##### Table of Contents





UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
      Form 20-F
 (Mark One)o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
    OF THE SECURITIES EXCHANGE ACT OF 1934orþ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from  tooro

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934Date of event requiring this shell company
    report  to   Commission file number
    0-25670
 Abbey National plc
 (Exact name of Registrant as
    specified in its charter)
  England
 (Jurisdiction of incorporation
    or organization)
  Abbey National House, 2 Triton
    Square, Regents Place, London NW1 3AN, England
 (Address of principal executive
    offices)
  Securities registered or to be
    registered pursuant to Section 12(b) of the
    Act. None
  Securities registered or to be
    registered pursuant to Section 12(g) of the
    Act. None
  Securities registered or to be
    registered pursuant to Section 15(d) of the
    Act.
          103/8%
    Non-cumulative Preference Shares of nominal value £1 each

200,000,00085/8%
    Non-cumulative Preference Shares of nominal value £1 each

125,000,000       þ o
  o þ
  o
   Large Accelerated
    Filer o     Accelerated
    Filer o     Non-Accelerated
    Filer þ
   o  U.S.
    GAAP      þ  International
    Financial Reporting Standards as issued by the International
    Accounting Standards Board
 o  Other
  o o
  o þ




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##### 



Contents
 Business Review and Forward-looking StatementsChief Executives Review 2Forward-looking Statements 4Business and Financial ReviewBusiness Overview 5Business Review  Summary 8Business Review  Personal Financial Services 12Business Review  Sold Life Businesses and Portfolio Business Unit 19Other Material Items 20Balance Sheet Business Review 22Risk Management 33Report of the DirectorsDirectors 50Directors Report 53Supervision and Regulation 59Financial StatementsReport of Independent Registered Public Accounting Firm  US opinion 62Primary Financial Statements 63Accounting Policies 68Notes to the Financial Statements 83Selected Financial Data 126Shareholder InformationShare Information 129Risk Factors 130Taxation for US Investors 131Contact Information 132Glossary and Definitions 134Cross-reference to Form 20-F 135Exhibit 7.1Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 15.1
  1




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Business Review and Forward-looking Statements
 
 Chief Executives Review
 Overview & Business Update
      Key Financial Highlights
    >
    
    Personal Financial Services trading profit before tax (managements preferred profit measure, described in the
Business Review  Summary on page 10) increased by £254m to £1,104m compared to £850m in 2006, with each business
division delivering robust growth;>
    
    Personal Financial Services trading income was 6.6% higher, within the targeted range of between 5% and 10%. Retail
Banking income benefited from robust asset growth of 8%, in challenging market conditions, and Abbeys continued
focus on effective margin management for both mortgages and customer deposits;>
    
    A further reduction in Personal Financial Services trading expenses of 3.8%; and>
    
    Credit quality remained strong, with the average loan to value (LTV) on new business and stock remaining low at 64%
(FY 2006: 61%) and 45% (FY 2006: 45%) respectively. Less than 5% of stock has an LTV of greater than 90%, and Abbey
has no net exposure to sub-prime mortgage lending. Further information about the current credit environment is
contained in the Risk Management Report on page 46.
  2




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Business Review and Forward-looking Statements
 Chief Executives Review continued
 Outlook
  >
    
    Better service and value for
money for our customers  making use of Partenon and our improved cost position,
improving sales productivity and improving service levels;>
    
    Further improvements in efficiency  allowing us to reinvest the money we save in the business;>
    
    Increased customer loyalty  encouraging our customers to buy more from us as they have better value for money
products;>
    
    Better teamwork  leveraging both global and local expertise and capabilities; and>
    
    More focus on meritocracy  making sure we recognise and reward people for their performance.
 Conclusion
  
 
 3




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Business Review and Forward-looking Statements
 
 Forward-looking Statements
  >
    
    projections or expectations of revenues, costs, profit (or loss), earnings (or loss) per share, dividends, capital
structure or other financial items or ratios;>
    
    statements of plans, objectives or goals of Abbey or its management, including those related to products or services;>
    
    statements of future economic performance; and>
    
    statements of assumptions underlying such statements.
     >
    
    inflation, interest rate, exchange rate, market and monetary fluctuations;>
    
    the effect of, and changes to, regulation and government policy;>
    
    the effects of market conditions and extent of economic activity in the geographic and business areas in which Abbey
conducts business;>
    
    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, or the effects of the
interpretation of laws by the courts;>
    
    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;>
    
    lack of liquidity in wholesale funding markets in periods of economic and political crisis;>
    
    consumer perception as to the continuing availability of credit and price competition; and>
    
    Abbeys success at managing the risks of the foregoing.
    4




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##### Table of Contents



Business and Financial Review
 
 Business Overview
  General
   Summary history
  .
 Corporate purpose and strategy
  Executive Responsibility
  >
    
    Retail Banking offers residential mortgages, savings
and banking and other personal financial products to
customers throughout the United Kingdom. This division
is headed by António Horta-Osório. Alison Brittain,
appointed an Executive Director on 2 January 2008, is
responsible for the Retail Distribution channel as well
as business banking, premium banking and e-commerce,
while Ricky Okey is responsible for the Intermediary
channel.>
    
    Global Banking & Markets provides financial markets
sales, trading and risk management services, as well as
manufacturing retail structured products. This division
is headed by Jaime Astarloa.>
    
    Corporate Banking offers banking services principally
to small and mid-sized UK companies. It also contains
specialised businesses and operations in run down. This
division is headed by Miguel Ángel Rodríguez-Sola.>
    
    Wealth Management offers private banking services,
self-invested personal pension plans, a WRAP service and
other specialist banking services. This division is
headed by Antonio Lorenzo.
   >
    
    Retail Products and Marketing responsible for
integrating and gaining the maximum value from Abbeys
products, marketing and brand communications to serve
Abbeys customers better. This division is headed by
Nathan Bostock.>
    
    Human Resources responsible for delivering the human
resources strategy and personnel support. It also
includes the learning function. This division is headed
by Nathan Bostock.>
    
    Manufacturing responsible for all information
technology, cost control and operations activity
(including service centres). This division is headed by
Juan Olaizola.>
    
    Risk responsible for ensuring that the Board and
senior management team of Abbey are provided with an
appropriate risk policy and control framework, and to
report any material risk issues to the Risk Committee
and the Board. Juan Colombás is the Chief Risk Officer,
Retail and Corporate Banking, and John Hennessy is the
Chief Risk Officer, Wholesale.>
    
    Internal Audit responsible for supervising the
compliance, effectiveness and efficiency of Abbeys
internal control systems to manage its risks. This
division is headed by Jorge de la Vega.
   5




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##### Table of Contents



Business and Financial Review
 Business Overview continued
 Competition
 Competitive environment, future trends and outlook
  Personal
Financial Services (PFS)
  Retail Banking
  Residential Mortgages
   Savings
  Banking and Consumer Credit
  cahoot
  General Insurance
  Abbey Business
  Asset Management
  6




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##### Table of Contents



Business and Financial Review
 Business Overview continued
 Global Banking & Markets
  Corporate Banking
  Wealth Management
  Abbey International
  James Hay
  Cater Allen
  Abbey Sharedealing
  Group Infrastructure
   Sold Life Businesses
  Portfolio Business Unit (PBU)
  7




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##### Table of Contents



Business and Financial Review
 
 Business
Review  Summary
  Executive summary
  >
    
    Business Review Summary this contains an explanation of the basis of Abbeys results and any potential changes to that basis in the future; a
summary Income Statement with commentary; a summary Income Statement analysed between Personal Financial Services, the Sold Life Businesses and
the Portfolio Business Unit; a summary of the nature of adjustments between Abbeys statutory basis of accounting (as described in the Accounting
Policies section on pages 68 to 82) and Abbeys management basis of accounting (known as the trading basis); and a description of key
performance indicators;>
    
    Personal Financial Services this contains a summary of the results, and commentary thereon, by Income Statement line item on a trading basis for
each segment. Additional information is provided for the Retail Banking segment due to its significance to Abbeys results;>
    
    Sold Life Businesses and Portfolio Business Unit this contains a summary of the results and commentary thereon on a trading basis of the life
insurance businesses sold in 2006 and the non-core businesses sold in 2005;>
    
    Other Material Items this contains information about the statutory to trading basis adjustments; and>
    
    Balance Sheet Business Review this contains an analysis of Abbeys balance sheet, including:
 >
    
    Capital disclosures this contains an analysis of Abbeys capital needs and availability;>
    
    Off-Balance Sheet disclosures this contains a summary of Abbeys off-balance
sheet arrangements, their business purpose, and importance to Abbey; and>
    
    Liquidity disclosures this contains an analysis of Abbeys sources and uses of
liquidity and cash flows.
 Basis of results presentation
  >
    
    Retail Banking;>
    
    Global Banking & Markets;>
    
    Corporate Banking;>
    
    Wealth Management;>
    
    Group Infrastructure;>
    
    Sold Life Businesses; and>
    
    Portfolio Business Unit.
  Critical factors affecting results
 Critical accounting policies and areas of significant management judgement
  Profit on disposal of Group undertakings
  Significant acquisitions and disposals
  Current and future accounting developments under IFRS
  8




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##### Table of Contents



Business and Financial Review
 Business Review  Summary continued
 Group Summary
 Summarised consolidated statutory income statement and selected ratios
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,499
    
    
    
    1,228
    
    
    
    1,172Non-interest income
    
    
    1,283
    
    
    
    1,242
    
    
    
    1,183Total operating income
    
    
    2,782
    
    
    
    2,470
    
    
    
    2,355Administrative expenses
    
    
    (1,369)
    
    
    
    (1,420)
    
    
    
    (1,577)Depreciation and amortisation
    
    
    (205)
    
    
    
    (215)
    
    
    
    (195)Total operating expenses excluding provisions and charges
    
    
    (1,574)
    
    
    
    (1,635)
    
    
    
    (1,772)Impairment losses on loans and advances
    
    
    (344)
    
    
    
    (344)
    
    
    
    (218)Provisions for other liabilities and charges
    
    
    
    
    
    
    (63)
    
    
    
    (3)Total operating provisions and charges
    
    
    (344)
    
    
    
    (407)
    
    
    
    (221)Profit on continuing operations before tax
    
    
    864
    
    
    
    428
    
    
    
    362Tax on profit on continuing operations
    
    
    (179
    )
    
    
    (115)
    
    
    
    (108)Profit for the year from continuing operations
    
    
    685
    
    
    
    313
    
    
    
    254(Loss) / profit for the year from discontinued operations
    
    
    
    
    
    
    (245)
    
    
    
    166Profit for the year
    
    
    685
    
    
    
    68
    
    
    
    420Tier 1 capital ratio (%)
    
    
    7.3%
    
    
    
    8.0%
    
    
    
    10.0%Equity Tier 1 capital ratio (%)
    
    
    5.4%
    
    
    
    5.6%
    
    
    
    6.6%Closing risk weighted assets
    
    
    68,562
    
    
    
    62,942
    
    
    
    55,972
 2007 compared to 2006
  >
    
    Net interest income of £1,499m compared to £1,228m in 2006 increased by £271m. Retail Banking income benefited
from robust asset growth of 8% in challenging market conditions, and Abbeys continued focus on effective
margin management for both mortgages and customer deposits. Overall the Retail Banking spread improved by 2
basis points. Net interest income also benefited from the full year impact of earnings from proceeds from the
sale of the life insurance businesses in 2006.>
    
    Non-interest income of £1,283m compared to £1,242m in 2006 increased by £41m. The increase relates to the
uplift in revenues within Global Banking & Markets despite difficult trading conditions in the second half of
the year restricting transaction flow. In addition, 2007 has benefited from the increase in the profit on part
sale of PFS subsidiaries, partially offset by higher losses from hedging and other mark-to-market variances
compared to 2006. Retail banking fee income declined slightly.>
    
    Administrative expenses of £1,369m (2006: £1,420m) decreased by £51m driven by on-going cost reduction activity.>
    
    Depreciation and amortisation of £205m (2006: £215m) decreased by £10m due to lower asset write-downs.>
    
    Impairment losses on loans and advances were unchanged at £344m, with reduced exposure to unsecured lending,
particularly internet-sourced lending, being offset by increases elsewhere reflecting the deterioration in
market conditions. Credit quality overall remains sound.>
    
    Provisions for other liabilities and charges net to £nil compared to £63m in 2006, principally due to the stay
in complaints relating to unauthorised overdraft charges pending a decision on legal proceedings in the High
Court of England and Wales to resolve legal uncertainties concerning the level, fairness and lawfulness of
unauthorised overdraft charges, as described in Note 37 to the Consolidated Financial Statements
 2006 compared to 2005
  >
    
    Net interest income of £1,228m compared to £1,172m in 2005 increased by £56m. The increase relates in part to
earnings on the proceeds from the sale of the life businesses in 2006. The remaining movement was largely due
to higher Retail Banking income driven by growth in retail lending assets and stable retail spreads being
offset by the reduction in income from asset financing operations and other businesses, which are being
run-down.>
    
    Non-interest income of £1,242m compared to £1,183m in 2005 increased by £59m. The increase relates primarily to
the uplift in revenues within Global Banking & Markets due to the benefits of favourable market conditions and
increased external business.>
    
    Administrative expenses of £1,420m (2005: £1,577m) decreased by £157m. The reduction largely reflects the
benefits of the cost reduction programme with the majority of the savings relating to employment costs driven
by a headcount reduction of approximately 2,000 in 2006 (excluding the reduction reflecting the impact of the
sale of the life insurance businesses). In addition, the 2005 administrative expenses included misselling costs
of £70m.>
    
    Depreciation and amortisation of £215m compared to £195m in 2005 increased by £20m due to the timing of asset
additions in 2005.>
    
    Impairment losses on loans and advances of £344m compared to £218m in 2005 increased by £126m. The growth was
partly driven by strengthening of the coverage ratio and in part by the maturing nature of the unsecured
personal loan portfolio, including portfolios that are no longer open to new business, with some deterioration
in quality. The remaining increase was mainly due to mortgage-related charges increasing modestly from a very
low base relative to the total book.>
    
    Provisions for other liabilities and charges of £63m compared to £3m in 2005 increased by £60m due to
provisions for misselling remediation payments to customers.
 9




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##### Table of Contents



Business and Financial Review
 Business Review  Summary continued
  Summarised consolidated statutory income statement analysed between Personal Financial Services,
Sold Life Businesses and the Portfolio Business Unit
 2007
    
    
    2006
    
    

    2005Sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    SoldPFS
    
    
    Life
    
    
    PBU
    
    
    Total
    
    
    PFS
    
    
    Life
    
    
    PBU
    
    
    Total
    
    
    PFS
    
    
    Life
    
    
    PBU
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,499
    
    
    
    
    
    
    
    
    
    
    
    1,499
    
    
    
    1,228
    
    
    
    
    
    
    
    
    
    
    
    1,228
    
    
    
    1,166
    
    
    
    
    
    
    
    6
    
    
    
    1,172Non-interest income
    
    
    1,283
    
    
    
    
    
    
    
    
    
    
    
    1,283
    
    
    
    1,242
    
    
    
    
    
    
    
    
    
    
    
    1,242
    
    
    
    1,122
    
    
    
    
    
    
    
    61
    
    
    
    1,183Total operating income
    
    
    2,782
    
    
    
    
    
    
    
    
    
    
    
    2,782
    
    
    
    2,470
    
    
    
    
    
    
    
    
    
    
    
    2,470
    
    
    
    2,288
    
    
    
    
    
    
    
    67
    
    
    
    2,355Administrative expenses
    
    
    (1,369)
    
    
    
    
    
    
    
    
    
    
    
    (1,369)
    
    
    
    (1,420)
    
    
    
    
    
    
    
    
    
    
    
    (1,420)
    
    
    
    (1,576)
    
    
    
    
    
    
    
    (1)
    
    
    
    (1,577)Depreciation and amortisation
    
    
    (205)
    
    
    
    
    
    
    
    
    
    
    
    (205)
    
    
    
    (215)
    
    
    
    
    
    
    
    
    
    
    
    (215)
    
    
    
    (194)
    
    
    
    
    
    
    
    (1)
    
    
    
    (195)Total operating expenses
excluding provisions and
charges
    
    
    (1,574)
    
    
    
    
    
    
    
    
    
    
    
    (1,574)
    
    
    
    (1,635)
    
    
    
    
    
    
    
    
    
    
    
    (1,635)
    
    
    
    (1,770)
    
    
    
    
    
    
    
    (2)
    
    
    
    (1,772)Impairment losses on loans
and advances
    
    
    (344)
    
    
    
    
    
    
    
    
    
    
    
    (344)
    
    
    
    (344)
    
    
    
    
    
    
    
    
    
    
    
    (344)
    
    
    
    (218)
    
    
    
    
    
    
    
    
    
    
    
    (218)Provisions for other
liabilities and charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63)
    
    
    
    
    
    
    
    
    
    
    
    (63)
    
    
    
    (11)
    
    
    
    
    
    
    
    8
    
    
    
    (3)Total operating provisions
and charges
    
    
    (344)
    
    
    
    
    
    
    
    
    
    
    
    (344)
    
    
    
    (407)
    
    
    
    
    
    
    
    
    
    
    
    (407)
    
    
    
    (229)
    
    
    
    
    
    
    
    8
    
    
    
    (221)Profit on continuing
operations before tax
    
    
    864
    
    
    
    
    
    
    
    
    
    
    
    864
    
    
    
    428
    
    
    
    
    
    
    
    
    
    
    
    428
    
    
    
    289
    
    
    
    
    
    
    
    73
    
    
    
    362Tax on profit on continuing
operations
    
    
    (179)
    
    
    
    
    
    
    
    
    
    
    
    (179)
    
    
    
    (115)
    
    
    
    
    
    
    
    
    
    
    
    (115)
    
    
    
    (106)
    
    
    
    
    
    
    
    (2)
    
    
    
    (108)Profit for the year on
continuing operations
    
    
    685
    
    
    
    
    
    
    
    
    
    
    
    685
    
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    313
    
    
    
    183
    
    
    
    
    
    
    
    71
    
    
    
    254Profit / (loss) for the year
on discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (245)
    
    
    
    
    
    
    
    (245)
    
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    166Profit / (loss) for the year
    
    
    685
    
    
    
    
    
    
    
    
    
    
    
    685
    
    
    
    313
    
    
    
    (245)
    
    
    
    
    
    
    
    68
    
    
    
    183
    
    
    
    166
    
    
    
    71
    
    
    
    420
 Adjustments between the statutory basis and the trading basis
   >
    
    Reorganisation and other costs Comprise implementation costs in
relation to the strategic change and cost reduction process, as well
as certain remediation administration expenses and credit provisions.
Management needs to understand the underlying drivers of the cost
base that will remain after these exercises are complete, and does
not want this view to be clouded by these costs, which are managed
independently.>
    
    Depreciation of operating lease assets The operating lease
businesses are managed as financing businesses and, therefore,
management needs to see the margin earned on the businesses. Residual
value risk is separately managed. As a result the depreciation is
netted against the related income.>
    
    Profit on part sale of PFS subsidiaries These profits are excluded
from the results to allow management to understand the underlying
performance of the business. In 2007, these consisted of the profit
on the sale of 49% of James Hay, Cater Allen and Abbey Sharedealing,
and small recoveries on certain other transactions. In 2006, the
profit on the sale of the Asset Management businesses was similarly
excluded.>
    
    Hedging and certain other mark-to-market variances The Balance
Sheet and Income Statement are subject to mark-to-market volatility
including from the accounting for elements of derivatives deemed
under IFRS rules to be ineffective as hedges. Where appropriate, such
volatility is separately identified to enable management to view the
underlying performance of the business.>
    
    Capital and other charges Principally comprise internal nominal
charges for capital invested in the Groups businesses. Management
implemented this charge to assess if capital is invested effectively.
  10




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##### Table of Contents



Business and Financial Review
 Business Review  Summary continued
 Key performance indicators
   Key performance indicator
    
    Note
    
    
    2007
    
    
    2006
    
    
    2005PFS trading revenues
    
    
    1
    
    
    
    £2,615m
    
    
    
    £2,452m
    
    
    
    £2,334mPFS trading cost:income ratio
    
    
    2
    
    
    
    49.7%
    
    
    
    55.0%
    
    
    
    61.3%Profit for the year
    
    
    3
    
    
    
    £685m
    
    
    
    £68m
    
    
    
    £420mRetail Banking spread
    
    
    4
    
    
    
    1.48%
    
    
    
    1.46%
    
    
    
    1.45%Total number of employees
    
    
    5
    
    
    
    15,236
    
    
    
    16,395
    
    
    
    20,642Mortgage market share
    
    
    6
    
    
    
    9.3%
    
    
    
    9.4%
    
    
    
    9.7%
 1.
    
    PFS trading revenues comprise net interest income and non-interest income of the Personal
Financial Services businesses. Discussion and analysis of this data is set out in the Business
Review  Personal Financial Services on pages 15 and 16.2.
    
    The PFS trading cost:income ratio is defined as trading expenses divided by trading income of
the Personal Financial Services businesses. Discussion and analysis of trading income and
expenses is set out in the Business Review  Personal Financial Services on pages 15 to 18.
Further information about the calculation of the PFS trading cost:income ratio is contained in
Selected Financial Data on page 127.3.
    
    Profit for the year is the statutory consolidated profit after tax for the year. Discussion
and analysis of this data is set out in the Group Summary in this Business Review  Summary
section on pages 9 and 10.4.
    
    Retail banking spread is defined as interest received (mortgage, unsecured personal loans and
overdraft interest) divided by interest earning assets, less interest payable (savings, and
in-credit bank accounts) divided by interest bearing liabilities. Discussion and analysis of
this data is set out in the Business Review  Personal Financial Services on pages 12 to 18.5.
    
    Total number of employees is measured at the year-end and calculated on a full-time
equivalent basis. As part of the planning process, headcount targets are set for each division
and reviewed on a monthly basis. Further information about employees on a segmental basis is
contained in Note 1 to the Consolidated Financial Statements.6.
    
    Mortgage market share represents the value of the Groups mortgage asset as a percentage of
the total value of mortgages in the UK market, and is measured at the year-end. Discussion and
analysis of this data is set out in the Business Review  Personal Financial Services on pages
13 and 14.
 11




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##### Table of Contents



Business and Financial Review
 
 Business Review  Personal Financial Services
  Personal Financial Services profit before tax by segment
 GlobalRetail
    
    
    Banking &
    
    
    Corporate
    
    
    Wealth
    
    
    GroupBanking
    
    
    Markets
    
    
    Banking
    
    
    Management
    
    
    Infrastructure
    
    
    Total31 December 2007
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,615
    
    
    
    
    
    
    
    (34)
    
    
    
    70
    
    
    
    (152)
    
    
    
    1,499Non-interest income
    
    
    645
    
    
    
    260
    
    
    
    127
    
    
    
    34
    
    
    
    50
    
    
    
    1,116Total trading income
    
    
    2,260
    
    
    
    260
    
    
    
    93
    
    
    
    104
    
    
    
    (102)
    
    
    
    2,615Total trading expenses
    
    
    (996)
    
    
    
    (107)
    
    
    
    (30)
    
    
    
    (61)
    
    
    
    (105)
    
    
    
    (1,299)Impairment losses on loans and advances
    
    
    (239)
    
    
    
    
    
    
    
    29
    
    
    
    (2
    )
    
    
    
    
    
    
    (212)Trading profit / (loss) before tax
    
    
    1,025
    
    
    
    153
    
    
    
    92
    
    
    
    41
    
    
    
    (207)
    
    
    
    1,104Adjust for: Reorganisation and other costs
    
    
    (139)
    
    
    
    (6)
    
    
    
    
    
    
    
    (1)
    
    
    
    (132)
    
    
    
    (278) Profit on part sale of PFS subsidiaries
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    105
    
    
    
    110 Hedging and certain other mark to market variances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72)
    
    
    
    (72) Capital and other charges
    
    
    (81)
    
    
    
    
    
    
    
    (8)
    
    
    
    19
    
    
    
    70
    
    
    
    Profit / (loss) from continuing operations before tax
    
    
    805
    
    
    
    147
    
    
    
    89
    
    
    
    59
    
    
    
    (236)
    
    
    
    864
 GlobalRetail
    
    
    Banking &
    
    
    Corporate
    
    
    Wealth
    
    
    GroupBanking
    
    
    Markets
    
    
    Banking
    
    
    Management
    
    
    Infrastructure
    
    
    Total31 December 2006
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,466
    
    
    
    
    
    
    
    (46)
    
    
    
    62
    
    
    
    (146)
    
    
    
    1,336Non-interest income
    
    
    648
    
    
    
    240
    
    
    
    125
    
    
    
    32
    
    
    
    71
    
    
    
    1,116Total trading income
    
    
    2,114
    
    
    
    240
    
    
    
    79
    
    
    
    94
    
    
    
    (75)
    
    
    
    2,452Total trading expenses
    
    
    (1,005)
    
    
    
    (93)
    
    
    
    (41)
    
    
    
    (58)
    
    
    
    (152)
    
    
    
    (1,349)Impairment losses on loans and advances
    
    
    (273)
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    (5)
    
    
    
    (251)Provisions for other liabilities and charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2)
    
    
    
    
    
    
    
    (2)Trading profit / (loss) before tax
    
    
    836
    
    
    
    147
    
    
    
    65
    
    
    
    34
    
    
    
    (232)
    
    
    
    850Adjust for: Reorganisation and other costs
    
    
    (133)
    
    
    
    (9)
    
    
    
    
    
    
    
    (5)
    
    
    
    (151)
    
    
    
    (298) Profit on part sale of PFS subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    41 Hedging and certain other mark to market variances
    
    
    (8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37)
    
    
    
    (45) Capital and other charges
    
    
    (44)
    
    
    
    
    
    
    
    (4)
    
    
    
    15
    
    
    
    (87)
    
    
    
    (120)Profit / (loss) from continuing operations before tax
    
    
    651
    
    
    
    138
    
    
    
    61
    
    
    
    44
    
    
    
    (466)
    
    
    
    428
 GlobalRetail
    
    
    Banking &
    
    
    Corporate
    
    
    Wealth
    
    
    GroupBanking
    
    
    Markets
    
    
    Banking
    
    
    Management
    
    
    Infrastructure
    
    
    Total31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,332
    
    
    
    
    
    
    
    (25)
    
    
    
    60
    
    
    
    (50)
    
    
    
    1,317Non-interest income
    
    
    608
    
    
    
    205
    
    
    
    107
    
    
    
    26
    
    
    
    71
    
    
    
    1,017Total trading income
    
    
    1,940
    
    
    
    205
    
    
    
    82
    
    
    
    86
    
    
    
    21
    
    
    
    2,334Total trading expenses
    
    
    (1,121)
    
    
    
    (90)
    
    
    
    (41)
    
    
    
    (63)
    
    
    
    (116)
    
    
    
    (1,431)Impairment losses on loans and advances
    
    
    (207)
    
    
    
    
    
    
    
    (10)
    
    
    
    (1)
    
    
    
    
    
    
    
    (218)Provisions for other liabilities and charges
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (14)
    
    
    
    
    
    
    
    (11)Trading profit / (loss) before tax
    
    
    615
    
    
    
    115
    
    
    
    31
    
    
    
    8
    
    
    
    (95)
    
    
    
    674Adjust for: Reorganisation and other costs
    
    
    (196)
    
    
    
    (5)
    
    
    
    
    
    
    
    (2)
    
    
    
    (13)
    
    
    
    (216) Hedging and certain other mark to market variances
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21)
    
    
    
    (18) Capital and other charges
    
    
    (37)
    
    
    
    
    
    
    
    (7)
    
    
    
    14
    
    
    
    (121)
    
    
    
    (151)Profit / (loss) from continuing operations before tax
    
    
    385
    
    
    
    110
    
    
    
    24
    
    
    
    20
    
    
    
    (250)
    
    
    
    289
 2007 compared to 2006
 >
    
    Personal Financial Services trading profit before tax of
£1,104m increased by £254m on the previous year (2006: £850m).
Trading income was 6.6% higher and within the targeted range.
There was a further reduction in trading expenses of 3.8% in
2007 with headcount 1,159 full time equivalents lower than 31
December 2006. Trading profit before tax benefited from
positive trading income and cost trends and lower credit
provisions.>
    
    Retail Banking trading profit before tax increased by £189m to
£1,025m (2006: £836m) driven by a 7% increase in trading
income and lower expenses and credit provisions. Trading
income benefited from robust asset growth of 8% in challenging
market conditions, and Abbeys continued focus on effective
margin management for both mortgages and customer deposits.
Trading provisions have decreased due to the lower unsecured
asset and are partially offset by a slight increase in
mortgage provisions from historic low levels.>

    
    Global Banking & Markets trading profit before tax increased
by £6m to £153m (2006: £147m). Trading income has increased
slightly with profits from the closeout of customer trades
offsetting the effects of difficult market conditions in the
second half of the year.
 12




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services continued
 >

    
    Corporate Banking trading profit before tax increased by £27m
to £92m (2006: £65m) reflecting lower trading costs from the
run down of asset financing operations and a reduced net
interest charge due to lower Porterbrook project and
maintenance funding costs. In addition, new Corporate Banking
business streams contributed positively.>

    
    Wealth Management trading profit before tax increased by £7m
to £41m (2006: £34m) reflecting higher trading income and
broadly stable costs. Trading income has improved as a result
of higher deposits in Cater Allen and improved margins in both
Cater Allen and Abbey International.>

    
    Group Infrastructure trading loss before tax decreased by £25m
to £207m (2006: £232m) reflecting a small decrease in net
interest income due to base rate changes more than offset by a
reduction in unallocated central costs.
 2006 compared to 2005
 >

    
    Personal Financial Services trading profit before tax of £850m
increased by £176m on the previous year (2005: £674m). Trading
income was 5% higher, and was within the targeted range of 5%
  10% for the first year of the 3-year plan. This represents a
significant improvement in performance after a number of years
of revenue decline and a flat performance in 2005. There was a
further reduction in trading expenses of over 5% in 2006 with
headcount approximately 2,000 full time equivalents lower than
31 December 2005 (excluding the impact of the sale of the life
insurance businesses). Positive trading income and cost trends
were offset by increased credit provisions driven largely by
the maturing of the unsecured loan portfolio.>

    
    Retail Banking trading profit before tax increased by £221m to
£836m (2005: £615m) reflecting lower trading costs, due to the
cost reduction programme, and higher trading income resulting
from growth in customer loans, stable Retail spreads and
increased volumes in mortgage, investments and bank accounts.
Trading income and cost trends were offset by increased credit
provisions. The growth was partly driven by strengthening of
the coverage ratio and in part by the maturing nature of the
unsecured personal loan portfolio with some deterioration in
quality. Mortgage related charges also increased modestly from
a very low base relative to the overall book.>

    
    Global Banking & Markets trading profit before tax increased
by £32m to £147m (2005: £115m). The increase was due to higher
trading revenues in both Derivative and Structured Products
and Short Term Financing businesses.>

    
    Corporate Banking trading profit before tax increased by £34m
to £65m (2005: £31m). 2006 included a provision release of
£27m primarily in relation to asset financing operations
compared to a charge of £10m in 2005. This was partially
offset by lower revenues following the run down of
asset-financing operations and other businesses.>

    
    Wealth Management trading profit before tax increased by £26m
to £34m (2005: £8m). Trading income increased, driven by
higher customer deposits in Cater Allen, improved margins in
both Cater Allen and Abbey International and increased sales
in James Hay. The remaining increase related primarily to a
lower closed office charge made in 2006.>

    
    Group Infrastructure trading loss before tax increased by
£137m to £232m (2005: £95m). Net interest income was adversely
impacted by base rate changes on central funding in 2006,
which were more than offset by benefits reported in Retail
Banking and Wealth Management under the Groups transfer
pricing arrangements. In addition, trading expenses increased
due to additional unallocated central costs.
 Personal Financial Services business flows
  2007
    

    2006

    
    2005Mortgages:Gross mortgage lending
    
    £35.6bn
    

    £32.6bn
    
    £27.6bnCapital repayments
    
    £26.9bn
    
    £24.8bn
    
    £24.6bnNet mortgage lending
    
    £8.8bn
    
    £7.8bn
    
    £3.0bnMortgage stock:
    
    £110.5bn
    
    £101.7bn
    
    £93.9bn Abbey retail
    
    £105.0bn
    
    £96.7bn
    
    £89.9bn Housing Association (1)
    
    £5.5bn
    
    £5.0bn
    
    £4.0bnMarket share  gross mortgage lending(2)
    
    
    9.8
    %
    
    
    9.4
    %
    
    
    9.6
    %Market share  capital repayments(2)
    
    
    10.5
    %
    
    
    10.5
    %
    
    
    12.5
    %Market share  net mortgage lending(2)
    
    
    8.1
    %
    
    
    7.1
    %
    
    
    3.3
    %Market share  mortgage stock(2)
    
    
    9.3
    %
    
    
    9.4
    %
    
    
    9.7
    %Retail deposits:Total net deposit flows
    
    £3.2bn
    
    £1.1bn
    
    £2.8bnDeposit stock
    
    £65.2bn
    
    £62.0bn
    
    £60.9bnInvestment and pensions annual premium income
    
    
    £1,669m

    
    
    £1,224m
    

    
    £1,058mProtection annual premium income
    
    
    £47m

    
    
    £71m

    
    
    £82mBanking:Bank account openings (000s) Abbey retail
    
    
    400

    
    
    425

    
    
    359 Other
    
    
    30

    
    
    28

    
    
    27430

    
    
    453

    
    
    386Bank account liability Abbey retail
    
    £5.5bn
    
    £5.3bn
    
    £4.8bn Other
    
    £4.8bn
    
    £4.5bn
    
    £4.1bn£10.3bn
    
    £9.8bn
    
    £8.9bn
 13




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services continued
 2007
    
    
    2006
    
    
    2005Gross unsecured personal lending: Abbey retail
    
    £0.9bn
    
    £1.5bn
    
    £1.3bn Other, including cahoot
    
    £0.1bn
    
    £0.8bn
    
    £0.8bn£1.0bn
    
    £2.3bn
    
    £2.1bnUnsecured lending asset(3): Abbey retail
    
    £2.5bn
    
    £2.7bn
    
    £2.3bn Other, including cahoot
    
    £0.8bn
    
    £1.4bn
    
    £1.4bn£3.3bn
    
    £4.1bn
    
    £3.7bnCredit card sales (000s)
    
    
    261
    
    

    112
 (1)
    
    Housing Association mortgages are classified within the Corporate Banking segment. This
excludes contingent liabilities and commitments. See Note 37 to the Consolidated Financial
Statements.(2)
    
    Market shares are estimated internally, based on information from the Bank of England and The
Council of Mortgage Lenders (CML).(3)
    
    Comprises unsecured personal loans, credit cards and overdrafts. 2007
compared to
2006
 Mortgages
  Retail Deposits and Investments
   Protection
  Banking
  Unsecured Personal Lending
  Credit Card Sales
  2006 compared to 2005
 Mortgages
  14




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##### Table of Contents



Business and Financial Review
 Business Review  Personal Financial Services continued
 Retail Deposits and Investments
  Protection
  Banking
  Unsecured Personal Lending
  Personal Financial Services trading net interest income by segment
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mRetail Banking
    
    
    1,615
    
    
    
    1,466
    
    
    
    1,332Corporate Banking
    
    
    (34)
    
    
    
    (46)
    
    
    
    (25)Wealth Management
    
    
    70
    
    
    
    62
    
    
    
    60Group Infrastructure
    
    
    (152)
    
    
    
    (146)
    
    
    
    (50)PFS trading net interest income
    
    
    1,499
    
    
    
    1,336
    
    
    
    1,317Adjust for: Capital and other charges
    
    
    
    
    
    
    (108)
    
    
    
    (151)PFS net interest income
    
    
    1,499
    
    
    
    1,228
    
    
    
    1,166
 2007 compared to 2006
     2006 compared to 2005
     15




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##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services continued
 Personal Financial Services trading non-interest income by segment
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mRetail Banking
    
    
    645
    
    
    
    648
    
    
    
    608Global Banking & Markets
    
    
    260
    
    
    
    240
    
    
    
    205Corporate Banking
    
    
    127
    
    
    
    125
    
    
    
    107Wealth Management
    
    
    34
    
    
    
    32
    
    
    
    26Group Infrastructure
    
    
    50
    
    
    
    71
    
    
    
    71PFS trading non-interest income
    
    
    1,116
    
    
    
    1,116
    
    
    
    1,017Adjust for: Depreciation of operating lease assets
    
    
    129
    
    
    
    130
    
    
    
    123 Hedging and certain other mark to market variances
    
    
    (72)
    
    
    
    (45)
    
    
    
    (18) Profit on part sale of PFS subsidiaries
    
    
    110
    
    
    
    41
    
    
    
    PFS non-interest income
    
    
    1,283
    
    
    
    1,242
    
    
    
    1,122
 2007 compared to 2006
 Retail Banking trading non-interest income decreased slightly to £645m (2006: £648m) due
largely to lower current account charges and redemption fees offset by benefits from the
contribution of new credit card sales and growth in both investments and protection.
 Global Banking & Markets non-interest income was ahead of prior year at £260m (2006:
£240m) delivering robust growth in 2007, despite difficult trading conditions. The Rates business
increased revenue substantially, as a result of successful trading strategies and the benefit of
closer, effective integration with other parts of Abbey and Santander Global Banking & Markets
worldwide. The Equity business, the largest business within Global Banking & Markets benefited from
the closeout of customer trades offsetting the effects of difficult market conditions in the second
half.
 Corporate Banking non-interest income was broadly in line with 2006 at £127m (2006: £125m)
as improved contributions from existing businesses more than offset the impact of those in run
down.
 Wealth Management non-interest income was slightly ahead of 2006 at £34m (2006: £32m), due
largely to the sale of two properties by Abbey International and higher fees in James Hay.
 Group Infrastructure non-interest income decreased by £21m to £50m (2006: £71m), largely
due to lower earnings from short term funding.
 2006 compared to 2005
 Retail Banking trading non-interest income increased by £40m in 2006 to £648m (2005: £608m) due
largely to increased volumes in mortgage, investments and bank accounts, as well as a fourth
quarter benefit from an uplift in commissions from the new distribution agreement with Resolution.
 Global Banking & Markets non-interest income increased by £35m to £240m (2005: £205m) due
to stronger sales of retail structured products and increased trading activity in Property
Derivatives.
 Corporate Banking non-interest income increased by £18m to £125m (2005: £107m) due to
reduced costs on asset financing operations.
 Wealth Management non-interest income increased slightly to £32m (2005: £26m) due to
higher sales in James Hay. The rebranding of the SIPP (self-invested personal pension schemes) and
WRAP portfolio management products helped lift sales in James Hay.
 Group Infrastructure non-interest income of £71m (2005: £71m) was in line with the
previous year as increased earnings from short term funding offset mark to market losses.
 Personal Financial Services total trading expenses by segment
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mRetail Banking
    
    
    996
    
    
    
    1,005
    
    
    
    1,121Global Banking & Markets
    
    
    107
    
    
    
    93
    
    
    
    90Corporate Banking
    
    
    30
    
    
    
    41
    
    
    
    41Wealth Management
    
    
    61
    
    
    
    58
    
    
    
    63Group Infrastructure
    
    
    105
    
    
    
    152
    
    
    
    116PFS total trading expenses
    
    
    1,299
    
    
    
    1,349
    
    
    
    1,431Adjust for: Reorganisation and other costs
    
    
    146
    
    
    
    144
    
    
    
    216 Depreciation of operating lease assets
    
    
    129
    
    
    
    130
    
    
    
    123Capital and other charges
    
    
    
    
    
    
    12
    
    
    
    PFS expenses
    
    
    1,574
    
    
    
    1,635
    
    
    
    1,770
 2007 compared to 2006
 During 2007 the cost reduction programme put in place at the time of acquisition of Abbey by
Santander made further progress and trading expenses of £1,299m in 2007 were 4% lower than the
previous year (2006: £1,349m).
 Retail Banking trading expenses of £996m showed a modest decrease of £9m (2006: £1,005m)
where further benefits of the cost reduction programme marginally outweighed the inflationary
effect on costs, and costs associated with an increased number of customer facing roles.
 16




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##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services continued
 Global Banking & Markets trading expenses of £107m showed an increase compared to 2006 of £14m
(2006: £93m), largely due to strategic growth of the business and higher performance related
payments.
 Corporate Banking trading expenses of £30m were £11m lower the previous year (2006: £41m),
which was largely driven by the run down of the Motor Finance business.
 Wealth Management trading expenses of £61m, were slightly higher than the previous year
(2006: £58m) driven by higher employment costs in James Hay reflecting growth plans.
 Group Infrastructure trading expenses of £105m were £47m lower than the previous year
(2006: £152m) due to lower central costs following on-going cost reduction activity and the
non-recurrence of trading expenses indirectly related to the life insurance businesses and other
entities sold during 2006.
 2006 compared to 2005
 A cost reduction programme targeting cost savings of £300m by the end of 2007 was put in place
at the time of the acquisition of Abbey by Santander. During 2006 this programme made further
progress and trading expenses of £1,349m in 2006 were over 5% lower than the previous year (2005:
£1,431m). The majority of the cost savings related to employment expenses. In total, over 2,000
roles were removed from the business during the year excluding the effects of the sale of the Life
insurance businesses.
 Global Banking & Markets trading expenses of £93m were slightly higher than previous year
(2005: £90m). The movement was due largely to savings from the cost reduction programme being more
than offset by increased investment in the sales and marketing teams and performance related
payments.
 Corporate Banking trading expenses of £41m were in line with the previous year (2005:
£41m).
 Wealth Management trading expenses of £58m were £5m lower than the previous year (2005:
£63m). As with the other operating divisions, Wealth Management benefited from cost savings
resulting from the cost reduction programme implemented at the time of the acquisition of Abbey by
Santander.
 Group Infrastructure trading expenses of £152m were £36m higher than the previous year
(2005: £116m) due to additional central costs.
 Personal Financial Services trading impairment losses on loans and advances by segment
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mRetail Banking
    
    
    239
    
    
    
    273
    
    
    
    207Corporate Banking
    
    
    (29)
    
    
    
    (27)
    
    
    
    10Wealth Management
    
    
    2
    
    
    
    
    
    
    
    1Group Infrastructure
    
    
    
    
    
    
    5
    
    
    
    PFS trading impairment losses on loans and advances
    
    
    212
    
    
    
    251
    
    
    
    218Adjust for: Reorganisation and other costs
    
    
    132
    
    
    
    93
    
    
    
    PFS impairment losses on loans and advances
    
    
    344
    
    
    
    344
    
    
    
    218
 2007 compared to 2006
 Trading impairment losses on loans and advances reduced by £39m to £212m (2006: £251m), driven
by a lower provisions charge in Retail Banking as a result of reduced exposure to unsecured
lending, particularly internet-sourced lending. The provisions on mortgages saw a slight increase
from historic lows, reflecting current economic conditions, although the credit quality of the
mortgage portfolio remains strong.
 Corporate Banking provision releases of £29m (2006: £27m) reflected the better than
anticipated performance of the run-down portfolios, a trend also seen in 2006.
 2006 compared to 2005
 Trading impairment losses on loans and advances increased by £33m to £251m (2005: £218m),
driven by a higher provisions charge in Retail Banking, partly offset by reductions of provisions
in Corporate Banking. The growth was partly driven by strengthening of the coverage ratio and in
part by the deterioration and maturing nature of the unsecured personal loan portfolio. Retail
Banking provisions also increased in part due to mortgage related charges increasing modestly from
a very low base relative to the overall book.
 Corporate Banking recorded provision releases following the run down of asset financing
and other businesses.
 Personal Financial Services non-performing loans
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mTotal non-performing loans (NPLs)
    
    
    892
    
    
    
    826
    
    
    
    882Total loans and advances to customers (excluding trading assets)
    
    
    118,399
    
    
    
    109,035
    
    
    
    100,267Total provisions (on a statutory basis)
    
    
    551
    
    
    
    536
    
    
    
    394NPLs as a % of loans and advances
    
    
    0.75%
    
    
    
    0.76%
    
    
    
    0.88%Provisions as a % of NPLs
    
    
    61.77%
    
    
    
    64.89%
    
    
    
    44.67%
  17




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##### Table of Contents



Business and Financial Review
 Business
Review  Personal Financial Services continued
 In 2006, the value of non-performing loans decreased to £826m (2005: £882m) and non-performing
loans as a percentage of loans and advances decreased to 0.76% (2005: 0.88%). During the year Abbey
strengthened its coverage of non-performing loans to 64.89% (2005: 44.67%), which is a reflection
of the change in macro-economic factors such as interest rates. The credit quality of the mortgage
book remains strong.
 Personal Financial Services trading provisions for other liabilities and charges by segment
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mRetail Banking
    
    
    
    
    
    
    
    
    
    
    (3)Wealth Management
    
    
    
    
    
    
    2
    
    
    
    14PFS trading provisions for other liabilities and charges
    
    
    
    
    
    
    2
    
    
    
    11Adjust for: Reorganisation and other costs
    
    
    
    
    
    
    61
    
    
    
    PFS provisions for other liabilities and charges
    
    
    
    
    
    
    63
    
    
    
    11
 In 2007, there were no net provisions for other liabilities and charges. Misselling remediation
provisions were £nil (2006: £61m) with remediation costs being charged directly to non-trading
expenses in 2007.
 In 2006, Wealth Management trading provisions for other liabilities and charges of £2m
were down from £14m in 2005. 2006 consisted of a further charge of £2m related to closure of the
Isle of Man offices, down from £14m during the previous year.
 18




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##### Table of Contents



Business and Financial Review
 
 Business
Review  Sold Life Businesses and Portfolio Business Unit
 Sold Life Businesses
 In 2006, Abbey sold its entire life insurance business to Resolution for cash consideration of
approximately £3.6bn. The principal life companies sold were Scottish Mutual Assurance plc,
Scottish Provident Limited and Abbey National Life plc, as well as the two offshore life companies,
Scottish Mutual International plc and Scottish Provident International Life Assurance Limited.
 The life insurance business qualifies as discontinued operations. The results, and loss on
sale, of the discontinued operations were as follows:
 Sold Life Businesses summarised income statement
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mTrading income
    
    
    
    
    
    
    116
    
    
    
    231Operating expenses
    
    
    
    
    
    
    (73)
    
    
    
    (151)Impairment losses on intangible assets
    
    
    
    
    
    
    (69)
    
    
    
    Trading profit before tax
    
    
    
    
    
    
    (26)
    
    
    
    80Adjust for: Capital and other charges
    
    
    
    
    
    
    120
    
    
    
    154Profit before tax
    
    
    
    
    
    
    94
    
    
    
    234Taxation expense
    
    
    
    
    
    
    (75)
    
    
    
    (68)Profit of discontinued operations
    
    
    
    
    
    
    19
    
    
    
    166Loss on sale of discontinued operations before and after tax
    
    
    
    
    
    
    (264)
    
    
    
    Profit / (loss) for the year from discontinued operations
    
    
    
    
    
    
    (245)
    
    
    
    166
 Trading income
 There was no trading income in 2007 as the businesses were sold in 2006. In 2006, trading
income of £116m was £115m lower than the previous year (2005: £231m), primarily reflecting the sale
of the life insurance business in the third quarter of 2006, together with an increased level of
lapses on with-profits bonds in 2006 prior to the sale.
 Operating expenses
 There were no operating expenses in 2007 as the businesses were sold in 2006. In 2006,
operating expenses of £73m were £78m lower than the previous year (2005: £151m), primarily
reflecting the sale of the business in the third quarter of 2006, and the successful continuation
of Group wide cost reduction initiatives.
 Impairment losses on intangible assets
 There were no impairment losses on intangible assets in 2007 as the businesses were sold in
2006. In 2006, an impairment charge of £69m on intangible assets was recognised as a result of the
classification of the life insurance businesses as held for sale prior to their eventual sale.
 Loss on sale of discontinued operations
 The loss on sale principally reflects the discount to embedded value that is normal in sales of
life insurance businesses. The existence of a discount reflects a potential buyers use of higher
discount rates than an existing owner to reflect a buyers inherent uncertainty over assumptions
and the potential for adverse lapse experience after a change in ownership.
 Portfolio Business Unit (PBU)
 The Portfolio Business Unit comprised a number of businesses, assets and portfolios that were
inconsistent with Abbeys strategy to focus on Personal Financial Services, and were sold during
2005. From the end of 2005, there were no businesses, assets or portfolios remaining within this
segment.
 PBU trading profit before tax
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mTrading income
    
    
    
    
    
    
    
    
    
    
    70Operating expenses
    
    
    
    
    
    
    
    
    
    
    (2)Provisions for other liabilities and charges
    
    
    
    
    
    
    
    
    
    
    8Trading profit before tax
    
    
    
    
    
    
    
    
    
    
    76Adjust for: Capital and other charges
    
    
    
    
    
    
    
    
    
    
    (3)Profit before tax
    
    
    
    
    
    
    
    
    
    
    73
 19




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##### Table of Contents



Business and Financial Review
 
 Other Material Items
 Adjustments between the statutory basis and the trading basis
 Abbeys Board reviews discrete financial information for each of its segments that includes
measures of operating results and assets, which are measured on a trading basis. The trading
basis differs from the statutory basis as a result of the application of various adjustments, as
presented below, and described in the Business Review  Summary. Management considers that the
trading basis provides the most appropriate way of reviewing the performance of the business.
 The adjustments arise principally in the ongoing Personal Financial Services businesses.
Where similar costs were incurred in the Portfolio Business Unit businesses or the Sold Life
Businesses, management typically no longer adjusts their results for previous periods for these
items, as those businesses have now been sold. However, due to the importance of these adjustments,
the consolidated amounts are presented below, together with an analysis of the total amount into
the businesses in which they were incurred unless the entire amount arose in the Personal Financial
Services businesses.
 The trading adjustments consist of:
 Reorganisation and other costs
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mCost reduction programme
    
    
    (109)
    
    
    
    (134)
    
    
    
    (158)Asset write-downs
    
    
    
    
    
    
    (18)
    
    
    
    (5)Credit provisions
    
    
    (132)
    
    
    
    (93)
    
    
    
    Misselling remediation administration costs
    
    
    (37)
    
    
    
    (61)
    
    
    
    (70)(278)
    
    
    
    (306)
    
    
    
    (233)
 These costs comprise implementation costs in relation to the strategic change and cost
reduction process, certain credit provisions taken centrally, as well as remediation
administration costs in respect of product misselling. Of the total reorganisation
and other costs of £278m (2006: £306m, 2005: £233m), £278m (2006: £298m, 2005: £216m) was adjusted
in the Personal Financial Services businesses, and £nil (2006: £8m, 2005: £17m) in the Sold Life
Businesses.
 2007 compared to 2006
 Total reorganisation and other costs of £278m decreased £28m compared to the previous period
(2006: £306m).
 Cost reduction programme related expenses of £109m decreased by £25m compared to the
previous period (2006: £134m) reflecting the more advanced stage of the programme.
 Non-trading credit provisions of £132m increased £39m compared to the previous period
(2006: £93m). In accordance with IFRS, the charge for credit provisions adjusts the balance sheet
provisions to the level that management deems adequate to absorb actual and inherent losses in
Abbeys loan portfolio from homogeneous portfolios of assets and individually identified loans, as
described more fully in the Risk Management Report  Provisions on loans and advances to customers,
and in the Accounting Policies in the Consolidated Financial Statements. The required charge is
generally determined using statistical techniques developed on previous experience and on
projections of current market conditions to the time the loss is expected to crystallise. For
management reporting purposes, the total charge is then split between the charge that would be
required based on conditions that persist at the balance sheet date, and the adjustment to that
charge in order to reflect the change in conditions when the loss is expected to crystallise. The
charge that would be required based on conditions that persist at the balance sheet date is used in
the day to day running of the business, and is therefore included in provisions on the trading
basis. The adjustment is excluded from the results on a trading basis and is classified as
non-trading. The charge in 2006 largely related to loan portfolios that are no longer open to new
business.
 Misselling remediation administration costs reduced to £37m (2006: £61m)
reflecting lower levels of complaints activity in relation to endowments due to the continuing
effect of time barring, and in relation to unauthorised overdraft charges due to the stay in
complaints relating to unauthorised overdraft charges pending a decision on legal proceedings in
the High Court of England and Wales to resolve legal uncertainties concerning the level, fairness
and lawfulness of unauthorised overdraft charges, as described in Note 37 to the Consolidated
Financial Statements.
 2006 compared to 2005
 Total reorganisation and other costs of £306m increased £73m compared to the previous period
(2005: £233m).
 Cost reduction programme related expenses of £134m decreased by £24m compared to the
previous period (2005: £158m) reflecting the advanced stage of the programme.
 Asset write-downs of £18m increased £13m compared to the previous period (2005: £5m),
reflecting higher write-downs resulting from the restructure of the business.
 Credit provisions of £93m largely related to loan portfolios that are no longer open to
new business. Misselling remediation costs of £61m decreased by £9m (2005: £70m) after a detailed
review of potential remediation costs.
 Hedging and certain other mark-to-market variances
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £m(72)
    
    
    
    (45)
    
    
    
    (18)
 The Balance Sheet and Income Statement are subject to a certain amount of mark-to-market
volatility including from the accounting for elements of derivatives deemed under IFRS rules to be
ineffective as hedges.
 20




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##### Table of Contents



Business and Financial Review
 Other Material Items continued
 2007 compared to 2006
 In 2007, the impact of this volatility of £(72)m (2006: £(45)m) was due to decreasing asset
credit spreads, with hedging variances representing an insignificant amount.
 2006 compared to 2005
 In 2006, the impact of this volatility was £(45)m (2005: £(18)m), due largely to greater market
movements, including interest rates, than in the previous period.
 Profit on part sale of PFS subsidiaries
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £m110
    
    
    
    41
    
    
    
    
 These profits are excluded from the results to allow management to understand the underlying
performance of the business. In 2007, these consisted of the profit on the sale of 49% of James
Hay, Cater Allen and Abbey Sharedealing, and small recoveries on certain other transactions. In
2006, the profit on the sale of the Asset Management businesses was similarly excluded.
 Capital and other charges
 Capital charges principally comprise internal nominal charges for capital invested in the
Groups businesses. Management implemented this charge to assess if capital is invested
effectively. On a consolidated basis, the total of these internal reallocations is nil. The change
in allocation in Group Infrastructure compared to 2006 and 2005 is due to the impact of the sale of
the life insurance businesses in 2006.
 Legal proceedings
 Abbey and its subsidiaries are party to various legal proceedings in the ordinary course of
business, the ultimate resolution of which is not expected to have a material adverse effect on the
financial position or the results of operations of Abbey. In addition, Abbey is party to legal
proceedings concerning unauthorised overdraft charges. See Note 37 to the Consolidated Financial
Statements.
 Material contracts
 Abbey and its subsidiaries are party to various contracts in the ordinary course of business.
For the three years ended 31 December 2007 there have been no material contracts entered into
outside the ordinary course of business, except for the contract described below.
 Abbey announced on 7 June 2006 that it had entered into an agreement to sell its entire life
insurance business to Resolution for cash consideration of approximately £3.6bn. The sale
completed in the third quarter of 2006. The principal life companies sold were Scottish Mutual
Assurance plc, Scottish Provident Limited and Abbey National Life plc, as well as the two
offshore life companies, Scottish Mutual International plc and Scottish Provident
International Life Assurance Limited. See Note 11 to the Consolidated Financial
Statements.
 Audit fees
 See Note 7 of the Consolidated Financial Statements.
 21




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##### Table of Contents



Business and Financial Review
 
 Balance Sheet Business Review
 Throughout this section, references to UK and non-UK refer to the location of the office where
the transaction is recorded.
 Securities
 The following table sets out the book and market values of securities at 31 December 2007, 2006
and 2005. For further information, see the Notes to the Consolidated Financial Statements.
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mTrading portfolioDebt securities:UK government
    
    
    
    
    
    
    48
    
    
    
    2,700US treasury and other US government agencies and corporations
    
    
    
    
    
    
    
    
    
    
    22Other public sector securities
    
    
    3,722
    
    
    
    2,415
    
    
    
    350Bank and building society certificates of deposit
    
    
    9,679
    
    
    
    10,839
    
    
    
    18,647Other issuers:Floating rate notes
    
    
    2,805
    
    
    
    298
    
    
    
    463Mortgage-backed securities
    
    
    2
    
    
    
    75
    
    
    
    350Other asset-backed securities
    
    
    2,368
    
    
    
    1,584
    
    
    
    4,626Other
    
    
    10,255
    
    
    
    14,551
    
    
    
    4,396Ordinary shares and similar securities
    
    
    1,494
    
    
    
    2,754
    
    
    
    1,53930,325
    
    
    
    32,564
    
    
    
    33,093Available for sale securitiesOther issuers:Other
    
    
    8
    
    
    
    8
    
    
    
    Ordinary shares and similar securities
    
    
    32
    
    
    
    15
    
    
    
    1340
    
    
    
    23
    
    
    
    13Fair value through profit and lossDebt securities:UK government
    
    
    
    
    
    
    
    
    
    
    2,794US treasury and other US government agencies and corporations
    
    
    
    
    
    
    
    
    
    
    100Other public sector securities
    
    
    
    
    
    
    
    
    
    
    417Bank and building society certificates of deposit
    
    
    15
    
    
    
    15
    
    
    
    841Other issuers:Mortgage-backed securities
    
    
    4,093
    
    
    
    3,006
    
    
    
    Other asset-backed securities
    
    
    1,460
    
    
    
    
    
    
    
    343Other
    
    
    514
    
    
    
    302
    
    
    
    8,387Ordinary shares and similar securities
    
    
    
    
    
    
    
    
    
    
    11,6706,082
    
    
    
    3,323
    
    
    
    24,552Total
    
    
    36,447
    
    
    
    35,910
    
    
    
    57,658
 The following table sets forth the book and market values of securities of individual
counterparties where the aggregate amount of those securities exceeded 10% of Abbeys shareholders
funds at 31 December 2007 as set out in the Consolidated Balance Sheet on page 64.
 £mBarclays Bank plc
    
    
    2,538Royal Bank of Scotland Group plc
    
    
    2,179HBOS plc
    
    
    1,792Celtic Residential Irish Mortgages Securitisation No. 13 Ltd
    
    
    1,394Hippototta No.3 plc
    
    
    1,360Her Majestys Government
    
    
    1,187Hippototta No.2 plc
    
    
    1,100HSBC Holdings plc
    
    
    886Government of Germany
    
    
    754Bank of Ireland
    
    
    609Credit Agricole SA
    
    
    588Societe Generale SA
    
    
    502Nationwide Building Society
    
    
    493Kingdom of Spain
    
    
    464Republic of Austria
    
    
    464Banco Bilbao Vizcaya Argentaria SA
    
    
    448Republic of Italy
    
    
    435ING Groep NV
    
    
    401Santander Hipotecario 1 A (SHIPO)
    
    
    359Fondo de Titulizacion Hipotecaria Banesto
    
    
    353Fortis Bank NV/SA
    
    
    337
 22




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 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 and Accounts), 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.
 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.
 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.
 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 asset-backed securities
 This category comprises a range of mostly floating-rate asset-backed securities including home
equity loans, commercial mortgages, car dealer, lease and credit card debtors and student loans.
Some of the credit card debtors incorporate cap features.
 Other 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.
 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. The balances below include loans and advances to
banks that are classified in the balance sheet as trading assets.
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mUK
    
    
    12,066
    
    
    
    11,943
    
    
    
    8,060
    
    
    
    11,081Non-UK
    
    
    222
    
    
    
    93
    
    
    
    1,036
    
    
    
    67012,288
    
    
    
    12,036
    
    
    
    9,096
    
    
    
    11,751
 The table below for 2003 contains information prepared under UK GAAP, Abbeys previous primary
GAAP, which is not comparable to information prepared under IFRS.
 2003£mUK
    
    
    6,219Non-UK
    
    
    9367,155
 The following table sets forth loans and advances to banks by maturity at 31 December 2007.
 In more thanIn more than
    
    
    one year butIn not more

    
    
    three months
    
    
    not more
    
    
    In moreOn

    
    
    than three
    
    
    but not more
    
    
    than five
    
    
    than fivedemand
    
    
    months
    
    
    than one year
    
    
    years
    
    
    years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUK
    
    
    740
    
    
    
    8,982
    
    
    
    1,317
    
    
    
    
    
    
    
    1,027
    
    
    
    12,066Non-UK
    
    
    62
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222802
    
    
    
    9,142
    
    
    
    1,317
    
    
    
    
    
    
    
    1,027
    
    
    
    12,288
 23




---



##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 The following table sets forth loans and advances to banks by interest rate sensitivity at 31
December 2007.
 Fixed rate
    
    
    Variable rate
    
    
    Total£m
    
    
    £m
    
    
    £mInterest-bearing loans and advances to banks(1):UK
    
    
    1,735
    
    
    
    9,201
    
    
    
    10,936Non-UK
    
    
    43
    
    
    
    179
    
    
    
    2221,778
    
    
    
    9,380
    
    
    
    11,158
 (1)
    
    Excludes non interest-bearing accounts
 Loans and advances to customers
 Abbey provides lending facilities primarily to personal customers in the form of mortgages
secured on residential properties 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 the Global Banking & Markets short-term markets business. The geographical
analysis of loans and advances presented in the following table is based on the location of the
office from which the loans and advances are made. The balances below include loans and advances to
customers that are classified in the balance sheet as trading assets.
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mUKAdvances secured on residential properties
    
    
    110,857
    
    
    
    102,096
    
    
    
    94,330
    
    
    
    91,164Purchase and resale agreements
    
    
    3,711
    
    
    
    5,427
    
    
    
    4,789
    
    
    
    4,520Other secured advances
    
    
    2,960
    
    
    
    2,305
    
    
    
    1,882
    
    
    
    1,793Corporate advances
    
    
    1,302
    
    
    
    666
    
    
    
    334
    
    
    
    1,030Unsecured personal advances
    
    
    3,263
    
    
    
    4,104
    
    
    
    3,845
    
    
    
    3,517Finance lease debtors
    
    
    
    
    
    
    1
    
    
    
    3
    
    
    
    1,108122,093
    
    
    
    114,599
    
    
    
    105,183
    
    
    
    103,132Non-UKAdvances secured on residential properties
    
    
    13
    
    
    
    19
    
    
    
    26
    
    
    
    14Purchase and resale agreements
    
    
    13,544
    
    
    
    14,375
    
    
    
    13,152
    
    
    
    6,737Other secured advances
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    Unsecured personal advances
    
    
    2
    
    
    
    35
    
    
    
    31
    
    
    
    13,561
    
    
    
    14,429
    
    
    
    13,209
    
    
    
    6,751Total
    
    
    135,654
    
    
    
    129,028
    
    
    
    118,392
    
    
    
    109,883
 The table below for 2003 contains information prepared under UK GAAP, Abbeys previous primary
GAAP, which is not comparable to information prepared under IFRS.
 2003£mUKAdvances secured on residential properties
    
    
    73,481Purchase and resale agreements
    
    
    2,958Other secured advances
    
    
    2,938Corporate advances
    
    
    3,762Unsecured personal advances
    
    
    3,228Finance lease debtors
    
    
    2,55888,925Non-UKAdvances secured on residential properties
    
    
    1,745Purchase and resale agreements
    
    
    6,414Other secured advances
    
    
    33Unsecured personal advances
    
    
    145Finance lease debtors
    
    
    158,352Total
    
    
    97,277
 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 2007. 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.
 24




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 In more thanIn more than
    
    
    one year butIn not more

    
    
    three months
    
    
    not more
    
    
    In moreOn

    
    
    than three
    
    
    but not more
    
    
    than five
    
    
    than fivedemand
    
    
    months
    
    
    than one year
    
    
    years
    
    
    years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mUKAdvances secured on residential properties
    
    
    3
    
    
    
    2,920
    
    
    
    1,909
    
    
    
    11,517
    
    
    
    94,508
    
    
    
    110,857Purchase and resale agreements
    
    
    2,838
    
    
    
    873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,711Other secured advances
    
    
    1
    
    
    
    11
    
    
    
    36
    
    
    
    77
    
    
    
    2,835
    
    
    
    2,960Corporate advances
    
    
    76
    
    
    
    1,037
    
    
    
    19
    
    
    
    37
    
    
    
    133
    
    
    
    1,302Unsecured personal advances
    
    
    249
    
    
    
    233
    
    
    
    276
    
    
    
    1,591
    
    
    
    914
    
    
    
    3,263Total UK
    
    
    3,167
    
    
    
    5,074
    
    
    
    2,240
    
    
    
    13,222
    
    
    
    98,390
    
    
    
    122,093Non-UKAdvances secured on residential properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    12
    
    
    
    13Purchase and resale agreements
    
    
    
    
    
    
    13,544
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,544Other secured advances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2Unsecured personal advances
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total non-UK
    
    
    2
    
    
    
    13,544
    
    
    
    
    
    
    
    1
    
    
    
    14
    
    
    
    13,561Total
    
    
    3,169
    
    
    
    18,618
    
    
    
    2,240
    
    
    
    13,223
    
    
    
    98,404
    
    
    
    135,654
 The interest rate sensitivity table below analyses loans between fixed rate and variable rate
as at 31 December 2007.
 Fixed rate
    
    
    Variable rate
    
    
    Total£m
    
    
    £m
    
    
    £mUK
    
    
    58,907
    
    
    
    63,186
    
    
    
    122,093Non-UK
    
    
    2
    
    
    
    13,559
    
    
    
    13,56158,909
    
    
    
    76,745
    
    
    
    135,654
 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.
 Provisions on loans and advances to customers
 Details of Abbeys provisioning policy, as well as an analysis of end-of-year provisions on
loans and advances to customers, movements in provisions for bad and doubtful debts, and Group
non-performing loans and advances are set out in the Risk Management Report on page 39.
 Potential problem loans and advances
 In Retail Banking, due to the homogenous nature of the loans, the assessment of impairment is
undertaken on a collective basis through the use of statistical techniques. The collective
assessment takes due consideration of the time in arrears, with higher times in arrears indicating
a higher probability of the loans to go to possession. Individual assessments are only undertaken
when the collateral on a secured residential loan is repossessed or on commercial loans, where the
loan is overdue.
 These techniques are equally used to establish the amount of provisions for bad and
doubtful debts. 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 has substantially increased in value over the life of the loans 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.
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £m6 months to 12 months in arrears
    
    
    163
    
    
    
    155
    
    
    
    172
    
    
    
    10512 months or more in arrears
    
    
    30
    
    
    
    27
    
    
    
    26
    
    
    
    15Properties in possession
    
    
    64
    
    
    
    42
    
    
    
    44
    
    
    
    18
 The table below for 2003 contains information prepared under UK GAAP, Abbeys previous primary
GAAP, which is not comparable to information prepared under IFRS.
 2003£m6 months to 12 months in arrears
    
    
    6212 months or more in arrears
    
    
    44Properties in possession
    
    
    7
 25




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 Potential credit risk elements in loans and advances
 Interest continues to be accrued on all loans and the element of interest that is not
anticipated to be recovered is derecognised. Interest income recognised on impaired loans is set
out in the Consolidated Financial Statements. The income adjustment in respect of interest that is
not anticipated to be recovered was £16m (2006: £15m, 2005: £18m).
 Country risk exposure
 Abbey has no 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 the Group, 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.
 Cross border outstandings exceeding 1% of total assets
 Commercial,As %
    
    
    
    
    
    
    Banks and other
    
    
    Governments
    
    
    industrial andof total
    
    
    
    
    
    
    financial
    
    
    and official
    
    
    other privateassets
    
    
    Total
    
    
    institutions
    
    
    institutions
    
    
    sector entities%
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAt 31 December 2007:United States
    
    
    1.19
    
    
    
    2,369
    
    
    
    2,369
    
    
    
    
    
    
    
    At 31 December 2006:United States
    
    
    1.25
    
    
    
    2,395
    
    
    
    2,395
    
    
    
    
    
    
    
    At 31 December 2005:United States
    
    
    1.55
    
    
    
    3,200
    
    
    
    3,200
    
    
    
    
    
    
    
    
 Cross border outstandings between 0.75% and 1% of total assets
 At 31 December 2007, 2006 and 2005, Abbey had no cross border outstandings between 0.75% and 1%
of total assets.
 Tangible fixed assets
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mCapital expenditure incurred during the year
    
    
    407
    
    
    
    230
    
    
    
    329
 Capital expenditure during each of the years ended 31 December 2007, 2006 and 2005 was
principally incurred by Retail Banking (mostly consisting of computer infrastructure, computer
software and furniture and fittings for branches) and by Corporate Banking (consisting of operating
lease assets). Details of capital expenditure contracted but not provided for in respect of
tangible fixed assets are set out in Notes 23 and 24 to the Consolidated Financial Statements.
 Abbey had 897 unique property interests at 31 December 2007 consisting of three freehold
leases and 894 operating lease interests, occupying a total floor space of 417,583 square metres.
The number of unique property interests owned by Abbey is more than the number of individual
properties as Abbey has more than one interest in some properties. The majority of Abbeys property
interests are retail branches. Included in the above total are 23 properties that were not occupied
by Abbey as at 31 December 2007. Of Abbeys individual properties, 762 are located in the UK and
six in Europe. There are no material environmental issues associated with the use of the above
properties.
 Abbey has four principal sites consisting of Abbeys headquarters and Treasury operations; the
banking back office and Human Resources functions; Wealth Management and the telephone distribution
operations; and Credit Cards, Debt Management, Finance, Compliance and Marketing. These properties
are held under operating leases. The registered office of Abbey is located at Abbey National House,
2 Triton Square, Regents Place, London NW1 3AN.
 Management believes its existing properties and those under construction, in conjunction
with the operating lease arrangements in place with Mapeley Columbus Limited, are adequate and
suitable for its business as presently conducted and to meet future business needs. All properties
are adequately maintained.
 Deposits
 The following tables set forth the average balances of deposits by location for each of the
three years ended 31 December 2007.
 Average: year ended 31 December2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mDeposits by banksUK
    
    
    34,120
    
    
    
    29,713
    
    
    
    26,084Non-UK
    
    
    2,454
    
    
    
    1,981
    
    
    
    67736,574
    
    
    
    31,694
    
    
    
    26,761Deposits by customers (all interest bearing)UK
    
    
    64,676
    
    
    
    62,452
    
    
    
    63,999Non-UK
    
    
    3,401
    
    
    
    4,226
    
    
    
    6,08068,077
    
    
    
    66,678
    
    
    
    70,079
 26




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 Deposits by customers
 The following tables set forth the average balances of deposits by customers by type.
 Average: year ended 31 December2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mUKRetail demand deposits
    
    
    56,563
    
    
    
    54,529
    
    
    
    52,083Retail time deposits
    
    
    6,033
    
    
    
    6,089
    
    
    
    9,076Wholesale deposits
    
    
    2,080
    
    
    
    1,834
    
    
    
    2,84064,676
    
    
    
    62,452
    
    
    
    63,999Non-UKRetail demand deposits
    
    
    1,811
    
    
    
    1,490
    
    
    
    1,092Retail time deposits
    
    
    1,532
    
    
    
    1,144
    
    
    
    4,875Wholesale deposits
    
    
    58
    
    
    
    1,592
    
    
    
    1133,401
    
    
    
    4,226
    
    
    
    6,08068,077
    
    
    
    66,678
    
    
    
    70,079
 Retail demand and time deposits are obtained either through the branch network, cahoot or
remotely (such as postal accounts). Retail demand and time deposits are also obtained outside the
UK, principally through Abbey International. They are all interest bearing and interest rates are
varied from time to time in response to competitive conditions.
 Demand deposits
 Demand deposits consist of savings and banking products. Savings products comprise Individual
Savings Accounts, instant saver savings accounts, remote access accounts, such as those serviced by
post, and a number of other accounts 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. Banking products consist of current accounts.
 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 that 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 2007. 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.
 Deposits by banks(1)
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mYear-end balance (2)
    
    
    27,555
    
    
    
    36,755
    
    
    
    27,478Average balance(3)
    
    
    36,574
    
    
    
    31,694
    
    
    
    26,761Maximum balance
    
    
    48,278
    
    
    
    37,485
    
    
    
    35,872
 (1)
    
    Abbey policy is to mark-to-market the majority of its deposits by banks balances including
interest. Mark to market movements are recorded in net trading income rather than net interest
income. As a result, it has not been possible to calculate either an average interest rate
during the year or a year-end interest rate.(2)
    
    The year-end deposits by banks balance includes non-interest bearing items in the course of
transmission of £786m (2006: £363m, 2005: £248m).(3)
    
    Average balances are based upon daily data for Abbey National Treasury Services plc and its
subsidiaries and monthly data for all other operations.
 The balances above also include deposits by banks that are classified in the balance sheet as
trading liabilities. At 31 December 2007, deposits by foreign banks amounted to £7,922m (2006:
£15,040m, 2005: £9,281m).
 Commercial paper(1)
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mYear-end balance
    
    
    7,283
    
    
    
    6,705
    
    
    
    6,009Average balance(2)
    
    
    6,610
    
    
    
    6,344
    
    
    
    2,891Maximum balance
    
    
    8,784
    
    
    
    7,308
    
    
    
    6,009
 (1)
    
    Abbey policy is to mark-to-market the majority of its commercial paper balances including
interest. Mark to market movements are recorded in net trading income rather than net interest
income. As a result, it has not been possible to calculate either an average interest rate
during the year or a year-end interest rate.(2)
    
    Average balances are based upon daily data for Abbey National
Treasury Services plc and its subsidiaries and monthly data for all other operations.
 27




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 Abbey issues commercial paper 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 LLP.
 Negotiable certificates of deposit(1)
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mYear-end balance
    
    
    11,326
    
    
    
    10,832
    
    
    
    5,282Average balance (2)
    
    
    13,037
    
    
    
    7,644
    
    
    
    5,727Maximum balance
    
    
    14,821
    
    
    
    10,832
    
    
    
    6,670
 (1)
    
    Abbey policy is to mark-to-market the majority of its deposits by banks balances including
interest. Mark to market movements are recorded in net trading income rather than net interest
income. As a result, it has not been possible to calculate either an average interest rate
during the year or a year-end interest rate.(2)
    
    Average balances are based upon daily data for Abbey National Treasury Services plc and its
subsidiaries and monthly data for all other operations.
 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 2007. 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 2007. 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 of claims under issues of commercial paper.
 In more than three
    
    
    In more than sixNot more than
    
    
    months but not more
    
    
    months but not more
    
    
    In more thanthree months
    
    
    than six months
    
    
    than one year
    
    
    one year
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCertificates of deposit:UK
    
    
    4,935
    
    
    
    708
    
    
    
    321
    
    
    
    48
    
    
    
    6,012Non-UK
    
    
    2,838
    
    
    
    256
    
    
    
    2,220
    
    
    
    
    
    
    
    5,314Wholesale time deposits:UK
    
    
    2,433
    
    
    
    247
    
    
    
    44
    
    
    
    792
    
    
    
    3,516Non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,206
    
    
    
    1,211
    
    
    
    2,585
    
    
    
    840
    
    
    
    14,842
 At 31 December 2007, an additional £1,819m (2006: £2,367m) of wholesale deposits were repayable
on demand.
 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. Details of Abbeys
objectives, policies and processes for managing capital, including the group capital table, can be
found in Note 47 to the Consolidated Financial Statements.
 Capital ratios
 The following capital ratios are calculated in accordance with the Financial Services
Authoritys interpretation of the techniques specified by the Basel Committee in 1988. They
demonstrate that Abbeys capital ratio exceeds both the Basel Committee minimum risk asset ratio of
8% and the Financial Services Authoritys set minimum capital ratio for Abbey. Abbey recognises
the additional security inherent in Tier 1 capital, and so also presents a Tier 1 to risk-weighted
assets ratio (the Tier 1 ratio). An Equity Tier 1 ratio (i.e. Tier 1 excluding preference
shares) is also presented.
 2007
    
    
    2006£m
    
    
    £mBanking book
    
    
    62,769
    
    
    
    56,853Trading book
    
    
    5,793
    
    
    
    6,089Total risk-weighted assets
    
    
    68,562
    
    
    
    62,942Capital ratios:Risk asset ratio (%)
    
    
    11.4
    
    
    
    12.6Tier 1 ratio (%)
    
    
    7.3
    
    
    
    8.0Equity Tier 1 ratio (%)
    
    
    5.4
    
    
    
    5.6
 Capital ratios reflect the inclusion of audited profits for the years ended 31 December 2007
and 31 December 2006 respectively.
 Risk-weighted assets (RWAs)
 In 2007, risk-weighted assets increased by £5.6bn. This was principally the result of secured
and unsecured loan growth, purchase of mortgage and other asset backed securities and guarantees
given to third parties, offset by two mortgage asset securitisation transactions in the first half
of the year.
 Basel II
 Details of the revised capital adequacy regime are set out in Note 47 to the Consolidated
Financial Statements.
 28




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 Off-Balance Sheet Arrangements
 In the ordinary course of business, Abbey issues guarantees on behalf of customers. The
significant types of guarantees are:
 >
    
    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 written and deposited with retailers
multiplied by the amount guaranteed per cheque, which can be between £50 and £100. In practice
most customers will only write cheques when they have funds in their account to meet the
cheque, and cheques are frequently presented without the benefit of the cheque guarantee. On
this basis management have assessed the risk with respect to this guarantee as highly remote
and consider the risk of loss as part of the provisioning requirement on bank accounts.>
    
    Standby letters of credit also represent the taking on of credit
on behalf of customers when actual funding is not required,
normally because a third party is not prepared to accept the
credit risk of Abbeys customer. These are also included in the
normal credit provisioning assessment alongside other forms of
credit exposure.>
    
    Abbey, as is normal in such activity, gives representations,
indemnities and warranties on the sale of subsidiaries and
businesses. The maximum potential amount of any claims made
against these is usually significantly higher than actual
settlements. Appropriate provision is made with respect to
managements best estimate of the likely outcome, either at the
time of sale, or subsequently if additional information becomes
available.
 Further information regarding off-balance sheet arrangements can be found in the Risk
Management Report  Impact of the Current Credit Environment on page 46. See Note 37 to the
Consolidated Financial Statements for additional information regarding Abbeys guarantees,
commitments and contingencies. In the ordinary course of business, Abbey also enters into
securitisation transactions as described in Note 18 to the Consolidated Financial Statements. The
Holmes securitisation vehicles are consolidated. The mortgage assets continue to be administered by
Abbey. The Holmes securitisation vehicles provide Abbey with an important source of long-term
funding and also a regulatory capital benefit.
 Liquidity disclosures
 Liquidity risk is the potential that, although remaining in operation, Abbey does not have
sufficient liquid financial resources to enable it to meet its obligations as they fall due, or can
secure them only at excessive cost.
 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. Abbey also complies
with the Financial Services Authoritys liquidity requirements, and has appropriate liquidity
controls in place.
 Analysis of cash flow movements
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mNet cash (outflow) from operating activities
    
    
    (10,813)
    
    
    
    (13,086)
    
    
    
    (7,255)Net cash (outflow)/inflow from investing activities
    
    
    (196)
    
    
    
    12
    
    
    
    2,034Net cash inflow from financing activities
    
    
    4,776
    
    
    
    1,758
    
    
    
    1,426Decrease in cash and cash equivalents
    
    
    (6,233)
    
    
    
    (11,316)
    
    
    
    (3,795)
 2007 compared to 2006
 Net cash movements increased by £5,083m to a net cash outflow of £6,233m in 2007 as compared
with a net cash outflow of £11,316m in 2006. The increase was primarily due to an increase in cash
equivalents of £6,958m, driven by a decrease in trading debt securities, trading loans and advances
to customers and trading loans and advances to banks with a maturity of less than three months. The
movements are due to Cater Allen International Limited trading activity, which can fluctuate
depending on its short term trading strategy.
 Net cash flows from investing activities declined compared to 2006 due to additional cash
outflows on the purchase of tangible fixed assets in relation to the Partenon project and
construction of operating lease assets.
 Net cash flows from financing activities increased compared to 2006 due to new issuances
of mortgage-backed securities under Abbeys securitisation programme. The effect was partially
offset by redemption of securities issued by the securitisation vehicles. For further information
on Abbeys securitisation programme, see Note 18 to the Consolidated Financial Statements.
 2006 compared to 2005
 Net cash movements decreased by £7,521m to a net cash outflow of £11,316m in 2006 as compared
with a net cash outflow of £3,795m in 2005. The decrease was primarily due to a decrease in cash
equivalents of £12,088m, driven by a decrease in trading debt securities with a maturity of less
than three months and an increase in trading deposits at banks with a maturity of less than three
months. The movements are due to Cater Allen International Limited trading activity, which can
fluctuate depending on its short term trading strategy.
 Net cash flows from investing activities declined compared to 2005 due to a reduction in
cash inflows on the disposal of subsidiaries, principally because 2005 included the proceeds from
the sale of the Groups entire portfolio of investment property, which was sold following the
decision to stop investing in direct holdings of investment property.
 Net cash flows from financing activities declined compared to 2005 due to significant
scheduled redemptions of loan capital in 2006 that were not replaced due to the receipt of cash as
a result of the sale of the life insurance subsidiaries.
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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 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 Banking savings business. 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, mortgage
securitisations 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 plc 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 2007
    
    
    Markets issued in$15bn medium-term notes
    
    $14.5bn
    
    Europe$4bn commercial paper
    
    $2.4bn
    
    Europe$20bn commercial paper
    
    $12.2bn
    
    United StatesEuro 2bn structured notes programme
    
    Euro 0.3bn
    
    EuropeEuro 12bn covered bond programme
    
    Euro 3.5bn
    
    EuropeEuro 12bn covered bond programme
    
    £0.6bn
    
    Europe
 For further information on sources of liquidity, including developments during the year, see
Risk Management Report  Liquidity Risk on page 47 and Risk
Management Report  Impact of the
Current Credit Environment on page 46.
 Uses of liquidity
 The principal uses of liquidity for Abbey are the funding of Retail Banking lending and
investment securities, payment of interest expense, dividends paid to shareholders, and the
repayment of debt. Abbeys ability to pay dividends depends on a number of factors, including
Abbeys regulatory capital requirements, distributable reserves and financial performance.
 Contractual obligations
 The amounts and maturities of contractual obligations in respect of guarantees are described in
Note 37 to the Consolidated Financial Statements. Other contractual obligations are:
 Payments due by periodTotal
    
    
    Less than 
1 year
    
    
    1-3 
years
    
    
    3-5 
years
    
    
    Over 
5 years£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDeposits by banks
    
    
    27,555
    
    
    
    27,555
    
    
    
    
    
    
    
    
    
    
    
    Deposits by customers
    
    
    90,148
    
    
    
    86,073
    
    
    
    1,631
    
    
    
    1,262
    
    
    
    1,182Debt securities in issue
    
    
    55,784
    
    
    
    24,226
    
    
    
    4,338
    
    
    
    1,178
    
    
    
    26,042Other borrowed funds
    
    
    1,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,419Subordinated liabilities
    
    
    4,732
    
    
    
    
    
    
    
    393
    
    
    
    378
    
    
    
    3,961Retirement benefit obligations
    
    
    979
    
    
    
    26
    
    
    
    53
    
    
    
    52
    
    
    
    848Operating lease obligations
    
    
    1,138
    
    
    
    101
    
    
    
    197
    
    
    
    199
    
    
    
    641Purchase obligations
    
    
    62
    
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    181,817
    
    
    
    138,043
    
    
    
    6,612
    
    
    
    3,069
    
    
    
    34,093
 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 deposits by
customers can be found in Notes 27 and 28 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. Under current conditions, Abbeys working capital is expected to be sufficient for
its present requirements and to pursue its planned business strategies.
 30




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 Interest rate sensitivity
   Changes in net interest income  volume and rate analysis
  2007/2006
    
    
    2006/2005Changes due to
    
    
    
    
    
    Changes due toTotal
    
    
    Increase / (decrease):
    
    

Total
    
    
    Increase / (decrease):change
    
    
    Volume
    
    
    Rate
    
    
    change
    
    
    Volume
    
    
    Rate£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mInterest incomeLoans and advances to banksUK
    
    
    69
    
    
    
    85
    
    
    
    (16)
    
    
    
    (13)
    
    
    
    (59)
    
    
    
    46Non-UK
    
    
    (1)
    
    
    
    (1)
    
    
    
    
    
    
    
    (2)
    
    
    
    (1)
    
    
    
    (1)Loans and advances to customersUK
    
    
    1,280
    
    
    
    390
    
    
    
    890
    
    
    
    255
    
    
    
    183
    
    
    
    72Non-UK
    
    
    (2)
    
    
    
    (1)
    
    
    
    (1)Total interest incomeUK
    
    
    1,349
    
    
    
    475
    
    
    
    874
    
    
    
    242
    
    
    
    124
    
    
    
    118Non-UK
    
    
    (3)
    
    
    
    (2)
    
    
    
    (1)
    
    
    
    (2)
    
    
    
    (1)
    
    
    
    (1)1,346
    
    
    
    473
    
    
    
    873
    
    
    
    240
    
    
    
    123
    
    
    
    117Interest expenseDeposits by banksUK
    
    
    105
    
    
    
    157
    
    
    
    (52)
    
    
    
    52
    
    
    
    34
    
    
    
    18Deposits by customers  retail demand depositsUK
    
    
    429
    
    
    
    72
    
    
    
    357
    
    
    
    140
    
    
    
    85
    
    
    
    55Non-UK
    
    
    58
    
    
    
    8
    
    
    
    50
    
    
    
    14
    
    
    
    9
    
    
    
    5Deposits by customers  retail time
depositsUK
    
    
    (2)
    
    
    
    (3)
    
    
    
    1
    
    
    
    (14)
    
    
    
    (117)
    
    
    
    103Non-UK
    
    
    (2)
    
    
    
    22
    
    
    
    (24)
    
    
    
    (146)
    
    
    
    (161)
    
    
    
    15Deposits by customers  wholesale depositsUK
    
    
    (7)
    
    
    
    10
    
    
    
    (17)
    
    
    
    (47)
    
    
    
    (44)
    
    
    
    (3)Non-UK
    
    
    (63)
    
    
    
    (64)
    
    
    
    1
    
    
    
    66
    
    
    
    
    
    
    
    66Bonds and medium-term notesUK
    
    
    668
    
    
    
    285
    
    
    
    383
    
    
    
    (160)
    
    
    
    (107)
    
    
    
    (53)Non-UK
    
    
    15
    
    
    
    (13)
    
    
    
    28
    
    
    
    262
    
    
    
    
    
    
    
    262Dated and undated loan capital and other subordinated liabilitiesUK
    
    
    (60)
    
    
    
    (21)
    
    
    
    (39)
    
    
    
    (16)
    
    
    
    (87)
    
    
    
    71Non-UK
    
    
    (1)
    
    
    
    (8)
    
    
    
    7
    
    
    
    11
    
    
    
    3
    
    
    
    8Other interest-bearing liabilities UK
    
    
    (3)
    
    
    
    (10)
    
    
    
    7
    
    
    
    (5)
    
    
    
    (5)
    
    
    
    Total interest expenseUK
    
    
    1,130
    
    
    
    490
    
    
    
    640
    
    
    
    (50)
    
    
    
    (241)
    
    
    
    191Non-UK
    
    
    7
    
    
    
    (55)
    
    
    
    62
    
    
    
    207
    
    
    
    (149)
    
    
    
    3561,137
    
    
    
    435
    
    
    
    702
    
    
    
    157
    
    
    
    (390)
    
    
    
    547Net interest income
    
    
    209
    
    
    
    38
    
    
    
    171
    
    
    
    83
    
    
    
    513
    
    
    
    (430)
 31




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##### Table of Contents



Business and Financial Review
 Balance Sheet Business Review continued
 Average balance sheet (1, 2)
 2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Averagebalance
    
    
    Interest
    
    
    rate
    
    
    balance
    
    
    Interest
    
    
    rate
    
    
    balance
    
    
    Interest
    
    
    rate£m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %
    
    
    £m
    
    
    £m
    
    
    %AssetsLoans and advances to banksUK
    
    
    3,731
    
    
    
    226
    
    
    
    6.06
    
    
    
    2,416
    
    
    
    157
    
    
    
    6.50
    
    
    
    3,694
    
    
    
    170
    
    
    
    4.60Non-UK
    
    
    30
    
    
    
    1
    
    
    
    3.99
    
    
    
    53
    
    
    
    2
    
    
    
    3.77
    
    
    
    76
    
    
    
    4
    
    
    
    5.25Loans and advances to customers(3)UK
    
    
    107,709
    
    
    
    6,815
    
    
    
    6.33
    
    
    
    100,627
    
    
    
    5,536
    
    
    
    5.50
    
    
    
    97,251
    
    
    
    5,281
    
    
    
    5.43Non-UK
    
    
    22
    
    
    
    1
    
    
    
    4.55
    
    
    
    51
    
    
    
    2
    
    
    
    3.92
    
    
    
    49
    
    
    
    2
    
    
    
    4.06Debt securitiesUK
    
    
    8
    
    
    
    
    
    
    
    7.60
    
    
    
    1
    
    
    
    
    
    
    
    0.00
    
    
    
    
    
    
    
    
    
    
    
    Total average interest-earning assets,
interest income  banking
    
    
    111,500
    
    
    
    7,043
    
    
    
    6.32
    
    
    
    103,148
    
    
    
    5,697
    
    
    
    5.52
    
    
    
    101,070
    
    
    
    5,457
    
    
    
    5.40Provision for loan losses
    
    
    (458)
    
    
    
    
    
    
    
    

    
    
    
    (431)
    
    
    
    
    
    
    
    
    
    
    
    (410)
    
    
    
    
    
    
    
    Trading business
    
    
    68,612
    
    
    
    


    
    
    
    
    
    60,780
    
    
    
    
    
    
    
    
    
    
    
    53,154
    
    
    
    
    
    
    
    Assets designated at fair value through profit
and loss
    
    
    9,152
    
    
    
    
    
    
    
    
    
    
    
    18,336
    
    
    
    
    
    
    
    
    
    
    
    27,612
    
    
    
    
    
    
    
    Non-interest-earning assets:Other
    
    
    15,162
    
    
    
    
    
    
    
    
    
    
    
    17,815
    
    
    
    
    
    
    
    
    
    
    
    19,146
    
    
    
    
    
    
    
    Total average assets
    
    
    203,968
    
    
    
    
    
    
    
    
    
    
    
    199,648
    
    
    
    
    
    
    
    
    
    
    
    200,572Non-UK assets as a % of total
    
    
    0.03%
    
    
    
    
    
    
    
    
    
    
    
    0.05%
    
    
    
    
    
    
    
    
    
    
    
    0.06%LiabilitiesDeposits by banksUK
    
    
    (5,169)
    
    
    
    (199)
    
    
    
    3.85
    
    
    
    (1,938)
    
    
    
    (94)
    
    
    
    4.85
    
    
    
    (1,070)
    
    
    
    (42)
    
    
    
    3.93Deposits by customers: retail demand(4)UK
    
    
    (56,563)
    
    
    
    (2,359)
    
    
    
    4.17
    
    
    
    (54,529)
    
    
    
    (1,930)
    
    
    
    3.54
    
    
    
    (52,083)
    
    
    
    (1,790)
    
    
    
    3.49Non-UK
    
    
    (1,811)
    
    
    
    (97)
    
    
    
    5.36
    
    
    
    (1,490)
    
    
    
    (39)
    
    
    
    2.62
    
    
    
    (1,092)
    
    
    
    (25)
    
    
    
    2.29Deposits by customers: retail time(4)UK
    
    
    (6,033)
    
    
    
    (339)
    
    
    
    5.62
    
    
    
    (6,089)
    
    
    
    (341)
    
    
    
    5.60
    
    
    
    (9,076)
    
    
    
    (355)
    
    
    
    3.91Non-UK
    
    
    (1,532)
    
    
    
    (62)
    
    
    
    4.05
    
    
    
    (1,144)
    
    
    
    (64)
    
    
    
    5.59
    
    
    
    (4,875)
    
    
    
    (210)
    
    
    
    4.31Deposits by customers: wholesale(4)UK
    
    
    (2,080)
    
    
    
    (71)
    
    
    
    3.41
    
    
    
    (1,834)
    
    
    
    (78)
    
    
    
    4.25
    
    
    
    (2,840)
    
    
    
    (125)
    
    
    
    4.40Non-UK
    
    
    (58)
    
    
    
    (3)
    
    
    
    5.17
    
    
    
    (1,592)
    
    
    
    (66)
    
    
    
    4.15
    
    
    
    (113)
    
    
    
    
    
    
    
    Bonds and medium-term notesUK
    
    
    (27,776)
    
    
    
    (1,675)
    
    
    
    6.03
    
    
    
    (21,649)
    
    
    
    (1,007)
    
    
    
    4.65
    
    
    
    (23,847)
    
    
    
    (1,167)
    
    
    
    4.89Non-UK
    
    
    (5,293)
    
    
    
    (277)
    
    
    
    5.23
    
    
    
    (5,579)
    
    
    
    (262)
    
    
    
    4.70
    
    
    
    
    
    
    
    
    
    
    
    Dated and undated loan capital and other
subordinated liabilitiesUK
    
    
    (5,778)
    
    
    
    (388)
    
    
    
    6.72
    
    
    
    (6,067)
    
    
    
    (448)
    
    
    
    7.38
    
    
    
    (7,509)
    
    
    
    (464)
    
    
    
    6.18Non-UK
    
    
    (511)
    
    
    
    (45)
    
    
    
    8.81
    
    
    
    (613)
    
    
    
    (46)
    
    
    
    7.50
    
    
    
    (563)
    
    
    
    (35)
    
    
    
    6.21Other interest-bearing liabilities UK
    
    
    (825)
    
    
    
    (29)
    
    
    
    3.52
    
    
    
    (1,179)
    
    
    
    (32)
    
    
    
    2.70
    
    
    
    (1,359)
    
    
    
    (37)
    
    
    
    2.70Total average interest-bearing liabilities,

interest expense  banking
    
    
    (113,429)
    
    
    
    (5,544)
    
    
    
    4.89
    
    
    
    (103,703)
    
    
    
    (4,407)
    
    
    
    4.25
    
    
    
    (104,427)
    
    
    
    (4,250)
    
    
    
    4.09Trading business
    
    
    (64,342)
    
    
    
    
    
    
    
    
    
    
    
    (56,062)
    
    
    
    
    
    
    
    
    
    
    
    (43,775)
    
    
    
    
    
    
    
    Liabilities designated at fair value through
profit and loss
    
    
    (7,847)
    
    
    
    
    
    
    
    
    
    
    
    (8,500)
    
    
    
    
    
    
    
    
    
    
    
    (8,153)
    
    
    
    
    
    
    
    Non-interest-bearing liabilities:Other
    
    
    (15,248)
    
    
    
    
    
    
    
    
    
    
    
    (28,292)
    
    
    
    
    
    
    
    
    
    
    
    (42,070)
    
    
    
    
    
    
    
    Shareholders funds
    
    
    (3,102)
    
    
    
    
    
    
    
    
    
    
    
    (3,091)
    
    
    
    
    
    
    
    
    
    
    
    (2,147)
    
    
    
    
    
    
    
    Total average liabilities and shareholders funds
    
    
    (203,968)
    
    
    
    
    
    
    
    
    
    
    
    (199,648)
    
    
    
    
    
    
    
    
    
    
    
    (200,572)Non-UK liabilities as a % of total
    
    
    4.51%
    
    
    
    
    
    
    
    
    
    
    
    5.22%
    
    
    
    
    
    
    
    
    
    
    
    3.31%Interest income as a percentage of average
interest-earning assets
    
    
    
    
    
    
    
    
    
    
    6.32
    
    
    
    
    
    
    
    
    
    
    
    5.52
    
    
    
    
    
    
    
    
    
    
    
    5.40Interest expense as a percentage of average
interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    4.89
    
    
    
    
    
    
    
    
    
    
    
    4.25
    
    
    
    
    
    
    
    
    
    
    
    4.09Interest spread
    
    
    
    
    
    
    
    
    
    
    1.43
    
    
    
    
    
    
    
    
    
    
    
    1.27
    
    
    
    
    
    
    
    
    
    
    
    1.31Net interest margin
    
    
    
    
    
    
    
    
    
    
    1.34
    
    
    
    
    
    
    
    
    
    
    
    1.25
    
    
    
    
    
    
    
    
    
    
    
    1.19
 (1)
    
    Abbey National Treasury Services plc prepares averages using average daily balances. The
rest of Abbey uses month end averages. These are representative of Abbeys operations.(2)
    
    The ratio of average interest-earning assets to interest-bearing liabilities for the year
ended 31 December 2007 was 98.30% (2006: 99.46%, 2005: 96.78%).(3)
    
    Loans and advances to customers includes non-performing loans. See Analysis of end-of-year
provisions on loans and advances to customers in the Risk Management section elsewhere in
this Annual Report.(4)
    
    Demand deposits, time deposits and wholesale deposits are defined under Deposits above.
 32




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##### Table of Contents



Business and Financial Review
 
 Risk Management
  Introduction
    
  Risk Governance Framework
  First tier of risk governance
 33




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##### Table of Contents



Business and Financial Review
 Risk Management continued
  Risk Committee
  Second tier of risk governance .
    >
    
    Group-wide risk policies;>
    
    Group-wide risk limits/parameters;>
    
    Approval processes relating to transactions that exceed local risk limits;>
    
    The systematic review of exposures to large clients, sectors, geographical areas and different risk types; and>
    
    Reporting to Santander
 Third tier of risk governance
 Non-Executive Directors
  Internal Audit
   Audit and Risk Committee
  >
    
    The oversight of the risk governance framework;>
    
    Review of the effectiveness of the Companys internal and external audit process;>
    
    Review of control policies and procedures including regulatory compliance and financial reporting;>
    
    The identification, assessment and reporting of risks; and>
    
    The risk governance structure and associated compliance with risk control policies and procedures.
 Financial Instruments
  34




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##### Table of Contents



Business and Financial Review
 Risk Management continued
  Basel II
  Risk Management
 Operational Risk (unaudited)
  Managing operational risk (unaudited)
   Key operational risk activity in 2007 risk (unaudited)
       Significant concentrations of credit risk
 
 35




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##### Table of Contents



Business
and Financial Review
 Risk Management continued
  Maximum exposure to credit risk
  2007
    
    
    2006£m
    
    
    £mTrading assets
    
    
    32,378
    
    
    
    35,751Purchase and resale agreements
    
    
    24,049
    
    
    
    26,563Derivatives
    
    
    9,951
    
    
    
    8,336Financial assets designated at fair value
    
    
    11,783
    
    
    
    8,713Loans and advances to customers
    
    
    112,147
    
    
    
    103,146Other
    
    
    6,762
    
    
    
    6,856Third party exposures(1)
    
    
    197,070
    
    
    
    189,365
 (1)
    
    In addition the Group is exposed to credit risk in respect of guarantees granted, loan
commitments and stock borrowing and lending agreements. The estimated maximum exposure to credit
risk is described in Note 37 to the Consolidated Financial Statements on page 111.
  Market risk
    Risk Management in Retail Banking and Group Infrastructure
 Credit risk
  Managing credit risk
  Residential Mortgages and secured lending
  36




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
    Mortgage credit
quality
    
    2007
    
    
    2006
    
    
    2005Loan-to-value analysis:New business> 90%
    
    
    3%
    
    
    
    4%
    
    
    
    4%75%  90%
    
    
    45%
    
    
    
    33%
    
    
    
    29%< 75%
    
    
    52%
    
    
    
    63%
    
    
    
    67%Average (at inception)
    
    
    64%
    
    
    
    61%
    
    
    
    60%Average loan-to-value of stock (indexed)
    
    
    46%
    
    
    
    44%
    
    
    
    45%New business profile:First-time buyers
    
    
    13%
    
    
    
    11%
    
    
    
    14%Home movers
    
    
    37%
    
    
    
    38%
    
    
    
    37%Remortgagers
    
    
    50%
    
    
    
    51%
    
    
    
    49%Average earnings multiple
    
    
    3.0
    
    
    
    2.9
    
    
    
    2.9
  >
    
    The average loan-to-value of new business has increased slightly during 2007 to 64%.>
    
    The average loan-to-value of existing business remained broadly level in 2007 at 46%.>
    
    The proportion of new business written with a high loan-to-value (greater than 90%) has remained low.
 Mortgage indemnity guarantee insurance and high loan-to-value fee
  Mortgage arrears and repossessions
    Abbey(1)(2)Mortgage arrears
    
    (Percentage of total mortgage loans by number)31 to 60 days in arrears31 December 2005
    
    
    
    
    
    
    1.3331 December 2006
    
    
    
    
    
    
    1.1931 December 2007
    
    
    
    
    
    
    1.4861 to 90 days in arrears31 December 2005
    
    
    
    
    
    
    0.5131 December 2006
    
    
    
    
    
    
    0.5031 December 2007
    
    
    
    
    
    
    0.59
 37




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
 CML(2)Abbey
    
    
    (unaudited)(Percentage of total mortgage loans by number)3 to 5 months in arrears31 December 2005
    
    
    0.45
    
    
    
    0.6131 December 2006
    
    
    0.42
    
    
    
    0.5731 December 2007
    
    
    0.49
    
    
    
    0.626 to 11 months in arrears31 December 2005
    
    
    0.20
    
    
    
    0.3431 December 2006
    
    
    0.17
    
    
    
    0.3131 December 2007
    
    
    0.17
    
    
    
    0.3512 months or more in arrears31 December 2005
    
    
    0.03
    
    
    
    0.1331 December 2006
    
    
    0.03
    
    
    
    0.1431 December 2007
    
    
    0.03
    
    
    
    0.13
 (1)
    
    Abbey data is not readily available for arrears less than 31 days(2)
    
    Council of Mortgage Lenders data is not available for arrears less than 3 months
 CMLAbbey
    
    
    (unaudited)Properties in possession
    
    (Percentage of total mortgage loans by number)31 December 2005
    
    
    0.04
    
    
    
    0.0531 December 2006
    
    
    0.04
    
    
    
    0.0831 December 2007
    
    
    0.05
    
    
    
    0.10
 Carrying amount of assets obtained as collateral
    
    £m31 December 2005
    
    
    4431 December 2006
    
    
    4331 December 2007
    
    
    64
  Restructured loans
  Banking and Consumer Credit.
  cahoot.
 Personal Financial Services banking and unsecured personal loan arrears
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mTotal banking and unsecured personal loan arrears(1,2)
    
    
    134
    
    
    
    167
    
    
    
    126Total banking and unsecured personal loan asset
    
    
    3,119
    
    
    
    3,936
    
    
    
    3,749Banking and unsecured personal loan arrears as a % of asset
    
    
    4.30%
    
    
    
    4.25%
    
    
    
    3.40%
 (1)
    
    Banking arrears are defined as customers whose borrowings exceed their overdraft by over
£100.(2)
    
    Unsecured personal loan and credit card arrears are defined as the balances of accounts that
are three or more months in arrears (> 4 instalments).
 Abbey Business
  38




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
  Provisions on loans and advances to customers
  >
    
    Observed provision an observed provision is established for all
past due loans after a specified period of repayment default where it
is likely that some of the capital will not be repaid or recovered
through enforcement of any applicable security. The length of the
default period depends on the nature of the advance and is generally
no more than three months. Once a loan misses a payment (breach of
contractual terms) an assessment of the likelihood of collecting the
principal and overdue payments is made. This assessment is generally
made using statistical techniques developed on previous experience
and on projections of current market conditions to the time the loss
is expected to crystallise. These techniques estimate the propensity
of loans to go to write off and as a separate exercise, the loss
incurred on written off debt is monitored. For advances secured on
residential property the propensity of loans to reach repossession is
determined, with repossessed properties assessed on an individual
basis through the use of external valuation, anticipated disposal
costs and the current exposure.>
    
    Incurred but not yet observed provision an incurred but not yet
observed provision is made against loans, which have not missed a
payment but are known from past experience to have deteriorated since
the initial decision to lend was made. Based on historical evidence,
the number of accounts likely to default in the future as a result of
events present at the balance sheet date are identified through use
of statistical techniques. From 1 January 2005, these statistical
techniques were expanded and enhanced. In particular, further
detailed examination is now performed on the losses that emerge over
a defined period of time after the reporting date called the
emergence period. This period is determined to ensure that only those
accounts which have credit deterioration at the reporting date are
captured and excludes accounts which will suffer credit deterioration
after the reporting period. The emergence period is three months for
unsecured lending and twelve months for secured lending. The
provision methodology outlined for observed provisions is then
applied to accounts identified as impaired in the performing
portfolios.>
    
    Amounts written off Unsecured loans are written off when all
internal avenues of collecting the debt have failed and the debt is
passed onto external collection agencies. On secured loans, the write
off takes place on ultimate realisation of collateral value, or from
claiming on any mortgage indemnity guarantee or other insurance. All
write offs are on a case by case basis, taking account of the
exposure at the date of write off, after accounting for the value
from any collateral or insurance held against the loan. The write-off
policy is regularly reviewed.
  Analysis of provisions on loans and advances to customers
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mObserved provisionAdvances secured on residential properties  UK
    
    
    73
    
    
    
    45
    
    
    
    21
    
    
    
    9Other secured advances  UK
    
    
    34
    
    
    
    75
    
    
    
    126
    
    
    
    148Unsecured personal advances  UK
    
    
    249
    
    
    
    242
    
    
    
    158
    
    
    
    133Corporate advances  UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Total observed provisions
    
    
    356
    
    
    
    362
    
    
    
    305
    
    
    
    357Incurred but not yet observed provisionAdvances secured on residential properties  UK
    
    
    102
    
    
    
    60
    
    
    
    35
    
    
    
    58Other secured advances  UK
    
    
    8
    
    
    
    3
    
    
    
    
    
    
    
    3Unsecured personal advances  UK
    
    
    85
    
    
    
    111
    
    
    
    54
    
    
    
    35Corporate advances  UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Total incurred but not yet observed provisions
    
    
    195
    
    
    
    174
    
    
    
    89
    
    
    
    110Total provisions
    
    
    551
    
    
    
    536
    
    
    
    394
    
    
    
    467
 39




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
   2003£mSpecificAdvances secured on residential properties  UK
    
    
    8Other secured advances  UK
    
    
    36Unsecured personal advances  UK
    
    
    171Corporate advances  UK
    
    
    161Advances secured on residential properties  non-UK
    
    
    17Other secured advances  non-UK
    
    
    26Unsecured personal advances  non-UK
    
    
    4Total specific provisions
    
    
    423GeneralAdvances secured on residential properties  UK
    
    
    165Other secured advances  UK
    
    
    58Unsecured personal advances  UK
    
    
    32Corporate advances  UK
    
    
    173Advances secured on residential properties  non-UK
    
    
    12Other secured advances  non-UK
    
    
    2Total general provisions
    
    
    442Total provisions
    
    
    865
 Movements in provisions for impairment losses on loans and advances
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mProvisions at 31 December
    
    
    536
    
    
    
    394
    
    
    
    467
    
    
    
    IFRS reclassifications
    
    
    
    
    
    
    
    
    
    
    (40)
    
    
    
    Provisions at 1 January
    
    
    536
    
    
    
    394
    
    
    
    427
    
    
    
    865Disposal of subsidiary undertakings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (70)536
    
    
    
    394
    
    
    
    427
    
    
    
    795Amounts written offAdvances secured on residential properties  UK
    
    
    (9)
    
    
    
    (11)
    
    
    
    (5)
    
    
    
    (2)Other secured advances  UK
    
    
    (25)
    
    
    
    (27)
    
    
    
    (36)
    
    
    
    (39)Unsecured personal advances  UK
    
    
    (339)
    
    
    
    (205)
    
    
    
    (247)
    
    
    
    (136)Corporate advances  UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (144)(373)
    
    
    
    (243)
    
    
    
    (288)
    
    
    
    (321)Advances secured on residential properties  non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2)Other secured advances  non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2)Total amounts written off
    
    
    (373)
    
    
    
    (243)
    
    
    
    (288)
    
    
    
    (325)Observed provisions charged against profitAdvances secured on residential properties  UK
    
    
    38
    
    
    
    35
    
    
    
    12
    
    
    
    3Other secured advances  UK
    
    
    (17)
    
    
    
    (25)
    
    
    
    11
    
    
    
    155Unsecured personal advances  UK
    
    
    346
    
    
    
    289
    
    
    
    221
    
    
    
    98Corporate advances  UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71367
    
    
    
    299
    
    
    
    244
    
    
    
    327Advances secured on residential properties  non-UK
    
    
    
    
    
    
    
    
    
    
    (3)
    
    
    
    (1)Unsecured personal advances  non-UK
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1Total observed provisions charged against profit
    
    
    367
    
    
    
    299
    
    
    
    241
    
    
    
    327Incurred but not yet observed provisions charged against profit
    
    
    21
    
    
    
    86
    
    
    
    14
    
    
    
    (330)Total provisions charged against profit (including discontinued operations)
    
    
    388
    
    
    
    385
    
    
    
    255
    
    
    
    (3)Provisions at the end of the year
    
    
    551
    
    
    
    536
    
    
    
    394
    
    
    
    467
  Recoveries
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mAdvances secured on residential properties  UK
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    16Other secured advances  UK
    
    
    6
    
    
    
    7
    
    
    
    7
    
    
    
    8Unsecured personal advances  UK
    
    
    36
    
    
    
    32
    
    
    
    27
    
    
    
    28Total amount recovered
    
    
    44
    
    
    
    41
    
    
    
    37
    
    
    
    52
 40




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
   2003£mProvisions at the beginning of the year
    
    
    746Disposal of subsidiary undertakings
    
    
    (94)652Amounts written offAdvances secured on residential properties  UK
    
    
    (16)Other secured advances  UK
    
    
    (45)Unsecured personal advances  UK
    
    
    (148)Corporate advances  UK
    
    
    (80)(289)Advances secured on residential properties  non-UK
    
    
    (10)Other secured advances  non-UK
    
    
    (10)Total amounts written off
    
    
    (309)RecoveriesAdvances secured on residential properties  UK
    
    
    4Unsecured personal advances  UK
    
    
    38Total amount recovered
    
    
    42Specific provisions charged against profitAdvances secured on residential properties  UK
    
    
    5Other secured advances  UK
    
    
    52Unsecured personal advances  UK
    
    
    205Corporate advances  UK
    
    
    36298Advances secured on residential properties  non-UK
    
    
    4Total specific provisions charged against profit
    
    
    302General provisions charged against profit
    
    
    172Total provisions charged against profit
    
    
    474Exchange and other adjustments
    
    
    6Provisions at the end of the year
    
    
    865
 Group non-performing loans and advances (1)
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mGroup non-performing loans and advances that are impaired
    
    
    296
    
    
    
    375
    
    
    
    314
    
    
    
    297Group non-performing loans and advances that are not impaired
    
    
    596
    
    
    
    451
    
    
    
    568
    
    
    
    844Total non-performing loans and advances(2)
    
    
    892
    
    
    
    826
    
    
    
    882
    
    
    
    1,141%
    
    
    
    %
    
    
    
    %
    
    
    
    %Non-performing loans and advances as a percentage of loans and advances to customers(3)
    
    
    0.66
    
    
    
    0.64
    
    
    
    0.74
    
    
    
    1.04Provision as a percentage of total non-performing loans and advances
    
    
    61.77
    
    
    
    64.89
    
    
    
    44.67
    
    
    
    40.93
 (1)
    
    Loans and advances are classified as non-performing typically when the counterparty fails to
make payments when contractually due for three months or longer(2)
    
    All non-performing loans are UK(3)
    
    Loans and advances to customers includes trading assets and excludes finance leases
    41




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
   2003£mAccruing loans and advances on which a proportion of interest has been suspended and/or specific provision has been made:UK
    
    
    1,531Non-UK
    
    
    1011,632Accruing loans and advances 90 days overdue on which no interest has been suspended and on which no specific provision
has been made:UK
    
    
    1,110Non-UK
    
    
    41,114Non-accruing loans and advances:Non-UK
    
    
    3030Total non-performing loans and advances:UK
    
    
    2,641Non-UK
    
    
    1352,776%Non-performing loans and advances as a percentage of loans and advances to customers excluding finance leases
    
    
    3.25Provision as a percentage of total non-performing loans and advances
    
    
    31.15
  Market risks in Retail Banking and Group Infrastructure
    Managing market risks in Retail Banking
   >
    
    Net Interest Margin sensitivity: the sensitivity of annual net
interest margin to an instantaneous and unexpected adverse 100 basis
point parallel shock to the yield curve.>
    
    Market Value of Equity sensitivity: the sensitivity of the net
present value of interest rate sensitive positions from an
instantaneous and unexpected adverse 100 basis point parallel shock
to the yield curve.
   2007
    
    
    2006£m
    
    
    £mNet interest margin sensitivity (100 basis points adverse parallel shock)
    
    
    (7)
    
    
    
    (4)Market value of equity sensitivity (100 basis points adverse parallel shock)
    
    
    (197)
    
    
    
    (139)
 42




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
 Derivatives
    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.Management of the basis between
administered rate assets and
liabilities and wholesale market rates.
    
    Reduced profitability due to adverse changes in the
basis spread.
    
    Basis swaps.Management of repricing profile of
wholesale funding.
    
    Reduced profitability due to adverse movement in
wholesale interest rates when large volumes of
wholesale funding are repriced.
    
    Forward Rate Agreements.Fixed rate lending and investments.
    
    Sensitivity to increases in interest rates.
    
    Pay fixed interest rate swaps.Fixed rate retail and wholesale funding.
    
    Sensitivity to falls in interest rates.
    
    Receive fixed interest rate swaps.Equity-linked retail funding.
    
    Sensitivity to increases in equity market indices.
    
    Receive equity swaps.Management of other net interest income
on retail activities.
    
    Sensitivity of income to changes in interest rates.
    
    Interest rate swaps.Issuance of products with embedded
equity options.
    
    Sensitivity to changes in underlying index and index
volatility causing option exercise.
    
    Interest rate swaps combined with
equity options.Lending, and issuance of, products with
embedded interest rate options.
    
    Sensitivity to changes in underlying rate and rate
volatility causing option exercise.
    
    Interest rate swaps plus caps/floors.Investment in, and issuance of, bonds
with put/call features.
    
    Sensitivity to changes in rates causing option
exercise.
    
    Interest rate swaps combined with
swaptions(1)and other
matched options.
 (1)
    
    A swaption is an option on a swap that gives the holder the right but not the obligation to
buy or sell a swap.
 Risk Management in Global Banking & Markets and Corporate Banking
 Credit risk
  Managing credit risk
     43




---



##### Table of Contents



Business and Financial Review
 Risk Management continued
  Credit risk mitigation  (i) Netting arrangements
  (ii) Collateralisation
  Net exposure by credit rating of the issuer or counterparty
 2007
    
    
    2006£m
    
    
    £mAAA
    
    
    11,033
    
    
    
    7,417AA
    
    
    18,959
    
    
    
    18,639A
    
    
    10,329
    
    
    
    11,023BBB
    
    
    4,801
    
    
    
    2,970BB
    
    
    1,408
    
    
    
    325B
    
    
    97
    
    
    
    11Total
    
    
    46,627
    
    
    
    40,385
  Market risk in Global Banking & Markets and Corporate Banking
  Managing market risk in Global Banking & Markets
   Short-term liquid market risk
 Structural market risk
 44




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##### Table of Contents



Business and Financial Review
 Risk Management continued
    Trading Risk
     Actual Exposure at 31 December2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mGroup trading instrumentsInterest rate risks
    
    
    3.0
    
    
    
    1.7
    
    
    
    1.5Equity risks
    
    
    2.2
    
    
    
    2.9
    
    
    
    2.7Spread risks
    
    
    1.9
    
    
    
    0.7
    
    
    
    2.1Other
risks(1)
    
    
    3.7
    
    
    
    1.7
    
    
    
    2.0Correlation
offsets(2)
    
    
    (2.3)
    
    
    
    (1.6)
    
    
    
    (1.6)Total correlated one-day Value at Risk
    
    
    8.5
    
    
    
    5.4
    
    
    
    6.7
 Exposure for the year ended 31 DecemberAverage exposure
    
    
    Highest exposure
    
    
    Lowest exposure2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mGroup trading instrumentsInterest rate risks
    
    
    1.7
    
    
    
    1.8
    
    
    
    2.1
    
    
    
    3.7
    
    
    
    2.7
    
    
    
    3.0
    
    
    
    0.9
    
    
    
    1.2
    
    
    
    1.4Equity risks
    
    
    2.4
    
    
    
    2.7
    
    
    
    3.5
    
    
    
    3.7
    
    
    
    3.9
    
    
    
    5.2
    
    
    
    1.6
    
    
    
    2.0
    
    
    
    2.0Spread risks
    
    
    0.9
    
    
    
    1.6
    
    
    
    1.7
    
    
    
    2.0
    
    
    
    2.3
    
    
    
    2.1
    
    
    
    0.4
    
    
    
    0.7
    
    
    
    1.4Other
risks(1)
    
    
    2.6
    
    
    
    1.9
    
    
    
    2.1
    
    
    
    3.8
    
    
    
    2.4
    
    
    
    2.6
    
    
    
    1.5
    
    
    
    1.6
    
    
    
    1.9Correlation
offsets(2)
    
    
    (1.6)
    
    
    
    (1.7)
    
    
    
    (1.8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total correlated one-day Value at Risk
    
    
    6.0
    
    
    
    6.3
    
    
    
    7.6
    
    
    
    8.8
    
    
    
    7.4
    
    
    
    9.9
    
    
    
    4.1
    
    
    
    5.1
    
    
    
    5.6
 (1)
    
    Other risks include foreign exchange risk and property risk.(2)
    
    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.
 Derivatives held for Trading Purposes
  >
    
    marketing derivatives to end users and hedging the resulting exposures efficiently; and>
    
    the management of trading exposure reflected on the Groups balance sheet.
  45




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##### Table of Contents



Business and Financial Review
 Risk Management Continued
 Credit Derivatives
    Residual value risk
   Impact of the Current Credit Environment
  Investing activities
 Protected exposures
  Structured Investment Vehicles
  Corporate Investment Portfolio
  Lending Activities
  Exposure to Off Balance Sheet Entities sponsored by the Group
  Risk Management in Wealth Management
 Credit risk
  46




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##### Table of Contents



Business and Financial Review
 Risk Management Continued
 Cater Allen estimated exposure
  2007
    
    
    2006£m
    
    
    £mLoans and advances to customers
    
    
    3.7
    
    
    
    4.1Other
    
    
    0.3
    
    
    
    0.3Third party exposures
    
    
    4.0
    
    
    
    4.4
 Abbey International
  >
    
    adverse movements in interest rates where the interest paid to the depositor is higher that
the market rate. The most significant market risk is yield curve risk. This yield curve risk
mitigated by re-pricing variable rate deposits; and
 >
    
    currency risk emanating from taking deposits in non-sterling currencies such as US dollars
and euro. This is hedged through forward foreign exchange contracts and cross currency and
foreign exchange swaps.
 James Hay
  Abbey Sharedealing
  Market risk
  Managing market risk
  Liquidity risk
  Liquidity
risk  current market conditions
  47




---



##### Table of Contents



Business and Financial Review
 Risk Management Continued
 Managing liquidity risk
       >
    
    the Treasurer, Head of Asset and Liability Management, is responsible
for the rapid assessment of the implications of a sudden, unexpected
event on the day-to-day liquidity of Abbey, and for the decision to
activate the Liquidity Contingency Plan; and>
    
    the liquidity crisis management team, under the chairmanship of the
Chief Financial Officer, is the decision-making authority in the
event of a liquidity crisis, and is responsible for implementing the
Liquidity Contingency Plan.
 Liquidity risk measurement
    Securitisation of assets
  48




---



##### Table of Contents



Business and Financial Review
 Risk Management Continued
 Maturities of financial liabilities
  GroupAt 31 December 2007
    
    
    Demand
    
    
    Up to 3
    
    
    3-12
    
    
    1-5
    
    
    Over 5months
    
    
    months
    
    
    years
    
    
    years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDeposits by banks
    
    
    416
    
    
    
    7,318
    
    
    
    257
    
    
    
    
    
    
    
    
    
    
    
    7,991Deposits by customers
    
    
    55,766
    
    
    
    8,541
    
    
    
    3,668
    
    
    
    1,920
    
    
    
    166
    
    
    
    70,061Derivative financial instruments
    
    
    3
    
    
    
    502
    
    
    
    731
    
    
    
    4,855
    
    
    
    10,891
    
    
    
    16,982Trading liabilities
    
    
    21,069
    
    
    
    28,973
    
    
    
    2,931
    
    
    
    1,409
    
    
    
    1,515
    
    
    
    55,897Financial liabilities designated at fair value
    
    
    
    
    
    
    1,598
    
    
    
    2,111
    
    
    
    3,647
    
    
    
    1,800
    
    
    
    9,156Debt securities in issue
    
    
    
    
    
    
    8,696
    
    
    
    2,437
    
    
    
    8,433
    
    
    
    47,619
    
    
    
    67,185Other borrowed funds
    
    
    
    
    
    
    56
    
    
    
    80
    
    
    
    424
    
    
    
    3,394
    
    
    
    3,954Subordinated liabilities
    
    
    
    
    
    
    194
    
    
    
    223
    
    
    
    1,820
    
    
    
    5,456
    
    
    
    7,693Total financial liabilities
    
    
    77,254
    
    
    
    55,878
    
    
    
    12,438
    
    
    
    22,508
    
    
    
    70,841
    
    
    
    238,919
 CompanyAt 31 December 2007
    
    
    Demand
    
    
    Up to 3
    
    
    3-12
    
    
    1-5
    
    
    Over 5months
    
    
    months
    
    
    years
    
    
    years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDeposits by banks
    
    
    2,060
    
    
    
    14,635
    
    
    
    8,897
    
    
    
    36,497
    
    
    
    6,444
    
    
    
    68,533Deposits by customers
    
    
    52,806
    
    
    
    7,332
    
    
    
    4,090
    
    
    
    10,088
    
    
    
    33,978
    
    
    
    108,294Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94
    
    
    
    2,658
    
    
    
    2,752Debt securities in issue
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Other borrowed funds
    
    
    
    
    
    
    45
    
    
    
    46
    
    
    
    245
    
    
    
    1,280
    
    
    
    1,616Subordinated liabilities
    
    
    
    
    
    
    205
    
    
    
    257
    
    
    
    1,999
    
    
    
    7,570
    
    
    
    10,031Total financial liabilities
    
    
    54,866
    
    
    
    22,221
    
    
    
    13,290
    
    
    
    48,923
    
    
    
    51,930
    
    
    
    191,230
 GroupAt 31 December 2006
    

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

    Demand
    
    
    Up to 3
    
    
    3-12
    
    
    1-5
    
    
    Over 5months
    
    
    months
    
    
    years
    
    
    years
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mDeposits by banks
    
    
    3,487
    
    
    
    22,937
    
    
    
    2,377
    
    
    
    27,905
    
    
    
    4,417
    
    
    
    61,123Deposits by customers
    
    
    55,765
    
    
    
    3,944
    
    
    
    1,617
    
    
    
    4,060
    
    
    
    14,718
    
    
    
    80,104Derivative financial instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    1,742
    
    
    
    1,834Debt securities in issue
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    4Other borrowed funds
    
    
    
    
    
    
    
    
    
    
    255
    
    
    
    
    
    
    
    830
    
    
    
    1,085Subordinated liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    710
    
    
    
    4,511
    
    
    
    5,221Total financial liabilities
    
    
    59,252
    
    
    
    26,881
    
    
    
    4,253
    
    
    
    32,767
    
    
    
    26,218
    
    
    
    149,371
 Pension obligation risk
  Risk management
  49




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##### Table of Contents



Report of the Directors
 
 Directors
 Board of DirectorsAs at 31 December 2007
 Chairman
 Lord Burns
  Executive directors
 António Horta-Osório
Chief Executive
  Nathan Bostock  Chief Financial Officer and Executive Director, Retail Products & Marketing, Human Resources, Credit Cards and Insurance
  Miguel BragançaExecutive Director, Retail Products and Marketing (until 2 January 2008)
  50




---



##### Table of Contents



Report of the Directors
 Directors continued
 Non-Executive Directors
 Juan Rodríguez Inciarte
Deputy Chairman
   José María Carballo
   José María Fuster
   Andrew Longhurst
   Jorge Morán
   51




---



##### Table of Contents



Report of the Directors
 Directors continued
 Rosemary Thorne
   Keith Woodley
   Appointments post 31 December 2007
 Executive Directors
 Alison Brittain
 Executive
Director, Retail Distribution
  Non-Executive Directors
 Miguel Bragança
  Auditors
 52




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##### Table of Contents



Report of the Directors
 
 Directors Report
 Corporate Structure
   Principal activities and business review
  Further information on the development and performance of the business of the Group, both at a
consolidated level and analysed by division can be found in the following sections:
 >
    
    An analysis of the Groups development and performance during the year is contained in the
Business Review  Summary on pages 8 to 11.>
    
    A further detailed analysis of the Personal Financial Services division is contained in the
Business Review  Personal Financial Services on pages 12 to 18.>
    
    Further analyses of the Sold Life Businesses and the Portfolio Business Unit are contained in
the Business Review  Sold Life Businesses and Portfolio Business Unit on page 19.
 Further information on the position of the Group at the end of the year can be found in the following sections:
 >
    
    An analysis of the Personal Financial Services business flows is contained in the Business
Review  Personal Financial Services on pages 13 and 14.>
    
    The Balance Sheet Business Review can be found on pages 22 to 32, including a review of capital
management and resources on page 31, details of capital expenditure on page 26, off balance
sheet arrangements on page 29, liquidity on pages 29 and 30, and contractual obligations on page
30.>
    
    The Groups key performance indicators are described in
the Business Review  Summary on page 11.
  Results and dividends
  Directors
     53




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##### Table of Contents



Report of the Directors
 Directors Report continued
 Committees of the Board
  Audit and Risk Committee
    Remuneration Committee
  Directors remuneration
  £Salaries and fees
    
    
    2,320,563Performance-related payments
    
    
    5,676,331Other taxable benefits
    
    
    5,976Total remuneration excluding pension contributions
    
    
    8,002,870Pension contributions
    
    
    Compensation for loss of office
    
    
    
  Medium-Term Incentive Plan
  54




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##### Table of Contents



Report of the Directors
 Directors Report continued
  Long-Term Incentive Plan
  Remuneration of Highest Paid Director
  Retirement Benefits
  Non-Executive Directors
  Directors Interests and Related Party Transactions
   Third Party Indemnities
  Financial Instruments
  Pension Funds
    55




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##### Table of Contents



Report of the Directors
 Directors Report continued
    Market Value of Land and Buildings
  Disability
  Employee Involvement  Employee share ownership
   th
 Communication
  Consultation
  Donations
  Political contributions
  Suppliers
  56




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##### Table of Contents



Report of the Directors
 Directors Report continued
 Policy and practice on payment of creditors
  Code of ethics
  >
    
    Employees should raise concerns if they become aware that ethical policies and principles are not being followed;>
    
    Abbey values all employees as individuals and treats them as partners in the business;>
    
    Abbey treats customers fairly and delivers what it promises;>
    
    Abbey considers ethical and environmental concerns when investing Abbey assets;>
    
    Abbey is committed to adopting sound environmental management practices; and>
    
    Abbey expects suppliers to operate to high ethical standards.
   Going concern
  Disclosure controls and procedures (Sarbanes-Oxley Act 2002)
  Managements report on internal control over financial reporting
  >
    
    Policies and procedures that relate to the maintenance of records
that fairly and accurately reflect the transactions and disposition
of assets.>
    
    Controls providing reasonable assurance that transactions are
recorded as necessary to permit the preparation of financial
statements in accordance with IFRS, and that receipts and
expenditures are being made only as authorised by management.>
    
    Controls providing reasonable assurance regarding prevention or
timely detection of unauthorised acquisition, use or disposition of
assets that could have a material effect on the financial statements.
  57




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##### Table of Contents



Report of the Directors
 Directors Report continued
   Relevant Audit Information
  >
    
    so far as the Director is aware, there is no relevant audit information of which Abbeys auditors are unaware; and>
    
    the Director has taken all steps that he/she ought to have taken as a Director to make himself/herself aware of
any relevant audit information and to establish that Abbeys auditors are aware of that information.
  Statement of Directors Responsibilities
    >
    
    properly select and apply accounting policies;>
    
    present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;>
    
    provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events and conditions on the entitys financial position and
financial performance; and>
    
    make an assessment of the companys ability to continue as a going concern.
   Auditors
  By order of the Board
 
 
  58




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##### Table of Contents



Report of the Directors
 
 Supervision and Regulation
  UK
     European Union
 ,
 Regulatory Developments
  >
    
    The Scheme arrangements;>
    
    The changes to consumer credit regulation;>
    
    Capital adequacy and liquidity arrangements; and>
    
    Conduct of business arrangements such as those resulting from the Markets in Financial Instruments Directive
 Basel II
   59




---



##### Table of Contents



Financial Statements
 Contents to Financial Statements
 Financial Statements62
    
    Report of
Independent Registered Public Accounting Firm  US opinion63
    
    Consolidated Income Statement for the years ended 31 December 2007, 2006 and 200564
    
    Consolidated Balance Sheet as at 31 December 2007 and 200665
    
    Consolidated Statement of Recognised Income and Expense for the years ended 31
December 2007, 2006 and 200565
    
    Consolidated Cash Flow Statement for the years ended 31 December 2007, 2006 and 200566
    
    Company Balance Sheet as at 31 December 2007 and 200667
    
    Company Statement of Recognised Income and Expense for the years ended 31 December
2007, 2006, and 200567
    
    Company Cash Flow Statement for the years ended 31 December 2007, 2006 and 200568
    
    Accounting
Policies83
    
    Notes to the
Financial Statements
 60




---



##### Table of Contents



Financial Statements
  61




---



##### Table of Contents



Financial Statements
 
 Report of Independent Registered Public Accounting Firm
 To the Board of Directors and Shareholder of Abbey National plc
    
 Deloitte & Touche LLP
 62




---



##### Table of Contents



Financial Statements
 
 Consolidated Income Statement
  2007
    
    
    2006
    
    
    2005Notes
    
    
    £m
    
    
    £m
    
    
    £mInterest and similar income
    
    
    2
    
    
    
    7,043
    
    
    
    5,644
    
    
    
    5,419Interest expense and similar charges
    
    
    2
    
    
    
    (5,544)
    
    
    
    (4,416)
    
    
    
    (4,247)Net interest income
    
    
    
    
    
    
    1,499
    
    
    
    1,228
    
    
    
    1,172Fee and commission income
    
    
    3
    
    
    
    785
    
    
    
    789
    
    
    
    751Fee and commission expense
    
    
    3
    
    
    
    (90)
    
    
    
    (90)
    
    
    
    (107)Net fee and commission income
    
    
    
    
    
    
    695
    
    
    
    699
    
    
    
    644Dividend income
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    1Net trading income
    
    
    
    
    
    
    260
    
    
    
    408
    
    
    
    471Other operating income, net
    
    
    4
    
    
    
    327
    
    
    
    134
    
    
    
    67Total operating income
    
    
    
    
    
    
    2,782
    
    
    
    2,470
    
    
    
    2,355Administration expenses
    
    
    5
    
    
    
    (1,369)
    
    
    
    (1,420)
    
    
    
    (1,577)Depreciation and amortisation
    
    
    6
    
    
    
    (205)
    
    
    
    (215)
    
    
    
    (195)Total operating expenses excluding provisions and charges
    
    
    
    
    
    
    (1,574)
    
    
    
    (1,635)
    
    
    
    (1,772)Impairment losses on loans and advances
    
    
    8
    
    
    
    (344)
    
    
    
    (344)
    
    
    
    (218)Provisions for other liabilities and charges
    
    
    
    
    
    
    
    
    
    
    (63)
    
    
    
    (3)Total operating provisions and charges
    
    
    
    
    
    
    (344)
    
    
    
    (407)
    
    
    
    (221)Profit on continuing operations before tax
    
    
    
    
    
    
    864
    
    
    
    428
    
    
    
    362Tax on profit on continuing operations
    
    
    9
    
    
    
    (179)
    
    
    
    (115)
    
    
    
    (108)Profit for the year from continuing operations
    
    
    
    
    
    
    685
    
    
    
    313
    
    
    
    254(Loss)/ profit for the year from discontinued operations
    
    
    11
    
    
    
    
    
    
    
    (245)
    
    
    
    166Profit for the year
    
    
    
    
    
    
    685
    
    
    
    68
    
    
    
    420Attributable to:Equity holders of the parent
    
    
    
    
    
    
    685
    
    
    
    68
    
    
    
    420
 
 63




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##### Table of Contents



Financial Statements
 
 Consolidated Balance Sheet
  2007
    
    
    2006Notes
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    12
    
    
    
    1,038
    
    
    
    888Trading assets
    
    
    13
    
    
    
    56,427
    
    
    
    62,314Derivative financial instruments
    
    
    14
    
    
    
    9,951
    
    
    
    8,336Financial assets designated at fair value
    
    
    15
    
    
    
    11,783
    
    
    
    8,713Loans and advances to banks
    
    
    16
    
    
    
    3,441
    
    
    
    2,242Loans and advances to customers
    
    
    17
    
    
    
    112,147
    
    
    
    103,146Available for sale securities
    
    
    19
    
    
    
    40
    
    
    
    23Macro hedge of interest rate risk
    
    
    
    
    
    
    217
    
    
    
    Investment in associated undertakings
    
    
    21
    
    
    
    29
    
    
    
    22Intangible assets
    
    
    22
    
    
    
    90
    
    
    
    90Property, plant and equipment
    
    
    23
    
    
    
    528
    
    
    
    415Operating lease assets
    
    
    24
    
    
    
    2,164
    
    
    
    2,082Current tax assets
    
    
    
    
    
    
    197
    
    
    
    223Deferred tax assets
    
    
    25
    
    
    
    665
    
    
    
    804Other assets
    
    
    26
    
    
    
    906
    
    
    
    2,507Total assets
    
    
    
    
    
    
    199,623
    
    
    
    191,805LiabilitiesDeposits by banks
    
    
    27
    
    
    
    7,923
    
    
    
    6,656Deposits by customers
    
    
    28
    
    
    
    69,650
    
    
    
    66,519Derivative financial instruments
    
    
    14
    
    
    
    9,931
    
    
    
    10,218Trading liabilities
    
    
    29
    
    
    
    54,916
    
    
    
    57,604Financial liabilities designated at fair value
    
    
    30
    
    
    
    7,538
    
    
    
    8,151Debt securities in issue
    
    
    31
    
    
    
    35,712
    
    
    
    28,998Other borrowed funds
    
    
    32
    
    
    
    1,419
    
    
    
    1,655Subordinated liabilities
    
    
    33
    
    
    
    4,732
    
    
    
    5,020Macro hedge of interest rate risk
    
    
    
    
    
    
    
    
    
    
    174Other liabilities
    
    
    34
    
    
    
    2,337
    
    
    
    1,616Provisions
    
    
    35
    
    
    
    131
    
    
    
    180Current tax liabilities
    
    
    
    
    
    
    369
    
    
    
    300Deferred tax liabilities
    
    
    25
    
    
    
    544
    
    
    
    564Retirement benefit obligations
    
    
    36
    
    
    
    979
    
    
    
    1,034Total liabilities
    
    
    
    
    
    
    196,181
    
    
    
    188,689EquityShare capital
    
    
    38
    
    
    
    148
    
    
    
    148Share premium account
    
    
    38
    
    
    
    1,857
    
    
    
    1,857Retained earnings
    
    
    39
    
    
    
    1,339
    
    
    
    1,1113,344
    
    
    
    3,116Minority interest
    
    
    39
    
    
    
    98
    
    
    
    Total shareholders equity
    
    
    
    
    
    
    3,442
    
    
    
    3,116Total liabilities and equity
    
    
    
    
    
    
    199,623
    
    
    
    191,805
   
 
 64




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##### Table of Contents



Financial Statements
 
 Consolidated Statement of Recognised Income and Expense
  2007
    
    
    2006
    
    
    2005Notes
    
    
    £m
    
    
    £m
    
    
    £mActuarial gains/(losses) on defined benefit pension plans
    
    
    36
    
    
    
    (113)
    
    
    
    219
    
    
    
    (154)Gains on available for sale securities
    
    
    
    
    
    
    19
    
    
    
    1
    
    
    
    Gains on available for sale securities transferred to profit or loss on sale
    
    
    
    
    
    
    (1)
    
    
    
    
    
    
    
    Exchange differences on translation of foreign operations
    
    
    
    
    
    
    (1)
    
    
    
    (9)
    
    
    
    3Tax on items taken directly to equity
    
    
    
    
    
    
    9
    
    
    
    (66)
    
    
    
    46Net gain/(loss) recognised directly in equity
    
    
    
    
    
    
    (87)
    
    
    
    145
    
    
    
    (105)Profit for the year
    
    
    
    
    
    
    685
    
    
    
    68
    
    
    
    420Total recognised income and expense for the year
    
    
    
    
    
    
    598
    
    
    
    213
    
    
    
    315Effect of changes in accounting policyIFRS transition adjustments at 1 January 2005:Retained earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (293)598
    
    
    
    213
    
    
    
    22Attributable to:Equity holders of the parent
    
    
    
    
    
    
    598
    
    
    
    213
    
    
    
    22
 
 Consolidated Cash Flow Statement
  2007
    
    
    2006
    
    
    2005Notes
    
    
    £m
    
    
    £m
    
    
    £mNet cash flow used in operating activitiesProfit for the year
    
    
    
    
    
    
    685
    
    
    
    68
    
    
    
    420Adjustments for:Non cash items included in net profit
    
    
    
    
    
    
    1,307
    
    
    
    1,125
    
    
    
    273Change in operating assets
    
    
    
    
    
    
    (12,411)
    
    
    
    (9,636)
    
    
    
    (11,541)Change in operating liabilities
    
    
    
    
    
    
    (785)
    
    
    
    (3,387)
    
    
    
    3,645Income taxes paid
    
    
    
    
    
    
    (5)
    
    
    
    (60)
    
    
    
    (132)Effects of exchange rate differences
    
    
    
    
    
    
    396
    
    
    
    (1,196)
    
    
    
    80Net cash flow used in operating activities
    
    
    40
    
    
    
    (10,813)
    
    
    
    (13,086)
    
    
    
    (7,255)Net cash flows (used in)/from investing activitiesDividends received from associates
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Investment in associates
    
    
    
    
    
    
    (8)
    
    
    
    (1)
    
    
    
    (5)Disposal of subsidiaries, net of cash disposed
    
    
    40
    
    
    
    5
    
    
    
    244
    
    
    
    845Disposal of non-controlling interest in subsidiaries
    
    
    
    
    
    
    203
    
    
    
    
    
    
    
    Purchase of tangible and intangible fixed assets
    
    
    
    
    
    
    (407)
    
    
    
    (230)
    
    
    
    (329)Proceeds from sale of tangible and intangible fixed assets
    
    
    
    
    
    
    8
    
    
    
    5
    
    
    
    190Proceeds from sale of investment properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,332Sale/(purchase) of non-dealing securities
    
    
    
    
    
    
    3
    
    
    
    (9)
    
    
    
    (2)Net cash flow (used in)/from investing activities
    
    
    
    
    
    
    (196)
    
    
    
    12
    
    
    
    2,034Net cash flow from financing activitiesIssue of loan capital
    
    
    
    
    
    
    13,363
    
    
    
    10,778
    
    
    
    4,351Repayment of loan capital
    
    
    
    
    
    
    (8,587)
    
    
    
    (8,813)
    
    
    
    (2,925)Dividends paid
    
    
    
    
    
    
    
    
    
    
    (207)
    
    
    
    Net cash flow from financing activities
    
    
    
    
    
    
    4,776
    
    
    
    1,758
    
    
    
    1,426Net decrease in cash and cash equivalents
    
    
    
    
    
    
    (6,233)
    
    
    
    (11,316)
    
    
    
    (3,795)Cash and cash equivalents at beginning of the year
    
    
    
    
    
    
    (3,847)
    
    
    
    8,241
    
    
    
    11,259Effects of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (725)
    
    
    
    (772)
    
    
    
    777Cash and cash equivalents at the end of the year
    
    
    
    
    
    
    (10,805)
    
    
    
    (3,847)
    
    
    
    8,241
 
 65




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##### Table of Contents



Financial Statements
 
 Company Balance Sheet
  2007
    
    
    2006Notes
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    12
    
    
    
    1,032
    
    
    
    888Derivative financial instruments
    
    
    14
    
    
    
    689
    
    
    
    646Financial assets designated at fair value
    
    
    15
    
    
    
    7,500
    
    
    
    66Loans and advances to banks
    
    
    16
    
    
    
    40,685
    
    
    
    41,711Loans and advances to customers
    
    
    17
    
    
    
    110,976
    
    
    
    103,249Available for sale securities
    
    
    19
    
    
    
    28
    
    
    
    12Investment in associated undertakings
    
    
    21
    
    
    
    33
    
    
    
    25Investment in subsidiary undertakings
    
    
    20
    
    
    
    5,053
    
    
    
    4,926Property, plant and equipment
    
    
    23
    
    
    
    501
    
    
    
    395Current tax asset
    
    
    
    
    
    
    190
    
    
    
    192Deferred tax assets
    
    
    25
    
    
    
    620
    
    
    
    747Other assets
    
    
    26
    
    
    
    686
    
    
    
    744Total assets
    
    
    
    
    
    
    167,993
    
    
    
    153,601LiabilitiesDeposits by banks
    
    
    27
    
    
    
    59,798
    
    
    
    61,123Deposits by customers
    
    
    28
    
    
    
    95,687
    
    
    
    80,104Derivative financial instruments
    
    
    14
    
    
    
    1,051
    
    
    
    681Debt securities in issue
    
    
    31
    
    
    
    
    
    
    
    4Other borrowed funds
    
    
    32
    
    
    
    834
    
    
    
    1,082Subordinated liabilities
    
    
    33
    
    
    
    5,352
    
    
    
    5,563Macro hedge of interest rate risk
    
    
    
    
    
    
    3
    
    
    
    6Other liabilities
    
    
    34
    
    
    
    1,452
    
    
    
    1,027Provisions
    
    
    35
    
    
    
    100
    
    
    
    157Current tax liabilities
    
    
    
    
    
    
    137
    
    
    
    122Deferred tax liabilities
    
    
    25
    
    
    
    6
    
    
    
    Retirement benefit obligations
    
    
    36
    
    
    
    982
    
    
    
    1,033Total liabilities
    
    
    
    
    
    
    165,402
    
    
    
    150,902EquityShare capital
    
    
    38
    
    
    
    148
    
    
    
    148Share premium account
    
    
    38
    
    
    
    1,857
    
    
    
    1,857Retained earnings
    
    
    39
    
    
    
    586
    
    
    
    694Total shareholders equity
    
    
    
    
    
    
    2,591
    
    
    
    2,699Total liabilities and equity
    
    
    
    
    
    
    167,993
    
    
    
    153,601
   
 
 66




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##### Table of Contents



Financial Statements
 
 Company Statement of Recognised Income and Expense
  2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mActuarial gains/(losses) on defined benefit pension plans
    
    
    (116)
    
    
    
    180
    
    
    
    (152)Gains on available for sale securities
    
    
    18
    
    
    
    
    
    
    
    Gains on available for sale securities transferred to profit or loss on sale
    
    
    (1)
    
    
    
    
    
    
    
    Tax on items taken directly to equity
    
    
    10
    
    
    
    (54)
    
    
    
    46Net gain/(loss) recognised directly in equity
    
    
    (89)
    
    
    
    126
    
    
    
    (106)Profit/(loss) for the year
    
    
    351
    
    
    
    (128)
    
    
    
    691Total recognised income and expense for the year
    
    
    262
    
    
    
    (2)
    
    
    
    585Effect of changes in accounting policyIFRS transition adjustments at 1 January 2005:Retained earnings
    
    
    
    
    
    
    
    
    
    
    (332)262
    
    
    
    (2)
    
    
    
    253Attributable to:Equity holders of the parent
    
    
    262
    
    
    
    (2)
    
    
    
    253
 
 Company Cash Flow Statement
  2007
    
    
    Restated(1)
2006
    
    
    2005Notes
    
    
    £m
    
    
    £m
    
    
    £mNet cash flow from/(used in) operating activitiesProfit/(loss) for the year
    
    
    
    
    
    
    351
    
    
    
    (128)
    
    
    
    691Adjustments for:Non cash items included in net profit
    
    
    
    
    
    
    446
    
    
    
    251
    
    
    
    (108)Change in operating assets
    
    
    
    
    
    
    (8,761)
    
    
    
    (19,662)
    
    
    
    (8,338)Change in operating liabilities
    
    
    
    
    
    
    24,391
    
    
    
    10,720
    
    
    
    1,938Income taxes (paid)/received
    
    
    
    
    
    
    48
    
    
    
    56
    
    
    
    (8)Effects of exchange rate differences
    
    
    
    
    
    
    
    
    
    
    (108)
    
    
    
    122Net cash flow from/(used in) operating activities
    
    
    40
    
    
    
    16,475
    
    
    
    (8,871)
    
    
    
    (5,703)Cash flows from/(used) in investing activitiesIncrease in investment in subsidiaries
    
    
    
    
    
    
    (418)
    
    
    
    (54)
    
    
    
    Investment in associates
    
    
    
    
    
    
    (8)
    
    
    
    (1)
    
    
    
    (5)Disposal of subsidiaries, net of cash disposed
    
    
    
    
    
    
    415
    
    
    
    3,751
    
    
    
    Disposal of non-controlling interest in subsidiary
    
    
    
    
    
    
    203
    
    
    
    
    
    
    
    Pre-acquisition dividends
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    Purchase of tangible and intangible fixed assets
    
    
    
    
    
    
    (181)
    
    
    
    (179)
    
    
    
    (185)Proceeds from sale of tangible and intangible fixed assets
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    56Purchase of non-dealing securities
    
    
    
    
    
    
    
    
    
    
    (9)
    
    
    
    (3)Proceeds from sale and redemption of non-dealing securities
    
    
    
    
    
    
    3
    
    
    
    269
    
    
    
    178Net cash flow from investing activities
    
    
    
    
    
    
    14
    
    
    
    3,977
    
    
    
    41Cash flows from/(used in) financing activitiesIssue of loan capital
    
    
    
    
    
    
    65
    
    
    
    
    
    
    
    554Repayment of loan capital
    
    
    
    
    
    
    (641)
    
    
    
    (1,032)
    
    
    
    (458)Dividends paid
    
    
    
    
    
    
    
    
    
    
    (207)
    
    
    
    Net cash flows from/(used in) financing activities
    
    
    
    
    
    
    (576)
    
    
    
    (1,239)
    
    
    
    96Net increase/(decrease) in cash and cash equivalents
    
    
    
    
    
    
    15,913
    
    
    
    (6,133)
    
    
    
    (5,566)Cash and cash equivalents at beginning of the year
    
    
    
    
    
    
    (21,217)
    
    
    
    (15,084)
    
    
    
    (9,518)Cash and cash equivalents at the end of the year
    
    
    
    
    
    
    (5,304)
    
    
    
    (21,217)
    
    
    
    (15,084)
 (1)
    
    A description of the restatement can be found in the Accounting policies on page 77.
  67




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Financial Statements
 
 Accounting Policies
 International Financial Reporting Standards
   Recent Developments
  a)
    
    The amendment to International Accounting Standard (IAS) 1 Capital Management which
requires that certain disclosures are made regarding the entitys objectives, policies and
processes for managing capital. The Groups capital management disclosures can be found in
Note 47 to the Consolidated Financial Statements on page 122.b)
    
    IFRIC 9 Reassessment of Embedded Derivatives which requires that there should be no
reassessment of whether an embedded derivative should be separated from the host contract
after initial recognition, unless there have been changes to the contract. The adoption of
IFRIC 9 had no impact on the Groups profit or loss or financial position. The Groups
accounting policy for embedded derivatives can be found on page 72.c)
    
    IFRIC 10 Interim Financial Reporting which requires that an impairment loss recognised in
an interim period on goodwill, investment in equity instruments and financial assets carried
at cost, is not reversed. The Groups accounting policy for impairment can be found on pages
73 and 74.d)
    
    Early adopted IFRS 8 Operating Segments for its consolidated financial statements. IFRS 8
requires a segmental analysis based on information used by management. The Groups segmental
disclosures can be found in Note 1 to the Consolidated Financial Statements on pages 83 to 86.
  Future Developments
  a)
    
    IAS 23 Borrowing Costs  On 29 March 2007, the IASB issued an amendment to IAS 23
Borrowing costs which removes the option to expense borrowing costs incurred during the
acquisition, construction or production of a qualifying asset. The Group does not expect the
adoption of the amendment to IAS 23 to have a material impact on the Groups profit or loss or
financial position. The amendment to IAS 23 is effective for periods beginning on or after 1
January 2009.b)
    
    IAS 1 Presentation of Financial Statements  On 6 September 2007, the IASB issued an
amendment to IAS 1 Presentation of Financial Statements which changes the way in which
non-owner changes in equity are required to be presented. It also changes the titles of
primary financial statements as they will be referred to in IFRS but does not require that
these be renamed in an entitys financial statements. The Group does not expect the adoption
of the amendment to IAS 1 to have an impact on the financial statements. The amendment to IAS
1 is effective for periods beginning on or after 1 January 2009.c)
    
    IFRS 3 Business Combinations  On 10 January 2008, the IASB issued an amendment to IFRS 3
Business Combinations which clarifies and changes certain elements of accounting for a
business combination, including measurement of contingent consideration, step acquisition and
intangible assets and also widens the scope of this standard. There are also associated
amendments to IAS 27, IAS 28 and IAS 31. The amendment to IFRS 3 is effective for periods
beginning on or after 1 July 2009.d)
    
    IFRIC 11 IFRS 2  Group and Treasury Share Transactions  On 30 November 2006 IFRIC issued
IFRIC 11 which requires that treasury share transactions are treated as equity-settled, and
share-based payments involving equity instruments of the parent should be treated as
equity-settled where the obligation is from the parent to the employee and cash-settled when
the obligation is from the subsidiary to the employee. This is consistent with the Groups
current practice therefore the Group does not expect the adoption of IFRIC 11 to have a
material impact on the Groups profit or loss or financial position. IFRIC 11 is effective for
annual periods beginning on or after 1 March 2007.e)
    
    IFRIC 14 IAS 19  The Asset Ceiling  On 5 July 2007 IFRIC issued IFRIC 14 which clarifies
the effect of minimum funding requirements on the recognition of a defined benefit asset. The
Group does not expect the adoption of IFRIC 14 to have a material impact on the Groups profit
or loss or financial position. IFRIC 14 is effective for annual periods beginning on or after
1 January 2008.
 Basis of preparation
  68




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Financial Statements
 Accounting Policies continued
 Consolidation
       Foreign currency translation
    Revenue recognition
     69




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##### Table of Contents



Financial Statements
 Accounting Policies continued
    Pensions and other post retirement benefits
    Share-based payments
   70




---



##### Table of Contents



Financial Statements
 Accounting Policies continued
  Goodwill and other intangible assets
   Property, plant and equipment
   Owner-occupied properties
    
    Not exceeding 50 yearsOffice fixtures and equipment
    
    3 to 10 yearsComputer software
    
    3 - 7 years
 Financial assets
          71




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##### Table of Contents



Financial Statements
 Accounting Policies continued
    Regular way purchases of financial assets
  Offsetting financial assets and liabilities
  Sale and repurchase agreements (including stock borrowing and lending)
  Derivative financial instruments
    Hedge accounting
   72




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##### Table of Contents



Financial Statements
 Accounting Policies continued
    Securitisation transactions
  Impairment of financial assets
           73




---



##### Table of Contents



Financial Statements
 Accounting Policies continued
 The emergence period
         Impairment of non-financial assets
   Leases
 
  74




---



##### Table of Contents



Financial Statements
 Accounting Policies continued
 Insurance
        
             75




---



##### Table of Contents



Financial Statements
 Accounting Policies continued
                      Income taxes, including deferred income taxes
   76




---



##### Table of Contents



Financial Statements
 Accounting Policies continued
    Cash and cash equivalents
   Financial liabilities
    Borrowings
   Share capital
  Provisions
   77




---



##### Table of Contents



Financial Statements
 Accounting Policies continued
   Financial guarantee contracts
  Dividends
  Critical accounting policies and areas of significant management judgement
  (a) Provisions for loans and advances
      78




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##### Table of Contents



Financial Statements
 Accounting Policies continued
 (b) Valuation of financial
instruments
 Initial measurement
  Subsequent measurement
Financial instruments valued using observable market prices
  Financial instruments valued

using a valuation technique
   Quoted
    
    Internal models based onprices in
    
    
    market
    
    
    data other
    
    
    
    
    
    Valuationactive
    
    
    observable
    
    
    than market
    
    
    
    
    
    techniqueBalance sheet category
    
    
    
    markets
    
    
    data
    
    
    observable data
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mAssetsTrading assets
    
    Loans and advances to banks
    
    
    
    
    
    
    8,847
    
    
    
    
    
    
    
    8,847
    
    
    ALoans and advances to customers
    
    
    
    
    
    
    17,255
    
    
    
    
    
    
    
    17,255
    
    
    ADebt securities
    
    
    19,118
    
    
    
    9,713
    
    
    
    
    
    
    
    28,831
    
    
    AEquity securities
    
    
    1,494
    
    
    
    
    
    
    
    
    
    
    
    1,494
    
    
    BDerivative assets
    
    Exchange rate contracts
    
    
    
    
    
    
    1,072
    
    
    
    
    
    
    
    1,072
    
    
    CInterest rate contracts
    
    
    88
    
    
    
    6,368
    
    
    
    
    
    
    
    6,456
    
    
    AEquity and credit contracts
    
    
    523
    
    
    
    1,782
    
    
    
    118
    
    
    
    2,423
    
    
    A B,C,DFinancial assets
at fair value
    
    Loans and advances to customers
    
    
    
    
    
    
    5,575
    
    
    
    126
    
    
    
    5,701
    
    
    ADebt securities
    
    
    
    
    
    
    1,693
    
    
    
    4,389
    
    
    
    6,082
    
    
    A,C,DAvailable for sale financial

assets
    
    Debt securities
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8
    
    
    AEquity securities
    
    
    12
    
    
    
    20
    
    
    
    
    
    
    
    32
    
    
    BLiabilitiesTrading liabilities
    
    Deposits by banks
    
    
    
    
    
    
    19,632
    
    
    
    
    
    
    
    19,632
    
    
    ADeposits by customers
    
    
    
    
    
    
    20,498
    
    
    
    
    
    
    
    20,498
    
    
    AShort positions in securities
    
    
    2,252
    
    
    
    
    
    
    
    
    
    
    
    2,252
    
    
    ADebt securities in issue
    
    
    
    
    
    
    12,534
    
    
    
    
    
    
    
    12,534
    
    
    ADerivative liabilities
    
    Exchange rate contracts
    
    
    
    
    
    
    1,083
    
    
    
    
    
    
    
    1,083
    
    
    CInterest rate contracts
    
    
    
    
    
    
    6,626
    
    
    
    
    
    
    
    6,626
    
    
    AEquity and credit contracts
    
    
    216
    
    
    
    1,858
    
    
    
    148
    
    
    
    2,222
    
    
    A,B,DFinancial liabilities at fair

value
    
    Debt securities in issue
    
    
    
    
    
    
    7,262
    
    
    
    276
    
    
    
    7,538
    
    
    A
 Valuation techniques
 A. Fixed income securities and
interest rate derivatives
  79




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Financial Statements
 Accounting Policies continued
  B. Equity
instruments
   C. Exchange rate
derivatives
   D. Credit derivatives
      Internal models based on information other than market data
  80




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Financial Statements
 Accounting Policies continued
 Balance
    
    Amountsheet value
    
    recognised inat 31
    
    incomeDecember
    
    inInstrument
    
    Valuation technique
    
    2007
    
    2007£m
    
    £m1. Derivative assets 
Equity and credit contracts
    
    These property derivatives are valued using a valuation model with Halifax's UK House Price Index (HPI) volatility, HPI forward growth, HPI spot rate, and mortality as inputs to derive valuations.

    
    
    

    98
    
    172. Derivative assets 
Equity and credit contracts
    
    These property derivatives are valued using a valuation model with the HPI spot rate, HPI forward growth, and HPI volatility as inputs to derive valuations.
    
    
    

    20
    
    113. Derivative assets 
Exchange rate contracts
    
    These derivatives are valued using a valuation model with interest rates, foreign exchange rates and long-dated foreign exchange volatility as inputs to derive valuations.
    
    
    

    
    
    24. FVTPL 
Loans and advances to customers
    
    These loans are valued using a valuation model with the HPI spot rate, HPI forward growth, HPI volatility, and mortality as inputs to derive valuations.
    
    
    

    126
    
    125. FVTPL 
Debt securities
    
    These debt securities are valued using a valuation model with the HPI spot rate, HPI forward growth, HPI volatility, and mortality as inputs to derive valuations
    
    
    

    268
    
    336. FVTPL 
Debt securities
    
    These prime AAA rated securities are valued using a valuation model with reference to the most relevant generic curve from a consensus pricing service, and an assumption with respect to the specific credit spread for that instrument as inputs to derive valuations.
    
    
    

    4,121
    
    687. Derivative liabilities 
Equity and credit contracts
    
    These derivatives are valued using a valuation model with the HPI spot rate, HPI forward growth, and HPI volatility as inputs to derive valuations
    
    
    

    (148)
    
    (14)8. FVTPL 
Debt securities in issue
    
    These debt securities are valued using a valuation model with interest rates, foreign exchange rates and long-dated foreign exchange volatility as inputs to derive valuations.
    
    
    

    (276)
    
    (12)
 Sensitivity analysis
  Impact on profit or loss before taxInput
    
    Assumed
    
    
    Instrument 1
    
    
    Instrument 2
    
    
    Instrument 4
    
    
    Instrument 5
    
    
    Instrument 6
    
    
    Instrument 7change
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mHPI forward growth
    
    
    1
    %
    
    
    12
    
    
    
    
    
    
    
    15
    
    
    
    14
    
    
    
    n/a
    
    
    
    (11
    )HPI volatility
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    n/a
    
    
    
    Mortality
    
    1 year
    
    
    (1
    )
    
    
    n/a
    
    
    
    (2
    )
    
    
    
    
    
    
    n/a
    
    
    
    n/aCredit spread
    
    10 basis points
     
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    11
    
    
    
    n/a
   2007
    
    2006£m
    
    £mAt 1 January
    
    18
    
    32Additions
    
    27
    
    Amortisation and
releases
    
    
    
    (14)At 31 December
    
    45
    
    18
 (c) Provisions for
misselling
   81




---



##### Table of Contents



Financial Statements
 Accounting Policies continued
    (d) Pensions
     82




---



##### Table of Contents



Financial Statements
 
 Notes to the Financial Statements
 1. Segments
  >
    
    Retail Banking>
    
    Global Banking & Markets>
    
    Corporate Banking>
    
    Wealth Management>
    
    Group Infrastructure>
    
    Sold Life Businesses>
    
    Portfolio Business Unit
    >
    
    Reorganisation and other costs Comprise

implementation costs in
relation to the strategic change and cost reduction process, as well
as certain remediation administration expenses and credit provisions.
Management needs to understand the underlying drivers of the cost
base that will remain after these exercises are complete, and does
not want this view to be clouded by these costs, which are managed
independently.>
    
    Depreciation of operating lease assets The

operating lease
businesses are managed as financing businesses and, therefore,
management needs to see the margin earned on the businesses. Residual
value risk is separately managed. As a result the depreciation is
netted against the related income.>
    
    Profit on part sale of PFS subsidiaries These

profits are excluded
from the results to allow management to understand the underlying
performance of the business. In 2007, these consisted of the profit
on the sale of 49% of James Hay, Cater Allen and Abbey Sharedealing,
and small recoveries on certain other transactions. In 2006, the
profit on the sale of the Asset Management businesses was similarly
excluded.>
    
    Hedging and certain other mark-to-market variances The Balance
Sheet and Income Statement are subject to mark-to-market volatility
including from the accounting for elements of derivatives deemed
under IFRS rules to be ineffective as hedges. Where appropriate, such
volatility is separately identified to enable management to view the
underlying performance of the business.>
    
    Capital and other charges Principally comprise
internal nominal
charges for capital invested in the Groups businesses. Management
implemented this charge to assess if capital is invested effectively.
    83




---



##### Table of Contents



Financial Statements
 Notes to the Financial
Statements continued
 a) Segmental information
 Global
    
    
    
    
    
    
    Wealth
    
    
    Group
    
    
    Sold
    
    
    PortfolioRetail
    
    
    Banking &
    
    
    Corporate
    
    
    Manage-
    
    
    Infra-
    
    
    Life
    
    
    Business
    
    
    
    
    
    
    Adjust-
    
    
    GroupBanking
    
    
    Markets
    
    
    Banking
    
    
    ment
    
    
    structure
    
    
    Businesses
    
    
    Unit
    
    
    Total
    
    
    ments
    
    
    Total2007
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,615
    
    
    
    
    
    
    
    (34)
    
    
    
    70
    
    
    
    (152)
    
    
    
    
    
    
    
    
    
    
    
    1,499
    
    
    
    
    
    
    
    1,499Non-interest income
    
    
    645
    
    
    
    260
    
    
    
    127
    
    
    
    34
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    1,116
    
    
    
    167
    
    
    
    1,283Total trading

income
    
    
    2,260
    
    
    
    260
    
    
    
    93
    
    
    
    104
    
    
    
    (102)
    
    
    
    
    
    
    
    
    
    
    
    2,615
    
    
    
    167
    
    
    
    2,782Administration expenses
    
    
    (937)
    
    
    
    (105)
    
    
    
    (30)
    
    
    
    (59)
    
    
    
    (105)
    
    
    
    
    
    
    
    
    
    
    
    (1,236)
    
    
    
    (133)
    
    
    
    (1,369)Depreciation/amortisation
    
    
    (59)
    
    
    
    (2)
    
    
    
    
    
    
    
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63)
    
    
    
    (142)
    
    
    
    (205)Total trading

expenses
    
    
    (996)
    
    
    
    (107)
    
    
    
    (30)
    
    
    
    (61)
    
    
    
    (105)
    
    
    
    
    
    
    
    
    
    
    
    (1,299)
    
    
    
    (275)
    
    
    
    (1,574)Impairment losses on
loans and advances
    
    
    (239)
    
    
    
    
    
    
    
    29
    
    
    
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (212)
    
    
    
    (132)
    
    
    
    (344)Trading profit / (loss)
before tax
    
    
    1,025
    
    
    
    153
    
    
    
    92
    
    
    
    41
    
    
    
    (207)
    
    
    
    
    
    
    
    
    
    
    
    1,104
    
    
    
    (240)
    
    
    
    864Adjust for:Reorganisation and other
costs
    
    
    (139)
    
    
    
    (6)
    
    
    
    
    
    
    
    (1)
    
    
    
    (132)
    
    
    
    
    
    
    
    
    
    
    
    (278)Profit on part sale of
PFS subsidiaries
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    
    110Hedging and certain
other mark to market
variances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72)
    
    
    
    
    
    
    
    
    
    
    
    (72)Capital and other

charges
    
    
    (81)
    
    
    
    
    
    
    
    (8)
    
    
    
    19
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    Profit/(loss) from
continuing operations
before tax
    
    
    805
    
    
    
    147
    
    
    
    89
    
    
    
    59
    
    
    
    (236)
    
    
    
    
    
    
    
    
    
    
    
    864Average number of staff
    
    
    13,269
    
    
    
    389
    
    
    
    166
    
    
    
    858
    
    
    
    221
    
    
    
    
    
    
    
    
    
    
    
    14,903Total assets
    
    
    114,306
    
    
    
    68,060
    
    
    
    9,357
    
    
    
    211
    
    
    
    7,689
    
    
    
    
    
    
    
    
    
    
    
    199,623
    
    
    
    
    
    
    
    199,623
 Impairment
    
    
    Provisions
    
    
    Profit onNet
    
    
    Non
    
    
    
    
    
    Depreciation
    
    
    losses on
    
    
    for other
    
    
    continuingInterest
    
    
    interest
    
    
    Administration
    
    
    and
    
    
    loans and
    
    
    liabilities
    
    
    ops beforeincome
    
    
    income
    
    
    expenses
    
    
    amortisation
    
    
    advances
    
    
    and charges
    
    
    taxAdjustments comprise:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mReorganisation and other

costs
    
    
    
    
    
    
    
    
    
    
    (133)
    
    
    
    (13)
    
    
    
    (132)
    
    
    
    
    
    
    
    (278)Depreciation on operating lease

assets
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    (129)
    
    
    
    
    
    
    
    
    
    
    
    Profit on part sale of PFS

subsidiaries
    
    
    
    
    
    
    110
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110Hedging and certain other mark to

market variances
    
    
    
    
    
    
    (72)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (72)
    
    
    
    167
    
    
    
    (133)
    
    
    
    (142)
    
    
    
    (132)
    
    
    
    
    
    
    
    (240)
  84




---



##### Table of Contents



Financial Statements
 Notes to the Financial
Statements continued
 Global
    
    
    
    
    
    
    Wealth
    
    
    Group
    
    
    Sold
    
    
    PortfolioRetail
    
    
    Banking &
    
    
    Corporate
    
    
    Manage-
    
    
    Infra-
    
    
    Life
    
    
    Business
    
    
    
    
    
    
    Adjust-
    
    
    GroupBanking
    
    
    Markets
    
    
    Banking
    
    
    ment
    
    
    structure
    
    
    Businesses
    
    
    Unit
    
    
    Total
    
    
    ments
    
    
    Total2006
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,466
    
    
    
    
    
    
    
    (46)
    
    
    
    62
    
    
    
    (146)
    
    
    
    
    
    
    
    
    
    
    
    1,336
    
    
    
    (108)
    
    
    
    1,228Non-interest income
    
    
    648
    
    
    
    240
    
    
    
    125
    
    
    
    32
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    1,116
    
    
    
    126
    
    
    
    1,242Total trading

income
    
    
    2,114
    
    
    
    240
    
    
    
    79
    
    
    
    94
    
    
    
    (75)
    
    
    
    
    
    
    
    
    
    
    
    2,452
    
    
    
    18
    
    
    
    2,470Administration expenses
    
    
    (943)
    
    
    
    (92)
    
    
    
    (41)
    
    
    
    (55)
    
    
    
    (149)
    
    
    
    
    
    
    
    
    
    
    
    (1,280)
    
    
    
    (140)
    
    
    
    (1,420)Depreciation/amortisation
    
    
    (62)
    
    
    
    (1)
    
    
    
    
    
    
    
    (3)
    
    
    
    (3)
    
    
    
    
    
    
    
    
    
    
    
    (69)
    
    
    
    (146)
    
    
    
    (215)Total trading

expenses
    
    
    (1,005)
    
    
    
    (93)
    
    
    
    (41)
    
    
    
    (58)
    
    
    
    (152)
    
    
    
    
    
    
    
    
    
    
    
    (1,349)
    
    
    
    (286)
    
    
    
    (1,635)Impairment losses on loans and

advances
    
    
    (273)
    
    
    
    
    
    
    
    27
    
    
    
    
    
    
    
    (5)
    
    
    
    
    
    
    
    
    
    
    
    (251)
    
    
    
    (93)
    
    
    
    (344)Provisions for other liabilities and
charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2)
    
    
    
    (61)
    
    
    
    (63)Trading profit /

(loss) before tax
    
    
    836
    
    
    
    147
    
    
    
    65
    
    
    
    34
    
    
    
    (232)
    
    
    
    
    
    
    
    
    
    
    
    850
    
    
    
    (422)
    
    
    
    428Adjust for:Reorganisation and other

costs
    
    
    (133)
    
    
    
    (9)
    
    
    
    
    
    
    
    (5)
    
    
    
    (151)
    
    
    
    
    
    
    
    
    
    
    
    (298)Profit on part sale of PFS

subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    41Hedging and certain other mark to

market
variances
    
    
    (8)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37)
    
    
    
    
    
    
    
    
    
    
    
    (45)Capital and other

charges
    
    
    (44)
    
    
    
    
    
    
    
    (4)
    
    
    
    15
    
    
    
    (87)
    
    
    
    
    
    
    
    
    
    
    
    (120)Profit/(loss) from continuing

operations
before tax
    
    
    651
    
    
    
    138
    
    
    
    61
    
    
    
    44
    
    
    
    (466)
    
    
    
    
    
    
    
    
    
    
    
    428Average number of staff
    
    
    15,077
    
    
    
    420
    
    
    
    178
    
    
    
    1,309
    
    
    
    356
    
    
    
    1,917
    
    
    
    
    
    
    
    19,257Total assets
    
    
    105,214
    
    
    
    76,164
    
    
    
    7,495
    
    
    
    249
    
    
    
    2,683
    
    
    
    
    
    
    
    
    
    
    
    191,805
    
    
    
    
    
    
    
    191,805
 Impairment
    
    
    Provisions
    
    
    Profit onNet
    
    
    Non
    
    
    
    
    
    Depreciation
    
    
    losses on
    
    
    for other
    
    
    continuingInterest
    
    
    interest
    
    
    Administration
    
    
    and
    
    
    loans and
    
    
    liabilities
    
    
    ops beforeincome
    
    
    income
    
    
    expenses
    
    
    amortisation
    
    
    advances
    
    
    and charges
    
    
    taxAdjustments comprise:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mReorganisation and other

costs
    
    
    
    
    
    
    
    
    
    
    (128)
    
    
    
    (16)
    
    
    
    (93)
    
    
    
    (61)
    
    
    
    (298)Depreciation on operating lease

assets
    
    
    
    
    
    
    130
    
    
    
    
    
    
    
    (130)
    
    
    
    
    
    
    
    
    
    
    
    Profit on part sale of PFS

subsidiaries
    
    
    
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41Hedging and certain other mark to

market variances
    
    
    
    
    
    
    (45)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45)Capital and other

charges
    
    
    (108)
    
    
    
    
    
    
    
    (12)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120)(108)
    
    
    
    126
    
    
    
    (140)
    
    
    
    (146)
    
    
    
    (93)
    
    
    
    (61)
    
    
    
    (422)
 85




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Global
    
    
    
    
    
    
    Wealth
    
    
    Group
    
    
    Sold
    
    
    PortfolioRetail
    
    
    Banking &
    
    
    Corporate
    
    
    Manage-
    
    
    Infra-
    
    
    Life
    
    
    Business
    
    
    
    
    
    
    Adjust-
    
    
    GroupBanking
    
    
    Markets
    
    
    Banking
    
    
    ment
    
    
    structure
    
    
    Businesses
    
    
    Unit
    
    
    Total
    
    
    ments
    
    
    Total2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,332
    
    
    
    
    
    
    
    (25)
    
    
    
    60
    
    
    
    (50)
    
    
    
    
    
    
    
    9
    
    
    
    1,326
    
    
    
    (154)
    
    
    
    1,172Non-interest income
    
    
    608
    
    
    
    205
    
    
    
    107
    
    
    
    26
    
    
    
    71
    
    
    
    
    
    
    
    61
    
    
    
    1,078
    
    
    
    105
    
    
    
    1,183Total trading

income
    
    
    1,940
    
    
    
    205
    
    
    
    82
    
    
    
    86
    
    
    
    21
    
    
    
    
    
    
    
    70
    
    
    
    2,404
    
    
    
    (49)
    
    
    
    2,355Administration expenses
    
    
    (1,058)
    
    
    
    (90)
    
    
    
    (41)
    
    
    
    (60)
    
    
    
    (116)
    
    
    
    
    
    
    
    (1)
    
    
    
    (1,366)
    
    
    
    (211)
    
    
    
    (1,577)Depreciation/amortisation
    
    
    (63)
    
    
    
    
    
    
    
    
    
    
    
    (3)
    
    
    
    
    
    
    
    
    
    
    
    (1)
    
    
    
    (67)
    
    
    
    (128)
    
    
    
    (195)Total trading

expenses
    
    
    (1,121)
    
    
    
    (90)
    
    
    
    (41)
    
    
    
    (63)
    
    
    
    (116)
    
    
    
    
    
    
    
    (2)
    
    
    
    (1,433)
    
    
    
    (339)
    
    
    
    (1,772)Impairment losses on loans and

advances
    
    
    (207)
    
    
    
    
    
    
    
    (10)
    
    
    
    (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (218)
    
    
    
    
    
    
    
    (218)Provisions for other liabilities and
charges
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (14)
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (3)
    
    
    
    
    
    
    
    (3)Trading profit /

(loss) before tax
    
    
    615
    
    
    
    115
    
    
    
    31
    
    
    
    8
    
    
    
    (95)
    
    
    
    
    
    
    
    76
    
    
    
    750
    
    
    
    (388)
    
    
    
    362Adjust for:Reorganisation and other

costs
    
    
    (196)
    
    
    
    (5)
    
    
    
    
    
    
    
    (2)
    
    
    
    (13)
    
    
    
    
    
    
    
    
    
    
    
    (216)Hedging and certain other mark to

market
variances
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21)
    
    
    
    
    
    
    
    
    
    
    
    (18)Capital and other

charges
    
    
    (37)
    
    
    
    
    
    
    
    (7)
    
    
    
    14
    
    
    
    (121)
    
    
    
    
    
    
    
    (3)
    
    
    
    (154)Profit/(loss) from continuing

operations
before tax
    
    
    385
    
    
    
    110
    
    
    
    24
    
    
    
    20
    
    
    
    (250)
    
    
    
    
    
    
    
    73
    
    
    
    362Average number of staff
    
    
    15,538
    
    
    
    500
    
    
    
    213
    
    
    
    1,179
    
    
    
    2,712
    
    
    
    2,255
    
    
    
    
    
    
    
    22,397Total assets
    
    
    94,302
    
    
    
    76,464
    
    
    
    6,724
    
    
    
    192
    
    
    
    629
    
    
    
    28,699
    
    
    
    24
    
    
    
    207,034
    
    
    
    
    
    
    
    207,034
 Impairment
    
    
    Provisions
    
    
    Profit onNet
    
    
    Non
    
    
    
    
    
    Depreciation
    
    
    losses on
    
    
    for other
    
    
    continuingInterest
    
    
    interest
    
    
    Administration
    
    
    and
    
    
    loans and
    
    
    liabilities
    
    
    ops beforeincome
    
    
    income
    
    
    expenses
    
    
    amortisation
    
    
    advances
    
    
    and charges
    
    
    taxAdjustments
comprise:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mReorganisation and other

costs
    
    
    
    
    
    
    
    
    
    (211)
    
    
    
    (5)
    
    
    
    
    
    
    
    
    
    
    
    (216)Depreciation on operating lease

assets
    
    
    
    
    
    
    123
    
    
    
    
    
    
    
    (123)
    
    
    
    
    
    
    
    
    
    
    
    Hedging and certain other mark to

market variances
    
    
    
    
    
    
    (18)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18)Capital and other

charges
    
    
    (154)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (154)(154)
    
    
    
    105
    
    
    
    (211)
    
    
    
    (128)
    
    
    
    
    
    
    
    
    
    
    
    (388)
 b) Geographical
information
 2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mTotal operating incomeUnited Kingdom
    
    
    2,678
    
    
    
    2,370
    
    
    
    2,352Other
    
    
    104
    
    
    
    100
    
    
    
    32,782
    
    
    
    2,470
    
    
    
    2,355Total assets other than
financial instruments and
deferred tax assetsUnited Kingdom
    
    
    2,809
    
    
    
    2,606Other
    
    
    2
    
    
    
    32,811
    
    
    
    2,609
 86




---



##### Table of Contents



Financial Statements
 Notes to the Financial
Statements continued
 2. Net interest income
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mInterest and similar

income:Loans and advances to

banks
    
    
    227
    
    
    
    141
    
    
    
    73Loans and advances to

customers
    
    
    6,747
    
    
    
    5,458
    
    
    
    5,287Other interest earning financial

assets
    
    
    69
    
    
    
    45
    
    
    
    59Total interest and similar

income
    
    
    7,043
    
    
    
    5,644
    
    
    
    5,419Interest expense and similar

charges:Deposits by banks
    
    
    200
    
    
    
    101
    
    
    
    9Deposits by customers
    
    
    2,905
    
    
    
    2,514
    
    
    
    2,578Debt securities in issue and other

borrowed funds
    
    
    1,726
    
    
    
    1,269
    
    
    
    1,175Other interest bearing financial

liabilities
    
    
    713
    
    
    
    532
    
    
    
    485Total interest expense and similar

charges
    
    
    5,544
    
    
    
    4,416
    
    
    
    4,247Net interest

income
    
    
    1,499
    
    
    
    1,228
    
    
    
    1,172
 3. Net fee and commission

income
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mFee and commission

income:Insurance
    
    
    201
    
    
    
    200
    
    
    
    176Banking fees
    
    
    450
    
    
    
    473
    
    
    
    467Fund management fees
    
    
    134
    
    
    
    116
    
    
    
    108Total fee and commission

income
    
    
    785
    
    
    
    789
    
    
    
    751Fee and commission

expense:Other fees paid
    
    
    90
    
    
    
    90
    
    
    
    107Total fee and commission

expense
    
    
    90
    
    
    
    90
    
    
    
    107Net fee and commission

income
    
    
    695
    
    
    
    699
    
    
    
    644
 4. Other operating income,

net
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mIncome from operating lease

assets
    
    
    245
    
    
    
    243
    
    
    
    231Income on assets held at fair value

through profit or loss
    
    
    368
    
    
    
    188
    
    
    
    241Expense on liabilities held at fair value

through profit or loss
    
    
    (382)
    
    
    
    (261)
    
    
    
    (318)Gains/(losses) on derivatives managed

with assets and liabilities held
at fair value through profit or loss
    
    
    (19)
    
    
    
    (27)
    
    
    
    (100)Profit on sale of a non-controlling

interest in subsidiary undertakings
    
    
    105
    
    
    
    
    
    
    
    Profit on sale of subsidiary

undertakings
    
    
    7
    
    
    
    41
    
    
    
    60Profit on sale of fixed

assets
    
    
    5
    
    
    
    1
    
    
    
    4Other
    
    
    (2)
    
    
    
    (51)
    
    
    
    (51)327
    
    
    
    134
    
    
    
    67
 5. Administration expenses
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mStaff costs:Wages and salaries
    
    
    529
    
    
    
    550
    
    
    
    610Social security costs
    
    
    42
    
    
    
    43
    
    
    
    53Pensions
costs:  defined

contribution plans
    
    
    7
    
    
    
    4
    
    
    
    4 defined benefit plans
    
    
    62
    
    
    
    81
    
    
    
    92Other personnel costs
    
    
    77
    
    
    
    88
    
    
    
    97717
    
    
    
    766
    
    
    
    856Property, plant and equipment

expenses
    
    
    191
    
    
    
    204
    
    
    
    189Information technology

expenses
    
    
    195
    
    
    
    175
    
    
    
    151Other administrative

expenses
    
    
    266
    
    
    
    275
    
    
    
    3811,369
    
    
    
    1,420
    
    
    
    1,577
 6. Depreciation and

amortisation
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mDepreciation of property, plant and

equipment excluding operating lease assets
    
    
    76
    
    
    
    85
    
    
    
    72Depreciation of operating lease

assets
    
    
    129
    
    
    
    130
    
    
    
    123205
    
    
    
    215
    
    
    
    195
 87




---



##### Table of Contents



Financial Statements
 Notes to the Financial
Statements continued
 7. Audit and other services
  Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mAudit fees:Fees payable to the Companys

auditors for the audit of the Groups annual accounts
    
    
    1.0
    
    
    
    1.7
    
    
    
    1.1Fees payable to the Companys

auditors and its associates for the audit of the
Companys subsidiaries pursuant to legislation
    
    
    1.8
    
    
    
    1.6
    
    
    
    3.6Total audit fees
    
    
    2.8
    
    
    
    3.3
    
    
    
    4.7Non-audit fees: Other services pursuant to

legislation
    
    
    1.4
    
    
    
    1.5
    
    
    
    2.1 Tax services
    
    
    
    
    
    
    0.1
    
    
    
     Other services
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.6Total non-audit fees
    
    
    2.1
    
    
    
    2.4
    
    
    
    2.7
       8. Impairment

losses/(recoveries) on loans and advances
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mImpairment losses on loans and
advances to customers
    
    
    388
    
    
    
    385
    
    
    
    255Recoveries of loans and advances to

customers
    
    
    (44)
    
    
    
    (41)
    
    
    
    (37)344
    
    
    
    344
    
    
    
    218
 9. Taxation expense
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mCurrent tax:UK corporation tax on profit of the

year
    
    
    122
    
    
    
    41
    
    
    
    121Adjustments and reclassifications in

respect of prior periods
    
    
    (31)
    
    
    
    120
    
    
    
    (1)Total current tax
    
    
    91
    
    
    
    161
    
    
    
    120Deferred tax:Current year
    
    
    68
    
    
    
    82
    
    
    
    (20)Adjustments and reclassifications in

respect of prior periods
    
    
    20
    
    
    
    (128)
    
    
    
    8Total deferred tax
    
    
    88
    
    
    
    (46)
    
    
    
    (12)Tax on profit for the

year
    
    
    179
    
    
    
    115
    
    
    
    108
  88




---



##### Table of Contents



Financial Statements
 Notes to the Financial
Statements continued
  Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mProfit before tax
    
    
    864
    
    
    
    428
    
    
    
    362Tax calculated at a tax rate of 30%

(2006: 30%, 2005: 30%)
    
    
    259
    
    
    
    128
    
    
    
    109Non taxable gain on sale of subsidiary

undertakings
    
    
    (33)
    
    
    
    (12)
    
    
    
    (7)Non deductible preference dividends

paid
    
    
    9
    
    
    
    17
    
    
    
    15Effect of non-allowable provisions and

other non-equalised items
    
    
    (10)
    
    
    
    1
    
    
    
    44Underlying tax relief on overseas

dividends
    
    
    
    
    
    
    
    
    
    
    (51)Non-taxable dividend

income
    
    
    (3)
    
    
    
    (5)
    
    
    
    (7)Impairment of goodwill
    
    
    
    
    
    
    
    
    
    
    (1)Effect of non-UK profits and

losses
    
    
    (11)
    
    
    
    (4)
    
    
    
    (1)Utilisation of capital losses for which

credit not previously recognised
    
    
    (11)
    
    
    
    (2)
    
    
    
    Effect of change in tax rate on deferred

tax provision
    
    
    (10)
    
    
    
    
    
    
    
    Adjustment to prior year

provisions
    
    
    (11)
    
    
    
    (8)
    
    
    
    7Income tax expense
    
    
    179
    
    
    
    115
    
    
    
    108
  10. Profit / (loss) on

ordinary activities after tax
  11. Discontinued

operations
  Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mTotal income net of insurance

claims
    
    
    
    
    
    
    236
    
    
    
    385Total operating expenses
    
    
    
    
    
    
    (73)
    
    
    
    (151)Impairment losses on intangible

assets
    
    
    
    
    
    
    (69)
    
    
    
    Profit of discontinued operations

before tax
    
    
    
    
    
    
    94
    
    
    
    234Taxation expense
    
    
    
    
    
    
    (75)
    
    
    
    (68)Profit of discontinued

operations
    
    
    
    
    
    
    19
    
    
    
    166Loss on sale of discontinued operations

before and after tax
    
    
    
    
    
    
    (264)
    
    
    
    (Loss) / profit for the year from

discontinued operations
    
    
    
    
    
    
    (245)
    
    
    
    166
 12. Cash and balances with

central banks
 Group
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mCash in hand
    
    
    365
    
    
    
    334
    
    
    
    365
    
    
    
    334Balances with central

banks
    
    
    673
    
    
    
    554
    
    
    
    667
    
    
    
    5541,038
    
    
    
    888
    
    
    
    1,032
    
    
    
    888
 89




---



##### Table of Contents



Financial Statements
 Notes to the Financial
Statements continued
 13. Trading assets
 Group2007
    
    
    2006£m
    
    
    £mLoans and advances to

banks
    
    
    8,847
    
    
    
    9,757Loans and advances to

customers
    
    
    17,255
    
    
    
    19,993Debt securities
    
    
    28,831
    
    
    
    29,810Equity securities
    
    
    1,494
    
    
    
    2,75456,427
    
    
    
    62,314
  Group2007
    
    
    2006£m
    
    
    £mIssued by public bodies: Government securities
    
    
    3,722
    
    
    
    2,463Issued by other issuers: Bank and building society certificates

of deposit
    
    
    9,679
    
    
    
    10,839Other debt securities
    
    
    15,430
    
    
    
    16,50828,831
    
    
    
    29,810
  Group2007
    
    
    2006£m
    
    
    £mDebt securities: Listed in the UK
    
    
    8,054
    
    
    
    3,508 Listed elsewhere
    
    
    11,064
    
    
    
    14,845 Unlisted
    
    
    9,713
    
    
    
    11,45728,831
    
    
    
    29,810Equity securities: Listed in the UK
    
    
    965
    
    
    
    1,850 Listed elsewhere
    
    
    529
    
    
    
    9041,494
    
    
    
    2,754
  14. Derivative financial

instruments
  Derivatives held

for trading purposes
  >
    
    Marketing derivatives to end users and hedging the resulting

exposures efficiently; and>
    
    The management of trading exposure reflected on the

Groups balance sheet.
  Derivatives held for risk

management purposes
   90




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
   GroupContract/ notional
    
    
    Fair value
    
    
    Fair value2007
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for trading
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    28,386
    
    
    
    816
    
    
    
    823- Foreign exchange swaps and forwards
    
    
    21,524
    
    
    
    256
    
    
    
    26049,910
    
    
    
    1,072
    
    
    
    1,083Interest rate contracts:- Interest rate swaps
    
    
    436,212
    
    
    
    5,211
    
    
    
    5,724- Caps, floors and swaptions
    
    
    42,318
    
    
    
    649
    
    
    
    621- Futures (exchange traded)
    
    
    29,383
    
    
    
    88
    
    
    
    - Forward rate agreements
    
    
    148,742
    
    
    
    76
    
    
    
    78656,655
    
    
    
    6,024
    
    
    
    6,423Equity and credit contracts:- Equity index and similar products
    
    
    15,204
    
    
    
    847
    
    
    
    1,820- Equity index options (exchange traded)
    
    
    6,009
    
    
    
    556
    
    
    
    216- Credit default swaps and similar products
    
    
    35,588
    
    
    
    1,020
    
    
    
    18656,801
    
    
    
    2,423
    
    
    
    2,222Total derivative assets and liabilities held for trading
    
    
    763,366
    
    
    
    9,519
    
    
    
    9,728
 GroupContract/ notional
    
    
    Fair value
    
    
    Fair value2007
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for fair value hedging
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    2,425
    
    
    
    
    
    
    
    Interest rate contracts:- Interest rate swaps
    
    
    39,629
    
    
    
    432
    
    
    
    203Total derivative assets and liabilities held for fair value hedging
    
    
    42,054
    
    
    
    432
    
    
    
    203Total recognised derivative assets and liabilities
    
    
    805,420
    
    
    
    9,951
    
    
    
    9,931
 CompanyContract/ notional
    
    
    Fair value
    
    
    Fair value2007
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for trading
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    7,654
    
    
    
    25
    
    
    
    194Interest rate contracts:- Interest rate swaps
    
    
    48,531
    
    
    
    181
    
    
    
    343- Caps, floors and swaptions
    
    
    424
    
    
    
    
    
    
    
    448,955
    
    
    
    181
    
    
    
    347Equity and credit contracts:- Equity index and similar products
    
    
    564
    
    
    
    120
    
    
    
    208Total derivative assets and liabilities held for trading
    
    
    57,173
    
    
    
    326
    
    
    
    749
 CompanyContract/ notional
    
    
    Fair value
    
    
    Fair value2007
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for fair value hedging
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    998
    
    
    
    222
    
    
    
    Interest rate contracts:- Interest rate swaps
    
    
    4,207
    
    
    
    141
    
    
    
    302Total derivative assets and liabilities held for fair value hedging
    
    
    5,205
    
    
    
    363
    
    
    
    302Total recognised derivative assets and liabilities
    
    
    62,378
    
    
    
    689
    
    
    
    1,051
 91




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 GroupContract/ notional
    
    
    Fair value
    
    
    Fair value2006
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for trading
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    11,745
    
    
    
    182
    
    
    
    372- Foreign exchange swaps and forwards
    
    
    3,620
    
    
    
    1
    
    
    
    8815,365
    
    
    
    183
    
    
    
    460Interest rate contracts:- Interest rate swaps
    
    
    366,812
    
    
    
    5,125
    
    
    
    5,712- Caps, floors and swaptions
    
    
    42,244
    
    
    
    628
    
    
    
    555- Futures (exchange traded)
    
    
    37,850
    
    
    
    86
    
    
    
    - Forward rate agreements
    
    
    68,250
    
    
    
    19
    
    
    
    20515,156
    
    
    
    5,858
    
    
    
    6,287Equity and credit contracts:- Equity index and similar products
    
    
    23,262
    
    
    
    1,026
    
    
    
    2,337- Equity index options (exchange traded)
    
    
    5,282
    
    
    
    438
    
    
    
    220- Credit default swaps and similar products
    
    
    23,906
    
    
    
    104
    
    
    
    8152,450
    
    
    
    1,568
    
    
    
    2,638Total derivative assets and liabilities held for trading
    
    
    582,971
    
    
    
    7,609
    
    
    
    9,385
 GroupContract/ notional
    
    
    Fair value
    
    
    Fair value2006
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for fair value hedging
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    14,720
    
    
    
    102
    
    
    
    833Interest rate contracts:- Interest rate swaps
    
    
    24,919
    
    
    
    625
    
    
    
    Total derivative assets and liabilities held for fair value hedging
    
    
    39,639
    
    
    
    727
    
    
    
    833Total recognised derivative assets and liabilities
    
    
    622,610
    
    
    
    8,336
    
    
    
    10,218
 CompanyContract/ notional
    
    
    Fair value
    
    
    Fair value2006
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for trading
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    829
    
    
    
    22
    
    
    
    36Interest rate contracts:- Interest rate swaps
    
    
    41,535
    
    
    
    190
    
    
    
    130- Caps, floors and swaptions
    
    
    253
    
    
    
    1
    
    
    
    441,788
    
    
    
    191
    
    
    
    134Equity and credit contracts:- Equity index and similar products
    
    
    577
    
    
    
    66
    
    
    
    181Total derivative assets and liabilities held for trading
    
    
    43,194
    
    
    
    279
    
    
    
    351
 CompanyContract/ notional
    
    
    Fair value
    
    
    Fair value2006
    
    amount
    
    
    assets
    
    
    liabilitiesDerivatives held for fair value hedging
    
    £m
    
    
    £m
    
    
    £mExchange rate contracts:- Cross-currency swaps
    
    
    1,398
    
    
    
    210
    
    
    
    24Interest rate contracts:- Interest rate swaps
    
    
    4,119
    
    
    
    157
    
    
    
    306Total derivative assets and liabilities held for fair value hedging
    
    
    5,517
    
    
    
    367
    
    
    
    330Total recognised derivative assets and liabilities
    
    
    48,711
    
    
    
    646
    
    
    
    681
 Gains or losses arising from fair value hedges
 Group
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mGains/(losses):On hedging instruments
    
    
    (413)
    
    
    
    (600)
    
    
    
    26
    
    
    
    (174)On the hedged items attributable to hedged risk
    
    
    449
    
    
    
    610
    
    
    
    (28)
    
    
    
    182Hedge ineffectiveness
    
    
    36
    
    
    
    10
    
    
    
    (2)
    
    
    
    8
 92




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 15. Financial assets designated at fair value
 Group
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mLoans and advances to banks
    
    
    
    
    
    
    37
    
    
    
    
    
    
    
    Loans and advances to customers
    
    
    5,701
    
    
    
    5,353
    
    
    
    54
    
    
    
    66Debt securities
    
    
    6,082
    
    
    
    3,323
    
    
    
    7,446
    
    
    
    11,783
    
    
    
    8,713
    
    
    
    7,500
    
    
    
    66
  (a)
    
    Loans and advances to customers, representing loans secured on residential property to
housing associations. These would otherwise have been measured at amortised cost with the
associated derivatives used to economically hedge the risk held for trading and measured at
fair value through profit or loss.(b)
    
    Debt securities in issue representing holdings of asset-backed securities. They are managed,
and their performance is evaluated, on a fair value basis in accordance with a documented
investment strategy and information about them is provided internally on that basis to the
Groups key management personnel.
   Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mListed in the UK
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    Listed elsewhere
    
    
    5,510
    
    
    
    2,725
    
    
    
    7,446
    
    
    
    Unlisted
    
    
    268
    
    
    
    598
    
    
    
    
    
    
    
    6,082
    
    
    
    3,323
    
    
    
    7,446
    
    
    
    
 16. Loans and advances to banks
 Group
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mPlacements with other banks
    
    
    1,801
    
    
    
    728
    
    
    
    1,171
    
    
    
    295Amounts due from parent
    
    
    1,640
    
    
    
    1,514
    
    
    
    1,018
    
    
    
    1,500Amounts due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    38,496
    
    
    
    39,9163,441
    
    
    
    2,242
    
    
    
    40,685
    
    
    
    41,711
 Group
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006Repayable:
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mOn demand
    
    
    1,271
    
    
    
    294
    
    
    
    5,771
    
    
    
    1,210In not more than 3 months
    
    
    940
    
    
    
    194
    
    
    
    3,791
    
    
    
    3,109In more than 3 months but not more than 1 year
    
    
    204
    
    
    
    15
    
    
    
    3,822
    
    
    
    691In more than 1 year but not more than 5 years
    
    
    
    
    
    
    239
    
    
    
    20,930
    
    
    
    22,129In more than 5 years
    
    
    1,026
    
    
    
    1,500
    
    
    
    6,371
    
    
    
    14,5723,441
    
    
    
    2,242
    
    
    
    40,685
    
    
    
    41,711
 17. Loans and advances to customers
 Group
    
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mAdvances secured on residential properties
    
    
    105,169
    
    
    
    96,918
    
    
    
    105,156
    
    
    
    96,899Corporate loans
    
    
    1,302
    
    
    
    353
    
    
    
    17
    
    
    
    7Finance leases
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Other secured advances
    
    
    2,962
    
    
    
    2,306
    
    
    
    2,889
    
    
    
    2,185Other unsecured advances
    
    
    3,265
    
    
    
    4,104
    
    
    
    3,258
    
    
    
    4,103Amounts due from subsidiaries
    
    
    
    
    
    
    
    
    
    
    310
    
    
    
    677Loans and advances to customers
    
    
    112,698
    
    
    
    103,682
    
    
    
    111,630
    
    
    
    103,872Less: loan loss allowances
    
    
    (551)
    
    
    
    (536)
    
    
    
    (654)
    
    
    
    (623)Loans and advances to customers, net of loan loss allowances
    
    
    112,147
    
    
    
    103,146
    
    
    
    110,976
    
    
    
    103,249
 93




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Group
    
    

    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mRepayable:On demand
    
    
    331
    
    
    
    635
    
    
    
    291
    
    
    
    1,219In no more than 3 months
    
    
    1,657
    
    
    
    1,865
    
    
    
    610
    
    
    
    1,477In more than 3 months but not more than 1 year
    
    
    1,983
    
    
    
    2,362
    
    
    
    2,121
    
    
    
    2,432In more than 1 year but not more than 5 years
    
    
    12,725
    
    
    
    13,178
    
    
    
    12,681
    
    
    
    13,129In more than 5 years
    
    
    96,002
    
    
    
    85,642
    
    
    
    95,927
    
    
    
    85,615Loans and advances to customers
    
    
    112,698
    
    
    
    103,682
    
    
    
    111,630
    
    
    
    103,872Less: loan loss allowances
    
    
    (551)
    
    
    
    (536)
    
    
    
    (654)
    
    
    
    (623)Loans and advances to customers, net of loan loss allowances
    
    
    112,147
    
    
    
    103,146
    
    
    
    110,976
    
    
    
    103,249
  Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mFixed rate
    
    
    56,031
    
    
    
    35,398
    
    
    
    55,942
    
    
    
    35,141Variable rate
    
    
    56,667
    
    
    
    68,284
    
    
    
    55,688
    
    
    
    68,731Less: loan loss allowances
    
    
    (551)
    
    
    
    (536)
    
    
    
    (654)
    
    
    
    (623)112,147
    
    
    
    103,146
    
    
    
    110,976
    
    
    
    103,249
  Loans secured
    
    
    
    
    
    
    Other
    
    
    Otheron residential
    
    
    Finance
    
    
    secured
    
    
    unsecuredproperty
    
    
    leases
    
    
    advances
    
    
    advances
    
    
    TotalGroup
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAs at 1 January 2007
    
    
    105
    
    
    
    1
    
    
    
    76
    
    
    
    354
    
    
    
    536Charge/(release) to the income statement
    
    
    80
    
    
    
    
    
    
    
    (12)
    
    
    
    320
    
    
    
    388Write offs
    
    
    (9)
    
    
    
    (1)
    
    
    
    (24)
    
    
    
    (339)
    
    
    
    (373)At 31 December 2007
    
    
    176
    
    
    
    
    
    
    
    40
    
    
    
    335
    
    
    
    551As at 1 January 2006
    
    
    56
    
    
    
    3
    
    
    
    123
    
    
    
    212
    
    
    
    394Charge/(release) to the income statement
    
    
    60
    
    
    
    
    
    
    
    (22)
    
    
    
    348
    
    
    
    386Write offs
    
    
    (11)
    
    
    
    (2)
    
    
    
    (25)
    
    
    
    (206)
    
    
    
    (244)At 31 December 2006
    
    
    105
    
    
    
    1
    
    
    
    76
    
    
    
    354
    
    
    
    536
 Loans secured
    
    
    Amounts
    
    
    
    
    
    
    Other
    
    
    Otheron residential
    
    
    due from
    
    
    Finance
    
    
    secured
    
    
    unsecuredproperty
    
    
    subsidiaries
    
    
    leases
    
    
    advances
    
    
    advances
    
    
    TotalCompany
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAs at 1 January 2007
    
    
    105
    
    
    
    161
    
    
    
    1
    
    
    
    4
    
    
    
    352
    
    
    
    623Charge/(release) to the income statement
    
    
    80
    
    
    
    (25)
    
    
    
    
    
    
    
    8
    
    
    
    316
    
    
    
    379Write offs
    
    
    (9)
    
    
    
    
    
    
    
    (1)
    
    
    
    (1)
    
    
    
    (337)
    
    
    
    (348)At 31 December 2007
    
    
    176
    
    
    
    136
    
    
    
    
    
    
    
    11
    
    
    
    331
    
    
    
    654As at 1 January 2006
    
    
    48
    
    
    
    186
    
    
    
    3
    
    
    
    6
    
    
    
    210
    
    
    
    453Charge/(release) to the income statement
    
    
    60
    
    
    
    (25)
    
    
    
    
    
    
    
    1
    
    
    
    374
    
    
    
    410Write offs
    
    
    (3)
    
    
    
    
    
    
    
    (2)
    
    
    
    (3)
    
    
    
    (232)
    
    
    
    (240)At 31 December 2006
    
    
    105
    
    
    
    161
    
    
    
    1
    
    
    
    4
    
    
    
    352
    
    
    
    623
  18. Securitisation of assets
   94




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
      Gross assets
 securitised
    
    
    Non-recourse 
financeSecuritisation company
    
    Closing date of securitisation
    
    
    £m
    
    
    £mHolmes Financing (No. 1) plc
    
    26 July 2000
    
    
    275
    
    
    
    275Holmes Financing (No. 6) plc
    
    7 November 2002
    
    
    546
    
    
    
    616Holmes Financing (No. 7) plc
    
    26 March 2003
    
    
    658
    
    
    
    658Holmes Financing (No. 8) plc
    
    1 April 2004
    
    
    2,003
    
    
    
    2,003Holmes Financing (No. 9) plc
    
    8 December 2005
    
    
    2,779
    
    
    
    2,779Holmes Financing (No. 10) plc
    
    8 August 2006
    
    
    3,200
    
    
    
    3,200Holmes Master Issuer plc  2006/1
    
    28 November 2006
    
    
    2,618
    
    
    
    2,618Holmes Master Issuer plc  2007/1
    
    28 March 2007
    
    
    4,301
    
    
    
    5,672Holmes Master Issuer plc  2007/2
    
    20 June 2007
    
    
    5,855
    
    
    
    5,855Holmes Master Issuer plc  2007/3
    
    21 December 2007
    
    
    7,259
    
    
    
    7,259Beneficial interest in Holmes Trustees Limited
    
    
    
    
    
    
    7,954
    
    
    
    37,448
    
    
    
    30,935
    Income statement for the year ended 31 December
 Securitisation companies2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mNet interest income
    
    
    35
    
    
    
    21
    
    
    
    22Other operating income/(expenses)
    
    
    35
    
    
    
    67
    
    
    
    (50)Administrative expenses
    
    
    (1)
    
    
    
    
    
    
    
    (2)Impairment losseson loans and advances
    
    
    (8)
    
    
    
    (4)
    
    
    
    (3)Taxation expense
    
    
    (17)
    
    
    
    (25)
    
    
    
    9Profit/(loss) for the year
    
    
    44
    
    
    
    59
    
    
    
    (24)
 95




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Balance sheet as at 31 December
 Securitisation companies2007
    
    
    2006£m
    
    
    £mDerivative financial instruments
    
    
    866
    
    
    
    169Loans and advances to banks
    
    
    2,375
    
    
    
    2,767Loans and advances to customers
    
    
    29,569
    
    
    
    15,189Other assets
    
    
    11
    
    
    
    3Total assets
    
    
    32,821
    
    
    
    18,128Deposits by banks
    
    
    743
    
    
    
    410Derivative financial instruments
    
    
    588
    
    
    
    712Debt securities in issue
    
    
    31,357
    
    
    
    16,941Other liabilities
    
    
    47
    
    
    
    23Total liabilities
    
    
    32,735
    
    
    
    18,086Retained earnings
    
    
    86
    
    
    
    42Total liabilities and equity
    
    
    32,821
    
    
    
    18,128
  19. Available for sale securities
 Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8Equity securities
    
    
    32
    
    
    
    15
    
    
    
    20
    
    
    
    440
    
    
    
    23
    
    
    
    28
    
    
    
    12
  Group
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mDue in more than one year but not more than 5 years
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8
   Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mListed in the UK
    
    
    12
    
    
    
    13
    
    
    
    
    
    
    
    2Listed elsewhere
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1Unlisted
    
    
    20
    
    
    
    1
    
    
    
    20
    
    
    
    132
    
    
    
    15
    
    
    
    20
    
    
    
    4
  Group
    
    
    Company£m
    
    
    £mAt 1 January 2007
    
    
    23
    
    
    
    12Disposals (sale and redemption)
    
    
    (2)
    
    
    
    (2)Movement in fair value
    
    
    19
    
    
    
    18At 31 December 2007
    
    
    40
    
    
    
    28
 Group
    
    
    Company£m
    
    
    £mAt 1 January 2006
    
    
    13
    
    
    
    272Additions
    
    
    9
    
    
    
    9Disposals (sale and redemption)
    
    
    
    
    
    
    (269)Movement in fair value
    
    
    1
    
    
    
    At 31 December 2006
    
    
    23
    
    
    
    12
 96




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 20. Investment in subsidiary undertakings
  CompanyCost
    
    
    Impairment
    
    
    Net book value£m
    
    
    £m
    
    
    £mAt 1 January 2007
    
    
    5,148
    
    
    
    (222)
    
    
    
    4,926Additions
    
    
    418
    
    
    
    
    
    
    
    418Disposals
    
    
    (353)
    
    
    
    29
    
    
    
    (324)Write-back of impairments
    
    
    
    
    
    
    33
    
    
    
    33At 31 December 2007
    
    
    5,213
    
    
    
    (160)
    
    
    
    5,053
 Cost
    
    
    Impairment
    
    
    Net book value£m
    
    
    £m
    
    
    £mAt 1 January 2006
    
    
    9,895
    
    
    
    (1,205)
    
    
    
    8,690Additions
    
    
    54
    
    
    
    (2)
    
    
    
    52Disposals
    
    
    (4,801)
    
    
    
    965
    
    
    
    (3,836)Write-back of impairments
    
    
    
    
    
    
    20
    
    
    
    20At 31 December 2006
    
    
    5,148
    
    
    
    (222)
    
    
    
    4,926
     Country of incorporationPrincipal subsidiary
    
    Nature of business
    
    
    
    % Interest held
    
    or registrationAbbey National Treasury Services plc
    
    Treasury operations
    
    
    100%
    

    
    England & WalesAbbey National International Limited*
    
    Personal finance
    
    
    100%
    

    
    JerseyCater Allen International Limited*
    
    Securities financing
    
    
    100%
    

    
    England & WalesCater Allen Limited*
    
    Bank, deposit taker
    
    
    51%
    

    
    England & WalesAbbey National North America LLC*
    
    Funding
    
    
    100%
    

    
    United StatesAbbey National Securities Inc*
    
    Securities financing
    
    
    100%
    

    
    United StatesPorterbrook Leasing Company Limited*
    
    Leasing
    
    
    100%
    

    
    England & Wales
 *
    
    Held indirectly through subsidiary companies.
  97




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 21. Investment in associated undertakings
  Group
    
    
    Company£m
    
    
    £mAt 1 January 2007
    
    
    22
    
    
    
    25Additional investment
    
    
    8
    
    
    
    8Share of results
    
    
    (1)
    
    
    
    At 31 December 2007
    
    
    29
    
    
    
    33
 Group
    
    
    Company£m
    
    
    £mAt 1 January 2006
    
    
    24
    
    
    
    24Additional investment
    
    
    19
    
    
    
    19Capital reduction
    
    
    (18)
    
    
    
    (18)Dividends received
    
    
    (3)
    
    
    
    At 31 December 2006
    
    
    22
    
    
    
    25
  Country of
    
    Assets
    
    
    Liabilities
    
    
    Income
    
    
    Expense
    
    
    % interestName and nature of business
    
    incorporation
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    heldPSA Finance plc, personal finance
    
    England and Wales
    
    
    8
    
    
    
    (1)
    
    
    
    (4)
    
    
    
    1
    
    
    
    50.0Santander Consumer (UK) plc, consumer finance
    
    England and Wales
    
    
    592
    
    
    
    (542)
    
    
    
    (34)
    
    
    
    39
    
    
    
    49.9
  Country of
    
    Assets
    
    
    Liabilities
    
    
    Income
    
    
    Expense
    
    
    % interestName and nature of business
    
    incorporation
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    heldPSA Finance plc, personal finance
    
    England and Wales
    
    
    7
    
    
    
    (3)
    
    
    
    (6)
    
    
    
    2
    
    
    
    50.0Santander Consumer (UK) plc, consumer finance
    
    England and Wales
    
    
    400
    
    
    
    (360)
    
    
    
    (28)
    
    
    
    32
    
    
    
    49.9
  22. Intangible assets
 a) Goodwill
 Group2007
    
    
    2006£m
    
    
    £mCostAt 1 January
    
    
    112
    
    
    
    776Disposals
    
    
    
    
    
    
    (664)At 31 December
    
    
    112
    
    
    
    112Accumulated impairmentAt 1 January
    
    
    22
    
    
    
    640Impairment losses
    
    
    
    
    
    
    46Disposals
    
    
    
    
    
    
    (664)At 31 December
    
    
    22
    
    
    
    22Net book value
    
    
    90
    
    
    
    90
 Impairment of Goodwill
 98




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
  GoodwillSignificant
    
    
    
    
    
    2007
    
    
    2006
    
    
    
    
    
    
    Key
    
    
    Discount
    
    
    GrowthBusiness Division
    
    Cash Generating Unit
    
    
    £m
    
    
    £m
    
    
    Basis of valuation
    
    assumptions
    
    
    rate
    
    
    rateRetail Banking
    
    Cater Allen Private Bank
    
    
    90
    
    
    
    90
    
    
    Value in use: cash flow
    
    3 year plan
    
    
    8.95%
    

    
    
    2.25%
 b) Other intangibles
 GroupTrademarks
    
    
    Distribution channels
    
    
    Total£m
    
    
    £m
    
    
    £mCostAt 1 January 2006
    
    
    24
    
    
    
    235
    
    
    
    259Disposals
    
    
    (24)
    
    
    
    (235)
    
    
    
    (259)At 31 December 2006
    
    
    
    
    
    
    
    
    
    
    Accumulated amortisation / impairmentAt 1 January 2006
    
    
    5
    
    
    
    219
    
    
    
    224Impairment losses
    
    
    18
    
    
    
    15
    
    
    
    33Charge for the year
    
    
    1
    
    
    
    1
    
    
    
    2Disposals
    
    
    (24)
    
    
    
    (235)
    
    
    
    (259)At 31 December 2006
    
    
    
    
    
    
    
    
    
    
    Net book value
    
    
    
    
    
    
    
    
    
    
    
  23. Property, plant and equipment (excluding operating lease assets)
 GroupOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2007
    
    
    55
    
    
    
    432
    
    
    
    261
    
    
    
    748Additions
    
    
    23
    
    
    
    66
    
    
    
    103
    
    
    
    192Disposals
    
    
    (4)
    
    
    
    (19)
    
    
    
    (5)
    
    
    
    (28)At 31 December 2007
    
    
    74
    
    
    
    479
    
    
    
    359
    
    
    
    912Accumulated depreciation:At 1 January 2007
    
    
    14
    
    
    
    245
    
    
    
    74
    
    
    
    333Depreciation charge for the year
    
    
    6
    
    
    
    56
    
    
    
    14
    
    
    
    76Disposals
    
    
    (2)
    
    
    
    (18)
    
    
    
    (5)
    
    
    
    (25)At 31 December 2007
    
    
    18
    
    
    
    283
    
    
    
    83
    
    
    
    384Net book value
    
    
    56
    
    
    
    196
    
    
    
    276
    
    
    
    528
 GroupOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2006
    
    
    46
    
    
    
    1,043
    
    
    
    347
    
    
    
    1,436Additions
    
    
    15
    
    
    
    71
    
    
    
    103
    
    
    
    189Disposals
    
    
    (6)
    
    
    
    (682)
    
    
    
    (189)
    
    
    
    (877)At 31 December 2006
    
    
    55
    
    
    
    432
    
    
    
    261
    
    
    
    748Accumulated depreciation:At 1 January 2006
    
    
    12
    
    
    
    850
    
    
    
    260
    
    
    
    1,122Depreciation charge for the year
    
    
    5
    
    
    
    77
    
    
    
    3
    
    
    
    85Disposals
    
    
    (3)
    
    
    
    (682)
    
    
    
    (189)
    
    
    
    (874)At 31 December 2006
    
    
    14
    
    
    
    245
    
    
    
    74
    
    
    
    333Net book value
    
    
    41
    
    
    
    187
    
    
    
    187
    
    
    
    415
 99




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 CompanyOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2007
    
    
    47
    
    
    
    406
    
    
    
    186
    
    
    
    639Additions
    
    
    23
    
    
    
    60
    
    
    
    98
    
    
    
    181Disposals
    
    
    (2)
    
    
    
    (13)
    
    
    
    (5)
    
    
    
    (20)At 31 December 2007
    
    
    68
    
    
    
    453
    
    
    
    279
    
    
    
    800Accumulated depreciation:At 1 January 2007
    
    
    10
    
    
    
    230
    
    
    
    5
    
    
    
    245Depreciation charge
    
    
    6
    
    
    
    53
    
    
    
    13
    
    
    
    72Disposals
    
    
    (1)
    
    
    
    (12)
    
    
    
    (5)
    
    
    
    (18)At 31 December 2007
    
    
    15
    
    
    
    271
    
    
    
    13
    
    
    
    299Net book value
    
    
    53
    
    
    
    182
    
    
    
    266
    
    
    
    501
 CompanyOwner-occupied
    
    
    Office fixtures
    
    
    Computerproperties
    
    
    and equipment
    
    
    software
    
    
    Total£m
    
    
    £m
    
    
    £m
    
    
    £mCost:At 1 January 2006
    
    
    38
    
    
    
    1,017
    
    
    
    199
    
    
    
    1,254Additions
    
    
    15
    
    
    
    66
    
    
    
    98
    
    
    
    179Disposals
    
    
    (6)
    
    
    
    (677)
    
    
    
    (110)
    
    
    
    (793)At 31 December 2006
    
    
    47
    
    
    
    406
    
    
    
    187
    
    
    
    640Accumulated depreciation:At 1 January 2006
    
    
    9
    
    
    
    834
    
    
    
    113
    
    
    
    956Depreciation charge
    
    
    4
    
    
    
    73
    
    
    
    2
    
    
    
    79Disposals
    
    
    (3)
    
    
    
    (677)
    
    
    
    (110)
    
    
    
    (790)At 31 December 2006
    
    
    10
    
    
    
    230
    
    
    
    5
    
    
    
    245Net book value
    
    
    37
    
    
    
    176
    
    
    
    182
    
    
    
    395
  24. Operating lease assets
 Group2007
    
    
    2006£m
    
    
    £mCostAt 1 January
    
    
    3,275
    
    
    
    3,252Additions
    
    
    215
    
    
    
    41Disposals
    
    
    (16)
    
    
    
    (18)At 31 December
    
    
    3,474
    
    
    
    3,275Depreciation and impairmentAt 1 January
    
    
    1,193
    
    
    
    1,080Charge for the year
    
    
    129
    
    
    
    130Impairment charge
    
    
    4
    
    
    
    Disposals
    
    
    (16)
    
    
    
    (17)At 31 December
    
    
    1,310
    
    
    
    1,193Net book value
    
    
    2,164
    
    
    
    2,082
   Group2007
    
    
    2006£m
    
    
    £mIn no more than 1 year
    
    
    296
    
    
    
    228In more than 1 year but no more than 5 years
    
    
    991
    
    
    
    636In more than 5 years
    
    
    678
    
    
    
    3381,965
    
    
    
    1,202Contingent rents recognised as income
    
    
    
    
    
    
    Capital expenditure which has been contracted, but not provided for in the financial statements
    
    
    258
    
    
    
    93
 100




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 25. Deferred tax
   Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mAt 1 January
    
    
    240
    
    
    
    (90)
    
    
    
    747
    
    
    
    702Income
statement charge  continuing operations
    
    
    (88)
    
    
    
    46
    
    
    
    (103)
    
    
    
    109Income
statement charge  discontinued operations
    
    
    
    
    
    
    (56)
    
    
    
    
    
    
    
    Credited/ (charged) to equity
    
    
    9
    
    
    
    (66)
    
    
    
    10
    
    
    
    (54)Disposal of subsidiary undertaking
    
    
    (40)
    
    
    
    406
    
    
    
    (40)
    
    
    
    (10)At 31 December
    
    
    121
    
    
    
    240
    
    
    
    614
    
    
    
    747
  Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mDeferred tax liabilitiesAccelerated tax depreciation
    
    
    (463)
    
    
    
    (483)
    
    
    
    
    
    
    
    Other temporary differences
    
    
    (81)
    
    
    
    (81)
    
    
    
    (6)
    
    
    
    (544)
    
    
    
    (564)
    
    
    
    (6)
    
    
    
    Deferred tax assetsPensions and other post retirement benefits
    
    
    275
    
    
    
    310
    
    
    
    275
    
    
    
    310Accelerated book depreciation
    
    
    45
    
    
    
    64
    
    
    
    41
    
    
    
    58IAS 32 & IAS 39 transitional adjustments
    
    
    135
    
    
    
    158
    
    
    
    91
    
    
    
    110Other temporary differences
    
    
    64
    
    
    
    78
    
    
    
    67
    
    
    
    75Tax losses carried forward
    
    
    146
    
    
    
    194
    
    
    
    146
    
    
    
    194665
    
    
    
    804
    
    
    
    620
    
    
    
    747
  Group
    
    
    
    
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mPensions and other post retirement benefits
    
    
    300
    
    
    
    309
    
    
    
    398
    
    
    
    301
    
    
    
    309
    
    
    
    363
    Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mAccelerated tax depreciation
    
    
    1
    
    
    
    36
    
    
    
    (83)Pensions and other post-retirement benefits
    
    
    (4)
    
    
    
    (27)
    
    
    
    7IAS 32 & IAS 39 transition adjustments
    
    
    (23)
    
    
    
    (16)
    
    
    
    (28)Tax losses carried forward
    
    
    (48)
    
    
    
    105
    
    
    
    89Other temporary differences
    
    
    (14)
    
    
    
    (52)
    
    
    
    27(88)
    
    
    
    46
    
    
    
    12
  101




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 26. Other assets
 Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mTrade and other receivables
    
    
    746
    
    
    
    2,341
    
    
    
    541
    
    
    
    597Prepayments
    
    
    48
    
    
    
    46
    
    
    
    45
    
    
    
    41Accrued income
    
    
    12
    
    
    
    14
    
    
    
    
    
    
    
    General insurance assets
    
    
    100
    
    
    
    106
    
    
    
    100
    
    
    
    106906
    
    
    
    2,507
    
    
    
    686
    
    
    
    744
 27. Deposits by banks
 Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mItems in the course of transmission
    
    
    786
    
    
    
    363
    
    
    
    769
    
    
    
    354Sale and repurchase agreements
    
    
    
    
    
    
    251
    
    
    
    
    
    
    
    Amounts due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    59,005
    
    
    
    60,767Other deposits
    
    
    7,137
    
    
    
    6,042
    
    
    
    24
    
    
    
    27,923
    
    
    
    6,656
    
    
    
    59,798
    
    
    
    61,123
 Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mRepayable:On demand
    
    
    416
    
    
    
    102
    
    
    
    2,060
    
    
    
    3,487In not more than 3 months
    
    
    7,256
    
    
    
    6,554
    
    
    
    13,838
    
    
    
    22,937In more than 3 months but not more than 1 year
    
    
    251
    
    
    
    
    
    
    
    7,845
    
    
    
    2,377In more than 1 year but not more than 5 years
    
    
    
    
    
    
    
    
    
    
    31,045
    
    
    
    27,905In more than 5 years
    
    
    
    
    
    
    
    
    
    
    5,010
    
    
    
    4,4177,923
    
    
    
    6,656
    
    
    
    59,798
    
    
    
    61,123
 28. Deposits by customers
 Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mRetail deposits
    
    
    67,208
    
    
    
    63,994
    
    
    
    59,187
    
    
    
    56,695Amounts due to subsidiaries
    
    
    
    
    
    
    
    
    
    
    34,623
    
    
    
    21,968Wholesale deposits by customers
    
    
    2,442
    
    
    
    2,525
    
    
    
    1,877
    
    
    
    1,44169,650
    
    
    
    66,519
    
    
    
    95,687
    
    
    
    80,104Repayable:In no more than 3 months
    
    
    64,204
    
    
    
    62,578
    
    
    
    59,588
    
    
    
    59,709In more than 3 months but no more than 1 year
    
    
    3,579
    
    
    
    2,279
    
    
    
    3,322
    
    
    
    1,617In more than 1 year but not more than 5 years
    
    
    1,728
    
    
    
    1,267
    
    
    
    5,687
    
    
    
    4,060In more than 5 years
    
    
    139
    
    
    
    395
    
    
    
    27,090
    
    
    
    14,71869,650
    
    
    
    66,519
    
    
    
    95,687
    
    
    
    80,104
  102




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 29. Trading liabilities
 Group2007
    
    
    2006£m
    
    
    £mDeposits by banks
    
    
    19,632
    
    
    
    30,099Deposits by customers
    
    
    20,498
    
    
    
    11,139Short positions in securities
    
    
    2,252
    
    
    
    4,600Debt securities in issue
    
    
    12,534
    
    
    
    11,76654,916
    
    
    
    57,604
 Equity index-linked deposits
 Capital at Risk:
 Capital Guaranteed:
   30. Financial liabilities designated at fair value
 Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mDebt securities in issue
    
    
    7,538
    
    
    
    8,151
    
    
    
    
    
    
    
    
  31. Debt securities in issue
 Group
    
    
    
    
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mBonds and medium term notes
    
    
    29,613
    
    
    
    23,149
    
    
    
    
    
    
    
    Other debt securities in issue
    
    
    6,099
    
    
    
    5,849
    
    
    
    
    
    
    
    435,712
    
    
    
    28,998
    
    
    
    
    
    
    
    4
 103




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
  Group
    
    
    
    
    
    
    CompanyInterest Rate
    
    
    Maturity

    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £mEuro
    
    
    2.00% - 3.99%
    
    
    Up to 2010
    
    
    
    
    
    
    
    674
    
    
    
    
    
    
    
    2011 - 2019
    
    
    
    1,406
    
    
    
    1,356
    
    
    
    
    
    
    
    2020 - 2029
    
    
    
    
    
    
    
    503
    
    
    
    
    
    
    
    2030 - 2040
    
    
    
    
    
    
    
    598
    
    
    
    
    
    
    
    4.00% - 4.99%
    
    
    Up to 2010
    
    
    
    1,476
    
    
    
    
    
    
    
    
    
    
    
    2020 - 2029
    
    
    
    1,063
    
    
    
    
    
    
    
    
    
    
    
    5.00% - 7.99%
    
    
    Up to 2010
    
    
    
    
    
    
    
    1,568
    
    
    
    
    
    
    
    2020 - 2029
    
    
    
    3,887
    
    
    
    2,371
    
    
    
    
    
    
    
    2030 - 2040
    
    
    
    2,679
    
    
    
    990
    
    
    
    
    
    
    
    US Dollar
    
    
    2.00% - 3.99%
    
    
    Up to 2010
    
    
    
    1,496
    
    
    
    
    
    
    
    
    
    
    
    4.00% - 6.87%
    
    
    Up to 2010
    
    
    
    5,351
    
    
    
    5,910
    
    
    
    
    
    
    
    2011 - 2019
    
    
    
    1,102
    
    
    
    2,662
    
    
    
    
    
    
    
    2020 - 2029
    
    
    
    4,509
    
    
    
    1,000
    
    
    
    
    
    
    
    2030 - 2040
    
    
    
    3,831
    
    
    
    2,559
    
    
    
    
    
    
    
    7.00% - 8.99%
    
    
    Up to 2010
    
    
    
    
    
    
    
    1,458
    
    
    
    
    
    
    
    2011 to 2040
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    Pounds Sterling
    
    
    2.00% - 4.99%
    
    
    Up to 2010
    
    
    
    
    
    
    
    6
    
    
    
    
    
    
    
    45.00% - 5.99%
    
    
    Up to 2010
    
    
    
    378
    
    
    
    1,494
    
    
    
    
    
    
    
    2011 - 2019
    
    
    
    
    
    
    
    1,470
    
    
    
    
    
    
    
    2020 - 2029
    
    
    
    
    
    
    
    405
    
    
    
    
    
    
    
    2030 - 2040
    
    
    
    
    
    
    
    3,374
    
    
    
    
    
    
    
    6.00% - 6.87%
    
    
    Up to 2010
    
    
    
    776
    
    
    
    
    
    
    
    
    
    
    
    2011 - 2019
    
    
    
    1,439
    
    
    
    
    
    
    
    
    
    
    
    2020 - 2029
    
    
    
    1,469
    
    
    
    
    
    
    
    
    
    
    
    2030 - 2040
    
    
    
    4,408
    
    
    
    143
    
    
    
    
    
    
    
    7.00% - 8.99%
    
    
    Up to 2010
    
    
    
    
    
    
    
    343
    
    
    
    
    
    
    
    2011 - 2040
    
    
    
    113
    
    
    
    
    
    
    
    
    
    
    
    Other currencies
    
    
    0.00% - 5.99%
    
    
    Up to 2010
    
    
    
    
    
    
    
    114
    
    
    
    
    
    
    
    6.00% - 6.87%
    
    
    
    2020 - 2029
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    35,712
    
    
    
    28,998
    
    
    
    
    
    
    
    4
  32. Other borrowed funds
 Group
    
    
    Company2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £m£300m Step Up Callable Perpetual Reserve Capital Instruments
    
    
    308
    
    
    
    309
    
    
    
    308
    
    
    
    309$500m Tier One Perpetual Subordinated Debt Instruments
    
    
    
    
    
    
    247
    
    
    
    
    
    
    
    247£175m Fixed/Floating Rate Tier One Preferred Income Capital Securities
    
    
    182
    
    
    
    182
    
    
    
    182
    
    
    
    182$1,000m Non-Cumulative Trust Preferred Securities
    
    
    585
    
    
    
    573
    
    
    
    
    
    
    
    £325m Sterling Preference Shares
    
    
    344
    
    
    
    344
    
    
    
    344
    
    
    
    3441,419
    
    
    
    1,655
    
    
    
    834
    
    
    
    1,082
 104




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements
 £300m Step-up Callable Perpetual Reserve Capital Instruments
  $500m Tier One Perpetual Subordinated Debt Securities
 £175m Fixed/Floating Rate Tier One Preferred Income Capital Securities
    pari passu
 $1,000m Non-Cumulative Trust Preferred Securities
    105




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 £325m Sterling Preference Shares
 Size of shareholding

Shareholders


Preference shares of £1 each1100


1



1001011,000


40



29,4581,001+


1,698



324,970,4421,739



325,000,000
 pari passu pari passu
   33. Subordinated Liabilities
 Group


Company2007


2006


2007


2006Dated subordinated liabilities:

£m


£m


£m


£m5.00%
Subordinated bond 2009 (511.3m)


393



362



393



3624.625% Subordinated notes 2011 (500m)


378



349



378



34910.125% Subordinated guaranteed bond 2023


212



230







11.50% Subordinated guaranteed bond 2017


220



217







11.59% Subordinated loan stock 2017










203



21310.18% Subordinated loan stock 2023










198



2047.57% Subordinated notes 2029 (US $1,000m)


588



578



588



5786.50% Subordinated notes 2030


164



167



164



1678.9% Subordinated notes 2030 (US $1,000m)










586



5735.25% Subordinated notes 2015


206



203



206



203Subordinated floating rate EURIBOR notes 2015


370



338



370



338Callable capped subordinated floating rate notes 2012 (US$50m)






26







26Callable subordinated floating rate notes 2012 (US $50m)






26







26Callable subordinated floating rate notes 2012 (500m)






335







335Subordinated floating rate EURIBOR notes 2016










65



2,531



2,831



3,151



3,374
 Group


Company2007


2006


2007


2006Undated subordinated liabilities:

£m


£m


£m


£m10.0625% Exchangeable subordinated capital securities


204



204



204



2046.70% Perpetual subordinated reset capital securities (US $500m)


252



258



252



2585.56% Subordinated guaranteed notes (YEN 15,000m)


84



81



84



815.50% Subordinated guaranteed notes (YEN 5,000m)


28



27



28



27Fixed/Floating rate subordinated notes (YEN 5,000m)


26



26



26



267.50% 10 Year step-up perpetual subordinated notes


342



342



342



3427.50% 15 Year step-up perpetual subordinated notes


465



466



465



4667.38% 20 Year step-up perpetual subordinated notes


198



199



198



1997.13% 30 Year step-up perpetual subordinated notes


293



298



293



2987.13% Fixed to floating rate perpetual subordinated notes


309



288



309



2882,201



2,189



2,201



2,189Total subordinated liabilities


4,732



5,020



5,352



5,563
 106




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
               Group


Company2007


2006


2007


2006£m


£m


£m


£mIn more than 1 year but no more than 5 years


771



711



771



711In more than 5 years


1,760



2,120



2,380



2,663Undated


2,201



2,189



2,201



2,1894,732



5,020



5,352



5,563
 34. Other liabilities
 Group


Company2007


2006


2007


2006£m


£m


£m


£mTrade and other payables


2,271



1,521



1,452



1,016Deferred income


66



95







112,337



1,616



1,452



1,027
 35. Provisions
 GroupMisselling


Other


Total£m


£m


£mAt 1 January 2007


153



27



180Additional provisions






1



1Provisions released






(1)



(1)Used during the year


(58)



(7)



(65)Reclassifications






16



16At 31 December 2007


95



36



131
 Misselling


Other


TotalTo be settled:

£m


£m


£mWithin 12 months


55



26



81In more than 12 months


40



10



5095



36



131
 107




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
  CompanyMisselling


Other


Total£m


£m


£mAt 1 January 2007


151



6



157Used during the year


(56)



(1)



(57)At 31 December 2007


95



5



100
 Misselling


Other


TotalTo be settled:

£m


£m


£mWithin 12 months


55



1



56In more than 12 months


40



4



4495



5



100
 GroupMisselling


Other


Total£m


£m


£mAt 1 January 2006


192



61



253Additional provisions


61



3



64Provisions released






(1)



(1)Used during the year


(100)



(47)



(147)Reclassifications






11



11At 31 December 2006


153



27



180
 Misselling


Other


TotalTo be settled:

£m


£m


£mWithin 12 months


131



16



147In more than 12 months


22



11



33153



27



180
 CompanyMisselling


Other


Total£m


£m


£mAt 1 January 2006


190



12



202Additional provisions


61







61Used during the year


(100)



(6)



(106)At 31 December 2006


151



6



157
 Misselling


Other


TotalTo be settled:

£m


£m


£mWithin 12 months


131



2



133In more than 12 months


20



4



24151



6



157
    36. Retirement benefit obligations
 Defined Contribution Pension schemes
   108




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Defined Benefit Pension schemes
     Group


Company2007


2006


2005


2007


2006


2005£m


£m


£m


£m


£m


£mCurrent service cost


67



92



102



57



76



85Past service cost


14



16



21



14



15



18Gain on settlements or curtailments


(10)



(69)







(10)



(69)



Expected return on pension scheme assets


(194)



(180)



(163)



(192)



(168)



(136)Interest cost


220



211



200



220



197



17597



70



160



89



51



142
  Group


Company2007


2006


2007


2006£m


£m


£m


£mPresent value of defined benefit obligation


(4,581)



(4,264)



(4,559)



(4,241)Fair value of plan assets


3,602



3,230



3,577



3,208Unfunded benefit obligation


(979)



(1,034)



(982)



(1,033)
  Group


Company2007


2006


2007


2006£m


£m


£m


£mBalance at 1 January


(4,264)



(4,354)



(4,241)



(3,822)Schemes transferred to Company














(472)Current service cost


(67)



(92)



(65)



(76)Interest cost


(220)



(211)



(220)



(197)Employee contributions


(8)



(9)



(8)



(9)Past service cost


(14)



(16)



(14)



(15)Actuarial (loss)/gain


(138)



228



(140)



166Actual benefit payments


120



121



119



115Settlement/curtailment


10



69



10



69Balance at 31 December


(4,581)



(4,264)



(4,559)



(4,241)
  Group


Company2007


2006


2007


2006£m


£m


£m


£mBalance at 1 January


3,230



2,974



3,208



2,582Schemes transferred to Company














374Expected return on scheme assets


194



180



192



168Actuarial gain/(loss) on scheme assets


33



(9)



32



Company contributions paid (regular)


243



181



242



174Company contributions paid (special)


14



16



14



16Employee contributions


8



9



8



9Actual benefit payments


(120)



(121)



(119)



(115)Balance at 31 December


3,602



3,230



3,577



3,208
 109




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
   Group2007


2006


2005


2004£m


£m


£m


£mExperience gain on scheme liabilities














13Actuarial (gain)/loss on scheme liabilities


146



(228)



436



164Actuarial (gain)/loss on scheme assets


(33)



9



(282)



(107)113



(219)



154



70
 Company2007


2006


2005


2004£m


£m


£m


£mExperience gain on scheme liabilities










7



10Actuarial (gain)/loss on scheme liabilities


148



(180)



387



133Actuarial (gain)/loss on scheme assets


(32)







(242)



(94)116



(180)



152



49
    2007


2006


2005Nominal per


Nominal per


Nominal perannum


annum


annum%


%


%To determine benefit obligations: Discount rate for scheme liabilities


5.8



5.2



4.85 General salary increase


4.0



4.0



4.3 General price inflation


3.5



3.0



2.8 Expected rate of pension increase


3.5



3.0



2.8 Expected rate of return on plan assets


6.1



6.0



6.5To determine net periodic benefit cost: Discount rate


5.2



4.85



5.4 Expected rate of pension increase


3.0



2.8



2.8 Expected rate of return on plan assets


6.1



6.0



6.5
   >

To maintain a portfolio of suitable assets of appropriate quality,
suitability and liquidity which will generate income and capital
growth to meet, together with new contributions from members and the
employers, the cost of current and future benefits which the Fund
provides, as set out in the Trust Deed and Rules.>

To limit the risk of the assets failing to meet the liabilities, over
the long-term and on a shorter-term basis as required by prevailing
legislation.>

To minimise the long-term costs of the Fund by maximising the return
on the assets whilst having regard to the objectives shown above.
   110




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
  2007


2006%


%UK equities


24



25Overseas equities


20



21Corporate bonds


30



27Government Fixed Interest


12



13Government Index Linked


10



11Others


4



3100



100
  Year ending 31 December:

£m2008


1282009


1372010


1482011


1592012


171Five years ended 2017


1,075
  37. Contingent liabilities and commitments
  Group


Company2007


2006


2007


2006£m


£m


£m


£mGuarantees given to subsidiaries










101,785



104,395Guarantees given to third parties


3,589



372







Formal standby facilities, credit lines and other commitments with original term to maturity of: One year or less


1,928



1,797



1,925



1,792 More than one year


5,392



4,445



3,150



2,52210,909



6,614



106,860



108,709
 Group


Company2007


2006


2007


2006£m


£m


£m


£mOther contingent liabilities


8



8



8



8
 Unauthorised overdraft fees
   111




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
   Overseas tax claim
  Other
  Obligations under stock borrowing and lending agreements
  Other off-balance sheet commitments
  Operating lease commitments
 Group


Company£m


£mRental commitments under operating leases expiring: No later than 1 year


101



94 Later than 1 year but no later than 5 years


396



367 Later than 5 years


641



5911,138



1,052
  Group


CompanyYear ended 31 December:

£m


£m2008


101



942009


98



912010


99



922011


101



932012


98



91Total thereafter


641



591
 (1)

Under the terms of these leases Abbey has the opportunity to extend its occupation of
properties by a minimum of three years subject to 12 months notice and lease renewal being
available from external landlords during the term of the lease. At expiry Abbey has the option
to reacquire the freehold of certain properties.  Group2007


2006


2005£m


£m


£mIn respect of minimum rentals


96



105



109Less: sub-lease rentals










96



105



109
  112




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 38. Share capital
 Ordinary 
shares of 10


Preference 
shares of £1


Preference 
shares of


Preference 
shares ofpence each


each


US$0.01 each


0.01 each


Total£m


£m


£m


£m


£mShare capitalAuthorised share capitalAt 31 December 2007 and 2006


175



1,000



6



6



1,187Issued and fully paid share capitalAt 31 December 2007 and 2006


148



325











473Share premium accountAt 31 December 2007 and 2006


1,857















1,857
 39. Retained earnings and minority interest
  Group


Company2007


2006


2007


2006£m


£m


£m


£mAt 1 January


1,111



1,105



694



903Profit/(loss) for the year


685



68



351



(128)Post tax actuarial movement on defined benefit pension schemes


(98)



153



(100)



126Gains on available for sale securities


13



1



12



Gains on available for sale securities transferred to profit or loss on sale


(1)







(1)



Exchange differences on translation of foreign operations


(1)



(9)







Equity dividends proposed


(370)



(207)



(370)



(207)At 31 December


1,339



1,111



586



694
  Group2007


2006£m


£mAt 1 January






Additions


98



At 31 December


98




 Group


Company2007


2006


2005


2007


2006


2005Pence per


Pence per


Pence per


Pence per


Pence per


Pence perShare


Share


Share


Share


Share


ShareOrdinary shares (equity):2006 interim


13.46



13.93







13.46



13.93



2007 interim


11.44











11.44







24.90



13.93







24.90



13.93




 40. Consolidated cash flow statement
 a) Reconciliation of profit/(loss) before tax to net cash inflow/(outflow) from operating activities:
 Group


Company2007


2006


2005


2007


2006


2005£m


£m


£m


£m


£m


£mGroup profit/(loss) for the year


685



68



420



351



(128)



691Non cash items included in net profitDecrease/(increase) in prepayments and accrued income


(105)



(91)



(306)



(353)



(91)



(203)Increase/(decrease) in accruals and deferred income


531



176



(220)



411



(64)



109Depreciation and amortisation


205



217



199



72



79



66Loss/(profit) on sale of subsidiary and associated undertakings






223



(62)











Change in value of in-force Life Assurance Business






96



56











Provisions for liabilities and charges






63



3







159



Provision for impairment


388



413



218



346



375



(296)Other non-cash items


288



28



385



(30)



(207)



2161,992



1,193



693



797



123



583
 113




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Group


Company2007


2006


2005


2007


Restated(1)2006


2005Changes in operating assets and liabilities

£m


£m


£m


£m


£m


£mNet increase in trading assets


(695)



(938)



(7,330)











Net (increase)/decrease in derivative assets


(1,615)



2,512



(1,717)



(43)



581



(970)Net (increase)/decrease in financial assets designated at fair value


(3,107)



(933)



(2,859)



(7,434)



724



(79)Net (increase)/decrease in loans and advances to banks and customers


(8,908)



(9,914)



(2,352)



(1,641)



(20,801)



(8,232)Net decrease/(increase) in other assets


1,914



(360)



2,650



357



(166)



943Net (increase/decrease in deferred acquisition costs






(3)



67











Net increase/(decrease) in deposits by banks and deposits by customers


3,024



329



(5,973)



24,339



10,796



2,894Net (decrease)/increase in derivative liabilities


(287)



(1,046)



(289)



370



58



623Net (decrease)/increase in trading liabilities


(3,251)



(6,668)



14,218











Net (decrease)/increase in financial liabilities designated at fair value


(619)



679



21











Net decrease in insurance contract liabilities






(1,832)



(231)











Net (decrease)/increase in investment contract liabilities






(53)



93











Net increase/(decrease) in debt issued


368



5,879



(185)



(3)







1Net (decrease)/increase in other liabilities


(20)



(675)



(4,009)



(315)



(134)



(1,580)Effects of exchange rate differences


396



(1,196)



80







(108)



122Net cash flow (used in)/from operating activities before tax


(10,808)



(13,026)



(7,123)



16,427



(8,927)



(5,695)Income tax (paid)/received


(5)



(60)



(132)



48



56



(8)Net cash flow (used in)/from operating activities


(10,813)



(13,086)



(7,255)



16,475



(8,871)



(5,703)
 b) Analysis of the balances of cash and cash equivalents in the balance sheet
 Group


Company2007


2006


2005


2007


Restated(1)2006


2005£m


£m


£m


£m


£m


£mCash and balances with central banks


1,038



888



991



1,032



888



370Debt securities


5,819



8,026



16,117











Net trading other cash equivalents


(11,832)



(6,629)



(5,175)











Net non trading other cash equivalents


(5,830)



(6,132)



(3,692)



(6,336)



(22,105)



(15,454)Cash and cash equivalents


(10,805)



(3,847)



8,241



(5,304)



(21,217)



(15,084)
 (1)
    
    A description of the restatement can be found in the
Accounting Policies on page 77.
 c) Sale of subsidiaries, associated undertakings and businesses
 Group2006


2005Net assets disposed of:

£m


£mDerivative financial instruments


1,007



Financial assets designated at fair value


24,130



Loans and advances to banks


1,329



Loans and advances to customers


19



1,092Value of in force business


1,625



Current tax accounts


4



Deferred tax asset


1



Other assets


1,903



20Deposits by banks


(609)



Deposits by customers


(3)



Financial liabilities designated at fair value


(544)



Debt securities in issue


(67)



Subordinated liabilities


(334)



Insurance and reinsurance liabilities


(19,647)



Other liabilities


(1,151)



(329)Investment contract liabilities


(3,253)



Current tax liabilities


(34)



Deferred tax liabilities


(406)



Retirement benefit obligations


(2)



3,968



783Profit/ (loss) on disposal


(223)



623,745



845Satisfied by:Cash and cash equivalents


3,745



845Less: Cash and cash equivalents in subsidiary sold


(3,501)



Net cash inflow of sale


244



845
 114




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
  d) Discontinued operations
  41. Collateral pledged and received
        42. Share-based compensation
    2007


2006


2005Risk free interest rate


5.0%-5.8%



4.5%-5.0%



4.5%-4.6%Dividend growth, based solely upon average growth since 1989


10%



10%



10%Volatility of underlying shares based upon historical volatility over five years


19.80%-26.90%



17.70%-19.85%



16.96%-17.58%Expected lives of options granted under: Employee Sharesave 3, 5 & 7 year schemes

3, 5 & 7 years


3, 5 & 7 years


3, 5 & 7 years Executive Share Option scheme

10 years


10 years


10 years Medium term incentive plan

3 years


3 years


3 years Long term incentive plan

3 years








 115




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
   Executive Share Option scheme
    
    
    Employee Sharesave scheme
    
    
    Employee Share Option schemeWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averageNumber of
    
    
    exercise
    
    
    Number of
    
    
    exercise
    
    
    Number of
    
    
    exerciseoptions
    
    
    price
    
    
    options
    
    
    price
    
    
    options
    
    
    price000s
    
    
    £
    
    
    000s
    
    
    £
    
    
    000s
    
    
    £2007Options outstanding at the start of the year
    
    
    178
    
    
    
    4.11
    
    
    
    7,638
    
    
    
    3.32
    
    
    
    
    
    
    
    Options exercised during the year
    
    
    (34)
    
    
    
    3.96
    
    
    
    (1,501)
    
    
    
    3.81
    
    
    
    
    
    
    
    Options forfeited during the year
    
    
    
    
    
    
    
    
    
    
    (419)
    
    
    
    3.25
    
    
    
    
    
    
    
    Options expired during the year
    
    
    
    
    
    
    
    
    
    
    (34)
    
    
    
    5.92
    
    
    
    
    
    
    
    Options outstanding at the end of the year
    
    
    144
    
    
    
    4.15
    
    
    
    5,684
    
    
    
    3.18
    
    
    
    
    
    
    
    Options exercisable at the end of the year
    
    
    144
    
    
    
    4.15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2006Options outstanding at the start of the year
    
    
    270
    
    
    
    4.08
    
    
    
    13,799
    
    
    
    3.38
    
    
    
    54
    
    
    
    5.90Options exercised during the year
    
    
    (92)
    
    
    
    4.01
    
    
    
    (5,095)
    
    
    
    3.36
    
    
    
    (33)
    
    
    
    5.90Options forfeited during the year
    
    
    
    
    
    
    
    
    
    
    (897)
    
    
    
    3.42
    
    
    
    
    
    
    
    Options expired during the year
    
    
    
    
    
    
    
    
    
    
    (169)
    
    
    
    6.05
    
    
    
    (21)
    
    
    
    5.90Options outstanding at the end of the year
    
    
    178
    
    
    
    4.11
    
    
    
    7,638
    
    
    
    3.32
    
    
    
    
    
    
    
    Options exercisable at the end of the year
    
    
    178
    
    
    
    4.11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2005Options outstanding at the start of the year
    
    
    359
    
    
    
    4.16
    
    
    
    17,260
    
    
    
    3.56
    
    
    
    57
    
    
    
    5.90Options exercised during the year
    
    
    (89)
    
    
    
    4.43
    
    
    
    (1,677)
    
    
    
    4.45
    
    
    
    (3)
    
    
    
    5.90Options forfeited during the year
    
    
    
    
    
    
    
    
    
    
    (1,775)
    
    
    
    4.07
    
    
    
    
    
    
    
    Options expired during the year
    
    
    
    
    
    
    
    
    
    
    (9)
    
    
    
    7.69
    
    
    
    
    
    
    
    Options outstanding at the end of the year
    
    
    270
    
    
    
    4.08
    
    
    
    13,799
    
    
    
    3.38
    
    
    
    54
    
    
    
    5.90Options exercisable at the end of the year
    
    
    270
    
    
    
    4.08
    
    
    
    3
    
    
    
    7.17
    
    
    
    54
    
    
    
    5.90
  Executive Share Option scheme
  Options outstanding
    
    
    Options exercisableWeighted
 average
    
    
    Weighted average
    
    
    
    
    
    
    Weighted 
averageNumber
    
    
    remaining
 contractual life
    
    
    exercise 
price
    
    
    Number
    
    
    exercise 
priceRange of exercise prices
    
    000s
    
    
    years
    
    
    £
    
    
    000s
    
    
    £Between £3 and £4
    
    
    70
    
    
    
    5
    
    
    
    3.73
    
    
    
    70
    
    
    
    3.73Between £4 and £5
    
    
    74
    
    
    
    6
    
    
    
    4.54
    
    
    
    74
    
    
    
    4.74
  Options outstanding
    
    
    
    
    
    
    Options exercisableWeighted
 average
    
    
    Weighted
 average
    
    
    
    
    
    
    Weighted
 averageNumber
    
    
    remaining 
contractual life
    
    
    exercise price
    
    
    Number
    
    
    exercise 
priceRange of exercise prices
    
    000s
    
    
    years
    
    
    £
    
    
    000s
    
    
    £Between £3 and £4
    
    
    94
    
    
    
    6
    
    
    
    3.73
    
    
    
    94
    
    
    
    3.73Between £4 and £5
    
    
    84
    
    
    
    7
    
    
    
    4.54
    
    
    
    84
    
    
    
    4.54
 Employee Sharesave scheme
  116




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Employee Share Option scheme
  Medium Term Incentive Plan
  Number of awards
    
    
    Weighted average fairgranted
    
    
    value2007
    
    000s
    
    
    £Conditional awards outstanding at the beginning of the year
    
    
    2,537
    
    
    
    9.39Conditional awards granted during the year
    
    
    
    
    
    
    Conditional awards forfeited during the year
    
    
    (317)
    
    
    
    9.39Conditional awards outstanding at the end of the year
    
    
    (2,220)
    
    
    
    10.88
 Number of awards
    
    
    Weighted average fairgranted
    
    
    value2006
    
    000s
    
    
    £Conditional awards outstanding at the beginning of the year
    
    
    2,519
    
    
    
    7.34Conditional awards granted during the year
    
    
    306
    
    
    
    8.83Conditional awards forfeited during the year
    
    
    (288)
    
    
    
    7.34Conditional awards outstanding at the end of the year
    
    
    2,537
    
    
    
    9.39
 Long Term Incentive Plan
  Number of awards
    
    
    Weighted average fairgranted
    
    
    value2007
    
    000s
    
    
    £Conditional awards outstanding at the beginning of the year
    
    
    
    
    
    
    Conditional awards granted during the year
    
    
    3,092
    
    
    
    4.23Conditional awards forfeited during the year
    
    
    
    
    
    
    Conditional awards outstanding at the end of the year
    
    
    3,092
    
    
    
    4.60
   43. Directors emoluments and interests
   Aggregate amountNumber of
    
    
    outstandingOther Key Management Personnel - Loans*
    
    persons
    
    
    £0002007
    
    
    1
    
    
    
    8062006
    
    
    2
    
    
    
    1,281
 *
    
    Other Key Management Personnel are defined as the Executive Committee of Abbey and the Board
and Executive Committee of Abbeys parent company, Banco Santander, S.A. who served during the
year.
  117




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 44. Related party disclosures
 Transactions with Directors, Other Key Management Personnel and each of their connected persons
 Amounts in respect ofNumber of directors 
and
    
    
    directors, Other Key
ManagementOther Key 
Management
    
    
    Personnel(1)and theirconnected persons2007
    
    Personnel(1)
    
    
    £000Secured loans, unsecured loans and overdraftsLoans outstanding at 1 January
    
    
    2
    
    
    
    1,281Net movements in the year
    
    
    (1)
    
    
    
    (475)Loans outstanding at 31 December
    
    
    1
    
    
    
    806Deposit, bank and instant access accounts and investmentsDeposits, bank instant access accounts and investments at 1 January
    
    
    14
    
    
    
    2,588Net movements in the year
    
    
    (2)
    
    
    
    2,977Deposit, bank and instant access accounts and investments at 31 December
    
    
    12
    
    
    
    5,565Life assurance policiesLife assurance policies at 1 January
    
    
    6
    
    
    
    1,515Net movements in the year
    
    
    (4)
    
    
    
    85Life assurance policies at 31 December
    
    
    2
    
    
    
    1,600
 Amounts in respect ofNumber of directors 
and
    
    
    directors, Other Key
ManagementOther Key 
Management
    
    
    Personnel(1)and their
connected persons2006
    
    Personnel(1)
    
    
    £000Secured loans, unsecured loans and overdraftsLoans outstanding at 1 January
    
    
    1
    
    
    
    215Net movements in the year
    
    
    1
    
    
    
    1,066Loans outstanding at 31 December
    
    
    2
    
    
    
    1,281Deposit, bank and instant access accounts and investmentsDeposits, bank instant access accounts and investments at 1 January
    
    
    12
    
    
    
    4,904Net movements in the year
    
    
    2
    
    
    
    (2,316)Deposit, bank and instant access accounts and investments at 31 December
    
    
    14
    
    
    
    2,588Life assurance policiesLife assurance policies at 1 January
    
    
    6
    
    
    
    1,202Net movements in the year
    
    
    
    
    
    
    313Life assurance policies at 31 December
    
    
    6
    
    
    
    1,515
 (1)
    
    Other Key Management Personnel are defined as the Executive Committee of Abbey and the Board
and Executive Committee of Abbeys parent company, Banco Santander, S.A., who served during
the year.
    Remuneration of Key Management Personnel
  2007
    
    
    2006
    
    
    2005Key management compensation
    
    £
    
    
    £
    
    
    £Short-term employee benefits
    
    
    11,602,405
    
    
    
    15,076,922
    
    
    
    14,700,960Post employment benefits
    
    
    77,814
    
    
    
    89,753
    
    
    
    4,138,247Other long term benefits
    
    
    
    
    
    
    
    
    
    
    Termination benefits
    
    
    
    
    
    
    548,692
    
    
    
    771,661Share-based payments
    
    
    1,101,786
    
    
    
    904,217
    
    
    
    984,10512,782,005
    
    
    
    16,619,584
    
    
    
    20,594,973
 118




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Medium Term Incentive Plan
  Long Term Incentive Plan
  Parent undertaking and controlling party
  Transactions with related parties
  Interest, fees and
    
    
    Interest, fees and
    
    
    Amounts owed by
    
    
    Amounts owedother income received
    
    
    other expenses paid
    
    
    related parties
    
    
    to related parties2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mParent company
    
    
    (293)
    
    
    
    (23)
    
    
    
    (16)
    
    
    
    327
    
    
    
    80
    
    
    
    40
    
    
    
    2,238
    
    
    
    1,562
    
    
    
    (7,388)
    
    
    
    (5,941)Fellow subsidiaries
    
    
    (171)
    
    
    
    (28)
    
    
    
    
    
    
    
    24
    
    
    
    84
    
    
    
    108
    
    
    
    3,031
    
    
    
    2,732
    
    
    
    (351)
    
    
    
    (408)Associates
    
    
    (19)
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    2
    
    
    
    
    
    
    
    3
    
    
    
    340
    
    
    
    (8)
    
    
    
    (483)
    
    
    
    (51)
    
    
    
    (16)
    
    
    
    356
    
    
    
    166
    
    
    
    148
    
    
    
    5,272
    
    
    
    4,634
    
    
    
    (7,747)
    
    
    
    (6,349)During the year, the Company entered into the following transactions with related parties:Interest, fees and
    
    
    
    
    
    
    Interest, fees and
    
    
    Amounts owed by
    
    
    Amounts owedother income received
    
    
    other expenses paid
    
    
    related parties
    
    
    to related parties2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006£m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mParent company
    
    
    (91)
    
    
    
    (21)
    
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    1,018
    
    
    
    1,500
    
    
    
    (373)
    
    
    
    Subsidiaries
    
    
    (2,072)
    
    
    
    (1,611)
    
    
    
    (1,541)
    
    
    
    4,532
    
    
    
    3,592
    
    
    
    3,442
    
    
    
    39,464
    
    
    
    41,219
    
    
    
    (95,553)
    
    
    
    (84,278)Fellow subsidiaries
    
    
    (106)
    
    
    
    (3)
    
    
    
    
    
    
    
    17
    
    
    
    61
    
    
    
    
    
    
    
    13
    
    
    
    7
    
    
    
    (228)
    
    
    
    (373)Associates
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    (2,269)
    
    
    
    (1,635)
    
    
    
    (1,541)
    
    
    
    4,549
    
    
    
    3,660
    
    
    
    3,442
    
    
    
    40,495
    
    
    
    42,727
    
    
    
    (96,154)
    
    
    
    (84,651)
   119




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##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
   45. Events after the balance sheet date
  46. Financial Instruments
   Group2007
    
    Carrying
    
    
    
    
    
    
    Surplus/value
    
    
    Fair value
    
    
    (deficit)£m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    1,038
    
    
    
    1,038
    
    
    
    Loans and advances to banks
    
    
    3,441
    
    
    
    3,441
    
    
    
    Loans and advances to customers
    
    
    112,147
    
    
    
    112,824
    
    
    
    677LiabilitiesDeposits by banks
    
    
    7,923
    
    
    
    7,923
    
    
    
    Deposits by customers
    
    
    69,650
    
    
    
    69,754
    
    
    
    (104)Debt securities in issue
    
    
    35,712
    
    
    
    35,399
    
    
    
    313Other borrowed funds
    
    
    1,419
    
    
    
    1,620
    
    
    
    (201)Subordinated liabilities
    
    
    4,732
    
    
    
    4,698
    
    
    
    34
 Company2007
    
    Carrying
    
    
    
    
    
    
    Surplus/value
    
    
    Fair value
    
    
    (deficit)£m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    1,032
    
    
    
    1,032
    
    
    
    Loans and advances to banks
    
    
    40,685
    
    
    
    40,685
    
    
    
    Loans and advances to customers
    
    
    110,976
    
    
    
    111,653
    
    
    
    677LiabilitiesDeposits by banks
    
    
    59,798
    
    
    
    60,019
    
    
    
    (221)Deposits by customers
    
    
    95,686
    
    
    
    95,791
    
    
    
    (105)Other borrowed funds
    
    
    834
    
    
    
    1,022
    
    
    
    (188)Subordinated liabilities
    
    
    5,352
    
    
    
    5,361
    
    
    
    (9)
 Group2006
    
    Carrying
    
    
    
    
    
    
    Surplus/value
    
    
    Fair value
    
    
    (deficit)£m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    888
    
    
    
    888
    
    
    
    Loans and advances to banks
    
    
    2,242
    
    
    
    2,242
    
    
    
    Loans and advances to customers
    
    
    103,146
    
    
    
    103,309
    
    
    
    163LiabilitiesDeposits by banks
    
    
    6,656
    
    
    
    6,656
    
    
    
    Deposits by customers
    
    
    66,519
    
    
    
    66,571
    
    
    
    (52)Debt securities in issue
    
    
    28,998
    
    
    
    29,142
    
    
    
    (144)Other borrowed funds
    
    
    1,655
    
    
    
    2,069
    
    
    
    (414)Subordinated liabilities
    
    
    5,020
    
    
    
    5,200
    
    
    
    (180)
 120




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Company2006
    
    Carrying
    
    
    
    
    
    
    Surplus/value
    
    
    Fair value
    
    
    (deficit)£m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    888
    
    
    
    888
    
    
    
    Loans and advances to banks
    
    
    41,711
    
    
    
    41,711
    
    
    
    Loans and advances to customers
    
    
    103,249
    
    
    
    103,412
    
    
    
    163LiabilitiesDeposits by banks
    
    
    61,123
    
    
    
    60,955
    
    
    
    168Deposits by customers
    
    
    80,104
    
    
    
    80,156
    
    
    
    (52)Debt securities in issue
    
    
    4
    
    
    
    4
    
    
    
    Other borrowed funds
    
    
    1,082
    
    
    
    1,392
    
    
    
    (310)Subordinated liabilities
    
    
    5,563
    
    
    
    5,877
    
    
    
    (314)
  Fair value measurement
  Fair value management
  Assets:
 Cash and balances at central banks/ Loans and advances to banks
  Loans and advances to customers
  a) Variable rate
  b) Fixed rate
  Liabilities:
 Deposits by banks
 Deposits by customers
  121




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Debt securities in issue and subordinated liabilities
  Intra Group balances
 Net gains and losses on financial instruments
 Group2007
    
    
    2006
    
    
    2005£m
    
    
    £m
    
    
    £mFinancial assets and liabilities at fair value through profit or loss on initial recognition
    
    
    (14)
    
    
    
    (73)
    
    
    
    (77)Financial assets and liabilities held for trading
    
    
    85
    
    
    
    430
    
    
    
    514Loans and receivables
    
    
    6,974
    
    
    
    5,599
    
    
    
    5,360Available for sale
    
    
    18
    
    
    
    1
    
    
    
    Financial liabilities held at amortised cost
    
    
    (5,292)
    
    
    
    (4,388)
    
    
    
    (4,294)1,771
    
    
    
    1,569
    
    
    
    1,503
 47. Capital Management and Resources
 Capital management and capital allocation
 Capital adequacy
 Group capital
 2007
    
    
    2006Balance sheet
    
    £m
    
    
    £mTotal Tier 1 capital
    
    
    4,971
    
    
    
    5,040Total Tier 2 capital
    
    
    4,260
    
    
    
    4,668Less: supervisory deductions
    
    
    (1,434)
    
    
    
    (1,806)Total regulatory capital
    
    
    7,797
    
    
    
    7,902
  122




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 2007 compared to 2006
 48. Consolidating financial information
    Income statements
 Abbey National 
TreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2007
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    1,101
    
    
    
    241
    
    
    
    162
    
    
    
    (5)
    
    
    
    1,499Fee, commission, trading, and other income
    
    
    900
    
    
    
    22
    
    
    
    623
    
    
    
    (262)
    
    
    
    1,283Total operating income
    
    
    2,001
    
    
    
    263
    
    
    
    785
    
    
    
    (267)
    
    
    
    2,782Administration expenses
    
    
    (1,163)
    
    
    
    (129)
    
    
    
    (92)
    
    
    
    15
    
    
    
    (1,369)Depreciation and amortisation
    
    
    (72)
    
    
    
    (2)
    
    
    
    (131)
    
    
    
    
    
    
    
    (205)Impairment and provisions
    
    
    (346)
    
    
    
    4
    
    
    
    24
    
    
    
    (26)
    
    
    
    (344)Profit/(loss) on continuing ops before tax
    
    
    420
    
    
    
    136
    
    
    
    586
    
    
    
    (278)
    
    
    
    864Tax on profit/(loss) on continuing ops
    
    
    (69)
    
    
    
    (29)
    
    
    
    (89)
    
    
    
    8
    
    
    
    (179)Profit/ (loss) for the year from continuing ops
    
    
    351
    
    
    
    107
    
    
    
    497
    
    
    
    (270)
    
    
    
    685Profit/(loss) for the year from discontinued ops
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Profit/(loss) for the year
    
    
    351
    
    
    
    107
    
    
    
    497
    
    
    
    (270)
    
    
    
    685
 Abbey National 
TreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2006
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    983
    
    
    
    109
    
    
    
    136
    
    
    
    
    
    
    
    1,228Fee, commission, trading, and other income
    
    
    574
    
    
    
    122
    
    
    
    805
    
    
    
    (259)
    
    
    
    1,242Total operating income
    
    
    1,557
    
    
    
    231
    
    
    
    941
    
    
    
    (259)
    
    
    
    2,470Administration expenses
    
    
    (1,181)
    
    
    
    (109)
    
    
    
    (130)
    
    
    
    
    
    
    
    (1,420)Depreciation and amortisation
    
    
    (79)
    
    
    
    (3)
    
    
    
    (133)
    
    
    
    
    
    
    
    (215)Impairment and provisions
    
    
    (534)
    
    
    
    
    
    
    
    165
    
    
    
    (38)
    
    
    
    (407)Profit/(loss) on continuing ops before tax
    
    
    (237)
    
    
    
    119
    
    
    
    843
    
    
    
    (297)
    
    
    
    428Tax on profit/(loss) on continuing ops
    
    
    109
    
    
    
    (55)
    
    
    
    (169)
    
    
    
    
    
    
    
    (115)Profit/ (loss) for the year from continuing ops
    
    
    (128)
    
    
    
    64
    
    
    
    674
    
    
    
    (297)
    
    
    
    313Profit/(loss) for the year from discontinued ops
    
    
    
    
    
    
    
    
    
    
    (245)
    
    
    
    
    
    
    
    (245)Profit/(loss) for the year
    
    
    (128)
    
    
    
    64
    
    
    
    429
    
    
    
    (297)
    
    
    
    68
 123




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Abbey National 
TreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    748
    
    
    
    156
    
    
    
    263
    
    
    
    5
    
    
    
    1,172Fee, commission, trading, and other income
    
    
    1,162
    
    
    
    240
    
    
    
    419
    
    
    
    (638)
    
    
    
    1,183Total operating income
    
    
    1,910
    
    
    
    396
    
    
    
    682
    
    
    
    (633)
    
    
    
    2,355Administration expenses
    
    
    (1,441)
    
    
    
    (128)
    
    
    
    (26)
    
    
    
    18
    
    
    
    (1,577)Depreciation and amortisation
    
    
    (66)
    
    
    
    (3)
    
    
    
    (126)
    
    
    
    
    
    
    
    (195)Impairment and provisions
    
    
    296
    
    
    
    
    
    
    
    (233)
    
    
    
    (284)
    
    
    
    (221)Profit/(loss) on continuing ops before tax
    
    
    699
    
    
    
    265
    
    
    
    297
    
    
    
    (899)
    
    
    
    362Tax on profit/(loss) on continuing ops
    
    
    (8)
    
    
    
    (89)
    
    
    
    (1)
    
    
    
    (10)
    
    
    
    (108)Profit/ (loss) for the year from continuing ops
    
    
    691
    
    
    
    176
    
    
    
    296
    
    
    
    (909)
    
    
    
    254Profit/(loss) for the year from discontinued ops
    
    
    
    
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    166Profit/(loss) for the year
    
    
    691
    
    
    
    176
    
    
    
    462
    
    
    
    (909)
    
    
    
    420
 Balance sheets
 Abbey NationalThe Company
    
    
    Treasury 
Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedAt 31 December 2007
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCash and balances at central banks
    
    
    1,032
    
    
    
    7
    
    
    
    (1)
    
    
    
    
    
    
    
    1,038Trading assets
    
    
    
    
    
    
    32,760
    
    
    
    34,622
    
    
    
    (10,955)
    
    
    
    56,427Derivative financial instruments
    
    
    689
    
    
    
    10,358
    
    
    
    1,618
    
    
    
    (2,714)
    
    
    
    9,951Financial assets designated at fair value
    
    
    7,500
    
    
    
    11,446
    
    
    
    283
    
    
    
    (7,446)
    
    
    
    11,783Loans and advances to banks
    
    
    40,685
    
    
    
    57,021
    
    
    
    60,124
    
    
    
    (154,389)
    
    
    
    3,441Loans and advances to customers
    
    
    110,976
    
    
    
    6,181
    
    
    
    35,143
    
    
    
    (40,153)
    
    
    
    112,147Available for sale securities
    
    
    28
    
    
    
    45
    
    
    
    1,929
    
    
    
    (1,962)
    
    
    
    40Macro hedge of interest rate risk
    
    
    
    
    
    
    220
    
    
    
    
    
    
    
    (3)
    
    
    
    217Investment in associated undertakings
    
    
    33
    
    
    
    
    
    
    
    
    
    
    
    (4)
    
    
    
    29Investment in subsidiary undertakings
    
    
    5,053
    
    
    
    2,336
    
    
    
    2,925
    
    
    
    (10,314)
    
    
    
    Intangible assets
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    90Property, plant and equipment
    
    
    501
    
    
    
    13
    
    
    
    14
    
    
    
    
    
    
    
    528Operating lease assets
    
    
    
    
    
    
    
    
    
    
    2,164
    
    
    
    
    
    
    
    2,164Current tax assets
    
    
    190
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    197Deferred tax assets
    
    
    620
    
    
    
    18
    
    
    
    27
    
    
    
    
    
    
    
    665Other assets
    
    
    686
    
    
    
    57
    
    
    
    165
    
    
    
    (2)
    
    
    
    906Total assets
    
    
    167,993
    
    
    
    120,462
    
    
    
    139,110
    
    
    
    (227,942)
    
    
    
    199,623Deposits by banks
    
    
    59,798
    
    
    
    49,847
    
    
    
    17,990
    
    
    
    (119,712)
    
    
    
    7,923Deposits by customers
    
    
    95,687
    
    
    
    9,714
    
    
    
    43,768
    
    
    
    (79,519)
    
    
    
    69,650Derivative financial instruments
    
    
    1,051
    
    
    
    10,457
    
    
    
    1,137
    
    
    
    (2,714)
    
    
    
    9,931Trading liabilities
    
    
    
    
    
    
    33,926
    
    
    
    27,219
    
    
    
    (6,229)
    
    
    
    54,916Financial liabilities designated at fair value
    
    
    
    
    
    
    7,530
    
    
    
    8
    
    
    
    
    
    
    
    7,538Debt securities in issue
    
    
    
    
    
    
    5,840
    
    
    
    37,502
    
    
    
    (7,630)
    
    
    
    35,712Other borrowed funds
    
    
    834
    
    
    
    
    
    
    
    737
    
    
    
    (152)
    
    
    
    1,419Subordinated liabilities
    
    
    5,352
    
    
    
    
    
    
    
    1,091
    
    
    
    (1,711)
    
    
    
    4,732Macro hedge of interest rate risk
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    (3)
    
    
    
    Other liabilities
    
    
    1,452
    
    
    
    254
    
    
    
    632
    
    
    
    (1)
    
    
    
    2,337Other provisions
    
    
    100
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    131Current tax liabilities
    
    
    137
    
    
    
    176
    
    
    
    56
    
    
    
    
    
    
    
    369Deferred tax liabilities
    
    
    6
    
    
    
    
    
    
    
    532
    
    
    
    6
    
    
    
    544Retirement benefit obligations
    
    
    982
    
    
    
    
    
    
    
    (3)
    
    
    
    
    
    
    
    979Total liabilities
    
    
    165,402
    
    
    
    117,744
    
    
    
    130,700
    
    
    
    (217,665)
    
    
    
    196,181Total shareholders equity
    
    
    2,591
    
    
    
    2,718
    
    
    
    8,410
    
    
    
    (10,277)
    
    
    
    3,342Total liabilities and equity
    
    
    167,993
    
    
    
    120,462
    
    
    
    139,110
    
    
    
    (227,942)
    
    
    
    199,623
 124




---



##### Table of Contents



Financial Statements
 Notes to the Financial Statements continued
 Abbey National 
TreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedAt 31 December 2006
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mCash and balances at central banks
    
    
    888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    888Trading assets
    
    
    
    
    
    
    39,611
    
    
    
    22,703
    
    
    
    
    
    
    
    62,314Derivative financial instruments
    
    
    646
    
    
    
    9,000
    
    
    
    427
    
    
    
    (1,737)
    
    
    
    8,336Financial assets designated at fair value
    
    
    66
    
    
    
    8,137
    
    
    
    510
    
    
    
    
    
    
    
    8,713Loans and advances to banks
    
    
    41,711
    
    
    
    57,784
    
    
    
    39,348
    
    
    
    (136,601)
    
    
    
    2,242Loans and advances to customers
    
    
    103,249
    
    
    
    4,860
    
    
    
    19,946
    
    
    
    (24,909)
    
    
    
    103,146Available for sale securities
    
    
    12
    
    
    
    46
    
    
    
    1,883
    
    
    
    (1,918)
    
    
    
    23Investment in associated undertakings
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    (3)
    
    
    
    22Investment in subsidiary undertakings
    
    
    4,926
    
    
    
    2,341
    
    
    
    2,518
    
    
    
    (9,785)
    
    
    
    Intangible assets
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    90Property, plant and equipment
    
    
    395
    
    
    
    8
    
    
    
    12
    
    
    
    
    
    
    
    415Operating lease assets
    
    
    
    
    
    
    
    
    
    
    2,082
    
    
    
    
    
    
    
    2,082Current tax assets
    
    
    192
    
    
    
    
    
    
    
    31
    
    
    
    
    
    
    
    223Deferred tax assets
    
    
    747
    
    
    
    22
    
    
    
    35
    
    
    
    
    
    
    
    804Other assets
    
    
    744
    
    
    
    1,470
    
    
    
    293
    
    
    
    
    
    
    
    2,507Total assets
    
    
    153,601
    
    
    
    123,279
    
    
    
    89,878
    
    
    
    (174,953)
    
    
    
    191,805Deposits by banks
    
    
    61,123
    
    
    
    49,012
    
    
    
    8,007
    
    
    
    (111,486)
    
    
    
    6,656Deposits by customers
    
    
    80,104
    
    
    
    8,261
    
    
    
    28,340
    
    
    
    (50,186)
    
    
    
    66,519Derivative financial instruments
    
    
    681
    
    
    
    10,236
    
    
    
    1,038
    
    
    
    (1,737)
    
    
    
    10,218Trading liabilities
    
    
    
    
    
    
    38,287
    
    
    
    19,317
    
    
    
    
    
    
    
    57,604Financial liabilities designated at fair value
    
    
    
    
    
    
    8,134
    
    
    
    17
    
    
    
    
    
    
    
    8,151Debt securities in issue
    
    
    4
    
    
    
    6,232
    
    
    
    22,762
    
    
    
    
    
    
    
    28,998Other borrowed funds
    
    
    1,082
    
    
    
    
    
    
    
    847
    
    
    
    (274)
    
    
    
    1,655Subordinated liabilities
    
    
    5,563
    
    
    
    
    
    
    
    1,102
    
    
    
    (1,645)
    
    
    
    5,020Macro hedge of interest rate risk
    
    
    6
    
    
    
    168
    
    
    
    
    
    
    
    
    
    
    
    174Other liabilities
    
    
    1,027
    
    
    
    177
    
    
    
    412
    
    
    
    
    
    
    
    1,616Other provisions
    
    
    157
    
    
    
    
    
    
    
    23
    
    
    
    
    
    
    
    180Current tax liabilities
    
    
    122
    
    
    
    160
    
    
    
    18
    
    
    
    
    
    
    
    300Deferred tax liabilities
    
    
    
    
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    564Retirement benefit obligations
    
    
    1,033
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    1,034Total liabilities
    
    
    150,902
    
    
    
    120,667
    
    
    
    82,448
    
    
    
    (165,328)
    
    
    
    188,689Total shareholders equity
    
    
    2,699
    
    
    
    2,612
    
    
    
    7,430
    
    
    
    (9,625)
    
    
    
    3,116Total liabilities and equity
    
    
    153,601
    
    
    
    123,279
    
    
    
    89,878
    
    
    
    (174,953)
    
    
    
    191,805
 Cash flow statements
 Abbey NationalThe Company
    
    
    Treasury 
Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2007
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet cash flow from / (used in) operating activities
    
    
    16,475
    
    
    
    (8,667)
    
    
    
    (18,621)
    
    
    
    
    
    
    
    (10,813)Net cash flow from / (used in) investing activities
    
    
    14
    
    
    
    (9)
    
    
    
    (201)
    
    
    
    
    
    
    
    (196)Net cash flow from / (used in) financing activities
    
    
    (576)
    
    
    
    
    
    
    
    5,352
    
    
    
    
    
    
    
    4,776Net increase/ (decrease) in cash and cash equivalents
    
    
    15,913
    
    
    
    (8,676)
    
    
    
    (13,470)
    
    
    
    
    
    
    
    (6,233)Cash and cash equivalents at beginning of the year
    
    
    (21,217)
    
    
    
    1,078
    
    
    
    16,292
    
    
    
    
    
    
    
    (3,847)Effects of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (333)
    
    
    
    (392)
    
    
    
    
    
    
    
    (725)Cash and cash equivalents at end of the year
    
    
    (5,304)
    
    
    
    (7,931)
    
    
    
    2,430
    
    
    
    
    
    
    
    (10,805)
 Abbey National TreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2006
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet cash flow from / (used in) operating activities
    
    
    (8,871)
    
    
    
    (9,024)
    
    
    
    4,809
    
    
    
    
    
    
    
    (13,086)Net cash flow from / (used in) investing activities
    
    
    3,977
    
    
    
    294
    
    
    
    (4,259)
    
    
    
    
    
    
    
    12Net cash flow from / (used in) financing activities
    
    
    (1,239)
    
    
    
    (247)
    
    
    
    3,244
    
    
    
    
    
    
    
    1,758Net (decrease) in cash and cash equivalents
    
    
    (6,133)
    
    
    
    (8,977)
    
    
    
    3,794
    
    
    
    
    
    
    
    (11,316)Cash and cash equivalents at beginning of the year
    
    
    (15,084)
    
    
    
    9,553
    
    
    
    13,772
    
    
    
    
    
    
    
    8,241Effects of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    502
    
    
    
    (1,274)
    
    
    
    
    
    
    
    (772)Cash and cash equivalents at end of the year
    
    
    (21,217)
    
    
    
    1,078
    
    
    
    16,292
    
    
    
    
    
    
    
    (3,847)
 Abbey National 
TreasuryThe Company
    
    
    Services
    
    
    Other
    
    
    Adjustments
    
    
    ConsolidatedFor the year ended 31 December 2005
    
    £m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet cash flow from / (used in) operating activities
    
    
    (5,703)
    
    
    
    (16,657)
    
    
    
    15,105
    
    
    
    
    
    
    
    (7,255)Net cash flow from investing activities
    
    
    41
    
    
    
    243
    
    
    
    1,750
    
    
    
    
    
    
    
    2,034Net cash flow from / (used in) financing activities
    
    
    96
    
    
    
    (38)
    
    
    
    1,368
    
    
    
    
    
    
    
    1,426Net increase/ (decrease) in cash and cash equivalents
    
    
    (5,566)
    
    
    
    (16,452)
    
    
    
    18,223
    
    
    
    
    
    
    
    (3,795)Cash and cash equivalents at beginning of the year
    
    
    (9,518)
    
    
    
    26,392
    
    
    
    (5,615)
    
    
    
    
    
    
    
    11,259Effects of exchange rate changes on cash and cash equivalents
    
    
    
    
    
    
    (387)
    
    
    
    1,164
    
    
    
    
    
    
    
    777Cash and cash equivalents at end of the year
    
    
    (15,084)
    
    
    
    9,553
    
    
    
    13,772
    
    
    
    
    
    
    
    8,241
 125




---



##### Table of Contents



Selected Financial Data
 
 Selected Financial Data
  Balance sheets
 2007(1)
    
    
    2007
    
    
    2006(2)
    
    
    2005(3)
    
    
    2004$m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mAssetsCash and balances at central banks
    
    
    2,060
    
    
    
    1,038
    
    
    
    888
    
    
    
    991
    
    
    
    454Trading assets
    
    
    111,968
    
    
    
    56,427
    
    
    
    62,314
    
    
    
    58,231
    
    
    
    Derivative financial instruments
    
    
    19,746
    
    
    
    9,951
    
    
    
    8,336
    
    
    
    11,855
    
    
    
    2,377Financial assets designated at fair value
    
    
    23,381
    
    
    
    11,783
    
    
    
    8,713
    
    
    
    30,597
    
    
    
    Loans and advances to banks
    
    
    6,828
    
    
    
    3,441
    
    
    
    2,242
    
    
    
    444
    
    
    
    11,751Loans and advances to customers
    
    
    222,532
    
    
    
    112,147
    
    
    
    103,146
    
    
    
    95,467
    
    
    
    109,416Debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,010Equity securities and other variable yield securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,792Available for sale securities
    
    
    79
    
    
    
    40
    
    
    
    23
    
    
    
    13
    
    
    
    Macro hedge of interest rate risk
    
    
    431
    
    
    
    217
    
    
    
    
    
    
    
    
    
    
    
    Investment in associated undertakings
    
    
    58
    
    
    
    29
    
    
    
    22
    
    
    
    24
    
    
    
    25Intangible assets
    
    
    179
    
    
    
    90
    
    
    
    90
    
    
    
    171
    
    
    
    175Value of in-force business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,721
    
    
    
    1,844Property, plant and equipment
    
    
    1,048
    
    
    
    528
    
    
    
    415
    
    
    
    314
    
    
    
    262Operating lease assets
    
    
    4,294
    
    
    
    2,164
    
    
    
    2,082
    
    
    
    2,172
    
    
    
    2,275Investment property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,228Current tax assets
    
    
    391
    
    
    
    197
    
    
    
    223
    
    
    
    235
    
    
    
    242Deferred tax assets
    
    
    1,320
    
    
    
    665
    
    
    
    804
    
    
    
    796
    
    
    
    501Other assets
    
    
    1,797
    
    
    
    906
    
    
    
    2,507
    
    
    
    4,003
    
    
    
    6,381Total assets
    
    
    396,112
    
    
    
    199,623
    
    
    
    191,805
    
    
    
    207,034
    
    
    
    184,733LiabilitiesDeposits by banks
    
    
    15,722
    
    
    
    7,923
    
    
    
    6,656
    
    
    
    5,617
    
    
    
    18,412Deposits by customers
    
    
    138,206
    
    
    
    69,650
    
    
    
    66,519
    
    
    
    65,889
    
    
    
    78,660Derivative financial instruments
    
    
    19,706
    
    
    
    9,931
    
    
    
    10,218
    
    
    
    11,264
    
    
    
    3,665Trading liabilities
    
    
    108,970
    
    
    
    54,916
    
    
    
    57,604
    
    
    
    52,664
    
    
    
    Financial liabilities designated at fair value
    
    
    14,958
    
    
    
    7,538
    
    
    
    8,151
    
    
    
    7,948
    
    
    
    Debt securities in issue
    
    
    70,863
    
    
    
    35,712
    
    
    
    28,998
    
    
    
    21,276
    
    
    
    37,067Other borrowed funds
    
    
    2,816
    
    
    
    1,419
    
    
    
    1,655
    
    
    
    2,244
    
    
    
    722Subordinated liabilities
    
    
    9,390
    
    
    
    4,732
    
    
    
    5,020
    
    
    
    6,205
    
    
    
    5,484Insurance and reinsurance liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,501
    
    
    
    24,923Macro hedge of interest rate risk
    
    
    
    
    
    
    
    
    
    
    174
    
    
    
    13
    
    
    
    Other liabilities
    
    
    4,637
    
    
    
    2,337
    
    
    
    1,616
    
    
    
    3,190
    
    
    
    8,844Investment contract liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,306
    
    
    
    Provisions
    
    
    260
    
    
    
    131
    
    
    
    180
    
    
    
    253
    
    
    
    302Current tax liabilities
    
    
    732
    
    
    
    369
    
    
    
    300
    
    
    
    288
    
    
    
    161Deferred tax liabilities
    
    
    1,079
    
    
    
    544
    
    
    
    564
    
    
    
    886
    
    
    
    1,064Retirement benefit obligations
    
    
    1,943
    
    
    
    979
    
    
    
    1,034
    
    
    
    1,380
    
    
    
    1,197Minority interests  non-equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    512Total liabilities
    
    
    389,282
    
    
    
    196,181
    
    
    
    188,689
    
    
    
    203,924
    
    
    
    181,013Share capital
    
    
    294
    
    
    
    148
    
    
    
    148
    
    
    
    148
    
    
    
    473Share premium account
    
    
    3,685
    
    
    
    1,857
    
    
    
    1,857
    
    
    
    1,857
    
    
    
    2,164Retained earnings
    
    
    2,657
    
    
    
    1,339
    
    
    
    1,111
    
    
    
    1,105
    
    
    
    1,0836,636
    
    
    
    3,344
    
    
    
    3,116
    
    
    
    3,110
    
    
    
    3,720Minority interest
    
    
    194
    
    
    
    98
    
    
    
    
    
    
    
    
    
    
    
    Total shareholders equity
    
    
    6,830
    
    
    
    3,442
    
    
    
    3,116
    
    
    
    3,110
    
    
    
    3,720Total liabilities and equity
    
    
    396,112
    
    
    
    199,623
    
    
    
    191,805
    
    
    
    207,034
    
    
    
    184,733
 1.
    
    Amounts stated in dollars have been
translated from sterling at the rate of £1.00  $1.9843, the
noon buying rate on 31 December 2007.2.
    
    In the third quarter of 2006 Abbey sold its life insurance business. A description of the
transaction, and an analysis of the results of the life insurance business are disclosed in Note 11
of the Consolidated Financial Statements.3.
    
    Abbey, in line with all listed entities in the European Union, was required to adopt
International Financial Reporting Standards (IFRS) in preparing its financial statements for the
year ended 31 December 2005. Up to 31 December 2004, the Group prepared its financial statements in
accordance with UK Generally Accepted Accounting Principles (UK GAAP). Key standards IAS 32
Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition
and Measurement and IFRS 4 Insurance Contracts have been applied prospectively from 1 January
2005. All other standards are required to be applied retrospectively. 126




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##### Table of Contents



Selected Financial Data
 Selected Financial Data continued
 Income Statements
 2007(1)
    
    
    2007
    
    
    2006(2)
    
    
    2005(3)
    
    
    2004$m
    
    
    £m
    
    
    £m
    
    
    £m
    
    
    £mNet interest income
    
    
    2,974
    
    
    
    1,499
    
    
    
    1,228
    
    
    
    1,172
    
    
    
    1,406Net fee and commission income
    
    
    1,379
    
    
    
    695
    
    
    
    699
    
    
    
    644
    
    
    
    526Dividend income
    
    
    2
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Net trading income
    
    
    516
    
    
    
    260
    
    
    
    408
    
    
    
    471
    
    
    
    267Other operating income
    
    
    649
    
    
    
    327
    
    
    
    134
    
    
    
    67
    
    
    
    330Total operating income
    
    
    5,520
    
    
    
    2,782
    
    
    
    2,470
    
    
    
    2,355
    
    
    
    2,530Administration expenses
    
    
    (2,717
    )
    
    
    (1,369
    )
    
    
    (1,420
    )
    
    
    (1,577
    )
    
    
    (2,013
    )Depreciation and amortisation
    
    
    (407
    )
    
    
    (205
    )
    
    
    (215
    )
    
    
    (195
    )
    
    
    (355
    )Total operating expenses, excluding provisions and charges
    
    
    (3,124
    )
    
    
    (1,574
    )
    
    
    (1,635
    )
    
    
    (1,772
    )
    
    
    (2,368
    )Impairment losses on loans and advances
    
    
    (682
    )
    
    
    (344
    )
    
    
    (344
    )
    
    
    (218
    )
    
    
    (25
    )Amounts written off fixed asset investments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Provisions for other liabilities and charges
    
    
    
    
    
    
    
    
    
    
    (63
    )
    
    
    (3
    )
    
    
    (201
    )Total operating provisions and charges
    
    
    (682
    )
    
    
    (344
    )
    
    
    (407
    )
    
    
    (221
    )
    
    
    (146
    )Profit on continuing operations before tax
    
    
    1,714
    
    
    
    864
    
    
    
    428
    
    
    
    362
    
    
    
    16Tax on profit on continuing operations
    
    
    (355)
    
    
    
    (179
    )
    
    
    (115)
    
    
    
    (108)
    
    
    
    12Profit on continuing operations after tax
    
    
    1,359
    
    
    
    685
    
    
    
    313
    
    
    
    254
    
    
    
    28Profit/(loss) on discontinued operations after tax
    
    
    
    
    
    
    
    
    
    
    (245)
    
    
    
    166
    
    
    
    (82)Profit/(loss) for the year
    
    
    1,359
    
    
    
    685
    
    
    
    68
    
    
    
    420
    
    
    
    (54
    )
 Selected statistical information
 2007
    
    
    2006(2)
    
    
    2005(3)
    
    
    2004%
    
    
    %
    
    
    %
    
    
    %Profitability ratios:Return on average total assets(4)
    
    
    0.34
    
    
    
    0.03
    
    
    
    0.21
    
    
    
    (0.03)Return on average ordinary shareholders funds (5)
    
    
    22.08
    
    
    
    2.20
    
    
    
    19.56
    
    
    
    (1.17)Return on average risk weighted assets (6)
    
    
    1.04
    
    
    
    0.11
    
    
    
    0.75
    
    
    
    (0.09)Net interest margin (7)
    
    
    1.34
    
    
    
    1.19
    
    
    
    1.19
    
    
    
    1.36Abbey trading cost income ratio (8)
    
    
    49.7
    
    
    
    55.0
    
    
    
    59.6
    
    
    
    74.0PFS trading cost income ratio (9)
    
    
    49.7
    
    
    
    55.0
    
    
    
    61.3
    
    
    
    73.0Capital ratios:Average ordinary shareholders funds as a percentage of average total assets
    
    
    1.52
    
    
    
    1.54
    
    
    
    1.07
    
    
    
    2.23Risk asset ratios:Total
    
    
    11.4
    
    
    
    12.6
    
    
    
    12.5
    
    
    
    12.0Tier 1
    
    
    7.3
    
    
    
    8.0
    
    
    
    10.0
    
    
    
    10.4Ratio of earnings to fixed charges: (10)Excluding interest on retail deposits
    
    
    132.74
    
    
    
    122.57
    
    
    
    121.45
    
    
    
    100.77Including interest on retail deposits
    
    
    115.58
    
    
    
    109.70
    
    
    
    108.52
    
    
    
    100.38
 1.
    
    Amounts stated in dollars have been
translated from sterling at the rate of £1.00  $1.9843, the
noon buying rate on 31 December 2007.2.
    
    In the third quarter of 2006 Abbey sold its life insurance business. See Note 11 of the
Consolidated Financial Statements.3.
    
    Abbey, in line with all listed entities in the European Union, was required to adopt
International Financial Reporting Standards (IFRS) in preparing its financial statements for the
year ended 31 December 2005. Up to 31 December 2004, the Group prepared its financial statements in
accordance with UK Generally Accepted Accounting Principles (UK GAAP). Key standards IAS 32
Financial Instruments: Disclosure and Presentation, IAS 39 Financial Instruments: Recognition
and Measurement and IFRS 4 Insurance Contracts have been applied prospectively from 1 January
2005. All other standards are required to be applied retrospectively.4.
    
    Profit after tax divided by average total assets.5.
    
    Profit after tax divided by average equity shareholders funds.6.
    
    Profit after tax divided by average risk weighted assets.7.
    
    Net interest margin represents net interest income as a percentage of average interest-earning
assets.8.
    
    The Abbey trading cost income ratio is defined as trading expenses from continuing operations
divided by trading income from continuing operations. Abbeys Board reviews discrete financial
information for each of its segments that includes measures of operating results and assets, which
are measured on a trading basis. The trading basis differs from the statutory basis as a result
of the application of various adjustments. For further information see Note 1 to the Consolidated
Financial Statements.9.
    
    The PFS trading cost income ratio is defined as trading expenses divided by trading income of
the Personal Financial Services businesses. The Personal Financial Services businesses represent
the continuing operations of the Group, except for the businesses, assets and portfolios that were
inconsistent with Abbeys future strategy to focus on Personal Financial Services and were sold
during 2004 and 2005. The excluded businesses were known as the Portfolio Business Unit (PBU). As
the PBU businesses are inconsistent with Abbeys future strategy, management believes that
presentation of this financial measure provides useful information to investors regarding the
Groups financial condition and results of operations. For further information on the PBU, see
Business Review  Portfolio Business Unit on page 19. As there were no longer any businesses,
assets or portfolios remaining in the PBU by the end of 2005, there is no difference between the
PFS cost income ratio and the Abbey cost income ratio from 2006 onwards. A reconciliation between
the Abbey trading cost income ratio and the PFS trading cost income ratio is as follows:
 2007
    
    
    2006
    
    
    2005
    
    
    2004£m
    
    
    £m
    
    
    £m
    
    
    £mPFS trading costs
    
    
    1,299
    
    
    
    1,349
    
    
    
    1,431
    
    
    
    1,627PBU trading costs
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    56Abbey trading costs
    
    
    1,299
    
    
    
    1,349
    
    
    
    1,433
    
    
    
    1,683PFS trading income
    
    
    2,615
    
    
    
    2,452
    
    
    
    2,334
    
    
    
    2,229PBU trading income
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    46Abbey trading income
    
    
    2,615
    
    
    
    2,452
    
    
    
    2,404
    
    
    
    2,275Abbey trading cost incomeratio
    
    
    49.7
    
    
    
    55.0
    
    
    
    59.6
    
    
    
    74.0PFS trading cost income ratio
    
    
    49.7
    
    
    
    55.0
    
    
    
    61.3
    
    
    
    73.0
 10.
    
    For the purpose of calculating the ratios of earnings to fixed charges, earnings consist of
profit on continuing operations before tax plus fixed charges. Fixed charges consist of interest
payable, which includes the amortisation of discounts and premiums on debt securities in issue and
interest payable on finance lease obligations.
 127




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##### Table of Contents



Selected Financial Data
 Selected Financial Data continued
 Exchange rates
 High
    
    
    Low
    
    
    Average (1)
    
    
    Period endCalendar period
    
    $Rate
    
    
    $Rate
    
    
    $Rate
    
    
    $RateYears ended 31 December:2007
    
    
    2.11
    
    
    
    1.92
    
    
    
    2.00
    
    
    
    1.982006
    
    
    1.98
    
    
    
    1.73
    
    
    
    1.84
    
    
    
    1.962005
    
    
    1.93
    
    
    
    1.72
    
    
    
    1.81
    
    
    
    1.722004
    
    
    1.95
    
    
    
    1.75
    
    
    
    1.84
    
    
    
    1.782003
    
    
    1.78
    
    
    
    1.55
    
    
    
    1.64
    
    
    
    1.78Months ended:March 2008(2)
    
    1.99
    
    

    1.99
    
    
    1.99
    

    
    1.99February 2008
    
    1.99
    

    
    1.94
    

    
    1.96
    
    

    1.99January 2008
    
    
    1.99
    
    
    
    1.95
    
    
    
    1.97
    
    
    
    1.99December 2007
    
    
    2.07
    
    
    
    1.98
    
    
    
    2.02
    
    
    
    1.98November 2007
    
    
    2.11
    
    
    
    2.05
    
    
    
    2.07
    
    
    
    2.06October 2007
    
    
    2.08
    
    
    
    2.03
    
    
    
    2.04
    
    
    
    2.08September 2007
    
    
    2.04
    
    
    
    1.99
    
    
    
    2.02
    
    
    
    2.04
 1.
    
    The average of the noon buying rates on the last business day of each month during the relevant
period.2.
    
    With respect to March 2008, for the period from 1 March to 3 March.
 128




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##### Table of Contents



Shareholder Information
 
 Share Information
 Sterling-denominated preference shares
 Major shareholders
 Exchange controls
 129




---



##### Table of Contents



Shareholder Information
 
 Risk Factors
  Risks concerning enforcement of judgements made in the United States
 Risks concerning borrower credit quality and general economic conditions are inherent in Abbeys
business
 Market risks associated with fluctuations in interest rates, bond and equity prices and other
market factors are inherent in Abbeys business
 Risks associated with liquidity and funding are inherent in Abbeys business
 Operational risks are inherent in Abbeys business
 Abbeys businesses are subject to substantial legislation, regulatory and governmental oversight
 Risks associated with strategic decisions regarding organic growth, the competitive environment and
potential acquisitions and disposals
 130




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##### Table of Contents



Shareholder Information
 
 Taxation for US Investors
  United States tax status of perpetual securities
 United Kingdom taxation on dividends
 United States taxation on dividends
   United Kingdom taxation on capital gains
 >
    
    an individual who is neither resident nor ordinarily resident in the UK; or>
    
    a company which is not resident in the UK;
  United States taxation of dispositions
  United Kingdom inheritance tax
 >
    
    domiciled for the purposes of the convention in the US; and>
    
    is not for the purposes of the convention a national of the UK;
  >
    
    the individuals death; or>
    
    on a gift of the shares during the individuals lifetime.
  131




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##### Table of Contents



Shareholder Information
 
 Contact Information
 Abbey National plc registered office, principal office and investor relations department
 Santander shareholder department
 Phone numbers
 
 Documents on display
 Corporate Governance
 Memorandum and Articles of Association
    th
  
  132




---



##### Table of Contents



Shareholder Information
 Contact Information continued
  >
    
    divide among the members in kind the whole or any part of the assets of
Abbey (whether they shall consist of property of the same kind or not)
and, for that purpose, set such values as he deems fair upon any property
to be divided and determine how the division shall be carried out as
between the members or different classes of members; or>
    
    vest the whole or any part of the assets in trustees upon such trusts for
the benefit of the contributories as the liquidator, with the like
sanction, shall think fit but no member shall be compelled to accept any
shares or other assets upon which there is any liability.
   
    >
    
    divide among the members the whole or any part of the assets of Abbey
(whether they shall consist of property of the same kind or not) and,
for that purpose, set such values as he deems fair upon any property
to be divided and determine how the division shall be carried out as
between the members or different classes of members; or>
    
    vest the whole or any part of the assets in trustees upon such trusts
for the benefit of the contributories as the liquidator, with the
like sanction, shall think fit but no member shall be compelled to
accept any shares or other assets upon which there is any liability.
         133




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##### Table of Contents



Glossary and Definitions
 
 Glossary and Definitions
 Terms used
    
    US equivalent or brief description of meaningAccounts
    
    Financial statementsAllotted
    
    IssuedAttributable profit
    
    Net incomeBalance sheet
    
    Statement of financial positionBills
    
    NotesCalled up share capital
    
    Ordinary shares or common stock and preferred stock, issued and fully paidCapital allowances
    
    Tax depreciation allowancesCombined Code
    
    UK-derived principles of good corporate governance and code of best practiceCreditors
    
    PayablesCurrent account
    
    Checking accountDealing
    
    TradingDebtors
    
    ReceivablesDeferred tax
    
    Deferred income taxDepreciation
    
    Write-down of tangible fixed assets over their estimated useful livesFees and commissions payable
    
    Fees and commissions expenseFees and commissions receivable
    
    Fees and commissions incomeFinance lease
    
    Capital leaseFreehold
    
    Ownership with absolute rights in perpetuityInterest payable
    
    Interest expenseInterest receivable
    
    Interest incomeLoans and advances
    
    LendingsLoan capital
    
    Long-term debtLong-term assurance fund
    
    Long-term insurance fundMembers
    
    ShareholdersMemorandum and Articles of Association
    
    BylawsNet asset value
    
    Book valueNominal value
    
    Par valueOne-off
    
    Non-recurringOrdinary shares
    
    Common stockOverdraft
    
    A line of credit established through a customers current account and
contractually repayable on demandPreference shares
    
    Preferred stockPremises
    
    Real estateProfit
    
    IncomeProvisions
    
    AllowancesShare capital
    
    Ordinary shares, or common stock, and preferred stockShareholders funds
    
    Stockholders equityShare premium account
    
    Additional paid-in capitalShares in issue
    
    Shares outstandingTangible fixed assets
    
    Property, plant and equipmentUndistributable reserves
    
    Restricted surplusWrite-offs
    
    Charge-offs
 134




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##### Table of Contents



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 Information
    
    Selected Financial Data
    
    
    126Capitalisation and Indebtedness 

Reasons for the Offer and use of Proceeds 
Risk Factors
    
    
    *
*
1304
    
    Information on the Company
    
    History and Development of the Company
    
    
    5Business Overview
    
    
    5Organisational Structure
    
    
    5Property, Plant and Equipment
    
    
    264A
    
    Unresolved Staff Comments
    
    
    
    
    N/a5
    
    Operating and Financial Review and Prospects
    
    Operating Results
    
    
    9Liquidity and Capital Resources
    
    
    28, 29, 30Research and Development, Patents and Licenses, etc 

Trend Information
    
    
    N/a
2Off- Balance Sheet Arrangements
    
    
    29Contractual Obligations
    
    
    306
    
    Directors, Senior Management and Employees
    
    Directors and senior management
    
    
    50,51,52Compensation
    
    
    54Board Practices
    
    
    53,54Employees
    
    
    56Share Ownership
    
    
    567
    
    Major Shareholders and Related Party Transactions
    
    Major Shareholders
    
    
    129Related Party Transactions 


Interests of Experts and Counsel
    
    
    55, 118, 119, 
120
*8
    
    Financial Information
    
    Consolidated Statements and Other Financial
    
    
    63Information
Significant Changes
    
    
    89
    
    The Offer and Listing
    
    Offer Listing and Details
    
    
    *Plan of Distribution 

Markets

Selling shareholders 

Dilution 
Expenses of the Issue
    
    
    *
N/a
*
*
*10
    
    Additional Information
    
    Share Capital
    
    
    *Memorandum and Articles of Association
    
    
    132Material Contracts
    
    
    21Exchange Controls
Taxation
    
    
    N/a
131Dividends and Paying Agents 

Statements by Experts 

Documents on Display
    
    
    *
*
132Subsidiary Information
    
    
    N/a11
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    
    
    3612
    
    Description of Securities Other Than Equity Securities
    
    Debt Securities
    
    
    *Part II
    
    
    
    Warrants and Rights 

Other Securities 

American Depositary Shares
    
    
    *
*
*13
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    
    
    N/a14
    
    Material Modifications to the
Rights of Security Holders and Use of Proceeds
    
    
    N/a15
    
    Controls and Procedures
    
    Disclosure Controls and Procedures
    
    
    57Managements Annual Report on Internal Control
    
    
    57, 58over Financial Reporting

Attestation Report of the Registered Public 

Accounting Firm 

Changes in Internal Control Over Financial Reporting
    
    
    N/a
5815T
    
    Controls and Procedures
    
    
    
    
    N/a16A
    
    Audit Committee Financial Expert
    
    
    
    
    5416B
    
    Code of Ethics
    
    
    
    
    5716C
    
    Principal Accountant Fees and Services
    
    
    
    
    8816D
    
    Exemptions from the Listing Standards for Audit Committees
    
    
    
    
    N/a16E
    
    Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    
    
    N/aPart III17
    
    Financial Statements
    
    
    
    
    N/a18
    
    Financial Statements
    
    
    
    
    6319
    
    Exhibits
    
    
    
    Filed with SEC
 * Not required for an Annual Report. 135




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##### Table of Contents



SIGNATURE
  Form 20-F
    By:
    /s/  António
    Horta-Osório     Dated: 4 March 2008




---



##### Table of Contents



EXHIBIT
    INDEX
  Exhibits *1
.1

Memorandum and Articles of Association of Abbey National plc***4
.1

Sale and Purchase Agreement between Abbey National plc,
    Resolution Life Limited and Resolution plc dated 7 June
    2006***7
.1

Statement of ratio of earning to fixed charges**8
.1

List of Subsidiaries of Abbey National 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 200215
.1

Consent of Deloitte & Touche LLP**     *
    
    Documents concerning Abbey
    National plc referred to within the Annual Report on
    Form 20-F
    2007 may be inspected at Abbey National House, 2 Triton
    Square, Regents Place, London NW1 3AN, the principal
    executive offices and registered address of Abbey National plc.**
    
    Incorporated by reference in the
    Registration Statement on
    Form F-3
    (No. 333-13146).***
    
    As previously filed with the
    Securities and Exchange Commission as an exhibit to Abbey
    National plcs
    Form 20-F
    dated 26 June 2006.