RNS Number : 2754A
Bank of Scotland Plc
31 July 2008
Bank of Scotland plc
Half Year Results 2008
31 July 2008
Stock Exchange Announcement
Page 1
Contents Page
Financial Review 2
Statement of Directors' Responsibilities 11
Condensed Financial Statements 11
Consolidated Income Statement 13
Consolidated Balance Sheet 14
Consolidated Statement of Recognised Income and Expense 15
Consolidated Cash Flow Statement 16
Notes to the Condensed Financial Statements 17
Independent Review Report 27
Contacts
Investor Relations Charles Wycks
Director of Investor
Relations
(0131) 243 5509
(020) 7905 9600
charleswycks@hbosplc.com
John Hope
Director, Investor
Relations
(0131) 243 5508
(020) 7905 9600
johnhope@hbosplc.com
Press Office Shane O'Riordain
General Manager, Group
Communications
(020) 7905 9600
07770 544585 (mobile)
shaneo'riordain@hbosplc.
com
Page 2
Financial Review
The Bank of Scotland plc group ('group') profit before tax for the half year to 30 June 2008 ('H1 2008') is �1,081m. This represents a
decrease of 58% over the comparative amount for corresponding period (H1 2007 �2,573m).
On 17 September 2007 in accordance with the provisions of the HBOS Group Reorganisation Act 2006 (the 'Act') the assets of the Halifax
plc group transferred to the group (the 'HBOS Group Reorganisation'). In accordance with the Act and the group's accounting policies merger
accounting has been adopted for 2007 with the result that the comparative amounts are presented as if the combined group had been in
existence throughout 2007. Full details of the HBOS Group Reorganisation and the group's accounting policies are given in the Bank of
Scotland plc Annual Report & Accounts 2007 ('BoS ARA 2007').
Net operating income decreased by �907m to �5,255m (H1 2007 �6,162m) driven by lower non-interest income, which included �910m of
negative net trading income in the period. Operating expenses fell by �20m to �2,739m (H1 2007 �2,759m) and impairment losses on loans and
advances increased by 36% to �1,310m (H1 2007 �963m).
Profit before tax is analysed in the table below.
Half Half year ended 30.06.2007 �m
yearended30.06.2008�m
Retail 1,033 1,079
Corporate 807 1,258
International 285 274
Treasury (892) 161
Other activities (152) (199)
Profit before tax 1,081 2,573
Divisional Review
The group is organised with the same divisional structure operating in the HBOS Group ('HBOS Group'). The performance of the HBOS Group,
including extensive disclosures on the performance of its divisions is given in the HBOS 2008 Half Year Results Announcement available on
the HBOS website: www.hbosplc.com.
Retail
Half Half yearended30.06.2007�m
yearended30.06.2008�m
Net interest income 2,107 2,126
Non-interest income 639 647
Net operating income 2,746 2,773
Operating expenses (1,047) (1,044)
Operating profit before 1,699 1,729
provisions
Impairment losses on loans and (722) (678)
advances
Impairment losses on (22)
investment securities
Share of losses of associates and jointly controlled (7)
entities
Non-operating income 56 57
Profit before tax 1,033 1,079
Retail profits declined by 4% to �1,033m (H1 �1,079m) primarily arising from an increase in impairment losses with an increased charge
in respect of secured loan impairments in part offset by a reduction in the level of unsecured impairments. Margins remained relatively
stable and operating expenses continue to reflect the benefits of cost reduction initiatives, remaining relatively flat. Non-operating
income arises from profits on the sale of tranches of shareholdings in Rightmove of �56m (H1 2007 �29m) with the first half of 2007 also
benefiting from a profit on the sale and leaseback of certain branch premises of �28m.
Page 3
Prospects
The economic outlook is clearly challenging with rising fuel and utility prices increasing affordability stretch. The reduced supply of
mortgage finance and generally less benign prospects for the economy are continuing to contribute to lower levels of housing transactions
and falling house prices.
In this environment, we will continue to favour profitable mortgage lending over market share and will maintain our cautious approach to
growth in Credit Cards and Unsecured Personal Loans. We expect to grow deposits faster than assets and expect to build on the strong first
half performance of our Banking business.
We have adjusted our asset pricing to cover the higher cost of wholesale and retail funding and have delivered a stable net interest
margin with the potential for further improvement. Our margin performance, together with tight cost control will continue to underpin
pre-provisioning profitability.
Corporate
Half Half yearended30.06.2007�m
yearended30.06.
2008�m
Net interest income 1,198 1,015
Non-interest income 1,165 1,311
Net operating income 2,363 2,326
Operating expenses (907) (936)
Operating profit before 1,456 1,390
provisions
Impairment losses on loans and (469) (235)
advances
Impairment losses on (145) (5)
investment securities
Share of (losses)/profits of associates and jointly (35) 108
controlled entities
Profit before tax 807 1,258
Corporate profits declined by 36% to �807m (H1 2007 �1,258m) primarily due to higher impairment charges. Net interest income increased
driven by higher lending volumes. The decrease in non-interest income reflects lower profits on sale of investment securities reflecting
fewer significant exits under current market conditions and reduced income from the investment portfolio. Losses from associates and jointly
controlled entities are due to weaker trading performance. The increase in impairment losses on loans and advances reflects the current
economic slowdown with credit conditions deteriorating as the economic environment weakens.
Prospects
The dislocation in world wide financial markets is expected to continue to shape our UK and European markets in 2008 and reduce the
supply of credit. We have adopted a cautious approach to lending and as a result, asset growth is now being slowed. Better pricing is being
achieved for both new lending and the renewal of existing assets.
Our plans anticipate a worsening in the economic environment, resulting in higher impairment charges. In a slower growth environment we
have also planned for lower returns from our investment portfolio. The cost base continues to be reviewed in recognition of the difficult
business environment.
Page 4
International
Half Half yearended30.06.2007�m
yearended30.06.
2008�m
Net interest income 680 511
Non-interest income 124 122
Net operating income 804 633
Operating expenses (399) (311)
Operating profit before 405 322
provisions
Impairment losses on loans and (119) (50)
advances
Share of (losses)/profits of associates and jointly (1) 2
controlled entities
Profit before tax 285 274
International profits increased by 4% to �285m (H1 2007 �274m). The growth in net operating income is driven by higher net interest
income from strong lending growth. The increase in operating expenses reflects the continued investment in the group's international
expansion programmes. Higher impairment charges reflect current global economic conditions and are increasing from historically low levels.
Prospects
HBOS continues to invest in building a market leading retail, business and corporate bank in Australia. The expansion of our national
physical presence and the continued investment in infrastructure and colleagues will, in the longer term, position HBOS Australia as a
significant national financial services provider.
In Ireland economic conditions are unlikely to improve in the near future and we are therefore adopting a selective approach to asset
growth. Margins remain under pressure from higher funding costs and changes in asset mix, given the focus on retail banking, including
deposits and current accounts. Impairment losses are expected to rise in the declining economic environment and softening property markets,
but the longer term prospects for growth in the Irish economy are considered to be favourable.
Our European and North American businesses are not immune to the global dislocation in commercial markets and we will remain highly
selective in asset growth, notwithstanding improved pricing available in the markets. In line with global economic trends, impairment losses
are likely to rise from relatively low levels, but overall performance is expected to be satisfactory.
Page 5
Treasury
Half Half yearended30.06.2007�m
yearended30.06.
2008�m
Net interest income 38 87
Non-interest (expense)/income (844) 170
Net operating (expense)/income (806) 257
Operating expenses (86) (96)
(Loss)/Profit before tax (892) 161
The Treasury loss includes negative fair value adjustments ('NFVA') of �1,095m (H1 2007 �nil) relating to debt securities in the Trading
Book. Net interest income fell as a result of the impact of higher funding costs, while operating expenses decreased reflecting a reduction
in performance related staff costs.
Treasury Debt Securities
In addition to the NFVA on the Trading Book there are also post-tax NFVA of �1,916m (H1 2007 �nil) to the group's available for sale
reserve in respect of Treasury debt securities in the Banking Book. This adjustment has no impact on reported profits or regulatory capital
strength. The pre-tax NFVA is �2.7bn and comprises �2.1bn (cumulative �2.5bn) for asset backed securities ('ABS'), �0.3bn (cumulative
�0.5bn) for Floating Rate Notes ('FRNs') and �0.3bn (cumulative �0.4bn) for Other securities. The cumulative amounts include the initial
impact of the financial market dislocation that arose in the second half of 2007.
As part of its investment credit activities Treasury holds a portfolio of debt securities which are analysed below. The investment
credit business has two functions; firstly it manages part of the HBOS Group's prudential liquidity portfolio and secondly it takes
investment positions principally as part of the Grampian conduit.
Asset class Banking Book Banking BookOther�bn TradingBook�bn 30.06.2008�m 31.12.2007�m
Grampian �bn
Mortgage Backed Securities
('MBS')
US Residential MBS ('RMBS') 4.5 1.2 3.0 8.7 9.5
Non-US RMBS 1.3 2.0 4.5 7.8 8.0
Commercial MBS ('CMBS') 3.1 0.2 3.3 3.3
8.9 3.2 7.7 19.8 20.8
Collateralised Debt
Obligations ('CDO')
Collateralised Bond 3.2 0.2 3.4 3.4
Obligations ('CBO')
Collateralised Loan 2.7 0.5 3.2 3.2
Obligations ('CLO')
5.9 0.2 0.5 6.6 6.6
Personal Sector
Auto Loans 0.5 0.9 1.4 1.5
Credit Cards 1.6 0.3 1.0 2.9 2.8
Personal Loans 0.7 0.2 0.9 1.0
2.8 0.3 2.1 5.2 5.3
FFELP(a)Student Loans 5.5 0.1 5.6 5.7
Other ABS 0.6 0.1 0.7 0.7
Negative Basis(b) 0.5 2.8 3.3 3.3
ABS NFVA (2.0) (0.5) (1.3) (3.8) (0.5)
Total ABS (net of cumulative 16.2 9.2 12.0 37.4 41.9
NFVA)
Covered Bonds 3.2 3.2 3.2
FRNs (net of cumulative NFVA) 11.8 5.5 17.3 17.4
Bank Certificates of Deposit 1.7 12.1 13.8 15.3
Other�(net of cumulative NFVA) 2.5 1.4 3.9 3.4
Total (net of cumulative NFVA) 16.2 28.4 31.0 75.6 81.2
a) Federal Family Education Loan Programme ('FFELP').
b) Negative basis refers to bonds held with separate matching credit default swap ('CDS') protection.
c) Principally governments and supra-nationals.
The US RMBS comprise assets classed as Prime �1,944m (end 2007 �2,304m), Alt-A �6,628m (end 2007 �1,944m) and Sub-prime �90m (end 2007
�105m). The group also has �291m (end 2007 �329m) of ABS CDO with Sub-prime Collateral within the CBO above.
Treasury has credit exposure to monolines of �0.7bn (end 2007 �0.4bn) through wrapped bonds and negative basis trades with purchased CDS
protection calculated using our internal methodology. For sub-investment grade monolines we have taken a prudent approach and assumed no
benefit from the
The ABS book is predominantly investment grade with the percentage of assets rated by external credit ratings being 'AAA' 93.0%, 'AA'
3.9%, 'A' 1.3%, 'BBB' 0.5%, 'BB' 0.2% and 'B' 1.1%. The comparative ratings at the end of 2007 are 'AAA' 99.6%, 'AA' 0.2% and 'A' 0.2%.
Prospects
The primary focus of the Treasury operations is to manage the HBOS Group's funding and liquidity. The dislocation in financial markets
which commenced in the second half of 2007 is expected to continue into 2009.
Treasury also provides services to the group and to the group's customers. We continue to invest in our capabilities to deliver a top
quality service and performance. Access to the group's customers, product innovation and our strong standing in the market underpin our
confidence in our business model. Our cautious approach to products and services remains unaltered.
Page 6
Other Activities
Other Activities combine the activities of the Insurance & Investment and Group Items divisions of the HBOS Group which are not
individually material to the group.
HBOS Group's Insurance & Investment operations are primarily transacted in entities outside of the group, with operations within the
group limited to sales activities in the banking network. Group Items carries out the head office and central activities of the group.
Half Half yearended30.06.2007�m
yearended30.06.2008�m
Non-interest income 148 173
Net operating income 148 173
Operating expenses (300) (372)
Loss before tax (152) (199)
Other Activities loss decreased by 24% to �152m (H1 2007 �199m) driven by a decrease in operating expenses. Non-interest income
decreased by �25m and is primarily derived from the insurance and investment sales activities that fall within the group. Operating expenses
have decreased by 19% to �300m mainly as a result of cost reductions arising from the group's cost efficiency programme.
Key Performance Indicators
Half year ended Half year ended 31.06.2007 30.06.2008 31.12.2007
30.06.2008
Cost:income ratio (note a) 48.6% 38.6%
Loans and advances to �493,635m �460,267m
customers
Impaired loans as a % of 2.56% 2.25%
closing advances
Total capital ratio (note b) 10.8% 11.9%
a) The cost:income ratio is calculated excluding regulatory provisions and after netting operating lease depreciation, impairment
losses on investment securities, changes in insurance and investment contract liabilities and net claims incurred on insurance contracts
against operating income, and including share of profits and losses of associates and jointly controlled entities within non-interest
income.
b) The group began operating under the new Basel II basis from 1 January 2008 hence the total capital ratio comparatives given are
as at this date.
Balance Sheet Analysis
Loans and advances to customers increased by 7% to �493,635m (end 2007 �460,267m) driven by growth in Retail, Corporate and
International. Customer deposits increased by 8% to �295,654m (end 2007 �272,687m) and wholesale funding (deposits by banks, debt
securities in issue and other borrowed funds) decreased by 2% to �259,500m (end 2007 �265,914m).
Classification of Advances
The mix of the group's gross lending portfolio at the period end is summarised in the following table:
30.06.2008 31.12.2007
% %
Manufacturing industry 1 1
Construction and property 9 9
Hotels, restaurants and wholesale and retail trade 3 3
Transport, storage and communication 1 2
Financial 10 8
Other services 3 3
Individuals:
Residential mortgages 48 51
Other personal lending 4 4
Non-UK residents 21 19
Total 100 100
The group's impaired lending exposure before provisions is analysed below:
Page 7
30.06.2008�m 31.12.2007�m
UK Retail secured 5,138 4,234
UK Retail unsecured 2,222 2,322
Corporate * no loss(a) 1,905 1,648
Corporate * with loss 2,131 1,517
International(b) 1,243 641
12,639 10,362
a) Loans categorised as impaired with no loss represent loans that have been individually assessed as having impairment characteristics
but where we expect, after taking into consideration collateral and other credit enhancements, full recovery of both interest and capital.
b) International's 2007 comparatives have been restated to reflect the change to the methodology used by Bank of Scotland (Ireland) in
categorising impaired loans to align more closely with group policy.
Capital Position
The Tier 1 capital ratio is 6.8% (1 January 2008 7.0%) and the Total regulatory capital ratio is 10.8% (1 January 2008 11.9%). In
addition to the retention of profit for the period Tier 1 capital was strengthened by the issuance of share capital and share premium
totalling �1,000m and Tier 2 capital was increased during the period by dated subordinated debt issuance of �1,500m.
Key Risks and Uncertainties
There have been no material changes to the risk management processes as described in the Risk Management report in the Bank of Scotland
plc Annual Report & Accounts 2007 ('BoS ARA 2007'). The key risks and uncertainties faced by the group over the next six months are set out
below. These should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. Quantitative and
other disclosures are given so as to aid understanding.
Economic Conditions and Credit
The group's business is affected by economic conditions in the UK, where the majority of the group's earnings are generated, as well as
in the other geographical areas in which it operates. Business and consumer confidence, employment trends, the state of the economy,
(including the state of the UK housing market, the commercial real estate sector, equity markets, inflation and the availability and cost of
credit), the liquidity of the global financial markets and market interest rates at the time may impact the group's earnings.
The key credit risks for Retail include any slowdown in the UK economy leading to higher unemployment, deterioration in household
finances due to inflation, higher interest rates or other pressures and a further contraction in the UK housing market. The extent of any
economic slowdown and the degree of further falls in house prices in the second half of the year will therefore impact on impairment
losses.
In our Corporate businesses we have exposures from loans, joint ventures and other investments to customers in different sectors,
including developers of commercial real estate and residential property. Commercial real estate has shown material declines in prices in the
first half whilst residential property developers are facing extremely challenging market conditions. Whilst we principally assess
counterparties on the strength of their underlying business and cash flows rather than the value of collateral a failure of these borrowers
to operate through the economic cycle combined with falls in collateral values would lead to increased impairment losses. Impairment losses
in the second half will therefore depend on the performance of those sectors exposed directly to property and how the current economic
slowdown spreads to other corporate sectors.
Our International businesses have both retail and corporate exposures to a range of geographies. These geographies are subject to
different economic pressures. Ireland and the United States are experiencing significant falls in house prices and slowing economies.
Australia is somewhat protected by the commodities boom but has experienced rises in interest rates to curtail inflationary pressures.
Impairment losses in International in the second half will depend on how these factors affect asset values, unemployment and corporate
profitability in those sectors to which we lend.
Page 8
Funding and Liquidity
Liquidity and funding risk is managed at the consolidated HBOS Group level. Accordingly the information below under the headings
Liquidity and Funding is based on the HBOS Group position.
Liquidity
Liquidity risk is the risk that the HBOS Group does not have sufficient financial resources to meet its obligations when they fall due
or will have to do so at excessive cost. In order to ensure that the HBOS Group continues to meet its funding obligations and maintain or
grow its business generally, the HBOS Group has developed comprehensive liquidity policies supported by a diversified funding mix comprising
both customer deposits and wholesale funding. Details of the composition of the HBOS Group's funding are set out on page 9.
The HBOS Group's banking operations in the UK comply with the FSA's Sterling Stock Liquidity approach for sterling liquidity management
and regulatory reporting. A key element of the FSA's Sterling Stock Liquidity policy is that a bank should hold a stock of high quality
liquid assets that can be sold quickly and discretely in order to replace funding that has been withdrawn due to an actual or perceived
problem with the bank. The objective is that this stock should enable the bank to continue business, whilst providing an opportunity to
arrange more permanent funding solutions. Limits on the five day Sterling net wholesale outflow and the minimum level of stock liquidity
have been agreed with the FSA. In addition, the Group Funding and Liquidity Committee has set a requirement for the stock liquidity ratio of
at least 105% (FSA minimum level 100%).
The HBOS Group also adheres to the requirements of other regulatory authorities including the Australian Prudential Regulatory Authority
and the Irish Financial Regulator in whose jurisdictions the HBOS Group has branches or subsidiaries.
The internal approach to liquidity management, which has been in place for several years, goes considerably beyond the regulatory
requirements (in terms of the depth of analysis conducted and the amount of liquidity held). The funding and liquidity framework includes:
� Funding diversity criteria focusing on retail, other customer and wholesale sources;
� Sight to one week and sight to one month mismatch limits as a percentage of total wholesale funding for all major currencies and
for all currencies in aggregate;
� Targets on the appropriate balance of short to medium term wholesale funding including limits for one month and three month
borrowings; and
� Criteria and limits on marketable assets by asset class for Sterling, US Dollars, Euros, other currencies, and for all currencies
in aggregate.
In response to the market dislocation since the second half of 2007, the Group Capital Committee has increased the frequency of its
meetings and Treasury monitors a range of metrics on a daily basis including market movements, flows and amounts of wholesale funding and
mismatch ratios. These measures are tailored to prevailing market conditions with agreed escalation procedures if any key triggers are
breached.
At 30 June 2008 the HBOS Group's liquidity portfolio of marketable assets, net of repos, was �51.7bn (end 2007 �60.0bn). The assets in
the liquidity portfolio are treated in two forms. Firstly, assets which we know to be eligible under normal arrangements with the Bank of
England, the European Central Bank and the Federal Reserve, which for internal purposes we describe as primary liquidity. Secondly, a
substantial pool of high quality (secondary) liquidity assets that allow us to manage through periods of stress taking into account the
likely behaviours of depositors and wholesale markets. The HBOS Group routinely uses the repo market as a liquidity management tool and has
well established relationships with a wide range of market participants. The HBOS Group also has access to the standing facilities at a
number of central banks.
In addition, on 21 April 2008 the Bank of England launched its Special Liquidity Scheme which allows banks to swap their high quality
mortgage-backed and other securities for UK Treasury Bills for a defined period. The HBOS Group has used this facility to provide high
quality liquidity assets.
Funding
Our ability to generate profitable growth depends on the pricing and availability of both retail and wholesale funding. Higher funding
costs in wholesale markets or customer deposits would increase the HBOS Group's cost of funding. The margins in the second half will depend
on the balance between any increased cost of funding and our ability to reprice our lending.
Loans and advances to customers grew strongly in the first half of 2008 as a consequence of the pipeline of business coming into the
year but this growth has now slowed significantly. This growth has been funded through increased customer deposits and wholesale funding.
Page 9
The HBOS Group's funding is summarised as follows:
30.06.2008 31.12.2007
�bn �bn
Loans and advances to customers 456.0 430.0
Customer accounts 258.1 243.2
Customer lending less customer accounts 197.9 186.8
Customer accounts as a % of loans and advances to 56.6% 56.6%
customers
In the current market conditions, global investor appetite in the medium and long term markets, including securitisations, remains
greatly reduced and the cost of wholesale funds remains high by historical comparison. Our plans are based on an expectation that the
securitisation markets will remain largely closed for the remainder of 2008 and well into 2009. We have issued �8.7bn of term funding
(including �750m of equity capital), largely replacing the �11.5bn term funding that matured in the first half. At 30 June 2008 41.4% (end
2007 41.0%) of our wholesale funding matures in more than one year as shown below.
During the first half of 2008 the HBOS Group's wholesale funding sources were well diversified by instrument, currency and by maturity
as shown in the tables below. The tables are prepared on the basis that "retail" is defined using the current statutory definition, i.e.
administered rate products. Wholesale funding, when issued in a foreign currency but swapped into sterling, is included at the swap
exchanged amount. Wholesale funding is shown excluding any repo activity and funding raised in the names of the conduits.
The HBOS Group's retail and wholesale funding sources by type of instrument are analysed below:
30.06.2008 30.06.2008 31.12.2007 31.12.2007
�bn % �bn %
Bank deposits 27.4 5.6 32.9 6.7
Customer deposits 31.3 6.4 27.8 5.6
Certificates of deposit 55.3 11.4 63.1 12.8
Medium term notes 39.7 8.2 42.8 8.7
Covered bonds 23.9 4.9 23.7 4.8
Commercial paper 17.7 3.7 16.9 3.4
Securitisation 43.5 9.0 45.9 9.3
Subordinated debt 21.5 4.4 20.0 4.1
Other 5.7 1.2 4.9 0.9
Total Wholesale 266.0 54.8 278.0 56.3
Retail 219.4 45.2 215.4 43.7
Total Group Funding 485.4 100.0 493.4 100.0
Wholesale funding is analysed
by currency as follows:
US dollar 89.4 33.6 104.5 37.6
Euro 88.6 33.3 79.0 28.4
Sterling 63.1 23.7 69.7 25.1
Other 24.9 9.4 24.8 8.9
Total Wholesale Funding 266.0 100.0 278.0 100.0
Wholesale funding is analysed by residual maturity
as follows:
Less than one year 155.9 58.6 164.1 59.0
One to two years 23.3 8.8 21.6 7.8
Two to five years 41.9 15.7 46.3 16.7
More than five years 44.9 16.9 46.0 16.5
Total Wholesale Funding 266.0 100.0 278.0 100.0
Conduits
The group sponsors two conduits, Grampian and Landale, which are special purpose vehicles that invest in highly rated assets and fund
via the Asset Backed Commercial Paper ('ABCP') market. At 30 June 2008, investments held by Grampian totalled �16.2bn (end 2007 �18.6bn).
Grampian is, and always has been, fully consolidated into our balance sheet. We also consolidated �0.6bn of assets held by Landale (end 2007
�0.6bn). Grampian is a long established, high grade credit investment vehicle that invests in diversified ABS. Grampian has a liquidity line
in place with the group which covers all of the assets and programme wide credit enhancement is also provided by the group. Landale holds
both assets originated from our own balance sheet and third party transactions. Landale has liquidity lines from the group and from third
party banks, and therefore the former, but not the latter, are consolidated into our balance sheet.
Due to the disruption in the ABCP market, there have been occasions when Grampian and Landale (in respect of assets backed by the
group's liquidity lines) have declined to issue ABCP given the unattractiveness of the spreads and maturities available. At 30 June 2008,
the group had provided funding to the Grampian and Landale conduits of �10.4bn (end 2007 �8.1bn).
Page 10
Market risk
Market risk is defined as the potential loss in value or earnings of the group arising from changes in external market factors such as
interest rates, credit spreads, foreign exchange rates and commodity and equity prices. Changes in interest rate levels, yield curves and
spreads may affect the interest rate margin realised between lending and borrowing costs. Since August 2007, there has been a period of high
and volatile inter-bank lending rates. Continued high spreads of inter-bank lending rates against the administered rate will continue to
negatively effect our margin unless this can be recovered through higher lending margins on new business.
The group is also subject to a risk of further negative fair value adjustments arising from Treasury's portfolio of debt securities.
This portfolio is exposed to changes in market prices principally driven by movements in credit spreads exacerbated by less liquid and/or
more volatile financial markets. This may lead to further net fair value adjustments arising from securities in the Trading Book, and
reductions to the available for sale reserve arising from securities in the Banking Book. Further deterioration in financial markets
including defaults by monolines that provide protection on a number of our securities could lead to impairments. Less liquid financial
markets could also affect the reliability of model valuations of certain asset backed securities. We review our valuation models regularly
and adjust the assumptions to take account of evolving market conditions.
Foreign exchange risk arises from earnings and net assets denominated in foreign currency for our International businesses where there
is a risk of devaluation upon conversion to sterling. To mitigate, forward contracts are entered into in order to hedge one year's expected
earnings and the net asset investment in overseas operations is hedged through borrowing taken out in the relevant currencies.
Regulation
The group is subject to laws, regulations, administrative actions and policies in each location in which it operates, all of which are
subject to change. The FSA is the main regulator for Bank of Scotland, although the group's principal international businesses in the US,
Australia and Ireland are subject to direct scrutiny from the Board of Governors of the Federal Reserve System and the Comptroller of the
Currency, the Australian Prudential Regulation Authority and the Irish Financial Regulator respectively. Regulatory intervention is an
ongoing feature of UK banking and changes could affect the profitability of our business. A key risk has arisen from the ongoing
investigation into bank charges where the HBOS Group is one of eight banks involved in a test case to resolve legal uncertainties concerning
the fairness and lawfulness of unarranged overdraft charges. Full details of the test case process are set out in the Contingent Liabilities
and Commitments Note 14 on page 25. A definitive outcome of the test case process is unlikely to be known for at least 12 months.
People Risk
The group's success depends on the ability and experience of its senior management. The loss of the services of certain key employees,
particularly to competitors, could have a material adverse effect on the group's revenue, profit and financial condition.
Competition Risk
There is substantial competition for the types of banking and other products and services that the group provides in the regions in
which it conducts its business. The intensity of this competition is affected by competitor behaviour, consumer demand, technological
changes, the impact of consolidation, regulatory actions and other factors. Competitive pressure on margins is a key feature across our UK
and International businesses, and in an adverse credit or competitive cycle our ability to maintain appropriate levels of returns to
shareholders may be adversely affected.
Page 11
STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE HALF YEAR RESULTS
The Directors listed below (being all the Directors of Bank of Scotland plc) are responsible for preparing the Half Year Results in
accordance with applicable law and regulations. The Directors are required to prepare the condensed financial statements in accordance with
IAS 34 'Interim Financial Reporting' as adopted by the European Union ('EU') and to disclose in the interim management report a fair review
of the information required under sections 4.2.7R and 4.2.8R of the Disclosure and Transparency Rules. These include an indication of
important events that have occurred during the first six months of the financial year and their impact on the condensed financial
statements; a description of the principal risks and uncertainties for the remaining six months of the financial year; any related party
transactions that have taken place in the first six months of the current financial year that have materially affected the financial
position or performance during the period; and any changes in the related party transactions described in the last annual financial statements that could do so in the remaining six months.
Bank of Scotland plc Board of Directors
Chairman Executive Directors Non-executive Directors
Dennis Stevenson Andy Hornby Sir Ron Garrick
Peter Cummings Richard Cousins
Jo Dawson Anthony Hobson
Mike Ellis Karen Jones
Philip Gore-Randall John E Mack
Colin Matthew Coline McConville
Dan Watkins Kate Nealon
CONDENSED FINANCIAL STATEMENTS
Basis of Preparation
The condensed consolidated Half Year financial statements ('condensed financial statements') have been prepared in accordance with IAS
34 'Interim Financial Reporting' as adopted by the EU and the Disclosure & Transparency Rules issued by the Financial Services Authority.
These are unaudited and they do not include all of the information required in preparing full annual financial statements. They should be
read in conjunction with the group's financial statements for the period ended 31 December 2007, copies of which are available upon request
from the head office at The Mound, Edinburgh EH1 1YZ.
Section 240 Statement
The comparative figures for the year ended 31 December 2007 included in these condensed financial statements do not constitute the
company's statutory accounts for that financial year within the meaning of section 240 of the Companies Act 1985 but are derived from the
Bank of Scotland Annual Report & Accounts 2007 ('BoS ARA 2007'). Those accounts, which were prepared in accordance with International
Financial Reporting Standards ('IFRS') and interpretations issued by the International Financial Reporting Interpretations Committee
('IFRIC') as adopted by the EU were approved by the Board of Directors on 26 February 2008 and have been delivered to the Registrar of
Companies. Those accounts have been reported on by the company's auditors, their report is unqualified and does not contain statements under
Section 237(2) or (3) of the Companies Act 1985.
Accounting Policies
The condensed financial statements have been prepared on the basis of the accounting policies as applied and disclosed in the BoS ARA
2007.
Critical Accounting Judgements
The preparation of these condensed financial statements necessarily requires the exercise of judgement in the selection and application
of accounting policies. These judgements are continually reviewed and evaluated based on historical experience and other factors. During the
half year to 30 June 2008 the group's critical accounting judgements have been reviewed with the conclusion that there are no changes to
those that were reported in the accounting policy section of the BoS ARA 2007. However, owing to continued market dislocations the
disclosure previously given on the judgements made in determining whether debt securities classified as available for sale within Treasury
are impaired has been enhanced as shown below.
Debt securities classified as available for sale are measured at fair value and are reviewed regularly for impairment at the specific
investment level in accordance with IFRS. The portfolio is continually reviewed for impairment and as at 30 June 2008 no objective evidence
of impairment has been found. Objective evidence of impairment might include non-receipt of due interest or principal repayment or a
measurable decrease in the estimated future cash flows from a group of financial assets since the initial recognition of those assets. The
disappearance of active markets, declines in fair values and rating downgrades associated with this asset portfolio do not in themselves
constitute objective evidence of impairment and unless a default has occurred, the determination of whether or not objective evidence of
impairment is present at the balance sheet date requires the exercise of management judgement. Although the fair value of the portfolio is
significantly below its purchase cost, the group believes that currently this is due to market dislocations rather than impairments of its assets.
Page 12
Critical Accounting Estimates
The preparation of these condensed financial statements requires the group to make estimations where uncertainty exists. These estimates
are continually reviewed in the light of changing conditions and other factors. During the half year to 30 June 2008 the group's principal
critical accounting estimates have been reviewed and the disclosures previously given on the valuation of asset backed securities ('ABS')
has been updated as follows.
Fair Values
The designation of financial instruments for measurement purposes and the valuation methodologies for financial instruments remain as
disclosed in the accounting policy section in the BoS ARA 2007.
Derivatives and financial instruments classified as at fair value through the income statement or available for sale are recognised at
fair value. The fair value of debt securities in active markets is based on market prices or broker/dealer valuations. Where quoted prices
on instruments are not readily and regularly available from a recognised broker, dealer or pricing service or available prices do not
represent regular transactions in the market, the fair value is estimated using quoted market prices for securities with similar credit,
maturity and yield characteristics or similar valuation models.
ABS not traded in an active market are valued using valuation models that include non-market observable inputs. These ABS consist
primarily of US RMBS and CDOs. The models use observed issuance prices in related asset classes, market correlations, prepayment assumptions
and external credit ratings. For each asset class within the ABS portfolio, the implied spread arrived at by using this methodology is
applied to the securities within that asset class. Additional assessments are then made on possible deterioration in credit risk for each
individual security and on liquidity considerations for particular asset classes.
At 30 June 2008, the fair value of ABS measured using models with non-market observable inputs comprised �2.4bn (end 2007 �5.3bn) within
financial assets held for trading and �15.4bn (end 2007 �12.2bn) within assets classified as available for sale.
During the period, a �461m pre-tax negative fair value adjustment has been recognised in the income statement on ABS that were valued
using models with non-market observable inputs (H1 2007 �nil). In addition to this a post-tax negative fair value adjustment of �1,485m (H1
2007 �nil) on ABS classified as available for sale that were valued using models with non-market observable inputs was recognised in equity
reserves.
For ABS valuations using non-market observable inputs, the effect of a one basis point move in credit spreads (which based on our
experience is the only key sensitivity) would result in a pre-tax movement of �1.1m for ABS assets classified as held for trading and a
post-tax movement of �5.1m (recognised in equity reserves) on assets classified as available for sale.
The use of non-market observable inputs in valuation models will diminish as and when activity returns to these markets.
Page 13
Consolidated Income Statement (unaudited)
For the half year ended 30 June 2008
Notes 30.06.2008�m 30.06.2007�m
Interest income 19,308 16,254
Interest expense (15,285) (12,515)
Net interest income 4,023 3,739
Fees and commission income 1,147 1,210
Fees and commission expense (205) (205)
Net earned premiums on 118 129
insurance contracts
Net trading income 1 (910) 140
Net investment income related to insurance and investment 31 7
business
Other operating income 1,051 1,142
Net operating income 2 5,255 6,162
Change in investment contract 9 (5)
liabilities
Net claims incurred on (46) (60)
insurance contracts
Net change in insurance 11 (3)
contract liabilities
Administrative expenses 3 (2,029) (2,014)
Depreciation andamortisation:
Intangible assets (76) (64)
other than
goodwill
Property and (100) (112)
equipment
Operating lease (508) (501)
assets
(684) (677)
Operating expenses (2,739) (2,759)
Impairment losses on loans and 4 (1,310) (963)
advances
Impairment losses on 9 (145) (27)
investment securities
Operating profit 1,061 2,413
Share of profits of jointly 2 94
controlled entities
Share of (losses)/profits of (38) 9
associates
Non-operating income 5 56 57
Profit before taxation 6 1,081 2,573
Tax on profit 7 (388) (680)
Profit after taxation 693 1,893
Profit of disposal group 4
Profit for the period 693 1,897
Attributable to:
Parent company shareholders 660 1,895
Minority interests 33 2
693 1,897
Page 14
Consolidated Balance Sheet (unaudited)
As at 30 June 2008
Notes 30.06.2008�m 31.12.2007
�m
Assets
Cash and balances at central banks 1,973 2,571
Items in course of collection 1,133 945
Financial assets held for trading 46,023 54,681
Derivative assets 17,492 13,794
Loans and advances to banks 8,131 4,468
Loans and advances to customers 8 493,635 460,267
Investment securities 9 49,408 52,354
Interests in jointly controlled entities 930 852
Interests in associates 190 148
Goodwill and other intangible assets 1,554 1,517
Property and equipment 1,336 1,291
Investment properties 45 34
Operating lease assets 4,370 4,643
Deferred costs 5 4
Other assets 3,942 4,633
Prepayments and accrued income 618 1,430
Total Assets 630,785 603,632
Liabilities
Deposits by banks 46,918 41,513
Customer accounts 295,654 272,687
Financial liabilities held for trading 28,744 22,705
Derivative liabilities 16,373 12,160
Notes in circulation 923 881
Insurance contract liabilities 27 24
Investment contract liabilities 94 98
Net post retirement benefit liabilities 24 8
Current tax liabilities 92 728
Deferred tax liabilities 547 965
Other liabilities 5,020 2,552
Accruals and deferred income 2,311 2,894
Provisions 171 172
Debt securities in issue 10 193,475 206,520
Other borrowed funds 11 19,107 17,881
Total Liabilities 609,480 581,788
Shareholders* Equity 12
Share capital 574 499
Share premium 7,768 6,343
Other reserves (232) 1,167
Retained earnings 12,908 13,479
Shareholders* Equity (excluding minority 21,018 21,488
interests)
Minority interests 287 356
Total Shareholders* Equity 21,305 21,844
Total Liabilities and Shareholders* Equity 630,785 603,632
Page 15
Consolidated Statement of Recognised Income and Expense (unaudited)
For the half year ended 30 June 2008
30.06.2008 30.06.2007
�m �m
Foreign exchange translation 41 93
Net actuarial losses from defined (15)
benefit schemes
Available for sale investments:
Net change in fair (1,954) 87
value (net of tax)
Transfer to the income statement (net of tax) 94 (129)
Cash flow hedges:
Effective portion of changes in fair value taken to equity 489 74
(net of tax)
Net gains transferred to the income statement (51) (118)
(net of tax)
Net (expense)/income recognised (1,396) 7
directly in equity
Profit for the period 693 1,897
Total recognised income and (703) 1,904
expense
Attributable to:
Parent company shareholders (736) 1,902
Minority interests 33 2
(703) 1,904
Page 16
Consolidated Cash Flow Statement (unaudited)
For the half year ended 30 June 2008
30.06.2008�m 30.06.2007�m
Profit before taxation 1,081 2,573
Adjustments for:
Impairment losses on loans and advances 1,310 963
Impairment losses on investment securities 145 27
Depreciation and amortisation 684 677
Interest on other borrowed funds 530 452
Movement in derivatives held for trading 267 356
Exchange differences 235 430
Other non-cash items (794) (214)
Net change in operating assets (46,794) (29,437)
Net change in operating liabilities 44,151 23,198
Net cash flows from operating activities 815 (975)
before tax
Tax paid (851) (458)
Cash flows from operating activities (36) (1,433)
Cash flows from investing activities (282) (48)
Cash flows from financing activities 639 1,453
Net increase/(decrease) in cash and cash 321 (28)
equivalents
Transfer in under HBOS Group (27,265)
Reorganisation
Opening cash and cash equivalents 1,495 32,533
Closing cash and cash equivalents 1,816 5,240
Analysis of Cash and Cash Equivalents
Cash and balances at central banks 861 457
repayable on demand
Loans and advances to banks with an 955 4,783
original maturity of less than three
months
Closing cash and cash equivalents 1,816 5,240
Investing Activities
Saleof other intangible assets 5 6
Purchase of other intangible assets (63) (126)
Saleof property and equipment 22 108
Purchase of property and equipment (150) (153)
Saleof investment properties 57
Disposal of subsidiaries 115
Investment in jointly controlled entities and associates (173) (188)
Disposal of jointly controlled entities and associates 74 55
Dividends received from jointly controlled entities 3 72
Dividends received from associates 6
Cash flows from investing activities (282) (48)
Financing Activities
Issue of ordinary shares 1,500 980
Issue of other borrowed funds 1,000 2,520
Repayments of other borrowed funds (516)
Repayment of equity to minority shareholders in (110)
subsidiaries
Equity dividends paid (1,216) (1,050)
Dividends paid to minority shareholders in subsidiaries (10) (13)
Interest on other borrowed funds relating to servicing of (525) (468)
finance
Cash flows from financing activities 639 1,453
Page 17
Notes to the Condensed Financial Statements
Half year Half year
ended ended
30.06.2008 30.06.2007
�m �m
1. Net Trading Income
Net trading income comprises:
Equity and commodity instruments and related derivatives (35) 27
Interest bearing securities and related
derivatives:
Net fair value adjustments on Treasury asset backed securities (1,095)
Other securities and related income 70 82
Foreign exchange and related derivatives 31 31
Fair value hedges:
Net (losses)/gains from hedging instruments (375) 357
Net gains/(losses) from hedged items 492 (357)
Cash flow hedge ineffectiveness recognised 2
(910) 140
Half year Half year
ended ended
30.06.2008 30.06.2007
�m �m
2. Net Operating Income
Included within net operating income are the following:
Cash flow hedges:
Net gains released from equity into income 72 169
Financial instruments at fair value through the income statement:
Net (losses)/gains from trading financial instruments and non hedging (1,029) 140
derivatives
Net gains and losses from designated financial instruments 222 160
Available for sale financial instruments:
Dividend income 74 13
Net realised gains on sale 36 183
Half year Half year
ended ended
30.06.2008 30.06.2007
�m �m
3. Administrative Expenses
Administrative expenses include:
Regulatory provisions charge 79
Colleague costs:
Wages and salaries 997 985
Social security costs 92 86
Pension costs 124 82
Other post retirement benefits 2
Expense arising from share based payments 51 54
1,266 1,207
Accommodation, repairs and maintenance 233 211
Technology 110 111
Marketing and communication 181 161
Page 18
4. Impairment Provisions and Losses on Loans and Advances
Half year Half year
ended ended
30.06.2008 30.06.2007
�m �m
At 1 January 3,373 1,561
Transfer in under the HBOS Group Reorganisation 1,528
New impairment provisions less releases 1,374 1,003
Amounts written off (1,056) (926)
Discount unwind on impaired loans and advances to customers (62) (65)
Foreign exchange translation 29 8
At 30 June 3,658 3,109
New impairment provisions less releases 1,374 1,003
Recoveries of amounts previously written off (64) (40)
Net charge to income statement 1,310 963
5. Non-operating Income
Half year Half year
ended ended
30.06.2008 30.06.2007
�m �m
Profit on the part disposal of Rightmove plc 56 29
Profit on the sale and leaseback of certain branch premises 28
56 57
Page 19
6. Segmental Analysis
Half year ended 30.06.2008
Retail Corporate �m International �m Treasury Other Total �m
�m �m �m
Net interest income - internal (604) (963) (885) 2,452
Net interest income - external 2,711 2,161 1,565 (2,414) 4,023
Net fee and commission income 85 4 1 19 (109)
- internal
Net fee and commission income 517 194 95 (10) 146 942
- external
Net trading income 21 (16) (34) (881) (910)
Other operating income - 10 5 3 1 (19)
internal
Other operating income - 6 978 59 27 130 1,200
external
Net operating income 2,746 2,363 804 (806) 148 5,255
Administrative expenses - (337) (87) (27) 451
internal
Administrative expenses - (678) (293) (350) (84) (624) (2,029)
external
Depreciation and amortisation (32) (527) (26) (2) (97) (684)
Other operating expenses 4 (30) (26)
Operating expenses (1,047) (907) (399) (86) (300) (2,739)
Impairment losses on loans and (722) (469) (119) (1,310)
advances
Impairment losses on (145) (145)
investment securities
Operating profit/(loss) 977 842 286 (892) (152) 1,061
Share of losses of jointly
controlled entities and (35) (1) (36)
associates
Non-operating income 56 56
Profit/(loss) before taxation 1,033 807 285 (892) (152) 1,081
Half year ended 30.06.2007
Retail Corporate �m International �m Treasury Other Total �m
�m �m �m
Net interest income - internal (511) (523) (556) 1,590
Net interest income - external 2,637 1,538 1,067 (1,503) 3,739
Net fee and commission income - internal
95 4 1 (72) (28)
Net fee and commission income - external 525 222 84 85 89 1,005
Net trading income 7 35 (6) 105 (1) 140
Other operating income - internal
Other operating income - external 20 1,050 43 52 113 1,278
Net operating income 2,773 2,326 633 257 173 6,162
Administrative expenses - internal (322) (79) (1) 402
Administrative expenses - external (685) (339) (278) (94) (618) (2,014)
Depreciation and amortisation (37) (518) (23) (2) (97) (677)
Other operating expenses (9) (59) (68)
Operating expenses (1,044) (936) (311) (96) (372) (2,759)
Impairment losses on loans and advances (678) (235) (50) (963)
Impairment losses on investment securities (22) (5) (27)
Operating profit/(loss) 1,029 1,150 272 161 (199) 2,413
Share of (losses)/profits of jointly controlled
entities and associates (7) 108 2 103
Non-operating income 57 57
Profit/(loss) before taxation 1,079 1,258 274 161 (199) 2,573
Page 20
7. Taxation
The tax charge for the period is �388m (H1 2007 �680m) resulting in an effective tax rate of 36%. The H1 2007 charge is net of a credit of
�59m in respect of the change in the
rate of UK corporation tax, excluding this item results in an effective rate of 29% for H1 2007. Included within the tax charge is overseas
tax of �117m (H1 2007 �75m).
The main UK corporation tax rate reduced from 30% to 28% in April 2008. The average rate of UK corporation tax for the year to December
2008 is 28.5%. A reconciliation of the
actual tax to the average rate of 28.5% (H1 2007 30%) is detailed below.
Half year Half year
ended ended
30.06.2008 30.06.2007
�m �m
Profit before tax
1,081 2,573
Expected tax charge at 28.5%/30%
308 772
Effects of:
Changes in rates of corporation tax on deferred tax assets and liabilities
(59)
Expenses not deductible/(income not chargeable) for tax purposes
44 (19)
Net effect of differing tax rates overseas
24 (11)
Tax exempt gains
(35) (34)
Impairment on investment securities
35 13
Adjustments in respect of previous periods
9 19
Other
3 (1)
Total income tax on profit
388 680
Page 21
8. Loans and Advances to Customers
30.06.2008 31.12.2007
�m �m
Loans and advances that are neither past due nor impaired 472,987 441,649
Loans and advances that are past due but not impaired 11,667 11,629
Impaired loans 12,639 10,362
Gross loans and advances to customers 497,293 463,640
Impairment provisions (Note 4) (3,658) (3,373)
Loans and advances to customers 493,635 460,267
The mix of the group's gross lending portfolio is summarised in the following table:
30.06.2008 31.12.2007
�m �m
Energy 2,343 2,269
Manufacturing industry 4,456 4,332
Construction and property 46,154 41,099
Hotels, restaurants and wholesale and retail trade 13,737 12,620
Transport, storage and communication 6,987 6,834
Financial 50,035 36,572
Other services 16,258 15,396
Individuals:
Residential mortgages 235,924 235,771
Other personal lending 17,910 19,229
Non-UK residents 103,489 89,518
Total 497,293 463,640
Loans and advances to customers include advances that are securitised under the group's securitisation programmes, the majority of which
have been sold by subsidiary companies to bankruptcy remote special purpose entities, funded by the issue of debt on terms whereby some of
the risks and rewards of the portfolio are retained by the subsidiary. Accordingly, all these advances are retained on the group's balance
sheet with the debt issued included within debt securities in issue.
The group's principal securitisation programmes and the type of loans and advances securitised are as follows:
Programme Type of loan 30.06.2008 31.12.2007
�m �m
Permanent UK residential 38,770 31,577
mortgages
Mound UK residential 4,545 4,545
mortgages
Swan Australian residential 2,592 2,726
mortgages
Candide Dutch residential 3,878 2,491
mortgages
Prominent Commercial loans 1,061 1,101
Pendeford UK residential 2,088 2,508
mortgages
Covered Bonds UK residential 44,775 34,704
mortgages
Social Housing Covered Bonds UK residential 2,393 2,362
mortgages
Melrose Commercial loans 750
Other UK residential 103 104
mortgages
Total 100,205 82,868
In addition to the programmes above loans and advances totalling �nil (end 2007 �14,089m) relating to UK residential mortgages have been
securitised using credit default swaps.
Page 22
9. Investment Securities
30.06.2008
At fair value
through
the income statement
�m Available for sale Loans and receivables
�m �m
Total
�m
Listed
Debt securities 707 30,518 31,225
Equity shares 13 204 217
Total listed 720 30,722 31,442
Unlisted
Debt securities 41 13,845 1,522 15,408
Equity shares 429 2,129 2,558
Total unlisted 470 15,974 1,522 17,966
Total 1,190 46,696 1,522 49,408
Comprising:
Debt securities 748 44,363 1,522 46,633
Equity shares 442 2,333 2,775
Total 1,190 46,696 1,522 49,408
31.12.2007
At fair value
through
the income statement
�m Available for sale Loans and receivables
�m �m
Total
�m
Listed
Debt securities 639 31,944 32,583
Equity shares 10 261 271
Total listed 649 32,205 32,854
Unlisted
Debt securities 151 14,833 1,266 16,250
Equity shares 308 2,942 3,250
Total unlisted 459 17,775 1,266 19,500
Total 1,108 49,980 1,266 52,354
Comprising:
Debt securities 790 46,777 1,266 48,833
Equity shares 318 3,203 3,521
Total 1,108 49,980 1,266 52,354
Page 23
9.Investment Securities (continued)
In keeping with normal market practice, the group enters into securities lending transactions and repurchase agreements, whereby cash
and securities are temporarily received or transferred as collateral.
Debt securities with a value of �23,806m (end 2007 �14,181m) were subject to agreement to repurchase, where the transferee obtains the
right to pledge or sell the asset they receive. Debt securities also include securities pledged as collateral as part of securities lending
transactions amounting to �28,549m (end 2007 �11,918m).
Debt securities include asset backed securities of �16,208m (end 2007 �18,563m) which are held in the group's Grampian conduit. This is
a series of bankruptcy remote special purpose entities ('SPEs') that are funded by the issue of commercial paper and banking facilities. As
some of the rewards and risks of the portfolio are retained by the group, including the provision of liquidity facilities by Bank of
Scotland plc, to the conduit, the assets and liabilities of the conduit are consolidated as part of the group.
The group also has a smaller conduit, Landale, which is partially consolidated. Debt securities of �552m (end 2007 �604m) are included
in available for sale investments. Further details are included in Note 15.
Impairments on investment securities of �145m (H1 2007 �27m) have been charged to the income statement and there are no impairment
provisions held in respect of the group's investment securities at the period end.
Securities held as collateral as stock borrowed or under reverse repurchase agreements amounted to �51,248m (end 2007 �39,975m). These
are not recognised as assets and are therefore not included above. Of this amount the group had resold or repledged �49,169m (end 2007
�28,817m) as collateral for its own transactions.
10. Debt Securities in Issue
30.06.2008 31.12.2007
�m �m
Bonds and medium term notes 72,430 73,818
Other debt securities 121,045 132,702
193,475 206,520
At 30 June 2008 debt securities in issue include �7,763m issued by the Grampian conduit (end 2007 �11,954m) and �689m issued by the
Landale conduit (end 2007 �137m).
11. Other Borrowed Funds
30.06.2008 31.12.2007
�m �m
Preferred securities 2,417 2,417
Preference shares 1,227 1,227
Subordinated liabilities:
Dated 11,675 10,485
Undated 3,788 3,752
19,107 17,881
During the period BOS plc issued �1,000m of dated subordinated debt at par to its parent company HBOS plc. Interest is payable annually
in arrears.
Page 24
12. Reconciliation of Shareholders' Equity
Other reserves
Share capital �m Share premium �m Cash flow hedge Available for sale reserve
�m Other reserves �m Retained earnings �m Minority interests�m Total�m
reserve �m
At 1 January 2008 499 6,343 (85)
(313) 1,565 13,479 356 21,844
Foreign exchange translation
23 18 41
Net actuarial losses from defined benefit plans
(15) (15)
Available for sale investments:
Net change in fair value
(1,954) (1,954)
Transfer to the income statement
94 94
Cash flow hedges:
Effective portion of changes in 489
489
fair value taken to equity
Net gains transferred to the (51)
(51)
income statement
Profit for the period
660 33 693
Total recognised income and expense (net of tax) 438
(1,860) 23 645 51 (703)
Dividends paid (Note 13)
(1,216) (10) (1,226)
Issue of new shares 75 1,425
1,500
Repayment of equity to minority shareholders
(110) (110)
At 30 June 2008 574 7,768 353
(2,173) 1,588 12,908 287 21,305
Other reserves
Share capital �m Share premium �m Cash flow hedge Available for sale Other reserves �m Retained
earnings �m Minority interests Total�m
reserve �m reserve �m
�m
At 1 January 2007 436 3,926 416 204 486
6,568 369 12,405
Foreign exchange translation 2 (6)
12 8
Available for sale
investments:
Net change in (336)
(336)
fair value
Transfer to (184)
(184)
the income statement
Cash flow hedges:
Effective (216)
(216)
portion of changes in fair
value taken to equity
Net gains (292)
(292)
transferred to the income
statement
Profit for the period
3,608 30 3,638
Total recognised income and (508) (518) (6)
3,608 42 2,618
expense (net of tax)
Transfer in under HBOS Group 7 1 1,085
5,011 15 6,119
reorganisation
Dividends paid
(1,672) (43) (1,715)
Issue of new shares 63 2,417
98 2,578
Disposal of subsidiaries
(125) (125)
Movement in share-based
(36) (36)
compensation reserve
At 31 December 2007 499 6,343 (85) (313) 1,565
13,479 356 21,844
Page 25
13. Dividends
The following dividends to ordinary shareholders have been charged direct to retained earnings:
Half year Half year
ended ended
30.06.2008 30.06.2007 �m
�m
Ordinary dividends
2006 final dividend 1,050
2007 final dividend 1,216
1,216 1,050
14. Contingent Liabilities and Commitments
The contract amounts noted below indicate the volume of business outstanding at the balance sheet date in
respect of contingent liabilities and commitments undertaken for customers. They do not reflect the underlying
credit and other risks, which are significantly lower.
30.06.2008 31.12.2007�m
�m
Contingent liabilities
Acceptances and endorsements 6 43
Guarantees and irrevocable letters of credit 4,890 6,491
4,896 6,534
Commitments
Short term trade related transactions 152 115
Undrawn formal standby facilities, credit lines and
other commitments to lend with a maturity:
Up to and including one year 58,941 68,253
Over one year 32,786 31,416
91,879 99,784
On 27 July 2007 it was announced that members of the HBOS Group, along with seven other major UK current account providers, had reached
agreement with the Office of Fair Trading to start legal proceedings in the High Court of England and Wales for a declaration (or
declarations) to resolve legal uncertainties concerning the fairness and lawfulness of unarranged overdraft charges (the "Test Case"). It
was also announced that HBOS and those other providers will seek a stay of all current and potential future Court proceedings which are
brought against them in the UK concerning these charges and have obtained the consent of the Financial Ombudsman Service not to proceed with
consideration of the merits of any complaints concerning these charges that are referred to him prior to the resolution of the Test Case. By
virtue of a waiver granted by the Financial Services Authority of its complaints handling rules, the Company (and other banks, including the
banks party to the Test Case) will not be dealing with or resolving customer complaints on unarranged overdraft charges while the waiver is in force. On 21 July 2008, the FSA confirmed that it is
extending its waiver regarding unarranged overdraft charges complaints until 26 January 2009.
The first step in the Test Case was a trial of certain 'preliminary' issues concerning the legal status and enforceability of
contractual terms relating to unarranged overdraft charges.
This preliminary trial concluded on 8 February 2008 and the judgement was handed down on 24 April 2008. The judgement held that the
contractual terms relating to unarranged overdraft charges currently used by the HBOS Group (i) are not unenforceable as penalties, but (ii)
are not exempt from assessment for fairness under the Unfair Terms in Consumer Contract Regulations 1999 ("UTCCRs").
Page 26
14.Contingent Liabilities and Commitments (continued)
At a court hearing on 22 and 23 May 2008, the Judge granted HBOS and the other Test Case banks permission to appeal his decision that
unarranged overdraft charges are assessable for fairness under the UTCCRs. This appeal is likely to take place before the end of 2008. A
further hearing took place in early July 2008 at which the Court was asked to consider whether terms and conditions previously used by the
Test Case banks are capable of being penalties. The judgement is awaited. Depending on the outcome of the appeal and the further hearing
that took place in July 2008, another hearing may be required in order for the Court to determine the fairness of the charges.
A definitive outcome of the Test Case is unlikely to be known for at least twelve months.
Given the early stage of these proceedings and the uncertainty as to their outcome, it is not practicable at this time to estimate any
potential financial effect.
The group is engaged in other litigation in the UK and overseas arising out of its normal business activities. The group considers that
none of these actions is material and has not disclosed any contingent liability in respect of these actions because it is not practical to
do so.
15.Special Purpose Entities
The group sponsors special purpose entities ('SPEs') that are used in its securitisation and funding programmes. The principal
securitisation programmes are listed in Note 8. In addition, the group sponsors two conduit programmes, Grampian and Landale, which invest
in asset-backed securities funded by commercial paper or through banking facilities. Details of the assets secured under these conduit
programmes are given in Note 9.
Two of the Landale SPEs are not consolidated by the group. One is the central funding company for the conduit that obtains external
funding and lends it to the purchasing companies. The second is a purchasing company that has acquired floating rate notes issued under the
group's mortgage securitisation programmes and which is supported by liquidity lines that are provided by third party banks. These entities
are not consolidated as there are insufficient indicators of control, in particular as the credit risk relating to the assets held by the
entities and the liquidity risks are not borne by the group. If these entities were consolidated the financial impact would be minimal.
16.Related Party Transactions
Related party transactions and transactions with key management personnel in the period to 30 June 2008 are similar in nature to those
for the period ended 31 December 2007. Full details of the group's related party transactions and transactions with key management personnel
can be found in the BoS ARA 2007.
Page 25
Independent Review Report to Bank of Scotland plc
Introduction
We have been engaged by Bank of Scotland plc (the 'Company') to review the Condensed Financial Statements in the half-yearly financial
report for the six months ended 30 June 2008 which comprises the Consolidated Income Statement, the Consolidated Balance Sheet, the
Consolidated Cash Flow Statement, the Consolidated Statement of Recognised Income and Expense and the related explanatory notes. We have
read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or
material inconsistencies with the information in the Condensed Financial Statements.
This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the
requirements of the Disclosure and Transparency Rules ('DTR') of the UK Financial Services Authority ('FSA'). Our review has been undertaken
so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or
for the conclusions we have reached.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for
preparing the half-yearly financial report in accordance with the DTR of the FSA.
As disclosed in the Section 240 Statement, the annual financial statements of the Group are prepared in accordance with IFRS as adopted
by the EU. The Condensed Financial Statements included in this half-yearly financial report has been prepared in accordance with IAS 34
'Interim Financial Reporting' as adopted by the EU.
Our responsibility
Our responsibility is to express to the Company a conclusion on the Condensed Financial Statements in the half-yearly financial report
based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim
Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the UK. A review
of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and
applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with
International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of
all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the Condensed Financial Statements in the
half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with IAS 34 as
adopted by the EU and the DTR of the FSA.
KPMG Audit Plc, Chartered Accountants, Edinburgh, 30 July 2008
This information is provided by RNS
The company news service from the London Stock Exchange
END
IR FFLBXVDBXBBD
Natwest.m 24 (LSE:63GF)
Gráfico Histórico do Ativo
De Nov 2024 até Dez 2024
Natwest.m 24 (LSE:63GF)
Gráfico Histórico do Ativo
De Dez 2023 até Dez 2024
