (20
    )Income from
associated
undertakings
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Profit on disposal
of group
undertakings
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Loss on the
termination of an
operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31
    )
    
    
    
    
    
    
    
    
    
    
    (31
    )Reclassification of
depreciation on
operating lease
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80
    
    
    
    (111
    )
    
    
    
    
    
    
    (465
    )
    
    
    (543
    )
 182




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued MotorBanking
    
    
    Investment
    
    
    
    Abbey
    
    
    
    
    
    
    Group
    
    
    
    
    
    
    Finance &and
    
    
    and
    
    
    Financial
    
    
    General
    
    
    Infra-
    
    
    Wholesale
    
    
    Litigation
    
    
    
    
    
    
    
    
    
    
    Adjust-
    
    
    GroupSavings
    
    
    protection
    
    
    Markets
    
    
    Insurance
    
    
    structure
    
    
    Banking
    
    
    Funding
    
    
    Other
    
    
    Total
    
    
    ments
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2003Interest income
    
    
    4,143
    
    
    
    132
    
    
    
    1,645
    
    
    
    3
    
    
    
    734
    
    
    
    66
    
    
    
    387
    
    
    
    197
    
    
    
    7,307
    
    
    
    (2,063
    )
    
    
    5,244Interest expense
    
    
    (2,423
    )
    
    
    (49
    )
    
    
    (1,619
    )
    
    
    (8
    )
    
    
    (849
    )
    
    
    (44
    )
    
    
    (142
    )
    
    
    (111
    )
    
    
    (5,245
    )
    
    
    2,063
    
    
    
    (3,182
    )Net interest income
    
    
    1,720
    
    
    
    83
    
    
    
    26
    
    
    
    (5
    )
    
    
    (115
    )
    
    
    22
    
    
    
    245
    
    
    
    86
    
    
    
    2,062
    
    
    
    
    
    
    
    2,062Non-interest income
    
    
    427
    
    
    
    214
    
    
    
    223
    
    
    
    126
    
    
    
    90
    
    
    
    (197
    )
    
    
    (58
    )
    
    
    25
    
    
    
    850
    
    
    
    (480
    )
    
    
    370Depreciation of
operating lease
assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    (1
    )
    
    
    
    
    
    
    (251
    )
    
    
    251
    
    
    
    Total trading income
    
    
    2,147
    
    
    
    297
    
    
    
    249
    
    
    
    121
    
    
    
    (25
    )
    
    
    (425
    )
    
    
    186
    
    
    
    111
    
    
    
    2,661
    
    
    
    (229
    )
    
    
    2,432Administrative and
other expenses
    
    
    (1,064
    )
    
    
    (57
    )
    
    
    (105
    )
    
    
    (48
    )
    
    
    (196
    )
    
    
    (96
    )
    
    
    (135
    )
    
    
    (73
    )
    
    
    (1,774
    )
    
    
    (511
    )
    
    
    (2,285
    )Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )Depreciation of
non-operating lease
assets
    
    
    (68
    )
    
    
    (1
    )
    
    
    (4
    )
    
    
    
    
    
    
    (24
    )
    
    
    (11
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (112
    )
    
    
    
    
    
    
    (112
    )Total trading
expenses
    
    
    (1,132
    )
    
    
    (58
    )
    
    
    (109
    )
    
    
    (48
    )
    
    
    (230
    )
    
    
    (107
    )
    
    
    (137
    )
    
    
    (83
    )
    
    
    (1,904
    )
    
    
    (511
    )
    
    
    (2,415
    )Provisions for bad
and doubtful debts
    
    
    (130
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154
    )
    
    
    (99
    )
    
    
    (11
    )
    
    
    (394
    )
    
    
    (80
    )
    
    
    (474
    )Provisions for
contingent
liabilities and
commitments
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    (2
    )
    
    
    
    
    
    
    (17
    )
    
    
    (80
    )
    
    
    (24
    )
    
    
    (104
    )Amounts written off
fixed asset
investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    (10
    )
    
    
    (193
    )Trading
profit/(loss)
before taxation
    
    
    876
    
    
    
    239
    
    
    
    140
    
    
    
    73
    
    
    
    (307
    )
    
    
    (871
    )
    
    
    (50
    )
    
    
    
    
    
    
    100
    
    
    
    (854
    )
    
    
    (754
    )Adjust for:Embedded value
charges and
rebasing
    
    
    
    
    
    
    (443
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (443
    )Reorganisation
expenses
    
    
    (169
    )
    
    
    (16
    )
    
    
    (19
    )
    
    
    (41
    )
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (315
    )Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )Income from
associated
undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (12
    )Profit on disposal
of group
undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (50
    )
    
    
    1
    
    
    
    (40
    )
    
    
    (89
    )Loss on the
termination of an
operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    27
    
    
    
    
    
    
    
    33Operating
profit/(loss)
    
    
    707
    
    
    
    (220
    )
    
    
    121
    
    
    
    32
    
    
    
    (405
    )
    
    
    (915
    )
    
    
    (34
    )
    
    
    (40
    )
    
    
    (754
    )Total assets
    
    
    77,183
    
    
    
    28,790
    
    
    
    54,459
    
    
    
    165
    
    
    
    564
    
    
    
    7,426
    
    
    
    2,160
    
    
    
    6,027
    
    
    
    176,774
 183




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Depreciation
    
    
    Depreciation
    
    
    Provision for
    
    
    
    
    
    
    AmountsNon-
    
    
    
    
    
    
    of operating
    
    
    of non-
    
    
    bad and
    
    
    Provision for
    
    
    written off
    
    
    
    
    
    
    Profit/(loss)interest
    
    
    Impair-
    
    
    lease
    
    
    operating
    
    
    doubtful
    
    
    contingent
    
    
    fixed asset
    
    
    Other
    
    
    beforeAdjustments
    
    income
    
    
    ments
    
    
    Assets
    
    
    lease assets
    
    
    debts
    
    
    liabilities
    
    
    investments
    
    
    expenses
    
    
    taxationcomprise:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2003Embedded value
charges and
rebasing
    
    
    (363
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (80
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (443
    )Reorganisation
expenses
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    (10
    )
    
    
    (265
    )
    
    
    (315
    )Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (28
    )Income from
associated
undertakings
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Profit on disposal
of group
undertakings
    
    
    (89
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (89
    )Loss on the
termination of an
operation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    33Reclassification of
depreciation on
operating lease
assets
    
    
    
    
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (251
    )
    
    
    (480
    )
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    (80
    )
    
    
    (24
    )
    
    
    (10
    )
    
    
    (511
    )
    
    
    (854
    )
 184




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued MotorBanking
    
    
    Investment
    
    
    
    Abbey
    
    
    
    
    
    
    Group
    
    
    
    
    
    
    Finance &and
    
    
    and
    
    
    Financial
    
    
    General
    
    
    Infra-
    
    
    Wholesale
    
    
    Litigation
    
    
    
    
    
    
    
    
    
    
    Adjust-
    
    
    GroupSavings
    
    
    protection
    
    
    Markets
    
    
    Insurance
    
    
    structure
    
    
    Banking
    
    
    Funding
    
    
    Other
    
    
    Total
    
    
    ments
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2002Interest income
    
    
    4,255
    
    
    
    150
    
    
    
    2,483
    
    
    
    4
    
    
    
    759
    
    
    
    327
    
    
    
    801
    
    
    
    160
    
    
    
    8,939
    
    
    
    (2,171
    )
    
    
    6,768Interest expense
    
    
    (2,456
    )
    
    
    (60
    )
    
    
    (2,456
    )
    
    
    (7
    )
    
    
    (934
    )
    
    
    
    
    
    
    (337
    )
    
    
    (105
    )
    
    
    (6,355
    )
    
    
    2,171
    
    
    
    (4,184
    )Net interest income
    
    
    1,799
    
    
    
    90
    
    
    
    27
    
    
    
    (3
    )
    
    
    (175
    )
    
    
    327
    
    
    
    464
    
    
    
    55
    
    
    
    2,584
    
    
    
    
    
    
    
    2,584Non-interest income
    
    
    454
    
    
    
    335
    
    
    
    231
    
    
    
    149
    
    
    
    106
    
    
    
    378
    
    
    
    (48
    )
    
    
    (71
    )
    
    
    1,534
    
    
    
    (618
    )
    
    
    916Depreciation of
operating lease
assets
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (252
    )
    
    
    (5
    )
    
    
    
    
    
    
    (280
    )
    
    
    280
    
    
    
    Total trading income
    
    
    2,230
    
    
    
    425
    
    
    
    258
    
    
    
    146
    
    
    
    (69
    )
    
    
    453
    
    
    
    411
    
    
    
    (16
    )
    
    
    3,838
    
    
    
    (338
    )
    
    
    3,500Administrative and
other expenses
    
    
    (1,042
    )
    
    
    (52
    )
    
    
    (103
    )
    
    
    (55
    )
    
    
    (230
    )
    
    
    (95
    )
    
    
    (183
    )
    
    
    (58
    )
    
    
    (1,818
    )
    
    
    (378
    )
    
    
    (2,196
    )Impairments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28
    )
    
    
    (357
    )
    
    
    (6
    )
    
    
    (391
    )
    
    
    (747
    )
    
    
    (1,138
    )Depreciation of
non-operating lease
assets
    
    
    (66
    )
    
    
    (1
    )
    
    
    (7
    )
    
    
    1
    
    
    
    (22
    )
    
    
    
    
    
    
    (6
    )
    
    
    (2
    )
    
    
    (103
    )
    
    
    
    
    
    
    (103
    )Total trading
expenses
    
    
    (1,108
    )
    
    
    (53
    )
    
    
    (110
    )
    
    
    (54
    )
    
    
    (252
    )
    
    
    (123
    )
    
    
    (546
    )
    
    
    (66
    )
    
    
    (2,312
    )
    
    
    (1,125
    )
    
    
    (3,437
    )Provisions for bad
and doubtful debts
    
    
    (151
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    (247
    )
    
    
    (115
    )
    
    
    (2
    )
    
    
    (514
    )
    
    
    
    
    
    
    (514
    )Provisions for
contingent
liabilities and
commitments
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    (50
    )
    
    
    
    
    
    
    (50
    )Amounts written off
fixed asset
investments
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (513
    )
    
    
    
    
    
    
    
    
    
    
    (511
    )
    
    
    
    
    
    
    (511
    )Trading
profit/(loss)
before taxation
    
    
    962
    
    
    
    372
    
    
    
    148
    
    
    
    92
    
    
    
    (355
    )
    
    
    (430
    )
    
    
    (254
    )
    
    
    (84
    )
    
    
    451
    
    
    
    (1,463
    )
    
    
    (1,012
    )Adjust for:Embedded value
charges and
rebasing
    
    
    
    
    
    
    (553
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (553
    )Reorganisation
expenses
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )Goodwill charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (811
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (811
    )Income from
associated
undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (17
    )Profit on disposal
of group
undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    (2
    )
    
    
    
    
    
    
    (48
    )Operating
profit/(loss)
    
    
    939
    
    
    
    (181
    )
    
    
    148
    
    
    
    92
    
    
    
    (1,177
    )
    
    
    (476
    )
    
    
    (273
    )
    
    
    (84
    )
    
    
    (1,012
    )Total assets
    
    
    67,264
    
    
    
    30,404
    
    
    
    43,603
    
    
    
    199
    
    
    
    837
    
    
    
    48,401
    
    
    
    7,751
    
    
    
    6,735
    
    
    
    205,194
 185




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Depreciation
    
    
    Depreciation
    
    
    Provision for
    
    
    
    
    
    
    AmountsNon-
    
    
    
    
    
    
    of operating
    
    
    of non-
    
    
    bad and
    
    
    Provision for
    
    
    written off
    
    
    
    
    
    
    Profit/(loss)interest
    
    
    Impair-
    
    
    lease
    
    
    operating
    
    
    doubtful
    
    
    contingent
    
    
    fixed asset
    
    
    Other
    
    
    beforeAdjustments
    
    income
    
    
    ments
    
    
    Assets
    
    
    lease assets
    
    
    debts
    
    
    liabilities
    
    
    investments
    
    
    expenses
    
    
    taxationcomprise
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m2002Embedded value
charges and
rebasing
    
    
    (553
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (553
    )Reorganisation
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    
    (34
    )Goodwill charges
    
    
    
    
    
    
    (747
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64
    )
    
    
    (811
    )Income from
associated
undertakings
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17
    )Profit on disposal
of group
undertakings
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )Reclassification of
depreciation on
operating lease
assets
    
    
    
    
    
    
    
    
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (280
    )
    
    
    (618
    )
    
    
    (747
    )
    
    
    280
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (378
    )
    
    
    (1,463
    )
 t) Restatements

During the preparation of Abbeys 2004 Consolidated Financial Statements, management identified a
number of errors in the US GAAP adjustments previously reported. As a result, Abbeys US GAAP net
(loss) income and shareholders funds for the years ended 31 December 2003 and 2002 have been
restated from the amounts previously reported as follows: Securitisations In 2004, Abbeys models used to calculate the UK GAAP to US GAAP adjustments for securitisations
were updated. As part of Abbeys review of the new models, certain clerical and administrative
input errors were discovered in the previous models used to calculate the initial values of
interest-only strips and subsequent revaluation gains/losses, and the interest income recognised
each year. Loan origination fees and costs In 2004, Abbeys models used to calculate the UK GAAP to US GAAP adjustments for loan origination
fees and costs were reviewed. As part of Abbeys review, certain errors were discovered in the
methodologies applied to identify the balances to be deferred. In addition, Abbey identified that
one of its divisions had been inappropriately omitted from its previous calculations, and in
another division, some fees had been inappropriately deferred. Goodwill In 2004, during the preparation of the financial statements, an error was identified in the posting
of a 2003 journal relating to the UK GAAP to US GAAP adjustment for goodwill. Life assurance businesses In 2004, the models used to calculate the UK GAAP to US GAAP adjustments for Abbeys life assurance
businesses were reviewed. As part of the review, certain clerical input errors were discovered in
the models used to calculate deferred acquisition costs. Operating leases In 2004, Abbey identified certain fixed assets leased to customers under operating leases for
which, in accordance with UK GAAP, depreciation and operating lease income are recognised using the
actuarial after-tax method rather than the straight-line method, but for which no UK GAAP to US
GAAP adjustment had been calculated in prior years. Other In 2004, Abbey identified
certain assets and liabilities that, in accordance with UK GAAP, had been
derecognised prior to their legal extinguishment, but for which no UK GAAP to US GAAP adjustment
had been calculated in prior years. 186




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued These findings have resulted in restatements of the previously reported US GAAP adjustments in
respect of Securitisation, Loan origination fees and costs, Goodwill, Shareholders interest
in long-term assurance business, Leasing and Other with their related tax effects, where applicable, as
follows: 2003
    
    
    2002£m
    
    
    £mNet (loss)/income:Net (loss)/income under US GAAP, as previously reported
    
    
    (131
    )
    
    
    (1,393
    )Adjustment to Securitisation
    
    
    (12
    )
    
    
    3Adjustment to Loan origination fees
    
    
    (107
    )
    
    
    (57
    )Adjustment to Goodwill
    
    
    190
    
    
    
    Adjustment to Shareholders interest in long-term assurance business
    
    
    (73
    )
    
    
    Adjustment
to Leasing
    
    
    (45
    )
    
    
    27Adjustment to Other
    
    
    (9
    )
    
    
    3Deferred tax effect of adjustments
    
    
    59
    
    
    
    10Net (loss)/income under US GAAP, as restated
    
    
    (128
    )
    
    
    (1,407
    )(Loss)/earnings per share:Basic (loss)/earnings per share, as previously reported
    
    
    (9.0
    )p
    
    
    (96.6
 )pEffect of adjustments
    
    
    0.2p
    
    
    
    (1.6
    )pBasic (loss)/earnings per share, as restated
    
    
    (8.8
    )p
    
    
    (98.2
 )pDiluted (loss)/earnings per share, as previously reported
    
    
    (9.0
    )p
    
    
    (96.6
 )pEffect of adjustments
    
    
    0.2p
    
    
    
    (1.6
    )pDiluted (loss)/earnings per share, as restated
    
    
    (8.8
    )p
    
    
    (98.2
    )pShareholders funds:Shareholders funds under US GAAP, as previously reported
    
    
    6,032
    
    
    
    6,090Adjustment to Securitisation
    
    
    (54
    )
    
    
    (31
    )Adjustment to Loan origination fees
    
    
    (298
    )
    
    
    (191
    )Adjustment to Shareholders interest in long-term assurance business
    
    
    (73
    )
    
    
    Adjustment
to Leasing
    
    
    (91
    )
    
    
    (46
    )Adjustment to Other
    
    
    (39
    )
    
    
    (30
    )Deferred tax effect of adjustments
    
    
    152
    
    
    
    107Shareholders funds under US GAAP, as restated
    
    
    5,629
    
    
    
    5,899
 The cumulative impact of the restatements on periods prior to 2002 is £(269)m. 63. Significant concentrations of credit risk During 2004, Abbeys significant exposures to credit risk arose mainly in the residential
mortgage portfolio and unsecured lending in Banking and Savings and in Abbey Financial Markets and
Wholesale Banking. See Risk management  Credit risk for additional information regarding Abbeys
approach to managing credit risk. Residential mortgages represented 45% (2003: 42%) of total assets at 31 December 2004; 100%
(2003: 98%) of the residential mortgage asset is located in the UK at 31 December 2004. Although the Abbey Financial Markets operation is based mainly in the UK, it has built up
exposures to various entities around the world. At 31 December 2004, 18% of Abbey Financial Markets
credit exposures were to counterparties from the United States, and 50% were to counterparties from
the UK. The remaining exposures were mainly to counterparties from Europe. Less than 3% of Abbey
Financial Markets exposures were to countries that are not members of the Organisation for
Economic Co-operation and Development. 64. Fair values of financial instruments The following disclosures are made in accordance with SFAS 107, Disclosures about Fair Value of
Financial Instruments. The fair values have been estimated using quoted market prices where available. Where no ready
markets exist and hence quoted market prices are not available, appropriate techniques are used to
estimate fair values which typically take account of the characteristics of the instruments,
including the future cash flows, market interest rates and prices available for similar
instruments. Unless otherwise specified, fair values of financial instruments have been estimated
by discounting anticipated future cash flows using market interest rates offered at 31 December
2004 for similar instruments. By its nature, the estimation of fair values is highly subjective and the results will depend
largely upon the assumptions made. See Operating review  highlights  Critical accounting policies for additional information.
Considerable caution should therefore be used in interpreting the fair values and particularly if
comparing with fair values presented by other financial institutions. The concept of fair values
assumes that the financial instruments will be realised by way of sale in the ordinary course of
business with adjustments made for liquidity as appropriate. SFAS 107 does not apply to non-financial assets and liabilities. Accordingly, tangible fixed
assets and balances relating to Long-term Assurance business are excluded. The carrying values and estimated fair values of financial instruments are as follows: 187




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued 2004
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2003
    
    
    2003Carrying
    
    
    Fair
    
    
    Surplus/
    
    
    Carrying
    
    
    Fair
    
    
    Surplus/amount
    
    
    value(1)
    
    
    (deficit)
    
    
    amount
    
    
    value (1)
    
    
    (deficit)£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNon-trading assetsCash and balances at central banks
    
    
    454
    
    
    
    454
    
    
    
    
    
    
    
    439
    
    
    
    439
    
    
    
    Loans and advances to banks
    
    
    3,068
    
    
    
    3,069
    
    
    
    1
    
    
    
    2,271
    
    
    
    2,271
    
    
    
    Related derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26
    
    
    
    27
    
    
    
    1Loans and advances to customers
    
    
    81,853
    
    
    
    82,093
    
    
    
    240
    
    
    
    84,426
    
    
    
    84,688
    
    
    
    262Related derivatives
    
    
    3
    
    
    
    (261
    )
    
    
    (264
    )
    
    
    (588
    )
    
    
    (1,061
    )
    
    
    (473
    )Debt securities
    
    
    672
    
    
    
    724
    
    
    
    52
    
    
    
    1,753
    
    
    
    1,841
    
    
    
    88Related derivatives
    
    
    (53
    )
    
    
    (96
    )
    
    
    (43
    )
    
    
    (58
    )
    
    
    (199
    )
    
    
    (141
    )Equity shares and other variable yield
securities
    
    
    30
    
    
    
    32
    
    
    
    2
    
    
    
    394
    
    
    
    394
    
    
    
    Non-trading liabilitiesDeposits by banks
    
    
    (8,578
    )
    
    
    (8,553
    )
    
    
    25
    
    
    
    (8,772
    )
    
    
    (8,793
    )
    
    
    (21
    )Related derivatives
    
    
    84
    
    
    
    84
    
    
    
    
    
    
    
    (67
    )
    
    
    (52
    )
    
    
    15Customer accounts
    
    
    (69,348
    )
    
    
    (69,540
    )
    
    
    (192
    )
    
    
    (68,666
    )
    
    
    (68,883
    )
    
    
    (217
    )Related derivatives
    
    
    1
    
    
    
    3
    
    
    
    2
    
    
    
    47
    
    
    
    187
    
    
    
    140Debt securities in issue
    
    
    (21,969
    )
    
    
    (21,297
    )
    
    
    672
    
    
    
    (24,834
    )
    
    
    (24,893
    )
    
    
    (59
    )Related derivatives
    
    
    275
    
    
    
    (229
    )
    
    
    (504
    )
    
    
    80
    
    
    
    259
    
    
    
    179Short positions in debt securities and
equity shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subordinated liabilities including
convertible debt
    
    
    (5,360
    )
    
    
    (5,656
    )
    
    
    (296
    )
    
    
    (6,337
    )
    
    
    (7,068
    )
    
    
    (731
    )Related derivatives
    
    
    (106
    )
    
    
    385
    
    
    
    491
    
    
    
    (99
    )
    
    
    425
    
    
    
    524Other long-term capital instruments
    
    
    (722
    )
    
    
    (805
    )
    
    
    (83
    )
    
    
    (742
    )
    
    
    (896
    )
    
    
    (154
    )Related derivatives
    
    
    2
    
    
    
    15
    
    
    
    13
    
    
    
    1
    
    
    
    208
    
    
    
    207Other non-trading derivatives (2)
    
    
    (1
    )
    
    
    20
    
    
    
    21
    
    
    
    10
    
    
    
    (5
    )
    
    
    (15
    )Trading assets/liabilitiesTreasury bills & other eligible bills
    
    
    1,990
    
    
    
    1,990
    
    
    
    
    
    
    
    1,630
    
    
    
    1,630
    
    
    
    Loans and advances to banks
    
    
    7,080
    
    
    
    7,080
    
    
    
    
    
    
    
    4,884
    
    
    
    4,884
    
    
    
    Loans and advances to customers
    
    
    11,357
    
    
    
    11,357
    
    
    
    
    
    
    
    9,413
    
    
    
    9,413
    
    
    
    Debt securities
    
    
    22,011
    
    
    
    22,011
    
    
    
    
    
    
    
    28,575
    
    
    
    28,575
    
    
    
    Equity shares and other variable yield
securities
    
    
    1,146
    
    
    
    1,146
    
    
    
    
    
    
    
    1,239
    
    
    
    1,239
    
    
    
    Deposits by banks
    
    
    (9,834
    )
    
    
    (9,834
    )
    
    
    
    
    
    
    (13,353
    )
    
    
    (13,353
    )
    
    

    Customer accounts
    
    
    (9,502
    )
    
    
    (9,502
    )
    
    
    
    
    
    
    (5,736
    )
    
    
    (5,736
    )
    
    
    Short positions in government debt
securities
    
    
    (2,715
    )
    
    
    (2,715
    )
    
    
    
    
    
    
    (4,303
    )
    
    
    (4,303
    )
    
    
    Derivative contracts with third parties
    
    
    (1,793
    )
    
    
    (1,793
    )
    
    
    
    
    
    
    (3,169
    )
    
    
    (3,169
    )
    
    
    Derivative contracts with ANFP
    
    
    505
    
    
    
    505
    
    
    
    
    
    
    
    50
    
    
    
    50
    
    
    
    
   (1)
    
    Where quoted market prices are not available, fair values of on-balance sheet financial
instruments incorporate the discounted value of the principal amounts, whereas, for associated
hedges of the underlying interest flows, fair values of derivatives do not reflect principal
amounts. Consequently, movements in the fair values of on-balance sheet financial instruments
are not necessarily matched by equal and opposite movements in the fair values of related
derivatives.(2)
    
    Other non-trading derivatives hedge finance, operating lease assets and non-equity minority
interests. SFAS 107 does not require disclosure of the fair value of finance lease debtors.
They are therefore excluded from the table. Non-equity minority interests are not classified
as liabilities under UK GAAP and have been excluded from the table. Fair values include the fair values of derivatives undertaken by Abbey entities for non-trading
purposes with Abbey National Financial Products. As part of an integrated approach to risk
management, Abbey uses both offbalance sheet and on-balance sheet instruments to manage risk.
On-balance sheet instruments which are used as hedges of other on-balance sheet instruments are
shown in the relevant standard balance sheet headings on the fair value table, and are not offset. Other assets, Prepayments and accrued income, Dividend proposed, Other liabilities, Accruals
and deferred income and Provisions for liabilities and charges may contain financial instruments
which fall within the scope of SFAS 107. Unless specifically included, these financial instruments
have been excluded from the above analysis as their fair values approximate to carrying values. The surplus/(deficit) in the table above represents the surplus/(deficit) of fair value
compared to the carrying amount of those financial instruments for which fair values have been
estimated under SFAS 107. The approach to specific categories of financial instruments is described below. 188




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Assets Debt securities and equity shares and other variable yield securities Where available, securities and investments have been valued using quoted market prices. Where
quoted market prices are not available, as is the case with certain over-the-counter derivatives
(OTC derivatives), fair value is determined using pricing models that 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. 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. 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 either through historical analysis of other observable market data (such as spot prices)
or through an estimation of a valuation adjustment appropriate for each product. Typically,
historical benchmarks are combined with management judgement in this process. 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. However, if a market value could be ascertained, the Directors believe it would reflect the
expectation of a long-term and continuing relationship with a majority of the customers. Although
substantial, this value is intangible and it cannot therefore be included in the fair value under
SFAS 107. Consequently the Directors believe that, for the purposes of SFAS 107, the carrying value
of the variable rate loans may be assumed to be their fair value. 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 31 December 2004 for similar
loans of maturity equal to the remaining fixed period. The fixed element of such loans is
substantially hedged such that any movement in the value of the loan as a result of market interest
rate changes will be offset by an equivalent movement in the value of the instrument used as a
hedge. Liabilities Deposits by banks and customers SFAS 107 states that the fair value of deposit liabilities payable on demand is 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 the
liabilities has been estimated by reference to the market rates
available at 31 December 2004 for 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, or stated at amortised cost. Financial commitments and contingent liabilities The Directors believe that, given the lack of an established market, the diversity of fee
structures and the estimation required to separate the value of the instruments from the value of
the overall transaction, it is generally difficult to estimate the fair value of financial
commitments and contingent liabilities. These are therefore excluded from the above table. However,
since the majority of these are at floating rates the book value may be a reasonable approximation
to fair value. Off-balance sheet derivative financial instruments Abbey uses various market-related off-balance sheet financial instruments. The fair value of these
instruments is measured as the sum of positive and negative fair values at the balance sheet date,
which is estimated using market prices where available or pricing models consistent with standard
market practice. 65. Consolidating financial information Abbey National Treasury Services plc is a wholly owned subsidiary of Abbey National plc and is
able to offer and sell certain securities in the US from time to time pursuant to a registration
statement on Form F-3 filed with the SEC (the Registration Statement). Abbey National plc has
fully and unconditionally guaranteed the obligations of Abbey
National Treasury Services plc that have
been, or will be incurred before 31 July 2008: this guarantee includes all securities issued by
Abbey National Treasury Services plc pursuant to the Registration Statement. The information below has been prepared in accordance with UK GAAP, based on the requirements
of the SECs Rule 3.10 of Regulation S-X. Cash flow information relates solely to third party cash
flows; Abbey does not maintain accounting records of cash flows on an individual company basis as
such information is not required to be presented under UK GAAP. Reconciliations to determine
intercompany cash flows are not practicable. This information is presented for: (i) Abbey National plc, on a stand-alone basis as guarantor
(The Company); (ii) Abbey National Treasury Services plc, on a stand-alone basis; (iii) other
non-guarantor subsidiaries of The Company and 189




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Abbey National Treasury Services plc on a combined basis (Other); (iv) consolidation adjustments
(Adjustments); and (v) total consolidated amounts (Consolidated). UK GAAP
Profit and loss accounts Abbey NationalThe Company
    
    
    Treasury Services
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mFor the year ended 31 December 2004Net interest income
    
    
    950
    
    
    
    272
    
    
    
    292
    
    
    
    16
    
    
    
    1,530Fees, commissions and other income
    
    
    629
    
    
    
    (1
    )
    
    
    1,181
    
    
    
    (643
    )
    
    
    1,166Total operating income
    
    
    1,579
    
    
    
    271
    
    
    
    1,473
    
    
    
    (627
    )
    
    
    2,696Operating expenses excluding operating lease
depreciation
    
    
    (1,812
    )
    
    
    (127
    )
    
    
    (428
    )
    
    
    213
    
    
    
    (2,154
    )Depreciation on operating lease assets
    
    
    
    
    
    
    (1
    )
    
    
    (150
    )
    
    
    
    
    
    
    (151
    )Provisions
    
    
    (181
    )
    
    
    160
    
    
    
    (19
    )
    
    
    (78
    )
    
    
    (118
    )Operating (loss)/profit on ordinary
activities before tax
    
    
    (414
    )
    
    
    303
    
    
    
    876
    
    
    
    (492
    )
    
    
    273Tax on (loss)/profit on ordinary activities
    
    
    183
    
    
    
    
    
    
    
    (55
    )
    
    
    (272
    )
    
    
    (144
    )(Loss)/profit on ordinary activities after tax
    
    
    (231
    )
    
    
    303
    
    
    
    821
    
    
    
    (764
    )
    
    
    129Minority interests  non-equity
    
    
    
    
    
    
    
    
    
    
    (49
    )
    
    
    
    
    
    
    (49
    )Loss for the financial year attributable to
the shareholders of Abbey National plc
    
    
    (231
    )
    
    
    303
    
    
    
    772
    
    
    
    (764
    )
    
    
    80Transfer from non-distributable reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    47Dividends including amounts attributable to
non-equity interests
    
    
    (631
    )
    
    
    51
    
    
    
    (145
    )
    
    
    94
    
    
    
    (631
    )Retained (loss)/profit for the year
    
    
    (862
    )
    
    
    354
    
    
    
    627
    
    
    
    (623
    )
    
    
    (504
    )For the year ended 31 December 2003Net interest income
    
    
    1,330
    
    
    
    18
    
    
    
    704
    
    
    
    10
    
    
    
    2,062Fees, commissions and other income
    
    
    1,109
    
    
    
    271
    
    
    
    68
    
    
    
    (977
    )
    
    
    471Total operating income
    
    
    2,439
    
    
    
    289
    
    
    
    772
    
    
    
    (967
    )
    
    
    2,533Operating expenses excluding operating lease
depreciation
    
    
    (1,677
    )
    
    
    (695
    )
    
    
    (42
    )
    
    
    217
    
    
    
    (2,197
    )Depreciation on operating lease assets
    
    
    
    
    
    
    
    
    
    
    (251
    )
    
    
    
    
    
    
    (251
    )Provisions
    
    
    (886
    )
    
    
    (198
    )
    
    
    (364
    )
    
    
    677
    
    
    
    (771
    )Operating (loss)/profit on ordinary
activities before tax
    
    
    (124
    )
    
    
    (604
    )
    
    
    115
    
    
    
    (73
    )
    
    
    (686
    )Tax on (loss)/profit on ordinary activities
    
    
    (43
    )
    
    
    188
    
    
    
    (83
    )
    
    
    (20
    )
    
    
    42(Loss)/profit on ordinary activities after tax
    
    
    (167
    )
    
    
    (416
    )
    
    
    32
    
    
    
    (93
    )
    
    
    (644
    )Minority interests  non-equity
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    
    
    
    
    (55
    )Loss for the financial year attributable to
the shareholders of Abbey National plc
    
    
    (167
    )
    
    
    (416
    )
    
    
    (23
    )
    
    
    (93
    )
    
    
    (699
    )Transfer from non-distributable reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (200
    )
    
    
    (200
    )Dividends including amounts attributable to
non-equity interests
    
    
    (424
    )
    
    
    91
    
    
    
    (569
    )
    
    
    478
    
    
    
    (424
    )Retained (loss)/profit for the year
    
    
    (591
    )
    
    
    (325
    )
    
    
    (592
    )
    
    
    185
    
    
    
    (1,323
    )For the year ended 31 December 2002Net interest income
    
    
    1,242
    
    
    
    239
    
    
    
    1,095
    
    
    
    8
    
    
    
    2,584Fees, commissions and other income
    
    
    1,337
    
    
    
    350
    
    
    
    230
    
    
    
    (936
    )
    
    
    981Total operating income
    
    
    2,579
    
    
    
    589
    
    
    
    1,325
    
    
    
    (928
    )
    
    
    3,565Operating expenses excluding operating lease
depreciation
    
    
    (1,485
    )
    
    
    (171
    )
    
    
    (1,401
    )
    
    
    (100
    )
    
    
    (3,157
    )Depreciation on operating lease assets
    
    
    
    
    
    
    
    
    
    
    (280
    )
    
    
    
    
    
    
    (280
    )Provisions
    
    
    (1,494
    )
    
    
    (656
    )
    
    
    (261
    )
    
    
    1,336
    
    
    
    (1,075
    )Operating (loss)/profit on ordinary
activities before tax
    
    
    (400
    )
    
    
    (238
    )
    
    
    (617
    )
    
    
    308
    
    
    
    (947
    )Tax on (loss)/profit on ordinary activities
    
    
    (97
    )
    
    
    101
    
    
    
    (237
    )
    
    
    81
    
    
    
    (152
    )(Loss)/profit on ordinary activities after tax
    
    
    (497
    )
    
    
    (137
    )
    
    
    (854
    )
    
    
    389
    
    
    
    (1,099
    )Minority interests  non-equity
    
    
    
    
    
    
    
    
    
    
    (60
    )
    
    
    (2
    )
    
    
    (62
    )(Loss)/profit for the financial year
attributable to the shareholders of Abbey
National plc
    
    
    (497
    )
    
    
    (137
    )
    
    
    (914
    )
    
    
    387
    
    
    
    (1,161
    )Transfer from non-distributable reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263
    
    
    
    263Dividends including amounts attributable to
non-equity interests
    
    
    (424
    )
    
    
    (449
    )
    
    
    (309
    )
    
    
    758
    
    
    
    (424
    )Retained (loss)/profit for the year
    
    
    (921
    )
    
    
    (586
    )
    
    
    (1,223
    )
    
    
    1,408
    
    
    
    (1,322
    )
 190




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued UK GAAP
Balance sheets Abbey NationalThe Company
    
    
    Treasury Services
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2004AssetsCash, treasury bills and other eligible bills
    
    
    443
    
    
    
    663
    
    
    
    1,338
    
    
    
    
    
    
    
    2,444Loans and advances to banks
    
    
    3,605
    
    
    
    52,448
    
    
    
    26,207
    
    
    
    (72,112
    )
    
    
    10,148Loans and advances to customers
    
    
    79,857
    
    
    
    3,593
    
    
    
    25,360
    
    
    
    (15,601
    )
    
    
    93,209Net investment in finance leases
    
    
    3
    
    
    
    
    
    
    
    1,142
    
    
    
    3
    
    
    
    1,148Securities and investments
    
    
    406
    
    
    
    12,067
    
    
    
    12,635
    
    
    
    (1,249
    )
    
    
    23,859Long-term assurance business
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    2,967
    
    
    
    2,968Intangible fixed assets
    
    
    
    
    
    
    
    
    
    
    317
    
    
    
    
    
    
    
    317Tangible fixed assets excluding operating lease assets
    
    
    226
    
    
    
    2
    
    
    
    145
    
    
    
    (127
    )
    
    
    246Operating lease assets
    
    
    
    
    
    
    
    
    
    
    2,341
    
    
    
    
    
    
    
    2,341Other assets
    
    
    1,684
    
    
    
    3,537
    
    
    
    967
    
    
    
    (307
    )
    
    
    5,881Shares in group undertakings
    
    
    8,250
    
    
    
    2,704
    
    
    
    4,642
    
    
    
    (15,596
    )
    
    
    Assets of long-term assurance funds
    
    
    
    
    
    
    
    
    
    
    29,631
    
    
    
    (2,451
    )
    
    
    27,180Total assets
    
    
    94,474
    
    
    
    75,014
    
    
    
    104,726
    
    
    
    (104,473
    )
    
    
    169,741LiabilitiesDeposits by banks
    
    
    15,697
    
    
    
    35,268
    
    
    
    21,800
    
    
    
    (54,353
    )
    
    
    18,412Customer accounts
    
    
    65,910
    
    
    
    12,048
    
    
    
    19,440
    
    
    
    (18,548
    )
    
    
    78,850Debt securities in issue
    
    
    4
    
    
    
    19,779
    
    
    
    17,284
    
    
    
    (15,098
    )
    
    
    21,969Other liabilities
    
    
    2,389
    
    
    
    5,279
    
    
    
    4,289
    
    
    
    (145
    )
    
    
    11,812Subordinated liabilities including convertible debt
    
    
    6,395
    
    
    
    278
    
    
    
    653
    
    
    
    (1,244
    )
    
    
    6,082Liabilities of long-term assurance funds
    
    
    
    
    
    
    
    
    
    
    29,631
    
    
    
    (2,451
    )
    
    
    27,18090,395
    
    
    
    72,652
    
    
    
    93,097
    
    
    
    (91,839
    )
    
    
    164,305Minority interests  non-equity
    
    
    
    
    
    
    
    
    
    
    518
    
    
    
    (6
    )
    
    
    512Non-equity shareholders funds
    
    
    632
    
    
    
    
    
    
    
    781
    
    
    
    (781
    )
    
    
    632Equity Shareholders Funds
    
    
    3,447
    
    
    
    2,362
    
    
    
    10,330
    
    
    
    (11,847
    )
    
    
    4,292Total liabilities
    
    
    94,474
    
    
    
    75,014
    
    
    
    104,726
    
    
    
    (104,473
    )
    
    
    169,741At 31 December 2003AssetsCash, treasury bills and other eligible bills
    
    
    417
    
    
    
    234
    
    
    
    1,419
    
    
    
    
    
    
    
    2,070Loans and advances to banks
    
    
    4,218
    
    
    
    16,977
    
    
    
    19,386
    
    
    
    (33,426
    )
    
    

    7,155Loans and advances to customers
    
    
    76,070
    
    
    
    18,525
    
    
    
    15,732
    
    
    
    (16,488
    )
    
    
    93,839Net investment in finance leases
    
    
    18
    
    
    
    
    
    
    
    2,535
    
    
    
    20
    
    
    
    2,573Securities and investments
    
    
    482
    
    
    
    14,399
    
    
    
    18,945
    
    
    
    (1,865
    )
    
    
    31,961Long-term assurance business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,272
    
    
    
    2,272Intangible fixed assets
    
    
    
    
    
    
    
    
    
    
    341
    
    
    
    
    
    
    
    341Tangible fixed assets excluding operating lease assets
    
    
    239
    
    
    
    3
    
    
    
    157
    
    
    
    (131
    )
    
    
    268Operating lease assets
    
    
    

    
    
    
    
    
    
    
    2,529
    
    
    
    
    
    
    
    2,529Other assets
    
    
    1,534
    
    
    
    3,631
    
    
    
    639
    
    
    
    (373
    )
    
    
    5,431Shares in group undertakings
    
    
    8,171
    
    
    
    2,704
    
    
    
    1,658
    
    
    
    (12,533
    )
    
    
    Assets of long-term assurance funds
    
    
    
    
    
    
    
    
    
    
    30,978
    
    
    
    (2,642
    )
    
    
    28,336Total assets
    
    
    91,149
    
    
    
    56,473
    
    
    
    94,319
    
    
    
    (65,166
    )
    
    
    176,775LiabilitiesDeposits by banks
    
    
    18,780
    
    
    
    14,726
    
    
    
    18,667
    
    
    
    (30,048
    )
    
    
    22,125Customer accounts
    
    
    57,900
    
    
    
    9,782
    
    
    
    12,227
    
    
    
    (5,508
    )
    
    
    74,401Debt securities in issue
    
    
    4
    
    
    
    22,882
    
    
    
    16,430
    
    
    
    (14,482
    )
    
    
    24,834Other liabilities
    
    
    2,198
    
    
    
    6,635
    
    
    
    5,794
    
    
    
    (512
    )
    
    
    14,115Subordinated liabilities including convertible debt
    
    
    7,431
    
    
    
    332
    
    
    
    1,173
    
    
    
    (1,857
    )
    
    
    7,079Liabilities of long-term assurance funds
    
    
    
    
    
    
    
    
    
    
    30,978
    
    
    
    (2,642
    )
    
    
    28,33686,313
    
    
    
    54,357
    
    
    
    85,269
    
    
    
    (55,049
    )
    
    
    170,890Minority interests  non-equity
    
    
    
    
    
    
    
    
    
    
    560
    
    
    
    (6
    )
    
    
    554Non-equity shareholders funds
    
    
    632
    
    
    
    
    
    
    
    (1,768
    )
    
    
    1,768
    
    
    
    632Equity Shareholders Funds
    
    
    4,204
    
    
    
    2,116
    
    
    
    10,258
    
    
    
    (11,879
    )
    
    
    4,699Total liabilities
    
    
    91,149
    
    
    
    56,473
    
    
    
    94,319
    
    
    
    (65,166
    )
    
    
    176,775
 191




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued US GAAP reconciliations Abbey NationalThe Company
    
    
    Treasury Services
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated2004
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mIncome statementLoss attributable to the shareholders  UK GAAP
    
    
    (231
    )
    
    
    303
    
    
    
    772
    
    
    
    (764
    )
    
    
    80Dividends on preference shares
    
    
    (48
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )(279
    )
    
    
    303
    
    
    
    772
    
    
    
    (764
    )
    
    
    32US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Other intangible assets
    
    
    
    
    
    
    
    
    
    
    (162
    )
    
    
    
    
    
    
    (162
    )Computer software
    
    
    (53
    )
    
    
    (7
    )
    
    
    (49
    )
    
    
    
    
    
    
    (109
    )Pensions cost
    
    
    (64
    )
    
    
    (2
    )
    
    
    (12
    )
    
    
    
    
    
    
    (78
    )Securitisation
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30Shareholders interest in long-term assurance
business
    
    
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    109Loan origination fees
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Leasing
    
    
    12
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    1Other
    
    
    7
    
    
    
    (5
    )
    
    
    (68
    )
    
    
    
    
    
    
    (66
    )Derivatives and hedging activities
    
    
    (261
    )
    
    
    297
    
    
    
    18
    
    
    
    
    
    
    
    54Tax effect on the above adjustments
    
    
    95
    
    
    
    (85
    )
    
    
    94
    
    
    
    
    
    
    
    104Net (loss)/income available to ordinary
shareholders  US GAAP
    
    
    (501
    )
    
    
    501
    
    
    
    691
    
    
    
    (759
    )
    
    
    (68
    )Shareholders fundsShareholders funds including non-equity
interests  UK GAAP
    
    
    4,079
    
    
    
    2,362
    
    
    
    11,111
    
    
    
    (12,628
    )
    
    
    4,924US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678
    
    
    
    678Other intangible assets
    
    
    
    
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    89Computer software
    
    
    5
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    8Pensions cost
    
    
    (476
    )
    
    
    (14
    )
    
    
    (93
    )
    
    
    
    
    
    
    (583
    )Securitisation
    
    
    368
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    368Shareholders interest in long-term assurance
business
    
    
    
    
    
    
    
    
    
    
    (935
    )
    
    
    
    
    
    
    (935
    )Leasing
    
    
    (36
    )
    
    
    
    
    
    
    (161
    )
    
    
    
    
    
    
    (197
    )Other
    
    
    (85
    )
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (138
    )Derivatives and hedging activities
    
    
    121
    
    
    
    84
    
    
    
    1
    
    
    
    
    
    
    
    206Loan origination fees
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Securities and Investments
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    52Dividend payable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax effect on the above adjustments
    
    
    10
    
    
    
    (38
    )
    
    
    329
    
    
    
    
    
    
    
    301Shareholders funds  US GAAP
    
    
    4,056
    
    
    
    2,449
    
    
    
    10,288
    
    
    
    (11,950
    )
    
    
    4,8432003Income statementLoss attributable to the shareholders  UK GAAP
    
    
    (167
    )
    
    
    (416
    )
    
    
    (23
    )
    
    
    (93
    )
    
    
    (699
    )Dividends on preference shares
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60
    )(227
    )
    
    
    (416
    )
    
    
    (23
    )
    
    
    (93
    )
    
    
    (759
    )US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    22Other intangible assets
    
    
    
    
    
    
    
    
    
    
    (53
    )
    
    
    
    
    
    
    (53
    )Computer software
    
    
    (15
    )
    
    
    (13
    )
    
    
    (14
    )
    
    
    
    
    
    
    (42
    )Pensions cost
    
    
    (5
    )
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (7
    )Securitisation
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Shareholders interest in long-term assurance
business
    
    
    
    
    
    
    
    
    
    
    270
    
    
    
    
    
    
    
    270Loan origination fees
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Leasing
    
    
    5
    
    
    
    
    
    
    
    (35
    )
    
    
    
    
    
    
    (30
    )Other
    
    
    15
    
    
    
    9
    
    
    
    (22
    )
    
    
    
    
    
    
    2Derivatives and hedging activities
    
    
    (25
    )
    
    
    300
    
    
    
    28
    
    
    
    
    
    
    
    303Tax effect on the above adjustments
    
    
    (30
    )
    
    
    (74
    )
    
    
    196
    
    
    
    
    
    
    
    92Net (loss)/income available to ordinary
shareholders  US GAAP
    
    
    (208
    )
    
    
    (194
    )
    
    
    345
    
    
    
    (71
    )
    
    
    (128
    )
 192




---



##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued Abbey NationalThe Company
    
    
    Treasury Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedShareholders funds
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mShareholders funds including
non-equity interests  UK GAAP
    
    
    4,836
    
    
    
    2,116
    
    
    
    8,490
    
    
    
    (10,111
    )
    
    
    5,331US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    673
    
    
    
    673Other intangible assets
    
    
    
    
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    251Computer software
    
    
    58
    
    
    
    10
    
    
    
    49
    
    
    
    
    
    
    
    117Pensions cost
    
    
    (352
    )
    
    
    (15
    )
    
    
    (97
    )
    
    
    
    
    
    
    (464
    )Securitisation
    
    
    310
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310Shareholders interest in
long-term assurance business
    
    
    
    
    
    
    
    
    
    
    (1,044
    )
    
    
    
    
    
    
    (1,044
    )Leasing
    
    
    (48
    )
    
    
    
    
    
    
    (150
    )
    
    
    
    
    
    
    (198
    )Other
    
    
    (92
    )
    
    
    5
    
    
    
    15
    
    
    
    
    
    
    
    (72
    )Derivatives and hedging activities
    
    
    382
    
    
    
    (213
    )
    
    
    (17
    )
    
    
    
    
    
    
    152Loan origination fees
    
    
    58
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58Securities and Investments
    
    
    
    
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    89Dividend payable
    
    
    242
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    242Tax effect on the above adjustments
    
    
    (95
    )
    
    
    37
    
    
    
    242
    
    
    
    
    
    
    
    184Shareholders funds  US GAAP
    
    
    5,299
    
    
    
    2,029
    
    
    
    7,739
    
    
    
    (9,438
    )
    
    
    5,6292002Income statementLoss attributable to the shareholders  UK GAAP
    
    
    (497
    )
    
    
    (137
    )
    
    
    (914
    )
    
    
    387
    
    
    
    (1,161
    )Dividends on preference shares
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (62
    )(559
    )
    
    
    (137
    )
    
    
    (914
    )
    
    
    387
    
    
    
    (1,223
    )US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    714
    
    
    
    714Other intangible assets
    
    
    
    
    
    
    
    
    
    
    (120
    )
    
    
    
    
    
    
    (120
    )Computer software
    
    
    29
    
    
    
    (4
    )
    
    
    (49
    )
    
    
    
    
    
    
    (24
    )Pensions cost
    
    
    (19
    )
    
    
    (1
    )
    
    
    (8
    )
    
    
    
    
    
    
    (28
    )Securitisation
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Shareholders interest in long-term assurance
business
    
    
    
    
    
    
    
    
    
    
    (673
    )
    
    
    
    
    
    
    (673
    )Loan origination fees
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73Leasing
    
    
    3
    
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    94Other
    
    
    (118
    )
    
    
    31
    
    
    
    50
    
    
    
    
    
    
    
    (37
    )Derivatives and hedging activities
    
    
    108
    
    
    
    (132
    )
    
    
    (114
    )
    
    
    
    
    
    
    (138
    )Tax effect on the above adjustments
    
    
    (31
    )
    
    
    32
    
    
    
    (72
    )
    
    
    
    
    
    
    (71
    )Net (loss) income available to ordinary
shareholders  US GAAP
    
    
    (488
    )
    
    
    (211
    )
    
    
    (1,809
    )
    
    
    1,101
    
    
    
    (1,407
    )Shareholders fundsShareholders funds including non-equity
interests  UK GAAP
    
    
    5,521
    
    
    
    2,440
    
    
    
    10,845
    
    
    
    (12,456
    )
    
    
    6,350US GAAP adjustments:Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    846
    
    
    
    846Other intangible assets
    
    
    
    
    
    
    
    
    
    
    304
    
    
    
    
    
    
    
    304Computer software
    
    
    73
    
    
    
    23
    
    
    
    63
    
    
    
    
    
    
    
    159Pensions cost
    
    
    (304
    )
    
    
    (12
    )
    
    
    (123
    )
    
    
    
    
    
    
    (439
    )Securitisation
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    188Shareholders interest in long-term assurance
business
    
    
    
    
    
    
    
    
    
    
    (1,284
    )
    
    
    
    
    
    
    (1,284
    )Leasing
    
    
    (53
    )
    
    
    
    
    
    
    (115
    )
    
    
    
    
    
    
    (168
    )Other
    
    
    (135
    )
    
    
    (4
    )
    
    
    37
    
    
    
    
    
    
    
    (102
    )Derivatives and hedging activities
    
    
    232
    
    
    
    (559
    )
    
    
    (83
    )
    
    
    
    
    
    
    (410
    )Loan origination fees
    
    
    19
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19Securities and investments
    
    
    
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    137Dividend payable
    
    
    107
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    107Tax effect on the above adjustments
    
    
    (6
    )
    
    
    125
    
    
    
    73
    
    
    
    
    
    
    
    192Shareholders funds  US GAAP
    
    
    5,642
    
    
    
    2,150
    
    
    
    9,717
    
    
    
    (11,610
    )
    
    
    5,899
 193




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##### Table of Contents



Financial Statements Notes to the Financial Statementscontinued UK GAAP
Cash flow statements Abbey NationalThe Company
    
    
    Treasury Services
    
    
    Other
    
    
    Adjustments
    
    
    Consolidated£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mFor the year ended 31 December 2004Net cash inflow from operating activities
    
    
    945
    
    
    
    136
    
    
    
    (3,100
    )
    
    
    
    
    
    
    (2,019
    )Net cash outflow from returns on investment
and servicing of finance
    
    
    (288
    )
    
    
    1
    
    
    
    (87
    )
    
    
    
    
    
    
    (374
    )Total taxation paid
    
    
    2
    
    
    
    129
    
    
    
    (143
    )
    
    
    
    
    
    
    (12
    )Net cash outflow from capital expenditure
and financial investment
    
    
    62
    
    
    
    1,676
    
    
    
    (1,204
    )
    
    
    
    
    
    
    534Acquisitions and disposals
    
    
    875
    
    
    
    
    
    
    
    2,305
    
    
    
    
    
    
    
    3,180Equity dividends paid
    
    
    (699

    )
    
    
    50
    
    
    
    (48
    )
    
    
    
    
    
    
    (697
    )Net cash (outflow)/inflow before financing
    
    
    897
    
    
    
    1,992
    
    
    
    (2,277
    )
    
    
    
    
    
    
    612Net cash inflow from financing
    
    
    (862
    )
    
    
    (52
    )
    
    
    114
    
    
    
    
    
    
    
    (800
    )(Decrease)/increase in cash
    
    
    35
    
    
    
    1,940
    
    
    
    (2,163
    )
    
    
    
    
    
    
    (188
    )For the year ended 31 December 2003Net cash inflow from operating activities
    
    
    (2,993
    )
    
    
    (21,547
    )
    
    
    (8,138
    )
    
    
    
    
    
    
    (32,678
    )Net cash outflow from returns on investment
and servicing of finance
    
    
    (284
    )
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    (372
    )Total taxation paid
    
    
    (145
    )
    
    
    54
    
    
    
    (8
    )
    
    
    
    
    
    
    (99
    )Net cash outflow from capital expenditure
and financial investment
    
    
    499
    
    
    
    (408
    )
    
    
    25,098
    
    
    
    
    
    
    
    25,189Acquisitions and disposals
    
    
    3,320
    
    
    
    22,570
    
    
    
    (17,087
    )
    
    
    
    
    
    
    8,803Equity dividends paid
    
    
    (216
    )
    
    
    91
    
    
    
    (91
    )
    
    
    
    
    
    
    (216
    )Net cash (outflow)/inflow before financing
    
    
    181
    
    
    
    760
    
    
    
    (314
    )
    
    
    
    
    
    
    627Net cash inflow from financing
    
    
    (122
    )
    
    
    (760
    )
    
    
    689
    
    
    
    
    
    
    
    (193
    )(Decrease)/increase in cash
    
    
    59
    
    
    
    
    
    
    
    375
    
    
    
    
    
    
    
    434For the year ended 31 December 2002Net cash inflow from operating activities
    
    
    1,298
    
    
    
    (2,024
    )
    
    
    (10,226
    )
    
    
    
    
    
    
    (10,952
    )Net cash outflow from returns on investment
and servicing of finance
    
    
    (292
    )
    
    
    (86
    )
    
    
    (84
    )
    
    
    
    
    
    
    (462
    )Total taxation paid
    
    
    (143
    )
    
    
    (43
    )
    
    
    (310
    )
    
    
    
    
    
    
    (496
    )Net cash outflow from capital expenditure
and financial investment
    
    
    (900
    )
    
    
    4,895
    
    
    
    5,560
    
    
    
    
    
    
    
    9,555Acquisitions and disposals
    
    
    (48
    )
    
    
    
    
    
    
    (488
    )
    
    
    
    
    
    
    (536
    )Equity dividends paid
    
    
    (648
    )
    
    
    (449
    )
    
    
    449
    
    
    
    
    
    
    
    (648
    )Net cash (outflow)/inflow before financing
    
    
    (733
    )
    
    
    2,293
    
    
    
    (5,099
    )
    
    
    
    
    
    
    (3,539
    )Net cash inflow from financing
    
    
    626
    
    
    
    110
    
    
    
    (49
    )
    
    
    
    
    
    
    687(Decrease)/increase in cash
    
    
    (107
    )
    
    
    2,403
    
    
    
    (5,148
    )
    
    
    
    
    
    
    (2,852
    )
 194




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##### Table of Contents



Financial Statements 
 Five year record The financial information set forth below for the twelve month periods ended 31 December 2004,
2003 and 2002, and as at 31 December 2004 and 2003 has been derived from the Consolidated Financial
Statements of the Group 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 2001 and 2000, and as at 31 December 2002, 2001 and 2000,
has been derived from the audited Consolidated Financial Statements of the Group for 2002, 2001 and
2000. 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 2004 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 2004,
2003, 2002, 2001 and 2000, were audited by Deloitte & Touche, independent accountants. The Groups
Consolidated Financial Statements included elsewhere in this Annual Report have been prepared in
accordance with UK GAAP, which differ in certain significant respects from US GAAP. Certain
significant differences between UK GAAP and US GAAP are discussed in note 58 to the Consolidated
Financial Statements, and notes 61 and 62 to the Consolidated Financial Statements include
reconciliations of certain amounts calculated in accordance with UK GAAP to US GAAP. Profit and loss accounts 2003
    
    
    2002
    
    
    2001
    
    
    20002004
    
    
    2004
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)
    
    
    (restated)$m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income (1, 5)
    
    
    2,723
    
    
    
    1,530
    
    
    
    2,062
    
    
    
    2,584
    
    
    
    2,692
    
    
    
    2,680Fees, commissions and other income (1, 2)
    
    
    2,075
    
    
    
    1,166
    
    
    
    471
    
    
    
    981
    
    
    
    1,400
    
    
    
    1,512Total operating income
    
    
    4,798
    
    
    
    2,696
    
    
    
    2,533
    
    
    
    3,565
    
    
    
    4,092
    
    
    
    4,192Operating expenses excluding impairment of goodwill and
operating lease depreciation (7)
    
    
    (3,835
    )
    
    
    (2,154
    )
    
    
    (2,179
    )
    
    
    (2,019
    )
    
    
    (1,856
    )
    
    
    (1,819
    )Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    (1,138
    )
    
    
    
    
    
    
    Depreciation on operating lease assets (2)
    
    
    (269
    )
    
    
    (151
    )
    
    
    (251
    )
    
    
    (280
    )
    
    
    (256
    )
    
    
    (178
    )Provisions
    
    
    (210
    )
    
    
    (118
    )
    
    
    (771
    )
    
    
    (1,075
    )
    
    
    (510
    )
    
    
    (326
    )(Loss)/profit on ordinary activities before tax(6)
    
    
    484
    
    
    
    273
    
    
    
    (686
    )
    
    
    (947
    )
    
    
    1,470
    
    
    
    1,869Tax on (loss)/profit on ordinary activities
    
    
    (256
    )
    
    
    (144
    )
    
    
    42
    
    
    
    (152
    )
    
    
    (464
    )
    
    
    (513
    )(Loss)/profit on ordinary activities after tax
    
    
    228
    
    
    
    129
    
    
    
    (644
    )
    
    
    (1,099
    )
    
    
    1,006
    
    
    
    1,356Minority interests  non-equity
    
    
    (87
    )
    
    
    (49
    )
    
    
    (55
    )
    
    
    (62
    )
    
    
    (59
    )
    
    
    (51
    )(Loss)/profit for the financial year attributable to the
shareholders of Abbey National plc
    
    
    141
    
    
    
    80
    
    
    
    (699
    )
    
    
    (1,161
    )
    
    
    947
    
    
    
    1,305Transfer (to)/from non-distributable reserve
    
    
    84
    
    
    
    47
    
    
    
    (200
    )
    
    
    263
    
    
    
    161
    
    
    
    (134
    )Dividends including amounts attributable to non-equity
interests
    
    
    (1,122
    )
    
    
    (631
    )
    
    
    (424
    )
    
    
    (424
    )
    
    
    (762
    )
    
    
    (687
    )Retained (loss)/profit for the year
    
    
    (897
    )
    
    
    (504
    )
    
    
    (1,323
    )
    
    
    (1,322
    )
    
    
    346
    
    
    
    484Selected UK GAAP profit and loss account dataEarnings/(loss) per ordinary share (pence and cents) basic
    
    
    3.9c
    
    
    
    2.2p
    
    
    
    (52.4
    )p
    
    
    (84.8
    )p
    
    
    63.2p
    
    
    
    89.2p diluted
    
    
    3.9c
    
    
    
    2.2p
    
    
    
    (52.4
    )p
    
    
    (84.3
    )p
    
    
    62.8p
    
    
    
    88.6pDividends per ordinary share (pence and cents) net (3)
    
    
    70.0c
    
    
    
    39.3p
    
    
    
    25.0p
    
    
    
    25.0p
    
    
    
    50.0p
    
    
    
    45.5p gross equivalent(4)
    
    
    77.8c
    
    
    
    43.7p
    
    
    
    27.8p
    
    
    
    27.8p
    
    
    
    55.6p
    
    
    
    50.6pDividend cover (times)
    
    
    0.10
    
    
    
    0.10
    
    
    
    (1.60
    )
    
    
    (2.70
    )
    
    
    1.20
    
    
    
    1.90Selected US GAAP profit and loss account data(Loss)/income from continuing operations (8)
    
    
    (183
    )
    
    
    (103
    )
    
    
    278
    
    
    
    (685
    )
    
    
    1,485
    
    
    
    Net (loss)/income available to ordinary shareholders
    
    
    (121
    )
    
    
    (68
    )
    
    
    (128
    )
    
    
    (1,407
    )
    
    
    947
    
    
    
    1,175(Loss)/earnings per ordinary share (pence)
from continuing operations (8) basic
and diluted
    
    
    (12.6
    )c
    
    
    (7.1
    )p
    
    
    (19.2
    )p
    
    
    (47.5
    )p
    
    
    63.4
    p
    
    
    from net (loss)/income available to ordinary shareholders basic
and diluted
    
    
    (8.3
    )c
    
    
    (4.7
    )p
    
    
    (8.8
    )p
    
    
    (98.2
    )p
    
    
    66.2
    p
    
    
    83.2p
 195




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##### Table of Contents



Financial Statements Five year record  Continued Balance sheets 2004
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000$m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash, treasury bills and other eligible bills
    
    
    4,351
    
    
    
    2,444
    
    
    
    2,070
    
    
    
    1,879
    
    
    
    2,983
    
    
    
    1,596Loans and advances to banks
    
    
    18,063
    
    
    
    10,148
    
    
    
    7,155
    
    
    
    6,601
    
    
    
    9,874
    
    
    
    12,168Loans and advances to customers before non-recourse finance
    
    
    141,210
    
    
    
    79,331
    
    
    
    84,488
    
    
    
    81,427
    
    
    
    78,650
    
    
    
    81,752Loans and advances subject to securitisation
    
    
    51,577
    
    
    
    28,976
    
    
    
    23,833
    
    
    
    24,156
    
    
    
    18,883
    
    
    
    7,927Less: non-recourse finance
    
    
    (26,874
    )
    
    
    (15,098
    )
    
    
    (14,482
    )
    
    
    (15,160
    )
    
    
    (12,952
    )
    
    
    (4,629
    )Loans and advances to customers
    
    
    165,913
    
    
    
    93,209
    
    
    
    93,839
    
    
    
    90,423
    
    
    
    84,581
    
    
    
    85,050Net investment in finance leases
    
    
    2,044
    
    
    
    1,148
    
    
    
    2,573
    
    
    
    3,447
    
    
    
    4,738
    
    
    
    5,192Securities and investments
    
    
    42,468
    
    
    
    23,859
    
    
    
    31,961
    
    
    
    60,770
    
    
    
    68,673
    
    
    
    69,573Long-term assurance business (8)
    
    
    5,283
    
    
    
    2,968
    
    
    
    2,272
    
    
    
    2,316
    
    
    
    1,662
    
    
    
    1,513Intangible fixed assets
    
    
    564
    
    
    
    317
    
    
    
    341
    
    
    
    376
    
    
    
    1,243
    
    
    
    245Tangible fixed assets excluding operating lease assets
    
    
    438
    
    
    
    246
    
    
    
    268
    
    
    
    371
    
    
    
    336
    
    
    
    389Operating lease assets
    
    
    4,166
    
    
    
    2,341
    
    
    
    2,529
    
    
    
    2,573
    
    
    
    2,522
    
    
    
    1,963Tangible fixed assets
    
    
    4,604
    
    
    
    2,587
    
    
    
    2,797
    
    
    
    2,944
    
    
    
    2,858
    
    
    
    2,352Other assets
    
    
    10,469
    
    
    
    5,881
    
    
    
    5,431
    
    
    
    7,027
    
    
    
    7,340
    
    
    
    7,565Assets of long-term assurance funds
    
    
    48,381
    
    
    
    27,180
    
    
    
    28,336
    
    
    
    29,411
    
    
    
    30,415
    
    
    
    19,083Total assets
    
    
    302,140
    
    
    
    169,741
    
    
    
    176,775
    
    
    
    205,194
    
    
    
    214,367
    
    
    
    204,337LiabilitiesDeposits by banks
    
    
    32,774
    
    
    
    18,412
    
    
    
    22,125
    
    
    
    24,174
    
    
    
    24,945
    
    
    
    34,996Customer accounts
    
    
    140,354
    
    
    
    78,850
    
    
    
    74,401
    
    
    
    76,766
    
    
    
    75,809
    
    
    
    66,795Debt securities in issue
    
    
    39,105
    
    
    
    21,969
    
    
    
    24,834
    
    
    
    48,079
    
    
    
    54,413
    
    
    
    57,078Other liabilities
    
    
    21,025
    
    
    
    11,812
    
    
    
    14,115
    
    
    
    12,484
    
    
    
    13,739
    
    
    
    12,978Subordinated liabilities including convertible debt (5)
    
    
    10,826
    
    
    
    6,082
    
    
    
    7,079
    
    
    
    7,303
    
    
    
    6,887
    
    
    
    5,871Liabilities of long-term assurance funds
    
    
    48,380
    
    
    
    27,180
    
    
    
    28,336
    
    
    
    29,411
    
    
    
    30,415
    
    
    
    19,083292,463
    
    
    
    164,305
    
    
    
    170,890
    
    
    
    198,217
    
    
    
    206,208
    
    
    
    196,801Minority interests  non-equity
    
    
    912
    
    
    
    512
    
    
    
    554
    
    
    
    627
    
    
    
    681
    
    
    
    664Non-equity shareholders funds (5)
    
    
    1,125
    
    
    
    632
    
    
    
    632
    
    
    
    748
    
    
    
    748
    
    
    
    450Equity shareholders funds
    
    
    7,640
    
    
    
    4,292
    
    
    
    4,699
    
    
    
    5,602
    
    
    
    6,730
    
    
    
    6,422Total liabilities
    
    
    302,140
    
    
    
    169,741
    
    
    
    176,775
    
    
    
    205,194
    
    
    
    214,367
    
    
    
    204,337Selected UK GAAP balance sheet dataShareholders
funds, inc non-equity
    
    
    8,765
    
    
    
    4,924
    
    
    
    5,331
    
    
    
    6,350
    
    
    
    7,478
    
    
    
    6,872Book value of equity shareholders funds per ordinary share
    
    
    514.1c
    
    
    
    288.8p
    
    
    
    321.3p
    
    
    
    384.2p
    
    
    
    468.3p
    
    
    
    450.6pSelected US GAAP balance sheet dataShareholders funds
    
    
    8,621
    
    
    
    4,843
    
    
    
    5,629
    
    
    
    5,899
    
    
    
    8,059
    
    
    
    7,634Book value of equity shareholders funds per ordinary share
    
    
    504.4c
    
    
    
    283.4p
    
    
    
    341.7p
    
    
    
    352.6p
    
    
    
    497.6p
    
    
    
    501.8pNumber of shares in issue, adjusted for changes in capital (m)
    
    
    1,465
    
    
    
    1,465
    
    
    
    1,453
    
    
    
    1,450
    
    
    
    1,440
    
    
    
    1,428Total assets
    
    
    331,552
    
    
    
    186,265
    
    
    
    197,836
    
    
    
    188,161
    
    
    
    188,689
    
    
    
    177,773
   (1)
    
    Equivalent US dollar amounts are shown in Shareholder information  Dividends on ordinary shares, included elsewhere in this Annual Report.(2)
    
    The calculation of the gross equivalent dividend per ordinary share applies a tax rate of 10%
for grossing-up purposes for dividends.(3)
    
    Prior to 2002, Reserve capital instruments were reported as a component of non-equity
shareholders funds, with coupon payments treated as a non-equity appropriation of profit.
Following an accounting presentation change, Reserve capital instruments are now reported
within Subordinated liabilities, with coupon payments recorded as Interest payable, within Net
interest income. The 2001 comparative amounts have been restated to reflect this accounting policy change and
as a consequence profit before tax has been reduced by £19m, with profits attributable to
shareholders remaining unchanged. Shareholders funds including non-equity interests have been
reduced by £297m in 2001. Comparative amounts for years prior to 2001 are unaffected. This change
results from the application of UITF 33, Obligations in capital instruments, which first applies
to the financial statements for the year ended 31 December 2002.  (4)
    The application of FRS 19, Deferred tax, for the year ended 31 December 2002 has resulted in
deferred taxation being provided on all timing differences that have not reversed before the
balance sheet date at the rate of tax expected to apply when those timing differences will
reverse. Deferred tax assets are now recognised to the extent that they are regarded as
recoverable. Previously, deferred taxation was accounted for where it was probable that a
liability or asset would arise. The 2001 and 2000 comparative amounts have been restated to
reflect this accounting policy change and as a consequence the tax charge has been reduced by
£24m (2001) and £16m (2000), respectively. Shareholders funds including non-equity interests
have been increased by £120m (2001) and£96m (2000) respectively.(5)
    Amounts stated in dollars have been translated from sterling at the rate of £1.00  $1.78,
the noon buying rate on 31 December 2004(6)
    Prior to 2002, the costs of equity-based instruments issued to employees under compensation
schemes were generally accounted for under the intrinsic value method. Abbey now accounts for
the costs of share-based instruments on a fair value basis. The costs of share-based payments
are computed by reference to the grant date; such costs are expensed over the vesting period
of the instrument. The 2001 and 2000 Profit and Loss accounts and statements of total
recognised gains and losses comparative amounts have been restated to reflect this accounting
policy change and as a consequence profit before tax has been reduced by £6m (2001) and £4m
(2000) respectively, with a corresponding credit to the statement of total recognised gains
and losses. No prior period adjustment to shareholders funds is required.(7)
    In 2002 certain adjustments were made to period end market values in reporting long-term
assurance business. The 2001 and 2000 comparative amounts have been restated to reflect this
change in accounting policy. The reported earnings in these periods have been reduced by £443m
and £102m, respectively. See note 21 Long term assurance business for further information.(8)
    Determination of the split of net income between continuing operations and discontinued
operations, and the related earnings per share amounts for 2000 is not practicable. 196




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##### Table of Contents



Financial Statements Five year record Continued Selected statistical information Year ended/as at 31 December2003
    
    
    20022004
    
    
    (restated)
    
    
    (restated)
    
    
    2001
    
    
    2000%
    
    
    %
    
    
    %
    
    
    %
    
    
    %Selected UK GAAP financial statisticsProfitability ratios:Return on average total assets(1, 9)
    
    
    0.02
    
    
    
    (0.39
    )
    
    
    (0.56
    )
    
    
    0.43
    
    
    
    0.66Return on average ordinary shareholders funds (2)
    
    
    0.66
    
    
    
    (13.54
    )
    
    
    (20.01
    )
    
    
    13.01
    
    
    
    20.56Return on average risk weighted assets (3)
    
    
    0.05
    
    
    
    (1.10
    )
    
    
    (1.47
    )
    
    
    1.07
    
    
    
    1.59Net interest margin (excluding exceptional items) (4, 9)
    
    
    1.40
    
    
    
    1.69
    
    
    
    1.73
    
    
    
    1.47
    
    
    
    1.61Cost: income ratio (including exceptional items) (5)
    
    
    84.65
    
    
    
    95.49
    
    
    
    61.46
    
    
    
    48.38
    
    
    
    45.32Cost: income ratio (excluding exceptional items) (5)
    
    
    84.65
    
    
    
    95.49
    
    
    
    61.46
    
    
    
    48.38
    
    
    
    45.32Capital ratios:Ordinary dividends as a percentage of net income
    
    
    1814.63
    
    
    
    (47.96
    )
    
    
    (29.60
    )
    
    
    79.56
    
    
    
    51.22Average ordinary shareholders funds as a percentage of average
total assets (9)
    
    
    2.56
    
    
    
    2.89
    
    
    
    2.80
    
    
    
    3.33
    
    
    
    3.21Risk asset ratios:Total
    
    
    12.0
    
    
    
    13.3
    
    
    
    11.6
    
    
    
    11.6
    
    
    
    13.5Tier 1
    
    
    10.4
    
    
    
    10.1
    
    
    
    9.2
    
    
    
    8.4
    
    
    
    8.8Credit quality data: (6)Non-performing loans as a percentage of loans and advances to
customers excluding finance leases (6, 7)
    
    
    1.48
    
    
    
    3.25
    
    
    
    2.36
    
    
    
    2.22
    
    
    
    2.60Provisions as a percentage of loans and advances to customers
excluding finance leases (6)
    
    
    0.57
    
    
    
    1.01
    
    
    
    0.78
    
    
    
    0.62
    
    
    
    0.70Provisions as a percentage of non-performing loans (6, 7)
    
    
    38.2
    
    
    
    31.14
    
    
    
    35.95
    
    
    
    27.76
    
    
    
    26.87Provisions charge for bad and doubtful debts as a percentage of
average loans and advances to customers excluding finance leases
(6)
    
    
    (0.04
    )
    
    
    0.54
    
    
    
    0.60
    
    
    
    0.33
    
    
    
    0.35Ratio of earnings to fixed charges: (8)Excluding interest on retail deposits
    
    
    116.35
    
    
    
    71.72
    
    
    
    74.68
    
    
    
    126.93
    
    
    
    129.62Including interest on retail deposits
    
    
    107.26
    
    
    
    83.16
    
    
    
    82.59
    
    
    
    119.47
    
    
    
    121.91Selected US GAAP financial statisticsReturn on average total assets (1)
    
    
    (0.04
    )
    
    
    (0.07
    )
    
    
    (0.76
    )
    
    
    0.52
    
    
    
    0.70Return on average ordinary shareholders funds (2)
    
    
    (1.48
    )
    
    
    (2.55
    )
    
    
    (22.77
    )
    
    
    12.95
    
    
    
    17.18Dividends as a percentage of net income
    
    
    (1213.22
    )
    
    
    (178.91
    )
    
    
    (51.22
    )
    
    
    71.29
    
    
    
    50.89Average ordinary shareholders funds as a percentage of average
total assets
    
    
    2.40
    
    
    
    2.63
    
    
    
    3.33
    
    
    
    3.99
    
    
    
    4.07
 Number
    
    
    Number
    
    
    Number
    
    
    Number
    
    
    NumberRatio of earnings to fixed charges: (8)Excluding interest on retail deposits
    
    
    1.07
    
    
    
    0.92
    
    
    
    0.67
    
    
    
    1.28
    
    
    
    1.26Including interest on retail deposits
    
    
    1.03
    
    
    
    0.95
    
    
    
    0.77
    
    
    
    1.20
    
    
    
    1.20
   (1)
    
    Profit after tax divided by average total assets.(2)
    
    Profit after tax divided by average equity shareholders funds.(3)
    
    Profit after tax divided by average risk weighted assets.(4)
    
    Net interest margin represents net interest income as a percentage of average
interest-earning assets.(5)
    
    Cost: income ratio equals operating expenses excluding depreciation on operating lease assets
divided by total operating income less depreciation on operating lease assets.(6)
    
    All credit quality data is calculated using period-end balances, except for provisions for
bad and doubtful debts as a percentage of average loans and advances to customers, excluding
assets held under purchase and resale agreements.(7)
    
    The non-performing loans used in these statistics are calculated in accordance with
conventional US definitions. The value of non-performing loans represents the aggregate
outstanding balance of all loans and advances 90 days or more overdue or, for unsecured loans
less than 90 days overdue, the balance of loans where a provision has been made or interest
suspended. Interest continues to be debited to substantially all of these loans and advances
for collection purposes. The proportion of this interest whose collectability is in doubt is
then suspended and excluded from the profit and loss account. Accordingly, the interest income
figures included in the profit and loss account are the same as would be reported in the
United States. However, the value of non-performing loans is higher by the cumulative amount
of this suspended interest. In cases where borrowers have made arrangements to pay off their arrears over a period of
time, the arrears remain on the loan accounts until cleared and as a result the loans are
included in non-performing loans even though the customers are currently performing and many will
ultimately discharge their loans fully. Abbey generally holds a first mortgage over the properties securing the UK residential
mortgage loans. The value of the security will in many cases completely cover the value of the
loan and the arrears and in the remainder will considerably reduce the size of the loss incurred. Non-performing loans also include the full value of loans for which Abbey has enforced its
security by taking into possession the borrowers properties. In many such cases the value of the
losses expected to result on sale of the security is known with some certainty and is included in
the specific provisions. However, the value of the losses is not charged off until the properties
are sold and the losses have thus been determined precisely. Other banks, including those in the
US, may charge off losses more rapidly. Although Abbeys practice does not affect net income or
the carrying value of loans and advances to customers, it does increase the reported value of
non-performing loans. For these reasons, the value of the non-performing loans is not necessarily indicative of the
value of losses which Abbey is likely to suffer. Management believes that it is important to
consider the quality of Abbeys UK residential mortgage portfolio compared with those of its
competitors. Over the reporting periods covered by this table, the number of mortgage loans which
are six months or more in arrears as a percentage of the total number of outstanding mortgage
loans has been broadly comparable with the UK Council of Mortgage Lenders (CML) industry
average. At 31 December 2003, Abbeys percentage was 0.19% compared with a Council of Mortgage
Lenders percentage of 0.36%. The value of these Abbey non- performing loans as a percentage of
its total UK 197




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##### Table of Contents



Financial Statements Five year record Continued residential mortgage loan assets was 0.16%. Non-performing loans in this table also include the
value of arrears cases between three and six months in arrears and the value of properties in
possession. On this basis, the non-performing UK residential mortgage loans are 0.1% of its total
UK residential loans and advances. If the remainder of Abbeys loans and advances (excluding
finance leases) are included, this ratio increases to 3.25%.  (8)
    For the purpose of calculating the ratios of earnings to fixed charges, earnings consists of
income before taxes plus fixed charges. Fixed charges consists of interest payable, which
includes the amortisation of discounts and premiums on debt securities in issue and interest
payable on finance lease obligations.(9)
    These ratios have been restated for each of the comparative periods due to the US GAAP total
assets being restated. 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 25 May was $1.8312 High
    
    
    Low
    
    
    Average (1)
    
    
    Period endCalendar period
    
    $ Rate
    
    
    $ Rate
    
    
    $ Rate
    
    
    $ RateYears ended 31 December:2004
    
    
    1.95
    
    
    
    1.75
    
    
    
    1.83
    
    
    
    1.782003
    
    
    1.78
    
    
    
    1.55
    
    
    
    1.63
    
    
    
    1.782002
    
    
    1.61
    
    
    
    1.41
    
    
    
    1.50
    
    
    
    1.612001
    
    
    1.50
    
    
    
    1.37
    
    
    
    1.44
    
    
    
    1.452000
    
    
    1.65
    
    
    
    1.40
    
    
    
    1.51
    
    
    
    1.50Months
ended:May 2005 (2)
    
    
    1.90
    
    
    
    1.82April 2005
    
    
    1.92
    
    
    
    1.87March 2005
    
    
    1.93
    
    
    
    1.87February 2005
    
    
    1.92
    
    
    
    1.86January 2005
    
    
    1.91
    
    
    
    1.86December 2004
    
    
    1.95
    
    
    
    1.91November 2004
    
    
    1.91
    
    
    
    1.83
   (1)
    
    The average of the noon buying rates on the last business day of each month during the
relevant period.(2)
    
    With respect to May 2005, for the period from May 1 to May 25. 198




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Shareholder Information 
 Dividend and Share Information Dividends on ordinary shares Abbey National plc has paid dividends on its ordinary shares every year without interruption since
its incorporation in 1989. At the interim stage in 2004 a dividend of 8.33 pence was paid. In
addition a special dividend of 25 pence together with 6 pence dividend differential was paid to
Abbey shareholders in December 2004 in relation to the sale to Banco Santander Central Hispano,
S.A. The dividends (including interim dividends) declared for each of the last five years were as
follows: Pence per ordinary share 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Interim
    
    
    8.33
    
    
    
    8.33
    
    
    
    17.65
    
    
    
    16.80
    
    
    
    15.15Final*
    
    
    31.00
    
    
    
    16.67
    
    
    
    7.35
    
    
    
    33.20
    
    
    
    30.35Total
    
    
    39.33
    
    
    
    25.00
    
    
    
    25.00
    
    
    
    50.00
    
    
    
    45.50
 Cents per ordinary share 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Interim
    
    
    14.83
    
    
    
    14.82
    
    
    
    28.41
    
    
    
    24.36
    
    
    
    22.66Final*
    
    
    55.18
    
    
    
    29.67
    
    
    
    11.83
    
    
    
    48.14
    
    
    
    45.39Total
    
    
    70.01
    
    
    
    44.49
    
    
    
    40.24
    
    
    
    72.50
    
    
    
    68.05
   *
    
    The final dividend column for 2004 includes the special dividend paid in December 2004 in
relation to the sale to Banco Santander Central Hispano, S.A. Dividends expressed in cents are translated from sterling at the non-buying rate on 31 December
of the year to which they relate (or the last business day in December if 31 December was not a
business day that particular year). No representation is made that pounds sterling amounts have
been, or could have been, or could be, converted into dollars at these rates. Dividends on dollar-denominated preference shares Dividends on the non-cumulative dollar-denominated preference shares, are paid quarterly at such
rates as will, including the UK associated tax credit and before deduction of UK withholding tax
(see Taxation for US investors below), result in annual dividends to holders amounting to 7 3/8%
of the $25.00 issue price, respectively. Dollar-denominated preference shares and American Depository Shares At 31 December 2004, Abbey National plc had outstanding 18,000,000 Series B non-cumulative
dollar-denominated preference shares, nominal value $0.01 each. The Series B preference shares were
issued in November 2001. Currently, the only trading market for these shares is the New York Stock
Exchange where they are traded in the form of Series B American Depositary Shares, each
representing one preference share. At
31 December 2004, the series B American Depository Shares were held by 32 holders, all
with US addresses. The Series B American Depository Shares traded on the New York Stock Exchange at
prices ranging from a high of $28.00 to a low of $24.37 during 2004. Share price history The following tables show the high and low sale prices for the ordinary shares during the periods
indicated, based on mid-market prices at the close of business on the London Stock Exchange for the
following periods:  (i)
    The five most recent financial years;(ii)
    Each financial quarter for the two most recent financial years; and(iii)
    Each of the six most recent months. (i) Five most recent financial years Ordinary sharesHigh
    
    
    Lowpence
    
    
    pence2004*
    
    
    644
    
    
    
    4202003
    
    
    596
    
    
    
    3172002
    
    
    1,132
    
    
    
    4872001
    
    
    1,305
    
    
    
    8852000
    
    
    1,219
    
    
    
    622
   *
    
    The period for which the figures are calculated is up to 12 November 2004 as on that date
the ordinary shares were cancelled. 199




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##### Table of Contents



Shareholder Information Dividend and Share Information  Continued (ii) Quarterly for the two most recent financial years 2004: Fourth quarter*
    
    
    644
    
    
    
    571Third quarter
    
    
    598
    
    
    
    469Second quarter
    
    
    513
    
    
    
    420First quarter
    
    
    587
    
    
    
    4382003: Fourth quarter
    
    
    596
    
    
    
    518Third quarter
    
    
    577
    
    
    
    470Second quarter
    
    
    538
    
    
    
    337First quarter
    
    
    539
    
    
    
    317
   *
    
    The period for which the figures are calculated is up to 12 November 2004, as on that date
the ordinary shares were cancelled.


(iii) The six most
recent
months November 2004**
    
    
    644
    
    
    
    623October 2004
    
    
    632
    
    
    
    571September 2004
    
    
    619
    
    
    
    550August 2004
    
    
    598
    
    
    
    575July 2004
    
    
    580
    
    
    
    469June 2004
    
    
    514
    
    
    
    448   **
    
    1 November 2004 through 12 November 2004. Major shareholders As at 31 December 2004, 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 share. Exchange controls There are no United Kingdom 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 Shares, except
as outlined in the section on Taxation.
 200




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##### Table of Contents



Shareholder Information 
 Risk Factors An investment in Abbeys shares involves a number of risks, certain of which are set forth
below. The factors discussed below should not be regarded as a complete and comprehensive statement
of all potential risks and uncertainties. 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. Over the last year we experienced a reduction in our
interest rate spread. Should interest rate spreads continue to decrease this could adversely affect
our 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) and its life assurance funds including the
requirement to maintain a minimum solvency margin. 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. Changes in supervision and regulation, in particular in
the UK, could materially affect Abbeys business, the products and services offered or the value of
assets. 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. See Supervision and Regulation for additional information. The resolution of a number of issues 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 including 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. Abbeys insurance businesses are subject to inherent risks regarding claims provisions Claims in Abbeys life assurance businesses may be higher than expected as a result of changing
trends in claims experience arising from changes in demographic developments, mortality and
morbidity rates and other factors outside Abbeys control. Such changes could affect the
profitability of current and future insurance products and services. See Risk Management  Life
Business. Risks associated with the disposal of our assets and/or businesses Certain businesses are being managed for exit. In some cases this involves the sale of assets
and/or businesses. Based on information currently available to us, the value of these assets or
businesses shown in our financial statements reflect managements best estimate of their current
value. We believe these values will be close to ultimate disposal values. However there is an
inherent uncertainty in predicting the ultimate sales value. As a result we may incur losses on
disposal or further amounts to be written off fixed asset investments and/or increases in
provisions, therefore reducing our profitability. 201




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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 an investment by a US taxpayer in the Ordinary Shares, the Series A or B
Non-cumulative Dollar-denominated Preference Shares, or the American Depositary Shares (ADSs)
representing an interest in such shares (collectively, the Shares). This summary applies to you
only if: >
    
    you are an individual US citizen or resident, a US corporation, or
otherwise subject to US federal income tax on a net income basis in
respect of the Shares;>
    
    you hold the Shares as a capital asset for tax purposes; and>
    
    you are not resident or ordinarily resident in the UK for UK tax
purposes, and do not hold the Shares for the purposes of a trade,
profession, or vocation that you carry on in the UK through a branch
or agency.
 This summary does not purport to be a comprehensive description of all of the tax considerations
that may be relevant to any particular investor, and does not address the tax treatment of
investors that are subject to special rules. We have assumed that you are familiar with the tax
rules applicable to investments in securities generally and with any special rules to which you may
be subject. You should consult your own tax advisers regarding the tax consequences of the
acquisition, ownership, and disposition of the Shares in the light of your own particular
circumstances. The discussion is based on laws, treaties, judicial decisions, and regulatory interpretations
in effect on the date hereof, all of which are subject to change. On March 31, 2003,
representatives of the UK and US exchanged instruments of notification for a new income tax
convention (the New Treaty). The New Treaty has the force and effect of law in respect of
withholding taxes on dividends from May 1, 2003. As discussed below, you will no longer be entitled
to claim a special foreign tax credit in respect of dividends that was available under the terms of
the Prior Treaty between the US and the UK from December 31, 1975 (the Prior Treaty), except for
a limited period of time during which you may elect to apply the entirety of the Prior Treaty in
preference to the New Treaty. In general, the UK and US federal income tax considerations relevant to an investment in the
Shares will be similar to the considerations relevant to investments in equity securities issued by
other UK corporations. With regard to UK taxation: >
    
    dividends that you receive on the Shares will not be subject to any UK withholding tax;>
    
    dispositions of Shares that you make will not give rise to any UK tax on chargeable gains;>
    
    no UK stamp duty or stamp duty reserve tax will be payable on a transfer of Shares in ADS form, provided,
in the case of stamp duty, that the ADSs and any instrument of transfer are executed and remain at all
times outside the UK; and>
    
    UK stamp duty or stamp duty reserve tax will generally be payable on a transfer of registered Shares in
non-ADS form, and you should consult your own tax advisers with respect to this possibility.
 With regard to US federal income taxation: >
    
    if you hold Shares in ADS form, you will be treated as holding the underlying shares for US federal
income tax purposes, and deposits and withdrawals of shares in exchange for ADSs will not be taxable
events;>
    
    you must include cash dividends paid on the Shares in ordinary income on the date that you or the ADS
depositary receive them, translating dividends paid in UK pounds sterling into US dollars using the
exchange rate in effect on the date of receipt;>
    
    subject to certain exceptions for
positions that are hedged or held for less than 61 days, an individual
holder of Shares generally should be subject to US taxation at a maximum rate of 15% in respect of
dividends received in 2004.>
    
    dispositions of Shares that you make will generally 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 were held for more than one year; and>
    
    if you qualify for benefits under the Prior Treaty, you may be eligible, subject to generally applicable
limitations, to receive a special US foreign tax credit equal to one-ninth of the amount of certain cash
dividends that you receive on the Shares, so long as you make an election to include in your income, as
an additional notional dividend, an amount equal to the tax credit. This foreign tax credit benefit is
generally only available with respect to dividends paid before May 1, 2003, unless you elect to apply the
Prior Treaty convention in its entirety for an optional 12-month extension period. You should consult
your own tax advisers regarding your potential eligibility for this foreign tax credit benefit.
 202




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Shareholder Information 
 Contact Information Abbey National plc registered and principal office
Abbey National House,
2 Triton Square,
Regents Place
London
NW1 3AN
Registered Number 2294747
Registered in England and Wales Grupo Santander shareholder department
Grupo Santander
Santander House
100, Ludgate Hill
London
EC4M 7NJ Phone number
Shareholder Services
0870 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 Judiciary Plaza, 450 Fifth Street, NW Washington, DC 20549. Information on the
operation of the public reference rooms can be obtained by calling the SEC on 1-800-SEC-0330. Web site Further information on Abbey is available on the Internet at www.abbey.com. Memorandum and Articles 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, registered number 2294747. Abbeys objects and
purposes are set out in the Memorandum of Association. These include the power to carry on all
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. Subject to certain exceptions, as permitted by English law, no director may vote, or be
counted in the quorum, 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. Directors remuneration is decided by the Remuneration Committee. The Board may exercise all the powers of the Company to borrow money and to mortgage or charge all
or any part of the Company 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 re-appointed at the Annual General Meeting. No share ownership is required for a directors qualification. Preference Shares Preference shares entitle the holder to receive a preferential dividend payment at a fixed or
variable rate and on such dates as are determined by the Board prior to their allotment. The Board
will also determine whether these rights are cumulative or non-cumulative. The preference shares
rank as regards participation in profits pari passu inter se. If dividends are unclaimed for
twelve years, the right to the dividend ceases in accordance with Article 44 of the Articles of
Association. The holders of any series of preference shares will only be entitled to receive notice of and
to attend any general meeting of the Company if the preference dividend on the shares of such
series has not, at the date of the notice of the 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 general meeting, for, or in relation to, the winding-up of the
Company; 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. 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
 203




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Shareholder Information Contact Informationcontinued >
    
    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
Articles. 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 shares are transferable. If
dividends are unclaimed, the right to the dividend ceases in accordance with Article 44 of the
Articles of Association. Subject to any special terms as to voting upon which any 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 Articles,
on a show of hands every member who is present in person at a general meeting of the Company 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 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.
 Abbeys Articles authorise it to issue redeemable shares, but Abbey 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 moneys 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 shares. Subject to the provisions of the Companies Acts, all or any of the rights attached to any
class of shares (whether or not the Company 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 general meeting of
the holders of those shares. Additional quorum and voting requirements apply to such meetings. Abbeys 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
general meetings. In addition, shareholders holding at least 95% in nominal value of shares
carrying voting rights at general meetings may require directors to call an EGM. The notice period
depends on the resolutions to be put to the meeting and will be 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 in the Bylaws governing the ownership threshold above which
shareholder ownership must be disclosed. There are no conditions governing changes in capital in the Articles of Association which are
more stringent than those implied by law. 204




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Glossary and Definitions Glossary and Definitions Terms used
    
    US equivalent or brief description of meaningAccounts
    
    Financial statementsAllotted
    
    IssuedArticles of Association
    
    BylawsAttributable profit
    
    Net incomeBalance sheet
    
    Statement of financial positionBills
    
    NotesCalled up share capital
    
    Ordinary shares and preferred stock, issued and fully paidCapital allowances
    
    Tax depreciation allowancesCombined Code
    
    UK-derived principles of good corporate governance and code of best practiceCreditors
    
    PayablesCurrent account
    
    Checking accountDealing
    
    TradingDebtors
    
    ReceivablesDeferred tax
    
    Deferred income taxDepreciation
    
    Write-down of tangible fixed assets over their estimated useful livesFees and commissions payable
    
    Fees and commissions expenseFees and commissions receivable
    
    Fees and commissions incomeFinance lease
    
    Capital leaseFreehold
    
    Ownership with absolute rights in perpetuityInterest payable
    
    Interest expenseInterest receivable
    
    Interest incomeLoans and advances
    
    LendingsLoan capital
    
    Long-term debtLong-term assurance fund
    
    Long-term insurance fundMembers
    
    ShareholdersNet asset value
    
    Book valueNominal value
    
    Par valueOne-off
    
    Non-recurringOrdinary shares
    
    Common stockOverdraft
    
    A line of credit established through a customers current account and
contractually repayable on demandPreference shares
    
    Preferred stockPremises
    
    Real estateProfit
    
    IncomeProfit and loss account
    
    Income statementProfit and loss account reserves
    
    Retained earningsProvisions
    
    AllowancesShare capital
    
    Ordinary shares, or common stock, and preferred stockShareholders funds
    
    Stockholders equityShare premium account
    
    Additional paid-in capitalShares in issue
    
    Shares outstandingTangible fixed assets
    
    Property, plant and equipmentUndistributable reserves
    
    Restricted surplusWrite-offs
    
    Charge-offs
 205




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Cross-reference to Form 20-F Cross-reference to Form 20-F Part I1
    
    Identity of Directors, Senior Management and Advisers
    
    
    *2
    
    Offer Statistics and Expected Timetable
    
    
    *3
    
    Key InformationSelected Financial Data
    
    
    195Capitalisation and Indebtedness
    
    
    *Reasons for the Offer and use of Proceeds
    
    
    *Exchange Rates
    
    
    198Risk Factors
    
    
    2014
    
    Information on the CompanyHistory and Development of the Company
    
    
    7Business Overview
    
    
    7Supervision and Regulation
    
    
    92Organisational Structure
    
    
    75
    
    Operating and Financial Review and ProspectsOperating Results
    
    
    11Liquidity and Capital Resources
    
    
    58Research and Development, Patents and Licenses, etc
    
    Not applicableTrend Information
    
    
    8Off- Balance Sheet Arrangements
    
    
    64Contractual Obligations
    
    
    656
    
    Directors, Senior Management and EmployeesDirectors
    
    
    80Compensation
    
    
    85Board Practices
    
    
    83Employees
    
    
    87Share Ownership
    
    
    857
    
    Major Shareholders and Related Party TransactionsMajor Shareholders
    
    
    200Related Party Transactions
    
    85Interests of Experts and Counsel
    
    
    *8
    
    Financial InformationConsolidated Statements and Other Financial Information
    
    
    98Significant Changes
    
    
    119
    
    The Offer and ListingOffer Listing and Details
    
    
    *Plan of Distribution
    
    
    *Selling shareholders
    
    
    *Share Price History
    
    
    199Trading Markets
    
    
    *Dilution
    
    
    *Expenses of the Issue
    
    
    *10
    
    Additional InformationShare Capital
    
    
    *Memorandum and Articles of Association
    
    
    203Material Contracts
    
    
    46Exchange Controls
    
    
    200Taxation
    
    
    202Dividends and Paying Agents
    
    
    *Statements by Experts
    
    
    *Documents on Display
    
    
    203Subsidiary Information
    
    Not applicable11
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    7212
    
    Description of Securities Other Than Equity SecuritiesDebt Securities
    
    
    *Warrants and Rights
    
    
    *Other Securities
    
    
    *American Depositary Shares
    
    
    *Part II13
    
    Defaults, Dividend Arrearages and Delinquencies
    
    Not applicable14
    
    Material Modifications to the Rights
    
    Not applicable15
    
    Controls and ProceduresDisclosure Controls and Procedures
    
    
    91Changes in Internal Control Over Financial Reporting
    
    
    *16
    
    Internal Control over Financial ReportingAudit Committee Financial Expert
    
    
    84
 206




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Cross-reference to Form 20-F Cross-reference to Form 20-F Code of Ethics
    
    
    90Principal Accountant Fees and Services
    
    
    114Exemptions from the Listing Standards for Audit Committees
    
    
    *Part III17
    
    Financial Statements
    
    Not applicable18
    
    Financial Statements
    
    
    9819
    
    Exhibits
    
    
    Filed with the SEC
   *
    
    Not required for an Annual Report. 207




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SIGNATURE The registrant hereby certifies that it meets all of 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 plcBy

/s/ Francisco Gómez-RoldánFrancisco Gómez-Roldán Date: 8 June 2005




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EXHIBIT INDEX Exhibits *  1.1
    Memorandum and Articles of Association of Abbey National plc8.1
    List of Subsidiaries of Abbey National plc12.1
    CEO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 200212.2
    CFO Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 200213.1
    Certificate pursuant to Section 906 of the Sarbanes-Oxley Act of 200214.1
    Consent of Deloitte & Touche LLP **   *
    
    Documents concerning Abbey National plc referred to within the Annual Report on Form 20-F
2004 may be inspected at Abbey National House, 2 Triton Square, Regents Place, London NW1
3AN, the principal executive offices and registered office of Abbey National plc.**
    
    Incorporated by reference to the Registration
Statements on Form F-3 (No.333-13146).